STORE Capital Corp (STOR) 2014 Q4 法說會逐字稿

Welcome, and thank you for joining the STORE Capital fourth quarter and year end 2014 conference call. Today's conference call is being recorded.

(Operator Instructions)

And now I would like to introduce Moira Conlon, who will host today's conference call. Moira, please go ahead.

Thank you, Maureen, and welcome to all of you who have joined us for today's call to discuss STORE Capital's fourth-quarter and full-year 2014 financial results. Our earnings release, which we issued this morning, along with a packet of supplemental information is available on our investor website at ir.storecapital.com under news and market data/quarterly results. I am here today with Chris Volk, President and Chief Executive Officer of STORE Capital, Cathy Long, Chief Financial Officer, and Mary Fedewa, Executive Vice President of Acquisitions. On today's call management will provide prepared remarks, and then we will open the call up to your questions.

Before we begin, I would like to remind you that comments on today's call will include forward-looking statements. Forward-looking statements can be identified by the use of words such as estimate, anticipate, expect, believe, intend, may, will, should, seek, approximate, or planned, or the negative of these words and phrases, or similar words or phrases. Forward-looking statements by their nature involve estimates, projections, goals, forecasts and assumptions, and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.

These forward-looking statements speak only as of the date of this conference call, and should not be relied upon as predictions of future events. STORE Capital expressly disclaims any obligation or undertaking to update or revise any forward-looking statements made today to reflect any change in STORE Capital expectations with regard thereto, or any other changes and events, conditions or circumstances on which any such statement is based, except as required by law. Please refer to our SEC filings and our Investor Relations website for additional information.

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

Good morning, everybody, and thank you all for joining us. I would like to welcome our analysts and stockholders to our first earnings call. We appreciate the strong support from the investment community, and our new stockholders who participated in our successful IPO in November. In the offering, we raised net proceeds of $546 million, including the full exercise of the over-allotment option. We're using the proceeds to further expand our real estate portfolio, and to bolster our leadership in the middle market net-lease solutions for single tenant real estate.

Now to get here, over the past three and half years as we grew to $2.8 billion in assets by deploying the private equity capital we had raised from Oaktree Capital and other institutional investors. And in that process, we became the first ever net-lease REIT be conceived and incubated through the use of capital derived from prominent institutional investors. And after scaling the business, we determined the time was right to go public.

Since this is our first conference call as a public company, and since many of you may be new to the STORE story, I would like to spend just a few minutes explaining to you what makes us different, and how we're well-positioned for continuing growth. First and foremost, we address a $2 trillion market of profit center real estate that includes over 1.5 million properties, and as a result we can be highly selective in the investments we make. We provide net-lease solutions principally to middle market and larger companies that own single tenant operational real estate, which is the inspiration for our name. And we also call this profit center real estate.

Store assets are a distinct asset class, in that they have three payment sources, whereas most real estate just has two. The differentiator lies in the primary payment source, which is embodied in the profits produced at the properties that we own. The remaining two payment sources reside in tenant credit quality and real estate residual values, which are payment sources that are common to all commercial real estate investments.

We formed STORE to fill the unmet needs of thousands of middle market and larger companies that require access to efficient long-term capital, to capitalize, improve and grow their businesses. At the heart of our success, is the strong reception by our customers to our flexible value-added real estate net-lease finance solutions. Our ability to add value to our customers over other alternatives they have, is embedded in both the thoughtful lease structuring, and also our ability to service their needs, long after we ink our contracts.

Our recent IPO and listing on the New York Stock Exchange is an important affirmation that the need we fill for our many tenant customers is supported by the broad investing public in a win-win partnership. This is the third company that many in our leadership team have taken public, and so we appreciate maybe more than most the increasingly high bar that one has to hurdle to gain that affirmation. We've had a significant pipeline of targeted investment opportunities since very day we opened our doors, and today that pipeline, which turns over multiple times a year has grown to about $6 billion.

This robust pipeline of opportunities allows us to be selective in choosing tenants and investments that meet our rigorous standards, and that offer attractive risk-adjusted rates of return. Approximately 75% of our portfolio is actually sourced from direct originations with companies that we service. So we are largely about creating investment opportunities, and not just gaining market share.

Now for a moment, I would like to turn to our well-diversified portfolio. For the year ended December 31, 2014, our real estate investment portfolio grew to $2.8 billion in gross investment dollars, representing 947 property locations, bound by approximately 360 contracts of which the vast majority of are on our own lease forms. This compares to $1.7 billion in gross investment dollars representing 622 property locations at December 31, 2013.

Our properties are located in 46 states. They are operated by over 200 brand names or concepts, and no concept represents more than 4% of the portfolio revenues. Our customers operate across 67 industries within the service, retail and industrial sectors of the US economy. Restaurants, health clubs, early childhood education centers, movie theaters and sporting goods stores represent the top industries in our portfolio.

Substantially all of our properties are profit centers for our customers, and we receive ongoing unit level financial reporting on virtually all of these properties. 97% of our properties are under triple net leases, which will serve to lessen our property cost. And 73% of our multi-unit investments are under master lease agreements, which is a highly prized feature from a credit vantage standpoint.

Of the lease contracts in our portfolio, we consider approximately 80% of them to be of investment grade quality. Our weighted average investment contract rating is equivalent to Baa3 rating, with the median store score contract rating of A2. Weighted average non-cancelable remaining term of the leases as of December 31, 2014 was 15 years, and the weighted average annual lease escalation is 1.7%, of which about two-thirds happens every single year.

Now turning to our operating platform. It is highly scalable. We built STORE with our own third-generation, highly efficient systems to facilitate growth and operating leverage. These systems will enhance our ability to remain portfolio quality, and to function with a large complement of relationship managers, credit underwriters and closers, where no transaction is too small. As we grow, we expect the cost to manage our portfolio will decline as a percentage of investment value.

We have always had a flexible, conservative and efficient capital structure that positions us to have a low cost of capital, even at our current size. We are one of the few REITs to have an A+ rated borrowing capacity through our Master Funding program. Our unsecured debt facility, which we put in place prior to the IPO, together with access to public equity markets at the IPO, will dramatically increase our financing flexibility. And finally, our liability flexibility allows us to start off 2015 with undrawn credit lines, and substantial unencumbered assets, together with a dividend payout ratio for 2015 that was conceived to be conservative by design.

And lastly, I would like to touch on the value we deliver to our customers. Today STORE is already one of the largest and fastest growing REITs in the United States. We are adding to our investment portfolio, and I am pleased to report strong acquisition activity for the fourth quarter and the full year ended December 31, 2014.

We originated $290 million of gross investment dollars, representing 105 property locations during the fourth quarter of 2014. These investments had a weighted average cash cap rate of 8%. For the year, we invested $1.1 billion in profit center real estate, representing 341 locations at an initial weighted average cash cap rate of 8.3%.

The average annual lease escalations for these transactions was consistent with our overall portfolio of 1.7%, resulting in a gross unlevered investment return of approximately 10%. Our 2014 investment activity was achieved through almost 140 separate transactions, and around 100 contracts. With this, I will turn the call over to our CFO, Cathy Long, for a review of the financial results.

Thanks, Chris. I'll begin my remarks today with an overview of our fourth quarter ended December 31, 2014. Next I will review our full-year results. Then I will discuss our balance sheet and capital structure, followed by our guidance for 2015. Unless otherwise noted, all comparisons I make refer to the comparable period of the prior-year.

So starting with fourth-quarter results. Total revenues increased 65% to $55.2 million, primarily due to real estate portfolio growth. As Chris mentioned, our portfolio grew by $1.1 billion in gross investment dollars over the course of the year.

Our portfolio's base rent and interest on an annualized basis was approximately $238 million at December 31. Total expenses increased to $41 million, compared to $26.2 million, about half of that change representing increased depreciation and amortization expense on our real estate acquisitions.

Interest expense increased 43% to $17.8 million, as we used long-term borrowings to partially fund the acquisition of properties for our growing real estate portfolio. G&A expenses increased to $5.5 million from $3.7 million, primarily due to portfolio growth, staff additions to support the growth, and the increased costs associated with becoming a public company.

Since substantially all of our leases are triple net, we incur very little property costs, less than $500,000 in all of 2014. Net income increased to $17.4 million or $0.18 per basic and diluted share, compared to $7.5 million in net income or $0.13 per basic and diluted share. Fourth quarter 2014 net income included an aggregate gain of $3.3 million on the sale of eight properties. A small portion of this gain was included in discontinued operations, related to one property that was held for sale at the end of 2013. In comparison for the fourth quarter 2013, we reported a $200,000 gain net of tax on the sale of one property that quarter.

I should point out that effective January 1, 2014, we early adopted accounting guidance ASU 2014-08, which provides that we no longer have to report the results of these occasional sales of properties as discontinued operations, beginning with the properties that were sold in 2014 that weren't already listed as held for sale at the beginning of that year.

Moving onto AFFO, AFFO increased 85% to $33.7 million or $0.35 per basic and diluted share, compared to AFFO of $18.3 million or $0.33 per basic and diluted share. Again, the increase was primarily driven by the revenue generated by portfolio growth, partially offset by our increase in borrowings associated with that portfolio growth, and the higher expenses to support the growth.

For the period between the IPO closing date of November 21 and December 31, we declared a dividend of $0.1139 per common share to our stockholders. This amount represents our intended quarterly cash dividend of $0.25 per share prorated over that partial period.

Now turning to our results for the full-year ended December 31, 2014. Total revenues for 2014 were $190.4 million, an increase of 75% from $108.9 million, driven primarily by portfolio growth. About half of the increase in revenues between periods was due to having a full year of revenue in 2014 on properties that were acquired throughout 2013. Likewise, the full impact of revenues from the properties we acquired throughout 2014 won't be recognized until the current year 2015.

Consistent with the prior year, rental revenues made up about 95% of our total revenues. Total expenses were $147.8 million, compared to $86.4 million. Interest expense and G&A expense increased primarily due to portfolio growth.

For the year, interest expense increased 73% to $68 million, and G&A expense increased 38%, or at about half the pace of new investments as a result of our scalability, to $19.5 million. Net income was $48.1 million or $0.61 per basic and diluted share, compared to $26.3 million or $0.52 per basic and diluted share. We had an aggregate gain of $5.5 million on the sale of 16 properties during 2014, versus $2.2 million in gains net of tax on the sale of 17 properties in 2013. As I mentioned earlier, a small portion of the gains we recognized on the sale of properties were classified in discontinued operations.

We were able to generate gains above the original cost of our properties due to our direct sourcing model, which enables us to invest in properties at lease rates generally above the auction market. On a relative basis, our property sales during 2014 represented about 2% of our portfolio at the beginning of the year. The sales generated gains of about 16% on original cost. These gains represent 3/10 of 1% of the portfolio at the beginning of the year.

While these gains are excluded from AFFO and FFO, they do represent an important value creation tool that offsets portfolio risk. AFFO was $109.9 million or $1.39 per basic and diluted share, compared to $61.7 million or $1.23 per basic and diluted share.

Now I will provide an update on our balance sheet and capital structure. For the first nine months of 2014, and prior to our IPO, we had two primary secured credit facilities that bore interest at a variable rate based on one month LIBOR, plus a credit spread ranging from 2.45% to 3%. In September 2014, we replaced these two credit facilities with a new $300 million unsecured credit facility that bears interest based on one month LIBOR, plus a credit spread ranging from 1.75% to 2.5% using a leverage-based scale.

I should mention that interest expense in 2014 included a nonrecurring charge for the write-off of $1.2 million in remaining unamortized deferred financing costs, related to the two credit facilities that were replaced. As of the end of 2014, we had nothing drawn on our credit facility, and the entire $300 million was available for use. In addition, we had unrestricted cash and cash equivalents of $136.3 million at year end, giving us liquidity for continuing real estate acquisition activity in 2015.

In 2014, we issued STORE master funding net-lease mortgage notes payable aggregating $260 million in principal amount. In addition, we added $53 million of traditional mortgage debt, bringing our total long-term debt outstanding to $1.28 billion at the end of 2014, up from $992 million in 2013.

Of our total $2.8 billion gross investment in real estate at year end, approximately $1.85 billion is used as collateral for our secured debt, leaving $952 million of real estate assets unencumbered as of year-end. Mary will talk about the volume of assets we acquired and added to this unencumbered pool since year end in her remarks.

As Chris discussed, we completed our IPO in November. The offering generated net proceeds of $546 million, which were used to repay $223 million of borrowings outstanding under our credit facility, to redeem all outstanding shares of STORE Capital Series A preferred stock that amounted to $125,000, and to fund approximately $243 million of property acquisitions from the closing date of the IPO through year end. As of today, we have fully deployed all of the net proceeds from our IPO.

We measure leverage using a ratio of adjusted debt to EBITDA. Because of our high rate of growth, we look at this ratio on a run rate basis, using our estimated run rate EBITDA. Based on our portfolio in place at year end, we estimate that our leverage ratio on a run rate EBITDA basis is approximately 5.3 times.

Our overall weighted average debt maturity of approximately seven years is well-laddered. Only 7% of our debt portfolio comes due in the next three years. We maintain a flexible capital structure that enables us to be a highly competitive and efficient supplier of capital to our customers.

Turning to guidance for 2015, we currently expect the following. First, AFFO. With material external growth as the primary driver of AFFO growth in 2015, we expect AFFO per share to be in the range of $1.33 to $1.39.

Second, acquisitions. For 2015, we expect full-year acquisitions of approximately $850 million, at an average cap rate of about 8%. Our view on acquisition volume for 2015 results from strong acquisition activity we are seeing in the first two months of this year, which Mary will talk about in her remarks.

The timing of these acquisitions is expected to be spread throughout the year, though history would show us that acquisition activity is generally weighted towards the end of each quarter, and that there is often slightly higher acquisition activity in the fourth quarter. We intend to initially fund these acquisitions with a combination of excess cash from operations and our unsecured credit facility, and we intend to pay down our credit facility by accessing our STORE Master Funding facility over the course of the year.

Third leverage. As a private company through most of 2014, we were operating comfortably with a higher level of leverage, roughly at 60% loan to portfolio cost for most of the year. Post IPO, we intend to operate at lower leverage, targeting a run rate debt-to-EBITDA level of between 6 and 7 times, which is more customary for publicly traded REITs in our space. This translates into a loan to portfolio cost of more like 50%.

And finally, G&A costs are expected to be between $28 million and $29 million for 2015, including commissions and equity comp. And we expect G&A costs as a percentage of our portfolio assets to trend lower over time, due to our scalable platform. This concludes my remarks, and I will now turn the call over to Mary.

Thank you, Cathy, and good morning, everyone. Today I want to give you more color on what we are seeing in the marketplace, and how we evaluate investment opportunities. I'll begin with the market. I am pleased to report that we are seeing many attractive transactions that support Chris's comments on our strong pipeline of targeted investment opportunities.

And overall, cap rates are holding fairly steady. We have seen some minor variations, but overall cap rates remain well within our target range for attractive opportunities. As Chris mentioned in the fourth quarter, our cap rate was 8%, which was slightly below our overall cap rate of 8.3% for 2014. So far in the first quarter, we're seeing cap rates slightly above 8%.

February is just about over and by month end, we expect to have closed approximately $160 million of transactions. Our net-lease financing solutions are continuing to create a lot of demand in the marketplace. And at the same time, we are taking a highly disciplined approach to selecting the right investments for our portfolio.

So we're really excited about the volume of quality transactions we've been able to close to date, and we are running slightly ahead of our initial plan for the year so far. That said, I want to remind you that this is a flow business, and it's very hard to predict exactly when transactions will close, and it's still too early to have a clear view through to the end of the year. As we move through the year, we will update our outlook as we have more information.

And to address how we evaluate investment opportunities, our targeted investment opportunities are the result of our direct outreach to middle market and larger companies, and the strong partnerships we form with these companies as we add value to their businesses, and in return, get paid for that value. Using this approach, we continue to build a quality portfolio, brick by brick.

We create granular investment-grade contracts that fill a strong need in the market for efficient long-term capital. In fact, if you look at our top 10 customers, substantially all of these relationships were created brick by brick. I look forward to keeping you updated on our progress, and I will now turn the call back over to Chris for some final remarks.

Thank you, Mary. I want to first make a few comments about our press release today. This morning, we simultaneously released both our earnings press release, and our first supplemental information packet, both of which are available on our website and on EDGAR. The supplemental information packet was produced in order to present information graphically, and in a user-friendly format. These complementary resources provide a great deal of disclosure about STORE, as well as extensive information about the quality of our investment portfolio.

We started with the simple notion that our investor should know what we believe to be important in evaluating our Company, based upon our own 30-plus years working in this industry. At the highest level, the disclosure includes portfolio stratifications that will be familiar to most of you. At a more granular level, the disclosure includes tenant and contract credit quality histograms for our full portfolio, information regarding master lease components, future lease escalations, lease types whether they are double net or triple net, ground lease exposure, and property replacement cost estimates.

The extent of some of this disclosure and much of which we put into our recent S-11 may be less familiar to you. Our ability to regularly produce this information is due in no small way to the robust systems we've developed from scratch over the past three and half years. Our disclosures, like our corporate governance policies, have been conceived to show you what we as investors would like to see.

I would also like to put in word for our website, which is the result of considerable thought and effort. There is a very good investor tab on the website.

However, perhaps more importantly the website is keenly directed to our customers, with video content, articles, blogs and social media links. Taking a look at this, will provide anyone with a much greater insight into our distinctive core competencies, deep customer relationships, solutions-oriented approach, and guiding investment principles. And following us on Facebook, LinkedIn or Twitter will further keep you in touch with STORE.

Finally, we cannot help but be excited by our many accomplishments in 2014 and prior years, and also by the continued momentum we are seeing so far in 2015. We have worked hard to create a growth company, which is also a REIT, and that's a really rare combination. And we have done this with the leadership team that has greater depth and experience investing in store properties than any other team in our asset class. We have positioned this Company to have market-leading balance sheet, with a well-protected dividend, and we have done this, by filling an acute need in what we believe will be a win-win partnership for years to come.

So now, as I turn the call over to the operator, I want to say that we are also joined on this call by Michael Bennett, Michael Zieg and Chris Burbach, which is the rest of our senior leadership team. And we're here to help in answering any questions you may have. So, operator, we're open to questions.

Thank you.

(Operator Instructions)

Vikram Malhotra, Morgan Stanley.

Thank you. Congrats, guys on your first earnings call. Just wanted to check, Cathy, on the funding for acquisitions. You mentioned initially at least using the STORE master funding. Can you just maybe give your thoughts on the use of equity versus debt towards maybe the second half of the year, kind of how you are viewing the funding of acquisitions, both the cash you have and anything that's used on the revolver?

Sure. As I mentioned on my remarks, we use the revolver to initially acquire properties until we can amass a sufficiently large and diverse pool of properties to put long-term debt together on in our master funding program. And I might take a minute, for those of you who don't -- not familiar with the master funding program. This is our own conduit, and what is neat about the master funding program is that, this is a conduit that we continue to add collateral to, and then can continue to issue notes off of. Right now, we have been issuing 7 and 10 year notes, but we have quite a lot of flexibility with regard to what kind of notes we can issue off of that pool.

What that provides us is flexibility. And that's important, because Mary wants to provide flexibility to her customers. And so, on the backend I provide the same flexibility on the capital side. So with the master funding program, I can actually substitute assets in and out if I need to. Or if I need to sell assets, I can substitute another one in. And so, it does provide us a lot of flexibility.

What we will be doing is accessing that conduit during the year. As Chris mentioned, as I mentioned in my remarks, we have quite a bit of unencumbered assets at this time. And so, we will be pulling together a pool, and that will actually free up the line for further usage of the revolver.

I probably didn't mention, and could mention that the revolver as well, has an accordion feature that will allow it to be expanded up to $500 million should we need that capacity. So we do have quite a bit of flexibility and capacity with regards to borrowing. I did mention that we had a targeted funded debt to EBITDA range of between 6% to 7%. So if you are modeling out the Company, you can kind of see where we might be raising equity at that point.

Okay, thanks. And then, just on the acquisitions. I may have missed this, but what was the remaining lease term on the acquisitions that you did in the quarter, and what are you making in terms of cap rates for the full year -- for 2015?

Our remaining lease term is generally 15 years, even on the new things we acquire, because as you recall, we are directly sourcing these. So we are creating a lease, and not necessarily buying an existing lease that would have a short lease term. So we are still at 15 years. We were at 15 years last year, we're still at 15 years.

And then for cap rates, 8% is about the average that we think during the year. There may be some slightly higher, and some slightly lower. But we think 8% is reasonable.

Okay. Thanks, guys.

Sure.

[Derek van Dijkum], Credit Suisse.

Hey, good morning, guys.

Good morning.

Just to talk about cap rates going forward, do you -- it looks like over the past year or so, your average cap rate has trended down a little bit. How do you look at that going forward? If you could maybe provide a little more color on -- are you seeing any more competition in the market that could potentially drive the cap rate, your average cap rate going forward a little lower?

This is Mary. Actually we have -- we've seen some compression, that's correct. But not as much compression as there's been in the marketplace. And that's basically because as Cathy mentioned, we are directly sourcing from a very large and under-served part of the market. There is over 70,000 middle market and larger companies that we can -- that we are sourcing from and being very selective with.

I think in terms of competition in the market, interest rates have been persistently low, and there is certainly plenty of capital out there chasing yield. But for us, we are very focused on this middle market and larger marketplace. And from that perspective, we can be very selective, and we've seen a lot less compression in the market.

I would say also -- this is Chris -- the fourth-quarter average was around 8%. The activity for the first quarter year-to-date, for whatever it's worth is slightly above 8%. So I wouldn't hold that as being a linear trend. It's going down. And if you talk to -- even if you talk in the auction marketplace to realtors today, they will pretty much tell you that they think that cap rates are being -- are holding pretty stable.

Got you. Okay. And then just one other question on Heald. Any update on those assets at all? Or is it sort of status quo still?

It's status quo. They're paying, and the schools to my knowledge are doing fine. We're in touch with them all the time, obviously.

And as anyone knows who's followed Corinthian at all, they had three education brands, and Heald was far and away the engine for their corporate EBITDA and cash flow. And so, that's been their crown jewel, and that is the -- I expect that they will be probably sold to another operator sometime later on this year. But that has been their stated intent. I don't think they have an absolute gun to their head on timing as to when that is going to happen. But I think it's a process that's ongoing. So we will work with them to facilitate change in ownership, although I would be surprised if there's a lot of change in management at the operating level, in terms of the operating platform level of Heald College

Got it. Okay. Thank you very much.

Cedrik Lachance, Green Street Advisors.

Hi, Cedrik.

Sorry, can you guys hear me now?

Yes.

Okay, great. Sorry. So just in terms of dispositions -- given the way you're putting together your portfolio, I would imagine there's not a lot of properties that you acquired, that you don't want to own for the longest period time. Therefore why would you be selling assets so early in your ownership?

Well, there are always a couple of reasons for it. I mean, you're always tracking the portfolio all the time. And some of the -- I would say probably half of the transactions that were sold last year, were sold in concert with a larger transaction, where we wanted to have greater portfolio diversity. And I am being -- sort of using a rule of thumb here -- but I think it is about half, and I'm getting some nods around the table. And the other half were assets that we sold where we thought that, from a portfolio quality perspective, selling them would actually in aggregate enhance portfolio quality.

I think that's our job. That is what we're supposed to do. One thing that I think is important to point out to analysts who cover us -- and when I say it's our job -- we're in the business of actively managing a portfolio, and you should expect that. And part of actively managing it, is trying to manage future risk, and so, we're doing this all the time.

But one thing that's important that Cathy mentioned, was that the gain on cost is 16%. And I can't promise you that that will happen all the time. But if you look at the transaction last year, we sold 2% of the portfolio at the end of 2013. So our average gain was 16%. That works out to about 33 basis points of assets at the end of 2013. So look at it this way. If you had a default -- so say you had a default, and it was 1%. Heald will be about 1% for example, by the end of this year.

If you had default of 1% of the portfolio, and you had a 70% recovery on that default, which is historically in line with what we do, your loss will be 30 basis points. Well, we made 30 basis points on sales from assets that were sold -- if you look at our portfolio from the end of last year, it tells you what a just terrific business this is. Where you can actually manage your risk, not only by properly managing any sort of credit exposure, but by also selectively selling off assets to really help in aggregate. Make it so that the portfolio is delivering a profoundly great risk-adjusted rate of return.

Okay. And as we get to the later in the stages, I guess, of the real estate cycle, the credit cycle, I would imagine banks are going to become a bigger competitor in providing financing to the tenants that you like to do business with. How can you position yourself to continue to create the kind of real estate transaction volume that you want to create, while the banks become more comfortable lending to the same tenants that you do business with?

As of today, actually we're not seeing that. I can't even begin to see that in the near-term. When we were running our first public company, FFCA, we did run into bank competition. So notwithstanding the fact that we were providing a lease, banks were giving 100% financing. They had low payment constants. FIRREA was passed in 1990 which was basically this -- in the wake of the S&L crisis in 1990, it was sort of the new standard by which assets would be valued, and supposedly help control banks and their lending practices.

But it didn't really force banks to control their lending practices, because they were still lending 100% loan to value in the 1990s, and they were doing so because FIRREA itself didn't prevent that. But along comes, Dodd-Frank, and Dodd-Frank actually makes that more difficult. So its puts teeth into FIRREA. So I don't see banks lending money 100% anytime soon, and they can't lend fixed for the most part.

Or if they lend fixed, they will do it floating, and they make people buy into a swap. So what happens is, if somebody owns a piece of real estate, and they end up with trapped equity. They can have trapped equity for 10 years, because they can't actually prepay their loan without incurring a really huge burdensome cost. And at same time, we're replacing the equity that they would otherwise have to put up. So we are displacing the equity.

So anyway, for all of those reasons, I don't think that banks any time soon will be competing with us. The other thing I forgot about too, was Basel III which forces banks to risk-adjust their capital. And when you're dealing with middle market companies, it gets harder and harder for banks to gauge what the investment risk is, and what the capital reserve should be for middle market companies. And so, we have seen that middle market companies by and large, especially when it comes to long-term financing tend to be underserved. And it is certainly a profound reason for why we fill a big need in the marketplace.

Okay. Great, thank you.

Craig Mailman, KeyBanc.

Hey, guys. Just maybe want to follow-up on some guidance assumptions, Cathy, and maybe another way of asking the equity question from earlier is, what is the ending fully diluted share count, and [OP] unit count by year-end 2015?

Well, actually we are not going to be disclosing that information in guidance. We're giving guidance on our leverage levels, guidance on what we are going to add during the year. So we are hoping that in your model, you can predict what that would be. (Multiple Speakers).

We have no OP units, and of course, we did the stock issuance, so you can take the stock issuance, and add the shares to the other shares

Right. What about interest expense? Can we get that number?

Well, our interest is -- as we're looking to guidance, we use our existing interest rate which is 4.9% -- basically 5%. So that's basically what we're using, if you want to look at the spread. We're assuming 8% cap rate on acquisitions, and a 5% long-term debt rate.

Okay. And then, I know guys aren't giving FFO guidance it looks like, just maybe the rationale there, and what the kind of spread you'd expect? I know it's $0.03 this quarter, but is that going to be decent spread relative to FFO?

I mean, our -- unique amongst net-lease REITs is that our AFFO tends to be higher than our FFO number, because we have so little straight-lining of rents. So we just -- and straight-lining is obviously non-cash, and it doesn't mean anything. So AFFO, if you're looking at net-lease REITs is obviously the number to look at. So we're focusing on AFFO guidance and not FFO guidance. But frankly, there's not a lot of difference between the two of them.

Okay. Then, Mary your comment on cap rates was helpful. Just curious if you guys are able to keep them in the 8% range, maybe a little bit above -- are you -- is there any big discrepancy between the STORE scores that you guys are able to sign contracts at today, versus maybe a year ago to get the same yield?

The answer is no. I mean, the contract credit ratings are within the same bandwidth, so there's not any deviation. Mary can give you chapter and verse of why we have a higher lease rate.

I mean, I think it sort of starts with solving -- providing solutions for customers and dealing directly -- and then imparting to customers that the value we create for them is very often much more added after we ink the contract. So when customers are just solely concerned about rate and proceeds in the marketplace that we serve, a lot of times the people that are delivering that capital can't provide them with the kind of flexibility that we can, which really adds value -- or can take away value from a business. So that's part of it. The second is, that if you're doing 75% of your business directly and there is no broker involved, you get 50 basis points right there.

Okay. And then just lastly, so guys did $160 million of investment through February. What do you guys have under contract and LOI?

Well, we thought about disclosing this and I -- when we did the offering, there was some disclosure about what was in closing. Keep in mind, that what's in closing is -- what's in closing has a lot of fall out. So there could be as much as 20% fall out from transactions that are in closing. So what we're really much more comfortable with is, giving you a guidance in terms of saying, we think we can do about $850 million for the year. And you can put some brackets around that if you want to.

And we don't want to give sort of specific forward guidance. If we gave you closing, you would sit there and think that we're going to close it all in the next 60 days -- which isn't true. It tends to bleed out over time. We will close some deals in March, so March we're not going to shut the place down. So we've done $160 million through today in February. And we may close a deal today or tomorrow. So we got a couple more days in February, and then -- which we're very encouraged by, by the way.

I mean, if you're looking at it historically, the busiest two quarters tend to be the second and fourth. And we're starting off to a rock-solid first quarter, but some of that again was due to some spillover from the fourth quarter of last year. So you shouldn't necessarily read into that we are going to do this every single first-quarter, it doesn't always happen like that.

So we will be very careful about giving guidance that way. In our business as Cathy said, if you close a deal in the first month of the quarter versus the last month in the quarter, just that little difference makes a huge difference to the AFFO per share number. So and in the growth story like STORE, we have to be very careful about, trying to make sure that we give you prudent direction.

Great. Thank you.

Stan Fediuk, SunTrust Robinson Humphrey.

Good morning, everyone.

Good morning.

Can you just provide some color on the portfolio quality that was acquired in 4Q 2014? For example, fixed-charge coverage ratio for the portfolio, and what were the property types and locations?

This is Mike Zieg. The acquisitions we made have been consistent with the prior year, and our median FCC at the unit level remains about 2 times, about 2.06. As far as the locations, they really vary across the country, and remain consistent. As you can see in the supplemental information packet, we are in 46 states, and pretty well-diversified.

I would point out when we disclosed coverage, one of the things that is distinct about us, is that the coverage is not a four-wall number. It is a -- and a lot of times there's no -- I would like to -- maybe we should go with the [CFA] is, than to try to come up with a standardization about how everybody discloses stuff. But our disclosure for coverages is not four-wall. So if we were doing four-wall, it would be sort of north of 3 somewhere.

But if you were doing a -- but we tend to do it on a four-wall minus indirect costs as well. Because if we have a restaurant that goes vacant for example, nobody will run it for four-wall. They have to absorb at the very least, the cost of running the store. So we're very big believers in giving you a disclosure of coverage that's net of indirect costs.

And so, the median coverage is 2 to 1. The weighted average coverage is actually quite a bit above 2 to 1, because we have a handful of credits that just do so well, that it drags up. But I think the median is sort of the number you should look at. And it's been stable.

Okay. Regarding your current acquisitions and what you're focusing on, is it the same type of property locations and types?

Yes, this is Mary. Absolutely is, very consistent.

Consistent. Great. Thank you.

Dan Donlan, Ladenburg Thalmann.

Thank you, and good morning.

Hi, Dan.

I had a quick question on your full-service restaurants, which is your highest customer industry. Have lower gas prices improved your coverages there from a cash flow perspective?

I'm going to say that I don't know yet. Because we get these financial statements quarterly, typically but they lag. So the low gas prices have not been going on for much more than the last 90 days or whatnot. But certainly it will be helpful. And if you look at basically all the retailer and earnings numbers that I've seen from other companies today, there have been a lot of same-store sales increases that have impressed the market. And I have to think that the lower gas prices help across the board.

Okay. And if I'm looking at this page 13 of the supplemental, how did the coverages look by customer industry? I mean, how does the full-service look relative to the limited service on the restaurant side, and versus the child education centers and movie theatres?

Well, keep in mind when you're looking at coverages, no two coverages are equal. So for example, a 1.50 coverage in a chain restaurant, is not as good as 1.50 coverage in early childhood education. So you're talking about what is sort of the tolerable fall off level, and you can't do direct apples and apples comparison between them, which is why we don't disclose this stuff.

But I would tell you that our coverages on the casual -- on the full-service portfolio are slightly higher than they are for the -- and maybe a quarter of a turn better than they are for the limited service. And that's to be expected. You have something that's (a) a more expensive investment, so we want to make sure that you're getting some margin for that. And (b) there is probably a little bit less volatility in some of the limited service numbers. So we can be willing to move to slightly lower coverages in limited service.

Okay. And then, as far as competition goes, there's not too many of the other REITs that are going after these properties. Have you seen anyone else creep into this industry -- there has been talk of foreign capital coming in. Obviously, it takes a long time to build the platform that you have. But just curious as to who you are competing against, is 1031 becoming more aggressive here? Or because you are sourcing directly from retailers, you're just not seeing anything?

Well, first of all I would say, that there are other public REITs that have been big players in restaurants or big players in C-stores, and sort of middle market and larger companies. So I would push back a little bit on the notion, that there is nobody else that's going after some of the stuff that we are doing. I think that there are some public companies who are doing it. We are not seeing any foreign capital in our space. We're not seeing any new sources of capital.

I would say that, we've been doing this for 30 years, and players have come and gone. So there's a lot of players that were there in the 1990s. And, of course, we sold our first company to GE Capital, which today is doing virtually no net-lease business in real estate. So there are people that go, and there are people that come back in, and yet the market has the same size or bigger. So that's -- hence the need for participants in the marketplace. We're here to grow it. We're not here to steal market share from any of these people.

Okay. Yes, I guess, I was talking more about the lines, if you're guiding to 8% caps, and some of the other REITs that have reported are guiding to 7% cap rates. There's obviously, they are going after different properties than you guys are so. Just kind of curious if -- what the competition is on that side? And with that in mind, do you see yourself -- your cap rates going down, if your cost of capital improves maybe you've chased -- I know your strategy is -- you do your own credit underwriting, but do you chase some of the lower cap rate deals?

We will go after a low cap rate deal from time to time. We -- I think that's the thing that you should know is, that the average transaction size that we did last year is under $10 million. I mean, the number of transactions we did -- I mean, we did 140 transactions last year. There is no one in our space that I know of who did 140 transactions, with 100 contracts.

And so, your -- so the entire way that you originate, the paradigm by which you are originating is just substantially different. And that causes us as a Company to have perhaps more origination staff than most people, because you got to do that. We have to have more credit staff than most people. We have to have a lot of closers. And yet despite having all that, we're a very efficient operating company, very heavily dependent upon efficiency of the systems that we've built, which being the third time around we can do that so.

And when you are doing transactions that are that size, it gives you a lot of freedom. If you are doing transactions that are let's say, north of $50 million or in that neighborhood, every one of those transactions will have some financial advisors, there will be kind of an auction process, and we will win some of that stuff. But last year, the biggest transaction we did was a --

$40 million.

$40 million.

Three properties.

With three properties, yes, three properties for $40 million is the biggest transaction we did all last year.

Okay. Thank you, Chris, really appreciate it.

Having no further questions, this concludes our question and answer session. I would like to turn the conference back over to Moira Conlon for any closing remarks.

Actually, we are turning it over to Chris Volk for any closing remarks.

And Chris Volk wishes you all a great day, and thank you very much. We look forward to seeing you in the future. Goodbye.

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