STORE Capital Corp (STOR) 2018 Q1 法說會逐字稿

Hello, and welcome to STORE Capital's First Quarter 2018 Earnings Call. (Operator Instructions) Please note this event is being recorded.

I'd now like to turn the conference over to Moira Conlon, Investor Relations. Please go ahead, ma'am.

Thank you, Keith, and thank you all for joining us today to discuss STORE Capital's first quarter 2018 financial results. This morning, we issued our earnings release and quarterly investor presentation, which include 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. I am here today with Chris Volk, President and Chief Executive Officer of STORE; Mary Fedewa, Chief Operating Officer; and Cathy Long, Chief Financial Officer.

On today's call, management will provide prepared remarks, and will then open the call up for your questions. (Operator Instructions)

Before we begin, I would like to remind you that comments on today's call will include forward-looking statements under the federal securities laws. Forward-looking statements are identified by words such as will be, intend, believe, expect, anticipate or other comparable words and phrases. Statements that are not historical facts such as statements about our expected acquisitions or our AFFO and AFFO per share guidance for 2018 and 2019, are also forward-looking statements. Our actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of the factors that could cause our results to differ materially from these forward-looking statements are contained in our SEC filings, including our reports on Form 10-K and 10-Q.

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

Thank you, Moira. And good morning, everyone and welcome to STORE Capital's First Quarter 2018 Earnings Call. With me today are Mary Fedewa, our Chief Operating Officer; and Cathy Long, our Chief Financial Officer.

We continued to be active on the acquisition front. Our investment activity for the quarter totaled just over $320 million, and we profitably divested approximately $45.5 million in real estate investments. Our investments and property sales reflect our ability to consistently invest in and divest of assets in a way that are accretive to our shareholders. At the same time, our portfolio remained healthy, with an occupancy rate of 99.6% and about 71% of the net-lease contracts rated investment grade in quality based upon our STORE Score methodology. You'll hear more about our property investment and sales activity and portfolio health from Mary.

Our dividend payout ratio for the quarter approximated 70% of our adjusted funds from operations, serving to provide our shareholders with a well-protected dividend in a company that's well-positioned for long-term internal growth based upon anticipated tenant rent increases and the reinvestment of our surplus cash flows.

During the first quarter, we closed on our inaugural issuance of public unsecured term debt, a $350 million offering of investment-grade rated 4 1/2% 10-year senior notes. The notes were rated Baa2 by Moody's and BBB by Fitch and S&P respectively. It has always been part of our financing strategy to enter the public debt markets. Our ability to publicly issue corporate investment-grade term debt expands our borrowing capacity and flexibility. Incorporating this newly issued debt with gradual new equity issued through our ATM program and our funded debt to EBITDA on a run-rate basis continued to approximate 5.7x for the quarter. Moreover, substantially all of our investments during the quarter added to our pool of unencumbered assets, which stood at $3.5 billion or about 55% of our gross investments, providing us with flexibility in our financing options.

Now as I do each quarter, here are some statistics relevant to our first quarter investment activity. The weighted average primary lease term for our new investments continues to be long at approximately 17 years. The median new tenant Moody's risk health credit rating profile was Ba2. The median post-overhead unit-level fixed charged coverage ratio for assets purchased during the quarter was 2.4:1. The median new investment-grade contract rating, or STORE Score, for investments was favorable at Baa2.

Our average new investment was made at approximately 80% of our replacement cost. 98.5% of the multiunit net-lease investments made during the quarter was subject to master leases. And all of the 103 new assets that we acquired during the quarter are required to deliver us unit-level financial statements, giving us required unit-level financial statement reporting from 97% of the properties within our portfolio.

Our investment activity continued to be highly granular, with 33 separate transactions completed at an average transaction size of under $10 million. At the end of the quarter, the portion of revenues realized from our top 10 customers was 18.8% of annualized rents and interest, up slightly from 18.5% at the end of 2017. Further, our top 10 customers continue to be highly diverse, and the largest single customer represented just 3.5% of our annualized rents and interest, with a long-term target of having no tenant exceed 3% of our annual revenues.

During the quarter, we sold 22 properties, which represents an original acquisition cost of approximately $45.5 million, and we netted a gain over our original cost of $4.3 million. Mary will dive deeper into this number for you, but our ability to generate profits from asset sales owes itself to our direct origination strategy. And as I have long stated, portfolio management activities like this, which produce real economic gains, serve to offset sporadic vacancies or asset underperformance, which is a customary part of the net-lease business.

Last of all, and normally this would be the first thing I would address, I'll talk about our lease economics. Our weighted average lease rate was about 7.84%, which is near where we were last quarter. The average annual contractual lease escalation for investments made during the quarter approximated 1.7%, providing us with a gross rate of return, which you get by adding the lease escalations to the initial lease rate, of almost 9.6%. As to what these impressive economics mean for our stockholders, our 7.84% lease rate this quarter was roughly 335 basis points above the 4.5% interest rate on our inaugural 10-year public debt offering, which is a great starting spread.

At leverage approximately averaging about 42% of cost, that makes delevered current cash yield about 10.2%. Add in the leveraged impact of the annual 1.7% rent increases, which you get by taking our 1.7% annual increases and dividing them by approximately 58% of our equity at cost, and you arrive at a gross leverage return before cost of over 13% annually.

Net investor rate to return will also be impacted by operating costs, property performance and the accretion of asset sales gains and external growth. However, the majority of our outperforming investor returns that we have delivered from STORE and our 2 predecessor companies have always been driven by having favorable leverage gross total property-level rates of return from the outset, which is why we take the time to disclose major return components.

And with that, I will turn the call over to Mary.

Thank you, Chris. Good morning, everyone. 2018 is off to a good start with acquisitions of about $320 million at a cap rate of over 7.8% for the first quarter. We invested in 33 separate transactions and added 7 new customers, with a granular transaction size of under $10 million.

We continued to actively manage our portfolio and take advantage of opportunities to sell properties. During the quarter, we sold 22 properties, which had an acquisition cost of $45.5 million, generating net gains over the original cost of approximately $4.3 million. 12 or about 55% of the properties sold were opportunistic sales and delivered the bulk of the gains, which averaged 17% profit over cost. Three properties were sold for strategic reasons to reposition the portfolio at a 4.2% gain over cost. These gains were slightly offset by the losses on 7 remaining properties that were sold as part of our ongoing property management activities. We recovered an impressive 94% of our original costs from these sales.

Now turning to our portfolio performance highlights. As of March 31, 2018, the service sector accounted for about 67% of our portfolio, 18% was in experiential retail and about 15% was in manufacturing.

Customer ranking within our top 10 remains extremely diverse by design, with our largest tenant, Art Van Furniture, representing only 3.5% of rent and interest. Customers new to our top 10 are Zips Holdings, Camping World and National Veterinary Associates. Zips and National Veterinary Associates moved into the top 10 as a result of incremental business with these long-standing customers. Camping World is back in our top 10 as a result of the new leases we signed for 8 Gander Mountain properties, now Gander Outdoors. These 8 are among the 70 new store locations being opened by Camping World in 2018.

Camping World is classified as a retailer, but also provides a heavy service component as the only national parks and service provider for recreational vehicles. National Veterinary Associates is one of the largest operators of veterinary hospitals in the U.S. with over 400 locations. Zips operates the second largest carwash business in the U.S.

Delinquencies and vacancies remained very low due to our active portfolio management and strong tenant partnerships, with only 7 out of our 2,000 properties vacant. Our portfolio health has remained stable and consistently strong.

Now turning to the overall market, our pipeline and our origination platform. Cap rates remained stable, which enables us to continue our pattern of strong spreads over our cost of long-term borrowings. Our Pipeline remains robust and diverse, with 84% of our pipeline representing customer-facing industries.

Regarding our origination platform, at our recent Investor Day, 4 of our senior managing directors presented case studies showing how our solutions are creating alpha for our investors, by helping our customers access efficient and low-cost growth capital with the highest level of operational flexibility. We continue to benefit from our strong customer relationships, with about 30% of our business coming from customers we have worked with for many years.

With that, I'll turn the call to Cathy, to talk about financial results.

Thank you, Mary. I'll start by discussing our capital markets activity and balance sheet, followed by our financial performance for the first quarter. Then, I'll review our guidance for 2018. Please note that all comparisons are year-over-year, unless otherwise noted.

From a capital markets perspective, the first quarter of 2018 was a very active time for STORE. In February, we expanded our unsecured revolving credit facility from $500 million to $600 million and the accordion feature from $300 million to $800 million. Taken together, this raises our maximum borrowing capacity under the facility to $1.4 billion, lengthens the maturity to February 2022 and adds two 6-month extension options.

In March, we closed on our first public debt offering with the issuance of $350 million of investment-grade 10-year notes at a coupon of 4.5%. In anticipation of this debt issuance, we had entered into a treasury rate lock agreement in January. We received $4.3 million in settlement when the debt was issued in March, giving us an effective rate of 4.4%.

In February, we established a new $500 million ATM program and terminated the program we launched in September 2016. During the first quarter, we sold an aggregate of 4.1 million shares under our ATM program at an average price of $24.51 per share. We raised net proceeds of nearly $100 million, which we put to work through our real estate investment activity. Our ATM program has been a very effective way to raise equity and makes a lot of sense for us, given the flow of our business and the granular size of our transactions.

As a result of these capital markets activities, at March 31, our long-term debt stood at $2.7 billion, with a weighted average interest rate of just under 4.4% and a weighted average maturity of 6.1 years. In an environment of raising interest rates, it's important to note that all of our long-term borrowings are fixed-rate and our debt maturities are intentionally well-laddered. Our median annual debt maturity is just under $270 million, and we have no meaningful debt maturities until the year 2020. Our leverage ratio at March 31 was 5.7x net debt-to-EBITDA on a run-rate basis. This equates to around 42% on a net debt-to-cost basis.

At the end of the quarter, we had borrowing capacity on our credit facility of over $500 million in addition to the $35 million cash on our balance sheet. As I indicated earlier, the accordion feature of our expanded credit facility provides access to even more liquidity. In summary, we're well positioned with a substantial financing flexibility, conservative leverage, and access to a variety of attractive equity and debt options to fund a large pipeline of investment opportunities.

Now turning to our financial performance. Acquisition activity during the first quarter was funded by strong cash flow from operations, cash proceeds of approximately $50 million from asset dispositions and the proceeds from our capital markets activities I noted earlier. As of March 31, our real estate portfolio stood at $6.5 billion, representing 2,000 properties. This compares to $5.5 billion, representing 1,750 properties at March 31 in 2017. The annualized base rent and interest generated by our portfolio in place at March 31 increased 16% to $520 million as compared to $448 million a year ago.

Acquisition activity drives revenue growth, and revenues increased 17% year-over-year to $126 million. Our first quarter acquisition volume was weighted towards the end of the quarter. Therefore, the full impact of that volume will not be realized until the second quarter of 2018. Our consistently strong revenue growth reflects the broad-based demand for our real estate capital solutions.

Total expenses increased 7% to $85 million compared to $80 million a year ago. Substantially all of this increase can be attributed to higher depreciation and amortization, reflecting the growth of the portfolio. Interest expense was relatively flat compared to a year ago, as higher average balances outstanding on our credit facility were offset by decreases in the weighted average interest rate on our long-term borrowings.

Property costs were $1.3 million for the quarter as compared to $800,000 a year ago. The increase was primarily related to property taxes, insurance and other costs on properties that were vacant during the quarter. G&A expenses were $10.9 million compared to $10.2 million a year ago, primarily due to the growth of our portfolio and related staff additions. For the quarter, G&A expenses as a percentage of average portfolio assets decreased to 68 basis points from 78 basis points during the first quarter of 2017, reflecting the scale efficiencies that come with portfolio growth.

Net income increased to $50 million for the quarter or $0.26 per basic and diluted share compared to $31 million or $0.19 per basic and diluted share a year ago. Net income for the first quarter of 2018 includes an aggregate net gain of $9.6 million from property sales versus an aggregate net gain of $3.7 million from property sales in the first quarter of 2017. Net income for 2018 also includes an impairment charge of $1.6 million related to a loan that was written off during the quarter. In comparison, the first quarter of 2017 included an impairment charge of $4.3 million related to a vacant property that was sold shortly after the end of that quarter.

AFFO for the quarter increased 23% to $86 million or $0.44 per basic and diluted share, from $70 million or $0.43 per basic and diluted share last year.

Our dividend is an important component of our overall stockholder return. And since our IPO in 2014, we've increased our dividend per share by 24%, while maintaining a low dividend payout ratio and, at the same time, reducing our leverage. For the first quarter, we declared a quarterly cash dividend of $0.31 per common share, representing approximately 70% of our AFFO per share.

Now turning to guidance. We are affirming our 2018 guidance first announced last November. Based on projected net acquisition volume of $900 million for 2018, we expect AFFO per share to be in the range of $1.78 to $1.84. AFFO per share in any period is sensitive to the timing of acquisitions during that period as well as the amount and timing of dispositions and capital markets activities.

In 2018, we expect acquisitions to be spread throughout the remainder of the year, though they're often weighted towards the end of each quarter. The midpoint of our AFFO guidance is based on a weighted average cap rate on new acquisitions of 7.75% and targeted leverage in the range of 5.5 to 6x run rate net debt to EBITDA.

Our AFFO per share guidance for 2018 equates to anticipated net income excluding gains or losses on property sales of $0.83 to $0.87 per share plus $0.87 -- excuse me, plus $0.88 to $0.90 per share of expected real estate depreciation and amortization, plus approximately $0.07 per share related to items such as straight-line rents, equity compensation and deferred financing costs.

And now I'll turn the call back to Chris

Thank you, Cathy. And as usual for me to do and before turning the call over to the operator for questions, I want to make a few added comments.

Every quarter, we disclose STORE Scores, which are base forms of contract rating, which you get by multiplying the probability of a tenant insolvency, and we derive this from Moody's Risk Calc, by our estimate of lease rejection probability, which is an option available in bankruptcy for insolvent companies. Over time, we'll get more precise with this form of measurement, but I can tell you that it overlooks a number of very important contributors to our performance.

Capital stack, for one, are very important. For instance, were we to adjust the top 10 tenants for unsecured capital stacks that are effectively subordinate to us, credit ratings would be elevated by approximately 2 notches. Other qualitative assistance can come from guarantees, either personal or corporate, low investment prices relative to values, rent deposits and more. All this amidst our ability to bend the risk curve through effective portfolio management.

So since the middle of 2017, the percentage of assets that we hold having base investment-grade STORE Scores has declined from an average of 75% to roughly 71% this quarter. We gave a lot of thought about uniquely disclosing this transparent data, which we use ourselves, because we figured you might rightly ask about STORE Score moves. So to preempt the ask, I'll tell you that there's nothing systemic that we see. A lot of it is simply balance sheet and growth-driven. No sector and industry stands out, and there is rotation.

So while the average percentage of investment-grade STORE Score ratings has fallen about 4% from 75% to 71%, 5% of the portfolio has experienced improvement, while almost 9% has moved in the other direction. And if you look behind the moves, most are technical or small moves in our estimated probability that caused individual contracts to move a notch or more. Given median unit-level coverages that have been holding very stable for the portfolio, little of the move pertains to unit-level performance. Very few of the contracts we have that have moved are on our watch list, which has actually fallen slightly since last year. And as you know, we continue to have fewer than 10 properties that are vacant. The number this quarter is 7 out of 2,000.

At the center of this exceptional performance of STORE are 2 cornerstone principles of corporate finance. The first is simply STORE's outstanding portfolio diversity, which is the best in our decades-long history of running successful public real estate investment trusts. Diversity is what permits pools of loans and leases to nonrated entities to have a substantial majority of their cash flows become investment grade.

The second cornerstone is contract seniority. Contract seniority is what permits nonrated businesses to issue highly-rated securities backed by senior cash flow claims. At STORE, we have sought to actually combine these disciplines by having a highly diversified portfolio of investments and net-lease contracts that represent senior claims on the cash flows of our tenants owing to the fact that we exclusively invest in profit center assets.

While the execution is complex, the principle is not. The static corporate level, and that's excluding the external growth that benefits our shareholders, our average 10 basis point loss on performance for the end of 2017 equates to what you might expect from an A credit rating, which is materially higher than reported historic base STORE Scores that we've reported. Only unlike A-rated notes, our gross levered property-level returns are materially higher, like around 900 basis points higher, which you can see from our better than 13% gross levered returns realized from our investments made this quarter alone. And therein lies the alchemy, achieving investment-grade risk through diversity and contract seniority, but with impressive equity rates of return that enabled double-digit rates of return for our shareholders for each of our first 3 years as a public company.

And with this, operator, I will now turn the call over to you for questions.

(Operator Instructions) And the first question comes from Craig Mailman with KeyBanc Capital Markets.

This is Laura Dickson here with Craig. I'll ask these questions for you, Cathy. As you said, you had an active capital markets quarter. Was this a function of upcoming maturities for the ATM program and credit facility? Or just being proactive? And I also wanted to know if you're still considering preferreds?

Okay. So this quarter, we had already talked about doing the public offering of bonds. And so that was part of the plan this year, and the timing in first quarter looked right. As far as the ATM renewal, yes, it was -- we were coming towards the end of our prior program, and that was just really refreshing it. And for the revolver, we were really looking towards expanding liquidity going into the year, so allowing us to have a little bit more optionality as to when we would do long-term debt by having a larger revolver and pushing out the maturity. We always believe that having longer revolvers is good.

Okay. That makes sense. And then, Mary, I noticed in the pipeline, it looks like entertainment has been de-emphasized from like 6% -- to 6% from like 11% in 4Q. And then restaurants and other retail have increased. So just wondering if that's indicative of where you're seeing the best opportunities, currently?

Yes. Laura, it's there. Essentially, the pipeline is pretty fluid and things move in and out pretty well. So I would say that -- it's probably -- we're still looking at plenty of family entertainment. It's still a big category, but there was probably some movement of a transaction that moved away from us or we actually looked at.

And the next question comes from Kevin Egan with Morgan Stanley.

I just had a quick question in terms of just acquisition funding. So essentially, kind of looking at what you've done this quarter. You raised some equity. And we just assume about $100 million per month and then dispositions of $300 million to get to $900 million net? It looks like you've done more acquisitions and probably less dispositions. So I'm just wondering, are you thinking about funding more acquisitions with dispositions and secure? Or rely on equity?

This is Cathy. Yes, the disposition activity is pretty lumpy. So I don't know that I would think that taking the first quarter and annualizing it would necessarily be what would really happen. So we will continue to look at disposition activity. As Mary mentioned, there are a couple of different kinds of dispositions we do. One is opportunistic, and that tends to be a little more where the timing may or may not be predictable, because some of it might be reverse inquiries and things like that. And then, we do active portfolio management. So -- and that's going to create lumpiness. So I think that assuming that we'll have a decent amount of property sales last year. We did about $250 million. I believe we'll be higher than that this year, somewhat. So yes, that will be a source of funding for the year for sure.

I think your assumption is not -- I think your assumption is okay. I mean, if you say $100 million a month and $300 million worth of sales, I think that's the rational option.

Yes.

Okay. And then -- so just in terms of the just cap rates on acquisition, have you seen any movement there? I know a lot of your peers have said they stayed pretty flat. But are you seeing anything, just on the deals that you look at?

Yes, same, very stable and not seeing -- maybe a little upward pressure out in the auction marketplace, just because interest rates are rising. But we haven't seen it really come through, but they're very stable.

Okay. And then, just back on dispositions. Are there any properties that you're looking at or do you have in mind that are fairly low cap rate properties? Or you feel like you could dispose of that would create minimal dilution? Or is that not something you're really looking at or have in mind right now?

This is Chris. First of all, if you look at our acquisition activity of 7.84%, the sales activity that we've been doing is less than that, I mean, from a cap rate perspective. So it's all accretive. And I think it's really important that the sales activity be accretive. And on the opportunistic side, it's exceptionally accretive. So we have transactions that fell off well into the 6s and sometimes even lower than that. So it's -- and it's partly because we're able to just originate stuff directly. And then, over time, what will happen with -- since we're dealing with BB tenants, it's an interesting thing, if you're dealing with BB tenants, your chances of upward and downward credit migration are about the same. So -- whereas your chances of downward credit migration or just the highest that you're dealing with investment-grade tenants, you have only one way to go. And -- but if you're at BB territory, you sort of have some moves in either direction. And then, when you have moves upward, it represents a huge opportunity for us sometimes to sell off assets and make serious money on them. So we've been able to do that and we'll take advantage of that going forward.

And the next question comes from Rob Stevenson with Janney.

Chris, how are you feeling these days about early childhood centers and movie theaters? You trimmed a little bit in the quarter. Is that something that we should expect to see you do? Or is it just opportunistic this time around?

I would say, right this time around, it's been opportunistic. We've -- theaters has always been kind of 6% or less in that neighborhood. So I mean you're not going to see us go long and big time into theaters. It's not something we would do. Early childhood education we like a lot, and we like the customers that we have. And I would think it's just a fundamental industry that's -- that has great size and strength. So you'll see us do more of that.

Okay. And then, what is Zips Holdings? What type of stores are those?

Yes. Zips Holdings, Mary you can talk about Zips Holdings.

Yes. So Zips is the second largest carwash in the U.S. They have about 108 locations. They're really -- and it's a fragmented industry, as you can appreciate. So they run -- they're actually doing a big -- pretty much good a roll-up of that. They have a -- it's a private company, so I can't talk a whole lot about the size and financials. But they have a nice membership program, which really sets them apart, good express washes. They have a large footprint and a company size. So they have a good economies of scale and stuff. So really strong player. And...

A competitor of Mister Car Wash?

Yes. So that's fair.

Well, if you wash cars, they're all competitors.

Yes. Yes. Yes. Carwash, yes. Exactly.

Are they regional? Or are they national?

They're national.

Yes. I mean, I would say they're national, but they have regional areas of strengths, since they only have 100 units. So Mister Car Wash is meaningfully larger, from a numbers perspective.

Yes. A couple of hundred, I think. Yes. With Mister Car Wash, second-largest, yes.

And the next question comes from Michael Knott with Green Street Advisors.

This one's maybe for Mary. On the pipeline velocity slide, can you just speak to the, I guess, I would describe it as continued parabolic ascent of the total pipeline? And then, also, the recent uptick in the number of deals reviewed?

Yes. So I'll try and explain this. So the pipeline is the trend line of the pipeline that you see going up is our total pipeline. It's $12.3 billion. The dynamic pipeline, as you can imagine, things go on and go off, a lot of velocity So for example in the first quarter, we might have looked at $2.7 billion. And then, we may have decision $2.7 billion. So it sort of stayed at a little over $12 billion in total. The bottom line talks about the deals that we are actually decisioning on. So those are transactions that we are either passing on or we're funding. So we're closing them or passing on them. So you'll see that in the first quarter we just had more of the pipeline sort of move through from a decision perspective, and it's pretty fluid. One quarter doesn't really make a trend or anything like that, but that's essentially what's happening on that chart.

Okay. And then, maybe for Chris, on your closing commentary about the slight downticks in the STORE Score investment-grade percentage, just curious -- and then, you also gave the reminder that -- the very useful reminder that credit migration tends to be down when you have an investment grade-rated tenant. Do you see an analogy there over time with your STORE Scores? And is that part of the recent downtick in your STORE Score investment-grade percentage? Is there sort of a corollary there?

No. First of all, the downgrade migration comment is totally correct for corporate credit ratings. So unsecured corporate credit ratings is what you see. I mean -- so and there's evidence, there's strong evidence that if you're investing in, let's say, a BBB Company, you probably have a better than 50-50 shot at being nonrated over 10 years, something like that. In our case, we're not rating companies per se, we're rating contracts. So we're basically doing a twofold type rating. So the migration capabilities are going to be a little bit different. I would say -- and you have to understand by the way, you have to appreciate the full magnitude of this, the difference between a AAA rated company and a BBB- rated company is a whopping 60 basis points of default probability. I mean that's the entire spread. So you're talking about just incredibly small moves in risk that can cause things to move up or down, and so what we've seen is that we've looked at -- across the portfolio, most of it has to do with things like growth. So for example, let's say, you're growing, you add a lot of debt, your balance sheet looks more levered, but you don't have a run rate income yet to show for it. So there is some of that that's happening. There are some people that have done actual buyouts where you do have some higher leverage, but the leverage is unsecured, so we're not really worried about it. And so we're going to be peeling back all of the reasons for all of this, but I thought that it's important for us to tell you sort of what's happening overall.

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

So can you, maybe, give us a little update on the progress with either selling or leasing up the vacant Gander stores? And potentially, maybe even returning those 2 that are under CMBS debt to the lender?

Yes. This is Cathy. As far as the 2 that we returned to the lender, there -- we had talked about that last quarter, that there was 2 properties that were CMBS-financed. And recovery-wise, turning that back to the lender was the most effective recovery time-wise as well, to put that to bed and move on. And then 8 of the properties, as mentioned, Mary -- Mary mentioned, we relet and those are the Gander outdoors, and they're all online as of now...

Yes. All [put] online.

So they're all paying rent. And they came on throughout the first 4 or 5 months.

We sold one.

And we have 2 -- and we sold one for 100%. And then, we have 2 that we're working on in special servicing, and we're getting a lot of activity on those 2 sites

So out of the 7 empty properties we have that are not paying, 2 of them are Gander's.

Yes. Of the 7 empty, 2 are Gander's.

Okay. So -- okay. So Essentially just the 2, and then, the rest -- just the 2 left to resolve at this point? The CMBS center has already been handed back to the lender at this point?

I mean, basically, the recovery on that would have been close to what the loan was anyway. So it just made sense for the CMBS lender to service it.

Understood. And then, can you guys maybe break out what your coverages are between service -- the service retail and manufacturing components of your portfolio, just generally speaking?

Well, I would say that the median coverage is around 2. For the portfolio, I would say that the retail is probably a little bit higher than that. So if you look at the, I would say, that the service component sector of our portfolio is probably -- if I had to do this broad speaking it's going to be kind of in line, maybe a touch lower. The manufacturing coverage is going to be considerably higher, which is why we basically talk about median coverage as opposed to weighted average coverage because sometimes, you'll have a manufacturing company and the coverage will be 15:1 or something like that. And by the way, having high coverages isn't always something that you sleep well at night on too because when you have high coverages, it just means that your rent is so insignificant that they might decide to move elsewhere. So you have to really focus on other issues as well.

And then, so the service you'd expect kind of be basically because of the bulk of the portfolio in line with the median number?

Yes.

Yes.

(Operator Instructions) And your next question comes from Collin Mings with Raymond James.

First question for me, just kind of going back to the manufacturing side of the deal pipeline. Can you just, maybe, provide an update on the growth opportunities there? Again, the deal pipeline looks pretty flat there, but just over the last couple of years, clearly, the exposure there has ticked up a little bit. Where do you see that going over, call it the next 6 months, year or so?

Collin, it's Mary. Manufacturing, we've always thought about it around 15% is kind of where it is. I wouldn't expect it to move much higher than that or maybe much lower either. There's actually been a lot of manufacturing transactions out in the market right now. As you know, a lot of people moved away from retail so manufacturing has gotten a little bit hotter on that asset class side of -- and the auction marketplace for sure. So but we're still we're looking at everything as we do no matter what it is, service as long as it has a P&L and it's -- they'll do the math to leases, and they'll report financials. We'll look at the opportunities. So I would say 15% has really been our sort of guideline there.

Got you. But I guess, the other part of that question was, and you touched on it, which is you are actively seeing a little bit more competition for deals there, just given the market dynamics?

Yes. Yes, I think that's fair. I think -- some people call it industrial. We call it manufacturing, and most of ours make a product, not all. And so yes, on the industrial side, we've seen a lot more activity out there and again I would probably attribute that to people kind of running from retail a little bit.

Okay. And then, a lot of my questions have been answered, but just 2 more housekeeping ones. Just can you expand on the loan loss recognized in the quarter?

Sure. That was -- this is Cathy. That was a loan that we made a couple of years ago that was secured by assets and the -- we took back most of the assets and the remaining amount was written off during the quarter. We may still collect on some of it. But to be conservative, it was just written off.

Okay. Fair enough. And then, just -- you touched on -- provide a little more color around Zips Holdings. But just maybe talk a little bit more, could there be some repeat business there? And just how do you think about that in terms of the diversity of your portfolio?

Sure there will definitely be -- all of our -- most -- as you know, 30% of our business is repeat. And when we work with customers, we expect that they're going to grow, and that we're going to be able to do more business with them. It's what the relationship piece is really important to us, and it's how we get paid for the value we add, as you know. So I do expect that we'll do some more Zips. I guess I'll defer to Chris on carwashes in general and the portfolio and I don't think that we'll do a whole bunch of...

Yes, we don't have a stated objective in terms of what our carwash limitations are...

Yes, from the industry but [effective].

But suffice it to say, it's a small sector. And so we're going to keep our exposure limited.

Yes.

And as there are no more questions, I would like to return the call to Christopher Volk for any closing comments.

And thank you, operator. Many of you listening attended our recent April 11 Investor Day at the New York Stock Exchange, which was terrific, and provided a deeper dive into STORE and our highly-evidenced space real estate investment, net-lease investing methodology. We're going to return to New York City for the NAREIT Conference on June 4 through 7. So if you'd like to see us there, please reach out to us or to financial profiles. And finally, we're posting less than 10 exciting, exciting STORE University, which will be on our website fully at the end of May. And STORE U also now has its own YouTube channel for easier access and massive binge watching.

So thanks, all, for listening. We'll be around today and tomorrow for any follow-up questions. Goodbye.

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