In a recent Framework Investing Office Hour session, I spoke with one of Framework’s members — hedge fund alum and New York City-based institutional investor, Robert Ruggirello, CFA — about a triple-net lease Real Estate Investment Trust called STORE Capital. Robert’s investment style was influenced by the work of the CIO of Yale College’s Endowment, David Swenson, who suggests that a significant proportion of an investor’s portfolio should be allocated to real assets. Robert’s company, Brave Eagle Wealth Management, invests client money with Swenson’s advice in mind, and Robert has become an expert on REIT investing.
An earlier favorite of Robert’s, Grammercy Property Trust (GPT), which he suggested in an April Office Hour session when it was trading for around $22 a share, was recently acquired by Blackstone’s Real Estate group for $27.50 a share. Robert describes the acquisition as a mixed blessing, because, while the immediate 25% gain is nice, it is hard to find a name in the Industrial REIT industry (renting warehouse space to eCommerce and logistics companies) to replace it.
STORE Capital is in a different field from Grammercy; STORE buys the locations of small and medium-sized chains and leases the locations back to the owners using what is known as “Triple Net” leases. Here is Robert explaining what a triple net lease is and how the triple net lease structure influences revenue growth and profitability.
Other firms that specialize in triple net leases like Reality Income (O) — a company we published a valuation report on to Framework members and are invested in — focus on providing real estate to large, public companies that have high credit ratings. STORE is different — leasing to companies with between $10 million and $1 billion in annual revenue, many of which are not closely followed by credit rating agencies.
STORE’s co-founder and CEO, Chris Volk, has been in the business for a long time and has honed a three-pronged approach to managing and monitoring the credit risk of its real estate portfolio that makes a lot of sense. Robert believes that STORE is effectively arbitraging a relatively opaque market through its risk control procedures, which offer STORE a detailed look at its tenants’ finances. Volk’s business model has not only impressed Robert and now me, but also the patron saint of value investing, Warren Buffett, whose Berkshire Hathaway invested in STORE at a 52-week low this time last year.
In the video below, which excerpts a portion of Robert and my Office Hour discussion, Robert talks about what STORE does, why he believes it does it uniquely well, and what he means when he says he thinks STORE has “contract alpha”.
If you enjoy these videos, please stop by Framework Investing’s YouTube channel and subscribe! If you look through our previous videos, you will find a series that features Robert talking about some REIT fundamentals, and which names he likes in the REIT space. I have also been working on analyzing another promising triple-net lease REIT that is undergoing a big transition and which looks very attractively priced. I will be publishing research about that firm to Framework Members this week.