Q2 2022 STORE Capital Corp Earnings Call
Good morning, and welcome to the store capital second quarter 2022 earnings Conference call.
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I'll turn the conference over to Megan Mcgrath Investor relation for store capital. Please go ahead.
Thank you operator, and thank you all for joining us today to discuss store Capital's second quarter 2022 financial results, we issued our earnings release, along with our earnings supplement and quarterly Investor presentation. After the market closed yesterday. These documents are available in the Investor Relations section of our website at IR that store capital.
Dot com under news and results quarterly results.
I'm here today with Mary feed of what President and Chief Executive Officer of store Sherry Rexroad, Chief Financial Officer, Craig Barnett EVP of underwriting and portfolio management, and Tyler Mark E V P of acquisitions.
On today's call management will provide prepared remarks, and then we will open up the call for your questions in order to maximize participation, while keeping our call to one hour we will be observing a two question when it during the Q&A portion of the call.
Participants can then reenter the queue. If you have follow up questions.
Before we begin I would like to remind you that today's comments will include forward looking statements under the federal Securities laws.
Forward looking statements are identified by words, such as will be intend believe expect anticipate or other comparable words and phrases statements.
Statements that are not historical facts, such as statements about our expected acquisitions dispositions or F O per share guidance for 'twenty 'twenty. Two are also forward looking statements our actual financial condition and results of operations may vary materially from these contemplated by such forward looking statements.
Discussion of the factors that could cause our results to differ materially from these forward looking statements are contained in our SEC filings, including our reports on Form 10-K, and Form 10-Q with that I would now like to turn the call over to Mary for you to walk stores Chief Executive Officer Mary. Please go ahead.
Thank you Meghan good morning, everyone welcome and thank you for joining us today.
I'll begin the call with an overview of our second quarter performance and some thoughts on the current market environment Craig.
Craig will provide an update on our portfolio and then Sherry will review our financial results. We will then open the call up to questions.
In the second quarter, we acquired $392 million in profit center real estate, bringing our year to date acquisitions to over $900 million.
Although the transactions we closed this quarter were largely negotiated a few months ago. We are pleased with our success in driving both higher cap rates and higher lease Escalations second quarter cap rates were up 10 basis points to seven 2% from the first quarter and lease Escalations increased from one 8% on first quarter.
<unk> to 2% in the second quarter. In addition from a credit perspective, the acquisitions, we made in the quarter improved our already strong portfolio.
Craig will touch on this in his remarks.
We delivered solid a F F O per share of 58 cents for the quarter, which is a 16% increase year over year.
Our strong performance is the result of our healthy first half acquisition pace the excellent performance of our portfolio and tailwind relating to the recovery from the pandemic. These tail wins include both strong rent deferral repayment and lower than anticipated property costs.
Based on our year to date results, we are raising our <unk> per share guidance to a range of $2 25 to $2.27.
Up from a range of $2 20 to $2.23 at the midpoint. This updated guidance represents greater than 10% growth over 2021 Sherry will discuss guidance in more detail in her remarks.
Now I would like to address how stores unique business model allows us to fund accretive acquisitions and maintain attractive spread to deliver solid risk adjusted returns in this and almost any economic environment.
First the market, we address is large and we have plenty of runway for growth. Therefore, we take it very selective approach to the investments we make second our unique direct origination model makes us a price setter in our market as opposed to a price taker. This is a very important distinction it allows.
As to price new leases every day at cap rates that help us maintain these attractive spreads.
Third the financing flexibility, we built into our model over the past decade positions us to optimize our cost of capital. So we can make accretive acquisitions, we have three sources of long term debt financing.
Our master funding program are investment grade unsecured public debt and our unsecured bank term debt.
This provides us multiple avenues for raising debt capital as market conditions change. In addition, we have access to our ATM facility to Accretively fund acquisitions.
Although we are mindful of the current macroeconomic environment, we are operating in a large and underserved market.
Regardless of external factors, we are confident that there are many strong and prospering businesses that will need and can benefit from the real estate financing solutions. Our unique business model can provide and as we have mentioned in the past, we often see great opportunity in times of market dislocation and stores prepay.
Third capitalize on every opportunity.
Before I turn the call over to Craig I would like to provide some color on the current acquisition market.
As you may have heard from others. The market did experience a pause in the beginning of the second quarter as buyers and sellers adjusted to the rapidly changing economic environment.
Even with this market volatility our team continued to knock on doors speaking with both customers and prospects.
We were in the market evaluating and closing transactions consistently throughout the quarter.
Regarding cap rates, we believe they bought them earlier in the year and we are now experiencing steady upward movement or recent letters of intent have cap rates in the seven 5% to 7.75% range and while we do not fund every letter of intent. This is a good indication that our team of success.
Asphalt negotiating higher cap rates, which we expect to see the benefit of in the second half of the year.
In addition to higher cap rates. We are also successfully driving higher annual lease escalations. Many consistently in that two to two and a half per cent range. Importantly, we are not sacrificing cap rates for rent escalations or vice versa and in most cases, we are seeing upward momentum in both metrics.
Regarding the competitive landscape, we believe that some of the more recent leverage market participants have become less competitive and the alternatives for prospects have become less attractive. This only enhances the opportunity set for store.
Right.
To summarize the store team is doing an outstanding job leveraging our differentiated and proven business model to help our customers and prospects. During these evolving market conditions, our business is resilient and nimble as demonstrated throughout our 11 year history.
Based on our results for the first half of the year, our strong pipeline of new opportunities the performance of our portfolio and our ongoing conversations with customers and prospects I am confident that we can deliver attractive risk adjusted returns to our shareholders in 2022 and beyond now I will turn the call over to Craig to discuss.
The portfolio.
Thank you Mary.
During the second quarter, we acquired 62, new properties and added 11 new customers.
Our new investment activity continued to be granular and diverse with an average deal size of approximately $12 million.
Our second quarter investments span 20 different industries, including car washes and auto service food processing specialty manufacturer, serving various end markets, which reflects our strategy of investing in diverse vital businesses that have sustainable growth profiles.
Repeat business has always been an important source of growth for store and approximately 40% of our second quarter acquisition volume was with existing customers. These customers value their direct relationships with store as well and reliability of execution, we provide which has become especially important in today's financing marketplace.
With our direct origination approach, we continued to create strong lease contracts are second quarter acquisitions had a weighted average four wall unit coverage of 6.2 times, improving our already strong portfolio coverage of 4.7 times.
The acquisitions had a long weighted average lease term of 18 years nearly all multi unit transactions had master leases and we will receive unit level reporting on a 100% of the new assets we acquired.
We sold 13 properties in the second quarter.
Nine were performing properties sold at a cap rate of six 4% that netted $44 million in proceeds yielding a 31% gain over our original investment.
The remaining four were nonperforming properties that were sold as part of our ongoing property management activities.
These sales net of $21 million in proceeds or 92% recovery of our original investment.
Now turning to our portfolio.
At quarter end, our portfolio remained highly diversified with 3012 properties operated by 579 customers across 124 industries.
Our sector mix was consistent with the service sector, representing 64% manufacturing, 21% and service oriented retail 15% of the portfolio.
The granularity of our portfolio is a key component of our strategy and a differentiator for store.
Top 10 customers account for less than 18% of base rent and interest with our largest customer representing less than 3% of base rent and interest.
In addition, 98% of our customers individually represent less than 1% of our base rent and interest.
We are confident that our portfolio will perform throughout various economic cycles for several reasons.
Store has purposely built a diverse and granular portfolio of profit center real estate and vital and essential industries to limit volatility and deliver consistent cash flow.
Through our disciplined credit and real estate underwriting we've handpicked our customers in properties, we enter into long term relationships with our customers. So we underwrite their ability to operate successfully in many economic environments.
Our customers are seasoned regional and national operators. They have been in business for an average of 26 years. So they have already navigated through a variety of market cycles.
We talk to our customers on a regular basis and have insight into their financial performance and the profitability of our properties. Additionally.
Additionally, we leveraged the vast amount of data we have accumulated over the past decade to inform our underwriting and investment decisions and to monitor the real time health of our portfolio.
Our customers are currently in a solid financial position they have stronger balance sheets, lower leverage and more cash available as compared to pre pandemic periods. This means our tenants are better prepared than ever to weather potential volatility ahead and translates into greater margins of safety first store in the fourth.
<unk> of higher corporate and unit level coverages.
We are proud of the portfolio, we have purposely built the goal of delivering consistent attractive risk adjusted returns to our shareholders over time.
We are confident that it will continue to perform as we navigate changing market conditions.
I'll now turn the call over to Sherry.
Thank you Paul.
Today, I will discuss our financial results for the second quarter, including a review of our balance sheet capital markets activity and an update of our 2022 guidance. Please.
Please note that all comparisons are year over year, unless otherwise noted.
Our second quarter revenues increased nearly 17% to $224 million up from 192 million.
This gain was largely driven by strong growth in our real estate portfolio, which totaled $11.4 billion at quarter end up from 10 billion a year ago.
Revenue from that acquisition activity included only a partial contribution from second quarter acquisitions since over half of the almost $400 million of our second quarter volume was closed in June .
It sets us up nicely for continued growth in the second half of the year.
Turning now to expenses intra.
Interest expense increased by $4.2 million, primarily reflecting the additional borrowings we made late last year.
April of this year to support growth in our real estate portfolio.
Actually offset by a lower overall cost of debt.
The weighted average interest rate on our long term debt was just over 3.8% as of June 30 down from four 1% a year ago.
Property costs were $2 $3 million for the second quarter down from $5 2 million.
Excluding amounts reimbursed by our tenants property costs for the 12 months ended June 30 represented about nine basis points of our average portfolio assets down from 16 basis points from the year ago period.
As reflected in these results our portfolio is healthy and property costs have returned to pre pandemic levels.
Second quarter, G&A expenses decreased slightly to $15 $9 million from $16 1 million.
The second quarter on a rolling 12 month basis, G&A expenses, excluding noncash stock based compensation.
44 basis points of average portfolio assets for the period ended June 32022.
This compares to 46 basis points for the same period last year. This reduction in G&A expenses reflects the efficiencies we are gaining as our platform scales.
5.3 million dollar impairment provision we recognized in the second quarter is related to the property suddenly youre likely to sell.
Our strong and healthy portfolio as well as the tailwind as Mary mentioned delivered a S. S. L $164 million up from 136 million in the year ago quarter on a per share basis, and so increased 16% to 58 cents per basic and diluted share.
As compared to 50 cents a year ago.
As you know we declared our second quarter 2022 dividend <unk> 38, and a half cents per share, which we paid on July 15th to shareholders of record on June 30th.
Now turning to our balance sheet and recent capital markets activity.
Funded our second quarter acquisitions with a combination of cash from operations proceeds from both property sales and the issuance of the bank term loans in April as well as the sale of equity through our ATM program.
During the quarter, we issued approximately three 1 million shares of common stock under our ATM program.
Average price of $27.52 per share raising net equity proceeds of $83 million, bringing our year to date proceeds to approximately $250 million.
Average price of $29.38.
Yeah.
We continuously evaluate our funding sources to optimize three main variables one our cost of funds and spreads to pitch our maturity ladder and three financial flexibility for example, whether we can prepay without penalty.
As we discussed on our first quarter earnings call, we entered into $600 million of unsecured variable rate bank term loans in April .
And used interest rate swap agreements to convert the variable rates on this debt and attractive weighted average fixed rate of 3.68%.
We used a portion of the proceeds from this transaction to prepay without penalty $134 million in store Master funding notes that had a coupon of 5% and.
And paid down the outstanding borrowings on our revolving credit facility as well.
We feel good about this unsecured debt transaction it fits nicely into our debt maturity schedule and provides us with liquidity to fund growth.
In addition, the recent term loan agreement allows for us to make additional term loan borrowings, which gives us another flexible option to evaluate as we continue to optimize our capital structure to support profitable growth.
At June 30th we had $4 $7 billion of long term fixed rate debt outstanding with a weighted average maturity of six four years and a weighted average interest rate of just over 3.8%.
Leverage is at the low end of our target range at five seven times net debt to EBITDA on a run rate basis.
Or about 41% on a net debt to portfolio of cost basis.
We closed the quarter with a strong balance sheet and ample access to capital, including $31 million in cash $555 million of immediate borrowing capacity available on our unsecured revolving credit facility as well as plenty of room under our ATM program.
Now turning to guidance.
As Mary said, we are raising our annual <unk> per share guidance based on our strong second quarter results.
Our pipeline of new investment opportunities, the continuing solid performance of our portfolio and efficiencies in our cost as well as tailwind from the pandemic recovery.
We are raising our 2022 <unk> per share guidance to a range of $2.25 to $2.27.
Represents nine 8% to 10, 7% growth over our 2021 peso per share.
Our 2022 acquisition volume guidance.
Net of anticipated sales is unchanged at $1 $3 billion to $1 5 billion.
We expect cap rates for the year to be at the higher end of our guidance range of seven to seven 2%.
With that I will turn the call back to Mary.
Thank you Sherry.
As you know our board regularly reviews, our dividend policy and considers raising it at least annually based on our results.
We have maintained our quarterly dividend at 38, and a half cent for four quarters now.
That along with our historically low dividend payout ratio and our strong <unk> growth you can anticipate that our board will be considering a dividend increase as we complete our third quarter with that we will now open the call to your questions.
We will now begin the question and answer session.
To ask a question like I saw them on the telephone keypad.
If there isn't a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please go starting to at Blizzcon called momentarily to assemble our roster.
Our first question will come from West Golladay with Baird.
Oh go ahead.
Hey, Yeah. Good morning, everyone I have a question on your conversations with tenants Hey, there are they seeing I guess, how would you characterize there theyre feeling maybe a quarter ago or are they concerned about slowdown price pressure or Conversely are they more opportunistic now that they can probably grow faster to take advantage of some maybe weaker.
Sure.
Hey, Ross this is Craig I would say the prevailing sentiment right now continues to be optimism.
I'd say, they characterize the financial outlook for their businesses.
Good or excellent.
They are mindful of the uncertainties around the overall the economy.
But they are still investing in growth and they have confidence.
In the second half of 2022, I mean backlogs are robust.
Demand for services remains high at least supply chain issues have.
Have subsided somewhat.
And you know from an economy standpoint, consumer spending is still healthy we still have a robust labor market and the consumer.
Consumer is still healthy.
We're obviously thoughtful of how that continues to play out.
Okay, and then it sounds like everything is back to normal from a candidate perspective, when we look at that $908 million annual cash rent.
Do we say is that the amount of tender on cash basis accounting still.
Okay Gotcha gotcha, Okay. So cash basis tenants are about one 5% of the portfolio.
We do receive cash payments from them, which brings it down to about 80 basis points.
Our next question will come from Linda Tsai with Jefferies.
You May now go ahead.
Hi.
Terms of the 7.7 to seven 5% cap rates you're seeing.
One is under LOI any color you can share regarding the tenant types of price points, where you're seeing the largest increases.
Yeah.
So Linda this is Mary were actually seen increase in cap rates across all sectors.
It's pretty broad.
Got it and then I know you said that the cap rate guidance. You know you guys would come in at the upper end of that but just given the increases just wondering why you didn't raise the cap rate guidance even more.
So Linda this is Mary again as it relates to guidance you know, we're halfway through the year the portfolio halfway through the year or is that about 713% and we'd look to do better but you know.
Large part of what was closed in the first quarter and the second quarter was negotiated at some of the lowest cap rates out there. So it's just going to take some time for these higher costs to work through the system. So.
So we're going to hope to do better but at this time, it's going to we're going to look towards the higher end.
Yeah.
Our next question will come from Ronald Camden with Morgan Stanley .
You May now go ahead.
Hey, just a quick questions on funding funding costs I think you talked about sort of the different channels, maybe for the rest of the year or how should we think about the equity versus debt mix and what leverage levels you're comfortable letting.
Well I think the balance sheet run two before issuing havent issue more equity.
Hey, Ron its Sherry and disciplined.
You know, we're going to stick to our.
No time tried ratios Ah you know, 40% that 60% equity, which resulted in about a $5 seven we state that the.
And the range for that net debt to EBITDA is five to six.
So our current quarter came in at $5.
Got it and then as you as you sort of think about.
The sort or the other side of that coin is you start to think about the funding plan for the rest of the year are you able to sort of get those dawn through debt issuance alone or do you need more equity how do we think about that balance.
So Rob this is Mary so as we think about as we move forward and think about the rest of the year as Sherry mentioned, we're going to stay within the guidelines and principles that we have here. We did mentioned in the first quarter that we had two thirds of our equity for the year at the midpoint and raised in about 85% of our debt raised for the year.
And so we feel like we're in a good position now we had a really nice issuance of $600 million of term debt come on all of our banks participating in national and great support for store and that gave US a lot of nice dry dry powder to seek to be a little more tactical as we look to optimize cost of capital.
It's your way so again, we're going to stick to the ratios of Sherry talked about but we feel good about being able to fund the rest of the year and in line.
Our next question will come from Todd Thomas with Keybanc Capital markets. You May now go ahead.
Hi, Thanks first question I, just wanted to follow up on the.
The last line.
Your line of questioning around cap rates, I guess just to be clear and in terms of the timing around cap rates just so.
That where there maybe are no surprises or are you expecting the acquisition cap rate to be higher in the third quarter or is the lag on when these deals with higher cap rates that you're talking about that are under LOI close is that more likely to be you know sort of later in the year or even.
In 2023.
So that's married nice to hear from you when do you expect to see some of.
The higher Capex in the second half of this year.
So I would say third fourth quarter.
Okay.
And then in terms of and dispositions moving forward. So the cap rates there in the quarter were lower at six 4%. So you know that a wider spread.
Do you see that spread widening given the the higher cap rates on acquisitions that you're anticipating or or are you expecting you know the disposition cap rates also there is just not not sure in terms of a mixture of what you're buying and selling so curious if you could talk about how that spread might look as the year progresses.
Yeah, you bet dispositions that we're focused really on very strategic dispositions.
So we would expect we might see that six or go up a little bit, but you know in that range would be dispose of properties here from a strategic perspective, we tend to have given the way we originate and the way we actually drive cap rates here, we tend to have embedded gains when.
We book our assets. So we're looking we think we'll be continuing to do that and it might be a little movement in that but probably.
Probably not so much.
Our next question will come from John Masako with Ladenburg Thalmann.
Go ahead.
Yeah.
Good morning.
John Good morning.
So on the investment volume side of things how should we think about.
Cadence between <unk> and <unk> understanding you normally there is some seasonality in <unk>, but could that be maybe more elevated this year versus in years past given some of the buyer seller disconnect that was kind of occurring earlier this year.
Yeah.
So John you're correct, usually the fourth quarter has a little bit of a push.
We will see if it happens again this year.
But it generally does so we're going to as it relates to the pipeline I can have a pilot or add a little color in terms of what we're seeing in terms of deal flow. If that's helpful.
Yes, so for what we're seeing on the front end front on the pipeline continues to be dynamic.
You know it seems to be strong and diverse usually it is a reflection of the.
Splits within our portfolio about 60% service and 20% each on the manufacturing and the service oriented retail side, we're still seeing that and.
So we're happy with what they are the deal flow that our front end team has been able to find them and at the same time continuing to push our increased spreads via both cap rates and escalators.
Okay, and then on the capital market side of things, specifically that I mean, how do the various kind of market do you have access to look today I mean, it seems like at least earlier in this year term debt was favorable but I mean has there.
That dynamic shifted at all or the other to kind of debt raising markets, maybe more attractive than they were last year, just any color on changes there would be helpful.
Okay, well relative to last year, but that markets are off to a more expensive than they were last year relative to last quarter. I think things are similar depending upon what point in time, you know you chose we happy the curve shifts up and then back down with the last.
Fed meeting.
So you know these these.
Shifting constantly but I I think the term loan deal that we did was was well executed and well timed.
I think that market is still open as are you starting to see the IGT market open up but that would certainly be a product of current for treasuries and spreads.
Okay.
Our next question will come from John Kim with BMO.
You May now go ahead.
Hi, everyone. It's Eric on for John just a quick one on the guidance.
Hi, how are you.
So the new <unk> got implies a 55% run rate can you just help us unpack the bridge to ethical given the lift in cap rates and positive pace of acquisitions in the first half and a historically heavier <unk> in terms of acquisitions. It just it seems a tad conservative.
Oh, Hey, John Oh, I'm, sorry, this is Mary.
Yeah, Let me start with a couple of things the portfolio is performing extremely well.
Customers aren't really good shape financially our business model as you know was designed to drive attractive spreads and we're doing that but there's a lot of uncertainty in the market and they were in an environment that we haven't seen in 40 years as it relates to interest rates and inflation. So so we're going to be prudent and we're gonna be conservative just as we always have done in guidance.
And we're going to keep your head down and just continue to execute on the business model and looked out for them.
Alright, Thank you and then.
You kind of help us triangulate the the leverage on acquisitions made in the quarter.
Just just between you know the split between debt.
Equity and maybe cash and dispositions what was kind of the breakout there.
Okay. So let's talk high level, so for the quarter I'm you know we did the debt issuance for the 600 million, we raised about eight $3 million in an equity, but you know we tend to look at this as a longer term basis and we look at it as Terry mentioned the ratios that we're looking at.
So one quarter just doesn't really make a trend what we did in the second quarter. We had that nice 600 million dollar issuance, we were able to pay down the line, we paid down out some outstanding debt on master funding and so net from a net perspective, we didn't really add much to move that but do we did have the dry powder there to fund the acquisitions and then we always have really hell.
The pre tax free cash flow, we have a very low dividend payout ratio as you know, which is at least $15 million a quarter and also a few dispositions. So its sort of shook out that way in the second quarter, but again. This is a long game that comes on the active with acquisitions come on and so on so there is.
In any quarter Youll have maybe have a tiny mismatch, though but hopefully that's helpful. This is again I'm, giving you a bigger picture of how things start to smooth out between those.
Capital sources that you suggested and those are all correct.
Okay.
Our next question will come from Connor Super Skinny with Wehrenberg you May now go ahead.
Hi, there thanks for having me on the call I'm looking forward into Q4, and perhaps early 2023 and consideration of where the forward rate curve is do you expect that the velocity of cap rate drift is such that you would be able to maintain that call. It 350 basis point spread over your cost of debt is eventually you will have to issue more.
So it's a great question, Conor and as though again as I mentioned as we look forward as we look forward from a guidance as we look forward and you know sort of the uncertainty in the marketplace. In these unprecedented times that we're in as it relates to interest rates and inflation and so on we're going to continue to execute.
The business model. So what we do as I mentioned, we're price setters, we're calling directly on customers. We are driving the spread we have access to deal flow and we're going to drive that spread and we we've been able to do that now for 11 years. So we've been in business 44 quarters, and all of those quarters and better.
300 basis point spread or higher.
This is really our business model.
<unk> is designed perfectly for this environment or any environment because of the way, we're controlling our destiny and we're creating a contract. So we have high confidence again and not to mentioned I'd love to I want to add that the market is just huge so we estimate 200000 companies. We've been in business you know 11 years got it understood.
Hundred come companies here. So there you can see that there are customers are companies out there that are going to grow prosper through all through this cycle and many cycles.
And we're going to find them and as we always do and we're going to continue to execute our business model absolutely designed to do that.
Our next question will come from Chris Lucas with capital. One you May now go ahead.
Hey, good.
Good morning, Good morning to you guys listen to me.
Hi.
One quick question and I apologize if you guys talked about this earlier on the call but.
<unk> is the master funding market open at all as a competitive at all and is there ways to manipulate say overcollateralization or whatever to sort of help you with the right issue.
Chris Mary the market is we're hearing that the market is open and you know as you know we have paid awesome tranches. So our master funding is at a lower leverage today than it normally is so we could optimize that I'm, a little bit by relapsing and so on but again it is opened.
Today, and we'll look to optimize the total capital stack and the cost of capital with them with the many options that we have that we're really grateful.
Grateful for.
So I guess, maybe if you could just bank market seems you guys did a good execution on the term loans that seems to be with all the peers are doing still.
And I guess so the bank market is still has a favorite site you were the only ones that have a master funding mechanism to do.
Debt issuance in that market and then you've got the unsecured market.
Is there any way to quantify sort of where where that cost would come out on the on the.
Master funding versus the unsecured market or are they pretty much in tandem.
Yeah.
They've been pretty much in tandem what I'll say is you know a store at the Master Trust that store has has it been in existence.
The entire time that we've been here since 2012, and we also had a trust in prior companies. So store is very much.
A gold plated or whatever you want to say issuer and we're well known in the in the states. We have you know many and our investors that have been a very good supporters of ours in the program. So I would say from the store's perspective that we.
We would have not only access to that market, but you know we have a very a great reputation in that market. So you know if you think about you know the tailoring the suit to store I think you could Taylor at the store.
Nicely, so I'll sort of leave it at that but we are definitely.
Our prime issuer and that in and people really support that.
Our next question will come from Sheila Mcgrath with Evercore you May now go ahead.
I guess good morning, I just wanted to check in on tenant credit health, maybe you could I know inflation is a challenge for many and I'm just wondering how your watch list is tracking at this point.
Okay.
Hi, Sheila this is Craig.
We're really confident in our customer's ability to manage through any potential recessionary environment.
As I mentioned in my prepared remarks stores built.
An extremely diverse portfolio to limit volatility.
And we underwrite or customers' ability to operate in various market cycles.
These are long term leases.
I also mentioned our tenants are actually in a better financial position today, they have stronger balance sheets.
Their unit coverages are higher and really what.
This provides a lot of margins of safety really to weather any slowdown and still pay our rent.
We gain.
Confidence through the fact that we own profit center real estate.
Where our customers derive their profits with high coverages.
Essentially were senior in a company's cap stack.
And we talk to our customers on a regular basis and have insight into their financial performance and our unit profitability.
We are very mindful and thoughtful of.
Current.
Environment.
And looking at industries that have.
Discretionary versus non discretionary spending.
We're underwriting new transactions, where we're stress testing those.
Those individual tenants, we're stress testing our existing portfolio and what we're finding is that there is a lot of capacity to even if there is sales declined some margin compression.
The high coverage is provides a lot of capacity for these customers still pay us Brian .
Thank you very much.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Mary Fedewa for any closing remarks.
Thank you and thank you all for participating in our call today and for your continued support and interest in store, we look forward to seeing some of you at upcoming investor conferences over the next few months and I'd also like to thank our dedicated team for their hard work and their contributions to store or are you simply are the best.
Please feel free to reach out to any of US if you have any questions and make it a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.