STORE Capital Corporation

Good day and welcome to the Store Capital First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Lisa Mueller of Investor Relations. Please go ahead.

Thank you, Operator, and thank you all for joining us today to discuss Store Capital's first quarter 2021 financial results. This morning, we issued our earnings release and quarterly investor presentation, which includes supplemental information for today's call. These documents are available in the Investor Relations section of our website at ir.storecapital.com under News and Results, Quarterly Results. On today's call, management will provide prepared remarks, and then we will open up the call for your questions. In order to maximize participation while keeping our call to an hour, we will be observing a two-question limit during the Q&A portion of the call. Participants can then reenter the queue if you have follow-up questions. Before we begin, I would like to remind you that today's comments will include forward-looking statements under the federal securities laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate, or other comparable words and phrases. Statements that are not historical facts, such as statements about our expected acquisitions, dispositions, or our AFFO per share guidance for 2021, are also forward-looking statements. Our actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of the factors that could cause our results to differ materially from these forward-looking statements are contained in our SEC filings, including our reports on Form 10-K and 10-K. With that, I would now like to turn the call over to Mary Fedewa, STOR's Chief Executive Officer. Mary, please go ahead.

Thank you, Lisa. Good morning, everyone, and thank you for joining us today. Before discussing our first quarter results, I would like to express how grateful I am for the opportunity to be the CEO of SOAR. I also want to personally thank Chris Volk for all his encouragement and support over the past 20 years that we have been working together. Fortunately, Chris and I will have the opportunity to continue to collaborate and work closely in his new role as chairman. I would also like to thank our entire board of directors for their confidence and support. With me today are Kathy Long, our Chief Financial Officer, Craig Barnett, our Executive Vice President of Underwriting and Portfolio Management, and Tyler Mertz, our Executive Vice President of Acquisitions. Many of you have already met Craig and Tyler at our Investor Days and other meetings. They have both been with STOR since our inception and were also part of prior platforms. They will be participating in our earnings calls going forward, and you will see more of them and other strong leaders here at the store at upcoming investor and industry conferences and non-deal roadshows. Turning now to the business at hand. While 2020 was an extraordinary year that tested and proved the resiliency of our customers, our team, and our business model, we are enthusiastically moving forward, and 2021 is off to a very good start. During the quarter, we invested $271 million at an attractive-rated average cap rate of 7.8%, with annual lease escalations of 1.9%. Consistent with our strategy, first quarter acquisitions were granular and diverse, with an average transaction size of $11 million across approximately 20 different industries. We added 11 new customers and closed the quarter with more than 520 customer relationships. We continue to originate long-term leases with our weighted average lease term for the quarter at 18 years, and we have virtually no near-term lease expirations. Our occupancy continues to be high at 99.6%, with only 11 vacant properties at the end of the quarter. As you know, our disciplined approach to real estate acquisition focuses on certain table stakes to ensure superior lease contracts. All of our first quarter investments were made at or below replacement costs and at attractive yields and gross returns of nearly 10% when you add the going in cap rate to our annual lease escalations. This results in continued nice spreads as our debt costs remain at historic lows. We also received master leases on multi-unit transactions and unit level financial reporting on all acquisitions in the quarter. Overall, our customers entered the new year in strong financial health and are focused on growing their businesses. Across the board, we are seeing re-energized confidence among our customers and prospects and a growing pipeline of attractive investment opportunities. We have been extremely pleased with how well our business model, which was designed with margins of safety, has performed through an unprecedented economic shutdown. These margins of safety include a highly diversified and granular portfolio, a disciplined and selective approach to underwriting, close relationships with our customers, a compelling customer value proposition, and a strong balance sheet and financing flexibility. As a result, we believe STOR is at an important inflection point of opportunity. My top priority is to lead our team and to leverage the platform we have built to continue to scale the company through the next phase of growth and success. Today, Storr has a nearly $10 billion real estate portfolio and a team of more than 100 outstanding and talented professionals. Developing our dynamic and industry-leading team has been one of the highlights of my career at Storr. As we continue to serve our large market of national and regional customers in vital industries, and deliver attractive industry-leading returns to our shareholders, one of my highest priorities as CEO is building the next generation of leaders. I look forward to the opportunity ahead. And now I would like to turn the call over to Craig.

Thank you, Mary. It's great to participate in the call today. I'm going to take a few minutes to provide an update on our portfolio. Since our inception, we have built with purpose a granular and diversified portfolio that today includes 117 industries and 2,600 properties. As of the end of the first quarter, our portfolio mix is approximately 64% service industries, 17% experiential retail, and 19% manufacturing. More than 75% of our portfolio is comprised of customers who individually account for less than 1% of our base rent and interest, and collectively, our top 10 customers accounted for just under 18% of base rent and interest. There were no significant shifts to our top 10 customers in the first quarter. Spring Education remained our largest customer, accounting for just 3% of base rent and interest. We continue to actively manage our portfolio. First quarter resulted in robust disposition activity, which was driven by pent-up demand during COVID. During the quarter, we sold 44 properties, which had a total acquisition cost of $141 million. Twenty-three were strategic sales and were break-even compared with cost. Two of these were opportunistic sales and resulted in a 24% gain over cost. The remaining sales were part of our ongoing property management activities and resulted in a 60% recovery of our original costs. Turning to cash collections, our percent of contractual collections held steady at 93% for the first quarter, moving to 95% for the month of April. We are extremely proud of our success in collections and attribute this to several important factors. First, the diversity of our portfolio. As a direct result of our deliberately diversified portfolio, only a handful of the 117 industries we serve were highly impacted by COVID and in need of rent deferral agreements. Most of our tenants are in industries that benefited from COVID, such as home furnishings, outdoor recreation, RV sales, vet and medical services, and many others were proven to be essential and therefore COVID resistant, such as manufacturing tenants. The benefits of maintaining a diversified portfolio are also evident in our unit-level fixed charge coverage ratio, which was 2.2 times at the end of the first quarter, up from 2.1 times last quarter, and consistent with pre-COVID levels. Second, our infrastructure and systems, together with the collection of tenant corporate and unit-level profit and loss statements, and constant tenant communications really made a positive difference. Taken all together, this allows us to analyze trends and review credit performance real-time and to make the best portfolio management decisions. In a rapidly evolving situation like COVID, the benefit of real-time information that informs decisions cannot be underestimated. Third, we have strong relationships with our customers and work directly with them to understand the impact of adverse events such as business shutdown on their liquidity profile operations, and future outlook. During COVID, this enabled us to effectively tailor short-term deferral arrangements for tenants who needed them, agreements that would work for them, store, and our stakeholders. As of today, none of our properties are mandated to be closed, and since there is a direct correlation between our locations being open and rent collections, we are seeing tailwinds in collections. We expect this to continue as restrictions are further lifted and COVID vaccines are completely rolled out. Our customers are telling us they are seeing positive trends in their businesses and are optimistic about 2021, and so are we. I'll now turn the call over to Kathy to discuss our financial results.

Thank you, Craig. I'll discuss our financial results for the first quarter, followed by an update on our balance sheet and capital markets activity. Then I'll review our guidance for 2021. Our first quarter revenues of $182 million increased by 2.5% from the year-ago quarter, primarily related to the growth in our real estate portfolio. Sequentially, revenue increased $9.4 million from Q4. About 70% of the increase was from net acquisition activity, which represented a full quarter's revenue from Q4 acquisitions, and only a small portion from first quarter acquisitions, which were back end weighted. The remaining increase in revenues included a mix of recoveries on previously reserved receivables, scheduled rent escalations, and higher revenues from COVID impacted leases. During the first quarter, net rent deferrals totaled $2 million, down from about $6 million in the fourth quarter. This quarter's deferrals were provided to a limited number of tenants in the few industries that had been slower to reopen, namely theaters, family entertainment, and health clubs. At quarter end, net COVID rent receivables stood at $43 million. This represents cumulative COVID rent deferrals of approximately $71 million since the beginning of the pandemic, less $16 million in repayments to date, less reserves of $12 million. Rent deferral repayments began in earnest in the fourth quarter, and just over 30% of the tenants who received deferrals have already completely repaid them. Over half of our current receivables are scheduled to be collected by the end of 2021, and we expect about 80% to be collected by the end of 2022. Now turning to expenses. Interest expense increased by just over $130,000 from the year-ago quarter, primarily due to our third issuance of senior unsecured public notes last November. The increase was offset by debt paydowns we made with the proceeds from this transaction, which resulted in a reduction of our weighted average interest rate from 4.3% to 4.2%. Property costs for the first quarter decreased $1.3 million year-over-year to $4.7 million. Sequentially, property costs decreased $2.7 million, a big improvement from Q4. Excluding those costs that are reimbursed by our tenants, property costs totaled about 14 basis points of our average gross portfolio as compared to 27 basis points last quarter and 21 basis points in a year-ago quarter. DNA expenses increased from the year-ago quarter, primarily due to the timing of expense recognition for long-term stock-based incentive compensation. Q1 expenses include about $10 million of non-cash compensation expense that was earned on certain performance-based stock awards. In the year-ago period, we derecognized $6.7 million of expense related to awards that were no longer expected to be earned due to the impact of the pandemic. Excluding this volatility, compensation expense and overall G&A expenses were relatively consistent year over year. As a percentage of average portfolio assets, G&A expense, excluding the impact of non-cash equity compensation, was 50 basis points, which is slightly lower than the 51 basis points a year ago. During the quarter, we recognized an aggregate $7.4 million impairment provision, which includes $2 million recognized on our portfolio of loans and financing receivables, and an aggregate $5.4 million impairment provision on properties we're likely to sell. AFFO for the first quarter increased to $125 million from $120 million a year ago. On a per diluted share basis, AFFO was $0.47 versus $0.49 a year ago. Sequentially, AFFO per share increased from $0.44 in Q4 to $0.47 in Q1, primarily due to higher revenues from net acquisitions and lower property costs. We declared a first quarter 2021 dividend of $0.36 per share, which we paid on April 15th, to shareholders of record on March 31st. Our dividend payout ratio has been steadily decreasing as the impacts of the COVID pandemic pass. For the quarter, it approximated 77%. We strategically aimed to maintain a conservative payout ratio in order to guard our dividend and add to our robust internal growth. With rent collections of 95% in April and expectations for continued reduction in tenant rent deferrals, we expect our ability to retain internally generated cash to only get better in 2021. Now turning to acquisition activity in our balance sheet. We funded our $270 million of first quarter acquisitions with cash from operations, cash proceeds from asset sales, and proceeds from the sale of equity through our ATM program. Since the majority of acquisitions closed later in the quarter, The full AFFO impact will be visible beginning in Q2. During the first quarter, we used the ATM program to issue about 3.5 million shares of common stock at an average price of $33.32 per share, raising net equity proceeds of $114 million. At March 31st, we had approximately $3.7 billion of long-term debt with a weighted average maturity of 6.4 years and a weighted average interest rate of 4.2%. Our leverage remains at a historically low level of 37% on a net debt to portfolio cost basis. Approximately 64% of our gross real estate portfolio was unencumbered, and our ratio of unencumbered NOI to unencumbered interest expense remains exceptional at seven times. We have no significant debt maturities until 2024, and three series of master funding notes will become available for prepayment without penalty during 2021. These notes have a 24-month prepayment window, and they bear interest at a weighted average rate of 5.06%, giving us an opportunity to continue to reduce debt costs this year. At the end of March, we had approximately $146 million in cash, $670 million available under our ATM program, and full access to the $600 million credit facility, which also has an $800 million accordion feature. We're well positioned to fund acquisitions in our pipeline. Now turning to guidance, given our strong pipeline of acquisition opportunities, we're reaffirming the 2021 guidance we announced in February. We remain confident in our ability to achieve the projected acquisition volume of approximately $1 to $1.2 billion, which is net of anticipated sales at attractive cap rates. We currently expect 2021 AFFO per share to be in the range of $1.90 to $1.96 based on this projected net acquisition volume. Our AFFO guidance is based on a weighted average cap rate on new acquisitions of 7.7% and a target leverage ratio in the range of 5.5 to 6 times run rate net debt to EBITDA. Our AFFO per share guidance for 2021 reflects anticipated net income excluding gains or losses on property sales of 80 to 85 cents per share plus 97 to 98 cents per share of expected real estate depreciation and amortization plus approximately 13 cents per share related to items such as straight-line rents, equity compensation, and deferred financing cost amortization. As always, we'll continue to reassess guidance as the year progresses. And now I'll turn the call back to Mary.

Thank you, Kathy. Before we open the call up to questions, I'm happy to tell you that we will be issuing our second annual Corporate Responsibility Report in a few weeks. Our dedicated ESG team has been very active in exploring and executing on ways to contribute to a more sustainable environment. We believe that we will make a big contribution to leaving the world a better place by living up to the principles of corporate and social responsibility and are committed to building on and creating new initiatives and programs each year. The pandemic highlighted the importance of corporate responsibility and the many benefits of an all-stakeholder approach to managing a company. We attribute much of our success in weathering the COVID storm to our direct customer relationships and our focus on partnering closely with all of our stakeholders in both good and challenging times. I want to thank my many colleagues who work incredibly hard on behalf of all of our stakeholders here each and every day for their continued support and commitment. With that, I will turn the call over to the operator for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. We do ask that you limit yourself to two questions. you may re-queue with additional questions. The first question will come from Frank Lee with BMO. Please go ahead.

Morning, everyone. Congrats, Mary, on the promotion.

Thank you, Frank.

Now that you transitioned to a new role, can you talk about any changes on how you would like to run the company and maybe how involved you'll be on the investment side versus in your previous role?

You bet, Frank. Happy to address that. So in my new role as CEO, we're going to very much be listening and open to all opportunities. And we actually believe that we're at a really important inflection point right now. We've been building this platform for 10 years now. And as a founder, I've been very involved in every aspect of that. So we're going to continue to stay disciplined and focused on granular, diverse, and profit center assets while we continue to scale the platform. By inflection point, what I mean is that we have largely come through a global pandemic. And the portfolio has performed really well. And in fact, the triple net space has performed really well. So the business model works. And we believe this will give us a great opportunity to have even greater access to capital to serve this very large marketplace. where we're going to continue to get attractive yields and great returns for our shareholders. So I'd say in a nutshell, you won't see a lot of changes. I've been here the whole time in building this, but we're at an inflection point where we've been through this pandemic, and we think we're going to continue to scale this platform.

Okay, great. And then this is the second quarter in a row where we've seen disposition activity exceed $100 million. I know you talked about sales being on the slower side last year. Is this more of you pulling forward some of the plan dispositions from last year, or are you taking a closer look at managing some of your exposures?

Yeah, Craig's going to help you with that one, Frank.

Sure. Yeah, so some of it was related to pulling some of the 2020 dispositions into this quarter just due to or driven by pent-up demand from buyers.

The next question will be from Jason Belcher of Wells Fargo.

Yeah, hi. You mentioned that the acquisitions in Q1 were back in weighted. Just wondering if you can give us a little more color there for modeling purposes. What portion of that run rate revenue can we assume hit in Q1?

Hi, Jason. This is Kathy. So it was March. heavily March-weighted, and I want to say three-quarters of it were in March.

Got it. That's helpful. Thank you. And then just if we could touch on your investment pipeline a little bit, just wondering what sectors you all are maybe seeing more opportunities in or more activity in, and if you could touch on any changes you might have picked up in the acquisition market, whether that's who you're going up against from a competitive standpoint or any changes in lease terms might be creeping up with elevated inflation outlook, things like that.

Yeah, hi, Jason. This is Tyler, and I'll touch on that. So first of all, from our pipeline, we're really excited about the pipeline that our front-end originations team is sourcing. We're seeing a traditional mix in our pipeline of that kind of 60-20-20 in terms of 60% service and 20% each of resale and manufacturing. Definitely pleased with the velocity of the pipeline, which continues to pick up. As you know, historically about a third of our volume is with repeat customers, and we're starting to see pent-up M&A activity as our customers begin to execute on their pipelines of opportunities, allowing us to partner with them and expand our relationships. And our team continues to find opportunities with attractive yields. Does that answer your question?

It does. Thank you very much. Sure.

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

Good morning. I guess maybe on the acquisitions, you maintained the net acquisition guidance of $1.2 billion, but once you came in at just about a quarter of that, But I know in the past you've talked about 1Q being seasonally low. So I was just wondering if over the course of the rest of the year, you expect that acquisition volume could pick up similar to what we've seen in the past.

Thanks, Tyler. Hey, Caitlin, it's Mary. Nice to hear from you. Tyler's going to take the front, you know, a piece of this, and I think Kathy will add to that. Is that kind of net volume? Yeah. Okay. Timing of the volume.

Yeah, sure. So, hi, Caitlin. Hi, Caitlin. Our gross acquisitions of $270 million was in line with our average first quarter over our history at SOAR. As Craig mentioned earlier, we did have an unusually large amount of dispositions in Q1, totaling $141 million, and those were focused on strategic sales at a timing which was driven by a sense of demand from buyers. We create tailored transactions with our customers, and as such, they can be lumpy from a timing standpoint. But the pipeline of new opportunities that the front end is identifying continues to be robust, and we're seeing increased velocity amongst both new and existing customers.

Yeah, and Caitlin, this is Kathy. Traditionally, Q4 is always the biggest quarter, with Q2 being... oftentimes either Q2 or Q3 being the second biggest quarter. So I think we're probably going to see that same kind of cadence continue. Okay.

Yeah, got it. And then maybe, Kathy, you mentioned that net debt to portfolio costs, I think it was, is low versus interest rates. But on a debt to EBITDA basis, you're at 5.8 times, which I guess is slightly higher than the midpoint of the 5.5 to 6 times that you mentioned. So I guess is that the metric you're looking at when you decide how much equity to issue in the quarter? And do you think that activity could pick up via the ATM in the second quarter?

Hi, Caitlin. You were breaking up quite a bit there, so I didn't hear the whole question. I know you were talking about leverage. Can you say the question one more time?

Yeah, I was just asking in terms of deciding how active to be with the ATM in the second quarter, seeing where debt to EBITDA is now, do you think they'll be more active in the second quarter?

You know, I think we'll stay on our normal cadence. If you look at debt to EBITDA, part of that, it's 5.8 on a run rate basis. Part of that is related to the stock comp expense recognition that we had in the quarter that was unusually high, because though stock comp doesn't affect AFFO, it does affect EBITDA. So if you exclude that sort of catch-up adjustment that we made, we're at a five and a half times funded debt to EBITDA, which is right at the low end of our target. So I think we'll stay on normal cadence, if that answers your question.

It does, thanks for that clarification. The next question will be from Keebin Kim of Truist.

Hi, good morning. So I didn't get that full – oh, good morning. And congratulations, Mary. Thank you. I didn't catch that full exchange. But did you just explain why the EBITDA RE run rate went from 159 million last quarter to 155 million this quarter? Yes. So this is Kathy. Okay, sorry.

What we had this year, you'll notice there's a swing in G&A expense from quarter over quarter. So if you exclude non-cash stock comp, G&A is actually flat to down. So the change that you see there is really due to the timing of expense recognition of these performance-based equity awards. If you recall the year-ago quarter, we derecognized $6.7 million of non-cash expense for awards that weren't expected to be earned due to the impact of the pandemic. And GAAP requires derecognition based on that probability. And then in Q1 2021, we reinstated a portion of that expense, plus pulling forward the current period accrual, again, as would be required by GAAP. Our awards have a significant portion that's tied to absolute AFFO growth, while most others have plans tied to relative shareholder return. So given the impact of the pandemic on 2020 results, our comp committee realigned the awards to adjust only that portion that was tied to the absolute AFFO metric. So that's the change there. If you exclude that from AFFO, I mean from the EBITDA calculation because it was sort of a catch-up, you would be back on normal cadence. So the going forward run rate funded debt to EBITDA would be 5.5. Does that help?

Thank you for that. Yes, thank you. So the second question for Mary, is there anything incremental that we should expect in terms of how you're thinking about what the sweet spot is for the things that you're looking to buy over the long haul?

You know, Keven, we're going to really stick to our, you know, granular and diverse portfolio across many asset class focused on profit center real estate. So we're going to stay there. As I mentioned in the first answer with Frank, you know, I do think that we're at an interesting inflection point here having largely come through this pandemic and What that means for us is the business model is proven. And as a result, we're expecting to see even greater access to, you know, capital and to serve this really large market. So even the triple net space did really well in the pandemic. So we're excited about that. You know, I'm showcasing the team here today. So we're building the next generation of leaders, which they're here and they're terrific. So you're going to see us really, you know, continue to scale this, and I think the pandemic has been a really great test that the business model has passed.

Okay. Thank you.

You're welcome.

The next question is from Harsh Himnani of Green Street.

Thank you. I was wondering, we've been seeing comments of cap rate compression across the net lease space. Your addressable market is a little different than all the other net lease REITs. So I'm just wondering if you're seeing the same given the cap rate ticked down a little bit. And can you talk about it from the perspective of both cap rates and then gross yields too?

Cap rates and what was the last part of that? I'm sorry, Hush.

The last part was gross yields, like including lease bumps, like red bumps.

Oh, gross yields. You bet. Gross returns. You bet. So Tyler's going to talk about cap rates and, yeah, we'll round it out together. You bet.

Sure. Hey there. So, yes, the triple net space has attracted some attention with its resilience from the pandemic as investors continue to search for yields. And that increased competition has put pressure on cap rate that we've been seeing in the marketplace. And this is why we've guided to 7.7% cap rate this year as compared to the 8.1% last year. That said, we definitely serve a very large sector, middle market, and larger companies, which we estimate consists of roughly 200,000 companies. So it's a huge market. And our front-end origination team is seeing plenty of opportunities in this granular niche market where we can truly add value to our customers and continue to earn attractive cap rates.

Yeah, and I would just add to that, this is Mary, that we originate directly with a lot of customers and prospects. And as a result of that, our sales team is out there really asking for the cap rate and asking for the escalation. So we're creating our own and on our own lease forms here. and they're incented to do that. So we're going to continue to do that. We tend to compress less in the marketplace, and that's just from a direct origination business model, and the market's very huge. It's probably said to keep doing that, but we are seeing pressure on cap rates and competition in the space.

That's good. Thank you.

You're welcome. The next question is from Sheila McGrath of Evercore ISI.

Yes, good morning. Kathy, I was wondering if you Wondering if you could clarify, again, the volatility in G&A. I think the headline number is why the stock might be a little bit weak today. So it was not because of stock price performance, but a change in the comp target? Is that what it was driven by? Yes.

So whereas most people have their plans tied to relative shareholder return, so when the pandemic happens, everyone gets hit, everyone's in the same boat. So you just have to worry about relatively, are you doing better than the next person? We also have a portion of our plan that works that way. And that stayed just the way it was. But a significant portion of our metrics are absolute AFFO growth. And it's a three-year, these are three-year plans. So the committee felt that The 2020 performance should be adjusted for the pandemic on an absolute basis. And so whereas a year ago we de-recognized it because that's what GAAP would require, we did reinstate a portion, I mean not all of the expense, but a portion of the expense and then brought it up to date. So you're seeing sort of a catch-up in Q1 that's not not the normal cadence. So the normal cadence is like $3.5 to $4.5 million per quarter. And Q1 got hit $10 million. So that's the difference.

Okay, thank you. And then I think in your prepared remarks, Mary, you may have put the buckets of your portfolio into service, experiential retail, and manufacturing. And I was just wondering if you could let us know the tenants that... requested relief? Were they in the majority in the experiential retail category for COVID relief?

Hey, Sheila. Actually, the tenants that requested maybe additional relief, there's not been any real new customers for a long time now, were just in the essential asset classes that got hit in COVID, or the non-essential, I'm sorry, the non-essential asset classes.

Yes, if we're looking at who was remaining in Q1 as having deferrals, it was really movie theaters, gyms, and family entertainment.

Okay, great. Thank you.

The next question is from Todd Thomas of KeyBank Capital Markets.

Hi, thanks. Um, Mary, you, you talked about being at an inflection point a number of times, and I'm just curious what additional advantages and scale your eyeing or what other sources of capital are out there for you to tap? Can you just describe what you're referencing perhaps in a little bit more detail?

Yeah. Well, hey, Todd, nice to hear from you. So I would say the inflection point, as I mentioned, is really having proven the business model through COVID. So we've come through a global pandemic, a complete economic shutdown, and the business model works. And we are seeing a lot of interest in the triple net space and a lot of money coming into the space. This whole space did well. So we would expect to be able to tap into that and increase interest. And the market's 200,000 companies. In 10 years, we have 522 customers. So we have a long runway. And these are customers that need us, where we can add value and we can actually continue to get attractive cap rates and great returns. So that's what we're seeing and that's what we're sensing, Todd.

Got it. So it's just an increased opportunity for investments. It's not something sort of strategic or transformative in nature in terms of how you're thinking about the business necessarily going forward relative to how you've been conducting it.

You got it. You got it. I mean, as I mentioned, we're going to be open and we're hearing and we're listening and we're going to listen and be open, but yes, you're correct.

Okay. And then just in terms of the last question, I guess, and some of the comments around collections, Do you have line of sight into collections improving further around, you know, the timing for, you know, theaters or fitness centers or restaurants, you know, to begin paying rent that might be lagging today?

Yeah, yeah. Craig can give you a little color on that. on the, you know, the improvement from the 95, and you can also give you a little color on movie theater, you know, those industries you just mentioned.

Right. So, yeah, we're extremely pleased with collections reaching 95 in April. And as we strive to get to 100, obviously the delta between that is we've got COVID-related deferral arrangements that are going to fall off. And then as the highly impacted businesses return to normal capacity, we expect collections to continue to increase.

Okay. Thank you.

The next question is from Ronald Camden of Morgan Stanley.

Great. Congrats, Mary. Just on the couple quick ones, first on just on the tenant health, I think the commentary suggests that you're feeling a lot better about sort of tenant health in the portfolio. Maybe can you talk about the 5% of tenants that were on cash basis at the end of the year? Maybe what collections are looking like there, and what assumptions do you bake into guidance in terms of collections for those tenants? Thanks.

Hi, this is Kathy. I'll take that one. So if you look at the bucket of people who were cashed on our cash basis, it's about flat quarter over quarter, maybe just slightly down. And for those tenants, they're currently paying about two-thirds of their normal rent. That's probably a little quicker than we expected to have. We show in our model for it to kind of ramp up over the year. And, you know, two-thirds was a little higher than we would have expected. So we're just a bit ahead of where we thought we would be.

Great. Helpful. And then just switching over to acquisitions and digging in a little bit into sort of the manufacturing, just sort of curious in terms of sourcing deals in that space, has that gotten it more competitive? Are you seeing more people sort of come into the space and Is that product type pretty similar to what, you know, all the other sort of net lease industrials are chasing after? Or how do you think that portfolio, that piece of the business is maybe different?

So, Tyler can add to this. I'm going to start. Ron, this is Mary. So, our manufacturing is very consistent with our profit center portfolio. asset class. So all of our manufacturing has a P&L attached to them. There are flavors of industrial manufacturing out there that are more logistical or more cost center related, and that wouldn't be a place where we would play. But there's plenty of that as you can imagine with Amazon and other distributions, a lot of distribution going on with online sales and so on. So for us, our manufacturing is very consistent with our portfolio, and I would say Tyler's team goes out and sources it just like they source every other deal here, where we're calling directly on customers and we're working through the broker network as well for a portion of our transactions here. So same approach for us, use our contract, but it is a profit center, pure focus for us in manufacturing.

Yeah, and Rob? I would just add that, you know, just the other part of your question. My earlier comments about, you know, the triple net space and resilience during the pandemic and that, you know, kind of leading to some cap rate pressure, that, you know, the manufacturing side has been part of that as well. That theme is kind of consistent across what we're seeing.

Great. Congrats again. Thanks, guys.

Thank you. The next question comes from Hendel St. Just of Mizuho.

Hey, good morning out there. And congratulations to you, Mary, and also to Craig and Tyler. First question, I just wanted to ask about Chris Volk's involvement in store going forward here. We haven't heard his voice at all on this call, which is a bit odd, given his involvement since the founding of the company, obviously. I'm curious if that's intentional or perhaps more reflective of what the level of engagement we should expect with him going forward. And can you also update us on the status of the CFO search? Thank you.

You bet. This is Mary. So Chris is very much here every day. And Chris is really – I said he was the chairman in my remarks. He is actually – he is obviously the executive chairman. I'm sure you've seen the 8K and you've seen all of the press releases, and he's very much engaged. He is actually an employee of the company and he's on my team. So he's actually very much engaged and we will be working closely with him for sure and an important part of us, of course. And also... On the CFO search, so the CFO search is going really well. As you know, we engaged Russell Reynolds, and they've been doing a great job of delivering a slate of very qualified candidates. And so we feel we're on track for the timing to be around mid to late summer as planned. But that being said, Kathy is committed to being here for a very smooth transition, and she wouldn't leave us without that. So we're in good shape there, and we're right on plan.

Great. Thanks for that. Can you also update us on where you are with the backfilling of the former loves boxes and how perhaps the new rents compare versus prior rents? I guess, you know, the 60% recoveries in 1Q seem kind of low. And so I was curious, you know, that the mix of assets in the disposition bucket, was that skewed by the loves boxes at all? And I'm also curious if the 1Q asset sales helped your overall rent collection. Thanks.

You got it. So Craig's going to, we'll tell you, we'll give you an update on Love's, and he'll address the 60% recovery, which was not impacted by Love's, and it was just a quarter point. So he'll talk about that. You want to start with Love's, Craig?

Sure. So what I can tell you about Love's is we had 19 properties at the beginning of the quarter. They are still in bankruptcy. We are receiving some rent as the locations are being liquidated. We have pending resolutions on all but seven of our locations. With the majority of those resolutions will be relets to large furniture retailers. But of the remaining seven, we're marketing those aggressively. You know, the furniture space is doing really well, and we really like the core footprint of the Lowe's locations. You know, when they were open, they were trending to art van sales and were making money, so Lowe's was not an industry issue, and we're pretty optimistic that we're going to have some good resolutions on the site. In regards to the mix on the dispositions, you know, we – The quarter was higher than normal. Again, it was driven by pent-up demand from buyers. The property sales were across many of our asset classes, primarily strategic as we rebalanced the portfolio. Casual restaurants were slightly an outsized portion of the mix. But the gain and loss over cost is consistent across the three categories of prior quarters. Does that answer your question?

Yeah, that's very helpful, very helpful. Mary, if I could sneak in a follow-up. I'm just curious, overall, we talked a lot about the rebalancing of the portfolio. Where it stands today, 64% service, 17% experiential, and the rest manufacturing, and the strong demand in the market. So I'm curious. Why not take advantage of that a bit here to put more of your imprint on the portfolio, perhaps rebalance a bit more quickly, more aggressively than you would have otherwise?

Are you, I'm sorry, Handel, are you talking about rebalancing more towards the manufacturing side or what?

No, I'm just curious overall, you know, as you think, as you look at the portfolio that you're now in charge of, right, you're running the company and thinking about the skew of it and also balancing the demand in the marketplace and the trends that you see in the market. Just curious overall, you know, is there any inclination or are you thinking or would you be inclined to be a bit more aggressive on dispositions here to put more of your imprint there? on the portfolio or if it's going to be more of this, you know, the status quo. And just curious on what you're thinking here is on, you know, the portfolio balance and the demand you're seeing. Thanks.

Yeah, yeah. No, today I think we're going to, you know, we're going to keep doing what we've been doing well over the last 10 years. You know, we address a very important part of the marketplace. It's so underserved, the middle market and larger companies. They're vital industries. So we're going to stick very close to profit centers and diversity, which served us really well during the pandemic. So we're going to stick there. But, you know, Handel, we start there, and the industries sort of make themselves, right? So we were nearly 40% manufacturing in the first quarter of our acquisition. So it does bump around a little bit in terms of where the opportunities are and as they come into us. But it's really important to us that we continue to stick to profit-centered real estate with our table stakes and continue to get our contracts at lease rates that are above the marketplace with nice escalations, and so we can continue to create great shareholder returns. So that's going to continue to be our focus. It's a really long game and a long runway for us to keep going in that space.

The next question is from John Masaka of Ladinburg-Fallman.

Good morning, and congratulations, Mary.

Hey, John. Hey, thanks, John.

So let me just talk about the dispositions again a little bit. Obviously, it seems like restaurants made up a big component of the sales. I was just curious as to what about those restaurant properties made them good targets for dispositions, just thinking about where we are kind of in the reopening cycle and maybe some of the demand that's been out there for years. operating-wise for casual dining business, given some of the stimulus as well? Just why were those good assets to dispose of at this current point in time?

This is Craig. I'll take that. I mean, dispositions are part of our monitoring process. They're intended to improve the overall health of the entire portfolio. So we collect financial statements every quarter. We're looking at the trends of financials of our properties that we own and the outlook of maybe the markets that they're located in. Is it an operator from a strategic side that we might want to reduce exposure to? So there's many factors that play into us deciding whether we want to, you know, dispose of that particular property. And it just so happened that this corridor was heavily weighted, or not just heavily, but casual restaurants were a bigger portion of the mix.

Pretty much timing, John, too. Yeah, we like the space.

Okay, understood. And then looking at the kind of pipeline today, it seems like gyms, entertainment, other kind of maybe more experiential assets are still a relatively small portion of the pipeline. Is that going to be a long-term decision just given some of the uncertainty created by the pandemic or is that just given where kind of deal flow is at the current moment in time and you're still very interested in those property types? And I guess maybe the follow-up, what's the pricing you're seeing out there on a cap rate basis for those types of assets?

Hey, John. This is Tyler. So with regard to the pipeline, I would say generally the pipeline is dynamic. Our acquisition team is calling on prospects, maintaining relationships, and identifying opportunities. We serve a wide range of industries. As Mary mentioned earlier, we're a pure play and profit center of real estate. And the industries that the opportunities arise in tend to evolve from there. So there's not necessarily – the small fluctuations can be driven by kind of timing. It's not really indicative of anything beyond that, but we're definitely optimistic about the overall size and composition of the pipeline that we have the opportunity to execute upon. With regard to cap rates, I can't really go into the specific – every deal we do is unique and a tailored solution with our customer. But, you know, kind of to the theme I was saying earlier, we're definitely, you know, we're out there finding opportunities, but we're also, you know, seeing some increased competition as discussed earlier.

Thank you very much for that. Appreciate it.

The next question is from Nate Crossett of Barenburg.

Hey, congrats, Mary.

Thanks, Nate.

A lot's been asked already, but maybe one on average deal size. How should we maybe expect that to evolve as you guys get larger? I understand the focus is still on granular transactions, but I'm wondering if as the portfolio gets larger, does that make you more flexible in terms of what you can actually look at? And also I had a question on I think it was mentioned that 30% of the pipeline comes from existing tenants, and I was curious if there was any differences in pricing between existing customers and new customers.

This is Mary. So, hey, Nate, in terms of the granularity, we're going to stick pretty much to that, and we can in this marketplace. in our opportunity set. But I would say, you know, we look at everything. We're going to be open to everything. I mean, we're $10 billion. We can do large transactions. But we're going to, you know, most likely stay pretty granular. And even if you look at the portfolio here and there, they tend to be pretty granular at the end of the day when you peel it all back. But we're definitely, you know, going to stick to our mainly fur knitting there and things will average out. But we're going to look at everything, too. And I would say in terms of the pipeline, the third of our business.

Yeah, I think you're asking about, you know, is there a difference in cap rates on existing customers versus new? And I'd say no. You know, I think it's generally every transaction we do, you know, is unique and tailored and it's just specific to the fundamentals of the transaction.

Okay. Thank you. Okay.

The next question is from Chris Lucas of Capital One.

Good morning out there, Mary. Congratulations. Thank you, Chris. I guess just two quick questions. Well, maybe not so quick, but, you know, we're kind of at a point in the cycle and we're seeing it in numbers where PE activity is picking up. They've raised a ton of money. We saw an announcement this morning that At Home was going to be taken private by a PE firm. When I think about your business, I'm just curious as to how you think about how PE impacts the business as it relates to opportunities. Having a more active PE environment, is that a positive for you or a negative for you as you think about your transaction opportunity set?

Yeah, hey, this is Mary. I'll take it, and Craig can add if I've missed something here. But, you know, we actually do business with a lot of PE firms, and we – we find them almost always to be additive. They almost always add value to our customers. They're a good exit strategy for customers that are building their businesses brick by brick and then have PE come in and help them. They've actually been good during COVID in terms of stepping up and and supporting the businesses they've been in. That's what we've seen. And again, we're in the middle market in larger spaces. But I would say overall, when we underwrite a company or even when a PE firm is involved, we're looking at all the metrics in terms of ensuring things aren't over-levered and so on and that it's a healthy transaction. And we're picking our spots in a really big marketplace with only 522 customers after 10 years. You can tell we've been really selective. So we'll pick our spots, but overall, PE's been a really great partner and part of our customer, a good customer for us.

Okay, great. Thank you for that. And then I just had a pretty quick question, I hope. Stock and field, just can you give us an update on where that is and whether or not it was flushed through completely through the quarter or there was some overhang coming in the second quarter?

So this is Craig. They're out of bankruptcy, and it's been resolved with all of our properties being retained.

Great outcome.

The next question comes from Linda Tsai of Jefferies.

Hello, and congratulations, Mary.

Thank you, Linda.

I just had one quick one. Why did property costs go down a bit in the quarter, and how does that trend going forward?

Hi, this is Kathy. We expected property costs to be able to trend back towards normal. If you recall from pre-pandemic days, normal is sort of ranging between, say, 8 to 12 basis points of the cost of our portfolio. That's kind of what you see on an annual basis. And we're down to 14 basis points. So we would expect that as the pandemic starts to pass here, that we'll have less and less property costs that we're picking up.

Thanks. That's all I had.

Thanks, Linda. And the last question will be a follow-up from Sheila McGrath of Evercore ISI.

Yes, I was wondering, because your unsecured bonds are over collateralized versus other REITs in terms of the larger unencumbered pool, could this be an inflection point where the rating agencies give you more credit for this larger unencumbered pool, just given you've been more cycle tested managing through the pandemic?

All right, Kathy, I'll take that and Mary can add if she wants. But I think With store having been public after the Great Recession, we haven't really been tested in some people's minds. I think the pandemic is certainly a test that nobody expected to have to face, but the portfolio performed really well. I think that is going to weigh in their thoughts as far as ratings go and things like that.

Yeah, I agree with her, Sheila, with Kathy, and we're definitely working with the rating agencies, and Kathy's in contact with them all the time, and, you know, we're working on that.

Great. Thank you.

Thank you. And this concludes our question-to-answer session. I would now like to turn the conference back over to Mary Fedewa for any closing remarks.

Thank you, operator, and thank you all for participating in our call today and for your interest in STOR. In closing, I'd like to just reiterate how excited we are about our outlook for 2021 and the next chapter for STOR. With the COVID impact diminishing, we are now at an important inflection point where we are very well positioned to continue to scale the company. We look forward to leveraging our proven business model and the outstanding team we have to address the huge market opportunity and to deliver attractive returns to our shareholders. We also look forward to seeing many of you at Mayread in June, and as always, please do not hesitate to reach out if we can answer any additional questions. Have a great day.

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