STORE Capital Corporation

Good morning and welcome to the Store Capital Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal 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 while you telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I'll now turn the conference over to Megan McGrath, Investor Relations for Store Capital. Please go ahead.

Thank you, Operator, and thank you all for joining us today to discuss Store Capital's second quarter 2022 financial results. We issued our earnings release along with our earnings supplement and quarterly investor presentation after the market closed yesterday. These documents are available in the investor relations section of our website at ir.storecapital.com under news and results, quarterly results. I'm here today with Mary Fedewa, President and Chief Executive Officer of Store and Sherry Rexroad, Chief Financial Officer, Craig Barnett, EVP of Underwriting and Portfolio Management, and Tyler Mertz, 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 one 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 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 2022, are also forward-looking statements. Our actual financial condition and results of operations may vary materially from these 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 now like to 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 second quarter performance and some thoughts on the current market environment. Craig will provide an update on our portfolio, and then Sherry will review our financial results. We will then open the call up to questions. In the second quarter, we acquired $392 million in Profit Center real estate, bringing our year-to-date acquisitions to over $900 million. Although the transactions we closed this quarter were largely negotiated a few months ago, We are pleased with our success in driving both higher cap rates and higher lease escalations. Second quarter cap rates were up 10 basis points to 7.2% from the first quarter, and lease escalations increased from 1.8% on first quarter acquisitions to 2% in the second quarter. In addition, from a credit perspective, the acquisitions we made in the quarter improved our already strong portfolio. Craig will touch on this in his remarks. We delivered solid AFFO per share of 58 cents for the quarter, which is a 16% increase year over year. Our strong performance is a result of our healthy first half acquisition pace, the excellent performance of our portfolio, and tailwinds relating to the recovery from the pandemic. These tailwinds include both strong rent deferral repayments and lower than anticipated property costs. Based on our year to date results, we are raising our AFFO per share guidance to a range of $2.25 to $2.27, up from a range of $2.20 to $2.23. At the midpoint, this updated guidance represents greater than 10% growth over 2021. Sherry will discuss guidance in more detail in her remarks. Now I would like to address how STORA's unique business model allows us to fund accretive acquisitions and maintain attractive spreads to deliver solid risk-adjusted returns in this and almost any economic environment. First, the market we address is large and we have plenty of runway for growth. Therefore, we take a very selective approach to the investments we make. Second, our unique direct origination model makes us a price setter in our market. as opposed to a price taker. This is a very important distinction. It allows us to price new leases every day at cap rates that help us maintain these attractive spreads. Third, the financing flexibility we built into our model over the past decade positions us to optimize our cost of capital so we can make accretive acquisitions. We have three sources of long-term debt financing, our master funding program, our investment-grade unsecured public debt, and our unsecured bank term debt. This provides us multiple avenues for raising debt capital as market conditions change. In addition, we have access to our ATM facility to accretively fund acquisitions. Although we are mindful of the current macroeconomic environment, we are operating in a large and underserved market. Regardless of external factors, we are confident that there are many strong and prospering businesses that will need and can benefit from the real estate financing solutions our unique business model can provide. And, as we have mentioned in the past, we often see great opportunity in times of market dislocation, and STORA is prepared to capitalize on every opportunity. Before I turn the call over to Craig, I would like to provide some color on the current acquisition market. As you may have heard from others, the market did experience a pause in the beginning of the second quarter as buyers and sellers adjusted to the rapidly changing economic environment. Even with this market volatility, our team continued to knock on doors, speaking with both customers and prospects. We were in the market evaluating and closing transactions consistently throughout the quarter. Regarding cap rates, we believe they bottomed earlier in the year and we are now experiencing steady upward movement. Our recent letters of intent have cap rates in the 7.5% to 7.75% range. And while we do not fund every letter of intent, this is a good indication that our team is successfully negotiating higher cap rates, which we expect to see the benefit of in the second half of the year. In addition to higher cap rates, we are also successfully driving higher annual lease escalations, many consistently in the 2 to 2.5% range. Importantly, we are not sacrificing cap rates for rent escalations or vice versa, and in most cases we are seeing upward momentum in both metrics. Regarding the competitive landscape, we believe that some of the more recent levered market participants have become less competitive and the alternatives for prospects have become less attractive. This only enhances the opportunity set for store. To summarize, the store team is doing an outstanding job leveraging our differentiated and proven business model to help our customers and prospects during these evolving market conditions. Our business is resilient and nimble as demonstrated throughout our 11-year history. Based on our results for the first half of the year, our strong pipeline of new opportunities, the performance of our portfolio, and our ongoing conversations with customers and prospects, I am confident that we can deliver attractive risk-adjusted returns to our shareholders in 2022 and beyond. Now I will turn the call over to Craig to discuss the portfolio.