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STORE Capital Corp  (NYSE:STOR)
Q4 2018 Earnings Conference Call
Feb. 21, 2019, 12:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Hello and welcome to STORE Capital's Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that today's event is being recorded.

I will now turn the conference over to Moira Conlon, Investor Relations for STORE Capital. Please go ahead.

Moira Conlon -- Investor Relations

Thank you, operator, and thank you all for joining us today to discuss STORE Capital's fourth quarter 2018 financial results. This morning, 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.

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 then we will open the call up to your questions. In order to maximize participation, while keeping our call to an hour, we will be observing a two 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 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, dispositions and our AFFO and AFFO per share guidance for 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 those 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.

Christopher H. Volk -- President, Chief Executive Officer and Director

Thanks, Moira. And good morning everyone, and welcome to STORE Capital's fourth quarter 2018 earnings call. With me today are Mary Fedewa, our Chief Operating Officer; and Cathy Long, our Chief Financial Officer.

During 2018, we achieved another record year of investment volume, while adhering to the granularity and diversity that we're known for. Funding a new real estate investment every day and a half. Mary will run through the numbers with you, but I would say that all of us here are happy with the progress we've made over the past several years to penetrate the large markets that we address. We often say to investors and analysts that we built our high performing and highly diverse portfolio brick-by-brick based upon a business model that we conceded in 2010 and that represents an evolution of thought over our more than 30 years in the net-lease real estate investment business.

In 2018, we posted meaningful investment, management and capital market highlights continuing our integrated approach to creating a trophy real estate investment portfolio. Such a portfolio should have the ability to achieve consistent sustainable investment grade performance while delivering attractive rates of returns and strong market value added creation for our shareholders. To-date, we're proud of our results, having produced double-digit rates of shareholder return for four consecutive years that have been driven enough by multiple expansion, but by strong AFFO per share growth.

In this light, we raised our dividend by 6.5% in the third quarter, which as a reminder was our fourth consecutive year of raising our dividend in a meaningful way. Even so, our dividend payout ratio for the fourth quarter was under 69% of our adjusted funds from operations, serving to continue to provide our shareholders with a highly protected dividend and a company that is well positioned for long-term internal growth based upon anticipated tenant rent increases and the reinvestment of our surplus cash flows. This payout will be potentially lower in 2019 based upon our AFFO growth projections which Cathy will address later when she offers an update on our 2019 guidance.

Our balance sheet remains extremely well positioned and we have realized our investor returns over four years while lowering our leverage profile. Our funded debt to EBITDA on a run-rate basis was 5.5 times for the quarter, which was at the lower end of our guidance range. Moreover, the vast majority of our investments made during the quarter added to our pool of unencumbered assets, which stood at just over $4.6 billion, or slightly more than our goal of 60% for gross investments at the end of the year, providing us with added flexibility in our financing options.

Now as I do each quarter, here are some statistics relative to our fourth quarter investment activity. Our weighted average lease rate during the quarter was approximately 8.04%, slightly higher than our 2018 trends. For the year, our weighted average lease rate was 7.93%. The average annual contractual lease escalation for investments made during the quarter approximated 2%, providing us with a growth rate of return, which you get by adding the lease escalations to the initial lease rate of over 10%. Incorporating average corporate borrowings approximating 41% of investment cost at an interest rate of 4.5% and you arrive at a gross levered total return of better than 13%.

Our outperforming investor returns from STORE and predecessor public companies have been mostly driven by adding favorable property level rates of return, which is why we take the time to disclose investment yields, contractual annual lease escalators, investment spreads to our cost of long-term borrowings and our operating costs as a percentage of assets, which are the four essential variables that enable you to compute expected investment returns.

The weighted average primary lease term of our new investments continues to be long at approximately 18 years. The median new tenant Moody's risk credit rating profile was BA2. The median post-overhead unit level fixed charge coverage ratio for assets purchased during the quarter was 3.1 to 1, well above our STORE portfolio median of around 2 times. The median new investment contract rating or STORE score for investments was favorable at Baa1. Our average new investment was made at approximately 78% of replacement cost, 92% of the multi-unit net lease investments that we made during the quarter were subject to master leases. In all 75 of the new assets acquired during the quarter are required to deliver us unit-level financial statements, giving us unprecedented unit-level financial reporting from 98% of the properties within our portfolio. This impressive fact is critical to our ability to evaluate contract seniority and real estate quality, as well as to our press of access to capital, including the inaugural issuance of AAA rated Master Funding notes in October of last year.

Our investment activity continued to be granular with 45 separate transactions completed and an average transaction size of just over $10 million. The strong demand for our solutions has enabled us to close an investment every day and a half during the past few quarters. This is how we built such a highly granular and diverse investment portfolio.

At the end of the quarter revenue realized from our top 10 customers was 18.1% of annualized rents and interests, down from 18.5% at the end of the third quarter. Our single largest customer represented just 2.7% of our annualized rents and interests placing us below our target of having no tenant exceed 3% of our annual revenues.

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

Mary Fedewa -- Chief Operating Officer and Director

Thank you, Chris and good morning everyone. During 2018 we invested over $1.6 billion in acquisitions, the highest annual volume in our history, and we profitably divested approximately $228 million in real estate investments. Our investment activity for the quarter totaled $460 million, which is our second highest quarterly volume. This is impressive as it follows on the heels of our record activity of over $500 million in the third quarter of 2018.

Our average transaction size was $10.2 million with an average cap rate of 8%, combined our net investment activity for the year exceeded our net investment guidance of $1.2 billion by over 15%. Our ability to continue to successfully identify assets for investments and to get those deals done as well as our profitable property sales reflect our ability to consistently invest in and divest of assets in ways that are accretive to our shareholders. At the same time, our portfolio remained extremely healthy with an occupancy rate of 99.6% and about 72% of the net lease contracts rated investment grade in quality based on our STORE score methodology.

In 2018 we sold 80 properties for an aggregate gain over cost of about $24 million or approximately 10% over cost. 39% of the property sales were opportunistic and delivered the bulk of the gain, averaging a 20% profit over cost. 42% of property sales were strategic to reposition the portfolio and generated a 5% gain over cost. The remaining 19% of properties were sold as part of our ongoing property management activities and resulted in an impressive recovery rate of 102%.

Now turning to our portfolio performance. At year-end 2018, our portfolio mix remains steady with 65% of properties in the service sector, 18% in experiential retail with a substantial online presence, and the remaining 17% in manufacturing. The customers within our top 10 remained unchanged since last quarter end, with our largest customer Art Van Furniture representing just 2.7% of annualized base rent and interest, down from 3.4% at the end of 2017. Our top 10 customers accounted for just 18% of base rent and interest. Overall, our portfolio remains highly granular and well diversified by design.

Repeat customers accounted for 34% of total acquisitions in 2018 and 28% in the fourth quarter. Delinquencies and vacancies remained very low in the fourth quarter due to our strong tenant partnerships and our active portfolio management. At year end, only eight of our 2,255 property locations were vacant.

Heading into the New Year, our pipeline remains robust and cap rates are holding steady. Over the course of 2018, our already very strong pipeline grew by over 8% or more than $1 billion resulting from increased staff and increased market penetration. Our team continues to identify plenty of attractive opportunities among middle market and larger companies that are in need of effective long-term financing solutions. Adding value for our clients is important and to that end on January 29th we held our third Annual Customer Conference, the Inside Track Forum, here in Scottsdale. It was our biggest and best event so far with attendance up 40%. The event offered our customers incredible access and insights from a top-notch lineup of speakers and in the way of actionable items to help them grow their businesses.

With that, I will turn the call over to Cathy to discuss our financial results.

Catherine Long -- Chief Financial Officer, Executive Vice President and Treasurer

Thank you, Mary. I'll begin by discussing our financing activity and balance sheet, followed by our financial performance for the fourth quarter and year ended December 31, 2018. Then I'll review our guidance for 2019.

Starting with our financing activity. We funded our strong fourth quarter acquisition volume with a combination of cash flows from operations, additional borrowings and equity proceeds from our ATM program. Our ATM program continues to be in a especially 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.

During the fourth quarter, we sold 9.2 million common shares under our ATM at an average price of $29.57 per share, raising net equity proceeds of just over $268 million. Over the course of 2018, we raised net equity proceeds of approximately $740 million through the ATM, which compares to $743 million raised in 2017, including the Berkshire Hathaway investment.

We were also strategically active in the debt markets this past year and fourth quarter was no exception. In October we issued an aggregate $592 million of net-lease mortgage notes under our STORE Master Funding program, including our first ever issuance of AAA rated notes. We used the proceeds to prepay without penalty, $233 million of notes that were scheduled to mature in 2020, and the remainder to pay down outstanding borrowings on our credit facility .

As a result of these financing activities at December 31st, our long-term debt stood at slightly under $3 billion at a weighted average maturity of about 6.2 years, and a weighted average interest rate of 4.4%. It's important to note that all our long-term borrowings are fixed rate and our debt maturities are intentionally well laddered. Our median annual debt maturity is currently just under $280 million, and with the prepayment of our Master Funding notes this past October, we successfully extended our larger debt maturities out to the year 2021. We have very little debt coming due over the next two years. Our total debt maturities are $105 million in 2019, virtually, all of which is an extendable bank term loan and just $68 million in 2020.

As you've seen over the past several years, our portfolio management strategy includes proactively selling properties and deploying the proceeds to acquire new properties or to repay debt as it matures. In any given year, our goal is to generate free cash flow that in combination with the proceeds from asset sales exceeds our annual debt maturities.

At December 31st, our leverage ratio was at the low end of our target range at 5.5 times, net debt to EBITDA on a run rate basis or around 40% on a net debt to cost basis. Approximately 61% of our $7.6 billion gross real estate investment portfolio was unencumbered at December 31, 2018. This amount is up from 53% at the end of 2017 and gives us substantial financing flexibility. The remaining $3 billion of our real estate assets were pledged as collateral for our secured debt. Longer term, we are targeting an unencumbered asset ratio of approximately 65%.

We are well positioned for the year ahead with substantial financing flexibility, conservative leverage, and access to a variety of attractive options to fund our large pipeline of investment opportunities. We entered 2019 with more than $450 million available on our credit facility, plus $800 million with the accordion feature. Also, we have just over $500 million available on the $750 million ATM program we launched in November.

Now turning to our financial performance. At year-end, our real estate portfolio stood at $7.6 billion representing 2,255 properties. This compares to $6.2 billion, representing 1,921 properties at December 31, 2017. The annualized base rent and interest generated by our portfolio increased 23% to $615 million as compared to $501 million, a year ago. Growing demand for our real estate financing solutions has continued to translate into strong and consistent revenue growth.

Fourth quarter revenues increased 22% to $147 million compared to $120 million in 2017. And total revenues for the year were $541 million, an increase of 19% over 2017 levels. Excluding a $4.6 million non-cash charge recognized a year ago, year-over-year revenues were up approximately 18%.

For the fourth quarter, total expenses were $105 million, up from $83 million a year ago. Excluding non-cash expenses, such as the accelerated amortization of deferred financing costs, depreciation and amortization and impairments, total expenses increased 17% year-over-year.

At December 31st, only eight of our 2,255 properties were vacant, and property costs totaled $1.4 million for the fourth quarter and $4.2 million for the year. Property costs for the fourth quarter were approximately 8 basis points of portfolio assets, which is up slightly from 6 basis points on average for the past four quarters. The property cost can vary quarter-to-quarter, they're not a significant portion of our annual cash expenditures.

G&A expenses were $12.5 million for the fourth quarter, compared to $11.2 million a year ago. The increase was due to the growth of our portfolio and related staff additions, partially offset by scale advantages and efficiencies from ongoing improvements to our process automation, and servicing platform. For the year, G&A expenses, expressed as a percentage of average portfolio assets decreased to about 67 basis points, down from about 72 basis points in 2017.

Net income for the fourth quarter increased to $57 million or $0.26 per basic and diluted share, compared to $41 million or $0.21 per basic and diluted share a year ago. Property disposition activity for the fourth quarter resulted in a net book gain of $14.7 million from the sale of 25 properties. This compares to a net book gain of $3.8 million from the sale of 15 properties in the fourth quarter of 2017.

Net income for the year was $217 million or a $1.06 per basic and diluted share, compared to $162 million or $0.90 per basic and diluted share for 2017. This included an aggregate net book gain of $45.5 million from the sale of 80 properties during the year, as compared to an aggregate net book gain of $39.6 million from the sale of 55 properties in 2017. Net income for 2018 also included $9.9 million of non-cash charges consisting of $2.1 million in interest expense for the accelerated amortization of deferred financing costs, primarily related to the prepayment of STORE Master Funding notes in the fourth quarter and an aggregate $7.8 million of impairment provisions on three properties.

Net income for 2017 included $20 million of non-cash charges consisting of a $4.6 million charge to revenue related to the accelerated amortization of lease incentives. A $2 million charge to interest expense related to the accelerated amortization of deferred financing costs associated with STORE Master Funding prepayments in 2017, and an aggregate $13.4 million of impairment provisions.

In the fourth quarter, we delivered another quarter of strong growth in AFFO and AFFO per share. AFFO increased 26% to $103 million from $82 million, a year ago. On a per share basis, fourth quarter AFFO was $0.48 per basic and diluted share, an increase of nearly 12% from $0.43 per basic and diluted share last year.

Full year 2018 AFFO increased 23% to $378 million or $1.85 per basic and $1.84 per diluted share. This compares to $306 million or $1.71 per basic and diluted share in 2017, representing a year-over-year AFFO per share increase of 7.6%. Chris already mentioned our dividend increase in the third quarter. So I'll just point out that since our IPO in 2014, we've increased our dividend per share by 32% while maintaining a low dividend payout ratio, and at the same time reducing our leverage.

Now turning to our guidance for 2019. Considering our record level of investment activity last year, and our outlook for 2019 as we enter the first quarter, we're affirming our 2019 guidance announced last November. Based on projected net acquisition volume for 2019 of approximately $1.1 billion, we expect AFFO per share to be in the range of $1.90 to $1.96. Our AFFO guidance is based on a weighted average cap rate on new acquisitions of 7.85%, and a target leverage ratio in the range of 5.5 times to 6 times run rate net debt to EBITDA. As I've said many times before, AFFO per share in any period is sensitive to both the amount and the timing of acquisitions, property dispositions, and capital market activities. Acquisition activity tends to be back-end weighted in each quarter.

Our AFFO per share guidance for 2019 equates to anticipated net income of $0.88 to $0.91 per share excluding gains or losses on property sales, plus $0.96 to $0.98 per share of expected real estate depreciation and amortization, plus approximately $0.06 to $0.07 per share related to items such as straight-line rents, equity compensation and deferred financing cost amortization.

Before I turn the call over to Chris, I'd like to note that we've recently adopted the new lease accounting standard that went into effect on January 1, 2019. While we don't expect this to have any significant impact on our results, there will be some changes to the way we report on leasing activities in our financial statements.

For example, we'll be reporting a right-of-used assets and corresponding lease liability for 20 of the 25 ground leases in our portfolio, as of January 1, 2019. As well as per the lease on our corporate headquarters office building in Scottsdale. As a result, we expect to report higher property costs and corresponding lease revenue in 2019, associated with grossing up the ground lease payments that our tenants are obligated to make on our behalf. We'll do this similar gross up for any property tax payments we collect from our tenants in the form of impairments. We expect a small increase in G&A expenses in 2019, since we are now required to expense certain lease origination costs that were previously capitalized. We will provide more details in our upcoming 2018 10-K filing.

And now I'll turn the call back to Chris.

Christopher H. Volk -- President, Chief Executive Officer and Director

Thank you so much, Cathy. As usual and before turning this call over to the operator for your questions, I want to highlight some of our significant achievements this year.

During 2018, STORE has continued to realize sector leading investment yields, which taken together with our sector leading investment spreads to our cost of borrowings, has resulted in market leading external growth efficiency. Add this to our internal AFFO per share growth drivers, which includes the dividend payout ratio that is among the lowest in the sector, and one of the highest tenant lease escalations in the sector, we have realized and believe are positioned to realize solid AFFO per share growth.

As Mary discussed, we have achieved the highest levels of investment activity in our history, both in terms of dollars invested and transaction counts. All of which illustrates the strong level of demand for our efficient net-lease solutions that we provide to our middle market and larger customers. Together with our earnings release today, we posted our updated corporate presentation, which I encourage you to review. In the appendix to the main presentation, on pages 37, 38 and 39, are three new slides that we prepare annually, and which expand upon past disclosure. Normally we would occasionally insert case studies especially service to asset illustrating minimal loss arising from the seniority of our lease contracts and our profit center real estate investments. You probably just thought that we were cherry picking. So we elected instead to insert a normalized histogram illustrating all of our recoveries on specialty service to asset since 2011.

We also compare the results to those of commercial mortgage backed securities and senior loan recoveries. Not surprisingly, our investment coverage tend to be meaningfully better and actually the distance between us and other traditional classes of credit extension is probably better still, since we measure our recoveries relative to the rents received and not just to the initial cost or value of the asset.

On page 38, we break down our 2018 asset sales illustrating are gains on both initial investment costs. More importantly, we show our sale cap rates on occupied property dispositions over the past three years and the ability we have had to reinvest property sales proceeds at higher investment cap rates which contributes to internal growth. Our incremental long-term average internal growth from recycling of asset sales proceeds is included in the updated internal growth walk on page 39. This chart illustrates our historic average internal growth since 2011, taking into account the benefits of tenant lease escalations, retained and reinvested free cash flow, recycled cash from asset sales and losses from under-performing specially service assets. It is as a complete of the disclosure of our business model as we know how to make.

After you digested our updated corporate presentation, I encourage you to also review my annual 2019 CEO letter, which was posted just this morning and is a regular an important part of our year end communication to you. I tried to pack a lot of information in these letters every year and hope you'll find this year's version to be informative.

Finally, I expect you all seen the announcement of the reappointment of Raj Shourie to STORES Board of Directors. Raj is Managing Director and co-portfolio manager of distressed opportunities Oaktree Capital and played an important role in the founding of STORE Capital. He comes to our Board with a broad perspective, an extensive institutional knowledge of STORE. On behalf of STORE and our Board of Directors we are excited to have him returning to our Board of Directors.

With these comments, I now turn the call over to your questions. Operator?

Questions and Answers:

Operator

Yes. Thank you. We will now begin the question-and-answer session. (Operator Instructions) And the first question comes from Vikram Malhotra of Morgan Stanley.

Kevin Egan -- Morgan Stanley -- Analyst

Hi. This is Kevin on for Vikram. Just a quick question, in regards to the acquisition guidance. I remember, on the last call that it was you guided to $1.1 billion, including what was remaining for the rest of the year. And then now I believe it's $1.1 billion for 2019. So I was just curious, should we be thinking of 2019 as being $1.1 billion or $1.1 billion, minus the fourth quarter acquisitions?

Catherine Long -- Chief Financial Officer, Executive Vice President and Treasurer

We believe -- this is Cathy. We believe it will be $1.1 billion net of property sales for 2019. Yes.

Kevin Egan -- Morgan Stanley -- Analyst

Okay. So would it actually be -- would that be an increase in your expectations or was that -- or it fell just pretty much in line with what you said before?

Christopher H. Volk -- President, Chief Executive Officer and Director

The answer is that a slight increase in the sense that we did more than we had targeted for 2018. So, but we're not adding the surplus of properties from 2018 into the 2019 guidance.

Mary Fedewa -- Chief Operating Officer and Director

Correct.

Kevin Egan -- Morgan Stanley -- Analyst

Okay. Thanks a lot.

Operator

Thank you. And the next question comes from Jeremy Metz with BMO Capital Markets.

Jeremy Metz -- BMO Capital Markets -- Analyst

Hey. Maybe a question for Chris and Mary. I'm just wondering, given some of the volatility we've seen in the credit markets, particularly in the fourth quarter. How does that impact your model and acquisitions? Obviously you sourced a lot of deals in the quarter. You exceeded even your revised expectations. So does it create an opportunity for you to step in and did you have any on the ground signs that this was the case?

Christopher H. Volk -- President, Chief Executive Officer and Director

Well. All right. Two things, obviously, the volatility can impact us as a potential borrower. So we would have seen our -- the 10-year treasury was favorable in a number -- as a number, but the spread to the 10-year treasury borrowed widened out, so gapped out. But the thing about what we're doing here is that the debt might have been a safe closer to 5 into 4.5 from a cost perspective, but the spreads are so attractive and the returns on equity are so attractive that it would still add market value added be accretive to shareholders. So, we weren't really concerned from our perspective. I mean I think that the market still incredibly favorable for what we do.

As far as what it means to the marketplace, and looking for transactions, we have seen that the spread volatility has caused lenders to be a little bit more conservative and the availability of capital to be less pervasive I think for people looking to finance individual real estate assets, which means that in the broker community and keep in mind that the real estate brokers are prior doing 90% of the sale leaseback business healthcare. So, and the broker community, most of that sales activity is dependent upon financing, and as you've said that financing becomes more expensive or less available then that's actually a positive for us.

Jeremy Metz -- BMO Capital Markets -- Analyst

Appreciate that color. And then, Chris, can you give us your thoughts about tethered and untethered leases and within that, how much of the portfolio falls into each bucket and what sort of differences are there in yields and rent coverage as you look for in doing one versus the other?

Christopher H. Volk -- President, Chief Executive Officer and Director

Okay. So for the rest of the people on the phone, the rest of the 80 people or so there on the phone that they don't know what an untethered lease is. I will first describe it. It's -- someone asked the question one time what kinds of deals we like the best? And my response was that we like -- if I had a choice, my choice is to do untethered real estate investments, freestanding properties on lease basis. And the untethered means that the properties are really fully independent of each other. So for example if you're doing BurgerKing restaurants, these properties are like independent businesses, they're getting their supplies and their goods from food suppliers, they are not really dependent upon some home office.

Whereas if you have a company like Gander Mountain more or less a Toys R' Us. I mean there are plenty of Toys R' Us stores that I'm sure we're very profitable. In the case of Gander Mountain, which we had vacancies of two years ago, we had plenty of Gander Mountain that were highly profitable to be owned. And in fact in the aggregate, our properties were covering in their entirety on the Master Lease level.

So, but on the other hand, those properties were tethered to all the other properties because they relying on the home office, they were relying on distribution centers and the like, and so given our choice if you're looking at exposure, if you have let's say an early childhood education operator those properties are really truly independent of each other and they not really dependent on each other for supplies or anything. There's not a lot of inter dependence upon them. So these properties can stand alone as a business and which means that, when you're making a credit extension or you have a early education provider like cadence, which is our top 10, really, you have lots and lots of true freestanding credits inside of a credit. So it all rolls up.

Whereas if you are in the retail, which our fans example which is our top exposure, again our exposure is 2.7%. So not a big number, but those properties are going to be more tethered because they are more interdependent, so we tend to like having more untethered if we were up to us and up to me personally. So, and in terms of what's the mix, I can't give you the technique...

Mary Fedewa -- Chief Operating Officer and Director

We have done the math.

Christopher H. Volk -- President, Chief Executive Officer and Director

I've done the math, and I would say most of the stuff that we do is untethered. I mean, and if we don't do that much retail and on the manufacturing side, most of the stuff that we do is untethered as well. And so I would say most of it doesn't really rely on other properties to be able to support, or other things that are not our properties to support our rents.

Operator

Thank you. (Operator Instructions) And the next question comes from Phil DeFelice with Wells Fargo.

Philip DeFelice -- Wells Fargo -- Analyst

Thank you. Little bit of follow-up on the question regarding dislocation in Q4. I heard your comments about -- a little bit more difficult to finance, one-off assets. The cap rate of 8.04%, the uptick in the Q4, would you expect that kind of going forward given those comments. And how does your current spreads given your stock price ATM issuances and Master Funding kind of relate to your historical average. Are these some of the best spreads you've ever seen?

Mary Fedewa -- Chief Operating Officer and Director

Phil, this is Mary, I'll touch on the cap rate and then I'll hand it to Chris for sort of the spreads. So on the cap rates side, I would say yes, we're seeing very stable and upward pressure on cap rates. And as you could you heard from Cathy in our guidance, we did increase our guidance to 7.85% cap rate this year from 7.75% cap that we've had for a couple of years actually. So I would say that we are seeing cap rates in the quarter or the year with 7.90% or so. So we've been very consistent in the range of high-7s for sure. In terms of the spread.

Christopher H. Volk -- President, Chief Executive Officer and Director

Yes, I mean from a spread perspective, we're going to do most likely a mix of the senior notes, which we've done in the past, unsecured, public unsecured debt, which we've done in the past, and Master Funding debt, which we've done in the past. Because the Master Funding debt last year, and if it is substantially from having a the lion's share of that being rated AAA, which is the first time anybody has done that. So last year, our actual cost of borrowings and our spreads went down as a result of that. So we were able to get that money in at 4.3%.

Given where the treasury is today, I'm cautiously optimistic that we'll be sort of in that bandwidth today between those three sources of borrowings. If you look at our laddered debt maturities and note that we have almost asset liability neutral. So for an interest rate perspective, we have virtually no exposure. Our annual cash flows are more than our debt payments are. So, which is very rare for a REIT to be able to do that.

And then also helping our spreads, candidly is that we've had some multiple expansions at the beginning of the year, joining all the other REITs out there with multiple expansion. And when you have all those expansion it also lowers your cost of capital and increases your spreads in the last year to be more efficient from an external growth perspective.

Philip DeFelice -- Wells Fargo -- Analyst

Thank you. And then what is the lead time typically for acquisitions? How much is like the acquisition guidance for example is, are there some sort of letter of content or formal process at this point?

Christopher H. Volk -- President, Chief Executive Officer and Director

Yes. I mean the answer is that -- the answer is it sort of yes, but when we give you a number, I'd say there is Ba1 for the year on a net basis, which includes significant property sales. We can't really see out to December or November. So we don't have a Ba1 worth of net transactions in hand when we are giving you that guidance.

But we do know is that we're a flow business and we've been doing transactions that have been averaging give or take $10 million per transaction. And we've been doing this for the last three years at an average pace of north of $100 million a month. And we see that the pipeline continues to be full. So lot of what we are giving you from an estimate is truly an estimate, but it is based upon having a robust pipeline, having continued sustained activity and having been able to do north of $100 million monthly. And certainly in the foreseeable future, seeing that kind of -- certainly for this quarter seeing that kind of activity as well.

Operator

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

John Massocca -- Ladenburg Thalmann -- Analyst

Good morning.

Christopher H. Volk -- President, Chief Executive Officer and Director

Hey John.

Catherine Long -- Chief Financial Officer, Executive Vice President and Treasurer

Good morning.

John Massocca -- Ladenburg Thalmann -- Analyst

So, excellent disclosure on kind of the disposition side of things. As we kind of look at dispositions maybe going forward into 2019, should we expect kind of roughly speaking the same blend between opportunistic strategic and property management. And then also is kind of cap rate you guys were able to obtain on dispositions in '18 kind of a good number for what you can see today in terms of 2019?

Mary Fedewa -- Chief Operating Officer and Director

I'll start it's Mary. But I would say yes. I would say that the 40%, 45% coming from opportunistic and only about 20% or so it's been coming from property management and the balance on strategic. So I think that's been fairly consistent. And I think from a disposition standpoint of cap rates you'll see -- and we have a new slide in our presentation. And we've been -- we had a disposition cap rate of 7.4% and that was -- and we're acquiring at 7.9% on average over the last three years.

So I think that you'll see and for 2018, we disclosed a 7.10% cap rate. Now, that includes everything, even our property management stuff, and so on that we sell, if we sell something that's vacant and so on. So it's opportunistic strategic and everything. So I think that those have been as you can see fairly consistent to the last three years that give you some averages there.

Christopher H. Volk -- President, Chief Executive Officer and Director

So if you look at page 38 of our presentation, which is the appendix, you'll see the annual numbers. And depending on the year, you can see what the internal growth impact is. So for example in 2016, the positive growth impact was 15 basis points. It's not a huge number. 2017, 20 basis points positive. This last year was a 0.5 point, which is starting to get to be sort of more meaningful. But it's all positive. It helps to shift the portfolio. It's adding a measure of incremental growth to our investors, and we think it's an important thing for us to do.

We think it is also important from just the interest rate management perspective. So this year we had roughly $120 million worth of free cash flow after dividends. Our annual debt maturity is around -- averaging around let's say $350 million a year. So if we can get that $120 million to be closer to $350 million or better than that, then you -- that's where you'd start to get to be asset liability neutral. So if you can lower your cash like this and then generate enough cash -- you have more cash than you have average debt maturities, and you can reinvest it positively, then you can add a measure of growth and also takeaway few (ph) risk.

John Massocca -- Ladenburg Thalmann -- Analyst

Appreciate the color. And then, not that it was a huge number, but can you maybe give a little color around the impairment this quarter?

Catherine Long -- Chief Financial Officer, Executive Vice President and Treasurer

Sure. This is Cathy. We had an impairment of a property in the Dakotas. It was a retail establishment. And it had been vacant for a good portion of the year. So that was what we had imperative in fourth quarter.

Christopher H. Volk -- President, Chief Executive Officer and Director

So just, -- just I'm not a huge fan of impairments because what happens is that in case we sell properties of losses, which is fine, that's part of the business rents. When we give you the property sales statistics on page 38, we're doing this based upon not GAAP, we're doing it based upon cost. So we bought it for this, we had this kind of cap rate, we sold of that cap rate. You can sort of really see exactly what's happening.

But sometimes the timing gets in the way. So you have a property it's targeted for sale and you've committed that you're willing to sell it. And at that point in time, you have to take an impairment. And so you have a sort of missed timing. Ideally, I would sell it with a loss in the quarter and not have an impairment because then you had to sort of mismatched numbers where you took an impairment the prior quarter and next quarter, we sell the asset, we won't show a loss on the asset, but there was a loss.

So we give you a disclosure on how we're doing with property sales, we're -- ignore the impairment stuff that's just GAAP, we're going to tell you exactly how much we made or loss on the properties we did during the given year and there will be no timing consequences from that.

Operator

Thank you.

Christopher H. Volk -- President, Chief Executive Officer and Director

Does that make sense. I hope that makes sense.

John Massocca -- Ladenburg Thalmann -- Analyst

That's it from me. Thank you very much.

Operator

Thank you. And the next question comes from Haendel St. Juste with Mizuho.

Haendel St. Juste -- Mizuho Securities -- Analyst

Hey. Good morning out there.

Christopher H. Volk -- President, Chief Executive Officer and Director

Hey Haendel.

Haendel St. Juste -- Mizuho Securities -- Analyst

So, I guess a question or two follow-ups on the transaction market. In light of the move in cap rates, I'm curious if you're seeing an increase in asset availability on the market, perhaps, more sellers putting more core and non-core assets on the market to capitalize on pretty full pricing in light of the move-ins, well late last year's move in interest rates and the move in cap rates. And then, I guess I'm curious how this might be impacting your your 2019. Do you -- as you look at the market, do you expect that to impact your closing ratios at all?

Mary Fedewa -- Chief Operating Officer and Director

This is Mary. So as I mentioned, we have seen an increase in our pipeline. So, year-over-year it was up 8% or $1 billion. Some of that is attributable to a couple of staff additions that we had on the direct side that have just really done a good job. And some of it is just market penetration, and I think what you're speaking to where people are putting their properties on the market. So I think that that's fair. We are seeing a lot of opportunity and increased opportunity. And so I think we'll continue to see that into 2019.

Haendel St. Juste -- Mizuho Securities -- Analyst

Okay. That's helpful. Did you mention I'm not sure if I missed it, but where -- what types of assets you might have seen cap rates move the most during the quarter.

Christopher H. Volk -- President, Chief Executive Officer and Director

We did mention that. And I --

Catherine Long -- Chief Financial Officer, Executive Vice President and Treasurer

We didn't look at it asset by asset in terms of what cap rates. We have a very narrow band anyways, really have cap rates. So in terms of maybe over 8-ish. So we ended up at 8 for the quarter. Construction plays a role in some of that and construction can go 35 to 50 basis points over because of the value you're adding there and as you know, we get paid for value. But I would say overall our cap rate range is pretty narrow. So probably...

Christopher H. Volk -- President, Chief Executive Officer and Director

We have nothing in the 6's, nothing in the 5's and so, and there's going to be kind of a decent distribution that's kind of certain idea, and 75 is the guidance for the year. We're not seeing any particular rush to desirable assets we saw at the beginning of last year. People moving away from retail properties. So we've seen that trend still is there. We've seen people, we've seen cap rates and industrial properties compress that trend is still there. So it's sort of like the anything but retail movement, but outside of that, we haven't seen anything new.

Haendel St. Juste -- Mizuho Securities -- Analyst

Got it. And then one more. The real estate side is getting certainly pretty long here and I'm curious -- and that you're building a portfolio for the long term, but just curious if the move in cap rates, maybe some of the late cycle thinking might be I think perhaps you're on dispositions and so I'm not ready to provide a specific dispositions numbers part of 2019 guidance, I'm just curious if we should expect to perhaps higher level of dispositions for this year still getting to your net acquisition guidance but any change and mindset on that.

Christopher H. Volk -- President, Chief Executive Officer and Director

So the first thing I would talk about is cycle, the notion of cycle, and this gets -- a lot of analysts focus on the expansion cycle that this economy has been in for a long period of time and the notes that somehow we must be getting near the end of the cycle. And I would say from my own self and from the industries that we've been addressing, we don't see that at this point. I think that this economy can grow at 2% to 3% at a margin, but inside of that 2%, 3% there's plenty of recession activity that's happening. So if you were working for Sears Roebuck you might have thought you were in a recession, if you are working for RadioShack you would have thought there was a recession.

Payless shoes I mean any one of the 9,000 retailers price closed toward and you would have felt pretty bad, right. A fewer in the oil industry, as oil prices plummeted in the Dakotas and elsewhere. And you are located in one of those states, you were thought there was a recession. So inside of that 2% to 3% growth there is a lot of kind of creative destruction that's happening that's buried in that.

If you look at the properties that we're buying, we're still able to buy assets for a less than they cost to replace. We're still be able to buy assets at cap rates that are high 7's from a return perspective, which we can get from generating new business. So from the time that we started this company in 2010 till today, we actually had -- really had a major movement in either the relative price we've been paying for real estate or the cap rates and the returns that we're able to generate, which should suggest that, that our assets are not really getting heated up at all. I mean there's not, it's not like we're having to lower our cap rates into the low 7's or high 6's to get the same business. We're not doing that all.

I mean, so you can, and no one can look at our business and say that there some cycle to it, because there's not a cycle to it. I mean and what we're providing -- and keep in mind what we're providing to people is real estate capital to help them finance their businesses either people that have a choice of whether they want to own their properties or rent their properties and it turns out that there is actually no decent bank financing for these properties. I mean not -- I mean it's inflexible, it's not assignable, it's not assimilable, it's not modifiable, it has got prepayment penalties associated with it, it's not long term it's not fixed rate.

So your average middle market company especially there of any size and if they have huge real estate needs and their real estate intensive they decided they would much, much rather have a landlord than a banker. And then the question is who they want to have their as their landlord. And we're raising our hands saying it's us, we should be your landlord. And and so none of that has anything to do with real estate cycle or trying to promote real estate has to do very much with the needs of businesses to be moving forward.

And then the question is, are we seeing any business valuations like spiking as a result of that. And the answer, there is no, we're not seeing that either. I mean, we're seeing that banks are being fairly conservative and judicious when it comes to how they finance middle market companies from our self what we also take solace in is that we own people's profit centers and that puts us at the top of the food chain relative to corporate credit with these possible exception of our asset base lenders. And so if you were to look at our STORE scores for example, and you were to back out all the unsecured debt or doesn't mean debt you'd ship that curve rate right over maybe to not just the right.

I mean STORE score under represents us in this the absolute solidness of the portfolio, we have. I mean we say that 75% of our contracts are investment grade in quality is higher than that. Because you know it's higher than that because you can look to the internal growth revenue walk on the -- in the appendix and realize that our losses are investment grade type loss I mean 100% of the portfolio. And so I would say, I would just dispute the notion that we're really cycle driven.

If we have a recession we'll get hurt like everybody else, but we'll get hurt a lot less, because we own people's profit centers. Our average tenant can lose maybe 20% to 40% of revenues at our properties before they can pay us the rent. That's the big question and that's why this is such a neat business.

Operator

Thank you. And the next question comes from Chris Lucas with Capital One Securities.

Chris Lucas -- Capital One Securities -- Analyst

Hey, good afternoon guys. Just a quick probably following up on the question of those probably going to run through a counter what you were just discussing. I guess you've got a sizable free cash flow every year it appears to me that your dividend payout is probably as low as it can go year equity access has been great. Any thoughts to sort of taking your leverage levels lower, at least for a period of time.

Christopher H. Volk -- President, Chief Executive Officer and Director

The answer to that is that we're pretty comfortable 5.5 to 6 times number. It's, I mean, when you have a portfolio that's performing and it's entirely like an investment grade portfolio, you could argue, I mean if you're not a public analyst, you might argue, if you're looking at privately, I mean a private person, who might (ph) double leverage on the portfolio like this. And in fact, there are companies out there that are entering the net lease space there are essentially harnessing Master Trust type technology that we created in 2005 to leverage assets to very high levels of rating and they're leveraging them at 80%, 85%. And so, to be in our position we're levered basically 40% with our unsecured leverage at 25% today and our unsecured leverage might rise to a smoking 30% which is still less than anybody else on the most people in the REIT space. I mean I would argue that our leverage is incredibly low and pushing our leverage down further, I think we're just help raise our cost of capital and lower our shareholder return. So I think that from where we are today it is the bandwidth we're in is pretty solid.

Chris Lucas -- Capital One Securities -- Analyst

Okay, great. That's all I had. Thank you.

Operator

Thank you. And this concludes the question-and-answer session. I'd like to turn the conference back to Chris Volk, for any closing comments.

Christopher H. Volk -- President, Chief Executive Officer and Director

So, first of all thanks a lot to all of you for attending the earnings call. All three of us are going to be attending the Citigroup Conference in Hollywood, Florida on March 4 and 5. And Cathy and Mary are going to be attending the Morgan Stanley net-lease conference a month later in New York City, on April 4. So let's know if you'd like to arrange a meeting at either one of those conferences and until then have a great day. And we're around for follow-up questions as usual. Thank you very much.

Operator

Thank you. The conference is now concluded. Thank you for attending. You may now disconnect your lines.

Duration: 54 minutes

Call participants:

Moira Conlon -- Investor Relations

Christopher H. Volk -- President, Chief Executive Officer and Director

Mary Fedewa -- Chief Operating Officer and Director

Catherine Long -- Chief Financial Officer, Executive Vice President and Treasurer

Kevin Egan -- Morgan Stanley -- Analyst

Jeremy Metz -- BMO Capital Markets -- Analyst

Philip DeFelice -- Wells Fargo -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

Haendel St. Juste -- Mizuho Securities -- Analyst

Chris Lucas -- Capital One Securities -- Analyst

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