The Companies Forced to Give 90% of Their Profits to Investors Each Year
Nov 23rd, 2022 12:09 EST
In 2017, business magnate Warren Buffett did something that’s somewhat unusual for him. He poured hundreds of millions of dollars into a real estate investment.
Buffett has been dismissive of real estate investing in the past. He’s called it a “lousy investment” in part because real estate can be expensive to maintain. Real estate also often requires “sweat equity” or the physical effort needed to upgrade properties or simply keep them from falling into disrepair.
Yet in 2017, Berkshire Hathaway Inc. (NYSE: BRK-A) invested $377 million in a real estate company, and in 2020, it scooped up another 5.8 million shares.
The company in question is STORE Capital (NYSE: STOR), a real estate investment trust (REIT) that controls over 3,000 properties across the U.S., including restaurant sites, manufacturing facilities, preschools, auto repair shops and gyms.
STORE has been on a dividend hot streak since it began sending payouts in 2014, raising its dividend by 259% in the time since. It now pays a yield of 5.17%, or nearly three times as great as the average 1.82% yield offered by S&P 500 firms.
STORE achieved this phenomenal dividend streak thanks to a special designation in the U.S. tax code. As a REIT, it’s exempt from corporate taxes on its property holdings — as long as it returns at least 90% of its profits back to investors in the form of dividends each year.
REITs were hit hard during the pandemic, but they’ve since returned to favor. In November 2020, billionaire investor Bruce Flatt, known as Canada’s Buffett for the more than $500 billion he’s managed successfully at Brookfield Asset Management Inc. (NYSE: BAM) for decades, told Bloomberg he considers REITs to be the best bargains in today’s market.
In the two years since, more billionaires have warmed to REITs. Steve Schwarzman, CEO of the $41.2 billion private equity firm Blackstone Group, launched a real estate flagship fund with the goal of raising $30.3 billion. Bill Ackman of Pershing Capital, who nimbly traded around the pandemic-induced market crash and subsequent rebound to make $3.8 billion in profits, is now recommending REITs to hedge against inflation. And Paul Tudor Jones, who predicted the 1987 stock market crash and made $100 million form it, scooped up hundreds of thousands of shares of REITs last quarter.
The Lazy Way to be a Landlord
Real estate investment trusts offer a way to earn money on properties without worrying about upkeep — no calls from tenants about broken air conditioning, no property taxes and none of the sweat equity headaches that personal land ownership entails.
But REITs aren’t a silver bullet. The Vanguard Real Estate ETF, a fund tracking REITs, has returned 48% since January 2012. The S&P 500, meanwhile, has logged returns of 214%.
Lofty dividend payouts may be what some investors prioritize over capital appreciation. But at least one billionaire, Jeff Bezos, is sidestepping the REIT craze for an even more aggressive way to play real estate.
For income investors looking to opt out of the chores of property ownership — and forgo a dividend yield to target capital appreciation — crowdfunding can be an answer. Benzinga has compiled a Real Estate Offering Screener to help readers find and keep tabs on passive real estate opportunities here.
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