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Edited Transcript of STOR earnings conference call or presentation 1-Aug-19 4:00pm GMT

Q2 2019 STORE Capital Corp Earnings Call

SCOTTSDALE Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Store Capital Corp earnings conference call or presentation Thursday, August 1, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Catherine F. Long

STORE Capital Corporation - Executive VP, CFO, Treasurer & Assistant Secretary

* Christopher H. Volk

STORE Capital Corporation - President, CEO & Director

* Lisa Mueller

STORE Capital Corporation - Head of IR

* Mary B. Fedewa

STORE Capital Corporation - Co-Founder, COO & Director

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Conference Call Participants

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* Alexei Siniakov

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Caitlin Burrows

Goldman Sachs Group Inc., Research Division - Research Analyst

* Craig Allen Mailman

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* Haendel Emmanuel St. Juste

Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst

* John James Massocca

Ladenburg Thalmann & Co. Inc., Research Division - Associate

* Nathan Daniel Crossett

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Robert Jeremy Metz

BMO Capital Markets Equity Research - Director & Analyst

* Spenser Bowes Allaway

Green Street Advisors, LLC, Research Division - Analyst of Retail

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Presentation

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Operator [1]

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(technical difficulty)

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Lisa Mueller, STORE Capital Corporation - Head of IR [2]

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Thank you, operator, and thank you all for joining us today to discuss STORE Capital's Second Quarter 2019 Financial Results. This morning, we issued our earnings release and quarterly investor presentation, which includes supplemental information for today's call. These documents are available in the Investor Relations section of our website at ir.storecapital.com under News & Results, Quarterly Results.

I'm here today with Chris Volk, President and Chief Executive Officer of STORE; Mary Fedewa, Chief Operating Officer; and Cathy Long, Chief Financial Officer.

On today's call, management will provide prepared remarks, and then we will open the call up for your questions. (Operator Instructions)

Before we begin, I would like to remind you that today's comments will include forward-looking statements under the federal securities laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate or other comparable words and phrases. Statements that are not historical facts such as statements about our expected acquisitions, dispositions or our AFFO and AFFO per share guidance for 2019 are also forward-looking statements.

Our actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of the factors that could cause our results to differ materially from these forward-looking statements are contained in our SEC filings, including our reports on Form 10-K and 10-Q.

With that, I would now like to turn the call over to Chris Volk. Chris, please go ahead.

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [3]

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Thank you, Lisa. Good morning, everyone, and welcome to STORE Capital's Second Quarter 2019 Earnings Call. With me today are Mary Fedewa, our Chief Operating Officer; and Cathy Long, our Chief Financial Officer.

On the investment front, we continued to be very active during the second quarter with investment activity of over $360 million while adhering to the granularity and diversity that we are known for. Mary will run through the numbers in more detail with you, but we are happy with our ongoing success in penetrating the large market that we address while maintaining our focus on meeting the needs of our existing customers.

Our second quarter demonstrated a continuation of strong corporate performance that we saw in the first quarter with AFFO per share growth for the first half of the year of 10.1%. Our dividend payout ratio for the second quarter fell to 66%, increasing the meaningful portion of our investment activity that is funded through retained cash flow.

We pair that reinvestment with our historic focus of maintaining annual tenant same-store rent contractual growth of nearly 2% to drive the majority of our expected AFFO per share growth. As Cathy will illustrate, we combine this internal growth with external growth that is accretively funded through new share issuances, which, for the past 2 years, have been successfully funded through our efficient aftermarket program.

Such equity issuances have enabled us to often maintain a consistently conservative leverage profile. In this vein, substantially all of our 2019 investments were funded through a combination of newly issued equity, our first quarter public unsecured note issuance and retained operating cash flows.

At the conclusion of the second quarter, our pool of unencumbered assets stood at $5.2 billion or about 63% of our gross investments. Given such performance consistency, STORE has enviable flexibility in our financing options, with our unsecured noteholders having amongst the lowest REIT unencumbered asset leverage profiles that we know of.

Now as I do each quarter, here are some statistics that are relevant to our second quarter investment activity. Our weighted average lease rates during the quarter was just under 7.9%, which is slightly above where we were last quarter. Add in the average contractual lease escalation for the investments made during the quarter of 1.9%, and you get a gross rate of return of just under 10%. With corporate leverage in the area of 40%, our levered investor returns were approximately 13%, with net returns after operating costs in the 12% range.

Our outperforming investor returns from STORE and predecessor public companies have been mostly driven by having favorable property-level rates of return, which is why we take the time to disclose investment yields, contractual annual lease escalators, investment spread to our cost of long-term borrowings and our operating cost as a percentage of assets, which are the 4 essential variables that enable you to compute expected investment returns.

The weighted average primary lease term of our new investments made during the quarter continues to be long at approximately 18 years. The median post-overhead unit-level fixed charge coverage ratio for assets purchased during the quarter was 2.4:1. The median new tenant Moody's RiskCalc rating profile was Ba2. Incorporate the potent contract-level fixed charge coverage ratios and the median new investment contract rating or STORE Score for investments was far more favorable at Baa1.

Our average new investment was made at approximately 71% of replacement costs. 93% of the multiunit net-lease investments made during the quarter were subject to master leases. And all 79 new assets that we acquired during the second quarter are required to deliver us unit-level financial statements, giving us unit-level financial reporting from 98% of the properties within our portfolio. This fact is critical to our ability to evaluate contract seniority and real estate quality as well as to our access to capital, including our inaugural issuances of AAA-rated Master Funding notes that we commenced in October of last year.

And with that, I will turn the call over to Mary.

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [4]

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Thank you, Chris, and good morning, everyone. We had a strong second quarter with $364 million in real estate acquisitions at a weighted average cap rate of 7.9%. This included investments in 36 separate transactions at an average transaction size of just over $10 million. We also successfully created 19 new customer relationships, ending the quarter with more than 450 customers and adding to our extremely granular portfolio of net-lease assets.

Our portfolio remained healthy with an occupancy rate of 99.7%, and approximately 3/4 of our net-lease contracts are rated investment-grade in quality based on our STORE Score methodology. Delinquencies and vacancies remained low due to our strong tenant partnerships and continued active portfolio management. At the end of the second quarter, only 7 of our nearly 2,400 property locations were vacant and not subject to a lease.

We continued to actively manage our portfolio, taking advantage of opportunities to sell properties. During the quarter, we sold 22 properties, which had an acquisition cost of $81 million. We generated net gains over that original cost of approximately $6 million. Of the 22 properties, 5 were opportunistic sales resulting in a 10% net gain over original costs, 9 sales were strategic and resulted in an 8% gain over costs, and the remaining property sales were from our ongoing property management activities and we were still able to achieve 107% recovery on those sales.

Now turning to our portfolio performance highlights. Our portfolio mix at the end of the second quarter remained consistent, with 64% of properties in the service sector, 19% in experiential and service-driven retail with a substantial online presence and the remaining 17% in manufacturing.

Our portfolio remained highly diversified with no single customer representing more than 3% of our annual revenues. Our single largest customer, Art Van, represented just 2.6% of our annualized rents and interest. Our top 10 customers were unchanged from last quarter. At the end of the quarter, revenue realized from the top 10 was under 18% of annualized rents and interest.

As we head into the third quarter, we are excited about the prospects for the rest of 2019. Our acquisition pipeline continues to be robust and diverse. We are excited about the level of compelling investment opportunities we are creating across a variety of industries that will reinforce our strategy for portfolio diversification. Our unique sales engine remains intensely focused on creating demand and delivering real value to our customers.

And now I'll turn the call to Cathy to discuss our financial results.

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Catherine F. Long, STORE Capital Corporation - Executive VP, CFO, Treasurer & Assistant Secretary [5]

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Thank you, Mary. I'll begin by discussing our financial performance for the second quarter of 2019, followed by an update on our capital markets activity and balance sheet, then I'll review our guidance.

Beginning with the income statement, our second quarter revenues increased almost 25% from the year ago quarter to $163.8 million. The annualized base rent and interest generated by our portfolio in place at June 30 increased over 24% to $669 million.

Total expenses for the second quarter increased to $111 million from $89 million last year. Approximately half of that increase can be attributed to higher depreciation and amortization expense related to our larger real estate portfolio.

Interest expense increased to $39.4 million from $31.9 million due primarily to additional long-term debt used to fund property acquisitions. The weighted average interest rate on our long-term debt remained relatively steady at 4.4%.

Property costs increased by $1.3 million year-over-year, of which $1.1 million related to the recent adoption of the new lease accounting standard, which requires us to present items such as impounded property taxes and the ground lease payments our tenants make on our behalf on a gross basis as both rental revenue and property costs. On an annualized basis, excluding this lease accounting gross-up, property costs totaled about 4 basis points of average portfolio assets for the quarter.

G&A expenses for the second quarter were $14 million, up from $11 million a year ago and included about $2 million in severance costs related to the departure of our General Counsel due to health-related reasons. Excluding these severance costs, G&A expenses decreased to 61 basis points of average portfolio assets from 66 basis points a year ago.

Taken together, property costs, excluding the impact of lease accounting gross-ups and our G&A costs net of the severance costs and excluding noncash equity compensation, amount to just 50 basis points on an annualized basis of our average portfolio assets.

We delivered another strong quarter of AFFO and AFFO per share growth. AFFO increased 25% to $114.2 million from $91.1 million a year ago. On a per share basis, AFFO was $0.50 per diluted share, an increase of 11%, and $0.45 per diluted share a year ago.

For the second quarter, we declared a quarterly cash dividend of $0.33 per share, and our dividend payout ratio was low at 66%. Since our IPO in 2014, we've increased our dividends per share by 32% while maintaining a low dividend payout ratio and at the same time reducing leverage. As you know, our Board evaluates our dividend policy at each Board meeting and considers raising it at least annually based on our results. We anticipate that our Board will consider a dividend increase as we complete our third quarter given that we've maintained our quarterly dividend at the $0.33 level for 4 quarters now, while we've grown our AFFO per share and our dividend payout ratio remains among the lowest in the net-lease sector.

Now turning to our capital markets activity and balance sheet. We funded our strong acquisition volume during the quarter with a combination of cash flow from operations, proceeds from property sales, temporary borrowings on our revolving credit facility and equity proceeds from our ATM program. Our ATM program continues to be a particularly effective way to raise equity, and it makes a lot of sense given the flow of our business and the granular size of our transactions. During the second quarter, we sold 4 million shares of common stock under our ATM program at an average price of $34.23 per share, raising net equity proceeds of over $135 million. For the first half of the year, we sold about 9 million shares of common stock under this program at an average price of $33.17 per share, raising net equity proceeds of $294 million.

It's important to note that substantially all our long-term borrowings are fixed rate and our debt maturities are intentionally well laddered. Our median annual debt maturity is currently $287 million. Our free cash flow, which is basically our cash from operations less dividends plus proceeds from property sales, tends to cover the amount of debt maturities coming due in any one year. And we have no meaningful near-term debt maturities.

At quarter end, our leverage ratio was at the low end of our target range at 5.6x net debt to EBITDA on a run rate basis or around 41% on a net debt to portfolio cost basis. Approximately 63% of our gross real estate portfolio was unencumbered at June 30, giving us substantial financing flexibility.

We entered the third quarter with a strong balance sheet, a conservative leverage profile and ample liquidity to fund our acquisition pipeline. Our flexible funding sources include just over $200 million of capacity on our $750 million equity ATM program that we launched last November and over $525 million available under our $600 million credit facility, which also has an $800 million accordion feature.

Now turning to our guidance for 2019. Considering our strong level of acquisition activity in the first half as well as our robust pipeline and positive outlook, we're raising the lower end of our AFFO per share guidance to a range of $1.92 to $1.96, up from $1.90 to $1.96 we first announced last November. This is based on projected net acquisition volume of approximately $1.1 billion for 2019.

As Mary mentioned, we actively monitor our portfolio to manage diversity and maintain the health of our long-term investments, so we expect to sell properties throughout the year. Based on current market opportunities, we believe property sales activity may be higher in the second half of the year than the first half of the year.

Our AFFO per share guidance for 2019 equates to anticipated net income of $0.88 to $0.91 per share, excluding gains or losses on property sales, plus $0.97 to $0.98 per share of expected real estate depreciation and amortization, plus approximately $0.07 per share related to items such as straight-line rents, equity compensation and the amortization of deferred financing costs.

The midpoint of our AFFO guidance is based on the weighted average cap rate on new acquisitions of 7.85% and a target leverage ratio of 5.5 to 6x run rate net debt to EBITDA. AFFO per share in any period is sensitive to both the amount and timing of acquisitions, property dispositions and capital markets activities. Acquisition activity tends to be back-end weighted in each quarter. As we move through the second half of the year, we'll continue to assess our outlook and update guidance as needed.

And now I'll turn the call back to Chris.

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [6]

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And thank you, Cathy. I'd like to close with a few words about our executive leadership team before turning the call over to the operator for questions.

A few weeks ago, Andrew Rosivach joined our team from Goldman Sachs where he led their REIT research efforts. He's assuming the role of Executive Vice President of Underwriting, which is formerly held by Chris Burbach who departed earlier this year to establish a net-lease index and an associated net-lease sector exchange traded fund. I have known Andy and have followed his thoughtful REIT evaluations and research since he covered us as a predecessor company for Credit Suisse back in 2005. And all of us here are delighted to have him join our team.

During the second quarter, we felt the departure of Michael Bennett, our fellow STORE Capital co-founder and General Counsel, who left us in May to concentrate on his battle with cancer, which was diagnosed earlier this year. On June 24, Michael passed away, and his loss has been devastating to us all. I know that many of you on the call knew Michael, and we miss him more than we can say.

And with those comments, I'd like to turn the call over to the operator for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from Jeremy Metz with BMO.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [2]

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Just going back to the guidance here and just the performance in the first half. I mean, Cathy, you mentioned the potential for some higher dispositions here in the second half. But just given the pace of acquisitions you've seen, Mary talked about feeling very good about the opportunities out there, is there anything else lingering out there that could really kind of bring you down to the midpoint or even the low end of your guide range?

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [3]

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A lot of it is timing, Jeremy. Sales can be lumpy. So if the sales are earlier in Q3, then that will tend to drag on AFFO, maybe a little more than it would if they're a little bit later. So that's -- basically, that's it. It's really timing of things like capital markets activities, sales, acquisitions.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [4]

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All right. And then in terms of the loans you originate, the balance grew here quite a bit. I think it's a little over $450 million now, which is, I think, the highest it's been since you've gone public. So how do you think about managing this part of business, Chris? Is there any sort of artificial cap that you put on it? Any thoughts around that?

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Catherine F. Long, STORE Capital Corporation - Executive VP, CFO, Treasurer & Assistant Secretary [5]

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It's Cathy. This growth is really -- a lot of it is fueled by the new lease accounting where if we do a sale leaseback transaction with a customer and it contains our purchase options, it gets accounted for as a financing, just for accounting purposes. In real life, it's a lease, but for accounting purposes, it gets treated as a financing. And when we file our Q tomorrow, you'll see that. And so that's really the big change.

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [6]

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Don't you love accounting?

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [7]

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Absolutely.

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [8]

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Sale leaseback, and it shows up as a loan. I mean this is what we come to, right?

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Catherine F. Long, STORE Capital Corporation - Executive VP, CFO, Treasurer & Assistant Secretary [9]

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Right. We'll have -- if you look at -- in our Q, we'll have a section on our investments where we'll detail out some of that information so it will be easier to see.

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Operator [10]

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And the next question comes from Caitlin Burrows with Goldman Sachs.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [11]

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Congrats on the new Executive VP team member. But moving on, I think you get this question a lot, but recognizing that 2018 net acquisitions were $1.4 billion and guidance for this year is somewhat below that, I guess to what extent is that conservatism and the unknown of being in a flow business versus a more specific expectation of lower acquisition volumes in 2019?

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [12]

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So Caitlin, this is Chris. I'll respond to that. Every year when we do guidance estimates, we tend -- I mean if you look from the beginning of time, we've always had guidance estimates that were lower than the prior year's net acquisition number. And part of it is we're in a flow business and we just don't have the transparency of the acquisition. So we can't see that far ahead. And our average transaction size is roughly $10 million a shot. We're closing a deal every day and a half, and we're in a flow business like this trying to -- and you don't have sight on some large portfolio that we're going to buy or whatnot. And we just don't have a way of really accurately measuring it. You'll see us certainly true that up towards the end of the year.

In the meantime, what's also happening is that we're very active on the sales side as well, and we're more active on the sales side than most of our peers. And so you're dealing with not only just the acquisition space, but you're also dealing with the sales space. And we can't always even really target the -- dial in the sales space exactly. So that tends to be lumpy. We're not dealing with treasury goals here, so it moves around. So we're doing the best we can to triangulate it. Clearly, if you go on the first half of the year on a net basis, we're going to beat the target. If it's up to Mary and our sales team and origination team, we'd like to do that. But it's a function of what are businesses out there, and we want to make sure that we have room so we don't have to overpromise.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [13]

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Got it. That makes sense. And then maybe just as you do grow and become a bigger company, is there anything you're being forced to change about the way your acquisition process works at all? If so, what's changing? And if not, kind of how are you able to keep it up at such a granular basis?

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [14]

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Well, at this point in time, we don't really have to change how we do things. So we have enough manpower and enough time to be able to look at all the credit writeups and adhere to the same credit and investment policy that we have since we started this company. Potentially, as we get bigger, you'll see us change up on some of that. This year, we're spending a lot of time investing in IT infrastructure. Last year, we did some test runs on business intelligence software, and we've been holding that in advance, although we've been sort of beefing it up when we have -- beefing that up. Over time, I think we're going to take that and apply it to more fundamental credit scoring and guidance techniques to make us more consistent in what we do. And if we can do that and we can do it successfully, it may improve the speed or the way in which we do things. So if we were to, let's say, go to a point in time where we're doing $2 billion worth of acquisitions a year, or whatever, we might be able to improve the efficiencies on acquisition activity. But we're working on that. It's something that's in our sights for next year and the year after that.

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Operator [15]

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And the next question comes from Ki Bin Kim with SunTrust.

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Alexei Siniakov, SunTrust Robinson Humphrey, Inc., Research Division - Associate [16]

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This is Ki Bin's associate, Alexei. One quick question. There was some recent news about a certain Perkins restaurant operator running into some issues, the possibility of closing down multiple stores. Do you happen to have any exposure to this specific franchisee or any exposure to Perkins restaurants in general?

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [17]

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This is Mary. We actually -- yes, we do. So I'll give you a little highlight on that operator. So today, they're current on their rent. The investment amount is very rational. We've got credit support on top of that. And what we know today is we expect all or maybe nearly all of the stores to remain open.

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Alexei Siniakov, SunTrust Robinson Humphrey, Inc., Research Division - Associate [18]

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Okay. Can you give some color around the number of stores or perhaps the percentage of total revenue that they contribute?

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [19]

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30 bps.

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [20]

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It's 30 basis points.

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [21]

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30 basis points. It is very small.

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [22]

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It's really small. Right. And we don't expect to have any losses from it. Before you go, I'm going to go back to you. So you guys produce research in the morning, and Ki made a point of talking about a migration of EDF scores downward a little bit. I thought I would address that.

Every quarter, we give you tenant expected default frequency scores that have come off of Moody's, and then we also adjust this for coverages. And really it comes up with a risk -- STORE Score number that is probably actually overstate to risk, by the way, because our portfolio did better than that score would suggest. But to make things even better from that, at the end of the -- what page is this number?

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [23]

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,

36.

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [24]

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Page 36 of our presentation, we give you this -- we sort of stack it up over 3 years so you can see what the trends are because I think any one quarter never makes the trend. So you want to look at stuff that's over a longer period of time than that.

And if you were to look at Page 36, you'll see that there is sort of a delta between where we are on tenant RiskCalc scores today versus, let's say, last year and the year before. So it suggests that there's been some degradation in some RiskCalc scores. It's not a huge number, by the way, if you look at it in the aggregate. The probability of default is very low, but there is some degradation. And almost all of that results from just a handful of tests. It's not -- if that makes sense. And most -- in most cases, it's because they're growing. And so what happens is you end up with a company that has a financial statement that during the state of growth, they just look more levered than they would otherwise. And so Moody's is going to ding them for that. But on a run rate basis, it looked just fine.

So I would say to you that we, overall, are fairly confident that our portfolio, from a credit quality perspective and investment quality perspective, has not deviated at all from last year or the year before that.

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Operator [25]

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And the next question comes from Craig Mailman with KeyBanc Capital Markets.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [26]

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Question. If I were to just do the net investment activity in the first half of the year, you gross up to like $1.3 billion, $1.4 billion. I know you said second half is going to be more robust in the sales side. I mean should we expect a $200 million, $250 million sales number? And where are you guys in the process of marketing those assets? Do you have anything on the contract? It did look like there's a lot held for sale. So just curious, as we think about timing in your flow business, kind of best estimate of where that could kind of come in.

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Catherine F. Long, STORE Capital Corporation - Executive VP, CFO, Treasurer & Assistant Secretary [27]

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It's Cathy, Craig. My best guess would be it would be in the midpoint of the second half when the majority of the sales will happen. Of the things that were held for sale, one of them -- there were 2 properties in there, and one of them is already sold at the beginning of July. The other one probably sell before the end of August. And we may -- a lot of times, end of quarters are heavy in sales activity. For example, for Q2, June was the heavier sales month than any other month in the quarter. And we may anticipate that, that would be the same for Q3, that September would be the heaviest month of the quarter. So if you kind of model in middle of the second half, it probably would make more sense. And yes, the sales activity can be several hundred million dollars.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [28]

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All right. And then just bigger picture, I know you guys are investing in technology. You've added some additional salespeople. You've been able to kind of ramp gross investment activity over the past couple of years. But with the kind of framework and staff that you have today, where do you think you guys could kind of scale investment activity on a reasonable basis versus post investment in some of these maybe robo underwriters, whatever you want to call them?

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [29]

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Well, I think that as you're hiring acquisitions people, it takes them 1 to 2 years to become really prolific. So the acquisition people are going to kick in over the next year or 2 in terms of productivity, I think. Beyond that, there'll be some variable costs in terms of acquiring salespeople. If you look at our just overall cost of running this business, and we tend to sort of look at not just G&A but also property costs, we back out on noncash shareholder comp -- sorry, equity-based comp, right, so you want to get to an AFFO number and you want to back out -- and you also want to back out any tenant reimbursable stuff, which basically inflates what property expenses would be. And if you're doing that, our cost to run this company today is 50 basis points, which is down from last year. Last year was closer to 56 basis points or something like that.

So there's definitely -- as we grow this platform, there are some economies of scale, but they're small. And from a shareholder perspective, saving 6 basis points on cost is not really where the cheese is at. I mean the cheese is really at booking assets at really nice cap rates, having nice lease escalators, having a low dividend payout ratio. I mean these are the things that are most essential to driving investor rates of return, and these are things where we've been concentrating a lot of our energy.

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Operator [30]

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And the next question comes from Nate Crossett with Berenberg.

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [31]

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Appreciate the comments on Perkins. We've heard some negative chatter about Pizza Huts and Wendy's through NPC International, and I'm wondering if there's any exposure there that you guys have.

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [32]

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There is no exposure. It's basically...

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [33]

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Pretty much 0.

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [34]

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A couple of stores, and there's nothing...

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [35]

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It tends to be relatively small as well. Yes.

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [36]

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We just -- to put it in perspective, overall, and this is true overall, our coverage ratio at the median after overhead is around 2:1. And so the 2:1 doesn't really fully state what the risk is because a 2:1, for example, for early childhood education is much better than 2:1 for a chain restaurant property. So what you want to do is focus then on tolerable fall-offs. And so this last quarter, we've spent a lot of time looking at how much our tenants could lose in sales and not pay us. And the number tends to be around 30% to 40%. I mean -- so when analysts look at, let's say, the movie theater industry or the restaurant industry or casual dining or some sector and they get very disserved by same-store sales trend of negative 2% or negative 5%, for us, we don't necessarily like that, but on the other hand, they got to down by 30% to 40% before we really get worried about it. Today, we have -- how many Pizza Huts do we have?

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [37]

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44 basis points of rent interests, and there's about 2x coverage.

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [38]

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It's 2x coverage, and it's 44 basis points of rent interests.

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [39]

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Okay. That's helpful. And then maybe you can just comment on the mix between services, retail and manufacturing. I'm curious to know how the weightings move from here. I mean are you trying to gain or lessen exposure anywhere?

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [40]

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It's been really consistent, Nate, and services really are favorite in our primary industry focus. And then retail, we've handpicked since we started in -- and they have heavy -- most of our retail, heavy service component and nice online presence and stuff, which is important to us. And then manufacturing, we're just -- we've been consistent on, we'll probably see that a little bit less than 17%. But...

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [41]

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The 19 new tenants this quarter, where were they?

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [42]

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Pardon?

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [43]

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The 19 new tenants this quarter, where areas were they in?

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [44]

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Across the asset classes, actually, yes, yes, service, retail.

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Operator [45]

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And the next question is from Haendel St. Juste with Mizuho.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [46]

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Just a couple of quick questions from me. Noticed that -- talking about industry exposure, that your auto repair and maintenance exposure is up, looks like 50 bps or so from last quarter. Now it's #6 on your list of Family Entertainment. The focus on that, I guess, sector seems consistent with the portfolio goals you've used -- you've outlined. But just curious, maybe you can talk a bit more what excites you or what in particular you're seeing about that business segment that drive you to it, how we could expect perhaps your exposure there to perhaps grow and maybe some color on yields, coverage ratios and the embedded ramp-ups in that subsector.

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [47]

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Yes. So let me start, Haendel, and Chris can add some color. But in that space, it tends to be -- we did do some maintenance and repair service jobs. And we actually had a handful of carwashes as well. So those are kind of the primary industries that added to the increase there. We like the space. We've talked a lot about the carwash space and the membership program that they have, and it's very much an acquisitive industry right now, so people are rolling up existing carwashes and so on. And so we're seeing good activity, and we like that space, good performance there. And then the maintenance and repair services, we pick our spots there, but we like that service as well.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [48]

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Okay. Can you or would you be willing to provide any color on the embedded ramp-ups or coverage or yields specifically? Or is that something you prefer not to...

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [49]

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I would say that the coverages are going to be right in line with the portfolio, so kind of around 2:1. And the ramp-ups are going to be same. They're going to be kind of 1:8, 1:9 annually.

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [50]

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Annual.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [51]

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Got it. Got it. And just a quick follow-up on the Perkins CLC. The 30 bps, that was as of 2Q end. Is that the same figure today? Or have you sold any thus far in third quarter?

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [52]

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It's the same.

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [53]

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It's the same, right?

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Operator [54]

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And the next question comes from John Massocca with Ladenburg Thalmann.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [55]

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So your exposure to kind of tenants with, let's say -- or customers with over $500 million of distribution is it went up quarter-over-quarter and it seems like it's kind of grown a little bit over the course of the year. Is that driven by acquisition activity? Or -- and if it is, are these larger tenants becoming a bigger focus in the acquisition pipeline for kind of strategic reasons? Or is it just a matter of where the deal flow is?

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [56]

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I would say it's a matter of where the deal flow is. We're not intentionally targeting companies over $500 million. I mean our view on this, broadly speaking, is if you look at the spaces that we're in, like if you look at every single sector that we're in, these are sectors that are all dominated by middle-market companies for the most part. They're not -- it's not like they're -- being a large company offers people any substantial advantages, which I think is important if you're thinking about what might happen in a recession or whatnot. There's always the thought process on how big companies are going to take over the world and little companies won't, which is, by the way, not true because in the last great recession, the little companies were able to add jobs and the big companies lost jobs.

But our view is really to go after middle-market companies. But every now and then, we come across some larger concerns obviously. And they're our customers as well. These are all a nonrated bank-dependent companies, and so they have the same issues. And it's not a particular target for us to be going strategically after larger businesses.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [57]

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Okay. And then on the disposition side, I mean is there some kind of expected mix between kind of the 3 different buckets as we look out in the back half of 2019? Is there going to be -- is there a particular amount of, let's say, opportunistic dispositions available to you?

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [58]

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I think, John -- it's Mary. I think you're going to see really consistency in what was done in the past. And in the past, we've done roughly, give or take, 40% in opportunistic, 40% strategic, and then the other 20% on property management. I think we will do that fairly consistent.

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Operator [59]

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And the next question comes from Spenser Allaway with Green Street Advisors.

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Spenser Bowes Allaway, Green Street Advisors, LLC, Research Division - Analyst of Retail [60]

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Last time, you guys mentioned that there was a lot of money-chasing restaurant deals. And considering your exposure continues to tick down yet again this quarter, would it be safe to say that competition remains fairly robust in that space?

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [61]

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Competition is robust in the restaurant space. People actually just love restaurants. They're granular. They're bite-size.

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [62]

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They have brands that people know.

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [63]

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So sometimes, you just find the cap rates are not really driven by risk, but they're driven by size. And we tend to be -- people are focusing on risk and returns and are trying to be -- are doing our best to be objective about where our opportunities are. And we could buy the restaurants and have them be accretive to AFFO, but that's not our goal. I mean our goal here is to buy really attractive risk-adjusted properties, not just buy anything because it covers -- here's some blanket. So -- and we found that restaurants have been harder for us to get kind of reflected [in our account].

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Spenser Bowes Allaway, Green Street Advisors, LLC, Research Division - Analyst of Retail [64]

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Okay. And then perhaps more broadly speaking, what other industries would you say that you guys have been running into like the most crowded bidding tends? And in terms of like the competition of competing capitals, has there been any change in the type of competition you've been running into?

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [65]

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Yes. This is Mary. Not really a big change. There's certainly a lot of capital out there and continues to be. But I would say at high level, manufacturing is still a hot industry class right now, and retail still a lot of favor. And I think that people are enjoying service, too. So we're seeing -- that's kind of the same mix we've seen all year.

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [66]

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And especially if they're large portfolio transactions or a [TDUP]. We're seeing a kind of line of people wanting to do the portfolio transaction.

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [67]

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Yes. And that just, we think, comes from the money out there that needs to be put to work and the insatiable like demand for yield or even some demand for yield at all.

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Spenser Bowes Allaway, Green Street Advisors, LLC, Research Division - Analyst of Retail [68]

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Right. And that would bode well for your more granular pipeline.

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [69]

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Yes. We're -- right. Right. We're playing in this nice niche place of $8 million, $9 million, $10 million, and it's a good place to be.

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [70]

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Yes. But to play in the niche, you got to have a pretty deep sales...

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [71]

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Yes. And systems and...

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Catherine F. Long, STORE Capital Corporation - Executive VP, CFO, Treasurer & Assistant Secretary [72]

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Origination interest.

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [73]

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Yes.

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [74]

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Yes, and origination interest, and it takes a long time to put that together.

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Operator [75]

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And the next, we have a follow-up from Caitlin Burrows with Goldman Sachs.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [76]

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Just a quick one, following up on the recent topics. Just given the customers that you did business with in the quarter, what do you think is your potential to do more business with those partners again?

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [77]

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Well, STORE repeat business last quarter was high. So I should say was half. Is that half?

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Mary B. Fedewa, STORE Capital Corporation - Co-Founder, COO & Director [78]

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Yes. For the quarter, it was. But year-to-date, it was about 33% or something like that. So it kind of ebbs and flows a little bit. So I would say the chance is very high, Caitlin, to do more with them. That's -- we tend to target growing customers, long-term partnerships, rewriting 15- and 20-year leases and adding real value to their businesses. So they tend to have a plan with us.

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [79]

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So if you look at the beginning of our early presentation this quarter, we've done a number of in terms of company revenue growth. And the average customer that we have has revenue growth in the neighborhood of 15% annually, which is bigger than most middle-market companies. And most of that is due to expansion and acquisition on their part, if not all. The same-store sales growth is the modest piece of that. So mostly that's due to growth, and that would be typical of the kind of customers that we have.

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Operator [80]

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And we also have a follow-up from Nate Crossett with Berenberg.

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [81]

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I just wanted to ask about the dividend, and I appreciate the comments in the prepared remarks. But maybe you can remind us how you think about the dividend in context with your payout ratio. Is there a certain payout ratio you look to target? I mean any help would be appreciated.

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [82]

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Well, Nate, my personal preference is to have the dividend payout ratio be as low as possible. I mean it does 2 things. One, it protects all of our investors. The second thing is it adds the most compounding of returns. So it's the cheapest source of capital, and it elevates the returns and it increases our internal growth a lot, so -- relative to what it would be otherwise.

But that being said, as you're growing AFFO per share, you can't retain it all. But you see, you're growing, it doesn't mean -- our year-to-date is 10% growth, so -- and that gives us some ample room to be able to raise the dividend, and I hope that we can accomplish that to the extent that we don't raise AFFO per share or dividend the same rate as AFFO per share. That will be a decision the Board makes, and they may make it in order to keep our payout ratio lower. But again, that will pay off to you as an investor over the long term. And as the company gets older, as we get older, you'll find that basically the dividend will start to just mirror what the AFFO growth is. And here, the good news is that the AFFO growth just from internal growth is kind of in the 5% range. And so this is a net-lease REIT that is dominated by internal growth, and it was designed to be dominated by internal growth so that we don't get in a trap where as we get bigger, we start losing a lot of edge on the external growth side. We may lose some edge on that but it'll be modest compared to the impact of the internal growth that we're creating.

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Operator [83]

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And as there are no more questions, I would like to turn the conference to Christopher Volk for any closing comments.

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Christopher H. Volk, STORE Capital Corporation - President, CEO & Director [84]

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Well, I mean, thank you very much for attending our second quarter 2019 earnings call. The next investor presentations that we're going to make will be at the Wells Fargo Net Lease REIT Forum, which is going to be held in New York City on September 10. So if you're interested in seeing us there, let us know. And meanwhile, thank you all for listening, and we're around today and tomorrow for any questions that you may have as a follow-up. And so have a great day.

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Operator [85]

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