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STORE Capital Corp  (NYSE:STOR)
Q1 2019 Earnings Call
May. 02, 2019, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the STORE Capital First Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I'll now turn the conference over to your host today Moira Conlon. Please go ahead.

Moira Conlon -- Head of Investor Relations

Thank you operator and thank you all for joining us today to discuss STORE Capital's First Quarter 2019 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. (Operator Instructions) 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, or 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 -- Chief Executive Officer

Good morning everyone and welcome to STORE Capital's First Quarter 2019 Earnings Call. With me today are Mary Fedewa, our Chief Operating Officer and Cathy Long, our Chief Financial Officer. We began 2019 with a very active quarter on the investment front with investment activity of nearly $400 million while ensuring the granularity and diversity we are known for. Mary will bring you to the numbers in more detail with you, but we're happy with our ongoing success in penetrating the large markets that we address while maintaining our focus on meeting the needs of our existing customers.

With a dividend payout ratio for the first quarter below 70% of adjusted funds from operations, a meaningful portion of our investment activity is being funded through retained cash flow. We paired that retained cash flow with our historic focus on maintaining annual tenant same-store rent contractual growth of nearly 2% to drive the majority of our expected AFFO growth per share. As Cathy will illustrate, we combine internal growth with external growth that is funded through new share issuances, which for the past two years have been successfully funded through our efficient at-the-market program. During the quarter, we closed on our second issuance of public unsecured term debt, a $350 million offering of investment-grade rated 4.625% 10-year Senior Notes.

As we have in past years, we expect to pair our unsecured debt offerings with other sources of efficient term borrowings most notably our Master Funding conduit with its access to highly efficient AAA-rated notes. At the conclusion of the first quarter, our pool of unencumbered assets stood at nearly $4.9 billion, where about 61% of our gross investments providing us with flexibility to financing options and our unsecured noteholders with a very low unencumbered asset leverage profile.

Now as I do each quarter, here are some statistics that are relevant to our first quarter investment activity. Our weighted average lease rate during the quarter exceeded 7.8%. Add in the average annual contractual lease escalations for investments made during the quarter of 1.9% and you get a gross rate of return of just under 10%. Now incorporate average corporate borrowings approximating 42% investment cost that is spread over our borrowing cost of around 3.3% and you'll arrive at a gross levered total return of better than 13%. This translates into return after-tax cash operating cost of about 12%. Our outperforming investor returns from STORE and predecessor public companies been mostly driven by having favorable property level rates of return, 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 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 investment contracts continues to be long at approximately 17 years. The median new tenant Moody's RiskCalc rating profile for the quarter was Ba3. The median post-overhead unit-level fixed charge coverage ratio for assets purchased during the quarter was 2.7 to 1. The median new investment contract rating or STORE Score for investments was favorable at Baa2. Our average new investment was made at approximately 71% of replacement cost. 98% of the multi-unit net-lease investments made during the quarter were subject to master leases.

And all 83 new assets that we acquired during the quarter are required to deliver a unit-level financial statements giving us unit-level financial reporting from 98% of the properties within our portfolio. This fact is critical to our ability to evaluate contract seniority and real estate quality as well as to our access to capital including our inaugural issuance of AAA-rated master funding notes in October of last year.

With that, I will turn the call over to Mary.

Mary Fedewa -- Top Key Executive

Thank you Chris and good morning everyone. 2019 is off to a strong start. In the first quarter, we invested nearly $400 million in real estate acquisitions at a weighted average cap rate of 7.83%. This included investments in 44 separate transactions at an average transaction size of just under $9 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 have built such a highly granular and diverse investment portfolio.

At the same time, our portfolio remained healthy with an occupancy rate of 99.7% and with approximately three-quarters of our net-lease contracts rated investment grade in quality based on our STORE Score methodology. Delinquencies and vacancies remained very low due to our strong tenant partnerships and continued active portfolio management. At the end of the first quarter, only 8 of our 2,334 property locations were vacant. Dispositions were light during the first quarter with only four properties being sold. One was opportunistic and was sold for a 15% gain over cost while the remaining three sales were part of our property management activities and resulted in an aggregate cash loss of slightly less than $10 million. For our projected sales during the remainder of the year, we expect to realize net gains over our costs similar to our past sales results.

Now turning to our portfolio performance. Our portfolio mix at the end of the first quarter remained steady with 65% of properties in the service sector, 18% in experiential and service-driven retail with a substantial online presence and the remaining 17% in manufacturing.

Overall, our portfolio remains highly granular and well-diversified by design. Our top 10 customers were unchanged from last quarter and at quarter end, revenue realized from our top 10 customers was 18% of annualized rents and interest, down slightly from the end of last year. Our single largest customer, Art Van represented 2.7% of our annualized rents and interest which places us below our target of having no tenant exceed 3% of our annual revenues.

Heading into the second quarter, we are excited about our prospects for the rest of 2019. Our pipeline remains strong and cap rates are holding steady. The investments we made last year to expand our staff are yielding strong results as reflected in our continued success in penetrating our large target market. Our direct origination team continues to identify plenty of middle-market companies across a diverse set of industries and geographies that are in need of the attractive long-term real estate solutions that we are uniquely qualified to deliver.

And now, I'll turn the call to Cathy to discuss our financial results.

Catherine Long -- Chief Financial Officer

Thank you, Mary. I'll begin by discussing our financial performance for the first quarter of 2019 followed by an update on our capital markets activity and balance sheet, then I'll review our guidance. As Chris and Mary discussed, we continued to grow our real estate portfolio and that growth is reflected in our first quarter revenues, which increased 24% from the year-ago quarter to $156.6 million. The annualized base rent and interest generated by our portfolio in place at March 31st also increased 24% to $646 million.

Total expenses for the first quarter increased to $109 million from $85.4 million last year with roughly half of that increase due to higher depreciation and amortization expense related to our larger real estate portfolio. Interest expense increased to $38.1 million from $29.3 million due primarily to additional long-term debt used to fund property acquisitions. The weighted average interest rate on our long-term debt has remained relatively steady increasing about 5 basis points year-over-year. G&A expenses for the first quarter were $12 million up from $10.9 million a year ago.

As a percentage of average portfolio assets, G&A expenses decreased to 62 basis points from 68 basis points a year ago primarily reflecting the scale advantages of our growing company. Property costs increased by $1.2 million year-over-year primarily due to the adoption of the new lease accounting standards in 2019. These new standards require us to present items such as impounded property taxes and ground lease payments our tenants make on our behalf on a gross basis as both rental revenue and property costs.

This amounted to about $1.3 million for the quarter. We delivered another strong quarter with AFFO and AFFO per share growth in the quarter. AFFO increased by nearly 26% to $107.8 million from $85.9 million a year ago. On a per share basis, AFFO was $0.48 per basic and diluted share, an increase of 9% from $0.44 per basic and diluted share a year ago. Finally, we declared a quarterly cash dividend of $0. 33 per share while continuing to maintain our low dividend payout ratio of just under 69%.

Now turning to our capital markets activity and balance sheet. We funded our strong acquisition volume with a combination of cash flow from operations, long-term borrowings and equity proceeds from our at-the-market program. At the end of February, we issued $350 million of 4.625% Senior Notes due in the year 2029 and used the net proceeds to pay down our credit facility. In March, we renewed our $100 million bank term loan and reduced the spread over LIBOR by 10 basis points. Also in March, we issued $41.7 million in 10-year CMBS debt at 4.8%.

And finally, we diffused $6.7 million in debt on a property that's pending disposition and included in real estate held for sale on our balance sheet. During the quarter, we sold approximately 5 million shares of common stock under our ATM Program at an average price of $32.31 per share raising net equity proceeds of just over $158 million. It's important to note that substantially all our long-term borrowings are fixed rate and our debt maturities are intentionally well laddered. Our median annual debt maturity is currently $287 million and we have very little non-extendable debt coming due over the next couple of years. At quarter end, our leverage ratio was at the low end of our target range at 5.6 times net debt to EBITDA on a run-rate basis or around 41% on a net debt to cost basis.

Approximately 61% of our gross real estate portfolio was unencumbered at March 31st giving us substantial financing flexibility. We entered the second quarter with a strong balance sheet, a conservative leverage profile, and plenty of liquidity to fund our acquisition pipeline. Our flexible funding sources include $344 million of capacity on our $750 million equity ATM Program that we launched last November, and the full amount available under our $600 million credit facility which also has an $800 million accordion feature.

Now turning to our guidance for 2019. Considering our strong level of acquisition activity in the first quarter as well as our robust pipeline and positive outlook, we're affirming our 2019 guidance announced last November. Based on projected net acquisition volume of approximately $1.1 billion for 2019, 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 of 5.5 times to 6 times run rate net debt to EBITDA.

AFFO per share in any period is sensitive to both the amount and timing of acquisitions, property dispositions, and capital markets 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 $0.06 to $0.07 per share related to items such as straight-line rents equity compensation and amortization of deferred financing costs.

Before I turn the call over to Chris, I'd like to note a few changes to our balance sheet resulting from the new lease accounting standards this quarter. First, we recorded right-of-use assets of approximately $22 million for operating ground leases related to our portfolio. The right-of-use assets are shown at a separate line item in our portfolio on our balance sheet. Second, we recorded a right of use asset of approximately $5 million related to our corporate office in Scottsdale, which is included within other assets on our balance sheet. And third, we recorded a corresponding operating lease liability totaling $27.6 million, which is shown as a separate liability on our balance sheet. While these changes impact our financial statements they don't impact our cash flows or the economics of our business. We'll provide additional details and disclosures related to the new lease accounting guidance in our upcoming 10-Q filing.

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

Christopher H. Volk -- Chief Executive Officer

Thanks so much, Cathy. As it's customary for me to do, I will close with a few comments before turning the call over to the operator for questions. We're in proxy season and our proxy has four items to be voted on by stockholders. Three of these are the usual group of proposals, including the reappointment of our auditor, the approval of our board nominees for next year, and the approval of executive officers' compensation based upon a review by our compensation consultants.

The fourth is new and offers eligible stockholders the option to propose amendments to STORE's bylaws, which proposals would be approved upon a majority vote of the outstanding shares entitled to be cast. From day one as a public company, STORE has pursued best-in-class governance designed to limit management entrenchment including being among the few REITs to actively opt out of MUTA or the Maryland Unsolicited Takeover Act.

In this spirit, this proposal is intended to offer our long-term stockholders an added a measure of control. Our proxy this year also importantly continues expanded corporate disclosure regarding corporate responsibility, which is echoed by a new Corporate Responsibility tab in front page of our corporate website and even in my recent annual letter to stockholders, which is made available at the time that we filed our annual 10-K with the SEC.

Corporate responsibility discussions regarding the obligations of business leaders and Board of Directors have been constructively promoted by many of the leading management teams and investment firms. We have taken a more proactive approach to since discussions in 2019 and looked to counter ourselves among thee leaders. From a broad corporate perspective, we take a view that attention to ESG or environmental social and governance issues is another way of thinking about our responsibility to all of our stakeholders. We actually started this company to meet the real estate capital needs of many real estate intensive middle-market companies.

So our customers are the stakeholders that inspires formation of STORE Capital. Then came our stockholders and employees followed by our business partners and many communities around the country that we think to positively impact the prudent investment of our capital alongside the growing businesses that are our customers'. Our measurement of success has always been to do well by all of our stakeholders. We win if we all win. This is true for the two prior successful public companies that were founded and led by this leadership team and is highly relevant today.

Finally, I recently offered my first Seeking Alpha post, which you might find interesting. The article addresses the business model dynamics of net-lease companies like STORE Capital and the eight variables that we have as business leaders to mathematically drive our internal and external growth. Those eight variables enable the computation of six additional key performance indicators as well as estimates of internal and external growth. Given such quantitative comparability, we started to benchmark ourselves against various peers at the beginning of the year based upon year-end 2018 data. In my opinion, quantitative business fundamentals like this are the foremost reason for STORE's outperforming and consistent stock performance from the beginning of 2015 to the end of 2018 while our share price to AFFO multiple differed little at these two points.

And with that, I will turn the call over to the operator for any questions you may have. Operator?

Questions and Answers:

Operator

Yes. Thank you. (Operator Instructions) And the first question comes from Rob Stevenson with Janney.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Good afternoon, guys. Chris, given that you guys get financials on on your tenants, have any of them gotten hit with significant tariffs on Chinese-made goods? I'm thinking furniture or maybe a few of the other businesses? And if so what impact that's having on coverage?

Christopher H. Volk -- Chief Executive Officer

Rob, we've been looking at at tariffs stuff since actually last summer. So as it start kicking in, we started actually surveying all of our tenants directly. And we have a lot of -- some were (inaudible) with the summer and we're stuck at -- to ingest that and calling up a lot of companies and just finding out exactly what the impacts were. And the answer to all of that is it's so far our customers are not impacted at all. And I think it's because a lot of them import goods away from China. I mean there are a lot of other places you can get goods whether it's Vietnam or Thailand, if you're in the furniture manufacturing businesses. There are all kinds of places where you buy parts and that's kind of what happens in furniture manufacturing. You're buying parts from places and then you're assembling them in the U.S.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Okay. And then how should we be thinking about the pace of acquisitions and what's acquisition market out there for you guys these days? I mean you maintained $1.1 billion. You Guys did $400 million roughly in the first quarter. Is there less product out there that you guys want to deal with on sale-leasebacks and everything? Or is it just sort of April early May conservatism in terms of raising acquisition guidance for the year?

Mary Fedewa -- Top Key Executive

Hey, Rob this is Mary. Acquisitions are going really well, but you will notice we didn't sell that much in the first quarter. So sales are a little bit lumpy as you know. So right now $1.1 billion is a net number. So I would say that we're pretty much on track from a gross basis. Yes. And I think our pipeline's good.

Christopher H. Volk -- Chief Executive Officer

And we're so much in the business, it's very hard to be predictive at this point in time. So we had a perfect start to a year and we're encouraged by it. But it's too early to start changing guidance and it's too early to try to measure exactly what the timing and the impact it's going to have on future quarters in terms of the pace of acquisitions or the pace of sale as Mary just said.

Operator

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

Jeremy Metz -- BMO Capital Markets -- Analyst

Hey guys. Given the success of the model, what are your interests in expanding outside of the U.S. if at all? Is that something you consider? Or is there just more than an enough to do here that you just see no need to stretch yourself in other international markets?

Christopher H. Volk -- Chief Executive Officer

Jeremy, this is a very personal decision for companies to make. I mean I would say that we think the market's big enough for what we do here. So we don't need to do it overseas. I think also it reduces the complexity of how we operate and allows investors to buy dollar-denominated assets that are based in America.

Jeremy Metz -- BMO Capital Markets -- Analyst

All right. And then just looking at your top 10 list, I know it didn't change much but you added about 10 properties with Cadence Education. Can just give us some color on what's attractive about early education? And then given the growing relationship there, do you expect to add more? I think they have over 200 schools out there? So is that something we can see grow here?

Christopher H. Volk -- Chief Executive Officer

Well, early childhood education is a service you can't buy over the internet. So you can't educate your kids rightly over the internet. It's a -- it's a very hot topic in politics today in terms of people wanting to make sure that kids have a way of getting educated, especially having access to early education, it's an insanely fragmented business.

So, there are lots of smaller operators. Cadence is an aggregator. It's a brand name you've never heard of probably because they acquire regional chains or regional players around the country and keep those brand names around the country. So it's actually a composite of a lot of different names and they run it very well. so we're just big believers in this space.

Operator

Thank you. And the next question comes from Ki Bin Kim with SunTrust.

Ki Bin Kim -- Suntrust Robinson Humphrey -- Analyst

Thanks. Good morning out there. Can you just talk about some of the types of tenants that are moving to have fixed charge coverage ratio up and build a category of tenants that are maybe pulling that number down?

Mary Fedewa -- Top Key Executive

Ki Bin, this is Mary. When you're talking about the fixed charge coverage, as you know it's much better. So our customers are doing really, really well and they're growing and we have someone, they're acquisitive as Christ just mentioned on several of them. A lot of them are integrating acquisitions that they've made and so forth, so they've had increased expense and some leverage and they'll realize the volume coming forward. So we have a really strong units and we are in a very favorable places on capital stacks on our units that are driving a lot of that coverage.

Ki Bin Kim -- Suntrust Robinson Humphrey -- Analyst

And how does furniture figure into that mix? It does seem like more, I mean furniture is traditionally always thought about being very internet resistant, but you look at Wayfair numbers and their sales are up 40% year-over-year. So maybe that brings into question kind of long-term how resistant it can be?

Christopher H. Volk -- Chief Executive Officer

Yes. This is Chris. I would say that furniture is itself fragmented business and Wayfair sales, I mean there have been a lot of invasions, but this -- I mean, but a lot of it is home, is what I'd call smaller home furnishings. A lot of it the stuff you can just put together easily, it's disassemble, you have the bed in the box type stuff which is obviously for people like the mattress firms and whatnot of the world to some degree. On other hand, it's very hard to ship a sofa and when you deal with furniture stores, they do more than just provide you with furnishings, they provide you with financing as well and they provide you with consulting and design. So, I mean, there is no successful retailer in America, in my personal view, that doesn't have a high service component to it. So that's where the industry is all going to. So if you're buying stuff over the Internet, don't expect a lot of service from that. If you're buying stuff in a facility, then you do expect service from that. And it's all the successful furniture retailers are providing high level of service. And they're providing immediacy of delivery. So it's hard to get like a one-day delivery of a sofa or anything like that, so all of these places have distribution facilities. If Amazon ever wants to get into furniture business, which by the way I think that when you deal with online retailing, all the pain it's been taken, I mean you start with books as the lowest hanging fruit there is, I mean it's a complete commodity and then you move from there. So the low-hanging fruit has been very heavily invaded. Now, you're getting into high-hanging fruit and I think furniture is high-hanging fruit. It's there, you can get some share, no question. But there's just a lot of furniture that is just very very difficult to ship and deliver and get the same time delivery. People want to try out furniture, it's a personal preference in terms of what they do, they want to pick up their fabrics. So for all those reasons, furniture retailers and successful furniture retailers will give the team successful and guys like Wayfair will their niche.

Ki Bin Kim -- Suntrust Robinson Humphrey -- Analyst

Just to clarify your tenants, if you look at the company ratios then sales trends look pretty healthy?

Christopher H. Volk -- Chief Executive Officer

Yes. I would say so. I mean, if you look across our furniture retailing, I would say pricing for sales is pretty flat, but it's not down. I mean and we have some by the way that are down and some that are up. But if you look at the overall number, it's been flat if you look at the overall, all the coverages. And we have some furniture manufacturing too by the way and there you have on the furniture manufacturing site, you have people that are delivering to retail storefronts, but then also have the ability to take advantage of some or all online sales as well. So on that side of their business, you get to cover more fronts to distribution.

Operator

Thank you. And next question comes from Collin Mings with Raymond James.

Collin Mings -- Raymond James. -- Analyst

Thank you. Good morning everybody. Just looking at the pipeline sector distribution graphic, restaurants tick down again continuing a trend that would seem to suggest this may be less of an opportunity set than it once was. you discussed your restaurant exposure a couple of quarters ago on the call. But can you just maybe update us on your thoughts as it relates to both where the portfolio currently sits as far as restaurant exposure and the flow of deal opportunities coming through the door?

Christopher H. Volk -- Chief Executive Officer

We like the space a lot. And so -- but I would say that we've been seeing less deal flow to the restaurant space in general and we've also been seeing a lot of competition and not really necessary from the public players, but from a lot of other folks as well. And so when you start seeing Sonny's Barbecue restaurants going off in the mid-6 caps, you know that there's a...

Mary Fedewa -- Top Key Executive

Money out there.

Christopher H. Volk -- Chief Executive Officer

lot of money out there chasing restaurant deals. So we're out trying to be value buyers and we're buying real estate and making investments that we think generate great risk-adjusted returns. And while we think of that, Sonny's Barbecues or other types of restaurants that have been selling at low cap rates are potentially interesting investments. We don't like the returns as much. So that's why we made that decision.

Collin Mings -- Raymond James. -- Analyst

Okay. And then moving back to furniture real quick, just drilling down any incremental color can provide on the increased exposure to Ashley and DSG in the quarter? and what the pipeline of future opportunities exist with them?

Christopher H. Volk -- Chief Executive Officer

So Dufresne Spencer Group is the largest Ashley distributor in the country. So they don't have franchisees, they have licensees. So they have a large licensee. And they have been growing in parts through acquisition and so that increased to Dufresne Spencer during the quarter with results from an acquisition. And Dufresne Spencer, by the way is very heavily owned by Ashley Corporate and so in a way it's part and parcel of the entire vertically integrated system.

Operator

Thank you. And the next question comes from Nate Crossett with Berenberg.

Nate Crossett -- Berenberg Capital Markets -- Analyst

Hi. Thanks for taking my question. I wanted to touch on cap rates and your growth spread over your cost of debt. And I know you have a slide in your presentation that showed you have the highest spread over the net lease players. So my question is we know we've seen some of the larger players willing to acquire at a lower and lower cap rates versus what they've done historically and so I just wanted to get a sense from you as to is there a level of spread that you just won't go below. And do you think, you'll be kind of achieve that roughly 5% spread over the median to long-term?

Christopher H. Volk -- Chief Executive Officer

Okay. Well, the answer is that we've run public companies with -- we've run successful public companies in previous lifetimes with less spreads than we're getting today. And so there is room to bring in our spread and still generate nice rates of return. That being said, it's not just from the spread business. I mean spread's nice but the numerator matters. So whether you're investing at a 7-cap or a 6-cap whatever, I mean the absolute dollar -- the absolute numerator does matter for shareholder return perspective.

And so we're mindful of both the spread and what the numerator is. As I said earlier to prior question, we are value investors. So we are looking to generate high rates of return. It's important that we be able to buy assets at yields that our in excess of where the option marketplace would be at any given time. We'd like to be able to sell the assets the following day and actually make money on it if that's what we wanted to do. So we want to buy things you can buy a cap rates you can get, is really what we'd like to do at least if you can get.

And now in terms of margin for error, we have a flat tone of margin for error. So if you -- our investment AFFO yield is sub-11, which essentially says to you that with it -- if our yield, somehow our AFFO yield gets hammered from 17 where say down to 11, we can still actually buy stuff up to that point and still make it work in terms of making incremental rates of return. that spread is probably the highest in the net lease space and it means we're the most , we have a very resilient platform which we're very proud of. It also is a very big reason why we've been creating more compound MVA per share growth than anybody else in the space which is also an exhibit on the pages that you're talking about. So our defined definition of a win is not just hitting AFFO growth per share, but it's also hitting and creating most shareholder value growth on a compound basis over the cost of our equity capital and we're mindful for that and if we have a -- if our cap rate or if our multiple goes to 20 or goes higher, we're not going to take advantage of that to say if we can go do a lot of keeper stuff. We've been at high multiples. They were in nice multiples, but we've been in higher multiples. And we haven't gone or run after investment-grade tenants or whatnot. We've made a decision to go after the middle-market and that's what we're doing.

Nate Crossett -- Berenberg Capital Markets -- Analyst

Okay. That's helpful. Thank you. And then, you mentioned on the call earlier that there was staff investments last year. Just curious as how that continues to grow as you continue to get bigger, are you expecting further investments this year? Maybe just a little color there.

Christopher H. Volk -- Chief Executive Officer

Yes. I mean, Mary can join on this, but I would say last year we spent a lot of time sprucing up some areas. I mean there are certain parts of this company that are just going to grow on the staffing front and one of them is on the asset and portfolio management side. We've been spending a lot of time also in terms of beefing up our middle management in this company a lot and so we did that. That being said, if you were to look at our numbers and again, I do something the way you don't know normally do it. But if you were to take our property cost, so basically the cost of running all the property costs and back out all the reimbursable stuff. So, Cathy Long talked about what's reimbursed to tenant in terms if ground leases and that kind of stuff. So if you look at our net cash property cost and you were to add our cash G&A cost which back out the shareholder compensation which is an add back to AFFO and is non-cash anyway and you were to take those cash costs, collective cash costs and divide it into average assets and you were to do this -- I didn't do it this for this quarter, but at the end of last quarter at the end of FY 2018, it would be around 60 basis points, maybe 59 basis points to run this. That would be the as efficient a net-lease company as there is. And we're not even the biggest. So we are incredibly efficient. We've been efficient because we have an exceptionally high occupancy rate. We have little in a way of double net-lease properties requiring us to have any obligations for them. And we have invested a lot in IT technology, which allows us to be more efficient. And we've outsourced certain aspects of our servicing platform which have allowed us to be more efficient. So that basically, this company today has 90 employees running over the 2500 properties with almost no administrative employees at all. And so we basically outsourced all of that. I mean so from an operating perspective, I just want to point out that if you were to sort of do the math and you have to do it a little bit forensically, so you have to peel back all these numbers, you would find that we're just insanely efficient relative to anybody else.

Operator

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

John Massocca -- Ladenburg Thalmann -- Analyst

Good afternoon. So properties not operating, but subject to a lease jumped a little bit kind of quarter-over-quarter, can you provide some color on what caused that and maybe the lease term roughly remaining on those assets or any potential resolutions for this properties?

Mary Fedewa -- Top Key Executive

Sure John. This is Mary. Yes I would say that the majority of those individual properties are in Master Leases. So a little over 70% are in Master Leases. And they are just simply individual properties that we're working through tenants in a Master Lease that they're looking to make some change and in one case in particular, they actually closed the site to remodel and reimage and then they're going to reopen that site. So it's a combination of those kind of activities operational flexibility, but as you know we have a substantial portion of our leases in Master Leases. I think it's like 91% in Master Leases. So that's helpful. These are individual properties covered by the Master Lease and we're working with tenants on that. There's is no concentration in any one tenant. It's an entire diverse list of tenants. So...

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. Understood. And then...

Christopher H. Volk -- Chief Executive Officer

By the way John, I think we may be -- this is Chris. I don't know how many people even disclose the number of properties that are empty, but paying rent. I mean it's very common to disclose properties that are empty and not paying rent, but I mean we've been disclosing this intentionally just because we think it's just important to keep abreast of it and it forces us to keep that number down. So our servicing works with the tenants to basically minimize that number and find ways to either close stores, sublease stories, swap stores out and we're doing a transaction right now with one of our tenants to swap out 10 properties, so 10 properties they don't like for 10 properties they do like. So and this is all part and parcel of the business that we're in.

Mary Fedewa -- Top Key Executive

Keeps our Master Leases really healthy.

John Massocca -- Ladenburg Thalmann -- Analyst

Make sense. And then, your exposure to manufacturing has kind of grown steadily over roughly the last 18 months. What is making those types of assets attractive especially given kind of continued cap rate compression in that space in amount of capital chasing industrial? And how are you able to kind of STORE's acquisitions to have returns kind of in line with your kind of historical averages?

Christopher H. Volk -- Chief Executive Officer

Well, I mean we do a fair amount of business direct and it always helps. I would say that the businesses we're doing tend to be very basic blocking and tackling businesses that are -- they're not sexy. And they've been around for long time and we think they have no functional obsolescence. They're going to be around for a while. We'll probably -- my guess is that we'll probably get manufacturing will stabilize between 15% and 17% of where we are. And so I don't think that they're going to see a creep up a lot more from where it is.

Operator

Thank you. And the next question comes from Todd Stender with Wells Fargo.

Todd Stender -- Wells Fargo Securities -- Analyst

Thanks. So the acquisitions in the quarter lease escalators came in above your overall portfolio average. You've already got the highest rent bumps in the net-lease space. Can you talk about how you ask for this or require this I guess in your negotiations? And then should we expect things to keep edging up closer to 2% over time?

Mary Fedewa -- Top Key Executive

Hi, Todd. This is Mary. So we -- the direct origination engine here actually asks for these escalations. So it's really simple. You go meet with the CEO or CFO and someone on the leadership team and you talk about what value we can add and how they can do better off if we own their real estate versus them. And we -- generally, there is some sort of -- there's always a use for the funds, so they're either recapitalizing the balance sheet, they're making an acquisition, or maybe there's some estate planning going on. So we're creating a solution for them and adding value. And once we figure out, we say that will be thank you very much, the rates will -- the escalations will be this and on this frequency. So our sales people are actually paid to ask for higher escalations and more frequent escalations so they make the ask and it's really that simple. And I think that 2% annual is sort of the market escalation rate. So generally you'll see -- I don't see you'll see much higher than that as we move forward.

Christopher H. Volk -- Chief Executive Officer

If you were to look at (inaudible) it's very common to see escalators like 10 every 5, which will be common, which actually works out to like 1.9 a year or something on a compound basis -- 1.8 on a compound basis. We tend to push for the annual escalations because we don't want to wait around for five years. And because we ask for 10 every 5, then in the last period, you sometimes just don't get those escalations, they mystically go away. And so we do that. So the majority of our escalators are annual.

Todd Stender -- Wells Fargo Securities -- Analyst

Okay. Thank you. Appreciate that. And then just looking at medical and then medical, dental, and behavioral health keep ticking up. Can you guys talk about how you're underwriting those, maybe length of leases? And then just to speak to the fungibility of the real estate?

Christopher H. Volk -- Chief Executive Officer

Behavioral health's been staying flat for the last three years, and that includes everything from eating disorders to drug rehab, alcohol rehab. We've done a handful of those, but I wouldn't say we have a big push on it. On the medical, dental, we've been seeing some of that. They've been just roll-up concepts of dental practices and certain medical practices and whether it's dermatology or whatever. In terms of how fungible they are, they're really fungible. I mean they're assets that oftentimes had other previous uses prior to being medical or dental facilities. Sometimes they're in areas where they're just nothing but medical and dental offices around so that they are in a hub like that. But I would say they're highly fungible.

Operator

Thank you. And the next question comes from Craig Mailman with KeyBanc.

Craig Mailman -- KeyBanc -- Analyst

Hey everyone. Maybe just asking earlier question a little bit differently. I know you guys don't like to address investment guidance at this point of the year, but could you maybe just give us a little bit of color on where you stand on the remaining dispositions? Because if you just annualize this quarter's AFFO you're kind of penny below the midpoint of the range. So just trying to get out what are kind of the puts and takes here as you go through the balance of the year that kept the midpoint unchanged?

Christopher H. Volk -- Chief Executive Officer

You think we're at midpoint -- well, I would say that I -- we don't -- you're suggesting we should lower our guidance?

Craig Mailman -- KeyBanc -- Analyst

No, no, no, no. You guys are just this quarter, you're already at above 92 annualized, you typically do more acquisitions toward the end of the quarter. So...

Christopher H. Volk -- Chief Executive Officer

Okay. I mean I would say -- I mean some of the questions we've got from people are why we're not raising guidance. And the answer is just because we're in a flow business and there's a lot of things that can happen. And so we -- for the last three years, I'm proud to tell you that we have given guidance in November of the preceding year. And we've actually come in the range of that guidance for basically three years straight without really adjusting outside of that range.

I mean so we've been very predictable in terms of what we've been doing. I'm saying this year would be not too far off from that from a guidance perspective. And in terms of property sales activity, property sales activity really, really waffles from quarter-to-quarter. So and you can look last year and see from quarter-to-quarter that we did some were incredibly busy disposition quarters and some were not. We've been selling $250 million plus or minus worth of real estate for the last two years.

I think that you can see us selling $250 to $300 million worth of assets and potentially more I mean during the course of this year. This last quarter we actually lost money on the assets we sold. I mean Mary pointed out we made a lot of money on one asset, but it was offset by money on assets that we sold and lost money on. But during the course of the year, my expectation is that you'll see us make a fair amount of money on selling assets in the aggregate, which is what you're trying to do. And then, we have a disclosure in our book on the property sales, where you can see that they've been property sales in our from a cap rate perspective tend to be a lower cap rate on property sales and there are investment cap rates, which allowed us to roll the cash accretively, last year it added 0.5 point to internal growth. In most years, that's less than that, so last year was a good year. On the average, it's added about 10 basis points for internal growth and but it's sort of there, it's part of the engine balancing the portfolio and adding another way to grow our AFFO per share.

Craig Mailman -- KeyBanc -- Analyst

That's helpful. I guess what I'm trying to get at is you guys only did $17 million of dispos in the first quarter. Do you have anything else under contract or any visibility on kind of -- if you can be more back-end weighted in the year is what I'm trying to get at?

Christopher H. Volk -- Chief Executive Officer

Well, the answer is sure. I mean the answer is we do have items under contract today. We always have items under contract. We don't give disclosure on that. I don't know I expect -- I can't tell you how the second quarter is going to pencil out, I mean I can probably give you an indication but I won't. But it will vary and I think that we'll hit numbers for this year. Do you assume it's back-end weighted for the purposes of your investment? Well, if you assume it's back-end weighted then it doesn't take away as much from AFFO per share and so it causes you to raise our estimates. And so, if you assume it's more front-end weighted, then it will be sort of more neutral to our estimates of AFFO per share. I would probably assume that it's more neutral.

Mary Fedewa -- Top Key Executive

And we've prior had a second quarter -- a larger second quarter of sales. Q2 sometimes has a lot of sales. And if you note on our balance sheet, we can do have real estate investments held for sale of $15 million, the intent would go out pretty quickly, if that helps.

Operator

Thank you. And we have reached the end of the question-and-answer session. At this time, I'd like to to return the conference over to Chris Volk for any closing comments.

Christopher H. Volk -- Chief Executive Officer

Thank you all for attending the first quarter 2019 earnings call. Mary and Cathy and I will be attending REIT Week in New York City in June, so let us know if you'd like to arrange a meeting then. And until then, we're around for any follow-up questions as usual during the day. Have a great day everyone. Thank you.

Operator

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

Duration: 50 minutes

Call participants:

Moira Conlon -- Head of Investor Relations

Christopher H. Volk -- Chief Executive Officer

Mary Fedewa -- Top Key Executive

Catherine Long -- Chief Financial Officer

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Jeremy Metz -- BMO Capital Markets -- Analyst

Ki Bin Kim -- Suntrust Robinson Humphrey -- Analyst

Collin Mings -- Raymond James. -- Analyst

Nate Crossett -- Berenberg Capital Markets -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

Todd Stender -- Wells Fargo Securities -- Analyst

Craig Mailman -- KeyBanc -- Analyst

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