STORE Capital Corporation
Q3 2017 Earnings Call Transcript

Published: 2 Nov 2017

[Operator:]

Good morning, and welcome to the STORE Capital Third Quarter 2017 Earnings Conference Call. All participants will be in listen only mode [Operator Instructions]. After today's presentation, there will 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. Please go ahead.

[Moira Conlon:]

Thank you, Carey, and thank you all for joining us for today to discuss STORE Capital's third quarter 2017 financial results. This morning we issued our earnings release, and quarterly investor presentation which includes supplemental information for today’s call. These documents are available in the investor relations section of our website at ir.storecapital.com under News & Results, Quarterly Results. I'm here today with Chris Volk, President and Chief Executive Officer of STORE; Mary Fedewa, Chief Operating Officer and Cathy Long, Chief Financial Officer. 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 re-enter 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 the federal securities laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate 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 and 2018 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 actual 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 third quarter 2017 earnings call. With me today are Mary Fedewa, our Chief Operating Officer and Cathy Long, our Chief Financial Officer. Today we have invested more than $1 billion in acquisitions, including over $400 million during the third quarter. At the same time, we've profitably divested approximately $210 million in real estate investments with most of this activity happening in the second quarter. So combined with net investment activity as of the end of the third quarter of just below $800 million we are right on track to meet our stated net investment guidance of $900 million for the year. Our year-to-date investments and property sales reflect our ability to consistently to invest in and divest up assets in ways that are accretive to our shareholders. At the same time, our portfolio remains healthy with approximately 75% of the net lease contracts weighted investment grade quality based upon our STORE scores methodology in just eight properties today requiring a vacancy resolution. You'll hear more about our property investment and sales activity and portfolio help later from Mary. Our dividend payout ratio for the quarter approximated 76% of our adjusted funds from operations, serving to provide our shareholders with a well protected dividend and a Company that's well positioned for long term internal growth based upon anticipated tenant rent increases and the reinvestment of our surplus cash flows. While our payout ratio increased during the quarter as a result of a 6.9% dividend increase, it will remain approximately in line with where it heads then based upon our preliminary 2018 guidance which Cathy will discuss in a few minutes. Now, as I do each quarter here are some statistics relative to our third quarter investment activity. Our weighted average lease rate was approximately 7.85%, which is up slightly compared to 7.84% last quarter. The average annual contractual lease escalations for investments made during the quarter approximated 1.9% providing us with a growth rate of return, which you get by adding the lease rate to the initial, to the escalators that was virtually unchanged from last quarter. The weighted average primary lease term of our new investments continues to be long at approximately 18 years; the median new tenant and Moody's RiskCalc corporate credit rating profile was Ba2; the median post-overhead unit-level fixed charge coverage ratio was 2.8

[Mary Fedewa:]

Thank you, Chris, and good morning, everyone. In the third quarter we funded $402 million of acquisitions at a cap rate of 7.85%. This was our second highest quarter ever and it brings our year-to-date acquisitions to over $1 billion. Net of dispositions, we are on track to meet our 2017 net acquisition target. During the third quarter we continued to actively manage our portfolio taking advantage of opportunities to sell properties. We sold a total of 12 properties which had an acquisition cost of $29 million. This brings our total dispositions for the year to $210 million. As a result of our direct origination strategy, our portfolio has been built with embedded gains over the market place from day one. Of the 40 properties we have sold year-to-date, 12 were opportunistic sales in which we had gains over original cost of approximately $17 million or 21%. We also sold 10 properties and strategic sales that resulted in more modest gains of approximately $3 million or 6% over our original cost. The remaining 18 properties were sold as part of our ongoing property management activities, which resulted in a 93% recovery or a $6 million loss. In summary, the combined gain of approximately $20 million year-to-date more than offset the $6 million loss. Now turning to some portfolio highlights. Our portfolio performance continues to be strong. 69% of our portfolio is in the service sector, 17.6% is an experiential retail and the remaining 13.4% is in manufacturing. The portfolio remains extremely diverse by design with our largest tenant representing less than 3% of rent and interest. In the third quarter we added two new tenants to our top 10. Simultaneous with the Bass Pro acquisition of Cabela’s in September we acquired nine properties and are excited to have Bass Pro as our second largest tenant. We continue to like the experiential retail sector and hunting, fishing, camping and boarding fit directly into that category. We also added U.S. LBM, one of the largest building material distributors in the U.S. with more than 230 locations in 29 states. We have built this relationship overtime and as a result of our fourth transaction with them they are now in our top 10. As of the end of the third quarter, we had 19 vacant properties, 13 of which are Gander Mountain properties. Since the end of the third quarter we have released eight of those and sold one. And we have pending resolution on two more of the Gander assets. As a result, today we are actively seeking resolution on only eight vacant properties out of over 1,800 properties and we have interest in many of these already. And now turning to the overall market, cap rates remain stable and our direct origination platform continues to generate a broad and diverse set of opportunities. Our acquisition pipeline has grown over 30% since the beginning of the year. This allows us to be highly selective in our investments while creating value for our customers and getting paid for this value. 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 third quarter. Then I’ll review our guidance for the remainder of 2017 and introduce our guidance for 2018. Please note that all comparisons are year-over-year, unless otherwise noted. Beginning with our capital structure. Following the Berkshire Hathaway investment in June, our strong liquidity going into the third quarter positions us well to execute on our acquisition plan for the quarter without any additional equity. We ended the third quarter with nearly $470 million of cash and the full availability on our $500 million credit facility giving us ample funds for both third quarter acquisition activity and the planned prepayment of debt. With respect to debt, one of the great features of our master funding program is our ability to prepay any series of notes within 24 months prior to maturity without a prepayment penalty. This long prepayment window gives us flexibility as to the timing of the note pay-offs or refinancing. To that end, during the third quarter we paid off our 2012-1 Class A Master Funding notes which had a principal balance of just under $200 million and a scheduled maturity of August 2019. These notes carried an interest rate of 5.77% and by paying them off early we reduced the weighted average interest rate of our long term debt, and also reduced our secured debt as a percentage of gross assets to under 30%. As a result at September 30, our long term debt outstanding stood at $2.3 billion with a weighted average interest rate of just under 4.4% and a weighted average maturity of 60 years. All of our long term borrowings are fixed rate and our debt maturities are intentionally well laddered with the median annual debt maturities of approximately $250 million and no meaningful near term debt maturities until 2020. At quarter end, gross investments in our real estate portfolio totalled $5.9 billion of which approximately $2.9 billion have been pledged as collateral for our secured debt. The remaining $3 billion of real estate assets are unencumbered giving us substantial financing flexibility. Our leverage ratio at the end of the third quarter was 5.8 times net debt to EBITDA on a run rate basis. This equates to roughly 40% on a net debt to cost basis. As of September 30, we have $35 million of cash and $418 million of borrowing capacity on our credit facility. So as we head into fourth quarter of 2017 our liquidity position remains healthy with conservative balance sheet leverage and access to a variety of attractive equity and debt options to fund the large pipeline of investment opportunities. Now turning to our financial performance. Acquisition activity during the quarter was funded by cash on hand, borrowings of $82 on a credit facility and cash proceeds of approximately $32 million from third quarter asset dispositions. As of September 30, our real estate portfolios stood at over $5.9 billion representing 1,826 properties compared to $4.8 billion representing 1,576 properties at September 30, 2016. The annualized base rent and interest generated by the portfolio at September 30th increased 20% to $474 million as compared to $395 million a year ago. Acquisition activity drives revenue growth, and in the third quarter, revenues increased 14% year-over-year to $111 million. A good portion of the third quarter acquisition volume didn’t occur until late in the quarter and the full revenue impact of that volume won’t be realized until the fourth quarter. Third quarter 2017 revenues include a $4.6 million non-cash charge related to the accelerated amortization of lease incentives associated with leases that were terminated during the quarter. Excluding this charge, revenues were up approximately 19% year-over-year. Our consistently strong revenue growth reflects the broad based demand for our real estate capital solutions. For the third quarter, total expenses increased 31% to $88 million compared to $67 million a year ago. A large portion of this increase in expenses relates to the $7.6 million non-cash charge related to the impairment of two Gander Mountain properties that are subject to CMDS financing which became vacant during the quarter. Approximately half of the remaining increase is attributable to higher depreciation and amortization expense, simply reflecting the growth of the portfolio. Our interest expense increased about 16% 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. Interest expense for the third quarter of 2017 includes a $2 million non-cash charge related to accelerated amortization of the deferred financing costs associated with the STORE Master Funding bonds we prepaid in August. Property costs were $1.3 million for the quarter, up from $800,000 a year ago. Since 98% 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 earned a significant portion of our annual expenses. Property tax expense on the increase in vacancies drove much of the year-over-year increase in property costs. G&A expenses in the third quarter were $10.3 million compared to $8.1 million a year ago. G&A expenses for the third quarter includes 300,000 of severance costs for an Executive Vice President who resigned in September. Excluding the severance charge G&A was 67 basis points on an annualized basis as a percentage of our total portfolio assets which is consistent with the third quarter of last year. [Net income] was $29 million or $0.15 per basic and diluted share for the third quarter of 2017, a decrease from $36 million or $0.24 per basic and diluted share a year ago. The decrease between years related mainly to the three non-cash charges I’ve just discussed. Real estate sales during the quarter generated gains of $6.3 million net of tax, which compares closely to the $6.7 million for the same period in 2016. For the quarter, AFFO increased 21% to $77 million, a $0.41 per basic and diluted share from $64 million or $0.42 per basic and $0.41 per diluted share last year. On a per share basis, third quarter AFFO 2017 reflects the impact of the Berkshire investment made at the end of the second quarter. As expected, our board increased our cash dividend to $0.31 per common share in the third quarter. Our dividend is an important component of our overall stockholder return and since our IPO in 2014 we’ve increased our dividend per share by 24% while maintaining a low dividend payout ratio and reducing our leverage. Now turning to our guidance for 2017. Year-to-date we are on track with our previously stated net acquisition volume guidance of $900 million for 2017. This guidance is net of estimated property sales in the range of $250 million to $330 million for the year. Based on these assumptions we are affirming our 2017 AFFO per share guidance which we expect to be in a range of $1.69 to $1.71 per share. This reflects both the impact of the June 2017 Berkshire Hathaway investment and our decision to maintain a reduced target leverage ratio in the range of 5.5 to 6 times net debt to EBTIDA. Our AFFO guidance is based on a weighted average cap rate of 7.75% on new acquisitions for the remainder of the year. Our AFFO per share guidance for 2017 assumes net income of $0.75 to $0.77 per share excluding gains and losses from property sales, plus $0.83 per share of real estate depreciation and amortization plus about $0.11 per share related to items such as equity compensation, the amortization of deferred financing cost and straight-line rent. Finally, I’ll turn to our initial guidance for 2018. We currently expect 2018 AFFO per share in the range of a $1.78 to $1.84. Based on our current projections for real estate acquisitions for the remainder of 2017, plus estimated acquisition volume of approximately $900 million for 2018 which is net of projected sales. AFFO per share in any period is always sensitive to the timing of acquisitions during that period as well as dispositions in capital markets activities. Our AFFO guidance is based on a weighted average cap rate on new acquisitions of 7.75% and a target leverage ratio in the range of 5.5 to 6 times run rate net debt to EBTIDA. Our AFFO per share guidance for 2018 equates to anticipated net income of $0.87 to $0.90 per share plus $0.84 to $0.87 per share of expected real estate depreciation and amortization, plus approximately $0.07 per share related to items such as straight-line rents, equity comps and deferred financing cost amortization. And now I’ll 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'm going to make a few added comments. I want to start off by drawing your attention to the latest addition to our board of directors, which we announced Tuesday and which raises the number of our directors to nine, seven of whom are independent. Many of you listening know Cathy right from her work as a past Chief Financial Officer of two highly regarded public lease. We first met her when she worked as a Investment Banker to make possible the 1994 New York Stock Exchange listing of our first public company, franchise finance corporation of America. Her understanding of our historic and current activities, together with a highly relevant experience with other companies having built and managed net lease investment portfolios make her a very welcome and valued addition to our board. Now I’d like to also mention some disclosure enhancements that we telegraphed last quarter. We elected to do away with the financial supplement disclosure and have instead incorporated this disclosure into our quarterly investor presentation which is final this morning. Given that there was considerable information redundancy in both documents we combined them. We also added some new disclosure items. And the first of these pertains to the revenue growth realized by our tenants between June 30, 2016 and June 30, 2017 which averaged near 11%. Most of this growth was also from corporate expansion and acquisition activity and evidence is a dynamism of the middle markets in general and our customers in particular. Given that approximately 30% of our new business is repeat business with existing customers, STORE is proud to have played a role of some sort in this growth. Providing real estate net lease solutions would serve to create well for our customers, create jobs in our communities and contribute to our overall economy has always been important to us. In our appendix we also provided some novel disclosure pertaining to shareholder value creation. As of September 30, we estimate that STORE’s market equity evaluation exceeded our historic, actual equity cost by approximately 35%. This raw market value added number or MVA is something we take pride in, but the compound annual growth rate of that number places us in a leadership position. And we have done this while not trading the most highly valued companies in our sector at least yet. Driving our ability to not just deliver returns but to create meaningful added wealth has been our leadership in delivering equity returns on the investments we’ve made every quarter. To illustrate this, we have additionally provided data on 2017 equity rates of return on our investment activity. We have always said that we do not believe the measure of our success lies in maintaining the highest occupancy rates although we are about there with just eight unresolved vacant properties out of our 1,826 assets held at the end of September. Or as our success just in administering the fewest non-performing tenants. Our measure of success is to endeavour to create the most market value added we can which can only be done over the long term by realizing equity rates of return on a consistent basis and exceed our market equity cost. MVA is a by-product that’s having a great business. Since we went public nearly three years ago, we have grown our dividend 24%, maintained a consistent level of dividend protection, created an unrivalled engine for our internal growth, doubled our investment pipeline, become amongst the most highly credit rated companies in the net lease factor and outperformed the RMC bench mark by a factor of better than six times. And today as we talk to you, our dividend yield approximates 5% and our valuation multiple approximates the multiple that we held after we went public at the end of 2014. On a relative value basis, we presently rank about 5 within the net lease factor, but based upon our performance and our proven ability to create MVA we all here believe that we should be higher. But more than that we believe the net lease sector itself with its historic ability to create MVA should be valued more highly and not in its current in your last position amongst REIT sectors. Store and another quality companies in our sector had proven to have store returns, MVA and low comparative shop ratios that we are deserving it more. And with this remark I will now turn the call over to the operator for questions.

[Operator:]

We will now begin the question and answer session. [Operator Instructions] The first question comes from Craig Mammon of KeyBanc Capital Markets. Please go ahead.

[Craig Mammon:]

Hey, guys. Cathy, could you just give the breakout between kind of gross investment in the net guidance for 2018 versus or what you guys think disposition to could come in next year?

[Cathy Long:]

Hey, Craig. We are giving initial guidance at this point just to give you an idea of where our head is at and what we think we can accomplish. But we’re not prepared at this time to really give any further guidance on breakout how much would be sales and how much would be acquisition volume.

[Craig Mammon:]

Okay. I guess one...

[Chris Volk:]

Well, Craig, this is Chris. Its our estimate at this point and we’re also in a flow business which makes it a little bit hard, so we don’t have exact visibility, but if you’re looking at us over the last two or three years our average investment rate is somewhere around $100 million a month, and so, if you wanted to assume that and something you could assume and then you’d assume that you’d have $300 million in asset sales then you get to $900 million.

[Craig Mammon:]

Got you. These sounds like you guys are going to be problematic here with the asset sales. Kind of what’s the criteria you guys call the portfolio? I know you guys have a leg up here with unit level financing. I mean, is it you guys trying to get ahead of any tenant issues? Or you’re going to have sort of thresholds in terms of if you see it revenue degradation or anything like that? I’m just curious as to other than when the property goes dark and you guys look to get rid of it kind of what’s the preemptive thought process there that to call?

[Mary Fedewa:]

Hey, Craig, this is Mary. So we sell properties in three sort of bucket. The first one is an opportunistic bucket and that is our active portfolio and generally we start with, are we going to do more business with these customers. We’re very customer centric and we have long-term relationships and third of our business is repeat. So, the first thing we kind of look at and now that we’re six years old and the portfolio has a lot of embedded games. We run through an algorithm that says, did I do two units with this guy in 2012. I'm not done anymore, so I'm probably not going to do more business with them, it’s in the nice area, its cash flowing, it’s a nice lease and there’s a nice gain and let’s so we’ll just go back. So we look at that periodically. And the second bucket is strategic and it’s more in line with what you were talking about. This is our portfolio where we might see some trends we don’t like or we just trying to get out in front of things and you’re correct, we can do this because we did lot of financial payments on 97% of the portfolio, so it’s super helpful. So that’s the strategic bucket. And then the last bucket again is more of a property management bucket which is a vacant and paying or the vacant properties. So that’s how our sales are determined and bucketed.

[Chris Volk:]

Craig, I want to just add some color to that. It sort of translate what Mary saying is it sort of the financial impact [Indiscernible]. One is that, we have as Mary said in her remarks earlier, we basically have embedded games on our portfolio the day we book the stuff and lot of that has to do with how you’re originating. And so it gives you the ability to almost just print some money from time to time, make some absolute gains and you’re going to pick your – you’re going to pick your spots based upon the relationship that Mary was talking about. So, number one, you’re going to make money there. The number two is a strategic peace where to your point you’re potentially avoiding some future problems. You are also thinking about portfolio diversity which is so important to us trying to maintain high level of tenant diversity and also sector diversity and not having lot of correlated risk. And what you’re doing here is and you’re also getting in front a potential future problem. All that relate to sort of bending the risk curve. So when you think about the risk curve which we all participate in, the more you can sort of think about this on a proactive basis then the more you can bend it and realize its not static risk curve which is - its part of the job that we have. And then, the final part is dealing with non-performing assets. So, if we put all three of those pieces together this year we’ve generated net of all of these activities plus the $40 million in income. I think the GAAP number, what is the GAAP number? That was $35 million. So, it mean, a lot of people talk about the GAAP number, but let’s get realistic and talk about what’s the gain over cost? And so the gain over cost is somewhere close to $40 million. So the $40 million is what you’re doing through portfolio management activities and that really help skew to give you even a further cushion, sort of synthetic cushion against any property vacancy you have. So, let’s you have Gander Mountain properties and you have a certain recovery on Gander Mountain properties, you can take that cushion and you just increase the recovery by 10% and I think that’s really important to know and as you look at this business over a long period of time, we’ll start to report that for you. So prior at the end of this year we’re going to create a run rate for you so you’ll see exactly what happens from birth to the end, so you're looking through losses on a assets which you’re going to have from time-to-time and then you’re going to have gains on these assets from time to time, and when you net it out, its going to only make a very dent in our internal growth. So basically we’re going to still have as high internal growth as anybody or higher than anybody in the entire net lease space inclusive of all those activities.

[Craig Mammon:]

Okay. Helpful.

[Operator:]

The next question will come from Vikram Malhotra of Morgan Stanley. Please go ahead.

[Unidentified Analyst:]

Hi. This is Kevin on Malhotra. I just had couple of questions. In terms of pricing in particularly within the different sub sectors that you look at, are you seeing any change versus say like last quarter just in terms of how the market skewing transactions in terms of velocity or in terms of pricing?

[Mary Fedewa:]

This is Mary. Cap rates have been really stable, and I would say in terms of velocity and our pipeline and opportunity I think we’ve seen some trends away from people looking at retail stuff, so it maybe some industrial little harder from a pricing perspective. But that’s about the biggest trends that we’ve seen out there.

[Unidentified Analyst:]

Okay. And then just one more, in terms of just your – basically your acquisition strategy and in terms of your team, is there any has been change there, any shift in strategy just given kind of what’s been going on recently with retail environment and what not?

[Mary Fedewa:]

No. This is Mary. No, change on the front end. I mean, we have – for us we’re 17% retail its all experiential retail, always has been since we started we’ve a team focused on adding value to the customer and creating our own contracts and we have large prospect in database, so nothing has changed for us. Strategy is the same.

[Operator:]

And the next question comes from Ki Bin Kim of SunTrust. Please go ahead.

[Ki Bin Kim:]

Thank you. Could you just describe some of the quality and tenants that you been buying this quarter? And I know it fluid market but is there any type of target you have for 2018?

[Chris Volk:]

Well, Ki, every single quarter we do this and we talk about the tenants in aggregate, we don’t talk about a lot of specific names. You can certainly look in the Top 10 that we added Bass Pro, so they would be included in the numbers. But overall the media and tenant profile is Baa2 which is pretty much consistent with what has been to sort of mid [BB] company, and I had sort of few on that by the way that when you’re dealing with credit everything tense to work around a BB type company. So, your BBB guys becoming BB guys and then your non-performing – your underperforming guys as a license stalls become BB guys. So the Baa2 is sort of consistent with what we’ve been. The median fixed charge overhead coverage ratio was 2.8

[Mary Fedewa:]

I think, Chris, as much you have for the question I think Chris, pretty much described it, so it’s very consistent and it will continue to be that way as we go forward. I think you mentioned 2018 we have no plans to change the strategy.

[Ki Bin Kim:]

Am I ask so?

[Mary Fedewa:]

Yes.

[Ki Bin Kim:]

Sorry. I thought I cut off. And just lastly on the Gander you kind of went through pretty quickly on the opening remarks. Can you just recap that for us? You said, you had 13 stores, eight were released to new tenants or to Gander. I wasn’t sure about that? And any kind of timing disruption? I know it’s a small part of portfolio, but that you should aware of?

[Mary Fedewa:]

Yes. This is Mary. So we have 13 properties. We have resolution on 11 of those. So we’re out there marketing two of those. We release eight of those to the new Gander entity and we sold one. And the other two are in CMBS and we’re in discussions on those. So we’re out to market with two. One of the two in the market right now actually we do have [an eye] on, so I was really pleased with how quickly we’ve been able to turn these assets into again performing assets.

[Operator:]

The next question comes from Todd Stender of Wells Fargo. Please go ahead.

[Todd Stender:]

Hi. Thanks. Can we hear further details on the Bass Pro purchase, maybe pricing and then how big are the footprints of your properties? I know that can vary in size?

[Mary Fedewa:]

So as we acquired there – Hey, Todd, I think I’ll start and then we’ll get some help here on the details of it. But we acquired nine properties from them. The amount is about $174 million something like that. Cap in the high sevens as we do master leases, same structures that we do. We’d like the acquisition. We like the synergies between the two companies. Cabela has been efficient in hunting and shooting. And Bass Pro being very efficient in boating and fishing, and I think together that makes for a nice company and the credit card program of Cabela is very strong, so with Bass Pro. So we really like that we think they’re going to be a lot more competitive in the marketplace and of course Bass Pro is very stout credit, so we’re pleased to have them in our Top 10 as well.

[Todd Stender:]

And size wise, just looking at fungibility, are they the 500,000 square foot size?

[Mary Fedewa:]

No, no. they’re pretty diversified within average square footage of about 90,000.

[Operator:]

The next question comes from Dan Donlan of Ladenburg Thalman. Please go ahead.

[Dan Donlan:]

Just sticking with Bass Pro here, just given what happen with Gander Mountain, what was the thought process to go back into the sporting good, hunting and fishing sector. Did you believe that there’s going to be Bass Pro one of two or one of three remaining retailers in the space, just kind of curious up in your exposure hereafter just perhaps Gander?

[Chris Volk:]

First off, Dan, this is Chris. As a banker in my prior life and having done this for a number of years, I don't get scared away from the space and I’ve learn never to get scared away and just overly react just because you have one tenant that becomes a problem and tenants become problem for different reasons. And I would say that in the case of Gander there are issues. I don't really or not really reflective of the dynamism of the hunting fishing market as a whole. So there are issues that affected them, including by the way enhance competition from Bass Pro and Cabela. So some of the locations that we had that ended up having issues and many of their locations are -- resulted from incursions of the market by Bass Pro and Cabela’s. We would say that Bass Pro and Cabela’s are probably the premier operator hunting and fishing establishments. There is a very experiment -- experiential and service component to business from both the attendance of how customers are attended to credit card services, Cabela's had actually a bank. So there’s just a huge service component towards off from guided tours and whatnot, So anything to do with hunting and fishing they do and I think that’s a really important in the retail space to have a very strong and experiential component to the business. We are – we think highly of them. I would also say that together, while Bass Pro and Cabela’s are a formable force. There still about 17% of the entire hunting and fishing market. So the market is still somewhat fragmented. There are moms-and-pops out there that do well. And of course, Camping World is buying Gander Mountain and we’re offering a number of sites and they’re going to have their own take on hunting, fishing, camping, recreational vehicle, boating experiential piece of the hunting, fishing market and we think that there’s room for all the players to play in this business.

[Dan Donlan:]

Okay. And then on Gander Mountain just curious of the ones that you released, could maybe disclose your outcome from what percentage of your prior rent you were able to recapture?

[Chris Volk:]

Yes. I would say that, first of all, we’re little early in a process, so we’ve given you a fair amount of disclosure in terms of where we are, in terms of numbers and locations based upon the transactions that we’re cutting with both the surviving Camping World company, they're getting the new Gander Mountain, and also the sales of properties. And then having a fairly good idea what’s going to happen with our two vacant properties and we’re in discussions with the CMBS lender on the other two, but those -- there’s no carrying costs associated with those at this point. I would say that we’re expecting that our recovery will range somewhere between 55% and 75%. If you look at the historic recoveries for us, we’ve been close to the 70s, so this will be prior little less than what we’ve been use to getting, but it will be kind of in that ballpark.

[Operator:]

The next question will come from Collin Mings of Raymond James. Please go ahead.

[Collin Mings:]

Thanks. Good morning out there. I wanted to ask about the investment pipeline update provided in the new presentations, specifically I just want to understand the drop-off and deals reviewed relative to that continued growth in that pipeline?

[Mary Fedewa:]

Yes. So hey, Collin, it’s Mary.

[Collin Mings:]

Hi, Mary.

[Mary Fedewa:]

Hi. How are you? So, when a deal – after the deal is either closed or it passed on. And that’s then takes it off of the – or its been reviewed. And the pipeline hasn’t really been growing. As you can see, in this last quarter we had some pretty good growth. So we’re just done – we just reviewing a lot of deals right now. So the decisions haven’t made yet to fund or to pass on them. So it’s a little bit of…

[Collin Mings:]

There’s some lag time…

[Mary Fedewa:]

Well, there’s some lag time as well, flow that’s little lumpy, little lumpy. That’s all. So it just a part of growth in the pipeline.

[Collin Mings:]

Okay. That’s helpful. Just understand the timing aspect of that. And maybe just turning to the pipeline distribution, I’m still on that slide and I was comparing that against what it looks like into 2015? And it does seem like that there maybe some changes as far as how things are being classified. But just recognizing this is not necessarily your guidance process, but just the overall pipeline, what should we make of the kind of uptick in entertainment overall, but then it looks like pretty steep drop-off in restaurant, but just as a percentage of that pipeline. Any color on that would be helpful?

[Chris Volk:]

So, this is Chris, and I’ll start off with this stuff. The drop-off in restaurants is in part just to the fact restaurants transactions get to be some popular that the cap rates on that are just not desirable for us often time to play in. So we’ll see them and – but we tend not to do a lot of them. And then as far as entertainment piece, I think the hunting, is hunting and fishing in the entertainment?

[Mary Fedewa:]

Well, it has it own category gap.

[Collin Mings:]

So hunting and fishing has got its own category. Okay.

[Mary Fedewa:]

Yes. I just think we’re seeing some more sort of family entertainment sort of opportunities around, I’ll say is, when I looking at like some main events or water parks, top golf, bowling, things like that in that space. We're just seeing a little bit more of opportunities like that, wedding venues are in there for example. So little bit more family entertainment and probably a little bit shift away from the retail.

[Operator:]

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

[Ki Bin Kim:]

Just a quick one. Have you thought about putting out like same-store NOI guidance or results going forward? And what does that look like?

[Chris Volk:]

The same-store NOI numbers are going sort of mirror our rent increases, I mean, once we start giving away rent increases, which we don’t, I mean, so when we’re booking stuff we’ve made a point every single quarter to give you not just the cap rate for the escalators that we’re building into it. And then we also have a slide to get you the timing of the escalators across the portfolio. So from a year to year, it can be – there could be some lumpiness in the sense that you have the five-year lease escalators that kick in and that’s about third of our portfolio that are going to kick in, but overall assuming that you’re giving guidance to your investors not just to hold us for six months, but they hold us for year or two. The number is going to end of being 1.8% increases on a same-store basis, and that’s what our lease escalators are.

[Ki Bin Kim:]

Okay. All right. Thank you.

[Operator:]

And our next question comes from Haendel St. Juste at Mizuho. Please go ahead.

[Haendel St. Juste:]

Hey, good morning out there. Looking at your balance sheet debt to EBITDA, [around 5.8], 500 million liquidity, lack of near term debt maturing and your stock trading at a premium to NAV. I guess I’m curious why we’re not looking at more near term acquisitions? Maybe you can talk a little bit what’s in the fourth quarter in terms of maybe net dispositions, maybe that’s the headwind, but certainly don’t think that access to capital is the issue here. You clearly have raised enough recently with your mid-year financial with Buffett. You’ve got availability capital with lots of variability out there, so I guess, I’m just curious on why not more proactive or positive view towards the acquisitions?

[Cathy Long:]

Hey, Haendel, this is Cathy. I’ll start and Mary can jump in if she wants. We had done dispositions of about 210 million through September and the guidance I gave to update for 2017 was 250 million to 330 million. So there’s still some sales that could come either this quarter or potentially fall into first quarter of next year. But that is part of what you’re seeing is that they are dispositions that are planned and the acquisition volume that we’re giving you is a net number. Mary, if you have anything to add.

[Mary Fedewa:]

No. I don’t I would add. Haendel, we’re certainly excited about the acquisition pipeline and in no means is it – and in no means is it behind or falling below our expectations. So we’re excited about the flow business, its timing, so we’re looking out the best we can considering what we want do on the property sale side. So, I don’t want you to get the impression that acquisition is slowing there. Absolutely not.

[Chris Volk:]

And then, this is Chris. I would just say, we’re being measured in terms of how we’re doing this. So we’re basically looking to grow at kind of a consistent pace that’s predictable for you and that’s allow us to keep basically the kind of diversity that you kind of expect from us.

[Haendel St. Juste:]

Appreciate the thoughts. And I guess one quick on the replacement cost being a bit higher than reset levels. Curious if that very spike is driven by specific tenant. Just curious if there’s any thoughts you provide on that and maybe what we should expect that going forward?

[Chris Volk:]

I mean, its – sometimes they are higher than others, but as a number [Indiscernible] I would say there’s nothing this quarter, that’s over 100%. And we tend not to disclose on individual kind of basis where we are.

[Operator:]

And this concludes today’s question and answer session. I would now like to turn the conference back over to Chris Volk for any closing remarks.

[Chris Volk:]

Yes. I have just couple comments. And first off, obviously thanks everybody for attending the call. We launch the brand new website last week, so I want to invite you to take a look at it. It has a pure navigation, cleaner look and also added video content, and one of the videos you can actually see me put on bow tie, which, I may not be able to live down. So that’s something I’m sure people are going to flash it front of me for years. And by the way our next investor presentations are going to be in the REIT World, which would be held in Dallas, November 14 to 16. So if you're interested in seeing us there, let us know. And have a great day.

[Operator:]

The conference is now concluded. Thank you for attending today presentation. You may now disconnect your lines. Have a great day.