STOR (2019 - Q2)

Thank you, Lisa. Good morning, everyone, and welcome to STORE Capital's second quarter 2019 earnings call. With me today are Mary Fedewa, our Chief Operating Officer; and Cathy Long, our Chief Financial Officer. On the investment front, we continued to be very active during the second quarter with investment activity of over $360 million while adhering to the granularity and diversity that we are known for. Mary will run through the numbers in more detail with you. But we are happy with our ongoing success in penetrating the large market that we address while maintaining our focus on meeting the needs of our existing customers. Our second quarter demonstrated a continuation of strong corporate performance that we saw in the first quarter. With AFFO per share growth for the first half of the year up 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 paired 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 internal growth with external growth that is accretively funded through new share issuances which for the past three years have been successfully funded through for efficient aftermarket program. Such equity issuances have enabled us to often maintain a consistently conservative leverage profile. In this vein [ph], substantially all of our 2019 investments were funded 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 3% of our growth investments. Given such performance consistency, STORE has enviable flexibility in our financing options with our unsecured note holders having amongst the lowest REIT unencumbered asset leverage profiles that we know of. Now as I do each quarter here are some statistics that are relevant to our second quarter investment activity. Our weighted average lease rates during the quarter was just under 7.9% which is slightly above what was over the last quarter. Adding the average contractual lease escalation for the investments made 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 will approximate 13% with net returns after operating cost in the 12% range. Our outperforming investor returns in STORE and predecessor public companies have been mostly driven by having favorable property level rates of return which is why we take the time to disclose investment yields, contractual annual lease escalators, investment spread through our cost of long-term borrowings and our operating cost and the percentage of assets which are the four essential variables that enable you to compute expected investment returns. The weighted average primary lease terms or new investments made during the quarter continues to long at approximately 18 years. The median post overhead unit level fixed charge coverage ratio for assets purchased during the quarter was 2.4:1. The median new tenant Moody's risk calculating profile was BA2. Incorporate the important contract level fixed charge coverage ratios and the median new investment contract rating or store score for investment was far more favorable at BAA1. Our average new investment was made at approximately 71% of replacement cost. Ninety three percent of the multi-unit net leased investments made during the quarter were subject to master leases. In all, 79 new assets that we acquired during the second quarter are required to deliver us unit level financial statements giving us unit level financial reporting from 98% of the properties within our portfolio. This fact is critical to our ability to evaluate contract seniority and real estate quality as well as to our access to capital including our inaugural issuances of AAA rated master funding notes that we commenced in October of last year. And with that, I will turn the call over to Mary. Mary Fedew

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 and an average transaction size of just over $10 million. We also successfully created 19 new customer relationship, ending the quarter with more than 450 customers and adding to our extremely granular portfolio of net leased assets. Our portfolio remained healthy with an occupancy rate of 99.7% and approximately three quarters of our net leased contracts are weighted 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, 5 were opportunistic sales resulting in a 10% net gain over original cost. Nine sales were strategic and resulted in an 8% over cost. And the remaining property sales were from our ongoing property management activities. And we were still able to achieve 107% recovery on those sales. Now turning to our portfolio performance highlights; our portfolio mix at the end of the second quarter remained consistent with 64% of properties in the service sector, 19% in experiential and service driven retail with a substantial online presence, and the remaining 17% in manufacturing. Our portfolio remained highly diversified with no single customer representing more than 3% of our annual revenues. Our single largest customer Art Van represented just 2.6% of our annualized rents and interest. Our top ten customers were unchanged from last quarter. At the end of the quarter, revenue realized from the top ten 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 will turn the call to Cathy to discuss our financial results.

Thank you, Mary. I will 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 will 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 rented 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 a 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 impended 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 four 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 council due to health-related reasons. Excluding these severance costs, G&A expenses decreased to 61 basis points at average portfolio assets from 66 basis points a year ago. Taking 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 a $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 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 a 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 cents 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 cents 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 ladder. 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 30, giving us substantial financing flexibility. We entered the third quarter with a strong balance sheet, a conservative leverage profile and ample liquidity to fund our acquisition pipeline. Our flexible funding sources include just over $200 million of capacity on our $750 million equity ATM program that we launched, last November. And over $525 million available under our $600 million credit facility, which also has an $800 million accordion feature. Now turning to our guidance for 2019, considering our strong level of acquisition in the first-half, as well as our robust pipeline and positive outlook, we're raising the lower end of our AFFO per share guidance to a range of $1.92, to $1.96, up from $1.90 to $1.96 we first announced last November. This is based on projected net acquisition volume of approximately $1.1 billion for 2019. As Mary mentioned, we actively monitor our portfolio to manage diversity and maintain the health of our long-term investments. So we expect to sell properties throughout the year. Based on current market opportunities, we believe property sales activity may be higher in the second-half of the year than the first-half of the year. Our AFFO per share guidance for 2019 equates to anticipated net income of $0.88 to $0.91 per share excluding gains or losses on property sales, plus $0.97 to $0.98 per share of expected real estate depreciation and amortization, plus approximately $0.07 per share related to items such as straight line rent, 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 to 6 time 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 backend 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.

And thank you, Cathy. I'd like to close with a few words about our executive leadership team before turning the call over to the operator for questions. Few weeks ago, Andrew Rosivach joined our team, from Goldman Sachs where he led their REIT research efforts. He's assuming the role of Executive Vice President of Underwriting, which was formally held by Chris Burbach who departed earlier this year to net lease index and an associated net lease sector exchange traded fund. I have known Andy and have followed this thoughtful REIT evaluations and research since he covered us at a predecessor company for Credit Suisse, back in 2005. And all of us here are deluged 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 Council, 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.

Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Jeremy Metz with BMO.

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

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

All right. And then in terms of loans you originated, 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 the business? Chris, is there any sort of artificial cap that you put on it, any thoughts around that?

Hey, Jeremy, it's Cathy. This growth is really -- a lot of it is fueled by the new lease accounting, where if we do a sale leaseback transaction with a customer and it contains 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.

Don't you love accounting?

Absolutely.

-- share leaseback and it shows up as a loan. I mean, this is what we've come to right, so…

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

All right. Thank you.

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

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

Caitlin, this is Chris. I'll respond to that. Every year when we do guidance at the end of the year we tend to -- I mean if you look from the beginning of time we've always had guidance estimates that were lower than the prior year's net acquisition number. And part of it is just we're in a flow business, and we just don't have the transparency of the acquisitions, 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 when you're in a flow business like this trying to -- and you don't have sight on some large portfolio that we're going to buy or whatnot, and we just don't have a way of really accurately measuring it, you'll see us true that out towards the end of the year. In the meantime what's also happening is that we're very active on the sales side as well. And we're more active on the sale side than most of our peers. And so you're dealing with not only just the acquisitions pace, but you're also dealing with the sales pace. And we can't always even really target dialing the sales pace exactly. So that has a tendency to be lumpy. We're not dealing with treasury bills 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. I mean it's up to Mary and our sales team and origination team; we'd like to do that. But it's a function of whether the business is out there, and we want to make sure that we have room so we don't have to overpromise.

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 you're 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?

Well, at this point in time we don't really have to change how we do things. So we have enough manpower and enough time to be able to look at all the credit 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 our business intelligence software and we've been holding that at abeyance 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 where we're doing $2 billion worth of acquisitions a year or whatever, not 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 the year after that.

Thanks.

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

Good morning. This is Ki Bin's associate, Alexi [ph]. One quick question, there was some recent new about a certain Perkins Restaurant 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?

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

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

Yes, it is 30 basis points or like that, so it is really small and we don't expect to have any losses from it.

Okay. Got it. Thank you very much. That is all I had.

Before you go, I'm going to go back to you, you guys produced research in the mornings and Keith made a point of talking about a migration of EDF scores downward a little bit. I thought I would address that. Every quarter we give you tenants expected to fall frequency scores come off of Moody's and then we also adjusted for coverages and it really comes up with a risk source for a number that is probably actually overstates the risk by the way because our portfolio does better than that score would suggest, but to make things even better than that, at the end of the what page number?

It is 36.

It is 36 of our presentation, we give you this we first stack it up over three years. You can see what the trends are because I think one quarter never makes the trends, you want to look at stuff that's over a longer period of time than that. And if you were to look at the Page 36 you'll see that there is sort of a delta between where we are on tenant risk calc scores today versus let's say last year and year before. So it's suggested that there's been some degradation and some risk costs for. It's not a huge number by the way if you look at it in the aggregate the probability of default is very low. But there is some degradation and almost all that result from just a handful of tenants. It's not that many tenants and most in most cases is because they're 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 leveraged than they would otherwise. It's a Moody's is going to do for that but on a run rate basis they look just fine. So I would say to you that we overall are fairly confident that our portfolio from a credit quality perspective, investment quality perspective has not deviated at all from last year or the year before that.

Okay, understood. Thanks a lot for that explanation.

Thank you.

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

Hey, everyone. Question, if I were to just do the net investment activity in the first half of the year, you gross up to like a $1.03 billion to $1.04 billion. I know you said the second half is going to be more robust on the sale side. I mean should we expect a $200 million, $250 million sales number and where are you guys in the process of marketing those assets. Give anything under contract did it look like there's a lot held for sale, so just curious as we think about timing in your flow business kind of best estimate of where that could kind of come in?

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 and one of them has already sold at the beginning of July. The other one probably sell before the end of August and we may a lot of times end of quarters are heavy in sales activity for example for Q2, June was the heavier sales month than any other month in the quarter and we may anticipate that that would be the same for Q3 that September would be the heaviest month of the quarter. So, if you kind of model in middle of the second half, it probably makes sense, and yes, the sales activity can be several hundred million dollars.

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

Well, I think that as you're hiring acquisitions people, it takes them 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 sales people. 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 back out non-cash shareholder employee compensation equity comp right, so you want to get to phone number and you want to back out and you also want to back out any tenant reimbursable stuff which basically inflates what property expenses would be. You're doing that our cost to run the company today is 50 basis points which is down from last year. Last year was closer to 56 basis points or so my guess. So there's definitely as we grow this platform, there's some economies of scale but they're small. And from a shareholder perspective saving six basis points on cost is not really where the cheese is at and the cheese is really at booking assets at really nice cap rates having nice lease escalators, having a low dividend payout ratio. I mean these are things that are most essential to driving investor rates return and these are things where we've been concentrating a lot of our energies.

Thank you. And the next question comes from Nate Crossett with Berenberg.

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…

It's couple of stores and it's nothing.

Pizza Hut will be relatively small as well. Yes.

Just to put in a perspective overall, I mean this is 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 a chain restaurant property. 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 a movie theater industry or the restaurant industry or casual dining or some sector and they get very disturbed by same-store sales trends of negative 2% or negative 5% plus 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?

It is 44 basis points.

It is 44 basis points.

And there is two times coverage.

It is two times coverage and it's 44 basis points of brand interest.

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 weighting is moved from here. I mean trying to gain or lessen exposure anywhere?

It has been really consistent Nate and services really are favorite in our primary industry focus. And then as you know retail we've handpicked since we started in 2000, they have heavy. Most of our retailers heavy service component and nice online presence and stuff which is important to us. And then manufacturing were just we were consistent. We've been consistent on -- will probably -- we probably see that a little bit less than 17%.

Were there 19 new tenants this quarter or?

Pardon me.

The 19 new tenants this quarter were areas within?

Across asset classes actually, a plethora of that, yes service, retail.

Okay that is helpful, thanks.

You're welcome. Thank you.

Thank you. And the next question is from Haendel St. Juste with Mizhuho.

Hey, good morning. Just a couple of quick ones from me, good morning, I noticed that talking about industry exposure that your auto repair and maintenance exposure is up 50 bps or so from last quarter now it's number six on your list at the head of family entertainment, the focus on that I guess sector seems consistent with the portfolio goals that you had outlined. But just curious maybe you could talk a bit more and what excites you or what in particularly you are seeing about that business segment that drive you to it how we could expect perhaps your exposure there to perhaps grow and maybe some color on yields coverage ratios and the embedded rent bumps in that sub-sector.

Yes, so let me start in dollar 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 the 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 like that service as well.

Okay. Can you, or would you be willing to provide any color on the embedded rent bumps are coverage yields specifically or is that something you prefer not taken.

I would say that the coverage, is it going to be right in line with the portfolio, so kind of around 2 to 1 and the rent bumps here to be the same they're going to be kind of 1-9 and annual.

Got it. And just a quick follow-up on the Turkey and CLC 30 bps that was as of 2Q and is that the same figure today or have you sold any thus far in third quarter.

It's same.

Okay. Thank you.

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

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

I would say it's a matter for the flow we're not intentionally targeting companies that were $500 million I mean, our view on this is sort of the 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 there 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 that there's always just thought processes and no big companies are going to take over the world a little companies want which is by the way not true, because in the last, Great Recession little companies we will add jobs in the big companies shops, 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.

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 the opportunistic dispositions available to you.

I think John that you see really consistency and what we've done 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 that's fairly consistent.

Okay, thank you very much.

Thank you.

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

Hey, Spenser.

Let's for you guys mentioned that there was a lot of money chasing restaurant deals and considering your exposure continues to tick down yet again this quarter would it be safe to say that competition remains fairly robust in that space.

Our competition is robust in the restaurant space. People actually just love restaurants for their [indiscernible] size…

Brands that people know.

So, sometimes you just find cap rates are not really driven by risk with their driven by size, and we tend to be people who are focusing on risk and returns and are trying to be are doing our best to be objective about where our opportunities are and we could buy the restaurants and having to be accretive to AFFO but that's not our goal and their goal here is to buy really attractive risk-adjusted properties, not just buy anything because the covers a blackout. So, and we found that restaurants have been harder for us to get the kind of trends, we'd like to have.

Okay. And then perhaps more broadly speaking, what other industries would you say that you guys have been running into like the most crowded bidding 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?

Yes, this is Mary, not really a big change is 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 to. So we're seeing that's kind of the same mix we've seen it all year.

And especially if they're large portfolio transactions or a teed up, we're seeing a kind of a lot of people wanting to do the portfolio trends are.

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

All right, that would bode well for your more granular pipeline.

Right. We plan in this nice niche place of $8 million $9 million $10 million and it's a good place to be.

For the play in the niche we've got to have a pretty deep sales system - it just takes a long time to put that together.

Okay, that's all from me. Thank you.

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

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 your potential to do more business with those partners again

So our repeat business last quarter was high. So and say it was half because it half --

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

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

Okay, thanks.

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

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.

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 and the second thing is that it has the most compounding of return. So this is the cheapest source of capital and that elevates the returns and increases our internal growth lot so relative to what it would be otherwise, but that being said, you guys are growing FFO for share you can't retain at all so these 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 there will be a decision the Board makes and they may make it in order to keep our payout ratio lower, but again that will pay off to investor over the long term. And as the company gets older - as we get older, you'll find that basically there 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 measure on that- it will be modest compared to the impact of the internal growth that we're creating.

Okay, that's helpful, thanks.

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

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 if they let us know and meanwhile, thank you all for listening and we're around today and tomorrow for any questions that you might have, so have a great day.

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