STOR (2020 - Q1)

Good afternoon, and welcome to the STORE Capital First Quarter 2020 Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note the event is being recorded.I'd now like to turn the conference over to Ms. Lisa Mueller with 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 2020 Financial Results. This afternoon, 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 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 2-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 by their nature involve estimates, projections goals, forecasts and assumptions and are subject to risks and uncertainties, including those arising from the Covid-19 pandemic and its related impacts on us and our tenants that could cause actual results or outcomes to different materially from those expressed in the forward-looking statement. 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.And with that I would now like to turn the call over Christopher Volk, STORE's President and Chief Executive Officer. Chris, please go ahead.

Lisa, thank you. And good afternoon everyone and welcome to STORE Capital's first quarter 2020 earnings call. With me today are Mary Fedewa, our Chief Operating Officer and Cathy Long, our Chief Financial Officer. First things first. We welcome the opportunity to speak to you today and hope that you and your families are healthy and safe. While the journey through this unprecedented event has tested us all, we'll come to the other side together and we at STORE look forward to the opportunities that await us. Meanwhile, we're very fortunate to have a team made up of 97 experienced and talented employees, who have worked collectively to address the impact of the coronavirus pandemic upon our customers.This is also a time when our strategic investment in technology and systems allowed us to quickly gather the necessary information to address the needs of our customers. Technology has been instrumental in the ability of our collective team to work remotely from home for over the past two months. Our direct origination strategy which fosters long-term tenant relationships also improves our ability to address moments of national business interruption like this. With that said, let me discuss our achievements for the quarter. Even with the curtailment of our acquisition efforts, we had investment activity of over $260 million during the first quarter. At the same time, our portfolio remained extremely healthy with an occupancy rate of 99.5% and with continued stability in the percentage of net lease contracts rated investment grade and quality based upon our STORE Score Methodology.At quarter end, our funded debt to EBITDA on a run rate basis was 5.4x which is slightly below the lower end of our target range and our pool of unencumbered assets stood at over $5.5 billion or about 61% of our total investments. Leverage on this majority of our balance sheet stood at a sector low of 23% of cost, providing us with ample flexibility in our financing options to navigate this pandemic. Now as I do each quarter, here are some statistics relevant to our first quarter investment activity.Our weighted average lease rate during the quarter was approximately 7.5%, slightly lower than in late 2019. However, the average annual contractual lease escalations for our investment made during the quarter was higher than normal at 2.5%, providing us with a gross rate of return which you get by adding the lease escalation to be initial lease rate and about 10%. This is also about recent quarters and with corporate leverage in the area of 40%, our levered investor return will approximate 14%, with net returns after operating cost in the 12% to 13% range.Our investor returns from STORE and from predecessor public companies have been mostly driven by favorable, property level rate of return. While we take the time to disclose investment yield, contractual annual lease escalators, investment spread to our cost of long term borrowings and our operating cost as a percentage of assets. These are the four essential variables that enable you to compute expected investment rates of return.The weighted average primary lease term of our quarterly new investment continue to be long at approximately 16 years. The median cost overhead unit level fixed charged coverage ratio for assets purchased during the quarter was 2.7 to 1. The median new tenant Moody's RiskCalc credit rating profile was B1. But if you incorporate the total contract level fixed charge coverage and the median new investment contract rating or STORE for our investment was far favorable at Baa2. Our average new investment has made approximately 77% of replacement cost, 90% of the multiunit net lease investments made during the quarter were subject to master leases. And all 57 new assets that we acquired during the quarter are required to deliver unit level financial statements, giving us unit level financial reporting from 98% of the properties in our portfolio.This is critical to our ability to evaluate contracts seniority and real estate quality has been really essential to our ability to quickly assess our tenant's ability to pay rent during this pandemic crisis.With that I'll turn the call over to Mary.

Thank you, Chris. And good afternoon, everyone. I'll start with the quick recap of our first quarter acquisition activity. We investment $264 million in real estate acquisition at a weighted average cap rate of 7.5%. This included investment in 21 separate transactions at an average size of about $12.5 million. As Chris mentioned, our portfolio remains healthy in the first quarter and only 12 of our more than 2,500 property locations were vacant and not subject to a lease agreement at March 31st which is unchanged from year end 2019.We sold nine properties in the first quarter. The majority of these properties were sold as part of our ongoing property management activities and resulted in a recovery compared to our original cost of just under 80%. Our portfolio mix at the end of first quarter remain steady, 65% of our properties were in the service sector; 19% in experiential and service driven retail businesses and the remaining 16% were in manufacturing. Our Top 10 customers were unchanged from last quarter. However, we continue to improve the diversity of our revenue and as a result our Top 10 customers are accounted for well below 18% of annualized rents and interest for the quarter.Our portfolio remains diverse and granular and our single largest customer Fleet Farm, represented just 2.8% of annualized rent. Our second largest customer Art Van, declared bankruptcy in early March. The bankruptcy process has experienced some temporary delays due to Covid-19. However, we continue to make good progress towards the resolution. Now turning to our response to the pandemic. First, I'd like to say we could not be more proud of our entire team at STORE and the efforts they have collectively made to step into action for our clients since the abrupt onset of Covid-19.You heard us say before that our focus on delivering value to our customer beyond real estate financing solutions has resulted in close customer relationship and significant repeat business. As you might have imagined, we've been in active dialogue with our customers over the past several weeks on many topics. From rent collections to government stimulus program that might help them. We also watch the Covid-19 website as a resource to help our customers understand and access the various government relief programs.As you know, the middle markets have always been in especially vibrant part of the economy and a key driver of economic wealth and job creation in the U.S. So it makes a lot of sense that the government is focused on helping middle market companies through CARES Act programs such as Paycheck Protection Program for smaller companies. And the main Street Lending Program which is expected to launch in May for larger companies. Many of our tenants are well positioned to benefit from these stimulus programs. And our team will continue to educate them about the options and help them through the process.Now turning to April rents, we have made good progress on rent collection since our last update just a couple of weeks ago. Our cash collections for April rent now represents 68% of our base rent of interest. Including these cash payments we have reached agreements for over 97% of our April rent. But the rents that were deferred, we negotiated short term agreement that included for example interest, higher lease escalation and our longer lease terms.And for the rest we agreed to differ for April, more than 75% were concentrated in only six of our, more than 100 industries represented in our diverse portfolio. These include industries like fitness clubs, theatres, early childhood education centers, restaurants and family entertainment centers that have high mandated closure rates across the country.Going into the pandemic our portfolio was performing well with strong corporate and unit level coverages. And in addition there was no discernable difference in April rent payments as it relates to company’s size or whether they were backed by private equity. What was clear is that tenants looking for rent release are in businesses that have been temporarily disrupted or closed due to Covid-19 rather than experiencing a credit event.We are therefore optimistic that these tenants will rebound nicely as the economy opens up. Again, these are essential businesses that people value, need and depend on. We also believe that geographic diversity is an important factor in evaluating the impact of Covid-19 on STORE given that certain regions of the country are opening sooner than others.Based on recent news announcements at least 17 states have each restriction so far and together they makeup nearly 50% of stores base rents and interests. So, we are now talking too many of our customers who are preparing to reopen their businesses in these select states.While overall our tenants view the Corona virus as a temporary destruction and believe that their businesses will open and recover. They realize that reopening will not happen over night but will be more of a phased in approach over time.In the meantime, our acquisition team continues to cultivate new and existing relationship to ensure that we continue to have a strong pipeline of opportunities. And in closing I’d like to reiterate our strategy. We invest in profit center real estate; it was profitable going into Covid-19. And we believe these locations will be profitable after Covid-19.Our team is focused each and every day on delivering the best outcomes for our customers, our employees and our shareholders. And that is what we will continue to do. And now I’ll turn the call to Cathy to discuss our financial results.

Thank you, Mary. I’ll begin by discussing our financial results for the first quarter, followed by and update on our balance sheet and the steps we’ve taken to increase our financial flexibility in response to the pandemic.Beginning with the interim statement, first quarter revenues increased 14% from the year-ago quarter to $178 million. And annualized based rents and interests generated by our portfolio in place at March 31st with $730 million, an increase of 13% from a year-ago.Total expenses for the first quarter were $118 million, as compared to $109 million in the first quarter of 2019.During the first quarter we do recognize $6.7 million of non-cash equity compensation expense related to certain performance based restricted to stock unit awards; they are no longer expected to be earned. Excluding this adjustment, the increase in total expenses was primarily due to higher depreciation and amortization expense related to our larger real estate portfolio as well as increased interest expense and property costs.Interest expense increased by $3.6 million to $41.7 million primarily due to additional long-term debt we issued in 2019 to fund investment activity. Property cost for the first quarter increased by $3.4 million year-over-year primarily due to property tax accruals related to non-performing properties leased to tenants that may not be able to pay these expenses. Nearly half of this amount which related to the Art Van bankruptcy in Q1. As a result of the de-recognition of the non cash equity compensation expense, G&A expenses for the first quarter was $7.9 million, down from $12 million a year ago. And included a minor amount of expenses related to our Covid-19 response. Excluding the impact of non cash equity compensation, G&A expenses as a percentage of our average portfolio assets decreased to 51 basis points during the quarter from 53 basis points a year ago. During the quarter, we recognized a $2.9 million impairment provision related to our real estate portfolio primarily for properties we are likely to sell.AFFO increased over 11% to $120 million from $108 million a year ago. On a per share basis, AFFO was $0.49 per diluted share, a 2.1% increase from $0.48 per diluted share a year ago.Now turning to our balance sheet. We funded our first quarter acquisition with a combination of cash flow from operation and $150 million of borrowings on our revolving credit facility along with proceeds from property sales and our ATM equity program. In early January, we issued about 4 million shares of common stock under our ATM program at an average price of $36.22 per share, raising net equity proceeds of approximately $149 million. At March 31st, we had approximately $3.6 billion of long-term debt. The year-over-year weighted average maturity of that debt rose to seven years. And the weighted average interest rate decrease slightly to 4.3%.In the first quarter, we extended the maturity of one of our $100 million bank term notes into 2021 and that note has two more one year extension option available. We have no significant debt maturities for the remainder of this year. We continue to be in compliance with all of debt covenants and we expect to remain in compliance going forward.We took steps in the latter half of the first quarter to augment our balance sheet and liquidity position in response to the pandemic. As previously announced at the end of March, we drew down the remaining amount on our $600 million credit facility as a precautionary measure to increase our liquidity. We have an additional $800 million of capacity available under the accordian feature of our facility. We have not yet requested access to that from our bank and the term debt markets remains open to us.At the end of April, we had over $550 million in cash after payment of the first quarter dividend and funding approximately $15 million in ongoing construction commitment. To put that amount of cash in perspective, it's over 2.5x of our full year 2019 operating cost, plus annual cash interest expense for the year combined.We believe our conservative leverage profile and this higher than normal cash balance position will service well to navigate the pandemic. Now turning to our outlook for the rest of 2020. As previously announced, in mid April, we withdrew our 2020 guidance based upon decisions we made to respond to the pandemic. This include curtailing near term acquisition activity, maintaining higher than normal liquidity levels and deferring a portion of our rent and interest income. We will reinstate guidance where we have more clarity around the pat and timeline for state and businesses to reopen.And now I'll turn the call back to Chris.

Thank you so much, Cathy. As is usual and before turning this call over to the operator for your questions, I'd like to make a few comments. We've included in our regulatory quarterly investor presentation a handful slides pertaining to the impact of Covid-19. Including a slide that addresses our current share evaluation. We believe that the value of STORE stays more compelling than when we started this company in 2011. It should be since investors at the end of April could buy in at roughly 15% discount to the actual cost of the equity we deploy.That discounted even more as I speak today. Before our share purchase window expired and well after the extent of pandemic was evident, much STORE's leadership and several Board purchased shares at prices close to $30. By April 3rd, our share has gone 61% before recovering to still material drop of around 45% by the end of April. I have a reason for this believe in our compelling valuation that comes in two parts. First part is that our current share price implies a permanent base rent and interest income loss equated to about 70% of our tenants paying half their contracted rents. We do not believe that this will happen which leads me to a second part of the reasoning which is also evident from the supplemental slides. As Mary mentioned virtually all the Covid-19 related lease deferrals granted by STORE emanated from closed sectors of the economy. And six of these sectors alone accounted for about three-quarters of the rents deferred.Our nation is replete with restaurants, education facilities, health clubs, movie theaters, home furnishings retailers and family entertainment facilities. In our view, these and more closed sectors represented within the STORE portfolio are central for a past and future way of life. We take hardness because we actually believe the ability of our tenants, non rated middle market and larger companies that fully comprised these largely closed sectors to successfully emerge from this pandemic. This leads to a clear lesson about a pandemic like this. Closures and lease defer requests did not pertain to tenant credit quality, revenues or balance sheet size.The results from its sensitivities to this black swan event that mandated a broad albeit temporary cessation of commerce. Surveying the wider landscape beyond a net lease arena, this notion becomes even more clear given the limited payments of rents from retailers of all sizes and credit ratings. With this said and evaluation of STORE at this moment cannot rest on statics benchmarks such as percentage of rents collected or percentage of investment grade tenants or occupancy rate. Everything is relative. In our approach to investing begins with an integrated business model that we pioneered in 1980 and refined over the past four decades across three separate and successful public investment platforms. Viewed in this light I believe STORE's non rated tenant April rent collections led in that leased sector.We chose both to our work and to the diversity of our portfolio, which fortunately for us included a number of sectors less impacted by the pandemic. And given the general spread between lease rates attainable from investment grade to non rated tenant, I would also posit that STORE's April cash yield on investment impacted as it was by lease deferrals lay near the very top of our net lease peer group. We've always stated that we succeed if our tenant succeeds. In the case of this Covid-19 event much of our ability to rebound is not tied simply to our tenants but to entire essential sectors of the US economy. STORE will emerge from this pandemic in a strong position.We fully expect to be proud of our tenants and how they perform and we will continue our devotion to this market that really needs us. Companies like STORE are essential for real estate capital formation among middle market and larger nominated companies and will help this country as we emerge from this pandemic.I'll close with a few comments about our plans for investor communication going forward. Since our last earnings call, I wrote a letter in March we have conducted two webcast update the investment community. In a time of national business upheaval, frequent communication has become essential. So we plan to hold three webcasts prior to the release of our second quarter financial results. The market calendar for the first of these calls which will occur on May 27. On that call we expect to provide you with an updated on May rent collections and comment on the broader status of our tenants as various states begin the very hard task of reopening. Because our annual shareholder meeting is scheduled for the very next day, we will not be providing a general business update at that meeting. We look forward to providing these future monthly updates and to making ourselves available to answer your questions.And now I'd like to turn the call over to the operator for any questions.

[Operator Instructions]The first question today will come from Nathan Crossett with Berenberg. Please go ahead.

Hey. Good afternoon, guys. Hope everybody is doing well. So just a question, I appreciate the slide on the Covid-19 impact, 68% of the rent was paid in April. You mentioned 98% of that or 98% you came to an agreement on. Are these agreements for April rent only or do they include future months? And then how should we think about kind of the mechanics of the deferrals? How long are the paybacks period et cetera?

Yes. Nat, this Mary. Before we start the Q&A if you don't mind I'd like to just provide a brief update on Art Van. The Delaware - yes, sure, okay. The Delaware Bankruptcy Court just approved the sale of certain Art Van assets including existing inventory and this approval has actually cleared the way for the releasing of all of STORE's 23 Art Van Wolf and Levin locations. Our STORE entered into four master leases for all 23 STORE owned locations with an existing customer of ours. And so therefore a no STORE owned former Art Van location will be vacant. Our estimated recovery is in line with the rest of our portfolio at approximately 70% of base rent with potential upside actually written in these leases. So I just want to give a quick update on that for everyone.So to go back to your question --

No I was going to say that's helpful. Do you want me to repeat my question or --

No. I think I've got it. So actually you asked about the April rent collections at 68% and are that for just one month. So our average deferral agreement was for two months on average. And so I would say that from that perspective and we expect to be paid back within the majority of it within the next 12 months. So that kind of hopefully answers your question there.

Okay and then 68% how many of those kind of access to PPP or if include PPP and some of these spend Fed programs, like where do you kind of taking out?

You bet. So actually great question, 98% of the cash received in April was paid without PPP help. So we just started as you know to come in towards the end of April and 1st of May here.

Okay. So like what percentage of your tenants is saying that they can and will access the PPP in some way shape or form?

So we're estimating about half of our tenants maybe a little over that will be able to do the PPP program and obviously that doesn't include the Main Street program. We're talking about just the Paycheck protection --

If you're looking at it we have four 491 tenants and in surveying the tenants we think about 350 of them are eligible which is about 71% of the tenants but it works that's about half the rent and then if you further break it down and say of that half how much how many of them could actually get enough PPP to really help on the rent, which is net stated that the other half won't help on the rent because if PPP money is any sort is helpful but of that half of about 175 which is about 25% of rents and interest will actually help out - have enough money to help out on the rent. So it's possible that it may will benefit from that certainly we would like to hope so. And June --and in the April possibly in a fact, they had no impact.

The next question comes from Craig Mailman with KeyBanc Capital Markets. Please go ahead.

Thanks everyone. Mary just may be on Art Van the 70% recovery rate when does that kick in and what's the drag on a dollar basis?

Yes. So just you know that the new operator will take possession by May 8th and the 70% is a total solution for these guys. So quickly they'll still take possession. They've already got management in place.

The 70% includes all the costs and all the drag, so in the net total coming -- but the rate could start as early as July but in May obviously we had Covid-19 thing so it just depends.

But I just when it starts like what would the new rent be versus the previous rent on just a dollar kind of drop?

70% of our original leases with our Van are the rent to start. --

Okay. And then on the deferrals can you just kind of go through if at all any of that was abatement versus just kind of deferral loans. And whether any of these agreements kind of go back and re-cut the leases maybe you're extending term, we're getting some other benefits.

So as I mentioned in the prepared remarks, so essentially there were no -- there was no forgiveness or abatement, all agreements that were made we got an economic benefit for here at STORE. So that could have been -- it could have been anything from interest on the deferral. As I mentioned to longer lease terms, higher escalations, stronger contracts but there was no pure forgiveness of rent.

Is anyone going on non-accrual?

No.

The next question will come from Rob Stevenson with Janney. Please go ahead.

Hi. Good afternoon, guys. At this point are you guys looking to, I mean, is acquisitions cut to zero at this point? Are you still selectively buying stuff? Ad if so, you're going to be buying anything where the tenants deferring or not paying rents?

Okay. Hey, Rob. This is Mary. So we're honoring our construction commitments that we have outstanding and we've made a few small acquisitions, very small under -- where we had you know contracts in place, purchase and sale agreements in place and it made sense but not without an update on of course an update on the credit and the Covid environment and so we would not be funding anybody who is asking -- who could not pay the rent or was really impacted by Covid.

Okay. And then I guess the other one would wind up being like were any -- did you guys require in order to even have the deferral discussions did you guys require people to be current as of that point in time and so you know is there likely to be a great a significant percentage of people that don't wind up paying may rent versus April or the people that are not likely to pay May the same as or like they didn't pay April.

That the may rent and well you're sort of intertwining, Rob, and this is Chris. So you may have correctly here but you shouldn't be intertwining the notion of doing new investments was May rent and what impact that's going to have on May rent. I think the general consensus if you're talking about May, the general consensus of the community that I've listened to is that May is more difficult month potentially just because with April the people had at least a half a month of operations in March. So they had some -- they had some steam going into April and May of course people were fully closed down. So there's an increased pressure on people in May. The offsetting part to that from our perspective businesses, we only got 2% of our payments in April from the PPP that could be upside for us which might be an equalizer. So we'll see how that works and

Reopening--

Yes. Nobody is reopening too.

Reopening were --

Right. So some gradual reopening and we'll keep tabs of that. So when we do our conference call on May 27th we will kind of give you an update as to who's open who's not. I mean what was interesting and Mary can elaborate on this, but if you -- the other handful of states out there that have actually not shut down I mean and so if you're just looking for state-by-state the recoveries or the rent payments that we've had from those states that are open tend to be closer in the 80% range right. And so that would suggest that states open there's an absolute upside, if we were to look at the states that are open today.

Okay. So I mean for the states that were that never really close there was still a decent amount of revenue collected on those people just didn't stay home automatically.

Yes. That's correct. The handful states that did not have a government declared stay in place order. From our rent collections, we saw substantial and materially better collections in those states as Chris mentioned about 80 plus percent.

The next question is from Vikram Malhotra with Morgan Stanley. Please go ahead.

Thanks for taking the questions. So I just want to clarify the difference between deferral and then interest. Can you clarify what sort of interest of this -- how are the mechanics on that?

So, Vikram, the way it works is that there are a variety of solutions. In some cases, you're doing lease modifications, you're building escalated payments into lease modifications and in some cases you're doing it in the form of notes that actually have interest rates better than a note. And so it's just a combination of those things. And if you look at the deferrals and the expected cash flows substantial majority of the amount of rent that will be deferred should be collected by the end of 2021.

And so these when you say notes are these like, you're providing funds to tenants. And they're giving you interest on those loans?

We're not providing -- we're not writing anybody a check, what we're doing is, if they can't pay us the rent we just make them execute a note for that amount of rent. And we're not actually writing anybody a check or anything.

It's not a business loan?

There's no business loans.

Okay and then just on the covenants, Cathy you mentioned sort of compliance with covenants, specifically related to the master funding kind of level in terms of the DSR coverage at 18, if you take that 18 and the deferrals that’s the 30ish percent deferral that you've seen today? You sort of get to a level that's close to the 13 where certain things could trigger. I'm just sort of wondering how do you bridge those two numbers.

Okay would it be helpful if I walk through some of the math on the master planning and how it would work?

Yes, sure.

So as like at the beginning of the year I'll start with the beginning of the year because it's easier to go back to the 10-K. And be able to pull numbers out of the management discussion and analysis section. Our annualized based rent in interest was $714 million dollars for the whole portfolio. And about 37% of the revenue comes from those assets that are in master funding.So that's about 264 million a year, would be going into master funding. So, if you, in a normal time frame that 264 million covers principle and interest on the outside debt that we have. And about 140 million comes to the bottom of the waterfall back to STORE Capital, that makes sense so far, so that's at a normal time when you're covering 18 or 19. If you take the 2640 million of revenue coming in and you say what if I only got 60% of that, that's $158 million.When you compare that to the 122 million or so of debt service that's a 1.295 coverage which gets you below that cash sweep trigger that you're talking about which is at 1.3 but at that point if you're getting a 158 million of revenue. And you're covering 122 of debt service what would flow through the bottom of the waterfall is about 36 million a year. And that's what gets trapped. So that's about $3 million a month.

And that was the most it could be by the way. It's the worst-case scenario and everything else is nothing. And I would say this to you, the master trusts for April was well north of 130 coverage. So, from a -- we're not, we're not close to cash sweeps I just want to point this out to you. And there are a lot of ways, there were a lot of reasons why we're not close to them but we're not close to them. If we ever got close to them it's not a big money amount.And I want to make it extremely clear, and happy to discuss it but that our leverage corporately is 40% which is right in the strike zone. And 40% cost that's right in the strike zone of where pretty much every triple B company was. In fact, Realty income at the end of last year before they did their equity offering, again this year was right around 48% plus or minus. And the only difference is that we're not relying solely on unsecured money, we're relying on the master trust as well.The master trust has two thirds of our debt, it only has one third of our assets, less than that. And so what ends up happening are that, the unencumbered net leverage is 23%, it’s the lowest in the space, there's no one that could come close to it. And so the question was in a real downside scenario, and Vikram you've mentioned that the master funding is, it poses some sort of risk to us. Given that we have this non-recourse debt on the balance sheet and in a total downside scenario, master trusts does a much better job of protecting our investors than it would be if we were just unsecured debt only.So, you’re a much better position than any other REIT would be both from a diversity of capital and from a protection of shareholders and unencumbered note holders because our unsecured note holders, because leverage is 23%.

Okay that makes sense, I just want to clarify, get the leverage aspect and the unencumbered portfolio but I'm just - I'm not maybe I'm not understanding it, when you have had deferrals of 30%, how are you, what are the reasons for not being close to the 13 it's like unless the deferrals are really different in the master funding vehicle versus like how print in the master funding vehicle versus like how is it not close to 13?

Fundamentally it comes down to the fact that we're the servicer. And because we're the servicer all the waterfalls come to us, this is not like CMBS where you have cash sweeps and you have a servicer, we are the servicer. So, if we choose to waive fees for example, then obviously it changes the waterfall. I mean so there are things that we can do that there are in our power to do that essentially allow us to not be subjected to cash sweeps.And at the end of the day if you're looking at us versus national retail realty income both of which are reliant on unsecured debt virtually completely.They look at the same, I mean there's the cash flow comes in, it goes out, the only difference is that we have a chunk of assets that are in a non-recourse vehicle, which at the end of the day prepare, create some protection for investors but basically because we're the servicer, we can manage the cash flows in such a way that we don't trigger any cash sweeps.

Okay, fair enough, I'll probably take it offline, thank you so much.

And our next question will come from Haendel St. Juste with Mizuho. Please go ahead.

Hey, good afternoon up there I hope you guys are all well, thank you for taking my question. So, Chris just personal to you, I can certainly understand that this is all happening so quickly but just curious how Covid and your portfolio performance and what you've seen in the marketplace in terms of other peers portfolio, exposures and performance. It's impacting your portfolio allocation theory at all, you could just make favorite yields more middle market tenants versus I grade.So just curious on your observations, how it might be impacting your thought strategy? Are you willing to do a bit more I great deals that you'll get a bit more attractive here? And then also can you sprinkle in some thoughts on how you're feeling about your exposures to the movie theatres, restaurants, gym. And what do you think that road to recovery for those rents look like? Thanks.

Sure, so thinking about where we want here. I think that Modern Portfolio theory when Eugene Fama came up with Modern Portfolio theory and won a Nobel Prize for it, he wasn't thinking about Covid-19. And Covid-19 is something that hasn't affected the United States for over a century. And what we're seeing is that companies that can pay rent are those companies, the companies are best able to pay rent today, are those companies that are in positions that are somewhat immune to Covid-19.So, it could be anybody from Amazon to grocery stores, to drugstores, dollar stores had done well. And those would be sort of at the very best and then and pretty much everybody else has done badly. And even if you look at retailers, you're looking at a company like LVMH which is owned by one of the richest people in the world and that's a single A rated company, to my knowledge they didn't pay any rent for the month of April.And so that the Covid, the Covid pandemic has caused the cessation of business where companies of any rating aren't really designed to have a cessation of business. So, my outlook on this going forward is a couple things. And then we'll have to wait and see what happens but the first thing is this illness has caused a huge cost on our society and our federal government. Its cost three trillion plus most likely from the federal government and maybe more.And just a 30 million unemployed so it's been an enormous cost just everybody. And so with such a cost my guess is that the US government and every other government is going to do their very level best to make sure this doesn't happen again. And so the likelihood of Covid being something that we need to worry about, next year or the year after I think it's going to be pretty slim. It really needs to be pretty slim because it's so ubiquitous you can't just go around and chase Covid proof businesses and have those businesses have a lower cost of capital than other businesses.And so in that case we're going to be going after a broad market of businesses middle market and larger non-rated companies which constitute the plurality of companies in the United States. And we're going to go after those companies and fulfill a very important need for them for efficient real estate capital. And we're going to do what we do best, as to whether we go into movie theaters or whatever; we're only 4% in the theaters anyway.So, we're pretty light in the movie theater sector anyway. Fitness centers were a little bit heavier. I think that you'll see us evaluating what the long-term implications of Covid-19 are there will be some societal impacts on Covid-19. Clearly, you've seen that with air, transit, hotel, hospitality industries. There'll be certain industries that could potentially be permanently impacted by this. I don't believe for example the early child education which was a big sector for us, is going to be permanently impacted.I think that fitness clubs long-term aren't that hugely impacted but the jury is out. I think the theaters will probably come back stronger than people think just because they're so content related. I mean if you bring in content and people have the ability to go to a theater and they can watch a new blockbuster release, I think they're going to want to go out and do that. And this could be really tied to content.So, I think that a lot of these industries are coming back. And one of things that we said in our prepared remarks was that 75% of our lost rents for April or deferred rents were tied to six sectors. It's just nothing, it's not tied to middle market tenants or unrated tenants or unrated tenants, one of the things that you often get comments about, we get comments about is, that somehow middle market tenants are riskier than big tenants.Covid basically takes no prisoners, it doesn't matter with your middle market or larger or whether you're a triple B company or a double B company. If you're in a Covid sensitive business you're going to be really, really hurt by this. And if you let it go on long enough with 30 million people, the rest of the people are going to be really hurt by it, because it's going to impact just the overall economy if we keep on going long enough for this.So, we're going to do what we do best. And we're going to stick to our strategy and we're going to evaluate these sectors closely. And take measure steps as we get through this. And what we always do is make bets and one of the things that we do when we make bets is we diversify which gets you to another Nobel laureate, which is Harry Markowitz, who talked about getting efficient portfolio’s theory and having huge amounts of diversification which by the way is why if you look at STORE today, STORE amongst all the net lease REITs probably collected a higher percentage of rents from non-rated companies than anybody else.And we did that because we had such diversity apart from the fact that we had a lot of people working hard on this.

I appreciate that, so certainly it doesn't sound like there's a near-term imminent shift in strategy but certainly that your commitment to middle market remains. Just a couple quick follow-ups here, did you guys talk about what's driving the bump in the annual contractual lease pumps here that the jump from up to 2.5 % is there any single tenant industry? Can you talk a little bit more about that and then maybe share what the rent collection was for assets within the trust during the month of April versus those outside the trust? Thank you.

Yes I'm happy to answer that I wanted to like make a small addendum to my last comment which is that when you talk about risk, one of your questions was will you go after investment grade tenants? And implicit in that discussion or that question is that somehow these are less risky that, and we would be just, wouldn't we better be better off there. And I would say that you cannot measure risk without measuring time. You can't actually discuss risk without discussing time.Now in the market like we're in today candidly like, long-term it’s lunch for most people, so they're just trying to figure out what's happening today, that's why we're having to do once a month conference calls with people. But so really like over a 10-year period of time if a triple B company is going to be unrated 60% of the time, then you can't treat it like a triple B company. And that's really the credit migration statistics for a triple B company.So, we're running this company not for tomorrow, we're running this company for 10 years from now. And we're thinking about risk and comparative risk, we're thinking about risk in the span of the decade, of years. And we know that risk adjusted returns have to be measured accordingly. I would say that in terms of the transactions this quarter, what happened was we got cut off honestly we were on a roll to do a decent quarter worth of acquisitions.We curtailed them, when we curtailed them we had sort of a small sample which makes you look like half rates went down and bunks went up. It was due to a handful of transactions where we had higher bumps and lower cap rates and really most of those bumps were really elevated in the short term. So, but in my prepared remarks I tend not to go into like a lot of details, so that's what we did discuss.

The next question will come from Shivani Sood with Deutsche Bank. Please go ahead.

Hi, thanks for taking the question. Chris you just sort of touched on the investment activity and Cathy you mentioned it in your opening remarks that the team curtails near-term investment activity when 2020 guidance was pulled. So just curious what your team would need to see in the market or sort of the operating environment to get comfortable with dipping a toe back in the market again? And could we see your team do something opportunistically if there were sort of an arbitrage opportunity to be had?

It's Cathy I'll start and then Mary can talk about what plans are for going forward. So, yes we had expected to have a bare quarter as Chris had mentioned. And very, very early when Covid hit the U.S., we decided to curtail investment activities, so most of March was less curtailed. Now we've got about a 100 million of construction commitments that Mary had talked about earlier, that we will be doing. And those are kind of spread out over the rest of the year. So, when I mentioned things about the construction that's what I'm talking about.And then and I think in Mary's prepared remarks she did mention that our relationship managers continue to keep the relationships going on the deals that we were working on. And on new deals for example and maybe you could talk to that Mary.

Yes, I would say that Shivani our pipeline our front end is, they've been helping a lot with the Covid-19 activity but pipeline is still very robust. We have many, many long-term relationships tiers in a lot of our businesses repeat. We have a lot of growing customers that are really on the edge of their seats and anxious to do something again. So, we're keeping the front end very warm. And as soon as we can get back out there, we will do that for sure, so I think we're warm on the front end still.

Great thanks for that color. And then Mary I think you had mentioned Mary that the 17 states that are starting to reopen represents about half of the company's annualized space rent. So, I appreciate that it's still very early on but any commentary that you guys can share there about demand and how quickly it may or may not be returning?

Yes, it's a great question but also a tough one as Chris has mentioned, it's just, it's anybody's guess right now as to how quickly these will reopen in what fashion they'll reopen. I think our customers are cautiously optimistic that they'll be able to get going but reopen doesn't really mean reopen right now, there are a lot of phased in approaches. They’re doing industry by industry, there's a lot of precautions that need to be put in place whether it's masks or taking temperatures or putting some spacing in between seats and movie theaters and so on.So, there are some things to do. And then the consumer behavior has yet to show itself. So, that's kind of the last piece of the puzzle, so we'll see what consumers if they start to jump out there or not. So I just think that it's really early Shivani but there is excitement definitely to get going.

If you look at some of the rules on a state-by-state basis so to tell people on the restaurant business or in the early childhood education business they could be 25% capacity but if you're a business person running a restaurant or early child education facility 25% is not going to excite you enough to want to open. Scene so mathematically you just need more room than that. And so I think that we're going to see this happen gradually. Somebody from the New York Times did suggest that we were in the second ending of this.I don't know whether it's a second or third innings, but this could take a while, right? And I think that we have to be prepared to be patient with us and work through it what we will.

The next question comes from Jeremy Metz with BMO, please go ahead.

Thanks, I guess I just want to go back to be to the master funding, you mentioned having well north of the 13 coverage here, being able to wave some fees to help us avoid any of this potential cash sweep. I guess just given the composition of the property pool that supports it, it's nearly 25% restaurants, that's a lot more than what's in the unencumbered pool you have another 16% retail. The outlines, the collections they're being pretty low for industries like restaurants.So I guess just wondering what else is that your disposal here to help keep it so far above that 13, is it just your ability to swap properties and is that something you're able to do? Is that something you're considering? Any color there?

So, Jeremy we don't swap properties into or out of master funding. So, we don't swap between the unencumbered pool and master funding. We can but we don't. And as far as the coverages are concerned, one way to another way to get the coverage one way is obviously to subordinate fees. And we have by the way the triple B note interest income. So, the 190 coverage that people talk about is actually after paying us for our interest on the triple B notes. And the fees right, so you seem you can basically subordinate all that stuff if you want to right?The other thing is that if you take a rent deferral and you do it in the form of a note. So, if we make a note to a tenant and we’re doing a rent deferral in that fashion. Then the master funding will look like it's been paid. And so there's no, there's just get to a cash referral. And so you'll see that happen as well. So, there are number things that our disposal to be able to manage the master funding portfolio. And if you're an investor in that match funding portfolio you would actually want us to do all these things.So, this is not something you don't want us to do, you want us to support it. Going to cash sweeps as easy as Cathy said, if we were -- essentially, a cash sweep is only going to happen if we decide to abandon master funding to be - I think it's to be sort of clear about if we were to say we don't really care about these assets. And then maybe you might get into a sweet but it's assuming that you really care about these assets, situation is temporary and these tenants are going to rebound.You're going to feel pretty good about it, I mean under normal circumstances by the way the difference between 190 and 130 it’s something like 35%-45% of your tenants have to default simultaneously which is happening in a Covid environment to your point but that's like also having 80% of your tenants defaulting and having a 50% recovery right? It's something that would have been really unthinkable. And it's candidly unthinkable to me that we're not going to be able to get those that, that's 35% or 40% of our tenants to be active again because it's the risk aren't really a tenant risk, it's a sector risk.And I don't think that the early child education sector is not going to exist. So hope that helps you.

Okay and then the second for us is, can you just give us your latest thinking around the dividend here just in light of what's going on, in light of some the rent collections you've noted and some of the pressures across some of these industries. Just wondering how and what the latest is there? Thanks.

Yes, I think we expect to be able to answer that in June for you. I think our board of directors is going to evaluate the dividend closely and they're going to do what they should do. And as you're looking - as you’re in June and you have transparency on June collections. And as you've seen May and April collections, and as you, more important than that or just as important as you can look forward and have some predictability of where you think the world is heading.Then I think boards are going to be in a very good position to make cogent and clear policy. And of course, the stuff changes every day as you know. So, one day things are closed, the next things are open and so on so forth. So, that's what's going to happen and of course we're going to give you monthly calls web access before the next earnings call. So, that means that you'll have an update, now you should expect one in June. And so when we do the one in June we'll be able to talk about it, dividend policy as well. And then we'll have another update in July.

The next question will come from Todd Stender with Wells Fargo, please go ahead.

Hi thanks. Obviously, it’s very early in May, you gave us the indications for April and may be May deteriorates, I guess from a rent collection standpoint. Looking out maybe it's too early but we're in June and heading to July what kind of data points or indicators that we can keep an eye on for you guys that would give us an indication that you could start to reinstate guidance? Is it collections, is it having every state reopen? How do you guys look about providing visibility on guidance?

I think Todd it’s a good question I think it's a macro issue. I think it's a state's being open. And then knowing what’s what happening in the restaurant space and early childhood education space and the industry that the risk to store today from a deferred rent perspective, as I said before on this call -- are not tenant specific they tend to be much more sector specific right and when you got 75% of the risk or the deferred rents tied to six sectors then it's then for you as an analyst looking out there those six sectors are important. I mean and if and they're showing no signs of opening or if consumers or cautious or if unemployment staying super high I mean I think that these are all things to be worried about.

Then when it comes to number of months, so far we're in the month one month, two month; three month ballpark of maybe rent deferrals at what point how many months you have to get to for a tenant not paying the rent before it becomes a rent default.

Well rent default doesn't happen unless we actually send a default notice. So I mean our tenant started calling us up in mid-March and so we started having dialogues with our tenants by the time April came around, we pretty much had a very clear idea before April 1st came around who was not going to pay. And there are always some people that come out of left field but we had a pretty good idea before April 1st happened. And so our tenants work with us partly because we have a good relationship with them in we originated well directly. I mean so I expected if our tenants need more assistance than what we've already agreed upon then we're going to have the exact same types of dialogues. And when you have those dialogues and you're working with a tenant and the tenant is part of the solution not part of the problem you're going to work with them.

And our last question today will come from John Massocca with Ladenburg Thalmann. Please go ahead.

Good afternoon. So what percentage of your kind of pre Covid contractual rent kind of roughly came from leases that had some kind of you know modification in April? I know you gave the 68% cash payment number but I would imagine that included partial deferral and maybe some other kinds of modification or support you provided where rent was kind of paid in April. So I just wanted to get a general feel for how many tenants reached out to you.

So the 68% is cash as percentage of rent and income. And so basically we were short 32% of rent collections for the month of April. While we did not really disclose how many tenants actually called us up and asked for things and what the negotiation was. And I don't expect that's really right for us to get that disclosure. I mean obviously there's back-and-forth and you're working on is getting a mutually agreeable mutually acceptable relationship because all this is just painful frankly for both for all of us.

But was there any kind of significant number of modifications that didn't turn out to be kind of monetary or where it didn't really impact the cash payment in April?

All of the modifications that were made to the leases had to do with least deferral agreements. There was nothing that was done outside of that.

Okay and then first a quick one what was -- there was a kind of you mentioned Art Van drove some of the elevated operating costs in 1Q, what was the other half it was just a broad group of things or was there any other kind of specific tenants that were maybe impacted in the quarter?

Yes. This is Cathy. Art Van was the only one that was big enough to point out separately. The rest were just a handful of minor stuff.

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the call back over to Chris Volk any closing remarks.

Well, thank you all and it's been a pleasure doing this Q&A and talking with you. And we look forward to talking to you again on May 27th when we do a follow up call until then have a great day.

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