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.

Thank you, Mary. I'll take a few minutes to cover what we added to our portfolio and our portfolio management activities for the fourth quarter. In the fourth quarter, our acquisitions continued to be diverse and granular, spanning a wide range of industries, including restaurants, early child education, auto service, health clubs, and several manufacturing businesses that serve a variety of vital end markets. These investments had a weighted average lease term of 17 years and an average deal size of under $10 million. New business from our existing customers was about 45%, which is above our historical average of about one-third of our investments. The strong relationships we've established over the past decade provide a solid foundation in an increasingly competitive marketplace. Now turning to the portfolio. We've intentionally built a diverse portfolio that is designed to deliver consistent and attractive risk adjusted returns to our shareholders. At the end of 2021, our overall portfolio mix was 65% in the service sector, 20% in manufacturing and 15% in service oriented retail. Our portfolio consists of 556 national and regional customers in more than 2,800 properties operating in 120 industries. More than 85% of the portfolio was comprised of businesses that individually represent less than 1% of our annual base rent and interest. There is no change in our top 10 customers, with our largest customer representing approximately 3% of base rent and interest, and our top 10 customers account for only 18% of base rent and interest. During the quarter, we sold 21 properties, 12 of which were sold strategically for $58 million in proceeds. or a 22% gain over our original investment at a 6.6% cap rate. The remaining nine properties were sold as part of our ongoing property management activities, garnering proceeds of $27 million. Our occupancy remained high at 99.5%. Overall, our customer's financial performance continues to remain strong and our portfolio continues to perform well. our customers are experiencing robust top-line growth and improved profitability. This is demonstrated by the improvement in our weighted average four-wall unit FCC for the portfolio from 3.9 times pre-COVID to 4.6 times for the most recent financials received. And this improvement is being felt across all of our sectors, with our service sector experiencing a 41 basis point increase to 3.7 times, Our manufacturing sector had an 83 basis point increase to 6.5 times and service oriented retail had 164 basis point increase to 5.9 times. This demonstrates the strength of our portfolio through a global pandemic and its ability to thrive beyond it. Our confidence in our customers stems from our deep relationships with them. We communicate with them on a regular basis regarding their financials and the performance of their businesses. Most recently, we have been monitoring and discussing the macro environment, including inflation, labor, and supply chain disruptions. Our customers have adapted in various and creative ways to respond to the specific impacts on their industry. Some customers have augmented staff with technology to make them more productive. Some have invested in automation to reduce physical labor, and others have instituted hedging strategies or changed pricing terms to mitigate supply chain risk. As the customers in our portfolio are a diverse group of regional and national businesses, their experiences mirrored what has been seen by U.S. corporations in 2021. Though faced with higher costs, corporations were able to raise prices and saw operating profits near record highs in 2021. The strong performance of our portfolio is no accident. We directly attribute it to the attention and effort we place on validating and underwriting the creditworthiness of our tenants on an ongoing basis. I would now like to turn the call over to Sherry.

Thank you, Craig. First, I would like to say how grateful I am for the warm welcome I have received over the past few months, not only here at STOR, but from our investors and analysts as well. I am thrilled to be here and look forward to working with all of you. Now, turning to the business at hand, I'll begin by discussing our financial results for the fourth quarter and full year 2021, including an update on our capital markets activity balance sheet, and our 2022 guidance. Please note, all comparisons are year over year and less otherwise noted. Beginning with our income statement, our fourth quarter revenues increased 21% from the year-ago quarter to $209 million, primarily reflecting the growth in our real estate portfolio. Revenue from net acquisition activity increased approximately $23 million representing a full quarter's revenue from third quarter acquisition activity, plus a partial contribution from our large volume of fourth quarter acquisitions. More than half of the $486 million in acquisitions in the fourth quarter closed in the last half of December. So this external growth is providing nice momentum into the first quarter of 2022. A portion of the increase in revenues during the quarter resulted from the increased level of cash payments collected on our rent receivables, which allowed us to release reserves we had previously posted, and this is a positive trend for our revenue projections going forward. Turning now to expenses. Interest expense increased by $2.2 million from the year-ago quarter, reflecting borrowings we made to support growth in our real estate portfolio. partially offset by a lower overall cost of debt. As a result of our capital markets activities in 2021, the weighted average interest rate on our long-term debt was 3.9% as of December 31st, a marked decrease from 4.2% a year ago. Property costs, which totaled $4.1 million for the fourth quarter, were down significantly from $7.4 million a year ago. This decrease was largely due to the reversal of property tax accruals made during the pandemic, demonstrating our customers' strengthening performance. For the year, property costs were $18.2 million as compared to $22 million in 2020, excluding amounts reimbursed by our tenants property costs for 2021 represented about 13 basis points of our average portfolio assets, down from 19 basis points in 2020. We expect the property costs will return to pre-pandemic levels as we move into 2022. Fourth quarter G&A expenses increased $11.6 million. Of that amount, $7.8 million was related to management severance and transition costs, and $3.2 million related to accelerated amortization of stock-based compensation awards associated with executive severance and retirement. As noted on page 10 of our press release, these one-time costs are added back in our ASFO calculation. For the year there was an increase in G&A of $34.4 million, of which $11 million was due to the fourth quarter management transition item, and $17 million was due to the impact of the accounting for certain long-term incentive compensation awards granted in 2018 and 2019. To refresh everyone's memory, the LTIP has both an ASFO and a relative performance component. Per GAAP rules, the AFFO portion must be evaluated each quarter as to how much expense should be recognized. In March of 2020, as COVID shutdowns were being implemented, it was determined we would not achieve our AFFO target. Therefore, we reversed the then $6.7 million of expense we had recognized for these awards. We reinstated the expense in the first quarter of 2021, which by then amounted to $10.1 million. Excluding non-cash, stock-based compensation expense, and one-time severance and transition costs from both periods, G&A expenses for the full year of 2021 were 44 basis points of average portfolio assets down from 47 basis points for the full year of 2020. This trend illustrates the increased efficiencies we gained from our scalable platform as the portfolio continues to grow. During the fourth quarter, we recognized an aggregate $7.6 million impairment provision, which includes $1 million recognized on our portfolio loans and financing receivables, and an aggregate $6.5 million real estate impairment provision associated with six properties. Fourth quarter AFFO increased to $153 million from $115 million. On a per share basis, AFFO increased 27% to 56 cents per diluted share from 44 cents a year ago. The increase in AFFO primarily reflects higher revenue from our growing real estate portfolio, and lower property costs. As Mary mentioned, full year 2021 ASFO increased to $554 million, or $2.05 per basic and diluted share. I'd like to provide more color on the ASFO beat for the year over our 2021 guidance. Compared with the high end of our guidance of $2 per share, the primary drivers were about two cents from higher than expected portfolio revenues as a result of improved cash collections on our receivables, approximately two cents from lower than expected general and administrative expenses, and about a penny from lower interest and property costs. We are very pleased with the strong momentum in AFFO growth generated by the performance of our portfolio. As many of you know, we declared a fourth quarter 2021 dividend of 38.5 cents per share, which we paid on January 18th to shareholders of record on December 31st. Now, turning to the balance sheet and our capital markets activity. We are fortunate to have multiple and flexible options available to fund our growth. For the full year, we closed $1.5 billion of acquisition with about 32% of the acquisition activity closing in the fourth quarter. We funded this strong acquisition activity with a variety of sources, including cash from operations, proceeds from our master funding issuance in the second quarter, and proceeds from our public debt offering in November, the sale of equity through our ATM program, and borrowings on our revolving credit facility. During the quarter, we issued approximately 1.7 million shares of common stock under our ATM program at an average price of $33.91 per share, raising net equity proceeds of $55 million. We are mindful of where our cost of equity is today, given the macro headwinds. Our business model allows us to continue to make accretive acquisitions at the current stock price. We look forward to improving investor sentiment as the Fed begins its anticipated interest rate hikes, turning speculation into certainty and allowing the market to stabilize. In November, we took advantage of an attractive debt market by issuing $375 million of senior unsecured 10-year investment grade rated notes at a coupon of 2.7%. We used a portion of the proceeds from this issuance to prepay without penalty $86 million in store master funding debt that had a coupon of 5.21%, providing us an opportunity to further lower our cost of capital. At December 31st, we had approximately $4 billion of long-term fixed-rate debt outstanding with a weighted average maturity of about seven years, and as noted earlier, A weighted average interest rate of 3.9%. Leverages at the low end of our target range at 5.6 times net debt to EBITDA on a run rate basis. Or about 40% on a net debt to portfolio cost basis. Our debt maturities are intentionally well laddered. As Mary mentioned, with the flexible prepayment windows under our master funding program, we will have the opportunity during 2022 to prepay three additional series, which have coupons ranging from about 4% to 5%, and therefore allow us to further lower our debt costs from the current 3.9%. We close the year with a strong balance sheet. We have ample access to capital with $64 million in cash, approximately $540 million available under our ATM program, and $470 million of immediate borrowing capacity under our revolving credit facility. Now turning to guidance. We are encouraged by the solid performance of our portfolio and as a result anticipate that we will continue to realize benefits from increased cash payments on our rent receivables and reductions in property costs as well. Coupled with our strong acquisition activity and pipeline and the efficiencies we are seeing in our cost structure, We are raising our 2022 ASFO per share guidance to be in the range of $2.18 to $2.22, which represents a range of 6.3% to 8.3% growth over 2021. Guidance continues to be based on an expected acquisition volume net of anticipated sales for 2022 of $1.1 billion to $1.3 billion. Today, we would also like to provide cap rate guidance of 7 to 7.2% for the year. ASFO per share in any period is sensitive not only to the amount, but also to the timing of acquisitions, property dispositions, and capital markets activities. As we move through the year, we'll continue to assess our outlook and update guidance as needed. With that, I'll turn the call back to Mary. Thank you, Sherry.

2021 was a very productive year for STOR, and our future is incredibly bright. Co-founding the company nearly 11 years ago, I am so fortunate to have been part of making sure we have always had the right strategy, the right team, and the right resources to support our future growth. As you read in our recent press releases, we are excited to announce that we have promoted Alex McCallie to EVP of Data, analytics and business strategy and Lori Markson to EVP of portfolio operations. Alex brings a wealth of knowledge and experience in building and deploying advanced analytic capabilities and Lori has been overseeing our portfolio operations for nearly six years from funding transactions to ensuring our customers' experience is superior. Both Alex and Lori further strengthen our bench of diverse leadership talent. And we also added two new independent board members, David Edwards, a PhD with a specialty in econometrics, and Jawad Hassan, the CFO of a publicly traded company. Both bring exceptional backgrounds and skills that complement our existing board and can assist management in guiding our growth strategy. I would also like to add that we are proud to be included in the Bloomberg Gender Equality Index for the second consecutive year. While we've made significant headway towards gender equality, We are actively focused on nurturing a culture that is rooted in diversity, equity, and inclusion at all levels of our organization. In summary, we address a very large and inefficient market and fill an important need for real estate capital financing. Our acquisition activity is in full swing. The lane we play in and our direct approach are mitigants to both an anticipated rising rate environment and the increased level of competition we are seeing in the sector. allowing us to continue to generate healthy spreads. Our pipeline is robust, diverse, and growing at $13 billion. We are continuing to focus on improving our cost structure both operationally as well as our financing costs. Our portfolio continues to perform exceptionally well, and all of this positions us for strong AFFO growth while maintaining our disciplined investment approach in 2022 and beyond, and we look forward to keeping you updated on our progress. With that, I'll turn the call over to the operator for questions.

Thank you very much. And if you would like to ask a question, please press star followed by one in your telephone keypad. And if you change your mind, please press star followed by two. We kindly ask those who register a question, please stick to two questions per person.

Thank you.

Our first question today comes in from John Kim of BMO Capital Markets. John, your line is now open. Please go ahead with your question.

Thanks. Good morning. Can you help us understand how the mechanics of your CPI-based leases work? I noticed in your last 10K, 85% of your leases are CPI-based. We now have inflation above 7.5%. So I'm wondering if there's a catch-up to that or if a lot of those leases are capped, essentially.

Yeah. Hey, John, it's Mary. So the majority of our rent escalations are the lesser of 1.25 times CPI or its fixed leg, which in the fourth quarter was 1.9%. So with inflation as high as it is today, we are definitely getting our fixed leg at 1.9%.

Okay. And is there a catch-up mechanism to that?

No, there is not one. What I would say, John, is that in the environment today, you know, with our business model and the fact that we're calling directly on customers, we are able to have conversations with customers that talk about, you know, inflation is rising, et cetera, and we do ask for escalations, and we ask for the frequent escalations. So we are able to have those conversations. We are mindful of what market is. And so I would say in this environment, market probably could be a little higher than 2%. And so we're having conversations like that. But you wouldn't be at 6% or 7%. Or you would have your phones ringing off the hook with customers calling and talking about that sort of high increase in rent. And this is sort of you know, we wouldn't expect 7% inflation for the long run, and these are long-term contracts.

But I would say that there would be opportunity. Okay. Yes.

Thank you. And our next question comes in from Ronald Camden of Morgan Stanley. Ronald, your line is open. Please go ahead with your question.

Great. Just picking up on the comments on cap rate compression a little bit, maybe can you provide a little bit more color on how that trends by maybe some of the bigger industries and so forth, whether manufacturing or some of the other industries that you look at?

Yeah, Tyler. Yeah, hey, Ron. This is Tyler. Yeah, so we've definitely seen compression like everyone else, and I would say for sure the sector that we've seen it the most in continues to be in the manufacturing industrial side of things.

And any sort of, can we quantify that? Is it 10 basis points, 15 basis points? Just trying to get a sense of just what you've seen and over what time frame.

Hey, Ron, this is Mary. So cap rates are, there's been a lot of, you know, money raised in the space, a significant amount of money raised in the space. And that money seems to be chasing bigger transactions and favors sort of the logistics distribution sort of center or industry. So what we're seeing is, you know, substantial reduction in cap rates in those areas, you know, and when I mean substantial, I mean in the fives, rates that are quite low, fives and certainly the sixes. So for larger transactions, I would say over 50, certainly over $100 million. We're seeing a lot of people bidding for those transactions. So the good news about STOR is that we have an 11-year-old business and platform where we're able to process individual 9 million this quarter deals that we can continue to price each individual deal. And so we have a real advantage to be able to organically grow here and not feel pressure or to play in sort of the what I call bidding wars that are going on out there. So we're really fortunate to have the solid platform to do that. And we're keeping our head down and we're staying real patient here.

Right. And then my last one, if I may, you could just remind us the percentage of tenants that are still on cash basis. And when, you know, you talked about sort of the improved cash collection on receivables in the quarter, is that theaters? Is that what sort of, is there sort of a theme or trend that you could point to? Or is it just sort of all across the board that drove that? Thanks.

Hey, Ron, it's Sherry. And I'll take the first half of the questions. Our cash basis tenants are at about 1.7%. That is relative to history, very similar. And relative to the third quarter of 21, it was at 2.4%. So you see that downward trend coming back to the normalized area. But I'll let Craig cover the tenant specifics.

Yeah, in regards to any kind of theme that you're seeing in the collections, Ron, is... There really isn't. It's across all of the highly impacted industries. They're all paying as agreed in regards to the referrals. The increase, some are actually paying us earlier just due to any kind of government assistance with the theaters, the shuttered venue grant program, or any refinancing opportunities that the tenants are, you know, doing with their balance sheets that provide them the capital to pay our deferrals back.

Thank you.

And our third question today comes from Kai Bin Kim of Tourist Securities. Kai, your line is open. Please go ahead.

Thanks. Good morning. Could you talk about what you're thinking about leverage and how we end up in 2022 in light of what's happening to the cost of capital with your still very robust acquisition appetite?

Thank you, Bennett Sherry. So, you know, we're going to stick to the 60-40 debt equity model that we've had in place. And we're fortunate enough to have both our master funding ABS program as well as the unsecured corporate debt market. And last year you saw us take advantage of both of those. And so you'll continue to see us evaluate that and evaluate which is the more effective market for us to approach in funding our acquisitions.

Do you have a sense of what that would mean in terms of a debt to EBITDA basis?

We'll stick to the net debt to EBITDA range of 5.5 to 6. We ended 2021 at the 5.6. So there's plenty of room in there.

And the 5.6 that you show in the supplemental and what you just mentioned, does that annualize some of the one-time items that we've gotten in 4Q?

No, the one-time items are removed from that calculation.

Okay. Thank you. And just a second question for me. This might be a blanket question, but what are the primary alternative sources of capital for, I guess, the majority of your tenants? And is that alternative source of capital starting to look more attractive or less attractive compared to what the store can now offer?

So, Keven, as it relates to our customers, they have capital stacks, but I would say that doing a sale-leaseback and choosing to lease your real estate versus own your real estate is a choice they can make. But as it relates to a comparable choice to a long-term flexible lease that has 100% financing for their real estate and has some modest escalations, is a superior choice to having bank funding where you actually have to, you might get 60% or 70% financing today, and then you've got to raise the equity. So immediately we lower their cost of capital. So we're a complementary source to a lot of the stuff in their capital stack, but we're not, you know, the long-term real estate, you know, products out there are, there just really aren't any. And that's the beauty of this business, you know, is that that's the inefficiency of the market that we talk about. we serve a really large inefficient market and these are these are companies that need their real estate to earn their profits or to to do their business and so um it makes a really you know really great big market for us where we where everyone's got their hand up and we can be really selective so um you know we're that's kind of how i think the customers sort of evaluate their sources

The next question on the line comes from Kaitlyn Burrows of Goldman Sachs. Kaitlyn, your line is open. Please go ahead.

Hi there. Maybe on the portfolio deal side, I think in 2021, Mary, you had started talking about that you could consider portfolio deals. So wondering if you have any update to that, maybe what efforts you've made and how they've been received by potential customers or partners.

Yeah, Kaitlyn, you bet. That is, you know, we talked about a three-pronged approach in August in our earnings calls, first being our organic growth, second being the fact that we now have a really solid and seasoned portfolio, years of strong execution, good reputation in the marketplace. We have scale and the ability to integrate, you know, larger portfolio transactions into our strategy while still maintaining the granularity and the diversity. I like to say brick by brick, and then I like to say having a whole bag of bricks that are showing up at your doorstep. So we have looked at some. We looked at some in 2022, but I will tell you that right now we're seeing so much money in the marketplace that we're seeing a lot of larger transactions really becoming very highly competitive and sort of driving the cap rates at a point lower than we're really comfortable with. And so we're going to continue to be patient, stick to our disciplined approach, of course, but we are definitely poised at this point in our life cycle that we think we could integrate and not dilute the story here. So we're going to keep watching, but a lot of competition there right now, Caitlin.

Got it. So on those potential portfolio deals, that would be ones that might be more widely marketed as opposed to kind of

Yes. I think we lost you, Caitlin. But the larger transactions right now are definitely being more widely marketed.

Thank you. And our next question today comes from Todd Thomas of KeyBank Capital Markets. Please go ahead, Todd.

Hi, thanks. Just as it pertains to the guidance increase, I was just wondering if you could provide a little bit more detail there around the factors behind that increase, what specifically drove the improved outlook relative to when you initially provided guidance.

Sure. This is Sherry. And if you look back to the fourth quarter peak, Approximately two cents of the five is recurring due to interest in G&A savings from management transition. And then, of course, we have tenants, you know, picking up, you know, repaying their COVID deferrals. And that is one time, but, of course, their continuing payment on their leases adds to the positive momentum. So, you know, we think two cents of the five is recurring. You could also have additional tailwinds then from further reserve reversals and lower property costs as tenants are able to pay their taxes. So the two cents, again, is what we think is recurring, and then you could have some potential tailwinds in there.

Okay. Of the collections in the quarter that were related to previously reserved amounts, I think I heard two cents for the full year. What was actually realized in the fourth quarter? And then I guess, so it sounds like that that trend, that positive trend is factored into the guidance for 22. Can you talk about what additional reserve reversals are embedded in the guidance?

Okay, so let's address your first question, which is the fourth quarter, the excess was all in the fourth quarter. And so that was the full two cents that we just talked about. The going forward into 2022, we expect that we're going to have continued to receive the payments and we anticipate that by the end of 2022, we will have gone from 67% received to 83% received. And by the end of 23, practically 100%.

Our next question on the line comes from Linda Sayes of Jefferies. Please go ahead with your question, Linda.

Hi, just another guidance question. In terms of the reversal of property tax accruals, I think you said it was supposed to normalize in 2022. Does that mean that there is some benefit in 2022?

Well, we've gone from 19 basis points to 13 basis points, which are normal, would just be a few basis points less than that. that do you want it in basis points or did you need a different qualification um i guess i guess that's fine i was just trying to get a sense of if there was um so going into 2022 if that's what you're asking um we are expecting additional um property tax benefits in 2022 But it's normalized in our guidance. So the normalization is to get us below 10 basis points, so the 13 to the 10.

OK, that's helpful. Thanks. And then just in terms of the relationship-based deals that occurred in the quarter, I think you said it was around 45%. What does the pipeline look like for 2022? Should we expect just a higher percentage of relationship-based deals going forward?

Linda, this is Mary. I'd say that we should, we'll probably back towards our one-third relationship deals. I think right now we're just seeing a little bit of a pickup and the tailwind's really coming still out of COVID with some pent-up demand on our existing customers that had pipelines building, and now they're executing on their pipelines.

Is that helpful? The next question is,

Sorry, the next question in the queue comes from Spencer Alloway of Green Street. Spencer, your line is open. Please go ahead.

Thank you. Can you guys provide some color around the decision for Chris to leave his post on the board, and are there any changes to a longer-term strategy that should be expected with this?

Yes, Spencer, this is Mary. So I just spoke a little bit about the strategy, and it remains the same. Um, you know, Chris and I, we were co-founders in this business, so we built this together and we love the, we both love the foundation and the fundamentals of this business and they're strong and profit center, real estate and brick by brick, but also the size now that we could, you know, integrate a portfolio without, you know, diluting the story. Um, and then we're going to use, you know, we have a lot of proprietary data that we're spending a lot of time on understanding and integrating that into the platform to make the platform even more efficient. from prospecting all the way to managing our portfolio. So that's what the strategy is going to be. As it relates to Chris, once the management transition was complete and there was no longer really a need for the executive chair role, the board felt that the company would be best served by having new independent board members with new skill sets. So as you know, we appointed Ton Kelly to the non-executive chairman of the board role. And then we have two new board members, both independent, Dave Edwards and Jawad Hassan. And we're excited to have them. And we're ready to take store into the second decade. And we've all worked a long time with Chris. And I guess I would like to say me personally for over 20 years. And we're excited about our next chapter when we're really excited about his. And we wish him really well. And we're excited for all of us.

That all makes sense on the strategy side. I guess it's just it seems as though if the goal was to not have an executive chairman upon the management or the C-suite transition, why not just have Chris have a little bit? I mean, you guys obviously overlapped. Why have him go to the executive chair position for such a short period of time if, again, the end goal is just to to kind of get rid of that post after you have, you know, taken over the helm.

Well, you know, as I mentioned, the management transitions, you know, Kathy was here. She's a 30-year veteran and CFO. It was important that we filled that position, you know, and were confident in that position being filled. And, you know, Chris was right alongside with us on that. So I think that was important. But once Sherry, you know, we found Sherry and then that was sort of the key management transition position that we wanted to have in place. And that's pretty solid now. So the team's solid and in place. And the position, you know, the executive chair position, you know, it does come with an expense. And I think that's it. it was a great vote of confidence for the board that the team was ready and that for the shareholder, we could eliminate that position and terminate the contract and move forward, saving that expense for the shareholder.

The next question on the line comes from John Massica of Landenberg Thalham. Please go ahead with your question, John.

Good morning.

Hey, John.

So as we kind of think about the, you know, I guess it's maybe a little bit unfair, but the two buckets I kind of think of when I think of the investment kind of strategy for store, right? The direct calling bucket and maybe some larger, you know, for lack of a better term, institutional customers that you might work with. I guess what is the cap rate spread between those two groups and how have cap rates been trended for those two groups over the last kind of 12 months?

Hey, John, it's Mary. So interestingly enough, regardless of the channel that the business comes into store, the approach is the same. And the approach is to work with the customer to ensure that we're adding value with the transaction and then asking to be paid for that value. So regardless of where the deal comes in, whether it's a bag of bricks, as I suggested, or one brick at a time, or it comes in off of our indirect broker desk, even all of the approach is the same. So we don't see a lot of variability in the cap rates there.

Okay. And then one kind of quick housekeeping question. As it relates to dispositions, were the kind of more property management related dispositions all vacant assets? And if not, what was the cap rate on those dispositions?

Yeah, this is Craig. The majority of the primary of the property management dispositions were the vacant properties.

Our final question on the line today comes from Sheila McGrath of Evercore. Please go ahead with your question, Sheila. Your line is open.

Yes. Good morning, Mary. I just wondered if you could comment on net lease in historical perspective in a rising rate environment, how quickly you can move cap rates on acquisitions higher. I know Craig mentioned the four-wall coverage is much higher now, so just wondering about that.

Yes, you bet, Sheila. So historically, and our experience has been that cap rates do, they will lag interest rate rises, right, interest rate increases. So they will lag. I would say, you know, it could be as much as six months or roughly six months, but I would say that in this environment of increased competition, which is continuing to put pressure on cap rates, we could see a longer lag. The good news, as far as you know, is that we are pricing every single new deal every day and having the macro environment conversation with our customers and saying, we're in an inflationary time, interest rates are rising, and so we're having the increased cap rate discussion, and we hope to continue to be effective at that. But I would say it definitely lags in this environment with the increased money being raised. It could lag a little longer.

Okay, and one other quick question. Acquisitions in 21 were $1.5 billion. Your net guidance with dispos is 1.1 to 1.3. What's the expected dispositions for this year? And given your pipeline, would you characterize the guidance as somewhat conservative?

So I would say two things. One is we would look to do about 3% to 5% in dispositions for the beginning balance for 2022. of our portfolio. I would suggest we might be on the lower end of that. And I would say that we, from a volume perspective, we don't have any portfolio deals like baked into the volume. And it's early, Sheila, it's really, really too early to tell. And so that's why we did not move the volume guidance because we feel pretty good about that number and it's early.

Thank you very much. We have no further questions on the line, so I'll hand back over to Mary for closing remarks.

Thank you. And thank you all for participating in our call today and for your continued support and interest in store. We look forward to seeing some of you in person, which is pretty exciting, at our investor conferences during the next few months. And in the meantime, reach out to us. We are here to answer any questions you have and have a great day.

Thank you very much. That concludes today's call. You may now disconnect your lines.