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STORE Capital (NYSE:STOR)
Q3 2020 Earnings Call
Nov 05, 2020, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the STORE Capital third-quarter 2020 financial results conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Lisa Mueller. Please go ahead.

Lisa Mueller -- Investor Relations

Thank you, operator, and thank you all for joining us today to discuss STORE Capital's third quarter 2020 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 & Results-Quarterly Results. On today's call, management will provide prepared remarks and then we will open the call up for 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, by their nature, involve estimates, projections, goals, forecasts and assumptions and are subject to risks and uncertainties, including those arising from the COVID-19 pandemic and its related impacts on us and our tenants that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Our actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of the factors that could cause our results to differ materially from these forward-looking statements are contained in our SEC filings, including our reports on Form 10-K and 10-Q.

With that, I would now like to turn the call over to Chris Volk, STORE's chief executive officer. Chris, please go ahead.

Chris Volk -- Chief Executive Officer

Thank you, Lisa, and good day, everyone, and welcome to STORE Capital's third-quarter 2020 earnings call. With me today are Mary Fedewa, our president and chief operating officer; and Cathy Long, our chief financial officer. As always, we welcome the opportunity to speak to you today and hope that you and your families continue to be healthy and safe. We come to you today encouraged on a number of fronts.

Our rent collections continue to steadily rise with over 90% of our rents collected for October. Meanwhile, our portfolio occupancy and vacancy levels remain at pre-pandemic levels, which says a lot. Perhaps most importantly, we entered into this pandemic with sector high yields on our portfolio investment, and that record has been sustained. Such performance is at the heart of risk-adjusted investment return delivery.

Mary will provide added detail here, but our portfolio diversity has been important to our success. As has our generally suburban investment profile, which is more conducive to the demand of social distancing. With that said, let me discuss our achievements for the quarter. Our portfolio remained healthy with an occupancy rate of 99.6%, and with the plurality of our net lease contracts rated investment-grade in quality based upon our STORE score methodology.

There has been some near-term contract migration, which was expected with this pandemic, and Mary will address this. On the acquisition front, we made over $250 million of new investments during the third quarter, results of which elevated our unencumbered assets to about 63% of total investments and reduced our financial leverage to cost to historically low levels.Leverage on the unencumbered majority portion of our balance sheet stood at a sector low of 22% of cost, providing our full recourse unsecured noteholders and our stockholders with a sector-leading defensive balance sheet and broad flexibility in our financing options. STORE's unencumbered asset leverage is lower than most any public REIT that I know of irrespective of corporate credit rating. Now as I do each quarter, here are some statistics relevant to our third-quarter investment activity.

Our weighted average lease rate for properties acquired during the quarter was 8.3%. The average annual contractual lease escalation for investments made during the quarter was 1.9%, providing us with a gross rate of return, which you get by adding the lease escalations to the initial lease rate of about 10.2%. Presently, we're not employing leverage on our new investments instead of electing to maintain a more conservative posture in these less certain times. However, we need to incorporate our customary corporate leverage in the area of 40%, our levered investor return would approximate 14% with net returns after operating costs at about 13%.

Our historic investor returns and outperformance from STORE and successful predecessor public companies have been mostly driven by a robust business model, which is why we take the time to disclose investment yields, contractual annual lease escalations, investment spreads to our cost of long-term borrowings and our operating cost as a percentage of assets. These are the four essential variables that enable you to compute expected investment rates of return. The weighted average primary lease term of our quarterly new investments continues to be long at approximately 18 years. As I did last quarter, I would like to note that our weighted average portfolio lease term has remained at about 14 years since 2015.

Moreover, we are highly defensive with less than 4% of our primary lease terms maturing over the next five years, which is far and away the lowest I'm aware of among our peer public net lease companies. A major reason for this important contract attribute is that we are constantly extending lease terms as we add new investments into existing master lease arrangements. Given an economically fractional environment, our lack of near-term lease maturities is definitely a good place to be. Another desirable attribute of our net lease portfolio is the growing percentage of our multi-location contracts that are subject to master leases.

Since 2015, that number has grown from 73% to 89% in 2018 and is now 93% today. The long-term result of all this work, we believe, will be a further reduction in eventual lease renewal risk. Perhaps most important is an elevation of interest alignment, which stands to be meaningful, especially in less certain moments like this. Alignment of interest has been extremely important in working constructively with our tenants during this disruptive period.

The median post overhead unit level fixed charge coverage ratio for assets that were purchased during the quarter was 2.4:1. The median new tenant Moody's risk credit rating profile was B1 and if you incorporate the potent contract level fixed charge coverages and the median new investment contract rating or STORE score for investments was much more favorable at BAA3. Our average new investment was made at approximately 75% of replacement cost and all of the net lease investments made during the quarter were required to deliver unit-level financial statements. Here, we continue to be the net least sector leader with substantially all of our properties required to deliver us unit-level financial statement reporting.

This is critical to our ability to evaluate contract seniority and real estate quality and has been essential to our ability to quickly assess our tenant's ability to pay rent, which is especially important at times like this. Importantly, during this past quarter, we announced a number of corporate structural and leadership changes. On the structural side, we took the step to fold our credit department into our portfolio management department. By way of some background, we chose to create a separate portfolio management group when we started STORE.

At our two prior successful publicly listed net lease companies, portfolio management activities have been shared among various departments. We felt this activity should be elevated, and it has indeed played a key role in our sector-leading annual asset sales, our sector leading portfolio diversity and in the contract quality monitoring that we have been consistently delivering to you. During this pandemic, our portfolio management team has been at the center of much of our rent collections activity and their fingerprints are solidly imprinted on our performance. Given the high level of credit evaluation skills embedded within this activity, we made the decision to consolidate our credit-centric team members under a single roof.

Importantly, in concert with this change, Mary Fedewa was elevated to President of STORE Capital. We also made a few other organizational changes that Mary will discuss. I have worked with Mary since 2001, which was instrumental in the integration of our earliest public company, Franchise Finance Corporation of America into GE Capital, where she had an impressive career. Later, I invited her to join me on our second public net lease company, where she was the leader in business development.

As we were conceptualizing STORE in 2010, I called on Mary to see if she would be interested in joining our efforts to start this company by heading our business development team. She moved to Arizona from North Carolina to co-found STORE, later being added to our board of directors and eventually serving with distinction as our chief operating officer. So this will be Mary's first of many quarterly conference calls as our President, and I'm proud to turn this call over to her.

Mary Fedewa -- President and Chief Operating Officer

Thank you, Chris, and hello, everyone. I'll begin with our acquisition activity. During the third quarter, we invested $251 million in real estate properties at a weighted average cap rate of 8.3%. Our investments were spread across 23 transactions with an average transaction size of less than $11 million, and our tenants average revenues have remained consistent at over $800 million.

We added 13 new customers and closed the quarter with more than 500 customer relationships in our diverse and granular portfolio. With strong tenant collaboration and active portfolio management, we have continued to keep the absolute number of vacant assets consistently low, and this quarter was no exception, with only 11 of our more than 2,500 properties vacant and not subject to a lease. During the quarter, we sold 18 properties, which had a total acquisition cost of $49 million. three of these were opportunistic sales and resulted in an 18% gain over cost.

eight were strategic sales to reposition our portfolio and were sold at prices very close to our original cost. The remaining seven properties were part of our ongoing property management activities and resulted in a 70% recovery of costs. Over the past four years, we have sold about $1.2 billion worth of real estate, reflecting a high level of liquidity for our granular assets. In addition, we have been able to recycle the cash from our sales at accretive yield.

Diversity and granularity have been a hallmark of STORE's business model from the start, and the portfolio continues to be well diversified. As of September 30, our portfolio mix by sector was 63% in the service sector, 19% in experiential and service-driven retail businesses and the remaining 18% in manufacturing. Sector diversity has definitely been helpful in 2020, with strong performances from our retail and manufacturing real estate investments as well as geographic diversity with much of our exposure centered in communities that facilitate social distances. In addition to our sector and geographic diversity, we also have strong customer diversity.

With the most single customer representing more than 3% of our annual revenues. Fleet Farm remained our largest customer, representing just 2.7% of base rents and interest. The concentration of our top 10 customers has continued to decline over time and currently represents just 16.8% of base rent and interest, down from 18.5% in 2018. In addition, nearly 80% of our portfolio is comprised of tenants that account for 1% or less of base rent and interest.

We entered the fourth quarter with a strong pipeline of opportunities, which allows us to continue to be highly selective and opportunistic in making new investments. Our deal flow ownership means that we rarely buy assets having existing leases, which is reflected in our low level of real estate lease intangibles. This is importantly, our direct pipeline ownership enables the realization of elevated comparable lease yields. As Chris mentioned, we had anticipated some short-term migration in our contract ratings due to COVID, and that is reflected in our most recent collection of tenant financial statements.

Our contracts rated investment-grade, as determined by our STORE score analysis, declined from 71% to 61% of our portfolio. 94% of this decline is directly related to COVID-sensitive industries. As we move out of the pandemic, we fully anticipate that our STORE scores will gradually revert to historic levels. Our tenants came into the pandemic with material margins for safety, which is the important thing.

When we include the benefit of the second quarter rent deferrals, the unit level fixed charge coverage ratio held constant at 2.1x. It is important to note that we've managed real estate portfolios across many market cycles. And we built STORE with several margins of safety. Our business model continues to perform well, and we can attribute that to three major things: number one, the unprecedented diversity and granularity in our investment portfolio, which includes a wide range of industries that were unaffected by COVID; number two, STORE's portfolio having strong coverages going into the pandemic; and number three, an established portfolio management organization, allowing us to quickly pivot and respond to our customers' needs, utilizing the financial statements that we have consistently collected each quarter.

When it comes to our team, I want to highlight our recent announcement of two well-deserved promotions to our executive team: Tyler Maertz to executive vice president of Acquisitions; and Craig Barnett to executive vice president of Underwriting and Portfolio Management. Tyler has been with STORE since our inception and has played a vital leadership role in building our direct origination approach. Prior to joining STORE, Tyler spent 11 years at GE Capital, graduating from GE's esteemed financial management program, where he gained extensive leadership experience in financial planning and analysis and was also a member of the sales team at GE Franchise Finance. Craig Barnett has an extensive credit background in both underwriting and portfolio management and will lead the consolidated credit centric group Chris mentioned earlier.

He previously served as our senior vice president of Portfolio Management, developing our company's portfolio management team, which has been an impactful contributor to the delivery of our potent risk adjusted performance. Like Tyler, Craig also joined STORE at the very beginning, with both having worked at prior net lease companies associated with our leadership team. We look forward to their ongoing contributions to the growth and success of our company. Finally, we are currently planning our fifth annual customer conference for late January 2021.

Although it will be virtual this year, we expect a strong turnout and our program will feature another amazing lineup of outstanding speakers whose expertise will give our customers the inside track for the coming year. We are really looking forward to hearing valuable insights from all our distinguished speakers at our 2021 customer conference. And now I'll turn the call to Cathy to discuss our financial results.

Cathy Long -- Chief Financial Officer

Thank you, Mary. I'll discuss our financial results for the third quarter and then provide an update on our capital markets activity and balance sheet and our initial guidance for 2021 acquisitions. Consistent with last quarter, I'll provide a sequential bridge from our second quarter to third-quarter results. All other comparisons discussed on today's call will be year-over-year.

Our third-quarter revenues increased 2% from the year ago quarter to $175.2 million, driven by growth in our real estate portfolio, offset by the impact of the pandemic. Sequentially, third-quarter revenues increased $6.9 million, reflecting a recovery in rent levels as retenanted properties began to reopen and the positive contribution from net acquisition activity. Taken together, these factors resulted in almost $0.005 per share increase in sequential AFFO. Lower interest expense from the paydown of our revolver and lower property costs contributed another $0.02, resulting in an overall increase of about $0.025 in AFFO per diluted share.

We granted rent deferrals of approximately $15 million during the third quarter, which is down significantly from $40 million in the second quarter. At September 30, COVID rent receivables stood at $50 million. This represents year-to-date rent deferrals of approximately $55 million, net of reserves of $4 million and approximately $1.3 million of repayments. Rent deferral repayments were generally scheduled to begin no earlier than the fourth quarter, so some of the payments we received in the third quarter were from tenants who repaid their deferred amounts early.

Now turning to expenses. Interest expense increased by $2.8 million from the year ago quarter, reflecting both the debt we issued under our master funding program last November and the higher interest expense we incurred in the quarter from maintaining excess liquidity on our balance sheet. By September 30, we had fully repaid our revolving line of credit, and the entire $600 million is available to fund future acquisition activity. Property costs for the third quarter were essentially flat year-over-year at $3.3 million.

G&A expenses increased by $1.2 million from the year ago quarter, primarily due to executive severance expense. As a percentage of our average portfolio assets, G&A expenses, excluding the impact of noncash equity compensation and severance expense, declined to 43 basis points from 49 basis points a year ago, reflecting decreased acquisition-related expenses on lower acquisition volume, along with reduced travel-related costs. During the quarter, we recognized an aggregate $2 million impairment provision on three properties we're likely to sell. AFFO for the third quarter increased to $119 million from $116 million a year ago, driven by our portfolio growth.

On a per share basis, AFFO was $0.47 per basic share and $0.46 per diluted share, down from $0.50 a year ago. We declared a third-quarter 2020 dividend of $0.36 per share, which was paid on October 15 to shareholders of record on September 30. This was a 2.9% increase from the prior quarter's dividend, reflecting confidence in our outlook and representing a payout ratio of approximately 78% for the quarter. Aggregate cash rent and interest collections for the third quarter totaled 87% and rose to 90% in October.

This represents a market increase from the 74% collected for the second quarter. In calculating a percentage of cash collections, we've included only the actual cash rent payments we received from our tenants. Now turning to acquisition activity and our balance sheet. We funded the $251 million of acquisitions in the quarter, with equity along with cash proceeds from asset sales.

We issued eight million shares of common stock under our ATM program at an average price of $27.19 per share, raising net equity proceeds of approximately $215 million. We entered the fourth quarter with approximately $144 million in cash and full access to our credit facility. At September 30, we had approximately $3.6 billion of long-term debt with a weighted average maturity of 6.2 years and a weighted average interest rate of 4.3%. Our leverage remains low at 37% on a net debt-to-portfolio cost basis, and we have no significant debt maturities until 2024.

Year to date, we've closed $526 million of net acquisitions and are on track to reach our target range of $625 million to $750 million for 2020. Based on our current acquisition pipeline, we're providing initial guidance for 2021 acquisition volume in the range of $1 billion to $1.2 billion, net of anticipated sales. And now I'll turn the call back to Chris.

Chris Volk -- Chief Executive Officer

Thanks so much, Cathy. And as usual, before turning this call over to the operator for your questions, I'd like to make a few brief comments. First, as we have done in our investor presentation over the past two quarters, we have included added disclosure addressing the impact of the COVID-19 pandemic. With eight consequential months having passed since the initial general business shutdown in early March, and with new data raising our knowledge monthly, we know much more now than we did then, giving us greater ability to illustrate portfolio trends and greater abilities to be predictive.

Our data shows that our rent collection rate is tied to the ability of our tenants to conduct commerce and to be open for business. This, together with frequent assertions by political and scientific leadership that a vaccine to address this pandemic is near, give us cause for optimism. Certainly, when it comes to our expected real estate investment activity for 2021, Cathy has provided initial guidance. Historically, we have offered future year earnings guidance during our third-quarter earnings call.

This year, we are deferring such guidance until our year-end earnings call in early 2021, at which time, we believe that we will be able to offer 2021 performance guidance with greater comfort and foresight. Until then, we plan to continue our practice of providing you with monthly portfolio performance updates. Finally, I'd like to make a brief comment on our dividend. When the COVID pandemic resulted in the closure of much of the U.S.

economy in March and April, we had no way of knowing how this would impact our portfolio and for how long. We had never conceived it such a scenario. The answer is the trough month for us approximated 70% cash collections, rising rapidly from there. So we maintained our dividend in the second quarter, knowing that it was not fully covered by quarterly cash flow because we saw the trended rent collections.

That trend resulted in a third-quarter dividend payout ratio of about 78% on an AFFO per share basis or about 86% on a cash basis, with our optimism reflected in a meaningful quarterly dividend raise, making STORE just one of 31 REITs to raise its dividend since the onset of this pandemic. If we look toward 2021 and include our expected rent deferral collections in our cash dividend payout ratio computation, we believe that our 2021 payout ratio on a cash basis will begin to trend toward our historic levels. Our internal expectation is we will be able to be in the area of our former low payout ratios and high dividend protection in 2022. Making this happen has been a full team effort and so we give a shout out to all of our STORE team members who've committed themselves to an amazing job on behalf of our shareholders, customers and other stakeholders.

As our economy turns around in 2021 and beyond, many of the jobs created will be created by middle market and larger companies that comprise our target market. And such companies are generally regional or national leaders that stand to benefit from elevated market share since we begin to look backward on this pandemic event. Collectively, our customers operate out of approximately 36,000 locations and employ approximately 2.5 million across more than 110 fundamental industries. STORE will be there to provide needed real estate capital, and we are proud to play a role in our collective economic betterment.

And now I'd like to turn the call over to the operator for any questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] The first question will be from Linda Tsai of Jefferies.

Linda Tsai -- Jefferies -- Analyst

Hi. Good morning. First, Mary, congratulations on becoming the president of STORE's great accomplishment and inspiring to see your ascent. I wanted to ask about acquisition cap rates, albeit lower than 3Q remain elevated for the second quarter in a row.

What's driving this?

Mary Fedewa -- President and Chief Operating Officer

Thank you again, Linda. Let me talk about the market in general, and maybe this will shed some light, and then Chris will add some comments as well. So we are seeing some cap rate compression overall in general. And I believe that our cap rates will go back to more pre-COVID levels.

The compression is generally due to supply and demand imbalances, if you will, related to investment-grade sort of flight to quality as well as industries that make sense to fund into and COVID. So and then there's some favorite industries like industrial right now or companies that have done well in COVID. So that's creating a little bit of cap rate compression. As you know, our model is to call directly on customers.

We have a pipeline for customers that we've been doing business with for a long time. So it's not a perfect market out there, and you can create cap rates and your deal flow yourself if you're out there knocking on doors to do that. So we're in general, we have a really nice pipeline. We're seeing gradually seeing improved deal flow.

And — but we do see the compression out there as well and expect we'll go back toward cap rates that were pre-COVID.

Chris Volk -- Chief Executive Officer

And this is Chris, Linda. I would say we — just as a reminder, we have 16 people in our business development group going on 18 in 2021. And having that number of people and having that coverage makes a huge difference. If you can remove brokers from the equation and whatnot, it gives you room for added cap rates.

And then one other item is it, to Mary's point, you're seeing flight to quality in terms of flight to perceived quality because I won't necessarily say I agree with all this, but flight to perceived quality with respect to chasing after investment-grade tenants. There's been a lot of that, a lot of chasing of industrial assets, especially, and especially if your industrial assets in major MSAs, you've seen some of that. And then if they're going after bite-sized properties, like smaller, there's also been sort of a chase after smaller assets. And so what we've always done has been value investors.

We're picking our spots. So part of it is direct originations, and part of it is also being a value investor mindset, which we've always brought to the table.

Linda Tsai -- Jefferies -- Analyst

And just as a follow-up. In terms of the third-quarter acquisitions, what was the composition of industries?

Mary Fedewa -- President and Chief Operating Officer

This is Mary again. Well, we had about 1/3, 1/3, 1/3 between retail, service and manufacturing. And I would say for us, that's a little heavier than on the manufacturing side than usual. We were — but we are investing in industries that makes sense to fund into during COVID and most of which have withstood the impact of COVID and, in most cases, actually have benefited from COVID.

Linda Tsai -- Jefferies -- Analyst

Thank you.

Operator

The next question will be from Frank Lee of BMO.

Frank Lee -- BMO Capital Markets -- Analyst

Morning, everyone. How should we think about funding for future acquisition? Chris, I know you mentioned in your prepared remarks that you're not looking to apply leverage on new investments. So should we continue to expect deals to be matched funded with the ATM and dispositions? Or maybe with some debt now that the line has been fully paid down?

Chris Volk -- Chief Executive Officer

Well, I'll answer this with Cathy. I mean — but I would say this year, we were taking a cautious approach, which I think you would appreciate. And as we see our EBITDA pick up and as we see our collections pick up, we'll end up happening, our funded debt-to-EBITDA ratio is going to just drop. And so as you get into 2021, I expect you're going to see us spending more with that than with equity.

So the mix will slightly changed, although on an overall basis, it will be smooth. So our historic leverage is kind of average around 40% of cost, which tends to work out to sort of 5.5x funded debt-to-EBITDA. I mean it's kind of in the daily work. As to what happens with you now and the end of this year, which is just very close to us, I can't say whether we'll be going into debt markets or not.

Cathy Long -- Chief Financial Officer

Right. The debt rates are attractive. So you may see us tap the debt markets in the next six months or so.

Frank Lee -- BMO Capital Markets -- Analyst

OK. Thanks. And then if I look at your rent collections by industry slide, it looks like the restaurant collections dipped a bit in October from September. Is there anything to read into here? Or is it just like a rent collection timing issue?

Mary Fedewa -- President and Chief Operating Officer

For the quarter, this is Mary. So again, our rent collections were 90%. The ones that the deferrals were really concentrated in the six industries, more importantly, most with the movie theater industry, which has suffered the most, as you know, through this. If there was a slight uptick in the restaurant space, it's just a timing issue.

It wouldn't have been a trend.

Frank Lee -- BMO Capital Markets -- Analyst

Great. Thank you.

Operator

The next question will be from Sheila McGrath of Evercore ISI.

Sheila McGrath -- Evercore ISI -- Analyst

Good afternoon. Chris, I was just wondering if you could give us some perspective, historical perspective in terms of cap rates versus the cost of debt. Are these spreads in the market currently available? Is this the widest that you've ever seen?

Chris Volk -- Chief Executive Officer

It's kind of in that ballpark, yes. I mean, if you can invest at cap rates north of 8% and borrow at debt that's between 3% and 4%, I mean it's a really sunning spread. So yes, it's very attractive.

Sheila McGrath -- Evercore ISI -- Analyst

And does that make you want to be a little more aggressive on investment volumes in the near term?

Chris Volk -- Chief Executive Officer

Yes. We're being attentive to the marketplace. I think that we're ramping up to sort of pre-COVID levels in terms of where our acquisition pace was running. So year to date, we're obviously going to be falling far short of that.

But — and really, we've been running kind of at half speed for a while. But you can see that this last quarter, third quarter, we kind of saw we're ramping up. So we're doing close to $100 million a month. Normally, we're doing recently over $100 million a month.

Q4, we hope to ramp up further. And then certainly, Cathy's given guidance for next year for 2021, which is definitely in $100 million a month range, and that's on a net basis, by the way. So we're always selling off assets. And we disclose kind of net numbers.

Sheila McGrath -- Evercore ISI -- Analyst

OK. Thank you.

Operator

The next question comes from Spenser Allaway of Green Street.

Harsh Hemnani -- Green Street Advisors -- Analyst

Thank you. This is Harsh filling in for Spenser. You spoke a little about rent collection and collections over different industries. Can you talk a little bit about the deferral granted? And if that happen, any of those that have been renegotiated, such as to extend the payback period?

Mary Fedewa -- President and Chief Operating Officer

I'm not sure we got all of the question. We heard part of it about the payback period. Could you repeat the question itself?

Harsh Hemnani -- Green Street Advisors -- Analyst

Yes. I was just asking, if you can talk a little bit about the deferrals you have granted. And if there have been any renegotiations on them?

Cathy Long -- Chief Financial Officer

Were there any renegotiations on the deferrals that we granted?

Mary Fedewa -- President and Chief Operating Officer

Yes. So this is Mary. So for many months now, we've had actually no new requests for deferrals. We have had customers in the highly impacted industries come back and having to extend a little bit of deferral from them.

If you look at our overall portfolio, you will see that we have only given 2.5 months on average of rent deferral. And even in our highly impacted industries, we have given less than three months of deferral. We have tailored terms for them to be able to pay back depending on the industry. Someone may have three months, someone may have six months.

But overall, the amount of deferral has been inside of three months of rent. And again, no new deferrals request in a long time. Is that helpful?

Harsh Hemnani -- Green Street Advisors -- Analyst

Yes. That is helpful. Thank you. And then on — you commented on total rent coverage and said that it's pretty much in line with what you've seen pre-pandemic.

But a little more broadly, how has rent coverage spread on some of the larger retail sub-categories like restaurant, education?

Chris Volk -- Chief Executive Officer

How coverage? You're asking how the coverages are with certain of our larger sectors like restaurants and early education?

Harsh Hemnani -- Green Street Advisors -- Analyst

Yes.

Mary Fedewa -- President and Chief Operating Officer

So overall, like I did mention. So we recently received financial statements that had one quarter of COVID impact in them. So we received June financial statements for most of our tenants. If you look at those financial statements on a trailing 12-month basis, and you actually give our customers that we gave deferrals to the benefit of those deferrals, they're covering consistent with what they did pre-pandemic.

So I would say both in the restaurant space and the early childhood education, you will see those exact trends as well, and both of which had really healthy coverages going into the pandemic.

Harsh Hemnani -- Green Street Advisors -- Analyst

Thank you so much.

Mary Fedewa -- President and Chief Operating Officer

You're welcome.

Operator

The next question comes from Todd Thomas of KeyBanc Capital Markets.

Ravi Vaidya -- KeyBanc Capital Markets -- Analyst

Good morning. This is Ravi Vaidya on the line for Todd Thomas. I wanted to ask you, can you please share the cap rate for the 18 assets sold in the quarter? And going forward, how should we think about dispositions in 4Q and '21 from a modeling standpoint? Over the past couple of years, 4% to 5% of the portfolio was sold. Is that an appropriate run rate for '21?

Cathy Long -- Chief Financial Officer

Yes. Well, this is Cathy. I'll start with that last question. Yes, it ranges from 3% to 5% of the beginning balance of the portfolio is normally sold during the year, just as a normal part of our process of going through and reviewing the portfolio and rebalancing it.

So if you kind of use a range of 3% to 5%, that would be appropriate for 2021 as well.

Chris Volk -- Chief Executive Officer

And then this is Chris, and I'll say that from a disclosure perspective, we don't disclose sale cap rates on a quarterly basis. We do it once a year on an annual basis. And there's a slide that does this, by the way, for '19, '18 and '17. So you have for three years.

And actually, we could put in '16, too, because we started actively selling assets from '16. If you look at the four years' worth of sales we've done, we've sold north of $1.2 billion of assets, which is probably the most in the peer set, which demonstrates not only the liquidity in the markets that we are addressing but also shows that we've been pretty good about buying properties right because the — our ability to reinvest or recycle the cash into new assets as in every single one of those four years has been accretive. So we've been buying assets at cap rates higher than ask rates than we've been selling assets. So it's getting you another 35 basis points of internal growth, which is important.

And so we do the math for you in terms of how it gets there. For 2020, this may be the first year, we don't — we aren't able to recycle into internal growth, but it's too early to say yet. To date, we've been selling assets, net netted losses, which Mary has shown you on the slide there, that's in the deck. And we have not done that many opportunistic sales.

But we do have a lot of people wanting to buy assets, and we are seeing a lot of liquidity and demand in the marketplace. And you can tell that from calls that you've been listening to from peers and other companies where they've been talking about scarcity of product in the marketplace. And so we've been having people make offers for restaurants, for example, for us in the five handle cap rate range and stuff. And we may sell some of that stuff during the course of this year.

So it remains to be seen.

Ravi Vaidya -- KeyBanc Capital Markets -- Analyst

OK. Great. Thanks. And with regards to the gyms and health clubs, can you offer any detail on foot traffic, rent coverage or any other trends that you're seeing for those assets?

Mary Fedewa -- President and Chief Operating Officer

Yes. This is Mary. So when we talk to our fitness center customers, of which most are open now, there's some California issues still going on. But across the rest of the U.S., they're open.

Once they open, they have a membership model, as you know, so they're able to charge memberships when they open. So that's been really helpful for them. I think there's been some capacity constraints on them, but the capacity is generally based on fire codes. And so those are fairly generous in terms of how many people can be in the facility at a time.

So I don't think we're having issues around the capacity. Definitely, the memberships are coming back. We've actually — they've actually had people signing up for new memberships and stuff, I don't know if it's been sitting on the couch with COVID and people are motivated to get back out and begin to live their life, but we've seen increased memberships, and we've seen them actually come back relatively nice. Our portfolio of fitness centers is generally sort of regional players, national players.

And so they're very strong. And those are the groups that are actually seeing good performance coming back better than I think they expected is what they're telling us, for sure.

Ravi Vaidya -- KeyBanc Capital Markets -- Analyst

Appreciate it. Thanks for the color. Thank you.

Operator

The next question is from Nate Crossett of Berenberg.

Nathan Crossett -- Berenberg -- Analyst

Hi, guys. For the 2021 volume, the $1 billion to $1.2 billion of net sales, what's the cap rate associated with that? Are we talking north of 8%? Or any color there would be helpful. And then in the off chance that we go back into a lockdown, what would be kind of the impact on your pipeline specifically? And do you guys think you can execute on that regardless if we go into a lockdown or not?

Cathy Long -- Chief Financial Officer

This is Cathy. When we're looking at 2021, as Mary mentioned, we're anticipating that cap rates trend back down to where they were pre-COVID. And if you recall, back at the beginning of the year, we had given a 7.75% cap rate for guidance of acquisitions pre-COVID. So we're expecting it would trend back there.

And you want to talk to the other question?

Mary Fedewa -- President and Chief Operating Officer

Yes. So Nate, the good news is that we've had the benefit of now seven or eight months. So of living through COVID, and our portfolio has been our — has weathered it really well. So I would say any new lockdown, which we wouldn't anticipate happening on a global basis, but you can see how we were able to perform through the global lockdown that we did see.

And so from that perspective, we are monitoring everything you can imagine from daily case rates to positive test rates to mobility of people to — we have an open table statistic that we follow on restaurants. And they will say that although restaurants are volatile, they are actually creeping up in terms of volume and stuff and business. So we're between masks and handwashing and social distancing. The world is adapting, as you can imagine, we're all very adaptive to things that happen in life.

And so I would say our pipeline will perform just fine, and I'm actually really proud of how our portfolio has performed and held up through COVID as we've in the past eight months as well.

Chris Volk -- Chief Executive Officer

And our experience, Nate has been a lot of — the closure issues have been on a state-by-state or even a regional-by-regional basis, and we've seen some of that just even here. We're in Arizona, in the Phoenix market. They were shutting down fitness clubs. We had some fitness club shutdowns also in California.

Today, all that stuff is open. And of course, Arizona we are was ground 0 for the entire world in terms of cases for 100,000 people for a while. So and today, we're in much better shape. If we look to other regions today that would be hot spots like El Paso, we're not seeing any sort of impact on our portfolio at this point.

And of course, there are slides that reflect Mary's comments there in the COVID deck. And of course, these are as of October 22. So they're not immediately current. But you can see that 13% of our properties are in highly sensitive industries relative to COVID that are in areas where there's more than 20 cases per 100,000 people, which is not even that many.

So I think right today, we feel pretty confident about where we are and that we can withstand the issues. And of course, the other thing I would point out is that about 60% of our tenants operate across multiple states. And so because they operate across multiple states, they're able to be strong regional and national players and if one market shuts down, they're operating in other markets, too.

Nathan Crossett -- Berenberg -- Analyst

OK. Just curious on the movie theaters. Are there any other use cases for the ones in your portfolio, worst-case scenario there?

Mary Fedewa -- President and Chief Operating Officer

Say that again for the movie theaters, what was the question?

Nathan Crossett -- Berenberg -- Analyst

Yes. Just worst case scenario, are there other use cases for those assets? I don't know, maybe industrial or distribution just trying to think about the worst case?

Mary Fedewa -- President and Chief Operating Officer

Yes, sure. Yes, for sure. They can be used for other things as well. They are pretty generic.

Chris Volk -- Chief Executive Officer

We sold a theater this last quarter, and it's being used for an Amazon. So the answer is yes. There are other uses for them. But I would say to you, first of all, a theaters are 3.9% exposure.

So they're not that big of an exposure for us in the first place. Secondly, we know what all the unit level numbers are because we get all of the financial reporting, and we feel pretty confident in most of the theaters that we own. And third, the movie theater business did $42 billion in revenues in 2019. And you just can't stream $42 billion.

So it's just not going to happen. So the studios really need it. And finally, our average investment in movie theaters is like $9 million a theater. So we're not really in the — for a lot — per theater or a lot for screen.

I mean we have been very judicious to the amount of money that we've spent on a location-by-location basis.

Mary Fedewa -- President and Chief Operating Officer

And their issue actually, Nate, as you know, has been product too. It's like getting that product out there to them. So they're open. You've got over — most of ours are open, over 85% are open.

And — but they need some product.

Chris Volk -- Chief Executive Officer

Yes. So if you look at a movie like Tenet, which was a disappointment in terms of how it opened in the United States as kind of an experiment, I guess, during COVID. In Europe, I think, kind of did $250 million in revenues. I mean so it's — people will go to theaters where they feel comfortable.

And there's some — candidly, there are just some industries and theaters. It's probably one of those industries where you're just not going to get back to normal until there's a vaccine. I mean — and there's nothing you can do about that. I mean, it just is what it is.

So which means that you're not going to be at the 100% collection rate right away. I mean it's going to bleed up there so.

Nathan Crossett -- Berenberg -- Analyst

OK. Thank you.

Operator

And the last question will come from John Massocca of Ladenburg Thalmann.

John Massocca -- Ladenburg Thalmann -- Analyst

Good morning. So maybe touching on the theaters a little bit more. How should we think about where those are in terms of how they're improving on a rent basis? I mean is most of that bucket on cash accounting at this point? Just given maybe what some of the other peers are doing, I'd be interested to know where those sit from cash accounting and maybe a receivable reserves perspective?

Cathy Long -- Chief Financial Officer

This is Cathy. So we do normally have a process to go through and determine who we would put on cash accounting. And it is related to whether or not they're making payments as agreed and things like that. Importantly, as we went into the pandemic, we immediately pivoted our internal team and the credit monitoring group was really the group that led the charge here, where they received the quarterly financial statements for each of our tenants.

So they understood very well the tenants' financial position, what industry they were in, what challenges that industry would have. And all of the deferrals that we created were tailored to that particular tenant. So it was a one by one, in other words, it wasn't like just one rent deferral program we had, and we just put it on everyone. Every single tenant had their own unique program that fit them.

And so if you have tenants who are not paying in accordance with that program, that would be one trigger to move them to cash accounting. And if we had some tenants where we came to no resolution where they weren't paying and we had no resolution, we would also put them on cash accounting, but that group was very, very small because we had very few that were not resolved. So I mean, I hope that helps.

Chris Volk -- Chief Executive Officer

Yes. So one of the big things that I think where STORE stands out through all this is that we were able to reach documented resolutions last quarter with 90% of the tenants that needed deferral agreements. And by the way, the ratio is pretty much the same as last quarter. So that means that you — from an accounting perspective, you're able to really kind of understand what you can accrue and what you can't accrue.

And then you have the 10% where you don't have resolution and all that 10% is on cash accounting, right? I mean you're not — you can't accrue for stuff you don't know. And so we've not done any accruals for anything unless we have a document behind it.

John Massocca -- Ladenburg Thalmann -- Analyst

I guess I mean how does that theater bucket kind of get sliced between those three areas, I guess?

Chris Volk -- Chief Executive Officer

Which three areas?

John Massocca -- Ladenburg Thalmann -- Analyst

I'm just thinking people who haven't come to resolution and therefore on cash accounting, people that are on cash accounting for some other reason and people who you've come to an agreement with them, and therefore, you're accruing the rent.

Chris Volk -- Chief Executive Officer

Right. So you have basically the people that you don't have a resolution with, they're on cash accounting. Then you have people — you always have a work in process. So we have a certain number of vacancies that happen every day.

Those guys are — those people are all on cash accounting. And then finally, you have the people you have resolutions and there, you book receivables, then you also book reserve against the receivables. So you're trying to be conservative on that because you can't book receivables without booking reserve.

Mary Fedewa -- President and Chief Operating Officer

Right. And recall that there are scenarios where we have a resolution with someone, but because of the way the resolution is structured, you can't really report the revenue right away. So for example, if someone had percentage rents that they were going to pay or something, you wouldn't report those percentage rents until they got over the threshold where the percentage rents were due. And some of them might have been where you gave somebody a month off, say, in September, and they were going to pay you percentage rent all during 2021.

Well, obviously, I can't report that revenue now. So they would be an example of somebody who would be in that bucket.

John Massocca -- Ladenburg Thalmann -- Analyst

OK. But maybe just saying this a different way. I mean, I guess if I think about that 3.9% of listed base rent that is theaters, how much of that is flowing through revenue today? Is it all 3.9%? Or is there kind of a haircut? In terms of what's actually in that top line number?

Mary Fedewa -- President and Chief Operating Officer

No, there would be a haircut, right? So we have deferrals, and as Chris mentioned, we have reserves against the deferrals, but we would have very few theaters unresolved, if any, today. We have agreements with all of our theaters.

Chris Volk -- Chief Executive Officer

And so basically, what you've got is, today, you have virtually everything we have open. But our rent collections for October were 90%, right? So — and the reason it's 90% is because — and you see this in some of the charts that we give you is that theaters being a great example, we have a number of theaters open, but our rent collection is only 20%. And it's like there. It's in the chart.

Mary Fedewa -- President and Chief Operating Officer

Yes, yes. And it's an agreed-upon 20% right based on their deferral, right, agreements that they have with us again but yes.

Chris Volk -- Chief Executive Officer

So there are certain sectors, and we sort of give you an idea of what the sector is and what the rent collection is. And sometimes, the rent collection is a function of a transaction or a deal that we structured months ago, right, where the company can actually afford to pay us more rent today, but we struck a deal. So you get stuck at 90%. I mean the really cool thing, honestly, is that if you were to look at STORE, and our rent collections are not as high as some people.

So I mean we're at 90%, let's say, the average of people that have investment-grade tenants is around 95%. But the thing is that we're going into the marketplace with yields on our investment of around eight and their yields on investment average around 7.3. So we're like 8%, 9% more than theirs, right? And so that means that we're collecting our — for every dollar we have invested, we're collecting a lot more than they are, right? And then because they're collecting 100% of their investment grade, that means they're not — they're collecting less of their noninvestment grade, and there's 150 basis point spread between those two typically. And so then you end up with even a wider gap in rent collections in terms of how many dollars we're collecting for every dollar we invest.

And so there's a chart on that because I think that's really important in terms of looking at how STORE's performing through this pandemic and where you're generating risk-adjusted rate of return is so key. And so the chart that describes that and compares us to peer groups that are dominated by investment-grade tenants, and we stand out really well.

John Massocca -- Ladenburg Thalmann -- Analyst

Understood. And then maybe on the investment side, just some of the comments you made earlier. I mean, are you seeing kind of opportunities maybe for these larger square foot properties where for whatever other reason, competitors are staying away from them? And is that a place where maybe you could kind of sustain some of these higher yields as we get into a more competitive environment? And maybe are there other kind of maybe differentiated, beyond your core differentiated investment thesis not thinking more on a property type level where some of the more COVID impact is...

Chris Volk -- Chief Executive Officer

John, I would say it's kind of like analyst ratings. If the analyst rates as a whole, it's probably a good thing to buy, right? So people buy stuff at the wrong time sometimes. So the times where STORE has had the most buy recommendations we've been trading at a 20 or 22 AFFO multiple. And when we're trading at low AFFO multiple, we have less buys.

And you have that in the real estate market, too, where you have certain areas that are out of favor, right? But if you peel back the envelope, the businesses behind them are really attractive businesses, and they can perform really well. And of course, if you're going after some of the big box stuff, you can get second-generation use out of it, which basically means you can be in it a lot cheaper. And so there are chances like that where you can make some really interesting investments today that we think will sustain the test of time.

Mary Fedewa -- President and Chief Operating Officer

Yes. And I agree, John, just real quick, this is Mary. But our process hasn't changed, right? We have a very disciplined process. We're pure-play in-process center real estate.

Our team is out there calling directly on customers, and we're making investments in a very disciplined way underwriting as we always had, and keeping very disciplined to all our table stakes and so on. So I would say that Chris is correct, in times of market disruption, there are opportunities. and we need to be mindful of all of that. But the bottom line is that we are running a business for the long term here and that we are very consistent and disciplined in how we are building it.

Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Chris Volk for any closing remarks.

Chris Volk -- Chief Executive Officer

Thanks, everyone, for attending the call today. So Mary, Cathy and I are going to be around for any follow-up questions that you got. Given that we're always working remotely, we're not seeing a lot of you, as we normally would during conference events. But during the remainder of the year, we're planning on virtually conducting a few non-deal road shows.

So if you are interested in non-deal road shows or investor presentations and being included in this outreach, feel free to call us. And meanwhile, we and other STORE leaders, so three of us and other STORE leaders plan to be at the virtual REIT week that's going to be on November 17 and 18. And again, if you want to be included in the meeting schedule, just let us know. Otherwise, have a great day, and thank you very much for attending.

Operator

[Operator signoff]

Duration: 58 minutes

Call participants:

Lisa Mueller -- Investor Relations

Chris Volk -- Chief Executive Officer

Mary Fedewa -- President and Chief Operating Officer

Cathy Long -- Chief Financial Officer

Linda Tsai -- Jefferies -- Analyst

Frank Lee -- BMO Capital Markets -- Analyst

Sheila McGrath -- Evercore ISI -- Analyst

Harsh Hemnani -- Green Street Advisors -- Analyst

Ravi Vaidya -- KeyBanc Capital Markets -- Analyst

Nathan Crossett -- Berenberg -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

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