STORE Capital Corporation
Q2 2015 Earnings Call Transcript

Published: 13 Aug 2015

[Operator:]

Welcome and thank you for joining the STORE Capital Second Quarter 2015 Conference Call. Today's conference call is being recorded. At this time, all participants are in a listen-only mode but will be prompted for a question-and-answer session following the speaker’s remarks. And now I would like to turn the conference over to Moira Conlon, Investor Relation for STORE Capital. Moira, please go ahead.

[Moira Conlon:]

Thank you, Amy, and welcome to all of you who have joined us for today's call to discuss STORE Capital's second quarter 2015 financial results. Our earnings release, which we issued this morning along with the packet of supplemental information, is available on our investor website at ir.storecapital.com, under News and 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. Before we begin, I would like to remind you that comments on today’s call will include forward-looking statements. Forward-looking statements can be identified by the use of words such as “estimate,” “anticipate,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “seek,” “approximate,” or “planned,” or the negative of these words and phrases or similar words or phrases. Forward-looking statements by their nature involve estimates, projections, goals, forecasts, and assumptions and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in our forward-looking statements. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. STORE Capital expressly disclaims any obligation or undertaking to update or revise any forward-looking statements made today to reflect any change in STORE Capital's expectations, with regard thereto, or any other changes in events, conditions, or circumstances on which any such statement is based, except as required by law. Please refer to our SEC filings and our Investor Relations website for additional information. With that, I would now like to turn the call over to Chris Volk. Chris, please go ahead.

[Christopher Volk:]

Thank you, Moira and good morning everyone and welcome to STORE Capitals second quarter earnings call. With me today are Cathy Long, our CFO; and Mary Fedewa, our Executive Vice President of Acquisitions. As you've all seen from our press release the first half of 2015 has begun to deliver on the promise of this great platform. Our second quarter was a record one for STORE in terms of investment activity. We generated approximately $395 million worth for investments and then in turn set a new investment record of $686 million for the first six months of the year. At the root of this record level of activity is a broad-based demand for our services. In the second quarter, alone 35% of our investment activity was from repeat customers with a majority from this activity from 32 new customers. In the quarter we closed 45 separate transactions bringing the number of transactions year-to-date 77. Our ability to directly touch and address the long-term needs of our middle market and larger tenants, resulted in consistent second quarter investment activity statistics, which include the following. Our weighted average lease rate for investments made during the second quarter helped firm adjust over 8.2%. The average annual lease escalations for our new investments approximated 1.8%. The weighted average primary lease term for our new investments was approximately 17 years. The median new investments tenant credit rating profile was Ba1. The median new investment contract rating or STORE Score was A2. Our average new investment was made at approximately 73% of a replacement cost, 90% of the multi unit investments we made during the quarter were subject to massive leases. Nearly 90% of the assets we acquired during the quarter will deliver us with unit level financial statements. Altogether, our portfolio performance during the second quarter was strong and we closed the quarter with an occupancy rate of 99.5%. The vacancies were centered in our five Heald College campuses, which were unfortunately forced to close in April. Of those five campuses, we have sold one and that was completed in July. And others under contract to be sold at a price that's slightly above our original investment. Two were in the process of being re-tenanted under long-term leases. The recovery rate for these four assets, approximates 90%, which leaves us today, which is only a quarter following the vacancy occurrence with only a single asset, which is being marketed and represents less than one quarter of 1% of our first quarter revenues. It bears mentioning that the yield on our cost of these at the time of their vacancy was approximately 9%. So a 90% recovery approximate the yield of 8.1%. I would say that on a net asset value basis, this yield will result and these continuing to be worth well more than our original cost. As STORE grows we may have more vacancies. This is part of the business we are in and we do factor it into our guidance. What is important to us is building a portfolio having margin for error. The ability to realize margins for error is embedded in our investment strategy and that strategy is as follows. STORE seeks to invest in assets that our shareholders may not otherwise be able to find at purchase prices relating to replacement cost they may not see, at lease rates they generally can't get, with lease escalations they may not be able to realize with lease documentation that closely aligns interest and financial reporting requirements, they may not also. Our ability to execute the strategy and our ability to actively manage our investment portfolio has been central to our successful with the Heald assets and we believe with any such assets in the future. You will seek from our supplemental disclosure on our website that the health of our overall portfolio continues to be very sound. The median tenant credit rating risk remained around Ba1 and we deem over 75% of our contracts to be of investment grade quality. These statistics are enabled by the receipt of tenant financial statements for all of our customers and also by STORE level financial statement - financial reporting, which we received for approximately 96% of our customers. Turning to our financial health, we executed two noteworthy capital markets transactions during the quarter. We already announced on our last earnings call the $365 million of term note issuance under our A+ rated STORE Master Funding conduit. We also raised net proceeds for approximately $225 million from a follow-on equity offering in June and that was designed to enable us to fund the incremental increased investment activity, at least in our elevated 2015 investment guidance. As a result of this capital markets activity, we entered the third quarter with no borrowings outstanding on our credit line, a debt structure comprised of well laddered long-term fixed rate borrowings and a run rate funded debt to EBITDA ratio of 6 times, which is the low end of our guidance range. We also had over $1.1 billion in unencumbered assets, which will increase as we deploy our short-term credit facility to make acquisitions this quarter and next. All of this serves to make STORE Capital the most financially flexible of the three market leading public net lease companies that we have guided. Based on the combination of our strong investment activity in the second quarter, our portfolio performance and our recent capital markets transactions we are today meaningfully raising our guidance for 2015 by increasing the bottom end of the range by $0.04 and the top of the range by nearly $0.02. Our AFFO per share for 2015 now stands at $1.38 to $1.42. Based upon the midpoints of the guidance range, our $0.25 per share quarterly dividend, represents a payout ratio of just 71%, which is amongst the lowest paid ratios in the growing REIT sector that we are a part of. If you look at an AFFO per share run rate, the payout ratio would be even lower at approximately 68%. So our financial flexibility is further enhanced by our dividend payout ratio, which is the lowest of any company we have ever led. This serves to both our protect dividend and improves our prospect for internal growth, which is a key part of our strategy. And on this note, I'd like to turn the call over to Mary Fedewa to discuss our current and forecasted investment activity.

[Mary Fedewa:]

Thank you, Chris and good morning everyone. As Chris mentioned we had a record quarter in acquisitions and I am pleased to report that our third quarter is already tracking nicely to our plan. As of yesterday, we have funded over $750 million in gross acquisition volume year-to-date. We continue to create our own contracts and build our portfolio brick-by-brick. As Chris mentioned, we closed 45 transactions last quarter, which is almost four a week. The properties we have acquired since June 30th and the properties currently in our closing pipeline continue to meet our investment criteria. They are predominantly in service industries, they have long-term master leases, they have annual escalations and strong STORE Scores that are consistent with investment grade tenant. Now turning to the market; the opportunities remain robust from an acquisition perspective. Coming off of second quarter and as we go into third quarter, we are seeing some cap rate compression in the market, because we continue to build our pipeline using our direct origination approach we are seeing less compression than the auction marketplace as a whole. That said, we continue to be comfortable with an overall 8% average lease rate for 2015. Our unique sales engine remains intensely focused on creating demand and delivering real value to our customers. We remain confident that we can achieve our volume target of $1 billion for 2015. Our pipeline of investment opportunities is as strong as ever and we are excited about our outlook. With that, I'll turn the call to Cathy to talk about our operating results.

[Catherine Long:]

Thanks, Mary. I'll begin my remarks today with an overview of our results for the second quarter ended June 30, 2015. Next I'll discuss our balance sheet and capital structure, followed by a recap of our current guidance for 2015. Unless otherwise noted, all comparisons refer to year-over-year periods. So starting with the income statement. As Chris and Mary mentioned, we achieved record acquisition volume for the second quarter and most of the changes in our operating revenue and expense levels are directly related to discontinued portfolio growth. Total revenues increased 53% to $68.9 million for the quarter, primarily attributable to the portfolios growth, which generated additional rental revenues and interest income. This also marks an increase of 12% from $61.5 million in revenues reported in the first quarter of this year. As I mentioned on previous calls, the timing of acquisitions during the year can have a meaningful impact on our results of operations. For the first six months of 2015, the pace of acquisitions was earlier in the year than anticipated, which also drove revenues higher. Our portfolio expanded to $3.5 billion, representing 1,175 property locations at June 30, 2015 from $2.3 billion in gross investment amount, representing 767 properties at June 30 a year ago. This represents a 52% net increase in the size of our portfolio in the past 12 months. This also reflects a 24% increase in the size of our portfolio, since year-end 2014. On an annualized basis, our portfolios base rent and interest was approximately $290 million at June 30th as compared to an annualized $238 million on the portfolio that was in place at the beginning of 2015. As Chris discussed, the weighted average going in lease rate for real estate investments acquired during the second quarter was 8.2%, slightly higher than the 8% weighted average rate we expect for all of 2015. Total expenses for the second quarter increased to $50.4 million compared to $35.9 million a year ago. Again, most of the expense increase relates to the growth of the portfolio. For the second quarter, more than half of our increase in total expenses was due to higher depreciation and amortization expense. Interest expense increased about 24% to $20.6 million for the quarter from $16.6 million due primarily to an increase in long-term borrowings used to partially fund the acquisition of properties added to our portfolio. The long-term debt we've added since June 30th a year ago includes the April 2015 issuance of $365 million a STORE Master funding A+ rated net leased mortgage notes, which we reported earlier this year and a minor amount of traditional mortgage debt. Property costs increased to $356,000 for the second quarter of 2015, due primarily to the Heald College properties that were vacant and not subject to a lease. As Chris discussed, we sold one of these properties in early July and on the remaining vacant properties we expect to incur some property level costs until they are rely or sold. G&A expenses increased to $7.2 million for the quarter from $4.9 million a year ago, primarily due to the growth of our portfolio, the increased costs associated with being a public company and staff additions to support our growth. Despite the addition of the regulatory and governance costs associated with being a public company, G&A expense as a percentage of portfolio assets decreased slightly from last year. Net income increased to $19.6 million for the quarter or $0.17 per basic and diluted share compared to $10.4 million or $0.15 per basic and diluted share for the year ago period. The increase in net income was driven by the additional rental revenues and interest income generated by the growth in our real estate investment portfolio. Our net income for the second quarter also included $1.2 million aggregate gain on the sale of four properties. In comparison net income for the second quarter of 2014 included an aggregate gain of $1.4 million on the sale five properties. AFFO increased by 71% to $42.8 million or $0.36 per basic and diluted share compared to AFFO of $25 million for $0.35 per basic and diluted share in the second quarter of last year. This is also an 8% increase from last quarter's AFFO of $39.5 million or $0.34 per basic and diluted share, which highlights our consistent and sequential growth. Again the increase in AFFO was primarily driven by the revenue generated by our portfolio growth partially offset by an increase in interest expense related to borrowings associated with the acquisition volume and the higher operating expenses to support the growth. For the second quarter of 2015, we declared a regular quarterly cash dividend of $0.25 per common share to our stockholders, which was paid on July 15. This represents a payout ratio of about 70% on AFFO per share of $0.36, which provides a level of free cash flow that can be used for additional real estate acquisitions. Now I'll provide an update on our balance sheet and capital structure. As Chris mentioned, in June we completed a follow-on equity offering of 11.6 million shares of common stock at a price of $20.25 per share. Store capital received net proceeds of approximately $225 million, which have been used to pay down the borrowings outstanding under our credit facility and to fund real estate acquisitions. As of June 30th we had $66.2 million in unrestricted cash and cash equivalents, the full amount available under our existing $300 million unsecured revolving credit facility and a pool of unencumbered assets aggregating just over $1.1 billion placing us well-positioned for additional acquisition activity this year. Our total debt outstanding was $1.64 billion at June 30th, we measured leverage using a ratio of adjusted debt-to-EBITDA because of our high rate of growth, we look at this ratio on a run rate basis using our estimated run rate EBITDA. Based on our real estate portfolio of $3.5 billion at June 30th, we estimate that our leverage ratio on a run rate adjusted debt to EBITDA basis was approximately 6 times. As reported earlier, on April 16th we issued our sixth series of STORE Master Funding net-lease mortgage notes. We issued $365 million of A+ rated Class A notes and $30 million of BBB rated Class B notes. The Class A notes are segregated into two tranches; $95 million of seven-year notes with an interest rate of 3.75% and $270 million of 10 year notes with an interest rate of 4.17%. At with these two of our previous Master Funding note series issuances, the Class B notes were retained by STORE and now total $108 million. Between our A+ rated long-term debt conduit, our short-term unsecured borrowing availability and over $1 billion in unencumbered assets, we continue to maintain a flexible and efficient capital structure that provides us with access to long-term low-cost capital. Now turning to our guidance for 2015. As Chris reported, based on our acquisition volume in the first half of the year and our expectations for the timing and amount of acquisitions for the remainder of the year, we're increasing and narrowing our AFFO per share guidance range from $1.34 to $1.40 to a range of $1.38 to $1.42. We're maintaining our acquisition volume guidance at $1 billion and I should point out that this is our volume expectation, net of anticipated property sales, including sales totaling $24 million in original acquisition cost, that were completed so far this year through yesterday. We continue to expect our average cap rate for the year to be about 8%. The timing of acquisitions is expected to be spread throughout the remainder of the year, though history would show us the acquisition activities generally weighted towards the end of each quarter and that there's often higher acquisition activity in the fourth quarter. Regarding leverage we continue to target a run rate debt to EBITDA level of between six and seven times, which translates into a loan to portfolio cost of roughly 50%. Finally G&A costs are expected to be between $29 million and $30 million for 2015, including commissions and non-cash equity compensation. As we've mentioned before, we expect G&A costs as a percentage of our portfolio assets to trend lower over time due to our scalable platform. That concludes my prepared remarks and now turn I'll turn the call back to Chris.

[Christopher Volk:]

Thank you, Cathy. I have a few remarks to make before turning this call over to questions. First I want to talk about our outlook for 2016. We are presently in the early stages of formulating our corporate budgets for 2016. We should be substantially complete by the time of our next earnings call in mid-November. So we expect to give you our initial guidance for 2016 at that time and it will be based upon our anticipated investment activity for the remainder of 2015 and our investment and operations expectations for 2016. Our outlook for 2016 will guide board as they evaluate any changes to our dividend policy later on in this year. Secondly, I invite you to go to our website and download our packet of supplemental information, which contains market-leading portfolio disclosure. While you are on our website please take a tour because we recently refreshed our website to expand our customer and social media content. Since we began our social media outreach over a year ago, we have garnered more than 5,000 likes on Facebook, which is probably a first for net-lease REIT. You can also subscribe to our blog and see a variety of customer testimonials, which will give you a better sense of our net-lease financing solutions add value to our customers. And third, there is no better medicine to combat interest rate fears than AFFO per share growth. STORE has shown itself to be a powerful creator of what we call external growth that is using newly raised shareholder equity to accretively make investments that benefit all shareholders. We have done this by achieving very attractive investment spreads relative historic standards, such spreads represents a difference between our lease rates and our borrowing rates. Based upon the range of the 10 year treasury is our view that these attractive investment spreads are likely to be with us for a while. However, we are also positioning the platform to have the best possible prospect for internal growth. We are doing this by combining a low dividend payout ratio with attractive lease escalations that average 1.7% annually and are amongst the highest in the business. Combine these two types of growth and you have growth prospects that are unusually high for a REIT and that we believe will translate into dividend growth for our shareholders for many years to come. And with that I'd like to turn the call over to the operator for questions.

[Operator:]

[Operator Instructions] Our first questions comes Caitlin Burrows at Goldman Sachs.

[Caitlin Burrows:]

Hi, good morning. I was just wondering if you could go through whether any future debt or equity raises are included in guidance. And then also if you've noticed STORE's cost of debt funding, whether it's changed given recent spread widening?

[Christopher Volk:]

I'll start Caitlin and then I'll turn it over to Cathy for the discussions on the projects and the budget. In terms of the cost of debt today, there's been - our last Master Funding was done in April as you know and the weighted average cost of borrowings for the two tranches we did was about 4.6%. We're ready [ph] to execute that offering today, it's likely that the cost of debt might be 25 basis points higher than that and that's just based upon estimates we have from bankers that have sold our debt in the past and have been keeping tabs on the market. A lot of that is due, obviously the 10 year treasury today is back at levels that are probably consistent with what they were in April, but a lot of that's due to sort of unrest in China or unrest in Europe with various issues that have happened and it would always change from day-to-day. So debt spreads will happen and change from day-to-day. The other thing that you'll notice is that as we've done our Master Funding transactions with virtually everyone are relative debt spreads have come in and we hope that that will continue to be the case too as we get the portfolio larger and more diversified.

[Catherine Long:]

And for the debt and equity guidance, I can't comment on exact timing and amount of any equity raises or debt transactions. But what I can say is that we do have financing flexibility with Master Funding program. Obviously, now that we're a public company we can tap equity. I can say that we do look at all of our alternatives and we are mindful of keeping a conservative leverage ratio. As Mary and Chris often say that we're in a flow business and $1 billion worth of volume that we estimate is what we have visibility on right now and it could be more, it could be less. We feel very confident with $1 billion and if it's more and if we have accretive acquisition opportunities, I'm going to make sure that Mary's team has the funds they need to acquire properties, just like we did with the June follow-on offerings. So I can't really give you more color than that.

[Caitlin Burrows:]

Okay. And then also just when looking at the full year AFFO guidance. It looks like the second half, just using the midpoint comes to out to about $0.69 at AFFO versus $0.71 in the first half. So I was just wondering if there was something in particular that was driving what looks like a slowdown?

[Catherine Long:]

Sure. Will the AFFO range considers several factors, so it considers the fact that we did have the June follow-on offering that was late in June. So those shares are going to be outstanding for full quarters going forward as they weren't in Q2. G&A costs also, if you'll note I am still getting guidance of $29 million to $30 million for the year and we have less than half of that in the first half of the year. So as we continue to build out our infrastructure, G&A will be slightly higher in the second half of the year, so that will be a little bit of it. Also Mary mentioned earlier that cap rates, we are seeing a little bit of compression, so that will factor into it as well.

[Caitlin Burrows:]

Okay. Great. Thank you.

[Operator:]

Our next question is from Ki Bin Kim at SunTrust Robinson Humphrey.

[Ki Bin Kim:]

Can we just talk about the nature of your acquisition side, did you just pull forward some of the acquisition that you expected in the second half to the second quarter? Or will you just say kind of as per the higher dollar value of volume you saw, new volume I should say?

[Christopher Volk:]

So, Ki, let me hear that question again, I mean, I'm not sure I get the - I would say this, it's not smart here [ph]. We $1 billion got the volume for the year. The first half of the year has been a record first half of year for us, so really a lot of our volume for the year has been front-end weighted. We're in a flow businesses as Mary and Cathy have said, so trying to sort of have an outlet in second half the year. The best we could tell you today is we have visibility of $2 billion [ph] and the $1 billion again is a net number, so we'll probably sell off. Last year we sold off 1.5% of our portfolio, this year it could be something in that range. So we're going to see, we have comfort to $1 billion net. We could do more of that, if Mary can find and our team can find more business than that we're going to our best to be able to do it, if it's accretive to shareholders and we have an obligation to that. Beyond that I don't know what else I can tell you.

[Ki Bin Kim:]

Okay. And if you look at the kind of deal volume like as you said and deals in the marketplace today, would you describe that pool as just as good in the second half that's out in the market or any changes there?

[Christopher Volk:]

I would say that the pool that we're looking at for the second half if you at our pipeline of deals that we're evaluating, would be consistent with the pool that we have overall today and was the, the investments we're making in the first half. As Cathy said, we're looking at overall cap rates of 8% for the year, which might imply that given our first two quarters cap rates were slightly above 8%, the second half might be below 8%. Keep in mind, by the way the fourth quarter last year for our first earnings call, the cap rate was 7.90%, so this stuff moves around. And you can't sort of look at it scientifically and look at our activity while it's meaningful, it's not statistically, it sounds ample of where the market is. So the things will, the cap rates move around. We feel comfortable with 8% for the year and that gives us room to absorb some cap rate compression if we see that happening to us in the second half.

[Ki Bin Kim:]

Okay. And the last quick one, I mean, with that kind of deals made on this quarter, from a practical standpoint, how do you gain comfort that the unit level financing data you're getting from I guess, all these numerous transactions are kind of fully vetted and 100% I would say conviction that it's real, looking at all these weaknesses [ph]. I mean, it assumes that a lot of volume --?

[Christopher Volk:]

We've been doing this for 30 years and I can't say that every company we've had, this company has more unit level financial information than any company that we have. Unit level financial statements by their nature are not to be audited financial statements. So you're not going to even the most - even the largest - most biggest multinational firm it's not going to have audited financial statements at the end level. We do have however, an extremely large book underwriting staff and servicing platform. When people present us with financial information, the amount of information we have historically, statistically is so potent as if somebody is building really on their unit low numbers, we tend to be able to tell. The number of times that that's happened in my career has been almost none. I mean, it's been so few, I mean, for somebody to do that, basically they have to lie about everything. I mean, so if you're talking about fraud on financial statements, they have to lie at the financial statement level then they got to lie at the corporate financial statement level because the financial statements at the end of the day do roll up to our company financial statements. So it's really very difficult for people to do it. So to unit level financial statements are intensely important to get and one of the things that we disclosed to you especially when you're profits on real estate, which is what we do. So if you're doing cost in a real estate you won't get them, but if you're doing profit in a real estate it's really important to get. And we're get them today 96% of our properties. During the quarter, it bears note that we only got them on 90% of the properties that we did, which there are handful of properties that we don't have them on which we're hopeful that we will get them on in the future which is why we did them. We were comfortable about them for a number of the reasons, but our aim is to keep this number extremely high and to be the vast majority, I mean, hopefully all of our properties will have financial statements. And I think from your perspective as analyst and from our investors perspective, when we disclose the corporate credit ratings, the corporate expected to fall frequencies for our tenants and give you histogram for that and then we overlay onto that, a sort of STORE Scores, which is effective contract rating, which factors in the unit level financial statements. We're proud of being a company that can be able to deliver that kind of information, which is necessitated by having information from all your tenants and having a very, very powerful IT backbone to be able to do it.

[Ki Bin Kim:]

Okay. Thank you.

[Operator:]

Our next question is from Craig.

[Craig Mailman:]

Hey guys can you hear me.

[Christopher Volk:]

Craig Mailman, how are you?

[Craig Mailman:]

Good. How are you guys doing?

[Christopher Volk:]

Good.

[Craig Mailman:]

Just a quick follow-up on guidance, could you guys raise the range last quarter and raise your spending range in this quarter, kind of spending staying the same, but earnings are still going higher. Is it just a functional of the volume coming sooner than anticipated and you guys maybe a little bit more conservative on the yields you're getting, that kind of were baked into guidance.

[Catherine Long:]

Yeah timing because the amount of acquisitions in a year are significant compared to the size of our company, timing of these acquisitions can really change AFFO. As I mentioned in my discussion, the timing this year was front-ended in the year more than we would have expected. So and even within a month, it was earlier in the month than normal and so just all that revenue, extra revenue comes in.

[Craig Mailman:]

So from our own perspective, we've been kind of doing back one-third of the quarter? Is it better you think at this point, given the flow that is sort of mid-quarter or even earlier in the quarter?

[Catherine Long:]

I don't know that we can say it's a trend yet. I know that you know when Mary is looking at opportunities the timing is something that is not necessarily very prescriptive where we can schedule a closing date and hold someone's feature apply it for that date. If you remember instead of us really going out into the auction marketplace and buying something that is already for sale, often times we are meeting with customers and presenting them with opportunities for them to sell is at the real estate and it may take a little bit of a longer lead time. And so timing wise, it's a little harder to predict, so I wouldn't necessarily say that this was at a trend. In fact, summer months are generally slower, so I would say third quarter is usually slower.

[Christopher Volk:]

So Mary gave you the idea for where we are for the quarter, we're a little over $750 million year-to-date as of yesterday. So the second quarter is starting off, I mean, the third quarter rather is starting off slower than where we were this time second quarter because people just take vacations. The summer quarter is always like that.

[Craig Mailman:]

Okay. That's helpful. And then bigger picture Chris just maybe your thoughts, the IRS potentially delaying cash for spin offs for some of the guys that have been in the news. Does that create more opportunity for you guys or the group in general? Do you think you see more the deals like the GLPI and Pinnacle kind of that structure?

[Christopher Volk:]

Well, I am kind of the view that that spins are good things, I'm hoping to see some of that. In terms of companies that would spin, but then decide to do sale leasebacks, I don't think you'll see a lot of that. I think that, for example, if you at Darden selling off Red Lobster. The tax impact to them of selling Red Lobster, the assets was so substantial, they got the entire board fired. So if I'm on the board of another company and I have that kind of an issue it may cause me to think twice before doing a big sale leaseback. So the spin issue, which is more tax efficient is this something that I think boards will consider. But if there's something like a sale of assets that causes your after-tax cap rate to be basically 10%, that's something that's not going to be too exciting here.

[Craig Mailman:]

Okay. And then just lastly on the dividends, you guys went through where you are in the payout ratio. Could you guys perhaps walk through where you are versus taxable? How the board looks at our retention of capital versus just targeting the payout?

[Catherine Long:]

As far as taxable goes we would expect normally, on a normal year that we would distribute sufficient amount to get to our 85% test [ph] and taxable income wise we think that this year for dividends, about 5% would represent return of capital. And that's due to the fact that if you recall earlier in the year, the first dividend that was paid in January was a stub period dividend for last December, basically from the time we went public to December 31 that was a stub period dividend. So this year will be a little bit of a different year. I can say that the outlook for 2016 is really what's going to drive the board's decisions on dividend versus necessarily trying to hit a particular tax position.

[Craig Mailman:]

Okay, I mean, I guess from the board perspectives are they more focused on a payout level or are they more focused on retaining maximum proceeds to kind of reinvest in the business?

[Christopher Volk:]

I think that when you're ever running one of these companies, there is a little bit of a balancing act that goes on. I think that if it's up to leadership team here and we've made recommendations to the board, we like having the dividend payout ratio to be kind of in the, where it is 70% give or take. I think they like having a payout ratio that's low relative to the net lease space. One thing that's so key about this is and I've run companies, every company we're run prior to this has had payout ratios than we expect. But if you combine 1.7% rent escalations with a low payout ratio at the loss to reinvest, it's conceivable that you can get to a number like 3% or 4% internal growth, which if you can, it's a total homerun for net-lease rate. Maybe frankly a homerun for any REIT and so the payout ratio is a big producer of being able to sustain that kind of growth and so then when you get the external growth, it's a very profitable engine, that's on top of some internal growth that becomes pretty reliable.

[Craig Mailman:]

Great guys. Thank you.

[Christopher Volk:]

Thank you.

[Operator:]

Our next question is from Todd Stender at Wells Fargo Securities.

[Todd Stender:]

Hey, thanks. I know 35% of your acquisition volume originated from existing tenants, but does that necessarily mean that they were a direct deals or off-market or could that also mean that they were a part of the marketed package?

[Mary Fedewa:]

Hey, Todd, it's Mary. No, those transactions in particular would come directly from the customer and the relationship we already have with them and they would be things like maybe they're making another acquisition, they might even be new development or model or reimage of their existing sites. Those would be absolutely direct for sure.

[Todd Stender:]

Okay, thanks. And while I have you Mary, can you break up the cap rates on that piece of the acquisition volume versus the remainder - remaining 65%?

[Mary Fedewa:]

Well, I don't have the data right in front of me, but generally it is very close to the original cap rate that we got from the customer in most cases we start there.

[Todd Stender:]

Okay. So for the quarter there's no real disparity between how it wraps --?

[Christopher Volk:]

No. And if you - so and when we give you the cap rate, the cap rate is going to be sort of a weighted average cap rate, right. So but I should point out to you that if you were to do a median cap rate for the quarter, the median cap rate also is right on top of the average. The distribution is pretty even on both sides.

[Todd Stender:]

Okay, that’s helpful. Then any characterizations you can make about what you did acquire in the quarter. Maybe give some ranges in terms of the size of the properties, small to large and then range of - the length of leases anything on the short side or anything on the real long side?

[Christopher Volk:]

I mean, our average was 17 years and there were, a couple restaurant properties we bought here in Scottsdale that have short-term leases. Those are some of the properties we don't have financial statements on, but brought them pretty inexpensively and we happen to know the marketplace since we're here. But basically outside of those and maybe there's something else, but basically all the assets were 15 to 20 year leases. In terms of the mix you can look at our overall portfolio mix, which the waiting is consistent with last quarter, which means that we haven't pushed the envelope with respect to moving more towards industrial or a lot more towards retail. So our retail service industrial mix tends to be about the same.

[Mary Fedewa:]

Yeah, it was pretty consistent, Todd.

[Christopher Volk:]

Yeah, I mean, if you looked at the mix of the cap rates, I would tell you the restaurant cap rates stuff tends to tighter. So that if you're looking at where stuff goes, the restaurant stuff tends to be tighter. There are occasional restaurant deals we can get with better cap rates, but there's just a lot of competition in the restaurant space, the rest of that moves around. I mean, the fun thing about the market we're in is, it's very imperfect. I mean, which you would expect. I mean, it's a - we're dealing with middle market, larger companies and you're dealing with the vast amount of market space. So our ability to exceed the pricing that you get in the auction marketplace, which is by the way not too inconsistent with other peers on the net-lease REIT base, is that relationship deals tend to come off with higher cap rates. Service, if it's a high service transaction, high service always gets you higher cap rate. So roughly 8% of our business is new development business, you always get higher cap rates on new development business and so on. So any time you can touch the customer and give them what I call high service, high touch value-added product, you can - if you can add value for that, you can charge for it. I mean, and the key is that you always have to be able to add more value to the customer than you charge. So I mean, the customer has to feel like they're actually net-net very positive for having done a deal. Of course, part of the ability to do direct business is you can get yourself another 50 basis points of cap rate just by not having a broker in the middle of the transaction. So all those things really help you to do the transaction, I mean, as I said earlier on, our goal here is not to buy things that you can buy. I mean, if there's a transaction out there and it's listed and it's an auction transaction then anybody could buy it as long as show for the check, that's really not our preference to buy deals like that. And so our goal is to buy things and generally you can't buy at lease rates. You can't get with documentation, you don't find and it's all done based upon relationship transactions. So we're really in the business of contract creation. We're not just buying somebody else's contract and if you can create a contract, and you can add value to the customer than our shareholders can win also.

[Todd Stender:]

That's helpful, thanks Chris. Just with the backdrop, hope you guys are making comments on narrowing cap rates or cap rate compression. How do you apply that to your disposition expectations? Do you think you're going to frontload more dispositions into the third quarter versus fourth quarter or any comments you can make about how you're looking at asset sales?

[Christopher Volk:]

So first I want to just make couple of comments on dispositions. Our dispositions during this last quarter were 7.9% on the cap rate side. You shouldn't read into it that our NAV is like 7.9% or something like that. Most of the stuff that we're selling is stuff strategically that we'd be better off not owning and so we're making decision to that. Now some of the stuff that we'll sell from time to time is just sold purely for diversification reasons. So the diversification stuff that we sell off tends to have much lower cap rates than the stuff that we're selling off where we're deciding not to hold it for strategic reasons. The gain on, we don't - we try also not to time the market, so we're not timing the market. I don't time the market when I buy stocks and I don't time the market when we buy real estate. I mean, you're making a very long-term investment play on the stuff and we try not to time the market with respect to assets sale. There have been one or two times where we get sort of unsolicited inbound calls where somebody say, I got to have this property and there maybe one or two times when we've actually taken them up on it. But basically by enlarge, we're not in the business of selling properties, we're in the business of creating a diversified portfolio. And to the extent that we sell property that should enhance our portfolio by giving it better quality and better diversity and so that's kind of, we think about. So for the rest the year we're not timing it, we're not, some of our properties - in this business just some assets are always more liquid than other assets. So if we wanted to sell off restaurants tomorrow, it's a huge market for restaurants and you can sell on six caps [ph], right. So we're not in the business to try to sort of selectively sell properties that can get the most gain. The $1 million in gain that we made last quarter, I should point out to you, since nobody gives us credit for the gains and AFFO per share and that the gains are real. I mean, the gain, the $1 million is really, since what we have been around that long, it's about $1 million on our costs. The quarter before that we took $1 million impairment on one of the Heald properties. So basically the gain virtually offsets any loss and keep in mind, that the Heald recovery rate is 90% without that gain. Like if I were to factor to gain in, just to sort of apply it indiscriminately to the instrument to the Heald, then you're talking about 95%. So one of the things that really makes this thing just a great business is being able to manage your portfolio. And if you can buy the asset for cap rates that otherwise are not available to marketplace, then you have substantial room for error. I mean, and also if the 10 year treasury goes up to 450 [ph] our assets will be worth more than they cost to build. If we have a default and we want to sell a property, we can sell it and not lose that market share [ph]. We might even not lose anything. In the case of the Heald properties, we're selling to, we're probably be releasing, we've already released two, we'll probably release the third one. But there's a good chance that all those properties will be worth on an NAV basis more than we actually pay for them. And so having a margin for error is just a very important in our businesses as far as we're concerned and will result in really stable predictable returns and performance for investors for years to come.

[Todd Stender:]

That's really helpful, Chris, thanks for your additional comments and it's really a testament to the size of the assets you're targeting, it's a very liquid market. So thanks again.

[Christopher Volk:]

Thank you, Todd.

[Operator:]

The next question is from Dan Donlan at Ladenburg Thalmann.

[Dan Donlan:]

Thank you and good morning. Chris, just wondered if we could talk a little bit out two of your tenants; Starplex as well as O’Charley’s and just reading the news, stories, it looks like O’Charley’s has consummated an IPO where the parent company lease is. Just kind of curious, what that means for you guys as a pretty large landlord for them? And then also it looks like AMC Theaters has taken Starplex, which probably is a decent credit upgrade for you. So just curious, what that also means and they have been converting a lot of their older theaters into these high amenity theaters. And if there's any way for you to participate in that and maybe contribute some capital and get a nice yield on that?

[Christopher Volk:]

Sure, well I guess, I'll start off with AMC. So AMC has announced that they're buying Starplex. Starplex is our second largest tenant. The acquisition is subject to government antitrust issues, but I don't expect that any trust issues will get in a way of that. I would tell you that Starplex is actually a really nice company. So from a credit perspective, moving from Starplex to AMC is not necessarily in and of itself something that is exciting to us and we're pleased to have a relationship with AMC and we own an AMC Theater outside of this as well so. But I mean, AMC, yeah, it's our a second largest theatre chain behind Regal, just ahead in the market. So it's nice having the size of that chamber. I wanted to just to point out that the credit for Starplex is pretty solid. Of course, that's represented by the price that they're paying for the company. So they're paying a very nice pricing for the company and the shareholders of Starplex will do well and we're pleased for them. The theatres we have with Starplex are all doing well and that's reflected obviously in the purchase price. To the extent that there are remodeling needs that AMC may have with the properties. One of the things that we always do with our tenants is see if there are ways that we can help them enhance the property that we have. And if you got to our website there's a cartoon video that will actually walk you through how much business value you can create by having her landlord be there for being able to improve assets that can help the improvement or the performance of those assets. So one of the things that we do to try to add value to our shareholders, is not just add value when we write the check, we add value well after we write the check. And so increasing our investment or frankly helping our customers administer nonperforming locations is very important and perhaps just as important or more important just writing the check. So I we'll be there for AMC and we look forward to a long relationship with them. As to O'Charley's, we did O'Charley's in 2011 in December. It was one of the first deals we did. It was $100 million at the time. We sold off $40 million of it to another player and the $40 million are being bought by American Realty Capital, now operates and owns the other $40 million of that. The $60 million cost investment that we have, it was a public company at the time we did the transaction. And then Blue Ribbon Holdings acquired it and Blue Ribbon Holdings is a subsidiary of Fidelity National Title insurance company. And they own a number of other brands besides O'Charley's. So they've been sort of amalgamating a number of different brands including Max & Erma's and Village Inn and some other brands as well, Ninety Nine Restaurant Corporation and they're looking at doing a public offering. During the course of this last year, they've added money into all of our properties or most properties and other of O'Charley's restaurants to reimage the assets and the results have been favorable for them. And so our units have been performing very nicely and the company I think has been doing reasonably well. And so we're excited if they go public and we look forward to having a continued relationship with them and hopefully we could help them with some of their other brands.

[Dan Donlan:]

Thanks. It's helpful. And then the coverage ratio that the portfolio is producing on a median basis; 1.95 that's basically equal to what it was in the first quarter. But yet you lost obviously some rent associated with the Heald stuff. So, I mean, obviously it seems like the coverage on what you bought in the second quarter was higher. Could you maybe give us what that coverage ratio was? How much --?

[Christopher Volk:]

I want to just sort of like walk you through the analysis you just made. The loss of Heald has nothing to do with the median coverage ratio. Heald would actually have impacted the weighted average coverage ratio if we reported it because their weighted average coverage at the time that they closed down was around 9. So but because we report a median, which is basically at the property level, so at all 1,100 properties, so we're looking at what the coverages are in each one of those properties. And we disclosed the median because frankly from an investment perspective, the weighted average is always higher than that. I mean, so the median is a much more representative of what you as an investor and what we as investors take it from a risk perspective. So we disclose median because it's just much more important. In my career while it's mathematically possible for the weighted average to below the median, I haven't seen that happen. You always have outliers at the top level that are going to be like Heald and so on. So the fact that their median was kind of the same would you that the median coverage during the quarter that we just went past us is a thing as well. I mean, it's kind of in the 195, 221 [ph] type range. Keep in mind that's after overhead, so it's not a 4-Wall number. We also disclosed in our supplemental number, the median 4-Wall as well. One thing that I would point out that's a little bit different in the supplemental package is that in the last supplement we gave out the weighted average number for the credit rating. So - and this time we decided to be consistent with our approach to giving up median information on STORE Score and on the portfolio. So we basically on the table started disclosing the median, just to make sure that we were not consistent, because we think the medians are just much more important.

[Dan Donlan:]

Right, okay. So then what was the coverage ratio on what you bought in the quarter? Then as you mentioned that mixing up with median actually meant? What is the weighted average unit fixed charge coverage ratio today?

[Christopher Volk:]

Well, if you look at the median, a fixed charge fixed coverage ratio, which is basically kind of at every single STORE, you just take the, every single contract, you're taking the EBITDAR, so it's not just STOREs, it's somewhat on contract by contract basis, sort of EBITDAR and you're providing it by your rents and debt service expense and you're also taking it for overheads. So in the restaurant space, it seems to be around 4% of revenues for overhead and so on. If you do all that and you're looking at the contracts and their roughly, we have 1,175 properties, they're going to be something like 300 contracts, give or take. So when you take those 300 contracts, you say what's my median coverage it ends up being around 195. Quarterly the number was same as this quarter as last quarter, which would tell you that basically our second quarter numbers tend to be kind of in the same range, so their around also 195. The 4-Wall number, if you don't take the overhead allowance, so you're just looking at what the 4-Wall number is because some people disclose that, so I want to make - we're consistent with that, is 246. If I were to give you a weighted average number, it will be north of 3.

[Dan Donlan:]

Okay. So it's still north of 3 even though you lost Heald.

[Christopher Volk:]

Heald would have nothing to do with whether we lost it or I mean - no I mean, the Heald would affect the weighted average a little bit, but it was only 1.5% of our portfolio, I would say, it was small, so less than that, [indiscernible].

[Dan Donlan:]

All right. And then as far as looking at the top 10 from a fixed coverage ratio, where do they stack up versus the remaining portion of the portfolio, your top 10 sense [ph].

[Christopher Volk:]

They're going to be in line.

[Dan Donlan:]

Okay. And then as far as without consent for everyone and as far as Ashley Furniture. Could you maybe talk a little bit about their health and where you those coverages how is that segment of the market base performing?

[Christopher Volk:]

Sure. So just, so everybody knows Ashley is the largest manufacturer and retailer of furniture in United States. They deal with kind of affordable segment, and if you go into an Ashley Furniture and you have $10,000 to spend, you could probably furnish an entire house. I mean, the value equation there is just extraordinary, in terms of what you can do and the quality is amazing. Ashley itself is a privately held company and it has some company operated stores and also has a manufacturing facility that's basically more of a assembly facilities, so in some ways it's in the logistics business. The Ashley Furniture exposure we have is not to the company, it's to licensees and so Ashley does not have franchisees like the restaurant space, who has licensees. We have today, Ashley is our number one brand at 3% of our revenues, it represents 17 properties, they're all with pretty large licensees, including the largest licensee, which has Texas and most of Texas and also the Northwest, I guess, they have Seattle and Portland, Oregon. Hill Country Holdings, which is in the top 10 is that largest operator, and that's 1.23% of revenues that takes over our 17 properties. The rest the operators are good operators and I would say the performance that we've seen from Ashley has been very stable. If I look over the long-term, since we did Hill Country in 2011, if I look at the long-term since 2011, it's actually better.

[Dan Donlan:]

Okay. And then as I look at the number of properties, I know it's a de minimis, but as we look at the number of properties that are subject to a lease, but aren't, it's gone I think four to six. What are the plans there for those assets? How do you see that trending over time as well?

[Christopher Volk:]

Mike, you want to answer that.

[Michael Zieg:]

Sure.

[Christopher Volk:]

Mike runs our service, he will provide [ph] --

[Michael Zieg:]

Yeah, the six vacant properties we had at June 30, five of which were the Heald properties and as Chris mentioned, four out of the five, we already have resolution.

[Christopher Volk:]

He's talking about the ones that are vacant and paying.

[Michael Zieg:]

Vacant and paying and then there is obviously the six properties. One of them actually reopened, subsequent to quarter end and two or three of the others is same. We're looking to market those to get them reopened and help the tenants. But obviously, the tenants are still obligated to pay all the maintenance taxes, insurance and et cetera.

[Christopher Volk:]

Perhaps, yeah. So I mean, one thing that we do from a disclosure perspective is to let you know, it's de minimis, rights, so 2 points de minimis. But if you have properties that are vacant and obviously means the residual value is pretty sketchy. I mean you could have a 10 year lease on them, but they are picking today. So our game - we've learned over the last 25 plus years, is if you have a tenant that has a vacant property, the right thing to do is not to compel the tenants pay rent, till the end of time without addressing the asset. Assets tend to deteriorate if they're empty and you want to make sure that they're deal with, so that's we do, so we work with our tenants to either sublease them, assign the leases to somebody else. Sell the assets off and redeploy the capital, I think for both our reasons, and our focus is also for the transport business, being able to accommodate close properties this way is extremely important. And one thing that's great about our Massive Funding conduit is that it gives us sort of the same, it gives us basically greater financial flexibility than unsecured debt and it gives us the same operational flexibility. So we can close down properties, we can sell off assets, we can sub lease assets, we can do anything that we want to and it not only helps us, but it helps our tenants out, which is the alignment of interest we need.

[Dan Donlan:]

Okay. And what's your guidance on Facebook likes by year-end?

[Christopher Volk:]

Yeah, I mean, the fact that we have 5,000 and we just tickle think that we even have 5,000. But I would say to you like, that we're very much a direct originator and the fact that we have that many people that look at us, is do in some part to the number of people that we touch. And I think it's sort of reflects of that.

[Dan Donlan:]

Okay. Thanks, appreciate it.

[Operator:]

The next question is from Michael Gorman at Cowen Group.

[Michael Gorman:]

Thanks, good morning. Just a couple of quick ones, Chris, I know you mentioned on the coverage ratios, there wasn't much change quarter-over-quarter. I'm just wondering within the portfolio, where there any kind of discernible trends or any changes in direction for any of the industry groups in the portfolio in terms of coverage?

[Christopher Volk:]

Yeah, I mean, the portfolio has held strong, I mean, it's remained consistent, so there is no declining in areas, its well diversified and within that diversification its held solid, so.

[Michael Gorman:]

Okay. And then just thinking about the future acquisitions given some of the commentary on cap rates in the more marketed transactions. Is it fair to assume that that proportion from direct origination is probably going to head higher over the back half of the year and maybe into 2016, just due to the market trends outside of your direct origination program?

[Mary Fedewa:]

Yeah, this is Mary. Actually our direct origination is over 75% of our volume today. It has been running a little bit higher in the last couple of quarters, it's closer to 80% and the desk job or broker job has been a little bit lower. So I think that will be consistent. We'll still play in both markets actually and, so it will be around that.

[Michael Gorman:]

Okay. Great. And then one last one maybe for Cathy. I know there was some discussion about how rates have trended since the last time, you guys did an ABS in April. But I'm wondering have you gotten any kind of guidance from your bank groups on what the demand is like in the marketplace right now relative to the rates just gives some of the uncertainty that's out in the marketplace right now.

[Christopher Volk:]

Well, if you look at the asset-backed securities marketplace the demand has been there. I would say it's not as robust as it was, which accounts for some of the spread widening that I mentioned earlier. But certainly in the asset-backed market, which governs things like solar receivables or timeshare receivables and the asset-backed markets are very large marketplace. But if you look at that marketplace there have been a lot of transactions we've executed. But in times where there's volatility spreads will gap a little bit and that could happen with us and I'm sure it can happen with the unsecured guys as well.

[Michael Gorman:]

Okay. Great. Thank you.

[Christopher Volk:]

Thank you.

[Operator:]

The next question is from Cedrik Lachance at Green Street Advisors.

[Tyler Grant:]

Yes, this is Tyler Grant filling in for Cedrik. STORE underperformed its peers by about 400 or greater than 450 basis points in the time between follow-on announcement and pricing. This was likely a result of the market being unsure of the process and actual timeline. What do you guys think you could have done differently or could do differently next time to mitigate the underperformance?

[Christopher Volk:]

I would say Tyler that when we announced it our flow was so small, you know I mean, so I think that when anybody does less [ph] and they go out to the marketplace, they always underperform in the marketplace, I mean, that's just a given. The degree by which they underperform is going to depend and no small measure as to how much flow they have out there and what the size the equity offering is relative to that flow that's out there? So in the case of the transaction that we did between our issuance and also between the selling of Oaktree's shares you're talking about selling off $400 million plus worth of shares against a total flow at the time of $700 million. So I think that itself along was probably the biggest contributing factor for why our stock and why short sellers or whatever were able to impact our stock price between the time that we issued and the time we sold. And of course, when sold our discount relative to the trading price at the time was almost nonexistent. I mean, we sold shares relatively on top of the trading price, which is probably because she pointed out, the discount, it had already been baked in to that price. I'm kind of the view that I don't want to do that again and I think our board doesn't want to do that again either. But having done that at the time and being aware of what could happen to us was, I mean, this is another public company, so we didn't fall out of a tree. I mean, we've been here before and our view was that the deals that we're doing are so accretive and the amount of stock that we're selling was relative to the total amount of value and the business was not hugely significant that it made sense for us to do this and put us to position to be able to swell our guidance for the year.

[Tyler Grant:]

All right very good. And do you expect that you guys will have a follow-on offering going forward where Oaktree sells, a component or a portion of its stake similar to how you've done it this year?

[Christopher Volk:]

My expectation is that you could look at some of the private sponsored equity deals and sort of see what they've done. Oaktree is a very, very disciplined shareholder. I would encourage you, if you haven't done so to go to their website and pull a power market discussion on liquidity and - which relates to how to sell investments and be intelligent about it. I would expect it, if it makes sense feedback, but it doesn't, they won't. And when we're F3 eligible I would expect them to be able to avail themselves of the ability to register their shares and sell over the next few years. And that's what I can say, otherwise we've had no plans with them, in terms of what's being done.

[Tyler Grant:]

All right. Great. I read the high remarks liquidity piece is very good, so that's all for me. Thank you.

[Operator:]

At this time, I show now further questions. I would like to turn the conference back over to Chris Volk for closing remarks.

[Christopher Volk:]

We were pleased to be able to make these announcements today and have this call. Thank you very much, if you have any questions you're welcome to give us a call and look forward to talking to you. Thanks so much. Bye.

[Operator:]

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