STOR (2021 - Q1)

Good day and welcome to the STORE Capital First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Lisa Mueller of Investor Relations. Please go ahead. Lisa Mue

Thank you, operator, and thank you all for joining us today to discuss STORE Capital's first quarter 2021 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 and Results, Quarterly Results. On today's call management will provide prepared remarks and 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 re-enter the queue if you have follow-up questions. Before we begin, I would like to remind you that today's comments will include forward-looking statements under the federal securities laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate or other comparable words and phrases. Statements that are not historical fact, such as statements about our expected acquisition, dispositions or our AFFO per share guidance for 2021 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 Mary Fedewa, Store's Chief Executive Officer. Mary, please go ahead.

Thank you, Lisa. Good morning, everyone and thank you for joining us today. Before discussing our first quarter results, I would like to express how grateful I am for the opportunity to be the CEO of Store. I also want to personally thank Chris Volk for all his encouragement and support over the past 20 years that we have been working together. Fortunately, Chris and I will have the opportunity to continue to collaborate and work closely in his new role as Chairman. I would also like to thank our entire board of directors for their confidence and support. With me today are Cathy Long, our Chief Financial Officer; Craig Barnett, our Executive Vice President of Underwriting and Portfolio Management, and Tyler Maertz, our Executive Vice President of Acquisitions. Many of you have already met Craig and Tyler at our investor days and other meetings. They have both been with Store since our inception and we're also part of prior platform. They will be participating in our earnings calls going forward and you will see more of them and other strong leaders here at Store at upcoming investor and industry conferences and on deal road shows. Turning now to the business at hand. Well, 2020 was an extraordinary year that tested and proved the resiliency of our customers, our team and our business model, we are enthusiastically moving forward and 2021 is off to a very good start. During the quarter we invested $271 million at an attractive weighted average cap rate of 7.8% with annual lease escalations of 1.9%. Consistent with our strategy, first quarter acquisitions were granular and diverse with an average transaction size of $11 million across approximately 20 different industries. We added 11 new customers and closed the quarter with more than 520 customer relationships. We continue to originate long term leases with our weighted average lease term for the quarter at 18 years, and we have virtually no near term lease expirations. Our occupancy continues to be high at 99.6% with only 11 vacant properties at the end of the quarter. As you know our disciplined approach to real estate acquisitions focuses on certain table stakes to ensure superior lease contracts. All of our first quarter investments were made at or below replacement cost and at attractive yields and gross returns of nearly 10% when you add the going and cap rate to our annual lease escalations. This results in continued nice spreads as our debt cost remain at historic lows. We also received master leases on multi unit transactions and unit level financial reporting on all acquisitions in the quarter. Overall, our customers entered the new year in strong financial health and are focused on growing their businesses. Across the board, we are seeing re-energized confidence among our customers and prospects and a growing pipeline of attractive investment opportunities. We have been extremely pleased with how well our business model which was designed with margins of safety has performed to an unprecedented economic shutdown. These margins of safety include a highly diversified and granular portfolio, a disciplined and selective approach to underwriting, close relationships with our customers, a compelling customer value proposition and a strong balance sheet and financing flexibility. As a result, we believe Store is at an important inflection point of opportunity. My top priority is to lead our team and to leverage the platform we have built to continue to scale the company through the next phase of growth and success. Today, Store has a nearly $10 billion real estate portfolio and a team of more than 100 outstanding and talented professionals. Developing our dynamic and industry leading team has been one of the highlights of my career at Store. As we continue to serve our large market of national and regional customers in vital industries and deliver attractive industry leading returns to our shareholders one of my highest priorities as CEO is building the next generation of leaders. I look forward to the opportunity ahead. And now I would like to turn the call over to Craig.

Thank you, Mary. It's great to participate in the call today. I'm going to take a few minutes to provide an update on our portfolio. Since our inception, we have built with purpose a granular and diversified portfolio that today includes 117 industries and 2,600 properties. As of the end of the first quarter a portfolio mix is approximately 64% service industries, 17% experiential retail and 19% manufacturing. More than 75% of our portfolio is comprised of customers who individually account for less than 1% of our base rent and interest and collectively our top 10 customers accounted for just under 18% of base rent and interest. There were no significant shifts to our top 10 customers in the first quarter. Spring Education remained our largest customer counting for just 3% of bas written interest. We continue to actively manage our portfolio. First quarter resulted in robust disposition activity which was driven by pent up demand during COVID. During the quarter, we sold 44 properties which had a total acquisition cost of $141 million. 23 were strategic sales and were breakeven compared with cost. Two of these were opportunistic sales and resulted in a 24% gain over cost. Remaining sales are part of our ongoing property management activities and resulted in a 60% recovery of our original costs. Turning to cash collections, our percent of contractual collections held steady at 93% for the first quarter moving to 95% for the month of April. We're extremely proud of our success in collections and attribute this to several important factors. First, the diversity of our portfolio. As a direct result of our deliberately diversified portfolio only a handful of the 117 industries we serve were highly impacted by COVID and in need of rental agreements. Most of our tenants are in industries that benefited from COVID such as home furnishings, outdoor recreation, RV sales, vet and medical services, and many others were proven to be essential and therefore COVID resistance, such as manufacturing tenants. The benefits of maintaining a diversified portfolio are also evident in our unit level fixed charge coverage ratio, which was 2.2 times at the end of the first quarter, up from 2.1 times last quarter and consistent with pre-COVID levels. Second, our infrastructure and systems together with the collection of tenant corporate and unit level profit and loss statement in constant tenant communications really made a positive difference. Taking altogether this allows us to analyze trends and review credit performance real time and to make the best portfolio management decisions. In a rapidly evolving situation like COVID the benefit of real time information that informs decisions cannot be underestimated. Third, we have strong relationships with our customers and work directly with them to understand the impact of adverse events, such as business shut down on their liquidity profile, operations, and future outlook. During COVID this enabled us to effectively tailor short term deferral arrangements for tenants who needed them, agreements that would work for them, Store and our stakeholders. As of today, none of our properties are mandated to be closed and since there is a direct correlation between our locations to being open and rent collections, we are seeing tailwind in collections. We expect this to continue as restrictions are further lifted and COVID vaccines are completely rolled out. Our customers are telling us they are seeing positive trends in their businesses and are optimistic about 2021. And so are we. I'll now turn the call over to Cathy to discuss our financial results.

Thank you, Craig. I'll discuss our financial results for the first quarter followed by an update on our balance sheet and capital markets activity. Then I'll review our guidance for 2021. Our first quarter revenues of $182 million increased by 2.5% from the year ago quarter, primarily related to the growth in our real estate portfolio. Sequentially, revenue increased $9.4 million from Q4. About 70% of the increase was from net acquisition activity which represented a full quarter’s revenue from Q4 acquisitions and only a small portion from first quarter acquisitions which were back end weighted. The remaining increase in revenues included a mix of recoveries on previously reserved receivables, scheduled rent escalations and higher revenues from COVID impacted leases. During the first quarter net rent deferrals totaled $2 million, down from about $6 million in the fourth quarter. This quarter's deferrals were provided to a limited number of tenants in the few industries that had been slower to reopen; namely theaters, family entertainment and health clubs. At quarter end net COVID rent receivables stood at $43 million. This represents cumulative COVID rent deferrals of approximately $71 million since the beginning of the pandemic, less $16 million in repayments to-date, less reserves of $12 million. Rent deferral repayments began in earnest in the fourth quarter and just over 30% of the tenants who received deferrals have already completely repaid them. Over half of our current receivables are scheduled to be collected by the end of 2021 and we expect about 80% to be collected by the end of 2022. Now turning to expenses. Interest expense increased by just over $130,000 from the year ago quarter, primarily due to our third issuance of senior unsecured public notes last November. The increase was offset by debt paid downs we made with the proceeds from this transaction, which resulted in a reduction of our weighted average interest rate from 4.3% to 4.2%. Property costs for the first quarter decreased $1.3 million year-over-year to $4.7 million. Sequentially, property costs decreased $2.7 million, a big improvement from Q4. Excluding those costs that are reimbursed by our tenants, property costs totaled about 14 basis points of our average gross portfolio as compared to 27 basis points last quarter, and 21 basis points in a year ago quarter. G&A expenses increased from the year ago quarter, primarily due to the timing of expense recognition for long term stock based incentive compensation. Q1 expenses include about $10 million of non-cash compensation expense that was earned on certain performance based stock awards. In the year ago period we do recognize $6.7 million of expense related to awards that were no longer expected to be earned due to the impact of the pandemic. Excluding this volatility, compensation expenses overall G&A expenses were relatively consistent year-over-year. As a percentage of average portfolio assets G&A expense excluding the impact of non-cash equity compensation was 50 basis points which is slightly lower than the 51 basis points a year ago. During the quarter we recognized an aggregate $7.4 million impairment provision, which includes $2 million recognized on our portfolio of loans and financing receivables and an aggregate $5.4 million impairment provision on properties we're likely to sell. AFFO for the first quarter increased to $125 million from $120 million a year ago. On a per diluted share basis, AFFO was $0.47 versus $0.49 a year ago. Sequentially, AFFO per share increased from $0.44 in Q4 to $0.47 in Q1 primarily due to higher revenues from net acquisitions and lower property costs. We declared a first quarter 2021 dividend of $0.36 per share, which we paid on April 15 to shareholders of record on March 31. Our dividend payout ratio has been steadily decreasing as the impacts of the COVID pandemic pass. For the quarter it approximated 77%. We strategically aimed to maintain a conservative payout ratio in order to guard our dividend and add to our robust internal growth. With rents collections of 95% in April, and expectations for continued reductions in tenant rent deferrals we expect our ability to retain internally generated cash to only get better in 2021. Now turning to acquisition activity and our balance sheet. We funded our $270 million at first quarter acquisitions with cash from operations, cash proceeds from asset sales, and proceeds from the sale of equity through our ATM program. Since the majority of acquisitions closed later in the quarter, the full AFFO impacts will be visible beginning in Q2. During the first quarter we used the ATM program to issue about 3.5 million shares of common stock at an average price of $33.32 per share, raising net equity proceeds of $114 million. At March 31, we had approximately $3.7 billion of long term debt, with a weighted average maturity of 6.4 years, and a weighted average interest rate of 4.2%. Our leverage remains at a historically low level of 37% on a net debt to portfolio cost basis. Approximately 64% of our gross real estate portfolio was unencumbered and our ratio of unencumbered NOI to unencumbered interest expense remains exceptional at seven times. We have no significant debt maturities until 2024. And three series of master funding notes will become available for prepayment without penalty during 2021. These notes have a 24 month prepayment window and they bear interest at a weighted average rate of 5.06% giving us an opportunity to continue to reduce debt costs this year. At the end of March, we had approximately $146 million in cash, $670 million available under our ATM program and full access to the $600 million credit facility which also has an $800 million accordion feature. We're well-positioned to find acquisitions in our pipeline. Now turning to guidance. Given our strong pipeline of acquisition opportunities, we're reaffirming the 2021 guidance we announced in February. We remain confident in our ability to achieve the projected acquisition volume of approximately $1 billion to $1.2 billion, which is net of anticipated sales at attractive cap rates. We currently expect 2021 AFFO per share to be in the range of $1.90 to $1.96 based on this projected net acquisition volume. Our AFFO guidance is based on a weighted average cap rate on new acquisitions of 7.7% and a target leverage ratio in the range of 5.5 times to 6 times run rate net debt to EBITDA. Our AFFO per share guidance for 2021 reflects anticipated net income excluding gains or losses on property sales of $0.80 to $0.85 per share, plus $0.97 to $0.98 per share of expected real estate depreciation and amortization, plus approximately $0.13 per share related to items such as straight line rents, equity compensation and deferred financing cost amortization. As always we will continue to reassess guidance as the year progresses. And now I'll turn the call back to Mary.

Thank you, Cathy. Before we open the call up to questions, I'm happy to tell you that we will be issuing our second annual corporate responsibility report in a few weeks. Our dedicated ESG team has been very active in exploring and executing on ways to contribute to a more sustainable environment. We believe that we will make a big contribution to leading the world a better place by living up to the principles of corporate and social responsibility and are committed to building on and creating new initiatives and programs each year. The pandemic highlighted the importance of corporate responsibility and the many benefits of an all stakeholder approach to managing a company. We attribute much of our success and weathering the COVID storm to our direct customer relationships and are focused on partnering closely with all of our stakeholders in both good and challenging time. I want to thank my many colleagues who work incredibly hard on behalf of all of our stakeholders here each and every day for their continued support and commitment. With that, I will turn the call over to the operator for questions.

We will now begin the question and answer session. [Operator Instructions] The first question will come from Frank Lee with BMO. Please go ahead.

Hi, good morning, everyone. Congrats, Mary for promotion.

Thank you Frank.

Yes. Now that you transition to a new role, can you talk about the changes on how you would like to run the company and maybe how involved you'll be on the investment side versus in your previous role?

You bet. Frank happy to address that. So in my new role as CEO, we're going to actually we're going to very much be listen and listening and open to all opportunities. And we actually believe that we're at a really important inflection point right now. We've been building this platform for 10 years now. And as a founder, I've been very involved in every aspect of that. So we're going to continue to stay disciplined and focused on granular, diverse profit center assets. While we continue to scale the platform. By inflection point, what I mean is that we have largely come through a global pandemic and the portfolio's performed really well. And in fact the triple net space has performed really well. So the business model worked. And we believe this will give us a great opportunity to have even greater access to capital to serve this very large marketplace where we are going to continue to get attractive yields and great returns for our shareholders. I'd say in a nutshell, you won't see a lot of changes. I've been here the whole time and building this, but we're at an inflection point where we've been through this pandemic and we think we're going to continue to scale this platform.

Okay, great. And then. This is second quarter in a row where we came disposition activity exceeded 100 million. I know you talked about sales being on the slower side last year. Is this more of you pulling forward some of the plan dispositions from last year? Are you taking a closer look at managing some of your exposures? Thanks.

Yes. Craig is going to help you with that one Frank.

Sure. Yes. So some of it was related to pulling some of the 2020 dispositions into this quarter just due to, are driven by sense of demand from buyers.

The next question will be from Jason [indiscernible] of Wells Fargo.

Yes. You mentioned the two acquisitions in Q1 where back end weighted. Just wondering if you can give us a little more color there for modeling purposes, what portion of those can we assume, what portion that run rate revenue can we assume hit in Q1?

Hi, Jason, this is Cathy. So it was March, heavily March weighted. And I want to say three quarters of it were in March.

Got it. That's helpful. Thank you. And then just if we could touch on your investment pipeline, a little bit, just wondering what sectors you all are maybe seeing more opportunities and more activity in and if you could touch on any changes you might have picked up in the acquisition market whether that's who you're going up against from a competitive standpoint or any changes and lease terms might be creeping up with elevated inflation outlook things like that?

Hi, Jason, this is Tyler and I will touch on that. So first of all, from our pipeline we're really excited about the pipeline that our front end originations team is sourcing. We're seeing a traditional mix in our pipeline of that kind of 60:20:20 in terms of 60%, service, and 20% each of retail and manufacturing, definitely pleased with the velocity of the pipeline which continues to pick up. As you know, probably about a third of our volume is with repeat customers. And we're starting to see pent up M&A activity as our customers begin to execute on their pipeline of opportunities, allowing us to partner with them and expand our relationships. And our team continues to find opportunities with attractive yields. Does that answer your question?

It does. Thank you very much.

The next question comes from Caitlin Burrows of Goldman Sachs. Please go ahead.

Hi, good morning. I guess maybe on the acquisition you maintained the net acquisition guidance of 1.2 billion but once you came in at just about a quarter back. But I know [indiscernible] just wondering if over the course of the rest of the year, the expected acquisition volume could pick up similar to what we've seen in the past.

Hey Caitlin, it's very nice to hear from you. Tyler going to take the front piece of this and I think Cathy will add to that --

Net volume?

Yes.

Yes. Sure. So Caitlin, our acquisitions of $270 million was in line with our average first quarter over our history of Store. As Craig mentioned earlier, we did have an unusually large amount of dispositions in Q1, totaling $141 million. And those were focused on strategic sales, timing which was driven by pent up demand from buyers. We create tailored transactions with our customers and as such, they can be lumpy from a timing standpoint, but the pipeline of new opportunities that the front end is identifying continues to be robust and we're seeing increased velocity amongst both new and existing customers.

Yes, and Caitlin, this is Cathy. Traditionally, Q4 is always the biggest quarter with Q2 being oftentimes either Q2, or Q3 being the second biggest quarter. So I think we're probably going to see that same kind of cadence continue.

Okay, Yes. Got it. And then maybe Cathy you mentioned that debt to portfolio cost I think it was low versus history [indiscernible] EBITDA based this year [Technical Difficulty] 5.5 to 6 times you mentioned. So I guess, is that EBITDA the metric you are looking at you decide how much equity issue in the quarter and do you think that activity could pick up via ATM in the second quarter?

Hi Caitlin, you were breaking up quite a bit there. So I didn't hear the whole question. I know you were talking about leverage. Can you say the question one more time?

Yes. I was just asking in terms of deciding how active with the ATM in the second quarter debt to EBITDA is now you think is more active in the second quarter?

I think we'll stay on our normal cadence. If you look at debt to EBITDA part of that it's 5.8 on a run rate basis. Part of that is related to the stock comp, expense recognition that we had in the quarter that was unusually high. Because though stock comp doesn't affect AFFO it does affect the EBITDA. If you exclude that, sort of catch up adjustment that we made, we're at a 5.5 times funded debt to EBITDA, which is right at the low end of our target. So I think we'll stay on normal cadence if that answers your question.

It does. Thanks for that clarification.

The next question will be from Ki Bin Kim of SunTrust.

Hi, good morning. So I didn't get that for, good morning and congratulations Mary.

Thank you.

[indiscernible] for exchange. Do you just explain why that EBITDA or run rate went from $159 million last quarter to $155 million this quarter?

Yes. So this is Cathy. What we have this year you'll notice there's a swing in G&A expense from quarter-over-quarter. So if you exclude non-cash comp G&A is actually flat to down. So the change that you see there is really due to the timing of expense recognition of these performance based equity awards. If you recall, the year ago quarter, we de-recognized $6.7 million of non-cash expense for awards that weren't expected to be earned due to the impact of the pandemic. And GAAP requires de-recognition based on that probability. And then in Q1, 2021, we reinstated a portion of that expense plus pulling forward the current period accrual again, as would be required by GAAP. Our awards have a significant portion is tied to absolute AFFO growth while most others have plans tied to relative shareholder return. So given the impact of the pandemic on 2020 results, our committee realigned the awards to adjust only that portion that was tied to the absolute AFFO metrics. So that's the change there. If you exclude that from AFFO, I mean from the EBITDA calculation because it was sort of a catch up where you would be back on normal cadence. So going forward run rate, funded debt to EBITDA would be 5.5. Does that help?

Thank you for that. Yes, thank you. So the second question for Mary, is there anything incremental, that we should expect in terms of how you're thinking about what the sweet spot is for the things that you're looking to buy over the long haul?

Ki Bi, we're going to really stick to our granular and diverse portfolio across many asset classes focused on profit center real estate. So we're going to stay there. As I mentioned in the first answer with Frank, I do think that we're at an interesting inflection point here having largely come through this pandemic. And what that means for us is the business model is proven. And as a result, we would, we're expecting to see even greater access to capital and to serve this really large market. So even the triple net space did really well in the pandemic. So we're excited about that. I'm showcasing the team here to-date. So we're going to build in the next generation of leaders which they're here and they're terrific. So you're going to see us really continue to scale this. And I think the pandemic has been a really great test that we've, that the business model has passed.

Okay, thank you.

You are welcome.

The next question is from Harsh Hemnani of Green Street.

Thank you. I was wondering, we've been seeing comments of cap rate compression across the net lease REIT, your addressable market is a little different than all the other net lease REIT. So I'm just wondering if you're seeing the same given the cap rate ticked down a little bit? And can you talk about it from the perspective of both cap rates and then cross yields too?

Cap rate and what was the last part I am sorry Harsh.

The last part was cross yields like including lease bumps like [red pump].

Gross yields, gross returns [indiscernible]. So Tyler is going to talk about cap rates and we can round it out together. You bet.

Sure. Hey there. So yes the triple net base has attracted some attention with the resilience from the pandemic as investors continue to search for yield. And that increased competition has put pressure on cap rates that we've been seeing in the marketplace. And this is why we've guided to 7.7% cap rate this year as compared to the 8.1% last year. And that we definitely serve a very large sector of middle market and larger companies which we estimated consists of roughly 200,000 companies. So it's a huge market. And our front end origination team has seen plenty of opportunities in this granular niche market we're in truly add value to our customers and continue to earn attractive cap rate.

Yes. and I would just add to that, this is Mary that we originate directly with a lot of customers and prospects. And as a result of that our sales team is out there really asking for the cap rate and asking for the escalation. So we're creating our own lease form here and their incentive to do that. So we're going to continue to do that. We tend to compress less than the marketplace. And that's just from a business, a direct origination business model. And the market is very huge. So I decided to keep doing that. But we are seeing pressure on cap rates and competition in this space.

That's good. Thank you.

You are welcome.

The next question is from Sheila McGrath of Evercore ISI.

Yes. Good morning. Cathy, I was wondering if you could clarify again the volatility in G&A. I think the headline numbers why the stock might be a little bit weak today. So it was because of a -- not because of stock price performance but a change in the comp target. Is that what it was driven by?

Where more people have their plans tied to relative shareholder return. So, when the pandemic happens, everyone gets hit, everyone's in the same boat. So well, you just have to worry about relatively are you doing better than the next person. We also have a portion of our plan that it works that way. And that stay just the way it were. But a significant portion of our matrix are absolute AFFO growth. So, and there it is a three year, these are three year plans. So, the committee felt that the 2020 performance should be adjusted for the pandemic on an absolute basis. And so, we're as a year ago we'd be recognize it because that for GAAP it'll require. We did reinstate a portion, I mean not all of the expense but a portion of expense and then brought it up to date. So, you're singing sort of a catch up in Q1, it's not the normal cadence. So, the normal cadence is like $3.5 million to $4.5 million per quarter. And Q1 got a $10 million. So, that's the difference.

Okay, thank you. And then, I think in your prepared remarks where you may have put the buckets of your portfolio into service experiential retail and manufacturing. And I was just wondering if you could let us know the tenants that requested where Lis, where they in the majority in the experiential retail category for COVID release?

I mean, Sheila, it -- actually the tenants that requested may be additional relief. There's not been any real new customers for a long time now, where just in the essential or the essential asset classes that got hit in COVID or the non-essential one side and non-essential asset classes. Yes. If we're looking at who was remaining in Q1 as having deferrals, it was really movie theaters, gyms and family entertainment.

Okay great, thank you.

The next question is from Todd Thomas of KeyBanc Capital Markets.

Hi, thanks. Mary, you talked about being at an inflexion point a number of times. And I'm just curious what additional advantages and scale you're eyeing or what other sources of capital are out there for you to tap. Can you just describe what you're referencing perhaps in a little bit more detail?

Yes. Well hey Todd, nice to hear from you. So, I would say the inflection point of that I mentioned is really having proven the business relative to COVID. So, it comes through a global pandemic and economic a complete economic shutdown. And the business model works and we are seeing a lot of interest in the triple net space and a lot of money coming into the space. These are all spaced well. So, we would expect to be able to tap into that and increase interest and then market 200,000 companies and in 10 years we have 522 customers that we have a long runway. And these are customers that need us where we can actually we can add value and we can actually get continue to get attractive cap rates and great returns. So, we're that's what we're seeing and that's for something, Todd.

Got it. So, it's just an increased opportunity for investments. It's not something sort of strategic or transformative in nature in terms of how you're thinking about the business necessarily go forward relative to how you've been conducting there. Okay.

You got it, you got. I mean, as I mention we're already open and then we're here in the Midwest mean and well know let's then be open but yes you're correct.

Okay. And then, just or in terms of the last question I guess in some of the comments around collections. Do you have line of sight into collections improving further around the timing for theaters or fitness centers or restaurants to begin paying rent that might be lagging today?

Yes, Chris can give you a little color on the improvement from the 95 and even also give you a little color on movie theatre, those industries you just mentioned were.

And so yes, we're extremely pleased with collections reaching 95 in April. And as we strive to get to a 100, obviously the delta between that is we've got COVID related deferral arrangements that are going to fall off. And then, as the highly impacted businesses returning to normal capacity. Now we expect collections to continue to increase.

Okay. Thank you.

The next question is from Ronald Kamdem of Morgan Stanley.

Okay. Congrats, Mary. Just on the couple of quick ones. First on just on the tenant health, I think the commentary suggest that you're feeling a lot better about sort of the tenant health in the portfolio. Maybe could you talk about the 5% of tenant that were on cash basis at the end of the year? Maybe what collections are looking like there and what assumptions do you bake into guidance in terms of collections, half of those tenants. Thanks.

Hi, this is Cathy, I'll take that one. So, if you look at a bucket of people who were cash on our cash basis. It's about flat quarter-over-quarter, maybe just slightly down. And for those tenants, they're currently paying about 2/3rds of their normal rent. That's probably a little quicker than we expected to have, we show in our model for it to kind of ramp up over the year. And 2/3rds is a little higher than we would have expected. So, we're just a bit ahead of where we thought we would be.

Right, helpful. And then, just switching over to acquisition and being in a little bit and sort of the manufacturing. Just sort of curious in terms of sourcing deals in that space, has that gotten it more competitive, are you seeing more people sort of come into this space and is that product type be pretty similar to what all the other sort of net lease industrials are chasing after or how do you think that portfolio that piece of the business is maybe different?

Cathy Long can answer this and then I'll start around with Mary. So, our manufacturing is very consistent with our profit centre asset class. So, all of our manufacturing has a P&L attached to them. There are flavors industrial manufacturing out there that are more logistical or more cost center related and that wouldn’t be a place where we would play with this. Plenty of that as you can imagine with Amazon and other distributions. A lot of distribution going on with online sales and so on. So, for us our manufacturing is very consistent with our portfolio and I would say Tyler's team goes out and the source is like just like the STORE's ever other deal here where we're calling directly on customers and we're working through the broker network as well for a portion of our transactions here. So, same approach for us, use our contract and but it is a profit centre pure focus for us the manufacturing.

Yes, right. And I would just add that just the other part of your question. We've been my earlier comments about the triple net based resilience during the pandemic and actually you're kind of leaving some cap rate pressure that the manufacturing side has been part of that world. That's been kind of consistent across what we're seeing.

Okay. Congrats again, thanks Chris.

Thank you.

The next question comes from Haendel St. Juste of Mizuho.

Hey, good morning out there.

Hi, Haendel, how are you?

And congratulations to you Mary and also to Greg and Tyler. First question, what are the -- well ask about Chris Volk's involvement in STORE going forward. We haven’t heard his voice at all in this call which is a bit odd. Given his involvement since the founding of the company obviously. I'm curious if that's intentional or perhaps more reflective of what the level of engagement we should expect within going forward. And can you offer update on this status of the CFO search. Thank you.

Yes, this is Mary. So, Chris is very much here every day. And Chris had is the really I said he was the Chairman in my remarks, he's actually he's obviously the Executive Chairman and so in the AK and you've seen all of the press releases and he's very much engaged. He's had the key is actually has a -- he's an employee of the company and he's on my team. So, he's actually very much engaged and we're all be working closely with him for sure. And an important part of for our bus of course. And also on CFO search. So, the CFO search is doing really well, as you know we engaged Russell Reynolds and they've been doing a great job of delivering a freight of very qualified candidates. And we feel we're on track for the timing to be around mid-to-late summer as planned. But that being said, Cathy is committed to being here for a very smooth transition and she and she wouldn’t leave us without that. So, we're in good shape there and we're right on plan.

Okay, thanks for that. Can you also update us on where you are with the back serving of the formal Loves boxes and how the perhaps the new rent compare versus prior rents. I guess, the 50% recoveries in 1Q seem kind of low. And so I was curious with the mix of assets in the disposition bucket, was that skewed by the Loves boxes at all. And I'm also curious if the 1Q asset sales helped the overall rent collections. Thanks.

Yes. So Craig, going to will tell you will give you an update on Loves and he'll address the 60% recovery which was not impacted by Loves and it was just a quarter point. So, he'll talk about that. You want to start with that, Craig?

Sure. So, what I can tell you about Loves is we had 19 properties at the beginning of the quarter. They are still in bankruptcy. We are receiving some rent is the locations are being liquidated. We are pending resolutions in all but seven of our location. With a majority of those resolutions will be re-let to large furniture retailers. But and as the remaining seven were marketing those aggressively. The furniture space is doing really well and we really like the core footprint of the Loves location. When they were open, they were trending to Art Van sales and were making money. So, this is not, Loves was not an industry issue and we're pretty optimistic that we're going to have some good resolutions on the site. In regards to the mix on the dispositions, we the quarter was higher than normal. Again it was driven by pent-up demand from buyers. The property sales were across many of our asset classes primarily strategic as we rebalance the portfolio. Casual restaurants work slightly an outsized portion of the mix. But the being in loss over cost is consistent across the three categories of prior quarters. Did that answer your question?

Yes, and that's very helpful. Mary, if I could sneak in a follow-up. I'm just curious of what we talked about the rebalancing the portfolio where it stands today 64% service from teams of experience. So, in the rest manufacturing and the strong demand in the market. So, I'm curious why not take advantage of that a bit here to put more of your imprint on the portfolio perhaps rebalance a bit more quickly more aggressively that you would have otherwise?

And we -- I'm sorry Haendel. You're talking about rebalancing more choices in manufacturing side or what?

No, I'm just curious overall. As you think, as you look at the portfolio that you do now in charge of that, you're running a company. And thinking about this skew a bit and also balancing the demand in the marketplace in the trend that you see in the market. Just curious overall. Is there any inclination or are you thinking or would you be inclined to be a bit more aggressive on dispositions here to put more of our input on the portfolio. Or if it's going to be more of this status quo. And just curious on what you're thinking here done the portfolio balance and the demand you're seeing. Thanks.

Yes. No, today I think we're going to keep doing what we've been doing well over the last 10 years. We address a very important part of the marketplace. It's so underserved the middle market and larger companies they're vital industries. Profits that we're going to stick very close to profit centres and diversity which serve us really well during the pandemic. So, we're going to stick there. But Haendel, we start there and the industry sort of make them sell. So, we were nearly 40% manufacturing in the first quarter of our acquisition. So, then we'll -- it doesn't bump around a little bit in terms of what where the opportunities are and as they come into us. So, but that’s really important to us that we continue to stick to profit centre real-estate, with our table stakes and continue to get our contracts at lease rates that are bumped the marketplace with nice escalations. And so, we can continue to create great shareholder returns. So, that's going to continue to be our focus. It's a really long game and a long runway for us to keep going in that space.

The next question is from John Massocca of Ladenburg Thalmann.

Good morning. And congratulation, Mary.

Hi, thanks John.

So, maybe just talking with the dispositions began a little bit. Obviously and this restaurant made up a big component of the sale. I was just curious as to what about those restaurant properties made in good target for this conditions, just thinking about where we are kind of a new opening cycle and maybe some of the demand that's been out there for your operating lives for casual dining business. Give us some of the stimulus as well just why were those good asset to dispose that at this current point-in-time?

Craig, I'll take that. I mean, we dispositions are part of our monitoring process. They're intended to improve the overall health of the entire portfolio. So, where we collect financial statements that record or when looking if the trends of financials of our properties that we own and the outlook of maybe the markets that they're located in. is it an operator that had construed [indiscernible] side that we might want to reduce exposure to. So, there is many factors that play into it deciding whether we want to dispose of that particular property. And it just so happened that this quarter was heavily weighted or right enough to heavily weight, casual restaurants were a bigger portion of the mix.

Pretty much timing down to. We're -- we like this space.

Understood. And then, looking at kind of pipeline today, it seems like gyms, entertainment and that kind of maybe more experiential assets that still relatively small portion of the pipeline. Is that going to be a long-term decision just gave in some of the uncertainty created by the pandemic or is that just given where kind of deal flow is and in the current moment in time and you're still very interested in those property types? And I guess maybe the follow-up, what's the pricing you're seeing out there on cap rate basis for those types of asset?

Hey John, this is Tyler. So, with regard to the pipeline, I would say generally the pipeline is dynamic. Our acquisition team is buying on prospect maintaining a relationship and identifying opportunities. We serve a wide range of industries and like Mary mentioned earlier, we're pure play and profits being a real-estate and the industries that the opportunities arises and to evolve from there. Though, there's not necessarily the small fluctuations to be driven by kind of timing not really indicative of anything beyond that. But we're definitely optimistic about the overall size and composition of the pipeline. There are really opportunities to execute one. With regard to cap rates, can we go on to this you know sectors the specific every deal we do is unique and that tailored solutions with our customer but kind of sort of the [indiscernible] earlier we're definitely we're out there finding opportunities but we're also seeing some a new composition as I said earlier.

Thanks, very much for that. I appreciate.

The next question is from Nate Crossett of Berenberg.

Hi, congrats Mary.

Thanks, Nate.

A lots been answered already but maybe one on average deal size. How should we maybe expect that to evolve as you guys get larger? I understand the focus and still on granular transactions. But I'm wondering if as the portfolio gets larger, does that make you more flexible in terms of what you can actually look at. And also I had a question on I think it was mentioned that 30% of the pipeline comes from visiting tenants. And I was curious if there was any differences and pricing between existing customer, the new customers.

Well first it's Mary. So hey, Nate. In terms of the granularity and on the -- we're going to stick pretty much of that and we can in this marketplace and in our opportunities that. But I would say we're going to whether we look at everything we're going to be open to everything I mean we're a $10 billion we can do large transactions but we're going to most likely stay pretty granular. And even if we look at the portfolio here and that would tend to be pretty granular at the end of the day when you peel it all back. So, but we are we're definitely going to stick to our mainly for getting there and things will average out but we're going to look at everything too. What I would say in terms of the pipeline, the third of our business.

Yes. I think you're asking about the different things in cap rates and existing customers versus new and say now you know I think it's generally every transaction we do is we can tailor and just specific to the fundamentals of the transaction.

Thank you.

The next question is from Chris Lucas of Capital One.

Good morning, out there. Mary, congratulation.

Thank you, Chris.

Just two quick questions. Well, maybe not so quick but what kind of a deployment cycle and we're seeing the numbers for PE activity is picking up, we've raised a ton of money. We found an announcement this morning that that home was going to be taking private by a PE. And when I think about your business, I'm just curious as to how you think about how PE will impact the businesses that relates to opportunity. Having a more active PE environment, is that a positive for you or negative for you as you think about your transaction opportunity set.

This scenario I'll take and Craig can add a few if I've missed something here but we actually do business with a lot of PE firms. And we find them almost always to be additive. They almost add that. The most always add value to our customers. They are a good exit strategy for customers that are building their business brick by brick and then have PE come in and help them. They've been really, there also been good during COVID in terms of stuffiness and supporting the businesses they've been in. that's what we've seen. And again, we're in the middle market and in larger spaces. And but I would say overall, when we underwrite and our company or even when in and the PE trends evolved and we were looking at all the metrics in terms of ensuring things and over the [indiscernible] and so on. And that's it's a healthy transaction and we're picking our spots. And a really big market place with only 522 customers after 10 years. You can tell we've been really selective. So, we'll pick our stocks but overall that is a very PE's been a really great partner and part of our customers, a good customer for us.

Okay, great. Thank you, for that. And then, I just had a but still a pretty quick question I hope. Stock in seal. Just can you give us an update on where that is and whether or not it was flush through completely through the quarter or some overhang coming into second quarter?

So, this is Craig. They're add a bankruptcy and it's been resolved with all of our properties being retained. We had that coming.

The next question comes from Linda Tsai of Jefferies.

So, and congratulations Mary.

Thank you, Linda.

I just had one quick one. How did [indiscernible] go down a bit in the quarter and how does that trend going forward?

Hi, this is Cathy. We expected property cost to be able to trend back towards normal. If you recall from pre-pandemic days. Normal is sort of ranging between say 8 basis points to 12 basis points of the cost of our portfolio. That's kind of what you see on an annual basis and we're down to 14 basis points. So, we would expect that as the pandemic starts to pass here. That we'll have less than most property cost that we're picking up.

Thanks. That's all I have.

Thanks, Linda.

And the last question will be a follow-up from Sheila McGrath of Evercore ISI.

Yes. I was wondering because your unsecured bonds are over collateralize versus other REITs in terms of the larger unencumbered pool. Could this be an inflexion point where the rating agencies could view more credit for this larger unencumbered pool just given you the more cycle tested managing through the pandemic?

Right. It's Cathy, I'll take that and Mary can add if she wants. But I think with STORE having been public after the great recession, we haven’t really been tested in some people's minds. And I think the pandemic has certainly tested, nobody expected to have to face but the portfolio performed really well. And I think that is going to weigh in on in their thoughts as far as ratings go and things like that. Yes.

I agree with her Sheila, with Cathy and we're definitely working with rating agencies and happy to contact with them all the time. And we're working on that.

Great. Thank you.

Thank you.

And this concludes our question and answer session. I will now like to turn the conference back over to Mary Fedewa for any closing remarks.

Thank you, operator. And thank you all for participating in our call today and for your interest in STORE. In closing, I'd like to just reiterate how excited we are about our outlook for 2021 and the next chapter for STORE. With the COVID impact and managing, we are now at an important inflexion point where we are very well positioned to continue to scale the company. We look forward to leveraging our proven business model and the outstanding team we have to address the huge market opportunity and to deliver attractive returns to our shareholders. We also look forward to seeing many of you at May REIT in June and always, please do not hesitate to reach out if we can answer any additional questions. Have a great day.

Thank you. The conference is now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.