STORE Capital Corp (STOR) Q2 2019 Earnings Call Transcript
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STORE Capital Corp (NYSE: STOR)
Q2 2019 Earnings Call
Aug 1, 2019, 12:00 p.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Lisa Mueller -- Investor Relations
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. In order to maximize participation, while keeping our call to an hour, we will be observing a two-question limit during the Q&A portion of the call. Participants can then 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 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.
Christopher H. Volk -- President, Chief Executive Officer and Director
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 continue to be very active during the second quarter with investment activity of over $360 million, while that 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 on 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 combined this internal growth with external growth that is accretively funded through new share issuances, which for the past two years have been successfully funded through our efficient at the market program. Such equity issuances have enabled us to also 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 among the lowest REIT unencumbered asset leverage profile 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 return 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 spreads to our cost of long-term borrowings and our operating costs as a percentage of assets, which are the four essential variables that enable you to compute expected investment returns.
The weighted average primary lease term 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 to 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 cost, 93% of the multi-units 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 issuance 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.
Mary Fedewa -- Chief Operating Officer and Director
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%, an approximately three quarters 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 seven of our nearly 2400 property locations were vacant and not subject to a lease.
We continue 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, five were opportunistic sales resulting in a 10% net gain over original cost, nine sales were strategic and resulted in an 8% gain over cost and the remaining property sales were from our ongoing property management activities and we were still able to achieve a 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 representing 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.
Catherine Long -- Chief Financial Officer, Executive Vice President and Treasurer
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 30th 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 non-cash 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% from $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 would consider a dividend increase, as we complete our third quarter, given that we've maintained our quarterly dividend at the $0.33 level for four 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 5.6 times 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 30th, 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 are raising the lower end of our AFFO per share guidance to a range of $1.92 to $1.96, up from $1.92 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 maybe 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 a weighted average cap rate on new acquisitions of 7.85% and a target leverage ratio of 5.5 times to 6 times 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.
Christopher H. Volk -- President, Chief Executive Officer and Director
Thank you, Kathy. I'd like to close with a few words about our executive leadership team, before turning the call over to the operator for questions.
Few weeks ago, Andrew Rosivach joined our team from Goldman Sachs, where he led their REIT research efforts. He is 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 at the 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 24th, 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.
Questions and Answers:
Operator
Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Jeremy Metz with BMO.
Jeremy Metz -- BMO Capital Markets -- Analyst
Hey guys. Just going back to the guidance here and just at 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 base of acquisitions you've seen, Mary, you 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 mid-point or even that low end of your guide range?
Mary Fedewa -- Chief Operating Officer and Director
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 there a little bit later. So, that's basically -- basically that's it, it's really timing of things like capital markets activity, sales acquisitions.
Jeremy Metz -- BMO Capital Markets -- Analyst
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? Curious, is there any sort of artificial cap that you put on it? Any thoughts around that.
Catherine Long -- Chief Financial Officer, Executive Vice President and Treasurer
Hey, Jeremy, it's Cathy. This growth is really a lot of it fueled by the new lease accounting, where if we do a sale leaseback transaction with the customer and it contains a purchase option. 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.
Christopher H. Volk -- President, Chief Executive Officer and Director
Don't you love accounting?
Jeremy Metz -- BMO Capital Markets -- Analyst
Absolutely.
Christopher H. Volk -- President, Chief Executive Officer and Director
Share lease [Phonetic] back, and it shows up to the loan. I mean, this is what where we come to it. Right.
Catherine Long -- Chief Financial Officer, Executive Vice President and Treasurer
Right. Well, if you look in our Q, we'll have a section on our investments, where we will detail out some of that information. So, it will be easier to see.
Jeremy Metz -- BMO Capital Markets -- Analyst
All right. Thank you.
Operator
Thank you. And the next question comes from Caitlin Burrows with Goldman Sachs.
Caitlin Burrows -- Goldman Sachs -- Analyst
Hi, good morning, team. Congrats on the new Executive VP team member. So, 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 the more specific expectation of lower acquisition volumes in 2019.
Christopher H. Volk -- President, Chief Executive Officer and Director
So, Caitlin this is Chris, I'll respond to that. Every year when we do our guidance as last year, we tend to -- I mean if you look from the beginning of time, we've always had guidance of that were lower than the prior year's net acquisition number. And part of it is, actually 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 going to flow business like this trying to, and you don't have site 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 toward 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, as in most of our peers. And so you're dealing with not only just the acquisitions pace, but you also dealing with the sales pace. And we can't always even really target the dial-in the sales pace exactly.
So, that tends to be lumpy. We're not dealing with treasury growth 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. It's up to Mary and our sales team and origination team would like to do that. But it's a function of what the businesses out there and we want to make sure that we have room. So, we don't have to overpromise.
Caitlin Burrows -- Goldman Sachs -- Analyst
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?
Christopher H. Volk -- President, Chief Executive Officer and Director
Well, at this point in time, we don't we have to change how we do things. So, we have enough manpower and enough time to be able to look at all the credit write ups and adhere to the same credit and investing 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, what 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 what we are doing $2 billion worth of acquisitions a year, whatever, we might be able to improve the efficiency of that acquisition activity. But we're working on that. It's something that's in our sights for next year and you're after that.
Caitlin Burrows -- Goldman Sachs -- Analyst
Thanks.
Operator
Thank you. And the next question comes from Ki Bin Kim with SunTrust.
Alexei Siniakov -- SunTrust Robinson Humphrey -- Analyst
Good morning. This is a Ki Bin's associate Alexei. One quick question. There were some recent news about a certain Perkins Restaurants operator running into some issues with 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?
Mary Fedewa -- Chief Operating Officer and Director
Hey, 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 the rents, the investment amount is very rational. We've got credit support on top of that and what we know today, as we expect all or maybe nearly all of the stores to remain open.
Alexei Siniakov -- SunTrust Robinson Humphrey -- Analyst
Okay. Can you give some color around the number of stores, or perhaps the percentage of total revenue that they contribute?
Mary Fedewa -- Chief Operating Officer and Director
30 bps.
Christopher H. Volk -- President, Chief Executive Officer and Director
It's 30 basis points and like that.
Mary Fedewa -- Chief Operating Officer and Director
It's very small.
Christopher H. Volk -- President, Chief Executive Officer and Director
It's really scalp, [Phonetic] right. And we don't expect to have any losses from it.
Alexei Siniakov -- SunTrust Robinson Humphrey -- Analyst
Okay, got it. Thank you very much. That's all I had.
Christopher H. Volk -- President, Chief Executive Officer and Director
Before you go.
Alexei Siniakov -- SunTrust Robinson Humphrey -- Analyst
Yeah.
Christopher H. Volk -- President, Chief Executive Officer and Director
I'm going to go back to you. So, you guys produce research in the mornings and Keith [Phonetic] made a point of talking about migration of EDF scores downward a little bit. I thought I would address that. Every quarter we give you tenant expected to fall frequency scores that come off of Moody's, and then we also adjusted for coverages. And really it comes up with the risk STORE Score number that is probably actually overstates risk by the way because our portfolio is better than that's we suggest.
But to make things even better than that, at the end of the -- what page is this number?
Mary Fedewa -- Chief Operating Officer and Director
36.
Christopher H. Volk -- President, Chief Executive Officer and Director
Okay. 36 of our presentation, we give you this we sort of stack it up over three years, you can see what the trends are, because I think one quarter never make the trends. You want to look at stuff, it's over a longer period of time in that. And if you were to look at the page 36, you will see that there is sort of a delta between, where we are on tenant RiskCalc score is today versus, let's say, last year and year before.
So, it suggested that there has been some degradation and some RiskCalc scores. It's not a huge number. By the way, if you look at it in the aggregate, the probability of default very low, but there is some degradation. And almost all of that results from just a handful of tenants. It's not that many tenants and most -- in most cases is because they are growing. And so what happens is, you end up with a company that has a financial statement that during this phase of growth. They just look more levered than they would otherwise.
It's a Moody's is going to do them for that, but on a run rate basis it look 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.
Alexei Siniakov -- SunTrust Robinson Humphrey -- Analyst
Okay. I understood. Thanks a lot for that explanation.
Christopher H. Volk -- President, Chief Executive Officer and Director
Thank you.
Operator
Thank you. And the next question comes from Craig Mailman with KeyBanc Capital Markets.
Craig Mailman -- KeyBanc Capital Markets -- Analyst
Hey, everyone. Question, if I were to just do the net investment activity in the first half of the year, your gross upto like a $1.3 billion or $1.4 billion. I know you said in the second half is going to be more robust on the sales side. I mean should we expect $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? Didn't look 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?
Catherine Long -- Chief Financial Officer, Executive Vice President and Treasurer
Hi, 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 two properties in there. One of them is already sold at the beginning of July. The other one probably sell before the end of August and we made 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 would be the same for Q3 that September would be the heaviest month of the quarter.
So, if you kind of model in little of the second half, it probably make more sense. Yes, the sales activity can be several hundred million dollars.
Craig Mailman -- KeyBanc Capital Markets -- Analyst
And then just bigger picture and 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 do you have today, where do you think you guys could kind of scale investment activity on a reasonable basis versus post investment some of these maybe robo [Phonetic] underwriters, whatever you want to call them.
Christopher H. Volk -- President, Chief Executive Officer and Director
Well, I think that as your hiring acquisitions team will take some one to two years to become really prolific. So, the acquisition people are going to kick in over the next year or two in terms of productivity I think. Beyond that there'll be some variable cost in terms of acquiring salespeople. If you look at our 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 non-cash shareholder comp -- employee equity comp, right. So, you want to get sort of an AFFO number and you want to back out and you also want to back at any tenant reimbursable stuff, which basically inflates, what property expenses would be.
We're doing that our cost to run this company today is 50 basis points, which is down from last year. Last year it was closer to 56 basis points or something like that. So, there's definitely, as we grow this platform, there's some economies of scale, but they're small. And from a shareholder perspective, savings 6 basis points on cost is not really, where the cheese is at. The cheese is really at booking assets that really nice cap rates, having nice lease escalators, having a low dividend payout ratio. I mean these are things that are most essential for driving investor rates return, and these are things where what we've been concentrating a lot of our energy.
Operator
Thank you. And the next question comes from Nate Crossett with Berenberg.
Nate Crossett -- Berenberg -- Analyst
Hey Thanks. I appreciate the comments on Perkins. We've heard some negative chatter about Pizza Hut and Wendy's through NPC International. And I'm wondering if there is any exposure there that you guys have?
Mary Fedewa -- Chief Operating Officer and Director
Yes, right no with Wendy's.
Christopher H. Volk -- President, Chief Executive Officer and Director
I think the Wendy's closure is basically a couple of stores. I mean nothing.
Mary Fedewa -- Chief Operating Officer and Director
It would relatively small as well. Yeah.
Christopher H. Volk -- President, Chief Executive Officer and Director
We just put it in a perspective, overall and this is just true overall. Our coverage ratio at the median after overhead is around 2 to 1. And so, but 2 to 1 doesn't really fully state what the risk is, because a 2 to 1, for example, for early childhood education is much better than 2 to 1 for chain restaurant properties .
So, what you want to do is focus then on tolerable fall off. And so this last quarter, we 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 the movie theater industry or the restaurant industry or casual dining or some sector and they get very deserved by same-store sales trends of negative 2% or negative 5%. For us, we don't necessarily like that, but on the other hand, they got to go down by 30% to 40% before we really get worried about it. Today we have how many Pizza Huts we have?
Mary Fedewa -- Chief Operating Officer and Director
44 basis points.
Christopher H. Volk -- President, Chief Executive Officer and Director
It's 44 basis points.
Mary Fedewa -- Chief Operating Officer and Director
And there is about two-times coverage.
Christopher H. Volk -- President, Chief Executive Officer and Director
It's two-times coverage and that's it 44 basis points of --
Mary Fedewa -- Chief Operating Officer and Director
Rent interest.
Christopher H. Volk -- President, Chief Executive Officer and Director
Rent interest.
Nate Crossett -- Berenberg -- Analyst
Okay, that's helpful. And then maybe you can just comment on the mix between services, retail, manufacturing. I'm curious to know how the waitings move from here. I mean are you trying to gain or lessen exposure anywhere?
Mary Fedewa -- Chief Operating Officer and Director
So, it's been really consistent Nate, and services really our favorite in our primary industry focus. And then if you know, retail we've hank picked, since we started in 2000 and they have heavy, most of our retail heavy service component and nice online presence and stuff, which is an important to us. And then manufacturing, we're just -- we're consistent -- we've been consistent on, we'll probably see that a little bit less than 17%, but you know.
Nate Crossett -- Berenberg -- Analyst
Okay. So, the 19 this quarter, or what were they? The 19 new tenants this quarter what areas were they in?
Mary Fedewa -- Chief Operating Officer and Director
It across asset classes actually. Yeah a plethora from, yeah, yes, service retail.
Nate Crossett -- Berenberg -- Analyst
Okay, that's helpful. Thanks.
Mary Fedewa -- Chief Operating Officer and Director
You're welcome. Thank you.
Operator
Thank you. And the question is from Haendel St. Juste with Mizuho.
Haendel St. Juste -- Mizuho Securities USA -- Analyst
Hey, good morning out there.
Mary Fedewa -- Chief Operating Officer and Director
Good morning Haendel.
Haendel St. Juste -- Mizuho Securities USA -- Analyst
Just a couple of quick one from me. Good morning. I noticed that talking about industry exposure that your auto repair and maintenance exposures, up it's a 50 bps or so from last quarter, now it's number 6 on your list just ahead of family entertainment.
The focus on that, I guess sector seems consistent with the portfolio goals you've outlined. But just curious, maybe you could talk a bit more and what excites you? What in particular you are seeing about that business segment that drive you to it? How we could expect perhaps your exposure there to perhaps -- maybe some color on yields, coverage ratios and the embedded rent bumps in that sub-sector.
Mary Fedewa -- Chief Operating Officer and Director
Yeah, so let me start and Chris can add some color. But in that space, it tends to be we did do some maintenance and repair service shops and we actually added a handful of car washes as well. So, those are kind of primary industries that added to the increase there. We like the space, we've talked a lot about the car wash space and membership programs that they have and it's very much an acquisitive industry right now. So, people are rolling up existing car washes 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'd like that service as well.
Haendel St. Juste -- Mizuho Securities USA -- Analyst
Okay. Can you, or would you be willing to provide any color on the embedded rent bumps or coverage yields specifically or is that something you prefer not to?
Christopher H. Volk -- President, Chief Executive Officer and Director
I would say that the coverage is going to be right in line with the portfolio. So, kind of around 2 to 1 and the rent bumps are going to be the same. So, they're going to be kind of 18, 19.
Mary Fedewa -- Chief Operating Officer and Director
Yeah annual.
Haendel St. Juste -- Mizuho Securities USA -- Analyst
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?
Mary Fedewa -- Chief Operating Officer and Director
It's the same.
Christopher H. Volk -- President, Chief Executive Officer and Director
It's the same I mean right now.
Haendel St. Juste -- Mizuho Securities USA -- Analyst
Okay. Thank you.
Operator
Thank you. And the next question comes from John Massocca with Ladenburg Thalmann.
John Massocca -- Ladenburg Thalmann -- Analsyt
Good morning.
Mary Fedewa -- Chief Operating Officer and Director
Hey John.
Christopher H. Volk -- President, Chief Executive Officer and Director
Hey John.
John Massocca -- Ladenburg Thalmann -- Analsyt
So, your exposure to kind of tenants with, I would say, are customers with over $500 million 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 yea. 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?
Christopher H. Volk -- President, Chief Executive Officer and Director
I would say it's a matter of where the deal flow is. We're not intentionally targeting companies that were $500 million. I mean, our view on this is sort of 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, either sectors that are all dominated by middle market companies for the most part.
They're not -- it's not like they are -- that being a large company offers people any substantial advantages, which I think it's important if you're thinking about what might happen in a recession, well that there's always thought processes. And big companies are going to take over the world and a little companies won't. We are just by the way not true, because in the last recession, the little company if you want people add jobs and the big company lost jobs. But our view is really to go after the market companies, but every now and then we'll come across the larger concerns obviously. And there are customers as well, these are all non-rated 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.
John Massocca -- Ladenburg Thalmann -- Analsyt
Okay. And then on the disposition side, I mean, is there some kind of expected mix between kind of three different buckets. As we look out in the back half of 2019, is it going to be, -- is there a particular amount of like say opportunistic dispositions available to you?
Catherine Long -- Chief Financial Officer, Executive Vice President and Treasurer
I think, John, you're going to see really consistency in what we've done in the past. And in the past we've done roughly, give or take 40% an opportunistic, 4% strategic and then the other 20% on property management, I think we do that fairly consistent.
John Massocca -- Ladenburg Thalmann -- Analsyt
Okay. Thank you very much.
Christopher H. Volk -- President, Chief Executive Officer and Director
Thank you.
Operator
Thank you. And the next question comes from Spenser Allaway with Green Street Advisors.
Christopher H. Volk -- President, Chief Executive Officer and Director
Hey Spenser.
Spenser Allaway -- Green Street Advisors -- Analyst
Last time, you guys mention that there was a lot of money in 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?
Christopher H. Volk -- President, Chief Executive Officer and Director
Our competition is robust in the restaurant space. People actually just love restaurants. They're granular, they're by size.
Catherine Long -- Chief Financial Officer, Executive Vice President and Treasurer
The brands that people know.
Christopher H. Volk -- President, Chief Executive Officer and Director
So, sometimes you just find a cap rates are not really driven by risk, but they are 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 -- our opportunities are. And we can buy the restaurants and having to 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 some blankets [Phonetic]. So, and we founded that restaurants have been harder for us to get the kind of trends, we'd like to have.
Spenser Allaway -- Green Street Advisors -- Analyst
Okay. And then perhaps more broadly speaking, what are the industries would you say that you guys have been running into like the most crowded bidding tense? And in terms of like the competition of competing capital -- has there been any change in the type of competition, you've been running into?
Mary Fedewa -- Chief Operating Officer and Director
Yes, this is Mary. Not really a big change, it's certainly a lot of capital out there and it continues to be. But I would say at a high level manufacturing is still a hot industry class right now, and retail is still out of favor. And I think people are enjoying service too. So, we're seeing that's kind of the same mix we've seen it all year.
Christopher H. Volk -- President, Chief Executive Officer and Director
And especially if they're large portfolio transactions or a teed up, we're seeing a kind of line of people wanting to do the portfolio trends there.
Mary Fedewa -- Chief Operating Officer and Director
Yes. And I just we think comes from the money out there that needs to be put to work and the insatiable like demand for yielder, even some demand for yield at all.
Spenser Allaway -- Green Street Advisors -- Analyst
Right, and that would bode well for your more granular pipeline?
Mary Fedewa -- Chief Operating Officer and Director
Yeah, 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.
Christopher H. Volk -- President, Chief Executive Officer and Director
For the play in the niche you got to have a pretty deep sales cycle.
Mary Fedewa -- Chief Operating Officer and Director
And a systems and (multiple speakers)
Christopher H. Volk -- President, Chief Executive Officer and Director
Yes, we have numbers [Phonetic] and origination interest, and it takes a long time to put that together.
Spenser Allaway -- Green Street Advisors -- Analyst
Excellent. Okay, that's all from me. Thank you.
Christopher H. Volk -- President, Chief Executive Officer and Director
Thank you.
Operator
Thank you. And the next we have a follow-up from Caitlin Burrows with Goldman Sachs.
Caitlin Burrows -- Goldman Sachs -- Analyst
Hi again. 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?
Christopher H. Volk -- President, Chief Executive Officer and Director
So, our key business last quarter it was high. So, it was -- I should say it was half, does it half?
Catherine Long -- Chief Financial Officer, Executive Vice President and Treasurer
Yes, for the quarter it was, but year-to-date it was about yeah 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 we're writing 15 and 20-year leases and adding real value to their businesses. So, they tend to have a plan with us.
Christopher H. Volk -- President, Chief Executive Officer and Director
If you look at the beginning of our quarterly presentation this quarter, we've done a number 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. It's not all -- the same-store sales growth is sort of modest piece of that. So, most of it is due to growth and that will be typical of the kind of customers that we have.
Caitlin Burrows -- Goldman Sachs -- Analyst
Okay, thanks.
Operator
Thank you. And we also have a follow-up from Nate Crossett with Berenberg.
Nate Crossett -- Berenberg -- Analyst
Yes, I just wanted to ask about the dividend. And I appreciate the comments in the prepared remarks. But maybe you can you 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.
Christopher H. Volk -- President, Chief Executive Officer and Director
Well, my personal preference is to have the dividend payout ratio be as low as possible. I mean, it does two things. We want to protect all of our investors. The second thing is that it has the most compounding of return. So, this is the cheapest source of capital and it elevate through returns and it increases our internal growth a lot. So, relative to what it would be otherwise.
But that being said, as you are growing AFFO per share, you can't retained at all. That you are growing, I mean, our year-to-date is 10% growth. So, and that gives us, it's an 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, I mean, our dividend at the same rate of AFFO per share that will be the 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 is 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 hedge on the external growth side. We may lose a edge on that-- it will be modest compared to the impact of the internal growth that we're creating.
Nate Crossett -- Berenberg -- Analyst
Okay, that's helpful. Thanks.
Operator
Thank you. And as there are no more questions, I would like to turn the conference to Christopher Volk, for any closing comments.
Christopher H. Volk -- President, Chief Executive Officer and Director
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 Well Fargo Net Lease REIT Forum, which is going to be held in New York City on September 10th. 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 follow-up for any questions if you might have, I will hop in. So, have a great day.
Operator
[Operator Closing Remarks]
Duration: 46 minutes
Call participants:
Lisa Mueller -- Investor Relations
Christopher H. Volk -- President, Chief Executive Officer and Director
Mary Fedewa -- Chief Operating Officer and Director
Catherine Long -- Chief Financial Officer, Executive Vice President and Treasurer
Jeremy Metz -- BMO Capital Markets -- Analyst
Caitlin Burrows -- Goldman Sachs -- Analyst
Alexei Siniakov -- SunTrust Robinson Humphrey -- Analyst
Craig Mailman -- KeyBanc Capital Markets -- Analyst
Nate Crossett -- Berenberg -- Analyst
Haendel St. Juste -- Mizuho Securities USA -- Analyst
John Massocca -- Ladenburg Thalmann -- Analsyt
Spenser Allaway -- Green Street Advisors -- Analyst
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