STORE Capital Corporation (NYSE:STOR) Q2 2020 Earnings Conference Call - Final Transcript

Aug 05, 2020 • 12:00 pm ET

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STORE Capital Corporation (NYSE:STOR) Q2 2020 Earnings Conference Call - Final Transcript

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Presentation
Executive
Christopher H. Volk

me discuss our achievements for the quarter. Our portfolio remains healthy with occupancy rate of 99.5%, and with continued stability in the percentage of net lease contracts rated investment grade in quality based upon our STORE Score methodology. On the acquisition front, we began to curtail our acquisition efforts beginning in the first quarter, but did make just over $135 million of new investments during the second quarter. Those investments were funded with equity and cash recycled from asset sales, the results of which elevated our unencumbered assets to about 62% of total investments and reduced our financial leverage to cost to historically low levels. Leverage on the unencumbered -- 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. STORE's unencumbered asset leverage is lower than most any public REIT I know of, irrespective of corporate credit rating.

Now as I do each quarter, here are some statistics relative to our second quarter investment activity. Our weighted average lease rate during the quarter was 8.7%, representing a meaningful rise over prior quarters and reflective of the less robust capital availability in general across the middle-market segment of the economy that we are principally dedicated to. The average annual contractual lease escalation for investments made during the quarter was 1.8%, providing us with a gross rate of return, which you get by adding the lease escalations to the initial lease rate or about 10.5%. Presently, we are not employing leverage on our new investments. Instead, we are electing to maintain a more conservative posture in these less certain times. However, we need to incorporate our customary corporate leverage in the area of 40%, our levered investor return would approximate 15% with net returns after operating costs of about 13%.

Our historic investor returns and outperformance from STORE and from predecessor public companies have been mostly driven by our robust business model, which is why we take the time to disclose investment yields, contractual annual lease escalations, investment spreads 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.

Weighted average primary lease term of our quarterly new investments continue to be long at approximately 17 years. I would like to note here that our weighted average portfolio lease term has remained at about 14 years since 2015. Moreover, we're highly defensive with less than 3% of our primary lease terms maturing over the next five years, which is far and away the lowest I am aware of among our peer public net lease companies. The major reason for this important contract attribute is that we are constantly extending lease terms as we add new investments into existing master lease arrangements. Given a recessionary environment, our lack of near-term lease maturities is definitely a good place to be.

Another desirable attribute our net