In a recent &l;a href=&q;https://frameworkinvesting.com&q; target=&q;_blank&q; rel=&q;noopener noreferrer&q; target=&q;_blank&q;&g;Framework Investing&l;/a&g; Office Hour session, I spoke with one of Framework&s;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. &l;span&g;Ruggirello&l;/span&g;&s;s investment style was influenced by the work of the CIO of Yale College&s;s Endowment, David Swenson, who &l;a href=&q;https://yalealumnimagazine.com/articles/2398-david-swensen-s-guide-to-sleeping-soundly&q; target=&q;_blank&q; rel=&q;noopener noreferrer&q; target=&q;_blank&q;&g;suggests&l;/a&g; that a significant proportion of an investor&s;s portfolio should be allocated to real assets. &l;span&g;Ruggirello&l;/span&g;&s;s company, &l;a href=&q;http://braveeaglewealthmanagement.com/&q; target=&q;_blank&q; rel=&q;noopener noreferrer&q; target=&q;_blank&q;&g;Brave Eagle Wealth Management&l;/a&g;, invests client money with Swenson&s;s advice in mind, and &l;span&g;Ruggirello&l;/span&g; has become an expert on REIT investing.
An earlier favorite of &l;span&g;Ruggirello&l;/span&g;&s;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;s Real Estate group for $27.50 a share. &l;span&g;Ruggirello&a;nbsp;&l;/span&g;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 &q;Triple Net&q; leases. Here is &l;span&g;Ruggirello&l;/span&g; explaining what a triple net lease is and how the triple net lease structure influences revenue growth and profitability.
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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;s co-founder and CEO, &l;a href=&q;https://www.storecapital.com/who-we-are/executive-team/christopher-h-volk/&q; target=&q;_blank&q; rel=&q;noopener noreferrer&q; target=&q;_blank&q;&g;Chris Volk&l;/a&g;, 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. &l;span&g;Ruggirello&l;/span&g; believes that STORE is effectively arbitraging a relatively opaque market through its risk control procedures, which offer STORE a detailed look at its tenants&s; finances. Volk&s;s business model has not only impressed &l;span&g;Ruggirello&l;/span&g; 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 &l;span&g;Ruggirello&l;/span&g; and my Office Hour discussion, &l;span&g;Ruggirello&l;/span&g;&a;nbsp;talks about what STORE does, why he believes it does it uniquely well, and what he means when he says he thinks STORE has &q;contract alpha.&q;
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If you enjoy these videos, please stop by &l;a href=&q;https://www.youtube.com/c/frameworkinvesting&q; target=&q;_blank&q; rel=&q;noopener noreferrer&q; target=&q;_blank&q;&g;Framework Investing&s;s YouTube channel&l;/a&g; and subscribe. If you look through our previous videos, you will find a series that features &l;span&g;Ruggirello&l;/span&g; 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 &l;a href=&q;https://frameworkinvesting.com&q; target=&q;_blank&q; rel=&q;noopener noreferrer&q; target=&q;_blank&q;&g;Framework Members&l;/a&g; this week.&l;/p&g;
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