STORE Capital Corporation
Q3 2016 Earnings Call Transcript

Published: 3 Nov 2016

[Operator:]

Hello and welcome to STORE Capital's Third Quarter 2016 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, Terry and welcome to all of you joining us for today's call to discuss STORE Capital's third quarter 2016 financial results. Our earnings release, which we issued this morning along with a packet of supplemental information, is available on our Investor website at ir.storecapital.com under News & Market Data, Quarterly Results. I am 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, we're keeping our call to one hour, we'll be observing a two question limit during the Q&A portion of the call. Participants can then reenter the queue, if they have follow-up question. 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, intent, 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 2016 and 2017 are also forward-looking statements. Our actual financial condition and results of our 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 forms 10-K and 10-Q. With that, I would now like to turn the call over to Chris Volk. Chris, please go ahead

[Christopher Volk:]

First of all, you're all awake after a thrilling game seven, I hope so. Good morning everyone and welcome to STORE Capital's third quarter 2016 earnings call. With me today are Cathy Long, our CFO; and Mary Fedewa, our Executive Vice President of Acquisitions. We continue to be active on the acquisitions front, investing over $257 million during the quarter, bringing our total new investments to nearly $900 million for the first nine months of the year. Net of approximately $56 million in growth asset sales, our investment activity for the year totaled $842 million. Our portfolio remained healthy with an occupancy rate of 99.2% and approximately 75% of our net lease contracts rated investment grade quality based upon our STORE Score methodology. Our dividend payout ratio for the quarter was below 71% of our adjusted funds from operations, serving to provide our shareholders with a well-protected dividend and a company well positioned for long-term internal growth based upon anticipated tenant rent increases and the reinvestment of our surplus cash flow. During the quarter, we were proud to raise our quarterly dividend to $0.29, which represents a sector-leading 7.4% increase over the past year. Our funded debt to EBITDA on a run rate basis continue to be just under 6 times at the end of the quarter with our unencumbered assets standing at $2.3 billion or 47% of our total gross investments, providing us with flexibility in our financing options. In August, we received a corporate rating of BBB minus with a positive outlook from Standard & Poor's, which adds to the BBB minus rating we received from Fitch ratings in 2015. We plan continuing to access the unsecured terminal markets on our way to elevating our unencumbered assets to more than 50% of our total portfolio. Meanwhile, we also have valued A plus rating for our master funding conduit, which we imported in October to issue $335 million in term notes. Here, we did something completely new for STORE. We sold $200 million of 10-year note, a record low interest rate for us of 3.96%. Then, we retained a $135 million worth of notes, which can be sold at any time as we needed the additional term financing. So, between our ability to issue BBB minus rated unsecured notes and to readily sell issued but retained master funding notes, we have increased our capital flexibility considerably. The long-term aim of having these complementary investment-grade borrowing options is to lower our comparative cost of capital relative to companies that had fewer such options. As we discussed in earlier calls, our interest rates on term borrowings highlights our historically high investment spreads that we've enabled to realize and the stable long-term laddered borrowed maturities that we are creating. Our laddered maturities supported by a free cash flows after dividend payments will largely protect store from liability sensitivity in the event of rising interest rates where interest rates reported to more historic average levels. Now, here are some statistics relevant to our third quarter investment activity. Our weighted average lease rates driven approximately 8.2%, up slightly from 7.8% last quarter. The average annual contractual lease escalation approximated 2%. The weighted average primary lease term was approximately 16.6 years. The median new tenant Moody's RiskCalc rating profile was Baa1. The median post overhead unit level fixed charge coverage ratio was approximately 2.4

[Mary Fedewa:]

Thank you, Chris, and good morning everyone. During the third quarter, we continue to see steady investment activity along with stable cap rates. Acquisition volume was $257 million, which is consistent with the same period last year. As Chris mentioned, our average lease rate for third quarter was 8.2%. This represents an uptick from 7.8% last quarter and brings our year-to-date average cap rate to 8%. As we frequently know variations in initial lease rates from quarter-to-quarter will happen. But our view is that over the long-term, cap rates remain relatively steady in the market we address. Including our third quarter investment activity, our portfolio remains consistent across industry types with approximately 70% in service industries, 16% in retail, and the remaining 14% in manufacturing assets, and approximately 75% of the contracts we create continue to be investment grade quality. When we started this company over five years ago, we were determined to build from a solid foundation. One of the key structural features of our foundation is our direct origination platform. This platform allows us to own deal flow. Owning deal flow allows us to create our own contracts, and in fact, we are using our own lease form approximately 90% of the time. Owning deal flow also enables us to provide tailored solutions to our customers and in turn to get paid for those solutions. The clear result is that since STORE's founding, our cap rates continue to be better than the auction marketplace. And finally, owning deal flow allows us to invest in real estate at rational prices. As I have mentioned on prior calls, we expect to sell selected properties during the year to take advantage of opportunistic gains and to balance our portfolio. Our year-to-date property sales totaled approximately $56 million of gross investment value. We consider $32 million of these sales to be opportunistic and we achieved cap rates on these sales of approximately 100 basis points, less than our year-to-date acquisition cap rate. This demonstrates the market premium we are realizing as a result of the value we deliver to our customers. As you saw in our press release, we've increased our 2016, acquisition guidance to $1.1 billion net of property sales, which we estimate will be $60 million to $80 million for the full year. Fourth quarter was off to a strong start. As of the end of this week, we will have funded over $1 billion in year-to-date growth acquisition volume. With that, I'll turn the call to Cathy to talk about financial results and guidance.

[Catherine Long:]

Thank you, Mary. I'll start by discussing our balance sheet and capital structure followed by our operating results for the third quarter and our guidance we announced today. Please note that all my remarks refer to the third quarter ended September 30, 2016, and all comparisons are year-over-year unless otherwise noted. Our third quarter operating results and balance sheet strength reflect the continued healthy growth of our portfolio, and our teams expertise in portfolio management. Our third quarter acquisition activity was funded through a combination of borrowings on our unsecured credit facility and equity raised through our ATM program. As planned, we launched our ATM program in the beginning of September this year. This equity program allowed us to sell from time-to-time registered shares up to a maximum amount of $400 million. During September, we issued and sold approximately 2.5 million raising $71.6 million in net proceeds. Our total long-term debt outstanding at September 30 was $2.1 billion with a weighted average maturity of 6.3 years and a weighted average interest rate of 4.6%. At the end of the third quarter, our leverage stood at a conservative 5.9 times net debt-to-EBITDA on a run-rate basis or roughly 45% on a debt-to-cost basis. Subsequent to quarter end, we issued our seventh series of long-term fixed-rate notes under our Master Funding Debt Program in the amount of $335 million. As Chris mentioned, we retained a $135 million of that debt for future sale. This seven series of notes included $20 million of BBB rated Class B notes, which were also retained by the company, bringing our total Class B notes retaining since the inception of our Master Funding program to $128 million. As a reminder, since we hold the Class B notes ourselves, the note asset and liability eliminating consolidation, so they're not reflected as asset or debt on our consolidated balance sheet. Since these Class B notes are issued in outstanding, they provide us with the flexibility to sell them to a third-parties in the future or use them as collateral for borrowings. As of the end of the third quarter, growth investment in our real estate portfolio totaled $4.8 billion of which approximately $2.5 billion has been flagship collateral for our secured debt. The remaining $2.3 billion of real estate assets are unencumbered providing as with multiple financing options to effectively manage our cost of capital. Since our IPO, we've significantly expanded our financial flexibility to include a variety of debt and equity options to support our continued growth as we scale the business. We entered the fourth quarter with $30 million in cash and nearly the full $500 million available on our credit facility giving us plenty of liquidity to fund real estate acquisition opportunities. Now, turning to our operating results, revenues increased 30% to $97 million, reflecting continuing growth in our real estate investment portfolio. Rental revenues again made up about 95% of our total revenues, with the remainder largely attributable to interest income on mortgages and leases accounted for as direct financing receivables. Our portfolio has grown from $3.7 billion in growth investment a year-ago, representing 1,246 property locations to $4.8 billion representing 1,576 property locations at quarter end. The annualized base rent and interest being generated by the portfolio in place at the end of the quarter increased 27% to $395 million as compared to $312 million last year with increased diversity by location, by industry, and by tenant. Total expenses increased 28% to $67 million compared to $52 million a year ago. The increase largely reflects the growth of the portfolio with about half of the increase due to higher depreciation and amortization expense. For the quarter, interest expense increased 27% to $27 million from $21 million a year ago, as we continue to fund a portion of our acquisitions with long-term borrowings. This increase in interest expense from our borrowing activity was slightly offset by a decrease in the weighted average interest rate on our long-term debt from 4.7% to 4.6%. Property costs were $800,000 for the third quarter. The increase year-over-year was largely driven by real estate taxes and other property carrying costs incurred on properties that were vacant during the quarter. As of September 30, 12 of our properties were vacant and not subject to release. These properties represent a very small amount, less than 1% of the annualized base rent and interest generated by our portfolio. Property costs can vary quarter-to-quarter based on the timing of property vacancies and the level of underperforming properties. But are generally not significant to our operations. G&A expenses were $8 million for the third quarter, compared to $7 million a year ago. As a percentage of portfolio assets G&A expenses decreased to approximately 70 basis points on an annualized basis compared to approximately 80 basis points a year ago largely due to the benefits of efficiency and scale come with portfolio growth. About half of the increase in G&A expenses is due to higher compensation and benefits associated with staffing additions to support our growing investment portfolio. The remainder of the increase is primarily due to amortization expense related to our equity base compensation program, where our legacy comp plans are being replaced with our new public company comp programs that are more comprehensive and include more employees. Net income increased to $36 million for the quarter or $0.24 per basic and diluted share compared to $23 million or $0.18 a year ago. Our net income for the third quarter included a gain of $6.7 million net of tax on the sale of 16 properties versus the $700,000 gain on the sale of three properties last year. Strong execution across the company delivered a 31% increase in AFFO resulting in $63.8 million of AFFO for the third quarter compared to $48.6 million a year ago. AFFO's per diluted share increased 8% in the quarter to $0.41 from $0.38 last year. For the third quarter, we declared a quarterly cash dividend of $0.29 per common share to our stock holders on an annualized basis with dividend of a $1.16 for common share represents an increase of $0.08 per share or 7.4% over the previous annualized dividend. Now turning to our guidance for 2016. Today we raised our projected 2016 annual real estate acquisition volume to $1.1 billion from $1 billion, which is net of anticipated property sales in the range of $60 million to $80 million. Our AFFO guidance is based on a weighted average cap rate of 7.75% on new acquisitions for the remainder of the year. The timing and mix of debt and equity have an impact on AFFO per share in any given period. While we don't give guidance on capital markets' activities, we are currently targeting a more conservative leverage level that's based on a run-rate net debt-to-EBITDA ratio of 6 times plus or minus 25 basis points or roughly 45% to 47% leverage on the gross cost of our portfolio. Based on these assumptions, we're narrowing our 2016 AFFO per share guidance to a range of $1.62 to $1.63 from $1.61 to $1.63. This equates to anticipated net income of $0.73 to $0.74 per share including net gains on the sale of properties excluding, excuse me, excluding net gain from the sale of properties plus about $0.79 per share of expected real estate depreciation and amortization plus approximately $0.10 per share related to non-cash items and real estate transaction costs. Finally, I'll turn to our initial guidance for 2017. We currently expect 2017 AFFO per share in the range of $1.74 to $1.76 based on our current projections for real estate acquisitions for the remainder of 2016 plus projected annual real estate acquisition volume for 2017 of approximately $900 million. As with 2016 and prior years, AFFO per share in any period is always sensitive to the timing of acquisitions during that period. The timing of acquisitions for 2017 is expected to be spread throughout the year though weighted towards the end of each quarter. Our AFFO guidance is based on a weighted average cap rate on new acquisitions of 7.5%. Our AFFO per share guidance for 2017 equates to anticipated net income of $0.78 to $0.79 per share plus $0.87 to $0.88 per share of expected real estate depreciation and amortization plus about $0.09 per share related to non-cash items and real estate transaction costs. For 2017, we're targeting leverage based on run rate net debt to EBITDA of around 6 times plus or minus 25 basis points and interest cost on new long-term debt for 2017 is estimated based on a weighted average interest rate of about 5%. And now, I'll turn the call back to Chris.

[Christopher Volk:]

Thanks, Cathy. Before turning the call over to the operator for questions, I would like to make a few comments. Year-to-date, we sold 21 properties with a gain over initial cost of approximately $5 million. While asset sales are a small part of our business activity, they are an important piece of our portfolio management activity. Most of the gains resulted from opportunistic asset sales from our [ 00

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Vikram Malhotra of Morgan Stanley. Please go ahead.

[Vikram Malhotra:]

Thank you. Just wanted to dig in a bit into the occupancy dip. Can you maybe just walk us through to elaborate a bit on sort of what led to that and just plans as you think about occupancy over the next 12 months, where you – how soon you can kind of deal with the vacancies?

[Christopher Burbach:]

Sure. Vikram, this is Chris and good morning. So all right, first of all, if you look at the occupancy deficit, it equates to a total of 12 properties. So it's not a material thing, it's a part of what we do. So I mean, we are going to have this over time, and in fact you should expect and built into our projections for both this year and next year are a level of property vacancies that are naturally a part of this business. And if you look at seasoned companies whether it is National Retail or a Realty Income, you will see that their occupancy level will gravitate down towards some number that's kind of in the very-high 90's, and over time our occupancy level, I can't always state a 100% because they drop a little bit. We haven't and a total amount of 12 vacant properties. We had no – all form of those vacant properties existed at the last conference call and in fact we talked about most of that because I think the Ruby Tuesdays franchisee that went out of business in Chicago that represented seven of those properties. And that was discussed, I know during the last conference call. So, going into that conference call, we had stated low vacancy level, but the vacancy level is with us today pretty much. So out of the full properties, I would say that six of the seven Ruby Tuesdays have been identified with a resolution. Two of the other properties have been made in there with resolution. So, we're basically dealing with a total of four properties that we're batting around in terms of what our choices are, and none of the cases that we're really worried about, where the recoveries have been on land. And of course, as you could see from our projections for the year we've been solid in terms of where we expect our numbers to land for this year. I mean, really if you look at our numbers for this year, from a projection perspective the biggest driver of where we are today versus where we could have been for the numbers is that we decided to lower our leverage. So if you look at our guidance from last November, we expected leverage being from 6.5 – I mean, 6 times EBITDA to 7 times EBITDA. And we're kind of budgeting in the mid-point around 6.4, 6.5. And that's a number of pennies a share moving entire balance sheet leverage lower. So, we've sacrificed that and yet still and we had vacancy – and yet we still hit – we still are holding to the high end of our target range that we set for ourselves a year ago.

[Vikram Malhotra:]

Okay. That's excellent. Just if you can update us on your thoughts around just maybe selling the vacant properties versus just pursuing new tenants, any update -- any more color there would be helpful?

[Catherine Long:]

Sure. Well, think about this way. Whether you sell a property or not, or we lease the property from your perspective as an investor, it has to be the same thing. So, for example, if I have a property that is – if I have a property and I am getting $1 million a year on rent and I re-rent it for $800,000, I get an 80% rate of recovery, okay. Now, let's say, I have a property cost of $1 million and I sell it for $800,000, does that an 80% recovery? No, not necessarily because what I can do is, give the $800,000 to Mary and she is going to reinvest the money into a new property and she said that she invest those money into a new property a cap rate that is less than the property that I was getting the money I was getting, then basically my recovery ends up being slightly less. So, everything you do have to be equated to what's happening from an AFFO perspective. Now, in the case of our [indiscernible] it's a good example, our cap rate on those properties is close to $10 million. Our current investment grade is $8 million. So, we have properties that we are going to sell them, [indiscernible] get all our money back out of this and yet our recovery effectively is going to be 80%. It's what we invested -- invest the money at 8 and that's going to be 8, yes. So, and sometimes it works the opposite way where we're investing the money to higher cap rates than where the properties were, but you get the picture.

[Operator:]

Our next question comes from Collin Mings of Raymond James. Please go ahead.

[Collin Mings:]

Hey, good morning.

[Christopher Volk:]

Good morning.

[Catherine Long:]

Hi, Collin.

[Collin Mings:]

Just first question as this relates to the guidance, is there anything specific that you see or don't see that's really driving the expectation of acquisition volumes next year will moderate?

[Catherine Long:]

No, the guidance was $900 million net of sales starting out next year. And Collin, the pipeline looks terrific because as you know the way we originate directly with our market being so large and having 70,000 middle market in larger companies for us to call on the pipeline, and – it's very robust and that's what we mean by owning deal flow is we can create that ourselves. So the pipeline looks terrific, and I don't see anything on the horizon.

[Christopher Volk:]

Yeah, so Collin, this is Chris. Just to put it in perspective, this time last year when we're giving guidance our initial guidance was $750 million net – $750 million net, today it's $900 million net. So we actually thought we're swinging out for you. The – if we can do more from that of course Mary's team will want to do more from that, but we're in a flow business. And we're looking at so much, and we're doing 30 transactions to 40 transactions a quarter. I mean, there is just nobody that has that kind of a granular deal flow stream that we do, and that's because we own the deal flow and because we do business this way which is unique in the space, it's just hard for us really kind of gauge where things will be.

[Collin Mings:]

Okay. And then I guess, underlying that as far as recognizing with the net number relative to this year, how are you thinking about potential disposition activity?

[Christopher Volk:]

We typically think that we'll sell somewhere between 1.5% to 2.5% of the pool, of the portfolio and that's the beginning portfolio. So we're going to start off the year with give or take $5 billion of that. So it's going to be similar, so 1.5% to 2.5%.

[Collin Mings:]

Perfect. Yeah.

[Operator:]

Our next question comes from Craig Mailman of KeyBanc Capital Markets. Please go ahead?

[Laura Dickson:]

Hi, everyone. This is Laura Dickson here with Craig.

[Christopher Volk:]

Hey, Laura.

[Laura Dickson:]

Hey. I was just curious regarding the ATM activity in the quarter, just wondering how you envision using this lever going forward.

[Mary Fedewa:]

Well, we were happy to put the ATM in place. It is one more tool that we have to work with raising capital. And it's efficient and it works for us, as we mentioned our portfolio is very granular. So being able to be in the markets in small amounts throughout the quarters is very nice. But that being said, we have a lot of options and we work very hard since our IPO to make sure we have a lot of options to raise both debt and equity capital, and we'll be looking at those potions as we go through the year and picking our spots for when the ATMs appropriate and then finding places where we may get better execution overall somewhere else. So, we love the ATM, we're happy to have it in place, but I don't know that we would rely on it totally. Does that answer your question.

[Laura Dickson:]

Yes. That makes sense. And then, just separately, I noticed that industrial ticked up to about 14.4% of annualized based rents in the quarter from 13.5% last quarter. So, I was just wondering if this is like – if this is something, you're focusing more investments on now, is that's new – is that's something you're focusing on?

[Christopher Volk:]

No. This is Chris Volk. These things come in waves. So, a lot of it's just timing. We expect that the and we call it industrial, it's really manufacturing. So, we're here and just, and the future of label [indiscernible] industrial sort of like a property type and manufacturing is more industrial and we tend to – sort of do things by industry. But and so – but we will be high kind of in the 15% or less range on that is what we've had long-term. And we've always been very heavily bent towards service industries. So, we expect to continue that and then of course, retail we expect to be sort of in – anywhere at 15% or less as non-retail.

[Operator:]

The next question comes from Rob Stevenson of Janney. Please go ahead.

[Robert Stevenson:]

Good morning, guys. Mary, given your cap rate stability comments in the prepared remarks, other than conservatism in guidance, what would have you guys really dropping down into a 7.75% acquisition yield next year? I mean, last year, you guys did 8.1% on a $1 billion something, this year you guys have average 8%. Any strategic decisions that you're making in terms of targeting specific asset types that would push the cap rate lower or is this just more or less conservatism, not knowing what the future holds?

[Mary Fedewa:]

Yeah. Hey, I think that that's right. It's – this quarter at 8.2% certainly is not a trend, as you know one quarter. Last quarter, it was 7.8%. So, that's near 7.75%. So, we are – we had a couple of transactions that closed at and above an 8% cap this quarter, they kind of lumped together. So, I would think that over the long-term, you're going to still look at a 7.75% as still a good number of us. But we're not strategically doing anything to try and get to that number, Rob, we're going now with providing solutions and we're asking to be paid for those solutions and we're going to continue in that way.

[Catherine Long:]

And Rob, I'd say, it also depends a little bit on the mix. For example, if you're doing restaurants, restaurants are generally going to be below 7.75%. I mean, maybe and then we get one for higher, but they're going to blow. So, we did a quarter with lots of restaurant properties, you're going to get that. So, it's – sometimes it's just sector-driven thing.

[Robert Stevenson:]

Okay. Yeah, I know the quarterly bumps are around, but I was just checking about – okay. And then Cathy, I know, it's a not a lot but you guys have 13 leases rolling in 2017, in your earnings guidance, what are you anticipating in terms of the number of those leases that all renew and what's the sort of new rent versus expiring sort of spread there?

[Catherine Long:]

We actually look at it, on a – on a lease-by-lease basis. So, in certain instances, where we are very confident about the leases we renew, we just continued that way and in some case – and basically that was, most of the cases that we looked at, but it is case-by-case and so we do – maybe if I had 1,200 leases that were maturing, I wouldn't do that, but because we have some severity, we actually go talk to with Mike 00

[Christopher Volk:]

Since we originate virtually all of our own deal flow and right -- roughly 90% of the contracts, as you might expect we don't – write one or two of your leases, but these are transactions we acquired them opportunistically from somebody else, Adam. And, we feel good about the time we did own some.

[Operator:]

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

[Unidentified Analyst:]

Hi, guys. This is actually Eon on for Ki Bin. Just a quick question about CPI increases. Do you guys use core CPI or just – standard CPI and what – what increases that right now?

[Catherine Long:]

What are my modeling, is that what you are asking?

[Unidentified Analyst:]

What are the rent bumps right now for your customers that are receiving increases based on CPI?

[Catherine Long:]

Well, they – it depends on when the rent is bumping, right. So, the rent bumps all throughout the year. So we don't have them all say bump on January 1 or something like that. They are dependent on when we actually did the deal. And so, if it's an annual bump, it would be annually from the day we did the deal. So it compares the CPI at that moment to what it would have been a year ago. And it's the change in CPI that would be looked at for the bump. And as you recall, we do the lesser of the change in 1.5 times the change in CPI or a fixed cap.

[Christopher Volk:]

It's 1.25 times.

[Catherine Long:]

1.25 times. I'm sorry, actually I said 1.25 times. Sorry. 1.25 times. So, it's going to depend on those areas and then the annual bumps would be just comparing the annual period whereas some that bump every say five years are comparing what was the change in CPI over that five-year period.

[Unidentified Analyst:]

Okay.

[Christopher Volk:]

And we use regular CPI in our lease forms. Now, in – in the handful of leases that we may have acquired from someone else, perhaps there might be some unique CPIs, but generally we use regular CPI.

[Unidentified Analyst:]

Okay. Thank you.

[Christopher Volk:]

Thanks. Okay.

[Operator:]

The next question comes from Vineeth Khanna of Capital One Securities. Please go ahead.

[Vineeth Khanna:]

Yeah. Thanks for taking my questions. Can you may be talk about reported financials and rent coverage? I mean, how they've been trending for the full service and limited service restaurants?

[Christopher Volk:]

Well, I mean this is Chris. If you're looking at the restaurant portfolios, the coverages have been holding pretty stable. We've not see any sort of massive – massive rate. Really, if you look at restaurant reports of the restaurants today, restaurant space versus new other spaces, it's holding up fine. So, and – I've always felt like the restaurant industry is a zero-sum gain. So we've had, you can read yourself some of the brands out there, are doing better than other brands at any given point in time. And so, right, right today if you're looking at our difference in full service and limited service both the coverages are over 2% at this point, if you look at the whole portfolio.

[Vineeth Khanna:]

Okay. Great. And then just regarding the office move, are there sort of any one-time costs related with that, and then maybe if you talk about where you've been growing head count?

[Catherine Long:]

Yeah. This is Cathy. For the office move, we're just actually moving down the street, so the costs we – will be minimal. The new office is larger so it will be slightly more expensive than where we are today, but we are busting at the seams. So, we're very grateful, that we're able to be in this location for as long as we have them frankly. For head count, we continue to add some head count in certain areas, to flush out the property management area for STORE and things like that, but nothing – no real big, big changes. It's just that right now we have every seat taken and if you want to come and visit us, we don't have very many conference rooms left last and things like that. So, the new office will have more conference space. We do have customers come to visit us and potential customers and things like that. And so we make quite a bit of use of our conference space and we were really running short in that area?

[Christopher Volk:]

My office counts as a conference room right now.

[Catherine Long:]

This is true. Yeah, we do. So it's really going to – we have some collaborative financier that we have in the new space that allows us to work in teams a little easier and so, it's just going to work better for us as we continue to invest in the platform and potentially prepared for being able to do additional growth.

[Christopher Volk:]

So from a G&A perspective, our G&A as a percentage of asset this year is roughly 80 basis points.

[Catherine Long:]

Down to 70 basis points.

[Christopher Volk:]

Yeah, we're around 70 basis points now. We're assuming it kind of would be 70 basis points maybe next year, and after that we'll get down to 60 basis points or so. So the G&A is going to come down. One thing we always tell people is that nearly half of our G&A cost, our cash G&A's, so some of the G&A is non-cash...

[Vineeth Khanna:]

Right.

[Christopher Volk:]

...the employee...

[Catherine Long:]

Stock compensation.

[Christopher Volk:]

...stock compensation which is not a small number, but nearly half our cash compensation is basically on the front end of the business. So, it's all the direct relationship manager as it's all the credit people that are involved with doing the transaction. It's all disclosures doing the transaction. And that makes it from a mix relative to other net lease companies that is sort of a high mix on the front end of the business, which comes with owing the deal flow that you have. So, if we want to invest in more deal flow ownership next year, we may increase that number. If we think that we have a chance of making better inroads into the $2.5 trillion marketplace and becoming – sort of growing organically through that. So we're going to just weight that over the course of the next year, in terms of what we do on the front end. Otherwise the G&A, staff cost is pretty modest. Obviously at Mike Zieg's department which is the servicing group, it's going to add people, it's going to be much more variable expense, but it's small and Cathy has obviously to add financial reporting professionals and what not and add 00

[Operator:]

The next question comes from Daniel Donlan of Ladenburg Thalmann. Please go ahead.

[John Masuk:]

Hi. This is actually John Masuka [ph] on for Dan. Just want to start off, -- if maybe you could give me some color on the Sprint your [indiscernible] fleet location as we enter the winter apparel season. And just kind of thoughts on if we have another week kind of winter sales season like last year, would you have any concerns about coverage at those location?

[Christopher Volk:]

Well, we may be the only gained our landmark that actually knows how our stores are performing since we have our financial statements and we obviously have trailing 12 year old financial statements, which includes their fourth quarter last year, which is the more difficult fourth quarter because of sales. So if you look at the trailing numbers, we're not concerned about our coverages and performance. The company today is performing just fine and we're pleased with their performance. Mostly, it's been around for 50 years, 60 years, I mean the average mills fleet store does about $45 million in revenues. I mean there are [indiscernible] ever seen it was Cosco on steroids. And sorry – Cosco combined with attractive supply or something. And either marketplace is where Amazon Prime is not going to hit tomorrow, right. So, these are filling an absolutely needs in the markets they have from a store level performance number. They not to cover off the ball. So there is nothing I – there is nothing I could say where even [indiscernible] want to be concerned on top of which unlike dealing with soft goods, the guys that mostly they're selling all kinds of stuff besides soft goods products. So, the level of sheer diversities they have in their sales mix is unlike any other retailer that we could probably follow.

[John Masuk:]

So, it would be fair to say that it would be, pretty drastically bad sales season for those locations to kind of come into question.

[Christopher Volk:]

I mean if you look at – if you looked at mostly during the great recession from 2008 to 2009, and if you excluded the price gaps, which they allow themselves gap. So, if you – so if you excluded the price of gaps, which seems to be volatile, their sales were almost flat. I mean, so we're going through the greatest recession in my lifetime.

[Operator:]

The next question is a follow-up from Collin Mings of Raymond James. Please go ahead.

[Collin Mings:]

Hey, thanks. I just want to go back real quickly to the ATM, just Cathy for the modeling purposes, Is there a way we should think about what would be the maximum that you guys would look to raise in a quarter under the ATM?

[Catherine Long:]

I think that if we needed significant volume in any quarter that would be, say more than 10% to 15% of our trading volume that the ATM may or may not be the best answer there. And, we might consider one of our many other options.

[Christopher Volk:]

And Collin, this is Chris. I mean, ATM is a great tool and it can – it's really perfect for a company like us where we're growing steadily, on and generally would like to do transactions. So, you can basically almost match funds yourself and plead in some equity, at the same time as you're pleading in deals. But, we're incredibly mindful of the fact that if you want to diversify your shareholder values, you can't do it through an ATM. So, you're going to do it through other ways, whether they're block trades or whether it's overnight transactions. So, a lot of the discussions about how we're going to raise equity capital, get down to tactical considerations like that, and that's just how much money we need.

[Collin Mings:]

Okay. That's helpful. And then Chris, just recognizing it bounces around a bit quarter-to-quarter, just can you highlight if there is anything specific that knock that median EDF down a notch?

[Christopher Volk:]

Well, the EDF, if you looked at the histogram, you'll see that the EDF went from the median corporate EDF, slipped from Baa1 to BB plus, down to BB2. That gargantuan move equates to 11 basis points of higher default probability. So, basically, it's almost nonexistent. If you look at the STORE Score, which is the contract, the sort of the law of contracts for, it's basically flat from a risk perspective. If you peel back, why did the EDF dropped or anything, you provided the default probability why the 11 basis points. In some cases, it was because, there were companies that were underperforming. In some cases, it's because companies just changed their capital structures. We had companies where they took on debt, there was change of control on the company level, and so again tenant credit is always a transient thing in this business. So, if you noticed this last week, Yum Brands, for example, sworn off Yum China, and in doing that they left all the debt with the parent current company. So the parent company went from being a BBB company, down to a BB company. So it is just either choices the companies has made based upon how their shareholders are going to do, because they run companies for shareholders not for debt guys. So we're going to focus on the STORE Score. I would tell you that, just sort of as a large focus, anyhow, when you're thinking about portfolio performance, if you look at the portfolio that this leadership team put together from 2003 to 2007, and then helps that at roughly through 2012, through the greatest recession in my lifetime, the entire loss through that period of time were something like 3.2%, which we have kept about 40 basis points a year that excludes the offsetting benefits of rent fund’s portfolio, property gain. So, we're designing an assets portfolio design to be as bulletproof as you can get and part of that's being done here by actually having much, much higher portfolio diversity and we're in a 100 different industries today. And you want to have things that are non-correlated, right. So, for example, movie theaters, in a way are correlated and the reason they're correlated is because if you have a bad movie at one theater, you'll have bad movies at all the theaters. Drugs stores are highly correlated. So, for example, if you have – your customers at drugs stores are all the same customers, CBE, their Medicare, CMS, ADNET Healthcare, Blue Cross, Blue shield, and so on, and your part of the healthcare delivery system in the United States, so the same things can happen. So when you're putting portfolios together, it's important to seek diversity where you have non-correlated tenant as much as possible to be able to insulate you from issues which we have done. So, we feel good about the EDF scores, where they are, we don't see anything that's secular in the economy at this point in time and because we're the only guy who could actually disclose what our EDF score is, you'll be the first to know if you see something big that happens and that's why we disclose it.

[Operator:]

The next question is a follow-up from Daniel Donlan of Ladenburg Thalmann. Please go ahead.

[Unidentified Analyst:]

Hey, it's Jonathan again, just quick one, do you guys have your same-store NOI growth for the portfolio? Sorry, if I missed that.

[Christopher Volk:]

We don't disclose same-store NOI growth for the portfolio. It's kind of a – it's frankly a sort of a trailing number anyway. So, if you're looking at where the growth is and where, what contributed the growth, whether it's external growth or internal growth, the answer is right this second, for this year, it will be mostly external growth because on a relative basis we've been growing pretty highly, and if you are looking at NOI growth or you had the same property for both 2016 and 2015 and you had it for 12 months then that percentage of the portfolio is pretty small and it won't really pay you that much. But that's why we take great pains to tell you what our lease escalators are for the assets we acquire during the quarter. So, you understand what the gross returns are and that's why we disclose the entire lease escalated for entire portfolio. So that you are looking at this and you are modeling this out, you can do this yourself. And most of the escalators are going to happen because unless CPI is ridiculously low, most of them are going to happen. And the reason we do the CPI so much is because we just hate streamlining rents so...

[Unidentified Analyst:]

Okay. Makes absolute sense. Thanks. That's it from me.

[Operator:]

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

[Christopher Volk:]

Well, thank you again, everybody for patiently listening to us and we are here if you have any questions and look forward to seeing you in NERI if you are able to come. Bye, bye.

[Operator:]

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