STORE Capital Corporation

Hello, good day and welcome to the Store Capital's fourth quarter and full year 2021 earnings conference call. All participants will be on listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star followed by zero. After today's presentation, there will also be an opportunity to ask questions. To ask a question, you may do so by pressing star and then followed by one on the telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the key to withdraw your question. Please press star followed by two. Please note this event is being recorded. I'd now like to turn the conference over to Mrs. Megan McGrath, investor relations for Store Capital. Please go ahead, ma'am. Thank you.

Thank you, operator, and thank you all for joining us today to discuss Store Capital's fourth quarter and full year 2021 financial results. We issued our earnings release and quarterly investor presentation after the market closed yesterday. which includes supplemental information for today's call. These documents are available in the investor relations section of our website at ir.storecapitals.com under news and quarterly results. I'm here today with Mary Fedewa, President and Chief Executive Officer of Store, Sherry Rexroad, Chief Financial Officer, Craig Barnett, EVP of Underwriting and Portfolio Management, and Tyler Merckx, EVP of Acquisitions. 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 re-enter 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 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 ASFO for shared guidance for 2022, 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 Form 10-Q. With that, I would like to now turn the call over to Mary Fedewa, STOR's Chief Executive Officer. Mary, please go ahead.

Thank you, Megan. Good morning, everyone. Welcome, and thank you for joining us today. I'll begin the call with an overview of our fourth quarter and 2021 year-end performance. Craig will provide an update on the additions we made to the portfolio and our portfolio management activities, and then Sherry will review our financial results and our guidance for 2022. Following our prepared remarks, we will open the call up to questions. As you read in our press release, momentum continued to build through 2021. We capped off the year with a very strong fourth quarter, delivering quarterly AFFO of 56 cents per share, the highest in our history. For the full year, AFFO was $554 million, or $2.05 per share, a 12% increase from 2020, which exceeded the high end of our guidance by 5 cents. Over the course of 2021, many business owners returned to growth mode and looked to store for our customized financing solutions to fund organic growth and their M&A opportunities. This growing demand resulted in a strong fourth quarter acquisition volume of $486 million at an initial cap rate of 7.2% and weighted average annual lease escalations of 1.9%. Our investment spread for the quarter also remains healthy at well over 4%. For the full year, we invested $1.5 billion in profit-centered real estate at an average cap rate of 7.5%. We mentioned on our second quarter earnings call that we expected tailwinds in the back half of 2021 related to both COVID deferral paybacks and lower property costs. Both of these tailwinds materialized in the fourth quarter, and at the same time, we continue to improve the efficiency of our overall cost structure, and our portfolio continues to perform exceptionally well. Sherry and Craig will share more about these positive trends in their remarks and Craig will also provide more color on our portfolio in a moment. Our fundamentals are effective and remain strong in 2021, and we carry that strength into 2022. I now want to touch on the macro environment. As we all know, inflation is the highest it has been since 1982, and as a result, we are anticipating a rising interest rate environment, while cap rates are compressing. Let's start with a couple of thoughts on inflation in our business. Triple net lease REITs do not generally incur property-related operating expenses. Our contractual rent escalations are meant to provide a natural hedge allowing us to manage well in the current inflationary period. In addition, inflation has the potential to drive up the value of our real estate portfolio. As it relates to an anticipated rising interest rate environment, STOR has significant financial flexibility, which includes access to the unsecured bond market, where we have completed four public issuances and currently have a triple B rating with a positive outlook from S&P. And our master funding program, which has access to both triple A and single A paper, the flexibility to prepay tranches two and three years before maturity without penalty. And in 2022, we have over $300 million in master funding notes that are available to prepay that have existing interest rates between about 4% and 5%. Refinancing these tranches at current rates would result in an interest savings of over $3 million annually. Therefore, we have an embedded reduction in our interest costs that we can realize in 2022, even in the anticipated rising rate environment. And finally, we have long-term fixed rate debt with a weighted average maturity of seven years. Now turning to cap rates. In the fourth quarter, we experienced further compression in our initial cap rates. However, we believe our business model enables us to source opportunities directly with tenants that are relationship-based and not subject to broadly marketed auctions where we are seeing increased levels of bidding wars. Our approach gives us flexibility to price each new investment individually with the potential to raise lease rates, which can mitigate a rising interest rate environment. In addition to our direct origination approach, since our inception, we have been consistently doing a large volume of granular transactions in vital industries with an average deal size of around $10 million. This is a niche or lane that requires a solid infrastructure to efficiently process each transaction. Storr has built this infrastructure over the past 11 years, creating a leg up on any new capital coming into our sector. To conclude on cap rates, our direct approach and our granular investment strategy give us an advantage in an anticipated rising interest rate environment and from the increasing competition in the market as well. As a result, we are confident STOR can continue to generate strong returns in almost any environment. In fact, periods of uncertainty and complexity in the capital markets can create opportunities for STOR as our customers need our unique financing solutions and partnership more than ever. And now I'll turn the call over to Craig.