Q3 2021 STORE Capital Corp Earnings Call

Good day, and welcome to the store capitals. Third quarter 2021 earnings conference, call and webcast. All participants will be in a listen-only mode. Sure. Do you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation. There will be an opportunity to ask questions to ask a question. You may press star then 1 on your touch-tone phone and to withdraw your question, please press star then 2, please note. This event is being recorded. I would now like to turn the conference over to Miss. Megan McGrath.

Investor relations for store Capital, please. Go ahead, ma'am. Thank you, sir. And thank you all for joining us today to discuss store Capital third quarter 2021 Financial results. This morning. We issued our earnings release and quarterly investor presentation, which include supplemental information for today's call. These documents are available in the investor relations section of our website at irs.gov store. Capital.com under news results. Quarterly results. I'm here today with Mary fetal of President and chief.

Executive officer of store, Cafe Long, Chief Financial Officer, Sherry rexrode to will become our CFO on November 8th, Craig Barnett EVP of underwriting, and portfolio management, and Tyler maertz, qvp 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 intense believe expect anticipate or other comparable words and phrases statements that are not historical facts. Such as statements about our expected Acquisitions dispositions, for our a fo, for sure, guidance for 2021 or also forward-looking statements.

Aunt or 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 now like to turn the call over to Mary feed stores, chief executive officer, please go ahead.

Thank you, Megan. Good morning, everyone and thank you for joining us today.

I'll begin the call with an overview of our third quarter performance. Craig will provide an update on what we added to the portfolio and our portfolio management activities, and Kathy, who is retiring. After this her 28th quarterly call will review our third quarter Financial results. Following our prepared remarks. We will open the call to questions as you all know, Kathy. And I have worked closely together for many years. So this conference call feels a bit like the end of an era. I want to thank Kathy for her.

Five Council and many contributions to store and especially for building an outstanding finance department on behalf of everyone at store. We wish Kathy all the best in her well-deserved, retirement, and ending can also signal a new beginning. And I am very excited to introduce you to Sherry rexrode who will assume the role of CFO on November 8. Many of, you know, Sherry from her successful career at BlackRock, and with her strong background in finance and capital markets.

She will be a great asset to our team. Sherry was also one of black rocks, top and bass Udders and promoting sustainable business practices, and we look forward to her help in advancing the ESG program at store as you saw in our press release. We had a very busy and productive. Third quarter business is back in full swing. We reopened our office in October and I'm very proud of our team's outstanding execution that resulted in, robust Acquisitions volume, and

Growth in our pipeline of New Opportunities. We saw a significant pickup in demand for our customized net lease financing Solutions as our customers and Prospects resumed growth both organically and through m&a activity. During the quarter. We acquired more than four hundred and ten million dollars in profit Center. Real estate at a weighted average cap rate of seven point four. Four percent bringing our year-to-date weighted average, capreit to 7.7%.

Ain't we also delivered a ffca of 52 cents per share, reflecting our strong Revenue growth and healthy portfolio operations. We also had strong prospecting activity and our pipeline grew to 13 billion dollars. Since the end of last quarter. We believe this is a direct reflection of a healthy operating environment are unique, customer value proposition, and the results of our direct relationship approach.

And at least space has continued to attract New Market participant. So we are not surprised that we saw some cap rate compression in the quarter. That said having been in the net lease financing business for several decades. I've had the benefit of operating across many economic cycles and interest rate environments. This gives me confidence that our business model positions store to continue to deliver above market cap rates and importantly, to continue to deliver attractive returns in today.

Operating environment. For example our most recent Master funding debt issuance had a weighted average coupon of 2.8% resulting in a healthy third-quarter investment spread of over 4%.

Aunt. Now, I'd like to touch on inflation which is a current headline, macroeconomic topic for a few key reasons. We believe store is, well, positioned to deliver. Strong AFF old growth, even in an inflationary environment first, as a triple net lease. Reit store does not incur property related operating expenses second. We have average annual contractual rent. Escalators of nearly 2% built into our leases, which provides a natural Hedge.

Inflation. Third, we have Flex.

Dancing options and our existing portfolio is financed with well laddered fixed rate debt and no significant maturities until 2024. Finally. We have a strong pipeline of New Opportunities and given our direct approach to Acquisitions. We have the flexibility to structure new lease contracts, based on the current operating environment.

And now, turning to our recent dividend increase on our last earnings call. I mentioned that our board would be evaluating our dividend and that a meaningful increase was likely based on our strong operational performance and positive outlook as expected. In September, our board approved, accordingly dividend increase of two and a half cents per share, which brings our annual dividend to one dollar and 54 cents per share. This represents a six point nine percent increase and is the highest perch.

Your dividend increase in our history as a public company, even with a significant increase, our dividend payout ratio, remains conservative at 74% of a ffca, the quarter before I turn the call over to Craig. As you may have seen S&P recently raised its outlook on store from stable to positive and affirmed their Triple B rating. Their report, underscored the resilience of our portfolio during the pandemic and are healthy operating performance.

Credit metrics and prudent Financial policies. This rating validation is especially significant on the heels of a global pandemic. That stress tested, our portfolio S&P also cited other factors for raising their Outlook including stores, High occupancy and above average, embedded, rent growth. As we have said before, we attribute our outstanding portfolio, performance, during the pandemic to the strength of our customers, who operate in vital, Industries, the size.

And diversity of our portfolio and our portfolio management. Expertise with that. I'll turn the call over to Craig.

Craig. Thank you. Mary. I'll take a few minutes to cover our Acquisitions and portfolio management activities for the third quarter. We originally it 412 million of Acquisitions at a weighted average cap rate of seven point four, four, and a weighted average lease term of 16 years. This elevated level of activity, was from both new and existing customers who selected store for our tailored financing solutions to address their Capital needs.

More than half of our volume, for the quarter was used to facilitate m&a transaction, and the remainder was used for either balance sheet, recapitalizations or growth capital.

Oil in the quarter about 75% of our Acquisitions, were from new customers highlighting, not only pent-up demand, and the broader economy, but also the strong new customer relationships are Acquisitions. Team has been cultivating over the past several years. About a third of our acquisition volume. Each quarter is from existing customers. Therefore, each new customer represents an important source of future growth as we collaborate together to identify new opportunities for repeat.

Our transactions, this quarter reflect our commitment to maintain.

You diverse and granular portfolio spending a wide range of Industries, including restaurants early, childhood education, auto, service, and food manufacturing this quarter. The majority of our Acquisitions were in the service sector consistent with our broader portfolio.

So, now turning to our portfolio.

Maintaining a diverse portfolio is one of the Hallmarks of our business model and position store to deliver consistent and attractive risk-adjusted returns across. All economic Cycles, a quarter end, our overall portfolio, mix with 66% in the service sector 19% in manufacturing. And 15% in service-oriented retail, our portfolio consists of 538 National and Regional customers across

88 properties operating in a hundred, nineteen Industries more than 85 percent. Of the portfolio was comprised of businesses that individually. Represent less than 1% of our annual base rent and interest taken together. Our top 10 customers account for only 19% of Base. Rent interest.

Overall, our customers financial performance remain strong in our portfolio continue to perform. Well, our weighted average unit level fixed charge coverage ratio is 4 point 4 times slightly higher than last quarter. Our occupancy rate remains high at 99.4%

Reflecting greater confidence in their near-term. Outlook many of our customers are focused on growing their businesses. They are seeing m&a opportunities created by valuation, dislocations in their sectors, and are taking advantage of opportunities to expand or vertically integrate our strong relationships with customers. Strengthens through constant communication with them as we review and monitor their financial help. Most recently. Our customers are

Based on the changes in the macroeconomic environment, such as labor, pressures supply, chain, disruptions, and inflation. We are encouraged that they are telling us. They are managing and adapting through these changes successfully. Moving on to our portfolio management activity.

Dispositions are a source of operating cash flow. That can be deployed toward a creative opportunity. And they continue to play an important role in our portfolio management strategy, during the quarter. We sold 25 properties. That had an original cost of about a hundred four million.

This included one property. We sold opportunistically for a fifteen percent gain over a cost which equated to a gross sale cap rate of 6%. The remaining properties were sold. Either strategically, or as part of our ongoing Property Management activities, the remaining 24 dispositions achieved. Net proceeds of 90% of our original cost. I'll now turn the call over to Kathy to discuss our financial results.

Thank you, Craig.

I'll begin by discussing our financial results for the third quarter followed by a review of our Capital markets activity and balance sheet. Then I'll provide our updated guidance for 2021 and I'll introduce our 2020 to guidance. All comparisons are year over year unless otherwise noted beginning with our income statement, third quarter, revenues increased 14% from new year ago quarter to a hundred ninety nine million dollars primarily reflecting the

Portfolio revenue for the third quarter of 2021 includes 1.8 million dollars of lease, termination fees collected in connection with properties. We sold.

Old interest expense increased by 1.3 million dollars from the year-ago quarter reflecting higher average debt outstanding as well as a non-cash charge of approximately 550 thousand dollars for Accelerated amortization of deferred financing costs related to the prepayment of debt in July.

Property costs totaled 4.3 million dollars for the third quarter and 14 point 1 million dollars, a year to date excluding amounts reimbursed. By our tenants property costs, represented about 13 basis points of our average portfolio assets. During the first three quarters of the Year down from 16 basis points for the same period. A year ago, we expect that GNA expenses will rise in some measure.

Investment Portfolio grows however, GNA expenses as a percentage of the portfolio. Will generally decrease somewhat over time due to efficiencies and economies of scale excluding the non-cash stock-based compensation. And the severance expenses recognized last year G & A expenses as a percentage of average portfolio assets were relatively flat quarter-over-quarter at about 43 basis.

Points.

During the third quarter. We recognized an aggregate 3.4 million dollar impairment provision on properties were likely to sell. This amount was more than offset by a ten point seven million dollar gain recognized on property sold during the quarter.

Or third quarter affo on a per share basis. Increased 13% to 52 cents per diluted share from 46 cents a year ago and total a affo increased to a hundred forty million dollars from a hundred and nineteen million dollars. The increase in a of a primarily reflects higher revenue from our real estate portfolio growth.

Now, turning to the balance sheet and our Capital markets activity.

T, we collected eight million dollars of rent receivables during the quarter that were originally deferred under our COVID-19, rent relief program. As of September 30th. We had just 34 million dollars remaining in net COVID-19 receivables. And we continue to expect the vast majority of this to be collected by the end of 2020 to, as scheduled.

Old, we funded our third quarter Acquisitions with cash from operations, borrowings on our revolving credit facility proceeds from dispositions of real estate and proceeds from the sale of equity to our ATM program.

During the quarter, we issue.

Approximately 500,000 shares of common stock, under our ATM program at an average price of $35.98 per share, raising that actually proceeds of 19 million dollars.

Yeah, in July of plan to be prepaid without penalty, 83 million dollars in store Master funding debt. That had a coupon of 5.3% using proceeds, from our June issuance of store, Master funding debt. This latest issuance of Master funding debt. There's a weighted average coupon of 2.8%. So we were able to take advantage of an opportunity to lower our cost of capital with this prepayment.

Our get maturities are intentionally well laddered and we have no significant maturities until 2020 for another series of Master funding notes will be available for prepayment without penalty. Later this month, these notes bear an interest rate of 5.2% giving us another opportunity to further lower our debt costs.

It's with a flexible prepayment Windows, under our Master funding program. We will have the opportunity to prepay additional series during 2022 and in future years.

At September 30th, we had approximately 4 billion dollars of long-term fixed rate debt outstanding with a weighted average interest rate of about 4% and a weighted average maturity in about seven years. Leverage is at the low end of our target range. At five point. Six times. Net debt to ebitda on a run rate basis or around 39 percent on a net debt to portfolio cost basis.

Approximately 63 percent of our gross, real estate portfolio with unencumbered and the ratio of net operating income to interest expense on our unencumbered portfolio remains exceptional at more than seven times.

We closed the quarter with a strong balance sheet. We have ample access to a variety of favorably, price, debt and Equity options to finance. Our growing pipeline of acquisition opportunities at very attractive. Spreads at quarter end. We had 37 million dollars in cash approximately six hundred million dollars available under our ATM program and nearly 500 million dollars of borrowing capacity, available under our revolving credit facility.

Now turning to guidance. We are raising our 20:21 asfo pre-shared guidance from a range of a dollar. Ninety four to a dollar ninety seven to arrange of a dollar. Ninety eight to two dollars. An increase at the midpoint of 8.7% over 20. 20 s AF affo.

Whoa, we're maintaining our 2021 annual real estate, acquisition volume guidance, net of projected property sales at one to 1.2 billion dollars.

based on our

21 Acquisitions activity today. And the overall cap rate compression were seeing in the net lease sector. We expect a weighted average capreit on new acquisitions for the year to be closer to seven and a half percent.

Aunt, finally, I'll turn to our initial guidance for 2022. We currently anticipate 2022. A affo per share to be within a range of $2.15 to two dollars and twenty cents. That represents a nine point three percent increase over 2021 projected results using the guidance midpoint for both years. This a ethical guidance is based on our current projections for net. Real estate acquisitions.

Remainder of 20 21 plus, projected 2022. And your real estate volume that a projected property sales of approximately 1.1 to 1.3 billion dollars before turning the call back to marry. I want to take a minute to thank the many investors and analysts. I've met over the past seven years since door went public.

Excuse awful, questions. And observations, gave me an important perspective of what it takes to drive value for our shareholders.

Well, it's hard to step away from Decades of working side-by-side with many talented colleagues. I can confidently retire knowing that I'm passing, the Baton to Sherry rexrode and experienced results-oriented leader with financial foresight. And a deep understanding of the Reit space. I wish her every success.

Yes, and finally, I want to express my sincere. Thanks to Mary. It has been a great privilege to work with you these past years and helping to build store into the PowerHouse company. It is today and I'm proud to call you both friend and colleague. I'm confident that your strong leadership and vision combined with the talents of Sherry and our outstanding team will lead the next chapter in store capitals success.

With that, I'll turn the call back to Mary. Thank you, Kathy. We are excited about the momentum in our business. Our customers are healthy and growing and so is our pipeline are cap rates. Remain at attractive levels supported by our unique business model. Our cost of capital is low and spreads are wide, allowing us to deliver. Excellent AFF. Oh, growth and returns. So it's a great time to be in the net leased business. Our team remains focused on executing the three.

John growth strategy, I outlined last quarter and we look forward to updating you on our progress, in the coming quarters. Finally. I want to mention that plans are well underway for our sixth annual customer conference, the inside track Forum in February. This much anticipated, event provides an opportunity for us to come together with our customers to network, share ideas and draw inspiration from many success stories. Our customers are valued stakeholders, and our conference is one of the

Ways we thank them for their trust and collaboration. This year. We're excited for the event to be back in person. And with that. I would like to turn the call over for your question. We will now begin the question-and-answer session to ask a question. You may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys and to withdraw your question, please press star then 2 and at this time we'll pause momentarily to assemble our roster.

Andy.

This question will come from, she let me graph. Whatever core is? I please go ahead, I guess, good morning. You mentioned, 16, new customer relationships. I was wondering if you could give us a little bit more detail, on what type of tenants these are and is it the result of adding new acquisition Personnel or perhaps widening, The Funnel of types of tenants that you you would consider.

After.

Manufacturers of specialty medical product or Metal Products. So that's kind of the span of it. It was just read of result of the continued relationships that were cultivating in the pipeline that we're, that we have been building, you know, since beginning of the year and prior. Okay, great. And then a question for Cathy, congratulations, Kathy, and Sherry also, but just one question you mentioned an upgrade from the rating agency.

These deposit. It if you were to get upgraded to a triple B positive or plus, should would, how would that impact financing cost?

Well, first of all, thank you, Sheila. So for financing costs, if you recall on our revolver, there is an investment grade pricing grid. So if you do pop up to Triple B, plus that would pull your rate down a little bit on the revolver. Plus, we are issuing every year, debt in the both, the senior unsecured Market as well as the ABS market and

Is there on the senior unsecured side with? Certainly allow our spreads to come in and lower cost of capital keeps those spreads wide. So even though you may see, you may have seen cap rate compression this quarter being able to lower our cost of capital, you know, maintains the spreads and and we put a chart. In fact, in Our Deck fist quarter on page 10 that talked about

Out how spreads have been able to maintain over all the many years we've been in this business. So, you know, that's, that's kind of what how we think about it.

That's great. Thank you.

What come from Caitlin Burrows. With Goldman Sachs, please? Go ahead.

Ed, congrats, Kathy, and welcome Sherry. Maybe we'll start with Mary earlier. This year. You mentioned the possibility of doing larger deals in the future, but looking at the 21 net Acquisitions guidance and the 22 guide. It looks like the acquisition. Guidance does not assume meaningfully higher volumes next year or maybe even a deceleration. So just wondering if you could discuss your pipeline today. And also whether there's anything different about its composition versus maybe a normal.

Covid time about Caitlyn. So I would say the

Volume for 20 21 this year. I'm the last November. We actually actually came out really with 2019 sort of guidance and that included acceleration throughout the year and we're on track to achieve that we have. I talked a lot about the three-pronged approach and you're specifically probably talking about the portfolio's. Although we've been active in evaluating a couple portfolios is nothing really to report right now. We're not in any hurry. We're going to be selective and we're going to continue to

To to look at things, but you're correct. The 20-22 guidance is not specifically include any portfolio acquisitions.

Okay, got it. And then Kathy mentioned that you have Master funding available to prepay in for Q. So I was just wondering if you were to move forward with prepaying that and or other debt in 22. What do you think? It could be replaced with? Would that be new master funding unsecured. Some of both?

Both could be could be both we we are committed to both markets. So on the master funding side, if you recall we can issue issue. AAA that on that side and the pricing, there is usually quite tight and then in the senior unsecured Market, we are still seeing attractive rate, you know, if we were to issue debt today, you know, on a 10-year basis you could be talking a hundred and twenty-five.

Appoint over the 10-year so still, you know, sub 3 great.

Got it. Thank you.

You do next question will come from Todd Thomas with keybanc capital markets, please go ahead.

Ed. Hi. Thanks. Good morning out there. Kathy best of luck in retirement and congratulations. Sherry first question just about the investment yields and the cap rates that you discuss that came in a little bit. In the quarter at 7.4%. Sounds like you're anticipating that yield to compress a little bit further in the fourth quarter based, on the the full-year, capreit expectation. Is that right?

Can you speak to what we should expect in terms of investment yields? Moving forward in 22 and what's embedded in the guidance?

Todd's. First of all, right, so and I would also encourage you, I would encourage you to look at page 10 in the corporate presentation. We are expecting that.

Although I really, I would say that the consent agenda consensus in the marketplace from our perspective and what we're are the front lines are telling us. Our Frontline is telling us is that, you know, we could be seen the bottom of a cap rate compression right now. The cost of capital is at an all-time low and, you know, more or less. That this is probably the lowest the cat that interest rates would go. That would make sense for most buyers. So we think that, you know, we'll see a little bit more, you're correct, but

But we could be getting towards the bottom Kathy guy that we guided to 754 2021 and will probably be in that range. 20 22 25.

Okay, great. And then

The the, in terms of the guidance for 21 which was revised higher and you know, thinking about 22, so year-to-date a affo you're at a dollar Forty Nine that implies 50 cents in the fourth quarter at the midpoint. So a 2 cent decrease from the third quarter. I realized there was about a half a penny or so of least term fee income realized in the quarter. But can you just provide some detail around the drivers of the sequential decrease before re ramping?

Too, I guess 54 cents per quarter in in 22, it's Kathy. So, fourth quarter, sometimes you have some seasonality and expensive so that could take up a little bit in fourth quarter. So that'd be part of it. Also, fourth quarter volume, is you remember gosh, at your end. Everybody wants to close deals on the left.

You're in. And so, the revenue impact that you have a fourth grader, Acquisitions is generally very small in the fourth quarter. It will provide a lot of boost into 2022, but we won't reap a lot of Revenue. Generally in fourth quarter from fourth quarter Acquisitions, just because your end is when people, you know, sort of look at doing real estate transactions, whether their tax motivated or or, you know, a man a motive,

Dated and so I think that's part of what you're going to see is not having that necessarily big Revenue lift timing wise.

Okay. Alright, that's helpful. Thank you.

Yeah.

The next question will come from Key been Kim with truest. Please. Go ahead.

Ed, thank you, and congratulations. Kathy. Thank you. Just a quick question. You're welcome. So quick question on your fixed charge coverage ratio. I noticed that you got an improvement on the average fixed harsh broadridge ratio, but the median, stay the same. Can you just help me understand? What's driving those two differences?

Are you speaking of the, the weighted average in the median?

Yeah, you're that's right. The median fixed Stars cover four years ago, was flat quarter-over-quarter, but your average increased just I understand what's happening there. Yeah, so the calculation on the media, it's a median. So that pretty much stayed the same when you think about a quarter to quarter. The weighted average is just a function of just our coverages with some larger Investments, pulling that one not up. So,

It's a weighted average.

Right, but I guess what I'm getting to is that was there a certain group of tennis is doing better? That's driving the weighted average higher. But the median being flat.

Right.

So in regards to just the composition or the industries, that might be pulling that up. I mean, it's, you know, our tenants are really in a very good Financial Health, you know, there have strong balance sheets. They've adjusted their operation, you know, so they're reducing expenses, you know, introducing technology and automation. So, you know, overall coverages are improving across the board, you know, so there's always a wide

Aspersion across Industries, you know, movie theaters are continuing to lag but we are seeing a lot of improvement in Industries, like Pet Care, especially medical restaurants. So those are kind of dragging or pulling the coverages.

Okay, and just a question on guide is your 2022 guys was fairly above consensus on numbers and you know, I don't pretend to know but everyone has in their models, but given your commentary about Ned Acquisitions, volume being pretty similar to 2021 and capreit compression. I'm just curious. Like what are the, is it interest expenses that you're assuming that you're going to save some money on or whether are there any other line items that we should just be aware of?

Sure. Yes, that is true. We are going to reap the benefits of lowering, our cost of capital because we were able to do that starting mid-year this year. And so we didn't really get a full Year's worth of the lower interest rates and we're talking quite a bit lower. Right? Because the master funding transactions that were done, many years ago were at greater than 5% interest rates and we've replaced that with interest rates that are set.

So you so, you know that that impact is quite large and you'll get a full year that impact next year, as well as just, you know, earlier this year. We had thought that coming out of the pandemic we would have lift in the second half of the year. And then last quarter, we had talked about seeing the lift a little faster than we expected to, but we're still getting lift in the second half of the Year from tea.

People, for example, who were paying a percentage of their sales will, their sales have increased quite a bit. And so, you're getting higher rent. We were able to move more people off of cash basis accounting. So, you know, whereas last quarter, it was about four percent of our annual eyespace revving engine interest. It's now under two and a half percent, but that are the cash basis group. So you're seeing all of those lifts that we

Expecting happening and that's going to push into 2022 and as well as that all, gives you a growing free. Cash flow after dividends, and remember, with a payout ratio right now to 74 percent, but that will Trend lower as we go along all that excess cash flow is being able to be reinvested in new properties for internal growth. And so you're not having to raise as much acquisitions.

T as you know by having stronger free cash flows, so that provides additional boost to affo. Does that help? Yeah, that's all for. Thank you. And just a quick one here. Are you how much Equity are you swimming in your 22 guidance?

We're.

Same leverage Target. So as a reminder, we do fund a debt to ebitda at five and a half to six times in that range and we're going to continue to do that. But remember a big part of what you do, you know, you're using debt financing and that free cash flow, which is reducing how much Equity you need.

Okay. Thank you.

The next question will come from Ronald kamdem with Morgan Stanley, please go ahead.

Action grass, Kathy and Sherry, appreciate providing the guidance, which is, which is just great transparency. Just just sticking. All that line of questioning. Your mind is. What are you assuming for? What to do? 22 assume for bad debt. May be relative to 2021 and also maybe relative to the to Reco COVID-19. Thanks.

We are pretty much at pre-k COVID-19 levels now. So if you look at Cash Collections and things like that, we're back to pre COVID-19 levels. So we're probably looking at maybe one and a half percent today that were not reporting revenue on people who are in process of being relaxed or things like that and that, you know will probably

We come down some so that show you could think about it that way.

Way. Got it. So one and a half percent of sort of a right ballpark or less. Yeah, or last, got it. And then, you know, the two Switching gears a little bit. Just so, you know, the pipeline, obviously grew, just looking for more color on that. Is that strictly because of the new tenant relationships and adding some of their, some of the opportunities there. Is there any specific sectors or industries that we can call out just any color on the pipeline that that hit?

Thirteen billion this quarter. Thanks. Yeah. Hey, this is Tyler. So, yeah, so generally, I think the pipeline. It's an evolving thing. It's a result of our acquisition team out there, you know, kind of cultivating relationships and all the industries that we address generally, you know, the composition is, you know, consistent with what with what where it's been in terms of an industry composition. There was an uptick in the, in the family entertainment industry in particular.

But overall that, you know, that's consistent with businesses returning the growth to do the business re-openings in pursuing m&a opportunities. So so it's really just, you know, continued, you know, like, you know, businesses back, you know, as Mary mentioned and the in the pipeline is dynamic in our acquisition of teams is always out there cultivating those relationships and fluctuations can be driven by, you know, timing not necessarily indicative of anything anything beyond that, but but it's really just, you know, our teams out there trying to

His rest.

Great, and then last one for me, if I may, and it's a small one, just the equity and income that came in through the quarter. I think you guys have taken equity in a bit and a tenant. Maybe. Can you just remind us of what that is? I came in through the quarter and how we should think about that.

Sure, I believe you're talking about the equity investment that we got last year, wasn't it? So what that is, we have a mortgage outstanding with a tenant and was able to as additional collateral. Basically for that mortgage. We were able to get an equity interest in an affiliate of there's that is in the amusement industry or water parks and things like that.

We valued it last year based on, you know, discounted, cash flows, and things like that. It was about three and a half million dollars of value that we put on our books as an asset were maintaining that now on Equity method accounting at the end of last year. They had some small losses and we picked up our share of those losses. But this year, they are actually ahead of budget and our reporting income and we're picking up our share of

We did see a small amount of cash distribution during the quarter, but was only a couple hundred thousand so we didn't really mention it. But that appears to be doing really well. We do not include that by the way, in affo. That's that's we just subtract that for me.

The next question will come from John. Massocca with Lautenberg, Bauman, please, go ahead. Good morning.

Is going to kind of run in about that 25% of volume or it's our acquisition volume, that it kind of has historically, or could there be some variation from that as we look out at 2022?

It's crappy. So baked into guidance how we think about it is looking at the beginning balance of the portfolio and then assuming anywhere from three to five percent of, that would be the amount. We were disposed of in a year.

We're okay. But so it's not really going to be related to the actual deal volume or just the employees. That's correct. That's correct. And then turns the pipeline, it was kind of notable, you know, obviously there's movement within the pipeline every quarter but entertainment releasing to jump up as a percentage of the pipeline. Can you remind us, you may be what type of assets are in that bucket? And then also just a color as to why it's moved up, is it just the timing of deals hitting is there's more activity.

That industry is any color. There would be helpful.

Taejeong's Mary, I'll just touch on that briefly. So as Tyler mentioned, it's really the result of, you know, coming out of COVID-19 and this in these industries with one in particular that is now looking to grow and do some emanate activities. And it can be things, you know, like adventure parks or, you know, laser tag prices or whirly ball or, you know, other things along that line was family, goes families, go and have a lot of

D. That's really the type of asset classes is in particular one quick one. Sorry that a competitive capreit environment right now.

That's it for me. Thank you all very much.

The next question will come from Linda Tsai with Jeffries, please go ahead. Hi. Congratulations. Do you copy? And then also to you chery in terms of the 8 million rep receivables collected as of September 30th mentioned, you have 34 million remaining and the vast majority will be collected by the end of 2020 to how should we think about the remaining amount coming online? Is it pretty evenly until the end of next year?

Yes, I think if you kind of bake that in, that's probably Fair.

fakes and then you've had success in writing in escalators, 1.8 percent this quarter 1.9% last quarter, how easy or difficult is it to get this from your tenants right now when they're also experiencing, you know, an inflationary environment and wage increases

This is what the market will bear, and asking for those and as it relates to, you know, labor and inflationary prices are a bit on that for for you, which I think you might find interesting as we talk to her. Yeah, so,

You know, the overwhelming sentiment, you know, based on our conversations, with our tenants has, you know, they're managing and adapting in demand actually remains very strong and it's driving businesses across all of our all of our Industries, you know, from a, a labor pressure perspective. I think, you know, everyone is doing more with less, you know, automation is a key capital investment today in the restaurant space. There's a movement obviously for ordering online and to

go pick up your able to do more or less with there.

It's very profitable for a restaurant, you know, reduce menu sizes. So they're, you know, they're managing and adapting from a labor perspective, you know, from specialized labor, you know, our customers are telling us they're tapping employment pipelines early, you know, they're establishing relationships with secondary or trade schools. And, you know, everyone's looking to creating incentive programs to, obviously retain retain labor, you know, from a supply chain for

Active wear their procuring alternative sources, if possible adapting, you know, to more efficient manufacturing processes to, you know, for their current capacity, you know, and you know, for example from from the front from our furniture retailers, we're hearing that their procurement practices or they're switching to procurement practices, you know, that what is shown on the showroom is immediately available instead.

Like taking special orders, so they're, you know, winning businesses by, you know, having less lead time, and then just, you know, from the inflationary to your question. A lot of our customers are able to pass on these inflationary increases to their customers. And actually some of them are realizing they have more pricing power than they actually realized and you know, are ending up very much more profitable in that case. So hopefully that kind of gives you some color on that.

The next question will come from Hindu St. Just with Mizzou. Ho. Please go ahead. Hey, good morning and Kathy. It's been a pleasure best of luck to you and your next adventures and Sherry. Welcome.

so,

My question is, I guess, on recovery rates on the fourth quarter dispositions. Can you talk about what they were and how they compare historically?

So, you know, from the Strategic and property manager and that actually includes some vacants, you know, so now we can actually go and reinvest those funds and and that is well above our historical recovery. And then, as you saw, we need 15 percent over cost on R1 opportunistic sale.

Got it. Okay. Thank you for that on the impairment in the quarter. Lots of talk about cap rate compression. I guess. I'm curious. Why impairments now? And maybe, which tenants or property types. They're tied to thanks Kathy. So the impairments were generally in the restaurant sector and those are properties were likely to sell. So,

So normally, they're not impaired, if you want to spend the time to really let the properties but you, but you have to do the analysis to say, are we better off holding onto the property and barring some cost on property taxes and things like that? Or are we better to sell the property at a slight loss and then reinvest it in a new property and get Revenue right away. And so when you make that analysis on a cake,

Some restaurant properties. You just want you just want to sell.

And so we took the impairments on those.

Does that help?

I appreciate the the comments there. Last one is on the cap. Rate compression story. We've heard all around us in the quarter here from your you and your peers. I guess I was on the impression that was a bit more acute for larger deals and and better credit, I guess. So, I guess I'm curious is that you seeing anyone enter your sandbox? I thought there was a bit more of a insulation from competition given what you guys are doing versus some of your peers.

Yeah, this is Mary and I are you, you're correct. And we I think on larger deals were probably seeing a little bit more compression and we're seeing quite a bit of compression in the manufacturing space. So we're still able to originate, you know, except near seven and a half and we're pleased with that.

At and new competition, I guess that both on the largest guy but also about on the direct side where you normally your bread and butter going directed, the tenant, you know.

Million dollars and we find ourselves in it in a nice place there to continue to grow the portfolio and we don't see as much competition there. That's correct.

The next question will come from. Nate Crossett with berenberg, please go ahead.

Ed? You can morning question on funding sources for 22, you know, maybe you can just remind us the mix that you target for master funding versus unsecured. And then I was just wondering if you've ever priced out preferred equity and what that might look like. The think one of your peers did their first preferred offering this quarter and I was just curious if that was something you've ever considered.

Yeah, it's Kathy. So we haven't done any preferred Equity to date but we do always evaluate any opportunity and strive to get the most flexible and efficient Capital stack that we can. So it's not as though we would rule that out when we're looking at Master funding versus doing a senior unsecured deal. You know, we're committed to both markets. So chances are we would do one of each

In particular because Master funding has the ability to have prepayments without penalty. When you have some more tranches coming up, that are going to be at higher interest rate who will take advantage of that and likely just refinance that with new master funding get at a at a lower price and then fill in the rest of the debt stack with you know, the senior unsecured.

Which has been a very robust Market.

Active rate that helps. Yeah, that's helpful thing. Thank you. And then I just had one on. Maybe you can just remind us on your tolerance of 10 and concentrations. I think you have a new top 10 in this quarter, you know, maybe. Just how do you balance those concentrations versus opportunities with those tenants like lbm or spraying or Cadence?

The next question will come from, Sheila McGrath. Whatever core is. I, please go ahead, I guess, one last one for me, Kathy apologize if you already said this, but on the Deferred COVID-19, like paybacks of 34 million. Can you remind us how that all flow through? Ffca o or a affo next year?

Yes, it does not flow through. So what we did was we were reporting revenue and see whether it was a receivable or in cash. We were recording the revenue. If we didn't think it was collectible. We didn't report the revenue at all. So if we were reporting the revenue, it was in a affo so that is not a boost to affo.

Okay. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Miss. Mary. Feeder wall for any closing remarks, please go ahead.

Ed. 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 at Navy next week. Please feel free to reach out to us if you have any additional questions and have a great day.

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

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