STORE Capital Corporation
Q2 2017 Earnings Call Transcript

Published: 3 Aug 2017

[Operator:]

Good day, and welcome to the STORE Capital Second Quarter 2017 Earnings Conference Call. All participants will be in listen only mode [Operator Instructions]. After today's presentation, there'll be an opportunity to ask questions [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Moira Conlon, Investor Relations for STORE Capital.

[Moira Conlon:]

Thank you, Allison, and welcome to all of you for joining us for today's call to discuss STORE Capital's second quarter 2017 financial results. Our earnings release, which we issued this morning along with a packet of supplemental information, is available on our investor Web site at ir.storecapital.com under News & Market Data, Quarterly Results. I'm here today with Chris Volk, President and Chief Executive Officer of STORE Capital; Cathy Long, Chief Financial Officer; and Mary Fedewa, Executive Vice President of Acquisitions. On today's call, management will provide prepared remarks, and then we will open the call up to your questions. In order to maximize participation while keeping our call to one hour, we will be observing a two-question limit during the Q&A portion of the call. Participants can then reenter the queue if you have follow-up questions. Before we begin, I would like to remind you that comments on today's call will include forward-looking statements under federal securities laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipates or other comparable words and phrases. Statements that are not historical facts such as statements about our expected acquisitions or our AFFO and AFFO per share guidance for 2017 are also forward-looking statements. 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-K and 10-Q. With that, I would now like to turn the call over to Chris Volk. Chris, please go ahead.

[Chris Volk:]

Thank you, Moira. And good morning, everyone, and welcome to STORE Capital's second Quarter 2017 earnings call. With me today are Cathy Long, our CFO; and Mary Fedewa, our Executive Vice President of Acquisitions. So far this year, we've invested more than $600 million in acquisitions, including $184 million during the second quarter. At the same time, we've profitably divested more than $190 million in real estate investments with most of this activity happening during the second quarter. Combined, these activities put STORE well on our way to realizing our net acquisition investment goal of $900 million for the year. So we're right on track to meet that guidance. Our year-to-date investments and property sales reflect our broad ability to both invest in and divest up assets in ways that are accretive to our shareholders. You'll hear more about our investment and property sales activity from Mary. Our portfolio remains healthy with a sustained high occupancy rate of 99.5%, and approximately 75% of the net lease contracts rated investment grading quality based upon STORE Score methodology. Our dividend payout ratio for the second quarter approximated 66% of our adjusted funds from operations, serving to provide our shareholders with a well protected dividend and a Company that's very well positioned for long term internal growth based upon anticipated tenant rent increases and the reinvestment of our surplus cash flows. On the capital markets front, the second quarter was eventful. In June, we received and accepted a proposal from Berkshire Hathway amongst the most respected and noted long term private investors in the world to acquire 9.8% stake in STORE. The proposal was a result of years of following our Company, and we’re honored by their confidence in our business model, staff and leadership and by their appreciation for our extensive investor disclosure. With the new share issuance to Brookshire, our run rate funded debt-to-EBITDA felled by full turn from around 6 times where it remained over the past few quarters to around 5 times at end of June. With our record liquidity invested into future and net least assets, our rate funded debt-to-EBITDA ratio would fall still further. That said, we plan to grow into a more normalized corporate leverage profile consistent with that of a BBB rated BAA two rated company, and Cathy Long will address this in her remarks. At the end of the quarter, we’re corporately rated by three major rating agencies. Moody's added their investment grade rating BAA2 with the stable outlook on June 29th. We also have corporate credit ratings from Fitch and from Standard and Poor's, which are both BBB minus with a positive outlook. Now, as I do each quarter, here are some specifics relative to our second quarter investment activity. Our weighted average lease rate stood at approximately 7.84%, up slightly from 7.74% last quarter. The average annual contractual rents escalation approximated 1.8% on the properties who we acquired, providing us with a growth rate of return, which you get by adding the lease escalations to the initial lease rate it was virtually unchanged from last quarter. The weighted average primary lease term of our new investments continues to be long and approximate 16 years; the median new tenant and Moody's RiskCalc credit rating profile was Ba1; the median post-overhead unit-level fixed charge coverage ratio was 3.3

[Mary Fedewa:]

Thank you, Chris, and good morning, everyone. Year-to-date, we have funded over $600 million in growth acquisitions. Our acquisition pace for the first half of 2017 puts us right on track to meet our stated acquisition guidance of $900 million for the year, which is net of property sales. Our second quarter acquisition volume was $184 million at an average lease rate of 7.8%. Lat quarter, we mentioned that opportunistic property sales would increase as we move through the year. In the second quarter, we filled 23 properties for over $158 million. Nearly half of these were opportunistic property sales, followed by proactive strategic portfolio management and property management sales. As a result of our direct origination strategy, our portfolio has been built with embedded gains over the marketplace from day one. In the second quarter, we were able to substantiate this with an average gain of about 20% over our cost on the opportunistic property sales. The market for asset dispositions is extremely deep and the net lease assets remain in high demand in a market where returns on liquid assets are limited and cash yields remain at historic lows. As our portfolio continues to mature, we will have more opportunities to sell properties. As of the end of the quarter, 86% of our investments were in customer facing industries, dominated by the service sector at 59% of our portfolio. 17% of our portfolio was in experiential retail. Our retail customers operate businesses that are difficult to be displaced by the Internet. The remaining 14% of our portfolio was in manufacturing facilities. Repeat business continues to account for about one-third of our business, and we are excited to have added our long-time customer, Stratford School to our top 10 concentration in the second quarter. Stratford is a top rank private elementary and middle school with about 6,000 students in Southern California and the Bay Area. Our deal pipeline remains robust and diverse, and has grown substantially since the beginning of this year. We continue to be highly selective in our investments while creating value for our customers and getting paid for the value we deliver. With that, I'll turn the call to Cathy to talk about financial results and guidance.

[Cathy Long:]

Thank you, Mary. I'll start by discussing our capital markets activity and balance sheet, followed by our financial performance for the second quarter and then review our 2017 guidance. Please note that all comparisons are year-over-year, unless otherwise noted. Beginning with our capital structure. Our financing flexibility reflects our ability to access both the equity and debt markets in a variety of ways. As Chris discussed, during the second quarter, we announced the private placement of 18.6 million common shares to a wholly owned subsidiary of Berkshire Hathaway. These shares were sold at a price of $20.25 per share, netting us proceeds of $377 million. We closed the second quarter with cash of $459 million, giving us a record level of liquidity for our planned acquisition activity and deleveraging our balance sheet. We also have the full $500 million of borrowing capacity on our credit facility. At June 30th, our total long-term debt outstanding was unchanged from the prior quarter at $2.6 billion with a weighted average maturity of six years and a weighted average interest rate of 4.5%. All our borrowings are long term and fixed rate. In addition, our debt maturities are intentionally well laddered with no meaningful near-term debt maturities. One of the great features of our Master Funding debt program is our ability to prepay those notes within 24 months prior to maturity without any prepayment penalty. This long prepayment window gives us flexibility as to the timing of no pay offs or refinancings. To that end, during the third quarter, we intend to pay off our 2012-1 class A master funding notes with a principal balance of just under $200 million and a scheduled maturity of August 2019. These notes carry an interest rate of 5.77%, and by paying them off early, will bring down our weighted average interest rate and slightly increase the weighted average life of our long term debt. At quarter end, gross investments in our real estate portfolio totaled $5.5 billion of which approximately $2.9 billion had been pledged as collateral for our secured debt. The remaining $2.6 billion of real estate assets are unencumbered giving us substantial financial flexibility. Of the $200 million in Master Funding notes being paid off at June 30th, our secured debt as a percentage of gross assets would drop below 30%. Our leverage ratio at the end of the second quarter was 5 times net debt to EBITDA on a run rate basis. This equates to roughly 37% on a net debt to cost basis. Our capital structure remains very conservative, and we have no near term plans to issue equity following the Berkshire Hathaway investment. Our balance sheet remains strong with low leverage, a vast amount of liquidity and access to a variety of attractive equity and debt options to fund the strong pipeline of investment opportunities. Now, turning to our financial performance. Second quarter gross acquisition volume was $184 million, bringing year-to-date acquisitions to over $600 million. This is on track with last year's $100 million per month acquisition pace. Second quarter asset dispositions provided us over $158 million in proceeds to reinvest in additional real estate. This amount includes about $7 million of loan repayments. As of June 30th, our real estate portfolio stood at over $5.5 billion, representing 1,770 properties compared to $4.6 billion, representing 1,508 properties at June 30, 2016. The annualized base rent and interest generated by the portfolio at June 30th increased 19% to $453 million as compared to $382 million a year ago. Acquisition activity drives revenue growth, and in the second quarter, revenues increased 24% year-over-year to $114 million. Our consistently strong revenue growth reflects the Broad based demand for our real estate capital solutions. For the second quarter, total expenses increased 22% to $79 million compared to $65 million a year ago. About 60% of this increase is attributable to higher depreciation and amortization expense, simply reflecting the growth of the portfolio. Our interest expense increased about 20% over the prior year as we continued to finance a portion of our acquisition activity with attractively priced long term fixed rate debt locking-in healthy spreads for the long term. Property costs were $1.1 million for the second quarter, relatively flat compared to approximately $1.2 million a year ago. Since 97% of our real estate investments are subject to triple net leases, property level costs, such as property taxes, insurance and maintenance, are the responsibility of our tenants and therefore are not a significant portion of our annual expenses. G&A expenses in the second quarter were $9.3 million compared to $8.5 million a year ago. As a percentage of our total portfolio assets, G&A was 67 basis points on an annualized basis, an improvement of 10% over the same period last year. Net income increased to $61 million or $0.35 per basic and diluted share for the quarter compared to $30 million or $0.21 per basic and diluted share a year ago. This increase was due both to the growth in the size of our real-estate investment portfolio, which generated additional rental revenues and interest income and to the significant increase in gains on property sales. Our net income for the second quarter included a gain of $26 million on the sale of 23 properties compared to a gain of about $3 million on the sale of four properties in the second quarter of 2016. We delivered another strong quarter of AFFO and AFFO per share growth. For the quarter, AFFO increased 29% to $76 million or $0.44 per basic and diluted share from $59 million or $0.40 per basic and diluted share last year. Our dividend is an important component of our overall stockholder return. And over the past two years, we've increased our dividend per share by 16%, while maintaining a low dividend payout ratio and reducing our leverage. For the second quarter, we declared a cash dividend of $0.29 per common share, representing approximately 66% of our AFFO per share. Our low payout ratio and attractive lease escalators generate excess cash flow that we can invest in new acquisition opportunities to generate strong internal growth. As you know, our Board evaluates our dividend policy at each Board meeting and considers raising it at least annually as our results permit. As we've maintained our quarterly dividend at the $0.29 level for four quarters now and our dividend payout ratio is currently among the lowest in net lease sector, you can anticipate that our Board will be considering a dividend increase as we complete our third quarter. Now turning to our guidance for 2017. Today, we're updating our 2017 guidance to reflect the recent Berkshire Hathaway investments and our decision to reduce our target leverage ratio. As you know, the Berkshire Hathaway investment meaningfully accelerated the timing of our planned equity raises, reducing expected AFFO per share for the remainder of 2017. Given this investment, we have no near-terms plans to issue additional equity and we’re well positioned for continued growth into 2018. This investment also allowed us to immediately de-lever our balance sheet and reduce our targeted leverage range by a quarter turn. We now expect 2017 AFFO per share to be in a range of $1.59 to $1.71. As with prior years, AFFO per share in any period is sensitive to the timing and amount of acquisitions, dispositions and capital markets activities. We had a particularly strong acquisition volume in the first quarter of this year, and particularly strong property sales volume in the second quarter. Year-to-date, we’re on track with our previously stated net acquisition volume guidance of $900 million for 2017, which we are affirming today. This amount is net of estimated property sales in the range of $200 million to $300 million, which includes the sales made in the first half of the year. Our AFFO guidance is based on the weighted average cap rate on new acquisitions of 7.75% and our new lower target leverage ratio in the range of 5.5 to 6 times run rate net debt to EBITDA. Our AFFO per share guidance for 2017 assumes net income of $0.79 to $0.80 per share, excluding gains and losses from property sales plus $0.82 to $0.83 per share of real-estate depreciation and amortization plus about $0.08 per share related to items such as equity compensation, the amortization of deferred financing costs and straight-line rent. And now, I will turn the call back to Chris.

[Chris Volk:]

Thank you so much, Cathy. As is usual for me to do and before turning the call over to the operator for questions, I'd just like to make a few added comments. First off, I would like to draw your attention to some enhanced disclosure in our investor supplement. STORE, by design, is devoted mostly to service sector tenants, followed far behind by retail and manufacturing tenants. In terms of industry exposure, we categorize our tenants by industry using the North American industry classification system or NACS, which is the standard use by the federal statistical agencies in classifying business establishments for the purposes of collecting, analyzing and publishing statistical data relating to U.S. business economy. From a diversity advantage point using such a system have advantages for us and as much as the codes themselves help us and you better understand true portfolio diversity. As of the end of the second quarter, our tenants expand 102 industries. Working for this industry base, we have aggregated industries into industry groups. All the shared number of industries in the base classification provides a better idea of non-correlated investment risk. Using industry groups makes a lot of sense to provide you greater insight into our tenant and industry diversity. So as of the second quarter, we compressed our 102 industries into 74 main industry groups, which substantially reduced the percentage of our investment portfolio allocated to un-defined or other industries in our disclosures. We’ve made a few additional changes to our disclosure. Included in our quarterly presentation, which we’ll file tomorrow, will also be added disclosure regarding property sales activity, which is particularly strong during the second quarter. We’re also adding a comparison of cumulative tenant credit and contract ratings over the past three years. We’re adding this so you can see the marked consistency in portfolio quality overtime making use of unprecedented comparative data we will provide you quarterly since 2014. With all of this added important disclosure next quarter, we intend to combine our investor presentation and investor supplemental information desk into a single document to improve information accessibility. Before closing, I would like to make a few comments about the Berkshire Hathaway equity investment in STORE, which closed on June 23rd. In agreeing to such a large and unplanned share issuance, our Board made a strategic decision to include Berkshire Hathaway amongst STORE’s largest shareholders. The unexpected share issuance naturally has an impact on our 2017 AFFO per share because of an elevated share count. However, from a growth perspective, the impact of an elevated share count is simply temporary and our long term growth trajectory is substantially the same. As our Board of Directors considers dividend policy, amongst other things, you can therefore expect that we will be making such evaluations in light of our expected growth trajectory. When viewed in this way, any lessening of our 2017 AFFO per share guidance is virtually off leading since our 2018 time weighted share issuance is expected to fall materially below earlier expectations. By the way, we plan to deliver our initial 2018 guidance to you on our next quarterly earnings call. Finally, about a penny of the 2017 guidance provision results from accompanying strategic election to reduce our leverage guidance to a range of 5.5 to 6 times funded debt to EBITDA. Overtime, we expect this decision will prove accretive to our shareholder through a lower cost of capital. Impressively, the top end of our leverage target now equates to the bottom end of our leverage target in January 2015. We’ve been able to realize this balance sheet strengthening while delivering amongst the highest net lease dividend growth at the same time elevating our shareholder dividend protection. All of us at STORE are proud of this meaningful accomplishment. And with that, let me turn the call back over to the operator for any questions.

[Operator:]

Thank you. We will now begin the question-and-answer session [Operator Instructions]. Our first question will come from Craig Mailman of KeyBanc Capital Markets. Please go ahead.

[Craig Mailman:]

Just curios, Mary, on the dispositions. What's the criteria or strategy you guys are taking? It seems like there's some opportunistic, but then some credit protection on the other side. Just curious you guys are looking through the portfolio, how you're slicing this up into buckets? And just curious, so you gave us 20% gain on the opportunistic sales. What's the gain on the other bucket?

[Mary Fedewa:]

So we look at property sales as portfolio management in one bucket and in that bucket is our opportunistic property sales, and these are -- properties that we own that we probably won't do any more business with the customer, we’ve really customer centric approach. So we go through first of say, are we going to do any more business with them, do they -- are they nice cash flowing properties and can we get a gain on some of these properties. So we select them from that criteria and go out and sale those. The other bucket of that and that was the 19% or the 20% gain that we had. The other bucket is strategic and that's where we're rebalancing our portfolio. We're actually getting on front of things that we might see as issues and so on. In that particular bucket, we did have a gain in that bucket as well and it was near 6% gain. So those together were both gains. Then the property management is actually more of a recovery metric and those are properties that might be in bankruptcy, they're vacant and paying or they're vacant. And we had about 91% recovery on those net offs for the first half of the year. Does that help you?

[Craig Mailman:]

No, it does. I was just curious if I think I saw Captain D's came off the top tenant list. Is there an industry group exposure you guys are [multiple speakers]…

[Mary Fedewa:]

They got bumped off a bit from other tenants like we did more with, yes -- we didn't sell them.

[Chris Volk:]

We have an existing customer called, Stratford Schools, which is in California. And we provide them some additional capital doing the quarter and that caused Captain D's to drop off.

[Craig Mailman:]

And then just one other quick question. The leverage coming down coupled with, if you look at it from a gross basis, you guys are doing about $1.1 billion, $1.2 billion a year for the last couple of years. Just thinking longer term from an earnings growth perspective, it seems like with lower leverage and that stable amount given some dispositions and just a growing denominator that overtime the earnings growth profile is eroding a bit. I'm just curious if the decision to go with lower leverage was, which I agree, was just you get some multiple expansion from going that route which can offset maybe some of the lower growth longer term. Is that the right way to think about how you guys are thinking about the business now?

[Chris Volk:]

Clearly, there's some correlation between size and multiples in the REIT space, the lease and net lease space, which I think is true. But one thing is that we've been really conscious of Craig is to position the Company for as much internal growth as we can get. And that's something you really have to think about early on. So you get internal growth by having a low dividend payout ratio. So at 66%, we're able to roll that cash and that gets you probably 2.5 points of growth if you're an investor. And then the other way you get internal growth is by lease escalators that are just built into the leases. And every net lease company that puts out money and leases invariably puts in contractual lease escalators of some form or another, ours average 1.8% a year, which is the highest as any of the companies that we've run previously going back 30 years; and if you look at 1.8 % of lease escalators that were assessed at another 2.5% plus wroth of growth. So you have five points worth of growth, which is more internal growth than we've ever had in any other company periods. So then the external growth is just gravy on top of that. And there will be some frictional drags if you have some vacancies and what not. And one thing that you noticed from the property sales is that you’re combining portfolio management with property management, and that's really a key. So for example, we generated $10 million profit above our cost, which basically to put another way, says that if hypothetically we had some vacant property and we lost $10 million then you combine it all together and you actually lose nothing. So the idea is to immunize your portfolio against to any form of losses at all while maximizing your internal growth. So as we grow the denominator, which is the asset base of this company, naturally growth has to slow down unless we increase our investment activity proportionally, right today we've been doing that. And so you can expect that external growth does taper off. But fortunately for our shareholders it’s offset by the highest internal growth in the net lease space.

[Operator:]

And our next question will come from Vikram Malhotra from Morgan Stanley. Please go ahead.

[Vikram Malhotra:]

Wanted to just understand what’s in the behavioral health and medical and dental. Can you give us some sense of what are in those categories? And one thing I've heard and talking to maybe some private folks in the industry is that the medical space maybe a category that's growing for the traditional net lease companies. Just any thoughts on that would be helpful?

[Mary Fedewa:]

In that space, we do some specialty what we call specialty medical, so we have some oncology units and we have some dental units, we have some dermatology in there. We have some addiction recovery units in there as well. So that's the mix -- urgent cares, so that's the mix of that bucket.

[Chris Volk:]

One of the things that we've been doing in order to give you better disclosure it was really hard for us given how many industries that we had to print all these things out on a page and get very specific. So your grouping in the case of the medical assets, really dispirit types of medical services that has that are non-correlated in total. But I think it just gives you a flavor for things that we've looked at.

[Vikram Malhotra:]

And then just a tenant question or couple of tenants. Any updates or you've heard on Gander Mountain, and second just as a lot of news and talk on around Applebee's. Any thoughts on both of those would be helpful.

[Chris Volk:]

So on Gander Mountain, they have until October to accept leases. And I know that prior net lease companies have had calls of gotten Gander Mountain questions or even made some comments. And I found that their comments are pretty universal along with ours, which is the company is looking through a lot of this issues. You'll notice if you are following Mr. [Lemonis] and you'll follow his tweets that he wants the number of our properties. So you know that they’re in negotiation. From a rent perspective, we have one possessed Gander Mountain today, which is a lease rejected in June. They paid rent for June, but they actually gave us the property back. So we have one of our 13 properties has been returned to us. And that is in Alabama its next to Hobby Lobby and that’s right next to a Wal-Mart is a relatively new center and it's -- we think it's a good location. So we should be able to re-rent that property. We are in the process of picking through what are the properties we’re getting back to that’s been in the works for some time. Although, you really can't -- it’s not actionable until you actually get the properties back. For July, we should have all of our rents for the other 12 properties for July, because they’ve not -- the lease has not been rejected. And for August, we should have all the rents -- . And on Applebee’s. Applebee’s we’ve got 47 Applebee’s total, of which 33 are with the second largest Applebee’s licensee. We’re not expecting problems for the portfolio they’ll be meaningful, if at all. I mean I think we’re not seeing anything out there. We are -- keep in mind when you have news, whether it's Applebee’s or whether it's theaters, with just theater announcement two days ago from one of the major theater operators on sales declines and what not. We don’t own the stock of these companies. We just own the real estate. And in the case of the rents -- the 4-Wall rents if you look at our casual dining exposure to the 4-Wall rents are reasonably north of 2

[Operator:]

And our next question will come from Michael Knott with Green Street Advisors. Please go ahead.

[Michael Knott:]

Just a question on cap rates, and some of the flagship deals that we’ve seen in 1Q and 2Q with Art Van in 1Q and Stratford in 2Q. Obviously, those are very different businesses. Overall, yields you’ve reported are pretty similar. So I'm just curious I think about what the right return to achieve on different types of deals, or is there just an overall target yield that you want to achieve, and the types of businesses aren’t as important in the context of a broad diversified portfolio. Just curious how you think about that?

[Chris Volk:]

The fun part about this business, Michael, is that it's full of participants that do not view risk the same way. And so that means the investment assets are never efficiently priced. So some people view assets as being highly attractive, but other people may not find them as attractive. And plus on top of that, risk can be broken down both into credit and unit level store risk, location risk. And so in theory, every single property should be -- have its own discreet cap rate if you’re going to get highly theoretical about this stuff. So the reality of it is that we’re out there getting the best lease rates that we know how to get. And we’re simplifying our relationship managers to do that, so the entire company is geared to be able to deliver that. I mean the goal being to -- on a portfolio basis make a return that’s higher than our cost of capital. And that’s what we’ve had a history of doing for the last 30 years. So some properties, if you’re having a cup of coffee with somebody and you’re about transactions some properties you look at and say why don’t we do this at this cap rate or when we do this at that cap rate, but that’s just a natural part of the business.

[Michael Knott:]

And then just to go back to your Applebee’s comments and your casual dining comments more generally. Aare you guys seeing any negative trends in terms of traffic or sales that may start to impact the coverage that you referenced? Or how are you thinking about in general those trends?

[Chris Volk:]

Well, we have more restaurants than any else. So we're going to always get some restaurants back from time-to-time. So I mean this quarter we had -- we ended the quarter with nine possessed properties of which some of them are casual dining restaurants. And we have ideas that what we're going to do with most of those nine properties in fact. And two of them came in and two of them left during the quarter, so we all through this stuff. So I expect during the course of the year, I wouldn't be surprised to have a few casual dining properties back. I don't think that it has any meaningful impact on us. And it's functionally baked into our guidance anyway. So when you're estimating all the stuff you guys assume that's part of guidance. If you are looking at casual dining in our portfolio and you're looking from how our same-store sales doing this quarter let's say versus a year ago, the answer is they're down around 3%, so not huge if you’re looking at the Applebee’s system. I think Applebee's system is down closer to 5%. The concepts that are doing the best out there are those that are appealing to the greater desire for takeout food and drive in food. So people using UberEATS and all that stuff, and Grubhub and people that have great phone apps, and then the companies that are falling behind are the companies that have less technology, less apps that appeal some millennials that really like the stuff. And Applebee's for sure has fallen behind of that side, and we expect them to catch up. I’ve always found that the restaurant business is a zero sum game. So it's a market share gain where one year McDonald's is winning and the next year they're losing, and we've been doing this for 30 years and seeing that. So you've seen restaurant chains falling apart times, because they’ve missed some strategic elements of their business and they’ve had oversights. In the case of Applebee's, beyond the oversight of technology that where they're not exactly leader on technology, they had the issues with the Wood Fire Grill, which was a costly experiment that was designed to change the product mix, and was not well received by their basic client base. But all that stuff can be corrected, and so over time, we're long term players in the stuff we understand it. And our risk is not that their sales dropped 3% or 5%, our risk is that they have to drop a lot more than that, because the average breakeven for most of our investments is something like 30%. So the margin for safety and the business that we're in is huge, and that's why there's a big spread between the contract risk and the credit risk of the tenants that we serve.

[Operator:]

And our next question will come from David Corak with FBR. Please go ahead.

[David Corak:]

Just going to back to the theaters when you think about the portfolio of the 39 assets. Can you tell us what the mix is between renovated and non-renovated today? And then any color on coverage and actual market exposure there that you could share with us that would be great?

[Chris Volk:]

Well, the coverages trailing 12 in excess of -- they're in excess of the overall portfolio, which is two month. So their coverage is in excess of the median STORE score is A3, which is also higher than median STORE score for the portfolio. If you look at the mix of properties that have fat shares and what not, I've got it right here. But I think it's -- we have about half our portfolio is traditional seating and about half is an upgraded to recliners and leather seats, about 40% has a dine-in element on our full serve or self serve. And frankly, of the half it's not been done -- most of that's been converted as well. And by the way, this is another reason on the casual dining side, one of the reasons is -- one of the things that’s impacting casual dining is that restaurants now casual dining establishments in and of themselves. So we’re to -- casual dining establishments in and of themselves so this whole new entry of theaters into the space where you used to go out to a Chili's restaurant and have a dinner and then go to the theater. And now you've just skip the Chili's altogether and you go right to the theater. So that's a kind of thing that’s happening in the space it's another element.

[Operator:]

Our next question will come from Dan Donlan of Ladenburg Thalman. Please go ahead.

[Dan Donlan:]

Just curious going back to Craig's question on the asset sales. Could you maybe break-out what the cap rates were on the opportunistic sales? And then maybe the cap rate on the more strategic sales where you might have wanted to get away from a credit that you were concerned about or something to that degree?

[Chris Volk:]

So Dan, if you look at the opportunistic sales, the average cap rate was just little bit north of 7, so around 7 pence give or take. But those cap rates range I mean the low cap rate was around at 6, I mean we have number of cap rates in the 6 area some of the cap rates in 730 area. And the higher cap rate opportunistic stuff was in industrial assets and then the lower cap rate stuff would have been restaurant assets. And the biggest -- the lowest cap rate we got during the quarter was casual dining restaurant concept. If you look at the strategic portfolio stuff that's where we’re basically just rebalancing the portfolio and we’re looking to shift exposure or reduce exposures here or there in ways that we think are long-term beneficial to customers. So the cap rate there is going to average in the 760 range. You’re basically obviously not selling your better assets right even when you’re doing that. So I would say if you’re looking at the quality of our portfolio if you’re thinking about net asset value, I would look at the opportunistic sales as being more representative of what the true asset value as if you were trying to sell the stuff, because we have such a huge amount of assets to do so well. The strategic stuff is just a small piece of that portfolio we’re trying to rebalance. And we've said at the beginning of this year and also last November when we started to give guidance that we’ll be viewing more of the stuff. And then the property management stuff is interesting in its own right. It includes things like properties where there were vacant properties we’re paying, so we go rid off one of those types of assets that there’re handful of bankrupt properties where they’re actually paying us rent through the bankruptcy. But then the companies got sold and people wanted to buy the properties and they paid us for those. We have properties like [indiscernible] college, which we sold at a loss that it was a vacant asset that have been vacant for some time. We have properties where we’ve got a couple of closer. There’ll to be two at the Midwest that we closed down. I think we made money those are booked even on those we have -- well. So I mean we've got some properties where we have tenants that have come to us and wanted to get out of leases, because properties have come less profitable. So we’ve asked to buy them back from us. And it's one of the benefits of doing business with us if you’re a tenant is exactly that. I mean the worst thing that can happen for a tenant is where a landlord who basically settles in with some lease and just doesn’t work with them ever. They want to close to get out of property. So we just took our original cost back from those assets, so all that kind of stuff is loaded into the property management area. So inclusive of all the vacant assets, we basically are north of 91% of our original cost in those assets, which is pretty great. And then if you look at the gains on the other assets, they’re so significant that net-net we’re actually 10 million positive over cost. And you can look at that as almost like a negative vacancy rate where you can use that $10 million cushion to basically offset potential losses on the nine empty properties that we’re sitting on today or potential issues relating to other vacant assets. And this is what we should do for you as investors.

[Dan Donlan:]

And then just going back maybe for Cathy or Chris to future financing in order to avoid the lumpiness from raising equity and the impact on earnings growth. Is the ATM going to be more of a thought process for you guys going forward? And then on the debt side, you’ve got the investment grade credit rating. I was just curious your appetite for unsecured versus the asset back facilities that you use. I understand the positives to be asset back facilities. But there is a lot of principal optimization associated with that, which obviously eats into your cash flow. So just curious if you could give us some flavor there.

[Chris Volk:]

So first on the asset back facilities, you’re correct. There’s principal amortization, it's not a lot, it's actually less and you would find in the CMBS market. But beyond that, the ABS market is pretty unique in the sense that you can actually re-leverage assets later on. So you can actually recoup that amortization to keep leverage on a more constant basis, which is just an important feature of that that you wouldn’t find in any other debt transaction. You’ll see us in the next year or two basically alternately between both markets. Our thesis on this is that the availability of master funding is really exceptionally accretive to those people that are backing us on the unsecured debt side, because it basically reduces every single unencumbered asset ratio you’d ever have. And I think long term that will be reflected both in our ratings and the desirability of the people that we have in terms of unsecured debt paper. And in that sense it will lower our cost of capital relative to a company that didn’t have the choice of the ABS debt market. And in the near term, we’re going to lower our ABS debt, because as Cathy said, we’re going to prepay some ABS debt that matures actually in 2019, but it's pre-payable in 2017. So that is coming up in August. The next debt issuance that we do is likely to be an unsecured debt issuance where we’re undecided as to whether we do prior placement or public offerings. At some point in time, we’ll enter the public market on the unsecured debt side. We like both of them we’ve intentionally gone to both marketplaces and our intention has been to be a BBB or better rate real estate investment trust. And that’s reflected certainly and the decision to make it so that the top end of our leverage targets today are equal to the bottom end of our leverage targets in January 2015. So hope that helps. And on the ATM side by the way, we won't use the ATM when it's appropriate we like the ATM. Obviously, in the near term we’re sitting on a lot of cash, sourcing and a lot of liquidity. So we don’t necessarily need to do anything for quite a while.

[Operator:]

And our next question will come from Todd Stender with Wells Fargo. Please go ahead.

[Todd Stender:]

Back to the private placement to Berkshire. You issued 2025 that’s at a discount of at least our estimate of NAV. But when you get a call like that from Berkshire and I guess you say yes. But how do you guys weigh the plusses and minuses about issuing really below maybe where your first choice would be with higher cost equity, but you certainly get us a shining endorsement from Berkshire?

[Chris Volk:]

Well, first of all, you as an analyst and your constituents as investors listening to the call today know exactly what the impact is, which the impact is basically $0.05 in AFFO for 2017 of which a penny of it is due to reduced leverage. So you’re now really talking $0.04 of a full number. And basically no change to what happens in 2018 or in '19 or '20, so it's just one term temporary, one-time temporary blip of AFFO caused by that dilution. And the question is $0.04 worth it for having one of the finest long term investors in the world, in your side. And our Board made decision it was truly clearly worth doing that.

[Todd Stender:]

And then probably for Mary, the stuff that you sold in the quarter. Can you just give maybe what's left maybe what's left in lease term and then any rent coverage range that you can provide?

[Mary Fedewa:]

Well, what's left in the lease term for what's left here in the portfolio or what’s…

[Todd Stender:]

The stuff you sold…

[Mary Fedewa:]

They were on -- we started this company six years ago, so most of our lease terms are 10 plus years, so they were in that range. And they were -- but it's really opportunistic stuff it was nice covering properties and stuff. And even the strategic things were -- we got a premium over the marketplace on those from a cap rate perspective. So they were nice covering properties too. But the lease terms are certainly above 10 years.

[Operator:]

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Chris Volk for any closing remarks.

[Chris Volk:]

Well, thanks for attending the call today. And our next Investor presentations, by the way, are going to be at the Wells Fargo Net Lease Forum, which is scheduled to be in New York City on September 12th. So if you’re interested in seeing us there, let us know. And have a great.

[Operator:]

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