STORE Capital Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 5, 2022

There are 14 speakers on the call.

Operator

Good day, and welcome to the STORE Capital First Quarter 2022 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, There will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Megan McGrath, Investor Relations for STORE Capital.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and thank you all for joining us today to discuss STORE Capital's Q1 2022 financial results. We issued our earnings release along with the newly reintroduced earnings supplement as well as our quarterly investor presentation after the market closed yesterday. These documents are available in the Investor Relations section of our website at ir. Storecapital.com under News and Results, Quarterly Results. I'm here today with Mary Fedula, President and Chief Executive Officer of Stor Sherry Rexrove, Chief Financial Officer Craig Barnett, EVP of Underwriting and Portfolio Management and Tyler Merck, EVP of Acquisitions.

Speaker 1

On today's call, management will provide prepared remarks, and then we will open up the call for your questions. In order to maximize Participants can then reenter the queue if you have follow-up questions. Before we begin, I would like to remind you that today's comments will include forward looking statements under federal securities laws. Forward looking statements are identified by words such as will, or other comparable words and phrases. Statements that are not historical facts, such as statements about our expected acquisitions, dispositions or AFFO per share guidance for 2022 are also forward looking statements.

Speaker 1

Our actual financial condition and results of operations may vary materially from those contemplated by such forward looking statements. Discussion of the factors that could cause our results to differ materially from these forward looking statements are contained in our SEC filings, including our reports on Form 10 ks and Form 10 Q. With that, I would now like to turn the call over to Mary Fedewa, STORE's Chief Executive Officer, Mary, please go ahead.

Speaker 2

Thank you, Megan. Good morning, everyone. Welcome and thank you for joining us today. I'll begin the call with an overview of our Q1 performance and some thoughts on the current market environment. Craig will provide an update on the additions we made to the portfolio and our portfolio management activities.

Speaker 2

And then Sherry will review our financial results. I'd like to quickly mention we have reinstated a financial supplement to our earnings release, which we hope will provide an efficient presentation of our financials. We look forward to your feedback. In light of our Q1 performance, we are raising our acquisition and AFFO guidance for the year. Sherry will provide this updated guidance as continued through the Q1 of 2022.

Speaker 2

We acquired $513,000,000 in profit center real estate, the highest Q1 volume in STORE's history. These acquisitions were at an initial cap rate of 7.1% with weighted average annual lease escalations of 1.8%. Cap rates were right in line with our guidance and our investment spread for the quarter was robust at approximately 3.40 basis points above our recent debt issuance. This activity along with the strong performance of our portfolio resulted in solid AFFO of $158,000,000 and AFFO per share of $0.57 for the quarter, both were the highest in our history and have had a consistent upward trend for the past 4 quarters. Given the recent sea change in interest rates and inflation, I'd like to address STORE's ability to continue to drive growth and attractive spreads in the current environment.

Speaker 2

Our total addressable market is estimated to be nearly $4,000,000,000,000 and over 2,000,000 properties. Within that total addressable market, we are focused on an estimated 200,000 companies

Speaker 3

that are

Speaker 2

in vital, Sustainable and growing industries. These are regional and national companies that benefit from the long term real estate financing solutions we provide. Given such a large market opportunity, we have a very long runway to grow and we can be very selective in the investments we make. One of STORE's strategic advantages has always been our ability to identify and successfully acquire a large volume of granular transactions through our direct origination approach. This has been our consistent strategy since inception.

Speaker 2

This approach allows us to price new leases from both a cap rate and rent escalation perspective that reflect the current economic environment, which today is one of inflation and rising interest rates. With pricing power on the front end and our disciplined underwriting process, which includes a deep dive into both the Credit of the customer as well as the value of the real estate, we are able to make accretive acquisitions with wide spreads resulting in attractive Risk adjusted returns. We also have strong internal growth of 5% between our annual rent escalations, which average 1.8% on the portfolio, Our retained cash flow from our low dividend payout ratio, which was 67.5% this quarter and proceeds from dispositions. The financing flexibility that we have built over the last decade positions us well to fund our growing pipeline of acquisitions with both debt and equity options, which allow us to optimize our cost of capital to generate attractive spreads. We have 3 primary sources of debt financing: Our STORE Master Funding Facility, investment grade unsecured debt and unsecured bank debt as well as access to the equity market, usually through our ATM program.

Speaker 2

While interest rates are rising, just last week, we were able to issue term debt financing at an attractive fixed rate of 3.68 percent. Sherry will provide more details in her remarks, but we are extremely pleased with this execution and the broad participation from all 13 banks in our bank group. In light of these key differentiators, We feel STORE is well positioned to execute on our objectives for the year. Now I'd like to provide a current market update. First, we are seeing a lot of activity and demand for our financing solutions.

Speaker 2

We have a strong diverse pipeline of over $13,000,000,000 and growing. We believe cap rates have bottomed and we are currently seeing upward movement of approximately 25 basis points, which we should see the benefit of in the second half of the year. 2nd, we are currently negotiating rent escalations on new opportunities in the range of 2.25 to 2.5% a year, up from about 2%. We anticipate seeing this in the contracts we fund in the second half of the year. 3rd, given the volatility of financing conditions, STORE's proven track record for timely execution has become a major consideration for our customers and an important advantage.

Speaker 2

As we have mentioned before, we really believe periods of uncertainty and Finally, STORE currently has an attractive dividend yield of about 5.5%, and historically, we have been able to grow our dividend annually by more than 6% on average. In summary, it was an excellent quarter and we expect the momentum to continue throughout this year. We believe these results directly reflect the fundamental strength of STORE's differentiated business model, which was built to deliver growth and attractive returns in a variety of economic environments, including the volatile and complex markets we are experiencing today. Now I'll turn the call over to Craig.

Speaker 4

Thank you, Mary. During the Q1, we provided a variety of tailored solutions to meet customers' needs. Approximately 2 thirds of the volume was sale leaseback transactions that allow customers to efficiently capitalize their balance sheets and invest in their businesses. Three meeting transactions assisted customer growth through expansions, new construction or acquisition financing. We acquired 111 new properties, added 19 new customers and invested at an average transaction size of approximately $13,000,000 and about $4,600,000 per property.

Speaker 4

The acquisitions covered a variety of industries, including home furnishings, restaurants, Health Clubs, Automotive Repair and Maintenance, Metal Fabrication and Food Processing. The weighted average Primary lease term of our new investments continues to be long at approximately 17 years. 100% of the multi unit net lease Investments that we made during the quarter were subject to master leases and all 111 of the new assets acquired during the quarter are required to deliver us to unit level financial statements, giving us extraordinary unit level financial reporting from 99% of the properties within our portfolio. The weighted average unit level coverage ratio of these new acquisitions was 5.2 times, which improves our already strong portfolio unit level coverage 4.7 times. About 1 third of quarterly acquisitions were done with existing customers in line with our historical average.

Speaker 4

Now turning to the portfolio. We have deliberately built a granular and diverse portfolio to limit volatility and deliver consistent and attractive risk adjusted returns to our shareholders. Our portfolio consists of 2,965 properties operating in 121 industries. Our sector mix remained consistent with our service sector representing 64%, Manufacturing 20% and service oriented retail 16%. About 85% of the portfolio was comprised This is the individually represent less than 1% of our annual base rent interest.

Speaker 4

There was no change in our top 10 customers And our largest customer represented approximately 3% of base rent and interest, and our top 10 customers accounted for only 18% of base rent and interest. Turning to dispositions. We sold 11 properties in the Q1, 8 were strategic sales that netted 47 point $3,000,000 in proceeds or a 9% gain over our original investment. The remaining 3 were vacant or nonpaying properties and were sold as part of our ongoing property management activities. Our occupancy remains high at 99.5%.

Speaker 4

We're very pleased with our portfolio's health and have confidence in the long term performance of our customers who have been in business on average 26 years. 2020 2021 was a period of adjustment for many tenants who responded to a changing macroeconomic environment by adapting in various and creative ways, including automation, technology improvements, commodity hedging and price and cost optimization to name a few. These adaptations improved our tenants' financials throughout 2021, a trend that continues into 2022. Compared to 2019, on average, our portfolio today exhibits higher corporate and unit level coverages, less leverage, higher sales and more liquidity. This data is consistent with the feedback we are receiving from our customers during our regular conversations.

Speaker 4

Our tenants are overwhelmingly conveying a Positive outlook for the next year as increases in consumer spending continues to drive higher demand for their products and services. We are proud of their resilience and look forward to partnering with them and their continued growth as well as adding new customer relationships. I'll now turn the call over to Sherry.

Speaker 5

Thank you, Craig. Today, I'll discuss our financial results for the Q1, including an update on our balance sheet, Capital Markets activity and our 2022 guidance. Please note that all comparisons are year over year unless otherwise noted. Our first quarter revenues increased 22% from the year ago quarter to $222,000,000 primarily reflecting the very strong growth in our real estate portfolio. Revenue from net acquisition activity increased Approximately $25,000,000 which includes a full quarter's revenue from our net acquisition activity in 2021 plus a partial contribution from a large volume of 1st quarter acquisitions.

Speaker 5

As Mary mentioned, Total acquisitions for the Q1 were $513,000,000 Approximately 2 thirds of this volume closed in the last half of March, which creates a nice built in base for our continued growth in the second quarter. Q1 2022 revenues include about $5,000,000 of lease termination and other fees, primarily related to properties we sold and $1,000,000 of interest income related to the early repayment of 1 of our mortgage loans. Turning now to expenses. Interest expense increased by $2,200,000 from the year ago quarter, primarily reflecting borrowings we made during 2021 to support growth in our real estate portfolio, partially offset by a lower overall cost of debt. The weighted average interest rate on our long term debt was 3.9% as of March 31, a marked decrease from 4.2% a year ago.

Speaker 5

Property costs, which totaled $4,200,000 for the Q1, or down from $4,700,000 a year ago. Property costs for the 12 months ended March of 2022 represented about 12 basis points of our average portfolio assets, down from 17 basis points for the same period ended March 2021. We expect that property costs as a percentage of our average portfolio asset will continue to decrease as we move through 2022. 1st quarter G and A expenses decreased to $17,000,000 and $25,000,000 in the Q1 of 2021, which included $10,100,000 of non cash Stock based expense related to certain long term incentive compensation awards. Excluding the impact of this expense, Overall G and A expenses were as expected and are in line with the growth in our portfolio.

Speaker 5

On a rolling 12 month basis, our G and A expenses, excluding non cash stock based compensation, or 44 basis points of average portfolio assets for the period ended March 31, 2022 as compared to 47 basis points for the comparable 12 month period ended March of 2021, which reflects the efficiencies we've gained from our scalable platform as our portfolio continues to grow. During the Q1, we recognized a $912,000 impairment provision, which included a $1,200,000 Real estate impairment provision related to 3 properties that we are likely to sell. This amount was partially offset by a net reduction of $288,000 and expected loss provisions on our portfolio of loans and financing receivables. As Mary mentioned, AFFO increased to $158,000,000 from 125,000,000 On a per share basis, AFFO increased 21 percent to $0.57 per basic and diluted share from $0.47 a year ago. This is $0.03 higher than we had budgeted as well as $0.03 higher than the consensus estimates.

Speaker 5

Approximately half of the increase is recurring and is primarily from the timing of acquisitions and lower property costs and G and A expense. And approximately half is non recurring and includes additional lease revenue from a contract modification, Onetime fees and loss reserve reversals from higher collections. As you know, we declared a first 2020 2 dividend of $0.385 per share, which we paid on April 15 to shareholders of record on March 31. Now turning to the balance sheet and our capital markets activity. We funded our record level of acquisitions with a variety of sources, including cash from operations, borrowings on our revolving credit facility and the sale of equity to our ATM program.

Speaker 5

During the quarter, we issued approximately 5,500,000 shares of common stock under our ATM program at an average price of $30.41 per share, raising net equity proceeds of $166,000,000 In April, we issued additional shares, bringing our total proceeds raised year to date to $195,000,000 We are mindful of where our collective equity is today, yet given our attractive cap rates and spreads, we are continuing to make accretive acquisitions at We closed the quarter with a strong balance sheet and ample access to capital, including $39,000,000 in cash, Approximately $370,000,000 available under our ATM program and the borrowing capacity available under our revolving credit facility. At March 31, we had $4,200,000,000 of long term fixed rate debt outstanding with a weighted average maturity of just under 7 years and as noted earlier, a weighted average interest rate of 3.9%. Leverage is at the low end of our target range of 5.7 times net debt to EBITDA on a run rate basis or under 40% on a net debt to portfolio cost basis. Subsequent to quarter end, we entered into $600,000,000 of unsecured floating rate bank term loans, including a $400,000,000 5 year loan and a $200,000,000 7 year loan, which complements our debt maturity schedule.

Speaker 5

We also entered into interest rate swap agreements, which effectively convert the floating rates on this debt to an attractive weighted average fixed rate of 3.68 percent. We used the proceeds from this debt transaction to prepay without penalty $134,000,000 in store master funding notes that had a coupon of 5%, generating annual interest savings of $1,800,000 We also paid down the outstanding borrowings on our revolving credit facility with the remainder to be used for growth. As a result of this debt transaction, our total long term debt stands at $4,700,000,000 with a weighted average cost of 3.85 percent. And we currently have the full availability on our $600,000,000 unsecured Revolving credit facility to fund our growth. Now turning to guidance.

Speaker 5

We are increasing our 2022 Acquisition volume, net of anticipated sales, to $1,300,000,000 to $1,500,000,000 and maintaining cap rate guidance of 7% to 7.2%. We are raising our 2022 AFFO per 8.8% growth over 2021 AFFO per share. We continue to assess our outlook and will update guidance as appropriate as we move through the remainder of the year. Given the current market environment, I'd like to more specifically address our sources of capital to fund our acquisition pipeline. Based on our updated net acquisition guidance of $1,400,000,000 at the midpoint.

Speaker 5

Our retained cash flow from operations and dispositions is estimated to be Approximately $500,000,000 for the year, which combined with our year to date ATM issuance of $195,000,000 will fund approximately 2 thirds of our equity needs, and the recent $600,000,000 debt issuance We'll provide approximately 85 percent of our leverage requirements, while adhering to our sixty-forty equity debt ratio. With that, I'll turn the call back to Mary.

Speaker 2

Thank you, Sherry. We will now open the call to your questions.

Operator

We will now begin the question and answer session. And you would like to withdraw your questions, please press star then 2. We ask you to please limit yourself to 2 questions and jump back into the queue if you have additional questions. At this time, we will pause momentarily to assemble our rosters. The first question today comes from Sheila McGrath with Evercore.

Operator

Please go ahead.

Speaker 3

Yes, good morning. First quarter volume was a record. What are the factors that you can point us to that might be driving that above average volume.

Speaker 2

Hey, Sheila. Good morning. This is Mary. So our Q1 really was the result of the continued momentum that we were starting See the second half of twenty twenty one. And as a matter of fact, our business performance has been really strong in the last four quarters on a lot of key metrics from acquisitions and gross income to AFFO.

Speaker 2

And so that momentum just really continued into Q1. Our customers, the M and A activity and they're back in growth mode, and we were able to take advantage of that as well with them. So, That's really what drove it.

Speaker 3

Okay. And my second question is, I think some people view the fact that you're able to execute at higher cap rates that, then at investment grade acquisitions, there's elevated credit risk. I was wondering if you can Comment on the tenant health of your portfolio, how the portfolio performed through the pandemic and maybe how the tenant watch list Is now and in historic context?

Speaker 2

Yes. We'd love to do that, Sheila. And I'll just make a quick comment, and then let me turn it over to Craig to give them. So our business model, actually the direct origination and our ability to go out and knock on doors and address the market place, which is 200,000 companies and we've been in business 11 years and we have about 600 customers here, is very, very large. So it allows us to go out and ask for the cap rate, create our own contracts, and have that pricing We're on the front end and then from there we have a very disciplined underwriting approach that actually allows us to sort of control our destiny on our spreads and I'm sure we'll Talk a little bit more about this and we've talked in the prepared remarks about how our business model is really, really built for the current environment and our ability to Continue to get these wider spreads.

Speaker 2

So I'll turn it to Craig now and he'll talk about the portfolio overall.

Speaker 4

Sure. Yes. So the portfolio is performing extremely well right now. We're seeing Strong demand for the services and products that our tenants offer. We're seeing that in the coverages that we have across our portfolio.

Speaker 4

And just we're confident in their ability to make it through any kind of potential recessionary environment. These business our tenants have been in business for a very long time. They have operated in multiple economic cycles, and we are very diligent in our underwriting process to make sure that we understand that and how they've operated in multiple economic cycles. And again, they're performing extremely well right now, strong demand. They've adapted their businesses to operate in the current environment.

Speaker 4

Our portfolio is extremely diverse and it's granular And it's really built to withstand any issues. And we might have some customers that have issues on the fringe if there is a Potential recessionary environment, but we're very diligent and have a deep underwriting process into the real estate And we like where we're at in the real estate. And again, we differentiate ourselves too by collecting the financial statements of our tenants. So we're able to monitor our tenants proactively to manage any potential issues.

Operator

The next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.

Speaker 6

Hi, good morning. Maybe just a follow-up on that, the cap rate topic. So I was just going to ask on it. Could you go through to what extent Store is like a price setter versus price taker. So just wondering if your cost of capital increases to what extent cap rates may or may not rise a similar amount and the impact that would then have on your spreads.

Speaker 2

Yes, this is Mary. I'll touch on that, Caitlin. So again, the business model here of the direct origination in the very, very large marketplace does allow us to Ask for higher cap rates and we are seeing we're seeing that. Now the timing of what we closed in Q1 was negotiated at the end of last year and what we're closing in Q2 was negotiated at the beginning of the year. So that's why I mentioned you'll see this upward trend towards the upward movement towards the second half of the year here.

Speaker 2

But we are very, very mindful of our Cost of capital here, and Sherry mentioned it in her remarks, I think, in a really nice way where she talked about the fact that we feel we're in a good place as it relates The capital needs this year with 2 thirds of our equity available or raised through our dispositions and our ATM. Also that we're in the position we're expecting and also 85% of our debt. So we feel good about where we are on the cost of capital. We're watching it every single day And being very mindful of it. And again, the business model just really allows us to knock on a lot of doors and ask for that higher cap rate.

Speaker 2

So we're asking for these spreads. They're huge market. We're in vital industries in America. I mean, We're in Middle America, which is needed. So what I love about this business is that it is, it's a value proposition, that is so Strong and there really isn't any long term real estate capital for these customers.

Speaker 2

So we are just we have just a great opportunity to continue to grow in this market and ask for the cap rate and spend our model consistently for 11 years and it's nimble. We play in a niche lane that's $8,000,000 to $12,000,000 of average deal size and it's not a small lane, it's a wide lane. And so we have been able to do not only get higher cap rates or ask for the cap rates for the spreads. And again, it's a win win for us and the customer. So it's a good conversation, but we can also Price the escalations.

Speaker 2

And as I mentioned in my prepared remarks, we're really pleased with seeing the escalation in the marketplace, the escalation coming up in the marketplace and Our front end team is all over that too. So, we are really this is how the business model this business model is designed to work In almost any environment, and this one in particular.

Speaker 6

Yes. And when you think about that idea of asking for the cap rate, could you just go through at this point the Potential partners that you're working with, maybe what their alternative sources of capital are and how working with STORE is attractive versus those other options and maybe how that

Operator

Yes, you bet. So as I mentioned,

Speaker 2

really, there is really no long term Real Estate financing capital out there as an option. You can go to your bank, you can get some short term, a short term debt. You got to come up with equity along with that. So The bank is going to do 60%, 70%, 80% LTV. You're going to come up with some equity, and you're going to and we're going to come up with 100%.

Speaker 2

So we're a debt and an equity substitute. So we immediately are going to reduce your cost of capital and increase your return on equity. So, and you were going to put together a long term 15 to 20 year lease that has flexibility and real alignment with the customer. So if in fact, and we're going to do that for cap rate with some escalation. So, and for the customer, there's a big alignment.

Speaker 2

We're kind of like equity on the And insurance on the downside. So if you have a bad store or you need to substitute a store that works, that's working and one that doesn't, We're going to allow that flexibility as long as you give us a story that is. That's insurance on the downside. And then if you have a story that's doing great, we're going to be here to help expand it. So it's equity on the upside.

Speaker 2

So it's a real alignment with our customers and a long term relationship. We have a lot of repeat business And they know we're going to be here. And what's been interesting in this market and we're seeing it very strongly is the certainty of execution right now is a real key advantage for us having for an 11 year old platform and just a big proven track record of execution and being there for our customers.

Operator

The next question comes from Todd Thomas with KeyBanc Capital Markets. Please go ahead.

Speaker 7

Hi, thanks. Can you talk a little bit more about how your acquisition effort Changes or perhaps might evolve at inflection points and I guess maybe said tightening cycles or the changing macro environment a little bit as we look ahead either in terms of the types of deals that you're doing, the types of industries, really whether or not the buy bucket changes at all going forward.

Speaker 2

Yes. Hey, Todd. Thanks for the question. Honestly, again, it's a really big market. We're focused on Profit Center Real Estate, there's 200,000 companies out there.

Speaker 2

We're really going to Stick to our knitting here and I don't see any big shifts in those areas of different pools of buyers or anything. We're looking at a lot of opportunities here. I'll mention that in COVID, in the Q2, April, May June of 2020, we were able to manage through Our share price was not was low at that time, much lower than it is today. And we were able to have pretty get higher cap rates during that I'm right at 8.6% in that quarter. So again, this is what I'm talking about of controlling our destiny and continuing to make Accretive acquisitions in all environments and our whole company understands this now.

Speaker 2

So our whole company is really aligned together and understand how we make money and how we address the marketplace and why we exist and how we add value to our customers and our shareholders.

Speaker 7

Okay. And then with regards to the acquisition yields and sort of the slight increase that You're starting to see, so the guidance assumes 7% to 7.2%, but it sounds like there could be upside To that based on what you're seeing, is that the right read or would you not expect acquisition yields To really trend above that range at least this year, based on the time it takes to get deals done and the lag in price changes?

Speaker 2

Yes, Todd, I think you're thinking about it right. I think you can think towards the high end of that and hopefully it will be higher than that. But because of the timing of acquisitions And because of the time, like what we're negotiating today, we'll close 60 days maybe later out into the future. I think you have to That's why we did we looked at that, but we didn't change it. So I think you're thinking about it right.

Speaker 2

It's a possibility, but the high end is probably the best place to be.

Operator

The next question comes from Harsh Hanani with Green Street. Please go ahead.

Speaker 5

Thank you.

Speaker 8

So the acquisition guidance increased meaningfully this quarter relative to last quarter. And The last time last couple of times we spoke, you mentioned that there were no portfolio transactions contemplated in this guidance. Is there any portfolio acquisitions baked into that now? And to that point, the last time we also Discuss the competitive environment for these kinds of portfolios saying that cap rates on these deals are lower, there is more Private capital coming in, have you seen that change at all and has that changed your view?

Speaker 2

Harsh, thank you. So a couple of things on the portfolio transaction. So first of all, our guidance has never included any portfolio transactions. And in Q1, they what we what was available in Q1 is still out of reach from an accretion or cap rate perspective as well as a lease term perspective. So we have not seen anything that is interesting.

Speaker 2

And again, I want to just mention that any portfolio transactions would need to Into our business model of granular, diverse and so on. And so nothing there to report. And as it relates Is that you've seen some of the money that is really reliant on asset based financing It's had to take somewhat a little bit of a pause or a sideline because they've seen we've seen the debt cost arise so substantially And cap rates were compressing, so those margins were getting quite thin. So we've seen a little pause there, but that money coming in, we weren't really we weren't These were not folks that tended to be in our lane of $8,000,000 to $12,000,000

Operator

deal sizes,

Speaker 2

but that's just some color on the money in the space that we were seeing come in.

Speaker 8

That's helpful. And then you mentioned in the prepared remarks that both the CapEx It's starting to go up and these escalators are starting to go up. So when you entered new negotiation With tenants, what are they most comfortable with? Are they comfortable with lower prices on their real estate today and In exchange for lower rent growth or do they still want

Speaker 2

to have higher

Speaker 8

prices with higher rent growth? So Yes. If you can give us any color on that.

Speaker 2

Okay. So, Harsh, I apologize. I'm I want to need you to repeat that last part just a little bit. You're talking about real estate Prices, at the level of them?

Speaker 8

Yes. You mentioned cap rates are moving up and Yes? Escalators are moving up too. And so what's the interplay between those 2 when you speak with tenants? What are they more willing to compromise

Speaker 2

Harsh, we're actually Both, actually. There's no real trade off there for us. I mean, we're actually talking about both with them and we're not giving there's not an option Between the 2. So we're actually talking to them about both of them and getting what the market will bear on both.

Operator

The next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.

Speaker 9

Hey, just sticking on that question, really interesting comments about, both sort of higher escalators as well as higher cap rates. Maybe asking a little bit differently, can you provide color in terms of maybe the segments, whether it's services versus manufacturing? Is it across the board? Are there sort of subsectors or sub industries where you're seeing more ability to post versus less? Just more color on that would be great.

Speaker 2

Yes. Hey, Ron. Yes, it's across the board. We're not seeing any, in terms of the rate, in terms of the upward movement, in both across the board. Now, of course, I said industrial still has a lower cap rate in terms of in the space, if you will, but Still there's upward pressure there too.

Speaker 2

So, across the space, we're seeing upward movement.

Speaker 9

Great. And then the next one, just on the bigger deal comment, again, bouncing off of that. I know there's nothing contemplated in the guidance, but Is that still something the company is thinking about and how to foster those opportunities and how is that coming along?

Speaker 2

If there's an there's a good news about STORE is we're $11,000,000,000 so we're big enough. If we see, I like to talk about having built this business brick by brick, which is what we've done primarily. And I'd like to talk about the fact that if a bag of bricks shows up here, We're $11,000,000,000 and we can process that and we can integrate that in and not dilute the story here of granularity and diversity. But the really good news is we don't need to, that we have an acquisition front end engine, well oiled machine That is calling on a very, very large universe of opportunities and we can grow Based on our objectives, doing that all day long.

Operator

The next question comes from John Massocca with Ladenburg Thalmann. Please go ahead.

Speaker 10

Good morning.

Speaker 2

Hi, John.

Speaker 10

Good. So, going back to guidance just a little bit, Yes, my back of the envelope math is right. You did basically 30% of the high end of the new net investment volume guidance In 1Q already. So I guess maybe what is driving the conservatism relative to kind of 1Q performance? Is it Just visibility into the tail end of the year or maybe more disposition volume that's expected over the course of the year?

Speaker 10

Just any color there would be helpful.

Speaker 2

Okay. Yes, this is Mary. So, I would say definitely, John, as you know, we have some visibility into short time periods looking forward, but we don't have 1st quarter ever and our 2nd highest quarter in our history. So we're expecting that 2nd, 3rd and 4th will probably go back to a more normal Potentially a normal more normal pace and stuff. So that's how the kind of the thought process that was put into the acquisition raise or acquisition guidance raise.

Speaker 2

The force that you really have, again, it's a flow business and we can't see all the way through the year. On

Speaker 10

the disposition front, I mean, is that pretty typical 1Q versus what you're expecting?

Operator

Yes. So on dispositions, we've kind of we've already

Speaker 2

sort of guided to 3% to percent of the portfolio and I would say that we would likely be at the lower end of that, low to mid range.

Operator

The next question comes from Ki Bin Kim with Truist. Please go ahead.

Speaker 11

Thank you. Good morning. Just wanted to go back to some of the prior questions around acquisitions. I know this isn't like a video game where you're going to stop and start and reset. But given your commentary and not just yours, but the entire sector is about expecting higher cap rates, how do you balance Doing more acquisitions like your guidance implies this year versus maybe holding back a little bit with the prospects of maybe better deals ahead?

Speaker 2

Okay, Ki Bin, this is Mary. So, actually, you're correct. It's not like playing a video game. And but I'll go back to the business model and I'll tell you that, our we have such a big market And we can go out and directly acquire accretive acquisitions and we can do that today and we can do that tomorrow. So, there is that's what we're focused on.

Speaker 2

We're focused on executing every single day. And Again, this market is just so big and our ability to get accretion. But we're mindful. We're mindful of our cost of We're mindful of making accretive acquisitions. So, and our it's kind of neat that we have this business model that really helps control of destiny on the spread side because we're out there knocking on doors and asking for the rate and aligning with customers as in the current market and the current environment.

Speaker 2

And so we have that flexibility, we're nimble, big market, big lane, and we're going to do that today and we're going to do that every day we wake up.

Speaker 11

And it's an interesting dynamic in triple nets where The more you buy, the better that you do, the tougher it gets next year, right, because you're inflating, but your asset base is growing. How does that configure into some of the calculus that you think about when you do deals and increasing the size of the company, Because it does get tougher to move their earnings needle, does that how does that factor into some of the decisions that you make?

Speaker 2

Yes, great question. Very true. And again, what I'll say is what's really important is the internal growth to start with and we have 5% of that. So we could So to think about that. And the other thing really to think about is the fact that we are creating deal flow.

Speaker 2

We're not sitting waiting for something to get listed or we're not sitting waiting for someone to come knocking on our door. We're creating it and the market is huge. So that's how we think about it is, our ability to granularly acquire businesses Our real estate every day with businesses is what we do. It's what this business model is designed to do and it's what we do. And we have a lot of repeat business too, by the way.

Speaker 2

So the loyalty program that we've created in this business has really been neat, like A third of our business consistently has been repeat business. So, we priced the new business there too. It's not on the old cap rates, so any repeat businesses price as well.

Operator

The next question comes from Wes Golladay with Baird. Please go ahead.

Speaker 12

Hey, good morning, everyone. Do you expect Any change in deal flow composition as the year progresses based on your tenant conversations? More so looking at are they talking about maybe slowing down M and A, It's picking up organic expansion or just looking at loss of value of real estate more now?

Speaker 2

The really short answer to that is no. Yes, I'm looking at Tyler. He's telling me now too. You want to say a few words?

Speaker 13

Yes, Wes, it's Tyler. So basically, we're still like Mary said earlier, And having conversations with our existing customers and our prospects and it's a very big market. So we're finding customers that are looking to grow And we're just sticking with that. Like Mary said, very big market, a lot of opportunities. So even if there are some people on the fringes that Our changing their plans as a result of what they're seeing, we're finding we're definitely partnering with existing customers and new ones that are that are looking to grow and that we can help with that effort.

Speaker 12

Got it. And then a few of the REITs have mentioned baby stepping up dispositions to I guess a little bit of a price differential between the public and private pricing. I know you have a lot of your equity funded for this year, but to the extent The market just takes another leg down lower. Would you step up the dispositions to kind of set up extra for the equity perspective?

Speaker 2

A couple of thoughts on that. So, we have, again, a long runway to grow and keeping NOI and here At STORE and performing assets is really what we're focused on doing. So we're going to do dispositions very strategically To improve our portfolio and we're going to keep continue to keep the NOI here now. And the things that we disclose of Strategically, again, our assets are granular. The way we make acquisitions, it was the higher cap rates above market, we have embedded gains.

Speaker 2

So we've been very successful in being able to Dispose when needed to, but as it relates to disposing to raise equity or to use as a substitute for equity or other private equity That we would not that's not something that we would be thinking about doing, because we have the sources of equity and we will dispose of Our properties strategically as we need to and keep the NOI here and go get more of that.

Operator

The next question is a follow-up from Ki Bin Kim with Truist. Please go ahead.

Speaker 11

Thanks. A quick one on guidance. So it went up about $0.01 a half, which is the same amount of that one time items. I I was just curious if there were other one time items that were embedded in guidance and if you can comment on any other line items that might be a potential drag.

Speaker 5

Okay. So, Ketan, the 1.5% is really revenue because our acquisitions were Healthy this quarter, we achieved the revenue in this quarter and it's considered recurring because it will go throughout the year. So it's a penny and a half of that recurring kind of revenue and some cost savings. The other one time things are mentioned in the guidance. And I think that the we have termination fees and things like that.

Speaker 5

We can't predict those. But yes, we anticipate that through time there will be recurrences of that, but those are one time events.

Speaker 11

Is there any kind of prior period rents that you're expecting for 2Q to 4Q?

Speaker 5

So, I think you're referring to like COVID, referrals and we are continuing to receive payments on those. We estimate by the end of this

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mary

Speaker 2

Thank you. Thank you all for participating in our call today and for your continued support and interest in STORE. We look forward to seeing some of you at investor conferences, including NAREIT over the next few months. And I would also like to thank our dedicated team for their hard work and contribution to STORE. Please feel free to reach out if we can answer any additional questions and have a great day.

Speaker 2

Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
STORE Capital Q1 2022
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