Q4 2019 Earnings Call

happy long Chief Financial

On today's call management will provide prepared remarks and then we will open the call up for your questions in order to maximize participation while keeping our call to an hour would be observing a two-question when it 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 Kabul words and phrases statements that are not historical facts such as statements about are expected Acquisitions dispositions wage or and ffo per share guidance for 2020 are also forward-looking statements are 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 a results to differ materially from these forward-looking statements are contained in our SEC filings, including our report on form 10-K and 10-q with that. I would now like to turn the call over to Chris bulk Chris, please go ahead. Thank you morning and good morning everyone and welcome to store capitals fourth quarter, 2019 Journey.

Call with me.

They are Murphy to our chief operating officer and Kathy long our Chief Financial Officer.

For the fourth quarter of 2019 received record investment by end with investing activity of nearly five hundred and forty million dollars while ensuring to the granularity and diversity that we're known for tap into the numbers with you, but I will say that the fourth quarter capped very successful year for us in evidence is the ongoing success. We have made over the past several years to penetrate the large Market that we address.

During 2019. We invested nearly one point seven billion dollars and Acquisitions and creatively sold close to $430 in real estate Investments at the same time our portfolio remained extremely healthy with noxious 99.5 per-cent and with continued stability in a percentage of net lease contracts rated investment-grade and quality based upon our store score of methodology. Mary will give you more information about our property investments in sales activity as well as our portfolio health

We raised our dividend by 6.1% in the third quarter, which as a reminder was our fifth consecutive year of raising our dividends in a meaningful way, even so our dividend payout ratio for the fourth quarter was right at 7% of our adjusted funds from operations on a per-share basis serving to continue to provide our shareholders with a highly protected dividend.

So for sure growth was a strong 8.2% for the year, which benefited from activity timing the caffeine will discuss.

It's always a reporter growth benefited from strong underlying internal growth with contributions from contractual lease escalations, averaging 1.8% Annually and reinvested cash flow after dividends enabled by a 70% payout ratio.

Your creative recycling of acid sales proceeds was also a modest contributor.

We combined our internal growth with external growth. It was a creatively funded through new share issuance has which for the past few years have been successfully funded through our efficient at the market program such Equity issuances of enabled us also to maintain consistently conservative leverage profile, but the fourth quarter are funded that the ebitda on a run-rate basis was five and half times which we've maintained at the lower end of our guidance range for more than a year.

At the end of 2019 our pool of unencumbered assets stood over five point three billion dollars were slightly over 60% of our investments providing us with unprecedented flexibility and financing options.

but again

20/20 we anticipate that this percentage will rise directly 66% which has been our stated Target.

Now if I do each quarter here are some statistics relevant to our fourth-quarter investment activities.

Are weighted average lease rate during the quarter was approximately 7.7% which is slightly lower than our Transit early 2019 for the year are weighted average lease rate approximately 7.8% off.

The average annual contract release escalation for Investments made during the quarter approximated 1.8% providing us with a growth rate of return which you get by adding the lease escalations to the initial leave a great about nine and half percent off.

Add in corporate leverage in the area of 40% and our leverage investor return. We'll approximately 13% with net returns after operating costs in the 12% range.

Or outperforming investor returns from store and from predecessor public companies. They're mostly driven by having favorable property level rates of return which is why we take the time to disclose investment yields control press and release escalations investment spreads to our cost of long-term borrowings and our operating costs as a percentage of assets, which are the four essential variables that enable you to compute expected investment rates of return.

Average primary lease term of our quarterly new Investments continues to be long at approximately Seventeen years the median post overhead. You level fixed charge coverage ratio for assets purchased during the quarter was 2.2 to 1 a.m. Comedian new tenant Moody's risk credit rating profile is 3 incorporate the potent contract level fixed charge coverage has and the media new investment contract rating or stores or for Investments as far more favorable at baa1.

Our average new investment was made approximately 75% of replacement costs a hundred percent of the multi-unit net lease Investments that we made during the quarter were subject to master leases and all one thousand and three of the new assets we acquired during the quarter are required to deliver us unit-level financial statements giving us you to level financial reporting from fully 98% of the properties within our portfolio. This impressive fact is critical to our ability to evaluate contract seniority and real estate quality as well as to our access to Capital including our recent second issuance of aaa-rated Master funny notes in November of last year, which authors concluded our inaugural issuance of 15-year notes. And with that. I will turn the call over to Mary. Thank you Chris and good morning. Everyone 2019 was another strong year for us. What's quarter? We met 537 million dollars in real estate Acquisitions at a weighted average cap rate of 7.7% this brought our 2019 Acquisitions total to about one point wage.

seven billion dollars with a weighted average kapre

Of 7.8% We profitably divested approximately four hundred and thirty million dollars in real estate Investments and our net investment activity for the year was nearly 1.3 billion dollars, which exceeded our net investment guidance of one point 1 billion dollars by more than 14% our investments for the quarter. We're spread across forty three separate transactions at an average Joe's actions size of about 12.5 million dollars. We added 21 new customer relationships and closed the quarter with more than 475 customers further diversifying our regular portfolio of net lease access in 2019. We sold ninety-five properties for an aggregate gained over cost of about $23 million dollars or approximately 5% over cost. This gain included about four million dollars of lease termination fees. We collected in connection with a few of our sales of the ninety-five properties twenty to age.

Opportunistic sales resulting in a 19% net gain over original cost 58 sales were strategic and resulted in a 7% gain over cost and the remaining fifteen locations were sold as part of our ongoing Property Management activities and resulted in a 72% recovery compared to original cost the higher level of dispositions this year reflects the size and majority of our portfolio as portfolio management becomes a larger part of our business now turning to our portfolio highlights at year end 2019. Our portfolio mix remained steady job was 65% of properties in the service sector 19% and experiential retail and the remaining 16% in manufacturing the customers within our top ten remain changed with our largest customer Fleet Farm group representing just 2.8% of annualised based rent and interest our top 10 customers accounted for just 17.9 Pig.

and the base rent and interest

In terms of portfolio performance 2019 was consistent with our long-term performance averages resulting in no movement in our average internal growth components which we discuss was once a year. Chris will discuss this in more detail later in this call, but I would like to share some information on Art Van Furniture, which is one of our top 10 customers. We own twenty-three Art Van stores, which represent only about 2.5% of our annualized base rent. We receive quarterly financials for all of our art van stores, and these properties have been profitable. We are in active discussions with a company and we will continue to monitor the situation working through tenant issues has always been a part of what we do and we have done this successfully for over thirty years in the business since our IPO in November of 2014. We have successfully resolved to bankruptcies within our top 10 and still provided strong returns to our shareholders. In that time. We have grown our dividends 40% and RAF.

Oh per share approximately 43.

Percent with most of the growth derived from internal growth. We have also built a very diverse portfolio there for any single credit event cannot meaningfully. Impact r a f f o. This is also a good opportunity to highlight our special servicing team vacancies remain very low in the fourth quarter due to our strong tenant Partnerships and are active portfolio management at year-end only twelve of our life than 2,500 property locations were vacant. We have already identified solutions for four of these assets since our first quarter is a public company. We have maintained our list of vacant properties not wage to at least at an average of well under ten properties for each of these twenty Quarters at the same time during 2019. We lowered our list of vacant and paying properties from 30. Mm. Well, the statistic is not often reported. We believe it is important and is reflective of our quality staff and deserving of attention. We have made substantial investments in our special servicing group wage.

achieve this consistency

As we enter 2020 our pipeline remains robust and diverse, and we will continue to be highly selective in the Investments. We make our direct origination team continues to identify attractive New Opportunities across a variety of industries that will bolster our already Diversified portfolio our business thrives on strong customer relationships. We have continued to reinforce these relationships over the past five years by investing in and giving back to our customers with our annual conference the inside track Forum, which we recently held here in Scottsdale a leading Economist a futurist Capital markets and even a celebrity business and motivational keynote speaker. Jon Taffer Bar Rescue were all on hand to provide exclusive insight and actionable ideas to our customer attendees years of that was our biggest and best ever and we're looking forward to providing our customers with another informative experience next year with that. I'll turn the call over to Kathy to discuss our financial results. Thank you, ma'am.

I'll begin by discussing.

Bring our financial performance for the fourth-quarter and full-year 2019 followed by an update on our Capital markets activity and balance sheet. Then I'll review our guidance for 20 28 beginning with the income statement fourth quarter revenues increased eighteen percent from the year-ago quarter to $173 million dollars the annualized base rent and interest generated by our portfolio in place at December 31st, increased 16% to $714.

Total expenses for the fourth quarter were a hundred and twenty five million dollars as compared to a hundred and five million dollars in the fourth quarter of 2018 just over one-third of the increase was due to higher depreciation and amortization expense related to our larger real estate portfolio.

Interest expense increased by 5.6 million to 41.6 million primarily due to additional long-term debt issued to fund investment activity.

GNA

Expenses for the fourth quarter or 14 and 1/2 million up from 12.5 million a year ago reflecting the continued growth of our portfolio and Associated staff additions off as a percentage of our average portfolio assets G&A expenses, excluding the impact of non-cash equity compensation decreased to fifty basis point average portfolio assets during the quarter from 53 basis points a year ago.

Property costs for the fourth quarter increased by one point six million dollars a year over a year approximately 75% of that increase was related to the new lease accounting standard wage. But now we require us to present items such as impounded property taxes and the ground lease payments are tenants make on our behalf on a gross basis as both rental Revenue agent property costs on an annualized basis, excluding the lease accounting gross up property costs totaled about 8 basis points of average portfolio assets phone unchanged from the year-ago quarter.

During the course.

We recognized in eight point eight million dollar impairment provision related to our real estate portfolio. The majority of the impairment provision relates to properties were likely to sell.

We delivered another quarter of strong growth in in with a f f o increasing 16% to $120 million from a hundred and three thousand a year ago on a per-share basis a f f o was fifty cents per diluted share a 4.2% increase from $0.48 per diluted share a year ago June.

Full year 2019 a SFO increased 21% to $458 million dollars or a dollar ninety-nine per basic and diluted share this represents year-over-year growth of 8.2% on a diluted per-share basis. Our 2019 ffo results were strengthened by higher revenues do in Iraq earlier than expected timing of real estate acquisition activity during the year most recently our fourth-quarter acquisition activity, which has traditionally been heavily back-end weighted showed strong and early October and November volume in addition to our normally heavy December activity enabling us to capture more Revenue in 2019.

higher

News were coupled with lower than anticipated interest costs due to the overall low interest rate environment during the year and to the low rates. We were able to achieve on our fourth quarter Master finding a transaction.

Now turning to our Capital markets activity and our balance sheet refunded our acquisition volume during the quarter with a combination of cash flow from operations proceeds from property sale a temporary borrowings. Our revolving credit facility proceeds from ratm Equity program and our mid quartermaster funding debt issuance. You continue to take a strategic approach to accessing the debt markets in November. We completed the issuance of 508 million dollars of notes under our store Master funding program, including 3026 million dollars of aaa-rated notes and our first-ever issuance a 15-year notes. The weighted average interest rates on the new notes are 3% on the seven years and 3.95% on the 15-year notes for a blended rate of 3.71%

Yes.

A portion of the proceeds to prepay without penalty 186 million dollars of Master funding notes with a weighted average interest rate of 4.22% that were scheduled to mature in 2020 and 2021. The remaining proceeds were used to pay down borrowings on our revolving credit facility and to fund acquisitions.

As a result of these financing activities at December 31st. Our long-term debt was just over three point six billion dollars. It's weighted average maturity had increased from 6 years to about seven years and are weighted average interest rate decreased slightly to 4.3%

Substantially all our long-term borrowings are fixed rate and our debt maturities are intentionally. Well laddered with the median annual debt maturity of about $275 million dollars beyond our extendable 100 million dollar Term Loan originally issued in March 2017. We have no significant debt maturities do in 2028.

We expected.

Free cash flow which represents cash from operations after dividends plus proceeds from property sales will more than cover debt maturities coming due in any one year for at least the next several years.

At December 31st or leverage ratio was at the low end of our target range at five and half times net debt-to-ebitda on a run-rate basis or around 40% on a net dead cost basis.

Ratm program continues to be a very effective way for us to raise Capital given a granular size of our Acquisitions during the fourth quarter. We launched our fourth ATM program in the amount of nine hundred million dollars use this program to issue five million shares of common stock during the quarter at an average price of $39.79 per share raising net proceeds of approximately $198 over the course of 2019. We issued over 18 million shares of common stock under r m m program at an average price of $35.72 per share raising net proceeds of approximately $659.

Oh, we're well-positioned for the year ahead with substantial financing flexibility conservative leverage and access to a variety of attractive options to fund our large pipeline of investment opportunities going into twenty-twenty. We have about seven hundred million dollars available under our ATM program and the full $600 million of capacity under our credit facility, which also has an 800 million dollar accordion feature.

At December 31st approximately sixty percent of our gross real estate portfolio was unencumbered which is consistent with 2018 and 2020. We intend to issue primarily unsecured debt and expect our level of unencumbered assets to Trend higher during the year.

Now turning to our guidance for 2020. We are affirming our 2020 guidance first announced in October and currently expect twenty-twenty as a phone number share to be in the range of $2.05 to $2.09 based on projected net acquisition volume of approximately 1.2 billion dollars worth of 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 and 1/2 to 6 times ranging up to ebitda.

Episode per share guidance for 2020 equates to anticipated net income excluding gains or losses on property sales of ninety-eight cents to a dollar one per share a month plus ninety-nine cents to a dollar per share of expected real estate depreciation and amortization plus approximately eight cents per share related to items such as straight line ran home equity compensation and deferred financing cost amortization. It's still early in the year. And as always we'll reassess guidance as we progress through the year and not return the call back to Chris. Thank you so much Kathy as usual and before turning the call over to the operator for questions. I'd like to make a few comments first. This is our annual results conference call which means it's certain annual slides in our quarterly investor presentation has been updated.

Chief among them are the revenue internal growth walk in the appendix on page forty-four which starts off with our average gross expected Revenue growth for tenant lease, escalations and reinvested cash after dividends and then walks to the components of what I tend to call Rent growth drag, which is Illustrated on a historic average basis has would you like to use averages because at least contract performance can exhibit your to your volatility that can mask the overall long run corporate business model that said Keen observers of this page will want to look at the degree to which variables have altered which can provide insights to where the 2019 was a better or worse Year from a drag perspective in our prior 2018 historic disclosure.

it was

On about park with the long-run average which is why the numbers were little changed drag starts with the accretion from asset sales, which averages ten basis points of average assets. Annually, then lose 2,000 losses from resolved contract credit events on average resolved credit events amounted to 1% of average assets annually of which recoveries average 73.7% before Associates the cost which is high by comparison with other credit based contractual instruments.

Our historic recovery after Associated expenditure amounts to about 71% which is also high and to the roughly 30 basis-point drag from the resolved credit event losses and other wage twenty basis points on average for unresolved credit events, which we tend to refer to as a work in process and you arrive at about an approximate fifty basis point average historic credit loss dragged off.

Subtract that from our average 1.8% annual lease escalator and arrived at effective long run same-store rent moves on average approximately 1.3% annually.

The 10 basis-point accretion for property sales gains. It tends to lessen the impact of this growth pollution.

As a percent of revenues losses from credit events would be a bigger number. We tend to illustrate everything as a percentage of assets which makes this business model evaluation and demonstrations simpler.

All together at the internal revenue growth tends to average around 3.4% before leverage of approximately 40% after Leverage. The growth is around 5% or so less an impact stock-based compensation to store staff which we estimated two mounts about twenty basis points in 2019.

Another truck that we have to manually is on page forty-three just before the internal growth walk and delves into our comprable asset sales activity and accretion for 2017-18 and 19,000 accretion and our property sale cap rates are Illustrated net of associated closing costs and sales commissions, which is key to making an accretion analysis.

given the spring time

This asset sales activity. We elect to illustrate its impact only once a year.

Doris been a leader amongst are pure public companies and asset sales and a creative asset sales.

We have work to make our quarterly presentation not something that's simply delivers a lot of data or has a distinctive business model and our quarterly presentation is intended to walk you through the contributors and detractors with a performance. We want to do the best that we can to connect the dots for you then annually, I write a letter to delve into our performance and observations a bit deeper. This year's letter will be posted are welcome tomorrow the current with our 10-K filing and with these comments. I'd like to turn the call over to the operator for any questions.

And I'll begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone using the speaker phone. Please pick up your handset before pressing the key off.

Withdraw your question, please. Press * then two.

This time we will pause momentarily do some Bara roster.

First question comes from Nate Crossett or any bark, please. Go ahead.

Hey guys. Thanks for taking my question. I appreciate the comments on our van. Can you give us any caller on current coverage for those is it over to or where do you stand on those assets in terms of rent coverage?

Nate this is Chris and and I'll well, I mean, I would median portfolio coverage around 2. I'd say the our fans are kind of in that area.

Okay, maybe just you know current thoughts on furniture in general is this is this an art van specific issue or is this a Furniture business issue? I mean, it looks like you bought one furniture store in the quarter. And you know, how was like Ashley's doing I guess.

Yeah, so hey Nate, this is Mary. We would say this is definitely an art van issue and not a systemic issue across the furniture space. We like the furniture space are the furniture customers are doing just fine, And the we did we actually real at an empty box into a Furniture to a Furniture operator. So that was the one you saw there. But we are we're still we still like the furniture space.

Okay, are there any?

They're kind of issues out there that we should be aware of. You know, I I know you have some Pizza Hut's there was an article about em out the other day, you know, is there anything else we should be tracking for you guys? Yeah the scenario again. So we do not have any we have a very small exposure to a few Pizza Hut franchise. He's so young and 40 basis points there and we too are aware of the you know handful of restaurant news. That's out there. I would say that what even we have a a little bit exposure on a couple of them again collectively less than sixty basis points strong Master leases. You don't expect to see any issues from them all operators specific. Oh by the way, as well, so no loss systemic issue in the restaurants basically see it as well.

Okay. Thanks guys.

Next question comes from Shivani Sade. What's your bank, please? Go ahead.

Taking the question. I appreciate that store is somewhat Limited in terms of what you can say on our fan but there was some commentary several quarters ago about tethered versus untethered leases and I think it came up at the Art Van locations are tethered. So I guess how does that change if you guys wanted to proactively re-tenant or sell some of these properties during a potential filing process? Okay. So the the concept well, thanks is this Chris on the concept of headed versus untethered is is one where you're asking can this store stand-alone independently, you know and with some retail chains, especially that they really can't because they're they're they're tied to distribution centres that are tied to each other in a way. They have a central buying group that kind of stuff where whereas, you know Burger King's you have a Burger King franchise e or lack of empathy which we don't have exposure to but you can have a Pizza Hut franchisee and they could go bankrupt and they could close down 90% of the stores hypothetically the other 10% can live so that's an untethered situation dead.

so in in the case of

Heather situation, you're a little bit. Uh, the the variables are a little bit greater, you know, so you're looking to see to reorganize an entire company. So I would tell you that if you look at our game in stores The Gander Mountain stores for profitable that we had. Uh, I'm sure they were a ton of profitable Toys R Us stores now and these are changed that ceased to exist. You know, we all right today or or cautiously optimistic that that will not happen to our fan. I mean, this is a chain that is one of the largest employers in Michigan it has you know, amazing brand equity and it has prospered for sixty years affecting not even having a blip to the Great Recession. So uh, and um, so they've had issues that are kind of distinctly their own and and hopefully they'll be able to work through those but with wages will tell it and and the fact that it's tethered a little bit elevated some of the risk and elevates some of the outcome possibilities.

That's great color. Thank you for that. And I think Mary you would mention that portfolio management would become a greater part of the business as as a portfolio continues to scale. So as you think about GNA off next year, I guess.

How much growth should we expect to see in this line item?

Kathy we'll talk about the gene. Hi ya, this is Cathy G&A has been trending about fifty basis points of average assets and we anticipate that as a pure number it will go up as we add staff in in some areas. But as a percentage of the portfolio, it'll continue to Trend down slowly. I see in my letter that'll come out tomorrow we could tend to do is look at the g n a and the property costs and we're evaluating our business model. We're not just looking at GNA we're looking at property costs and when we're doing it, we're back out reimbursable property costs. They basically are getting to the things that are unreal Percival and they are looking at GNA you're backing out things like non-cash stock-based compensation because that's basically creating twenty basis points that they have a bulb drag, but that's what the the number itself and have a sort of an algorithm of numbers. See see if you back all that stuff out and you compare the aggregate of those to cost from year to year or the Delta between 2019 and 2018.

Something like forty basis points or something like that or it's no excuse me. It's four basis points. So so it's not that much right? So it's so I think the G&A was like Fifty basis points and the property management office at 7 basis points or something and year before that it was you know, a few basic points left. So it's it's not like we're uh, it's not like there's a lot of scale here. I mean as a you know in the south, I mean at least space had the highest profit margins like that exists, you know, I mean. The end I mean, you know, if you're comparing it to almost any other business in the world any other real estate, you know type related. So they've the Jews here for you as invested is not for us to figure out a way to lower our G&A expenses by 4 basis points. It's basically to do more business and to do business half rates are really a creative too.

Got it.

Thank you.

Next question is from frankly a BMO, please go ahead.

If we look at your investment pipeline activity, this quarter looks like the number of deals past and close increased by a billion from 3 Cube and no part of this is due to the strong deal volume to close off during the quarter of a curious to know if you also decided to pass on more deals in fortitude if any reasons for that if any do you think it's Mary you're you're exactly right that I would attract more to good activity in the fourth quarter as opposed to maybe more less New Opportunities added or more of passed on so and again, it's a quarter. So these things will bump around quarter-to-quarter as you can expect.

Okay. Thanks. And then you also collected for lease term fees last year. I know you exclude them from a f f o but just curious to know what generally has been the Run rate for term fees. And if you have any 2020 models.

Yeah, it's Kathy. We don't we don't really project to have them they're kind of sporadic and we just part of why we don't include them in a f f o so you'll notice we back them. So I don't project that. They're going to be you know, any material fees in twenty-twenty. I think Frank is Chris is that the lease termination fees tend to be associated with people wanting to walk away from a property. So they're they have a property is subject to at least they'd like to go dark on it. And so we cut a deal with them. And so part of the lease termination fee tends to be associated with the sale of that money and because it's associated with the sale of the asset. Well, you'll see in the disclosure on on property sales activity and gains is that we're taking lease termination fees and including it and that number as opposed to putting it into wage if a false or treating it's sort of like a a gain on sale of property which you would back out of a f f o

Okay, great. Thank you.

Next question comes from and Elsa juice.

So please go ahead hi there everyone.

I know so Chris, I guess in the past you've talked about being able to generate 45% a f f o growth with no external grown. And so just considering the guide again for this year about four percent growth that includes one point two billion of net Acquisitions. I guess. I'm curious. You know, how do I could tell that should we be reading that as maybe an expectation of maybe more credit losses or just pure conservatism given where we are in a year, I think well, first of all, we've never met and I'm going to answer this is Cathy so we'll do this together. But but we have never historically raised our guidance in the first quarter of the year with the exception of 2015. So it's just too early to do it. I mean, there's a lot of things that happened in New York a timing perspective. The second thing is that we obviously do have the Art Van situation. So there are there are a variety of alcohol and stuff. And so and it's just too early to even speculate on what could happen.

So, you know, that would be sort of a big movies while the third is is that I would say that you know, the the north of 8% growth that we achieve last year was partly due to wrong stealing away some of the growth that would have happened this year because we had we had some deals that closed a little bit early right and and in the fourth quarter of last year and it also by the way took away from growth from 2018 because we had a strong first quarter of last year. So when you're looking at companies like ours where you do have timing issues that can affect matters. It's sort of important to kind of look at the long run growth the company and not just focus on on on that stuff. And if you look at uh-huh, like I mean, hypothetically if you if you look at store capitals proxy statement or whatever from last year from our you know, our a lot of our long-term compensation is based upon our stock-based compensation is based upon achieving growth that that gets to six and a half percent or better right so dead.

that's that's

The way like the max compensation we can go we can get to that number and I think that's six and a half percent is a good number and so you take 6 and 1/2 and add that to you know, close to 4% dividend yield you're getting to north of 10% till tax return which if you can do double-digit rates of return which we've down done for five consecutive years. I think that's a very attractive thing to do.

Great. Thank you for that and just going back to the the level of dispositions again last year. I think he sold four hundred fifty million issue, which was highest level for you as a public company. So just curious how we should be thinking about that. Is it more that your portfolio is maturing after reaching the 5 year mark post-ipo is Rod replacement being bigger or you trying to get in front of some credit issues and how should we think about dispositions this year as part of that the guidance on life and I'll give you some comments on that. I think you know, we've been talking about selling about 5% a little over of our beginning balance of of on our portfolio. So that's I think you'll find me to be consistent and then just briefly I'll remind you that, you know, this positions are done for three kind of category three different reasons, opportunistic strategic and property management and so forth.

I would say this past year. We actually

Give me a call last quarter. We moved our manufacturing exposure down a whole point. And so the Strategic piece for the year was a little higher about 55% of what we did and it generally runs about 40 40,000 for opportunistic strategic and Property Management. So probably little higher on the Strategic strategic when we did that this year. But again, it's a it's across those three categories and will be consisted of that as we move forward.

And and it property sales were around 5% of our, you know, beginning portfolio. So as a percentage of the portfolio, it's kind of in line where like last year was slightly last year before that. I was around 5%. So it's not inconsistent with with that and I think you would expect us to be able to do that. And and of course last year, if you look at the accretion from the sales that adds roughly 35 points to growth which is which is higher than a 10 basis-point growth averaged accretion. So so we're we're pretty focused on being able to try to add two internal growth and also detract away from risk associated with credit app and rebalancing from the you know, between ten and and industries is what we're trying to do, of course.

Got it. Got it. Okay. Thank you.

Thank you. Next questions from him, please. Go ahead. And did you guys put any type of Outsiders Reserve in your 2020 SL guidance guidance?

For like our fan and other tenants.

Like even if Kathy we always Thinkin I mean this this is part of our business, you know, if you have occasional tenant issues. This is part of the net least business and I always take something in for guidance every year.

About what? How much was it this year for 2020?

We don't specifically give guidance on that. Okay, and just following up on our fan obviously it's early and there's a lot of different outcomes. I can come out but if but what are the in your point of view of the more likely outcomes and instead of menu options you have for the exposure and maybe some of the restaurant and maybe you can frame that wage or with the quality of real estate or quality of education for those stores.

well, I'm

It's Chris. I'll help I'll start maybe Muriel also have some comments. But I'd say we've taken a look at every single app that we have and we feel good about the investment in the assets that we feel very strong about their ability to have a an attractive recovery and virtually any type of outcome beyond that, you know, we're not handicapped in today, you know, what's going to happen with our fan. We're hopeful that the RPM name continues to survive and prosper cuz we think that there's there's a viable business office there and um, uh, but but the time will tell and you know, the unfortunate thing for this call is at our fan the our fan issue is so recent and off and and and candidly like the the Catalyst, you know, they're

You know their fiscal year end of September. So if you were looking at their September numbers, which we have, I mean you wouldn't have said that the company that's going to you would have expected. The company would have been insolvent by the end of June. So, I don't think I think most rational people would have looked at and said that there was going to happen. So so there's there's obviously catalysts. I'm not sure exactly precisely what those are today. But you know, we feel good about where we are at this point and and and as we know something and we'll obviously you'll you'll get more information as we get more information.

all right, and just

For one thing you've mentioned earlier. You said I think you said sixty basis points exposure to the name restaurants that were in the headlines is that they're total exposure to the the restaurant, perhaps a little bit of trouble or is that just for that's total and I think I've seen okay and and I would say that that's sixty basis points. We're not expecting any rental options from the substantial majority of them. That's not all of it. So, all right.

Please remember to limit yourself to two questions at a time or next question will be from Vikram Morgan Stanley, please go ahead. Um, thanks for taking the questions. Not not to beat a dead horse, but I just want to understand uh on on Art Van. I remember when Gander happened have been criticized for chatting. I think of the narrate it kind of shown at the chart saying you've tracked the store score in the coverage and kind of you look back lesson learned you would have probably acted in terms of selling off assets sooner or trying to fix things sooner with our advantage the different situation I get it, but just when you originally did the deal, I believe you had mentioned coverages were in the high three's now coverage is right around 2 as that sort of happened over time. I'm just trying to understand how did you think about the portfolio maybe attacking pieces of it all of it off?

When you sort of get comfortable with it.

Well, the answer is that we did sell assets. We we sold the number of assets. We we actually had well over 3% exposure to Art Van and and that's less probably because we were bigger but they've we sold off and none of our fan assets which lead down to a down to 2.4% of on your basement and interest about 20% reduction victims that we did do that here and I would say that you know, we they are banned deal happened in 2017, you know, they bought Wolf & live in an eighteen and this was an integration, you know, this wasn't that big acquisition integration story. So we were watching Em and they were they were, you know, pulling this together, but I think what you know, what's important is, you know storage designed as a very granular very diverse and we're designed to have faith, you know did work through these sort of credit issues and and I would say too. I mean, I mean candidly we had we had some that we had a handful of our pants under contract to sell the day they you know wage.

Which now, so that was my next question. I was I was either people who had read on the actual statements and everything, right? So so, you know, sometimes you just get you know, you get a little bit unlucky, right so uh and things happen, but those sales

River Rock Center Stand By and we're done. I was right back in what happened or is this girl who knows what it is? But hello. I think we have laws Vikram. We'll move on to Rob's. Okay, it was Beckham. Okay. We'll move on to Rob Stevenson from Janet, please. Go ahead. Good afternoon guys Mary. I think the average Art Van Furniture box is 68000 square ft. How much tennis demand is are out there for boxes of that size these days if you were to get any of them back and how easily or costly with these locations be too divided into smaller spaces and multi-tenant.

yeah, so you're

Correct. Our stores are on average about sixty thousand square feet. And you know, I I would say that, you know, we there would be interest for those and we we could put there's there's a lot of other sort of asset classes out there Thursday. It's family entertainment go cart places, you know, even a a large fitness center another Furniture. I mean, we we are still in favor of the furniture space and there's plenty of good writers out there. And as Chris mentioned earlier, we like the real estate we have and we like what we're in the real estate at so I would think that you know, we would we would work hard to do that and I I think we would get that done in terms of you know, breaking them up. Yeah, we always look at that to Vikram. I'm sorry not that comes to you know, we lost him but we always look at that as well as to whether we can you know, what does it cost to do that off and put a couple of tenants in there? So that will be part of the that would be part of the analysis. And again, there are users for these boxes General. You don't break them up, you know your best wage.

That is to just keep them intact and and and get another 60,000 square-foot user. The good news about these is it they're not like, you know, most of your big box stuff tends to be

Um in shopping malls, so it tends to actually not be on street corners. So it's it's it's buried and it it could be a Power Center or whatnot. These are freestanding 60,000 square-foot boxes. Meaning that they have much higher levels of visibility. The tenant profile tends to be very different. There are people that just want to have you know, that street Frontage and they want to be you know closest. It's just not quite the same risk as I'd rather have that kind of box. I would suck the big box in the middle of the shopping center personally. So, okay and 489 Art Van question Kathy. Can you walk us through the November funding decision and why you did MasterChef versus unsecured debt was it cost flexibility? And what would the pricing difference had been if you choosing to do seven and 15 year unsecured debt instead?

Okay, so we have a debt strategy that kind of balances both doing Master funding transactions on the secured side off and doing unsecured debt. What's cool about that having that flexibility in those options is that on the master funding side The Leverage is higher in the ABS market and that allows the unencumbered side or the unsecured debt to have significantly higher coverage metrics, which we believe over time and that balance will drive down the total cost of death. So we do like having both options. We had the opportunity to issue a 15-year notes in the ABS market. So that was of importance. We also have the ability to prepay some of our Master funding notes with the new birth.

that allowed us to

Drop our interest rates the the notes that we prepaid without penalty by the way. We're at a weighted average rate of 4.22% And the Blended rate of the new Note Edge was 3.71 which included Triple AAA notes, you know in the high twos so that was that was most of the time you'll find that we balance secured and unsecured debt. And since we adjust done that transaction in the fall will likely in 2020 doing unsecured debt and so are unencumbered asset pool will will tend to Trend upward. So that makes sense. Yeah, it's where's pricing for you guys now on unsecured wage, its if you wanted to go out and do something in the you know, Seven Ten Or fifteen year range. I ten year would be in the high twos.

Okay.

All right. Thanks guys. Appreciate it. Thank you. Next question comes from Spencer Alloway Green Street advisors, please. Go ahead.

Thanks.

Just in terms of the competition you guys are seeing in the market right now. Can you provide some color on which Industries within retail specifically that are seeing the most crowded bennington's?

This is Mary. I would say in terms of competition. You know again, most of our competition is away from the you know, public and private streets and in more into 1031 family office space off and I would say that you know service is still, you know, a a one of the best asset classes out there as opposed to the retail space again and also manufacture recall manufacturing and Industrial is still pretty pretty hot out there as well.

And then we we think we think of restaurants for example of service by the way, so which you might think of is retail. So if it's if it's something you can't buy it's not physical good and you can't buy it over the internet, you know, and you're somebody's making something for you like a sandwich they take away the service and so in restaurants tend to be a ways sought-after, right? Thank you. And then just lastly I know you guys do a sensitivity analysis quarterly that assesses how much 10 and sales need to would need to fall before you would lose rent. Are there any meaningful changes here in regards to particular tenants or any notable Trends across Industries?

No.

Actually, this is Mary and I think you might be referring to are tolerable fall off which is which is been very consistent and it's about forty percent across the portfolio. So no change center of that's meaningful. Okay. Thank you.

You're welcome. Our next question from John Cole Almond, please go ahead good morning John. So I appreciate the additional disclosure on page forty-three the presentation where you kind of break out, you know, total gain or loss on the different buckets of dispositions faith in that 2019 Property Management dispositions, you know, the I guess lost verse original cost was was 28% off. Is that a do you think about your portfolio now that it's kind of a little bit more mature. Is that kind of going to be the typical Property Management disposition loss going forward or resist wage You Know It's just tough to tell year to year. Well, first of all in terms of how you look at the chart, you got to understand that it's not a 28% loss over.

original cost

Um, that's that's not how to read this chart these the gains and losses are all based upon the loss in essentially analyze, right? I mean, uh, so in other words you could sell a property if I have a property in eight cap or a nightcap and I sell it for a hundred percent of value and then I redeployed the money at seven seventy-five or something like that or 770 then you've lost money right as as an investor. And so when you're when you're looking through Revenue growth, you're trying to figure out how to recycle Revenue growth. You have to translate everything into a revenue growth number and a f f o number right you you it doesn't matter what the percentage of cost I get back is so the percentage of cost is probably higher than that Los is less than that, but from a revenue perspective, that's really what you want to look at. And so that's how we disclose this which is very unique people. So it's very important that you know know that which basically means that when you're looking at recoveries for us and we're saying it's a 73% recovery and you're comparing that to cmbs recovery or something. They're doing it as a percentage of principle not a percentage of Revenue age.

Yeah, and we're doing as a percent.

Which is much much more conservative in terms of how you do it.

No, I'm sorry. And then the next question is okay. Now that you know that the fact that we had a bigger loss here or you know on on the whole properties symptomatic of what's going to happen going forward in the answer is no it's just the function of this one year. I mean every year is its own year. It's very, you know, you can look over the last three years and you can see that bought a 2017. It was worth 2018. We actually made money on properties that we were having issues with so which is unusual.

Okay, but that that 28% number then is just based on what you could redeploy the Lost Revenue.

Right, right. So no worries. It's a it's a loss of the comparative loss of Revenue. So our rent would have gone down by 28% on those properties. Okay understood and I'm kind of parsing maybe some of the commentary on Acquisitions in 4q sounds like it was a little bit more front and loaded than typical. I know you still said you had a pretty you know, robust December 3rd, but, you know given the way those Acquisitions broke out. I mean, is there any read through to that that maybe some acquisition activity slipped into two one Q 20 and and maybe it's a little more elevator in and kind of the first quarter of this year than is typical.

this is

I it turns out that you know having a big December like that. Yes to start again October November were heavier than normal and not only the volume for six months themselves, but that the volume was very early in the months, which is sort of unusual. A lot of times our volume is back and waited in the month. But these were almost front edge of the people I think about it that way and December was very big and kind of middle weighted. But what what that tends to do sometimes is that people who are customer is looking at their tax situation. Some of them will take transactions that might have been scheduled for January and accelerate them into December because they needed in that tax a year off if some of that goes on and in 2019, you had the benefit of some 2018 transactions bleeding into January of 2019 and then on the birth

and you had some

January twenty twenty transactions being accelerated back into December. So you're capturing more Revenue in December. And so we might anticipate that off to one will revert more to our normal quarter, which is always our lowest quarter. So, you know, and it's still early and things could still come in but it wouldn't be unusual took that it will revert to our normal cycle of it being the lowest quarter with key for being the highest Q to being the second-highest.

Can I help I apologize that question Michael Gorman. Btig, please. Go ahead.

Thanks. Good morning. I had to jump on a little bit late. So I apologize if this was already addressed but what what percentage of your total rental stream comes from private-equity back to tenants at that point?

This is Mary. So I guess we would estimate that probably around forty 45%

Okay, and then just in terms of your experience with with private Equity backers, I mean, do you do you approach the acquisition process differently or the tenant monitoring process differently based on the counter or is it is it just like any other Finance Senate?

I would say it's very consistent. Michael is with any other, you know customer that we look at you know, we're looking at the entire relationship both with the private equity and with the tenant month and we're monitoring it very closely quarterly with we get financials and so on. So yeah, like I I was just as Chris I I would say that I am in in recent press private Equity has gotten a bad name, you know, and it's funny. I've I've seen people talk about private Equity as it's like well these guys by a totally decent company and then they sell off all the real estate and rent it all that kind of thing which by the way, you know, private businesses all day long or doing exactly that they they they're growing without ever owning the real estate. So it's so it's kind of an interesting notion that somehow selling the real estate to two people like us is is not good, you know, it's good. And and if you look at private Equity companies, we have found that most private Equity companies that we've had if they've had an issue age.

Stepped up with with had a capital and really made a difference in helping companies through which is they were privately held we we don't think that would have happened. You know, then you get

Down in the situation of like m&a transactions cuz most private Equity deals coming in with m&a transactions. So it's a if it's a large lemonade transaction sort of like a comparably Meg m a transaction there tends to be always more risk than if it's a it's a follow-on transaction. So and and most of the stuff that we're doing is sort of roll up follow on transactions and that's sort of the mega-deal type transactions and see me neither tends to be sort of much more modest risk of that kind of stuff. No, thanks for the call. I thought that was kind of my point was just to the what extent do you look through to the sponsor behind the business and and try to page make sure that that's a good partner for you on the other side of it. Just given some of the other issues hundred percent with you you bet. Okay. Thank you.

Well take our last question of the day is a follow-up from excuse me. Think of Morgan Stanley, please go ahead. Sorry about that. I don't know what happened. I was speaking and nothing was a going through Chris. I just want to clarify you'd mentioned you were in the market the day the news hit. I'm assuming sort of that put on hold now that process.

Hi.

Yeah, that's that's a 10-4, but but but it just goes to show you that, you know, everybody has current information. There's a lot of em that had strong views about the health the company and that furniture business and you know, and and sometimes you're you're selling assets and you and sometimes they fly off the shelf and sometimes, you know, they fall out and you get we're dead trees here. So and sometimes you get unlucky on some of the stuff. So yeah, but for a few other things you would have had a little bit less exposure right now, but but again, it's it's today. It's less than to 2.4 wage around news or anything else two and a half percent road. So it's it's a modest exposure and we will be fine. Okay, great. Thanks so much. Yep. No problem. Thank you.

This concludes our question-and-answer session. I'll like to turn the conference back over to mr. Kristol for any closing remarks, please go ahead. All right. Thank you very much. And thank you all for attending today married Kathy and I are going to be attending the upcoming Citigroup investor conference in Hollywood, Florida our second and third and I'm expecting number if you'll be there if you're interested in seeing us there at let us know. We're also going to be posting an investor day at or investor day at the New York Stock Exchange in April 16th. And so if you'd like to attend this Gathering there is still space available for let us know about that, too. Thank you all for listening. We're around today and tomorrow for any questions. Have a great day.

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