STORE Capital (STOR) Q2 2022 Earnings Call Transcript

STORE Capital (STOR)
Q2 2022 Earnings Call
Aug 04, 2022, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the STORE Capital second quarter 2022 earnings conference call. [Operator instructions] Please note this event is being recorded. I'd now like to turn the conference over to Megan McGrath, investor relations for STORE Capital. Please go ahead.

Megan McGrath -- Investor Relations

Thank you, operator, and thank you all for joining us today to discuss STORE Capital's second quarter 2022 financial results. We issued our earnings release along with our earnings supplement and quarterly investor presentation after the market closed yesterday. These documents are available in the investor relations section of our website at ir.storecapital.com under News & Results, Quarterly Results. I'm here today with Mary Fedewa, president and chief executive officer of STORE; Sherry Rexroad, chief financial officer; Craig Barnett, EVP of underwriting and portfolio management; and Tyler Maertz, EVP of acquisitions.

On today's call, management will provide prepared remarks, and then we will open up the call for your questions. In order to maximize participation while keeping our call to one hour, we will be observing a two-question limit during the Q&A portion of the call. Participants can then reenter the queue if you have follow-up questions. Before we begin, I would like to remind you that today's comments will include forward-looking statements under the federal securities laws.

Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate or other comparable words and phrases. Statements that are not historical facts, such as statements about our expected acquisitions, dispositions or our AFFO per share guidance for 2022 are also forward-looking statements. Our actual financial condition and results of operations may vary materially from these 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 Form 10-Q.

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

Mary Fedewa -- President and Chief Executive Officer

Thank you, Megan. Good morning, everyone. Welcome, and thank you for joining us today. I'll begin the call with an overview of our second quarter performance and some thoughts on the current market environment.

Craig will provide an update on our portfolio and then Sherry will review our financial results. We will then open the call up to questions. In the second quarter, we acquired $392 million in profit center real estate, bringing our year-to-date acquisitions to over $900 million. Although the transactions we closed this quarter were largely negotiated a few months ago, we are pleased with our success in driving both higher cap rates and higher lease escalations.

Second quarter cap rates were up 10 basis points to 7.2% from the first quarter and lease escalations increased from 1.8% on first quarter acquisitions to 2% in the second quarter. In addition, from a credit perspective, the acquisitions we made in the quarter improved our already strong portfolio. Craig will touch on this in his remarks. We delivered solid AFFO per share of $0.58 for the quarter, which is a 16% increase year over year.

Our strong performance is a result of our healthy first half acquisition pace, the excellent performance of our portfolio and tailwinds relating to the recovery from the pandemic. These tailwinds include both strong rent deferral repayments and lower-than-anticipated property costs. Based on our year-to-date results, we are raising our AFFO per share guidance to a range of $2.25 to $2.27, up from a range of $2.20 to $2.23. At the midpoint, this updated guidance represents greater than 10% growth over 2021.

Sherry will discuss guidance in more detail in her remarks. Now, I would like to address how STORE's unique business model allows us to fund accretive acquisitions and maintain attractive spreads to deliver solid risk-adjusted returns in this and almost any economic environment. First, the market we address is large, and we have plenty of runway for growth. Therefore, we take a very selective approach to the investments we make.

Second, our unique direct origination model makes us a price setter in our market as opposed to a price taker. This is a very important distinction. It allows us to price new leases every day at cap rates that help us maintain these attractive spreads. Third, the financing flexibility we built into our model over the past decade positions us to optimize our cost of capital so we can make accretive acquisitions.

We have three sources of long-term debt financing: our Master Funding Program, our investment-grade unsecured public debt and our unsecured bank term debt. This provides us multiple avenues for raising debt capital as market conditions change. In addition, we have access to our ATM facility to accretively fund acquisitions. Although we are mindful of the current macroeconomic environment, we are operating in a large and underserved market.

Regardless of external factors, we are confident that there are many strong and prospering businesses that will need and can benefit from the real estate financing solutions our unique business model can provide. And as we have mentioned in the past, we often see great opportunity in times of market dislocation, and STORE is prepared to capitalize on every opportunity. Before I turn the call over to Craig, I would like to provide some color on the current acquisition market. As you may have heard from others, the market did experience a pause in the beginning of the second quarter as buyers and sellers adjusted to the rapidly changing economic environment.

Even with this market volatility, our team continued to knock on doors, speaking with both customers and prospects. We were in the market evaluating and closing transactions consistently throughout the quarter. Regarding cap rates, we believe they bottomed earlier in the year, and we are now experiencing steady upward movement. Our recent letters of intent have cap rates in the 7.5% to 7.75% range.

And while we do not fund every letter of intent, this is a good indication that our team is successfully negotiating higher cap rates, which we expect to see the benefit of in the second half of the year. In addition to higher cap rates, we are also successfully driving higher annual lease escalations, many consistently in the two to two and a half percent range. Importantly, we are not sacrificing cap rates for rent escalations or vice versa. And in most cases, we are seeing upward momentum in both metrics.

Regarding the competitive landscape, we believe that some of the more recent levered market participants have become less competitive and the alternatives for prospects have become less attractive. This only enhances the opportunity set for STORE. To summarize, the STORE team is doing an outstanding job leveraging our differentiated and proven business model to help our customers and prospects during these evolving market conditions. Our business is resilient and nimble as demonstrated throughout our 11-year history.

Based on our results for the first half of the year, our strong pipeline of new opportunities, the performance of our portfolio and our ongoing conversations with customers and prospects, I am confident that we can deliver attractive risk-adjusted returns to our shareholders in 2022 and beyond. Now, I will turn the call over to Craig to discuss the portfolio.

Craig Barnett -- Executive Vice President of Underwriting and Portfolio Management

Thank you, Mary. During the second quarter, we acquired 62 new properties and added 11 new customers. Our new investment activity continued to be granular and diverse with an average deal size of approximately $12 million. Our second quarter investments span 20 different industries, including car washes and auto service, food processing and specialty manufacturers serving various end markets which reflects our strategy of investing in diverse, vital businesses that have sustainable growth profiles.

Repeat business has always been an important source of growth for STORE and approximately 40% of our second quarter acquisition volume was with existing customers. These customers value their direct relationships with STORE as well as a reliability of execution we provide, which has become especially important in today's financing marketplace. With our direct origination approach, we continue to create strong lease contracts. Our second quarter acquisitions had a weighted average four-wall unit coverage of 6.2 times, improving our already strong portfolio coverage of 4.7 times.

The acquisitions had a long weighted average lease term of 18 years. Nearly all multiunit transactions had master leases and we will receive unit-level reporting on 100% of the new assets we acquired. We sold 13 properties in the second quarter. Nine were performing properties sold at a cap rate of 6.4% that netted $44 million in proceeds, yielding a 31% gain over our original investment.

The remaining four were nonperforming properties that were sold as part of our ongoing property management activities. These sales netted $21 million in proceeds or 92% recovery of our original investment. Now, turning to our portfolio. At quarter end, our portfolio remained highly diversified with 3,012 properties operated by 579 customers across 124 industries.

Our sector mix was consistent with the service sector representing 64%, manufacturing 21% and service-oriented retail 15% of the portfolio. The granularity of our portfolio is a key component of our strategy and a differentiator for STORE. Top 10 customers account for less than 18% of base rent and interest, with our largest customer representing less than 3% of base rent and interest. In addition, 98% of our customers individually represent less than 1% of our base rent and interest.

We are confident that our portfolio will perform throughout various economic cycles for several reasons. STORE has purposely built a diverse and granular portfolio of profit center real estate in vital and essential industries to limit volatility and deliver consistent cash flow. Through our disciplined credit and real estate underwriting, we have handpicked our customers and properties. We enter into long-term relationships with our customers, so we underwrite their ability to operate successfully in many economic environments.

Our customers are seasoned regional and national operators. They have been in business for an average of 26 years, so they have already navigated through a variety of market cycles. We talk to our customers on a regular basis and have insight into their financial performance and the profitability of our properties. Additionally, we leverage the vast amount of data we have accumulated over the past decade to inform our underwriting and investment decision and to monitor the real-time health of our portfolio.

Our customers are currently in a solid financial position. They have stronger balance sheets, lower leverage and more cash available as compared to pre-pandemic periods. This means our tenants are better prepared than ever to weather potential volatility ahead and translates into greater margins of safety for STORE in the form of higher corporate and unit-level coverages. We are proud of the portfolio we have purposely built, with the goal of delivering consistent, attractive risk-adjusted returns to our shareholders over time.

We are confident that it will continue to perform as we navigate changing market conditions. I'll now turn the call over to Sherry.

Sherry Rexroad -- Chief Financial Officer

Thank you, Craig. Today, I will discuss our financial results for the second quarter including a review of our balance sheet, capital markets activity and an update of our 2022 guidance. Please note that all comparisons are year over year, unless otherwise noted. Our second quarter revenues increased nearly 17% to $224 million, up from $192 million.

This gain was largely driven by strong growth in our real estate portfolio, which totaled $11.4 billion at quarter end, up from $10 billion a year ago. Revenue from net acquisition activity included only a partial contribution from second quarter acquisitions since over half of the almost $400 million of our second quarter volume was closed in June. This sets us up nicely for continued growth in the second half of the year. Turning now to expenses.

Interest expense increased by $4.2 million, primarily reflecting the net additional borrowings we made late last year and in April of this year to support growth in our real estate portfolio, partially offset by a lower overall cost of debt. The weighted average interest rate on our long-term debt was just over 3.8% as of June 30, down from 4.1% a year ago. Property costs were $2.3 million for the second quarter, down from $5.2 million. Excluding amounts reimbursed by our tenants, property costs for the 12 months ended June 30 represented about 9 basis points of our average portfolio assets, down from 16 basis points from the year ago period.

As reflected in these results, our portfolio is healthy and property costs have returned to pre-pandemic levels. Second quarter G&A expenses decreased slightly to $15.9 million from $16.1 million in the second quarter. On a rolling 12-month basis, G&A expenses, excluding noncash stock-based compensation, were 44 basis points of average portfolio assets for the period ended June 30, 2022. This compares to 46 basis points for the same period last year.

This reduction in G&A expenses reflects the efficiencies we are gaining as our platform scales. The $5.3 million impairment provision we recognized in the second quarter is related to the properties that we are likely to sell. Our strong and healthy portfolio, as well as the tailwinds Mary mentioned, delivered AFFO of $164 million, up from $136 million in the year ago quarter. On a per share basis, AFFO increased 16% to $0.58 per basic and diluted share compared to $0.50 a year ago.

As you know, we declared a second quarter 2022 dividend of $0.385 per share, which we paid on July 15 to shareholders of record on June 30. Now, turning to our balance sheet and recent capital markets activity. We funded our second quarter acquisitions with a combination of cash from operations, proceeds from both property sales and the issuance of the bank term loans in April as well as the sale of equity through our ATM program. During the quarter, we issued approximately 3.1 million shares of common stock under our ATM program at an average price of $27.52 per share raising net equity proceeds of $83 million, bringing our year-to-date proceeds to approximately $250 million at an average price of $29.38.

We continuously evaluate our funding sources to optimize three main variables: one, our cost of funds and spreads; two, fit to our maturity ladder; and three, financial flexibility, for example, whether we can prepay without penalty. As we discussed on our first quarter earnings call, we entered into $600 million of unsecured variable rate bank term loans in April and used interest rate swap agreements to convert the variable rates on this debt to an attractive weighted average fixed rate of 3.68%. We used a portion of the proceeds from this transaction to prepay without penalty $134 million in STORE Master Funding notes that had a coupon of 5% and paid down the outstanding borrowings on our revolving credit facility as well. We feel good about this unsecured debt transaction.

It fits nicely into our debt maturity schedule and provides us with liquidity to fund growth. In addition, this recent term loan agreement allows for us to make additional term loan borrowings, which gives us another flexible option to evaluate as we continue to optimize our capital structure to support profitable growth. At June 30, we had $4.7 billion of long-term fixed rate debt outstanding with a weighted average maturity of 6.4 years and a weighted average interest rate of just over 3.8%. Leverage is at the low end of our target range at 5.7 times net debt to EBITDA on a run rate basis or about 41% on a net-debt-to-portfolio cost basis.

We closed the quarter with a strong balance sheet and ample access to capital, including $31 million in cash, $555 million of immediate borrowing capacity available on our unsecured revolving credit facility as well as plenty of room under our ATM program. Now, turning to guidance. As Mary said, we are raising our annual AFFO per share guidance based on our strong second quarter results. Our pipeline of new investment opportunities, the continuing solid performance of our portfolio, and efficiencies in our cost as well as tailwinds from the pandemic recovery we are raising our 2022 AFFO per share guidance to a range of $2.25 to $2.27, which represents 9.8% to 10.7% growth over our 2021 AFFO per share.

Our 2022 acquisition volume guidance net of anticipated sales is unchanged at $1.3 billion to $1.5 billion. We expect cap rates for the year to be at the higher end of our guidance range of 7% to 7.2%. With that, I will turn the call back to Mary.

Mary Fedewa -- President and Chief Executive Officer

Thank you, Sherry. As you know, our board regularly reviews our dividend policy and considers raising it at least annually based on our results. We have maintained our quarterly dividend at $0.385 for four quarters now. That, along with our historically low dividend payout ratio and our strong AFFO growth, you can anticipate that our board will be considering a dividend increase as we complete our third quarter.

With that, we will now open the call to your questions.

Questions & Answers:

Operator

[Operator instructions] Our first question will come from Wes Golladay with Baird. You may now go ahead.

Wes Golladay -- Baird -- Analyst

Hey. Good morning, everyone. I have a question on your conversations with tenants. Hey, there.

Are they seeing -- I guess, how would you characterize their feelings maybe versus a quarter ago? Are they concerned about a slowdown, price pressure? Or conversely, are they more opportunistic now that they can probably grow faster and take advantage of some maybe weaker peers?

Craig Barnett -- Executive Vice President of Underwriting and Portfolio Management

Hey, Wes. This is Craig. I would say the prevailing sentiment right now continues to be optimism. I'd say they characterize the financial outlook for their business as good or excellent.

Obviously, they're mindful of the uncertainties around the overall the economy, but they are still investing in growth, and they have confidence in the second half of 2022. I mean backlogs are robust. Demand for services remains high. These supply chain issues have subsided somewhat.

And from an economy standpoint, consumer spending is still healthy. We still have a robust labor market and consumer -- the consumer is still healthy. But we're obviously thoughtful of how that continues to play out.

Wes Golladay -- Baird -- Analyst

OK. And then it sounds like everything is back to normal from a tenant perspective. When we look at that $908 million annual cash rent, what should we say is the amount of tenants on cash basis accounting still?

Mary Fedewa -- President and Chief Executive Officer

Go ahead, Sherry. Cash basis.

Sherry Rexroad -- Chief Financial Officer

OK. So cash basis of tenants are about 1.5% of the portfolio. We do receive cash payments from them, which brings it down to about 80 basis points.

Operator

Our next question will come from Linda Tsai with Jefferies. You may now go ahead.

Linda Tsai -- Jefferies -- Analyst

In terms of the 7.7% to 7.5% cap rates you're seeing for the ones under LOI, any color you can share regarding the tenant types or price points where you're seeing the largest increases?

Mary Fedewa -- President and Chief Executive Officer

So Linda, this is Mary. We're actually seeing increase in cap rates across all sectors. So it's pretty broad.

Linda Tsai -- Jefferies -- Analyst

Got it. And then I know you said that the cap rate guidance, you guys would come in at the upper end of that. But just given the increases, just wondering why you didn't raise the cap rate guidance even more.

Mary Fedewa -- President and Chief Executive Officer

So Linda, this is Mary again. As it relates to guidance, we're halfway through the year. The portfolio halfway through the year is at about 7.13%. And we look to do better, but a large part of what was closed in the first quarter and the second quarter was negotiated at some of the lowest cap rates out there.

So it's just going to take some time for these higher caps to work through the system. So we're going to hope to better. But at this time, it's going to -- we're going to look toward the higher end.

Operator

Our next question will come from Ronald Kamdem with Morgan Stanley. You may now go ahead.

Ronald Kamdem -- Morgan Stanley -- Analyst

Hey. Just a quick question on funding costs. I think you talked about sort of the different channels. Maybe for the rest of the year, how should we think about the equity versus debt mix? And what leverage levels you're comfortable letting the balance sheet run to before issuing -- having to issue more equity? Thanks.

Sherry Rexroad -- Chief Financial Officer

Ron, it's Sherry. Just -- we're going to stick to our time try ratios of 40% debt, 60% equity which results in about the 5.7 we say is net debt to EBITDA. And the range for that net debt to EBITDA is five and a half to six. And so our current quarter came in at 5.7.

Ronald Kamdem -- Morgan Stanley -- Analyst

Got it. And then as you sort of think about sort of the other side of that coin, as you sort of think about the funding plan for the rest of the year, are you able to sort of get those done through debt issuance alone? Or do you need more equity? How do we think about that balance? Thanks.

Mary Fedewa -- President and Chief Executive Officer

So Ron, this is Mary. So as we think about -- as we move forward and think about the rest of the year, as Sherry mentioned, we're going to stay within the guidelines and principles that we have here. We did mention in the first quarter that we had two-thirds of our equity for the year at the midpoint raised and about 85% of our debt raised for the year. So we feel like we're in a good position.

We had a really nice issuance of $600 million of term debt from all of our banks participating in that, showing great support for STORE, and that gave us a lot of nice dry powder to be a little more tactical as we look to optimize cost of capital in a big picture way. So again, we're going to stick to the ratios that Sherry talked about, but we feel good about being able to fund the rest of the year in line.

Operator

Our next question will come from Todd Thomas with KeyBanc Capital Markets. You may now go ahead.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Hi. Thanks. First question, just wanted to follow up on the last line of questioning around cap rates, I guess. Just to be clear and in terms of the timing around cap rates, just so that were -- there maybe are no surprises.

Are you expecting the acquisition cap rate to be higher in the third quarter? Or is the lag on when these deals with higher cap rates that you're talking about that are under LOI closed? Is that more likely to be sort of later in the year or even in 2023?

Mary Fedewa -- President and Chief Executive Officer

So Todd, this is Mary. Nice to hear from you. We expect to see some of the higher cap rates in the second half of this year. So I would say, third, fourth quarter.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

OK. And then in terms of -- in dispositions moving forward, so the cap rates there in the quarter were lower at 6.4%. So a wider spread. Do you see that spread widening given the higher cap rates on acquisitions that you're anticipating or are you expecting the disposition cap rates also to rise? Just not sure in terms of mix of what you're buying and selling.

So curious if you could talk about how that spread might look as the year progresses.

Mary Fedewa -- President and Chief Executive Officer

Yeah, you bet. Dispositions that we're focused really on very strategic dispositions. And so we would expect -- we might see that 6.4% go up a little bit, but in that range. I mean, we dispose of properties here from a strategic perspective.

We tend to have -- given the way we originate and the way we actually drive cap rates here, we tend to have embedded gains when we book our assets. So we think we'll be -- continue to do that. And you might see a little movement in that, but probably not so much.

Operator

Our next question will come from John Massocca with Ladenburg Thalman. You may now go ahead.

John Massocca -- Ladenburg Thalmann -- Analyst

Good morning.

Mary Fedewa -- President and Chief Executive Officer

Hi, John. Good morning. 

John Massocca -- Ladenburg Thalmann -- Analyst

So on the investment volume side of things, how should we think about cadence between 3Q and 4Q, understanding normally, there's some seasonality in 4Q, but could that be maybe more elevated this year versus in the year's past, given some of the buyer/seller disconnect that was kind of occurring earlier this year?

Mary Fedewa -- President and Chief Executive Officer

So John, you're correct, usually the fourth quarter has a little bit of a push. We will see if it happens again this year, but it generally does. So we're going to -- as it relates to the pipeline, I can have Tyler add a little color in terms of what we're seeing in terms of deal flow, if that's helpful.

Tyler Maertz -- Executive Vice President of Acquisitions

Yeah. So for what we're seeing on the front end on the pipeline continues to be dynamic. It continues to be strong and diverse. Usually, it is a reflection of the split within our portfolio, about 60% service and 20% each on the manufacturing and the service-oriented retail side.

We're still seeing that. So we're happy with what the deal flow that our front-end team has been able to find. And at the same time, continuing to push increased spreads via both cap rates and escalators.

John Massocca -- Ladenburg Thalmann -- Analyst

OK. And then on the capital market side of things, specifically debt. I mean how do the various kind of markets you have access to look today? I mean, it seems like at least earlier this year, term debt was favorable. But I mean, has that dynamic shifted at all? Are the other two kind of debt raising markets maybe more attractive than they were last year? Just any color on changes there would be helpful.

Sherry Rexroad -- Chief Financial Officer

OK. Well, relative to last year, the debt markets are also more expensive than they were last year. Relative to last quarter, I think things are similar, depending upon what point in time you chose. We have the curve shift up and then back down with the last Fed meeting.

So the rates are shifting constantly. But I think the term loan deal that we did was well executed and well timed. I think that market is still open as our year's starting to see the IG market open up, but that would certainly be a product of current treasuries and spreads.

Operator

Our next question will come from John Kim with BMO. You may now go ahead.

Unknown speaker -- BMO Capital Markets -- Analyst

Hi, everyone. It's Eric on for John. Just a quick one on the guidance. 

Mary Fedewa -- President and Chief Executive Officer

Hi, Eric.

Unknown speaker -- BMO Capital Markets -- Analyst

Hi. How are you? So the new AFFO guide implies a $0.55 run rate. Can you just help us unpack the bridge to AFFO given the lift in cap rates and positive pace of acquisitions in the first half and a historically heavier 4Q in terms of acquisitions? It's just it seems to tag conservative.

Mary Fedewa -- President and Chief Executive Officer

Hi, John. I'm sorry. This is Mary. Let me start with a couple of things.

The portfolio is performing extremely well. Our customers are in really good shape financially. Our business model, as you know, was designed to drive attractive spreads, and we're doing that. But there's a lot of uncertainty in the market and that we're in an environment that we haven't seen in 40 years as it relates to interest rates and inflation.

So we're going to be prudent, and we're going to be conservative just as we always have been in guidance. And we're going to keep our heads down and just continue to execute on the business model and look to outperform.

Unknown speaker -- BMO Capital Markets -- Analyst

All right. Thank you. And then can you kind of help us triangulate the leverage on acquisitions made in the quarter, just between the split between debt equity and maybe cash from dispositions? What was kind of the breakout there?

Mary Fedewa -- President and Chief Executive Officer

So let's talk high level. So for the quarter, we did the debt issuance, the $600 million we raised about $83 million in equity. But we tend to look at this as on a longer-term basis, and we look at as Sherry mentioned, the ratios that we're looking at. So one quarter just doesn't really make a trend.

What we did in the second quarter, we had that nice $600 million issuance. We were able to pay down the line. We paid down some outstanding debt on master funding. And so from a net perspective, we didn't really add much new debt, but we did have the dry powder there to fund the acquisitions.

And then we always have really healthy free cash flow. We have a very low dividend payout ratio, as you know, which is at least $50 million a quarter. And also, we did a few dispositions. So it sort of shook out that way in the second quarter.

But again, this is a long game. The debt comes on. The acquisitions come on and so on. So there's -- in any quarter, you'll have -- maybe have a tiny mismatch.

So -- but hopefully, that's helpful. This is -- again, I'm giving you a bigger picture of how things sort of smooth out between those capital sources that you suggested, and those are all correct.

Operator

Our next question will come from Connor Siversky with Berenberg. You may now go ahead.

Connor Siversky -- Berenberg Capital Markets -- Analyst

Hi, there. Thanks for having me on the call. Looking forward into Q4 and perhaps early 2023 in consideration of where the forward rate curve is. Do you expect that the velocity of cap rate drift is such that you would be able to maintain that, call it, 350-basis-point spread over your cost of debt as eventually will have to issue more?

Mary Fedewa -- President and Chief Executive Officer

So great question, Connor. And so again, as I mentioned, as we look forward, as we look forward from our guidance, as we look forward into sort of this uncertainty in the marketplace and these sort of unprecedented times that we're in as it relates to interest rates and inflation and so on, we're going to continue to execute the business model. So what we do, as I mentioned, we're price setters we're calling directly on customers. We are driving the spread.

We have access to deal flow, and we're going to drive that spread. And we've been able to do that now for 11 years. So we've been in business 44 quarters. And all of those quarters have been a 300-basis-point spread or higher.

So this is really our business, the model is designed perfectly for this environment or any environment because of the way we're controlling our destiny, and we're creating our contracts. So we have high confidence, again, and I will -- not to mention, I'd love to -- I want to add that the market is just huge. So we estimate 200,000 companies. We've been in business 11 years, we've got under 600 companies here.

So there -- you can bet there are customers or companies out there that are going to grow, prosper through all -- through this cycle and many cycles and we're going to find them. And as we always do, and we're going to continue to execute. Our business model is absolutely designed to do that.

Operator

Our next question will come from Chris Lucas with Capital One. You may now go ahead.

Chris Lucas -- Capital One Securities -- Analyst

Good morning to you guys. Good afternoon to me. Hi. One quick question, and I apologize if you guys talked about this earlier on the call.

But is the master funding market open at all? Is it competitive at all? And is there ways to manipulate say, over collateralization or whatever to sort of help you with the rate issue?

Mary Fedewa -- President and Chief Executive Officer

Chris, it's Mary. The market is -- we're hearing that the market is open. And as you know, we have paid awesome tranches. So our master funding is at a lower leverage today than it normally is.

So we could optimize that a little bit by relevering and so on. But again, it is open today, and we'll look to optimize the total capital stack and the cost of capital with the many options that we have that we're really grateful for.

Chris Lucas -- Capital One Securities -- Analyst

So I guess maybe if you could just -- bank market seems -- you guys did a good execution on the term loans. That seems to be what all the peers are doing still. And I guess, so the bank market still is a favorite site. You were the only ones that have a master funding mechanism to do debt issuance in that market and then you've got the unsecured market.

Can you -- is there any way to quantify sort of where that cost would come out on the master funding versus the unsecured market? Or are they pretty much in tandem?

Mary Fedewa -- President and Chief Executive Officer

It's been pretty much in tandem. What I'll say is STORE -- the Master Trust that STORE has has been inexistence all -- the entire time that we've been here since 2012. And we also had a trust in prior companies. So STORE is very much a gold-plated or, what do I say, issuer, and we're well known in the space.

We have many investors that have been very good supporters of ours in the program. So I would say from STORE's perspective that we would have not only access to that market, but we have a very great reputation in that market. So if you think about the tailoring the suit to STORE, I think you could tailor it to STORE really nicely. So I'll sort of leave it at that, but we are definitely a prime insurer in that and people really support us.

Operator

Our next question will come from Sheila McGrath with Evercore. You may now go ahead.

Sheila McGrath -- Evercore ISI -- Analyst

Yes, good morning. I just wanted to check in on tenant credit health, maybe you could -- I know inflation is a challenge for many. And I'm just wondering how your watch list is tracking at this point.

Craig Barnett -- Executive Vice President of Underwriting and Portfolio Management

Sheila, this is Craig. Yes, we're really confident in our customers' ability to manage through any potential recessionary environment. As I -- as I mentioned in my prepared remarks, STORE has built an extremely diverse portfolio to limit volatility, and we underwrite our customers' ability to operate in various market cycles as these are long-term leases. As I also mentioned, our tenants are actually in better financial position today.

They have stronger balance sheets. Their unit coverages are higher and really with -- this provides a lot of margins of safety really to weather any slowdown and still pay our rent. We gain confidence through the fact that we open profit center real estate where our customers derive their profits with high coverages. So essentially, we're senior in a company's cap stack, and we talk to our customers on a regular basis and have insight into their financial performance and our unit' profitability.

We are very mindful and thoughtful of the current environment in looking at industries that have discretionary versus nondiscretionary spending. And we're underwriting new transactions where we're stress testing those individual tenants. We're stress testing our existing portfolio. And what we're finding is that there's a lot of capacity to -- even if there is sales decline, some margin compression, the high coverages provides a lot of capacity for these customers to still pay us rent.

Operator

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

Mary Fedewa -- President and Chief Executive Officer

Thank you, and thank you all for participating in our call today and for your continued support and interest in STORE. We look forward to seeing some of you at upcoming investor conferences over the next few months. And I'd also like to thank our dedicated team for their hard work and their contributions to STORE. You simply are the best.

Please feel free to reach out to any of us if you have any questions and make it a great day.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Megan McGrath -- Investor Relations

Mary Fedewa -- President and Chief Executive Officer

Craig Barnett -- Executive Vice President of Underwriting and Portfolio Management

Sherry Rexroad -- Chief Financial Officer

Wes Golladay -- Baird -- Analyst

Linda Tsai -- Jefferies -- Analyst

Ronald Kamdem -- Morgan Stanley -- Analyst

Todd Thomas -- KeyBanc Capital Markets -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

Tyler Maertz -- Executive Vice President of Acquisitions

Unknown speaker -- BMO Capital Markets -- Analyst

Connor Siversky -- Berenberg Capital Markets -- Analyst

Chris Lucas -- Capital One Securities -- Analyst

Sheila McGrath -- Evercore ISI -- Analyst

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