STORE Capital Corporation (STOR) CEO Mary Fedewa on Q1 2022 Results - Earnings Call Transcript

May 05, 2022 4:51 PM ETSTORE Capital Corporation (STOR)1 Comment
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STORE Capital Corporation (NYSE:STOR) Q1 2022 Results Conference Call May 5, 2022 12:00 PM ET

Company Participants

Megan McGrath - IR

Mary Fedewa - President, CEO

Sherry Rexroad - CFO

Craig Barnett - EVP, Underwriting & Portfolio Management

Tyler Maertz - EVP, Acquisitions

Conference Call Participants

Caitlin Burrows - Goldman Sachs

Harsh Hemnani - Green Street

John Massocca - Ladenburg Thalmann

Ki Bin Kim - Truist

Ronald Kamdem - Morgan Stanley

Sheila McGrath - Evercore

Todd Thomas - KeyBanc Capital Markets

Wes Golladay - Baird

Operator

Good day, and welcome to the STORE Capital's First Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Megan McGrath, Investor Relations for STORE Capital. Please go ahead.

Megan McGrath

Thank you, operator, and thank you all for joining us today to discuss STORE Capital's first quarter 2022 financial results.

We issued our earnings release along with a newly reintroduced earnings supplement as well as our 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 and 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 an hour, we will be observing a 2-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 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 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 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

Thank you, Megan. Good morning, everyone. Welcome, and thank you for joining us today. I'll begin the call with an overview of our first quarter performance and some thoughts on the current market environment. Craig will provide an update on the additions we made to the portfolio and our portfolio management activities. And then Sherry will review our financial results.

I'd like to quickly mention, we have reinstated a financial supplement to our earnings release, which we hope will provide an efficient presentation of our financials. We look forward to your feedback.

In light of our first quarter performance, we are raising our acquisition and AFFO guidance for the year. Sherry will provide this updated guidance for 2022 in her remarks. We will then open the call to questions.

Our momentum from 2021 has continued through the first quarter of 2022. We acquired $513 million in profit center real estate, the highest first quarter volume in STORE's history. These acquisitions were at an initial cap rate of 7.1% with weighted average annual lease escalations of 1.8%. Cap rates were right in line with our guidance. And our investment spread for the quarter was robust at approximately 340 basis points above our recent debt issuance.

This activity, along with the strong performance of our portfolio, resulted in solid AFFO of $158 million and AFFO per share of $0.57 for the quarter. Both were the highest in our history and have had a consistent upward trend for the past 4 quarters.

Given the recent sea change in interest rate and inflation, I'd like to address STORE's ability to continue to drive growth and attractive spreads in the current environment. Our total addressable market is estimated to be nearly $4 trillion and over 2 million properties. Within that total addressable market, we are focused on an estimated 200,000 companies that are in vital, sustainable and growing industries. These are regional and national companies that benefit from the long-term real estate financing solutions we provide. Given such a large market opportunity, we have a very long runway to grow, and we can be very selective in the investments we make.

One of STORE's strategic advantages has always been our ability to identify and successfully acquire a large volume of granular transactions through our direct origination approach. This has been our consistent strategy since inception. This approach allows us to price new leases from both a cap rate and rent escalation perspective that reflect the current economic environment, which today is one of inflation and rising interest rates.

With pricing power on the front end and our disciplined underwriting process, which includes a deep dive into both the credit of the customer as well as the value of the real estate, we are able to make accretive acquisitions with wide spreads, resulting in attractive risk-adjusted returns.

We also have strong internal growth of 5% between our annual rent escalations, which average 1.8% on the portfolio, our retained cash flow from our low dividend payout ratio, which was 67.5% this quarter, and proceeds from dispositions.

The financing flexibility that we have built over the last decade positions us well to fund our growing pipeline of acquisitions with both debt and equity options, which allow us to optimize our cost of capital to generate attractive spreads. We have 3 primary sources of debt financing. Our Store Master Funding facility, investment-grade unsecured debt and unsecured bank debt as well as access to the equity market, usually through our ATM program.

While interest rates are rising, just last week, we were able to issue term debt financing at an attractive fixed rate of 3.68%. Sherry will provide more details in her remarks, but we are extremely pleased with this execution and the broad participation from all 13 banks in our bank group. In light of these key differentiators, we feel STORE is well positioned to execute on our objectives for the year.

Now I'd like to provide a current market update. First, we are seeing a lot of activity and demand for our financing solutions. We have a strong, diverse pipeline of over $13 billion and growing. We believe cap rates have bottomed. And we are currently seeing upward movement of approximately 25 basis points, which we should see the benefit of in the second half of the year.

Second, we are currently negotiating rent escalations on new opportunities in the range of 2.25% to 2.5% a year, up from about 2%. We anticipate seeing this in the contracts we fund in the second half of the year.

Third, given the volatility of financing conditions, STORE's proven track record for timely execution has become a major consideration for our customers and an important advantage. As we have mentioned before, we really believe periods of uncertainty and complexity in the capital markets can create opportunities for us as our customers will need our unique financing solutions and partnership more than ever.

Finally, STORE currently has an attractive dividend yield of about 5.5%. And historically, we have been able to grow our dividend annually by more than 6% on average.

In summary, it was an excellent quarter, and we expect the momentum to continue throughout this year. We believe these results directly reflect the fundamental strength of STORE's differentiated business model, which was built to deliver growth and attractive returns in a variety of economic environments, including the volatile and complex markets we are experiencing today.

Now I'll turn the call over to Craig.

Craig Barnett

Thank you, Mary. During the first quarter, we provided a variety of tailored solutions to meet customers' needs. Approximately 2/3 of the volume was sale-leaseback transactions that allow customers to efficiently capitalize their balance sheets and invest in their businesses. The remaining transactions assisted customer growth through expansions, new construction or acquisition financing.

We acquired 111 new properties, added 19 new customers and invested at an average transaction size of approximately $13 million and about $4.6 million per property. The acquisitions covered a variety of industries, including home furnishings, restaurants, health clubs, automotive repair and maintenance, metal fabrication and food processing.

The weighted average primary lease term of our new investments continues to be long at approximately 17 years. 100% of the multiunit net lease investments that we made during the quarter were subject to master leases, and all 111 of the new assets acquired during the quarter are required to deliver us unit-level financial statements, giving us extraordinary unit-level financial reporting from 99% of the properties within our portfolio.

The weighted average unit-level coverage ratio of these new acquisitions was 5.2x, which improves our already strong portfolio unit-level coverage of 4.7x. About 1/3 of quarterly acquisitions were done with existing customers, in line with our historical average.

Now turning to the portfolio. We have deliberately built a granular and diverse portfolio to limit volatility and deliver consistent and attractive risk-adjusted returns to our shareholders. Our portfolio consists of 2,965 properties operating in 121 industries. Our sector mix remained consistent with our service sector representing 64%, manufacturing 20% and service-oriented retail 16%. About 85% of the portfolio was comprised of businesses that individually represent less than 1% of our annual base rent and interest.

There was no change in our top 10 customers. And our largest customer represented approximately 3% of base rent and interest, and our top 10 customers accounted for only 18% of base rent and interest.

Turning to dispositions. We sold 11 properties in the first quarter. 8 were strategic sales that netted $47.3 million in proceeds or a 9% gain over our original investment. The remaining 3 were vacant or nonpaying properties and were sold as part of our ongoing property management activities. Our occupancy remains high at 99.5%.

We're very pleased with our portfolio's health and have confidence in the long-term performance of our customers, who have been in business, on average, 26 years. 2020 and 2021 was a period of adjustment for many tenants, who responded to a changing macroeconomic environment by adapting in various and creative ways, including automation, technology improvements, commodity hedging and price and cost optimization, to name a few. These adaptations improved our tenants' financials throughout 2021, a trend that continues into 2022.

Compared to 2019, on average, our portfolio today exhibits higher corporate and unit-level coverages, less leverage, higher sales and more liquidity. This data is consistent with the feedback we are receiving from our customers during our regular conversations. Our tenants are overwhelmingly conveying a positive outlook for the next year as increases in consumer spending continues to drive higher demand for their products and services. We are proud of their resilience and look forward to partnering with them in their continued growth as well as adding new customer relationships.

I'll now turn the call over to Sherry.

Sherry Rexroad

Thank you, Craig. Today, I'll discuss our financial results for the first quarter, including an update on our balance sheet, capital markets activity and our 2022 guidance. Please note that all comparisons are year-over-year, unless otherwise noted.

Our first quarter revenues increased 22% from the year-ago quarter to $222 million, primarily reflecting the very strong growth in our real estate portfolio. Revenue from net acquisition activity increased approximately $25 million, which includes a full quarter's revenue from our net acquisition activity in 2021, plus a partial contribution from a large volume of first quarter acquisitions. As Mary mentioned, total acquisitions for the first quarter were $513 million. Approximately 2/3 of this volume closed in the last half of March, which creates a nice built-in base for our continued growth in the second quarter.

First quarter 2022 revenues include about $5 million of lease termination and other fees primarily related to properties we sold and $1 million of interest income related to the early repayment of one of our mortgage loans.

Turning now to expenses. Interest expense increased by $2.2 million from the year-ago quarter, primarily reflecting borrowings we made during 2021 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 3.9% as of March 31, a marked decrease from 4.2% a year ago.

Property costs, which totaled $4.2 million for the first quarter, were down from $4.7 million a year ago. Property costs for the 12 months ended March of 2022 represented about 12 basis points of our average portfolio assets, down from 17 basis points for the same period ended March 2021. We expect that property costs, as a percentage of our average portfolio assets, will continue to decrease as we move through 2022.

First quarter G&A expenses decreased to $17 million from $25 million in the first quarter of 2021, which included $10.1 million of noncash stock-based expense related to certain long-term incentive compensation awards. Excluding the impact of this expense, overall G&A expenses were as expected and are in line with the growth in our portfolio.

On a rolling 12-month basis, our G&A expenses, excluding noncash stock-based compensation, were 44 basis points of average portfolio assets for the period ended March 31, 2022, as compared to 47 basis points for the comparable 12-month period ended March of 2021, which reflects the efficiencies we gained from our scalable platform as our portfolio continues to grow.

During the first quarter, we recognized a $912,000 impairment provision, which included a $1.2 million real estate impairment provision related to 3 properties that we are likely to sell. This amount was partially offset by a net reduction of $288,000 in expected loss provisions on our portfolio of loans and financing receivables.

As Mary mentioned, AFFO increased to $158 million from $125 million. On a per share basis, AFFO increased 21% to $0.57 per basic and diluted share from $0.47 a year ago. This is $0.03 higher than we had budgeted as well as $0.03 higher than the consensus estimate. Approximately half of the increase is recurring and is primarily from the timing of acquisitions and lower property costs and G&A expense. And approximately half is nonrecurring and includes additional lease revenue from a contract modification, onetime fees and loss reserve reversals from higher collections.

As you know, we declared a first quarter 2022 dividend of $0.385 per share, which we paid on April 15 to shareholders of record on March 31.

Now turning to the balance sheet and our capital markets activity. We funded our record level of acquisitions with a variety of sources, including cash from operations, borrowings on our revolving credit facility and the sale of equity through our ATM program. During the quarter, we issued approximately 5.5 million shares of common stock under our ATM program at an average price of $30.41 per share, raising net equity proceeds of $166 million.

In April, we issued additional shares, bringing our total proceeds raised year-to-date to $195 million. We are mindful of where our cost of equity is today. And given our attractive cap rates and spreads, we are continuing to make accretive acquisitions at current stock price level.

We closed the quarter with a strong balance sheet and ample access to capital, including $39 million in cash, approximately $370 million available under our ATM program and the borrowing capacity available under our revolving credit facility. At March 31, we had $4.2 billion of long-term fixed-rate debt outstanding with a weighted average maturity of just under 7 years, and as noted earlier, a weighted average interest rate of 3.9%. Leverage is at the low end of our target range of 5.7x net debt-to-EBITDA on a run rate basis or under 40% on a net debt-to-portfolio cost basis.

Subsequent to quarter-end, we entered into $600 million of unsecured floating rate bank term loans, including a $400 million 5-year loan and a $200 million 7-year loan, which complements our debt maturity schedule. We also entered into interest rate swap agreements, which effectively convert the floating rates on this debt to an attractive weighted average fixed rate of 3.68%.

We used the proceeds from this debt transaction to prepay, without penalty, $134 million in STORE Master Funding notes that had a coupon of 5%, generating annual interest savings of $1.8 million. We also paid down the outstanding borrowings on our revolving credit facility, with the remainder to be used for growth.

As a result of this debt transaction, our total long-term debt stands at $4.7 billion with a weighted average cost of 3.85%. And we currently have the full availability on our $600 million unsecured revolving credit facility to fund our growth.

Now turning to guidance. We are increasing our 2022 acquisition volume, net of anticipated sales, to $1.3 billion to $1.5 billion, and maintaining cap rate guidance of 7% to 7.2%. We are raising our 2022 AFFO per share guidance to a range of $2.20 to $2.23, which represents 7.3% to 8.8% growth over 2021 AFFO per share. We continue to assess our outlook, and we'll update guidance as appropriate as we move through the remainder of the year.

Given the current market environment, I'd like to more specifically address our sources of capital to fund our acquisition pipeline. Based on our updated net acquisition guidance of $1.4 billion at the midpoint, our retained cash flows from operations and dispositions is estimated to be approximately $500 million for the year, which combined with our year-to-date ATM issuance of $195 million, will fund approximately 2/3 of our equity needs. And the recent $600 million debt issuance will provide approximately 85% of our leverage requirements while adhering to our 60-40 equity debt ratio.

With that, I'll turn the call back to Mary.

Mary Fedewa

Thank you, Sherry. We will now open the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question today comes from Sheila McGrath with Evercore.

Sheila McGrath

First quarter volume was a record. What are the factors that you can point us to that might be driving that above-average volume?

Mary Fedewa

This is Mary. So our first quarter really was the result of the continued momentum that we were starting to see in the second half of 2021. And as a matter of fact, our business performance has been really strong in the last 4 quarters on a lot of key metrics from acquisitions and gross income to AFFO. And so that momentum just really continued into first quarter. Our customers, the M&A activity and their back-in-growth mode, and we were able to take advantage of that as well with them. So that's really what drove it.

Sheila McGrath

Okay. And my second question is, I think some people view the fact that you're able to execute at higher cap rates, that the investment-grade acquisitions, there's elevated credit risk. I was wondering if you can comment on the tenant health of your portfolio. How the portfolio performed through the pandemic? And maybe how the tenant watch list is now and in historic context?

Mary Fedewa

Yes, we'd love to do that, Sheila, and I'll just make a quick comment, and then let me turn it over to Craig to give them. So our business model, actually, the direct origination and our ability to go out and knock on doors and address the marketplace, which is 200,000 companies, and we've been in business 11 years, and we have about 600 customers here, is very, very large. So it allows us to go out and ask for the cap rate, create our own contracts and have that pricing power on the front end.

And then from there, we have a very disciplined underwriting approach that actually allows us to sort of control our destiny on our spreads. And I'm sure we'll talk a little bit more about this, and we've talked in the prepared remarks about how our business model is really, really built for the current environment and our ability to continue to get these wider spreads. So I'll turn it to Craig now, and he'll talk about the portfolio overall and --

Craig Barnett

Sure. Yes. So the portfolio is performing extremely well right now. We're seeing strong demand for the services and products that our tenants offer. We're seeing that in the coverages that we have across our portfolio. And just we're confident in their ability to make it through any kind of potential recessionary environment. These business -- our tenants have been in business for a very long time. They have operated in multiple economic cycles, and we are very diligent in our underwriting process to make sure that we understand that and how they've operated in multiple economic cycles.

And again, they're performing extremely well right now, strong demand. They've adapted their businesses to operate in the current environment. And our portfolio is extremely diverse, and it's granular, and it's really built to withstand any issues. And we might have some customers that have issues on the fringe, if there is a potential recessionary environment. But we're very diligent and have a deep underwriting process into the real estate, and we like where we're at in the real estate.

And again, we differentiate ourselves, too, by collecting the financial statements of our tenants. So we're able to monitor our tenants proactively to manage any potential issues.

Operator

The next question comes from Caitlin Burrows with Goldman Sachs.

Caitlin Burrows

Maybe just a follow-up on that -- the cap rate topic. So I was just going to ask on it. Could you go through to what extent STORE is like a price setter versus price taker. So just wondering if your cost of capital increases, to what extent cap rates may or may not rise a similar amount and the impact that would then have on your spreads?

Mary Fedewa

Yes. This is Mary. I'll touch on that, Caitlin. So again, the business model here of the direct origination in the very, very large marketplace does allow us to ask for higher cap rates, and we're seeing that. Now the timing of what we're -- what we closed in first quarter was negotiated at the end of last year. And what we're closing in the second quarter was negotiated at the beginning of the year. So that's why I mentioned, you'll see this upward trend towards the -- upward movement towards the second half of the year here.

But we are very, very mindful of our cost of capital here. And Sherry mentioned it in her remarks, I think, in a really nice way, where she talked about the fact that we feel we're in a good place as it relates to capital needs this year, with 2/3 of our equity available or raised through our dispositions and our ATM, also the distribution we're expecting and also 85% of our debt.

So we feel good about where we are on the cost of capital. We're watching it every single day and being very mindful of it. And again, the business model just really allows us to knock on a lot of doors and ask for that higher cap rate.

So we're asking for these spreads, huge market. We're in vital industries in America. I mean we're in Middle America, which is needed. So what I love about this business is that it's a value proposition that is so strong, and there really isn't any long-term real estate capital for these customers.

So we are just -- we have just a great opportunity to continue to grow in this marketplace and ask for the cap rate. It's been our model consistently for 11 years, and it's nimble. We play in a niche lane. That's $8 million to $12 million of average deal size, and it's not a small lane. It's a wide lane. And so we have been able to do not only get higher cap rates or ask for the cap rates and the spreads, and again, it's a win-win for us and the customer.

So it's a good conversation, but we can also price the escalations. And as I mentioned in my prepared remarks, we're really pleased with seeing the escalation in the marketplace, the escalation is coming up in the marketplace. And our front-end team is all over that, too. So we are really -- this is how the business model -- this business model is designed to work in almost any environment and this one in particular.

Caitlin Burrows

Yes. And when you think about that idea of asking for the cap rate, could you just go through at this point the potential partners that you're working with, maybe what their alternative sources of capital are and how working with STORE is attractive versus those other options and maybe how that changes -- has changed --

Mary Fedewa

Yes, you bet. You bet. So as I mentioned, really, there is really no long-term real estate financing capital out there as an option. You can go to your bank, you can get some short-term a short-term debt. You've got to come up with equity along with that, so the bank is going to do 60%, 75%, 80% LTV. You're going to come up with some equity. And you're going to -- and we're going to come up with 100%. So we're a debt and an equity substitute. So we immediately are going to reduce your cost of capital and increase your return on equity.

So -- and we're going to put together a long-term 15- to 20-year lease that has flexibility and real alignment with the customer. So if in fact -- and we're going to do that for a cap rate with some escalation. So -- and for the customer, there's a big alignment. We're kind of like equity on the upside and insurance on the downside.

So if you have a bad store or you need to substitute a store that works, that's working and one that doesn't, we are going to allow that flexibility as long as you give us the store that is. That's insurance on the downside. And then if you're doing great, we're going to be here to help expand it. So that's equity on the upside.

So it's a real alignment with our customers and a long-term relationship. We have a lot of repeat business. And they know we're going to be here. And what's been interesting in this market, and we're seeing it very strongly, is the certainty of execution right now is a real key advantage for us having for an 11-year-old platform and just a big proven track record of execution and being there for our customers.

Operator

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

Todd Thomas

Can you talk a little bit more about how your acquisition effort changes or perhaps might evolve at inflection points and, I guess, maybe Fed tightening cycles or the changing macro environment a little bit as we look ahead, either in terms of the types of deals that you're doing, the types of industries, really whether or not the buy bucket changes at all going forward?

Mary Fedewa

Todd, thanks for the question. Honestly, again, it's a really big market. We're focused on profit center real estate. There's 200,000 companies out there. We're really going to stick to our knitting here, and I don't see any big shifts in those areas of different pools of buyers or anything we're looking at a lot of opportunities here.

I'll mention that in COVID in the second quarter, April, May and June of 2020, we were able to manage through. Our share price was not -- was low at that time, much lower than it is today. And we were able to have pretty -- get higher cap rates during that time, right, at 8.6% in that quarter. So again, this is what I'm talking about of controlling our destiny and continuing to make accretive acquisitions in all environments.

And our whole company understands this now. So our whole company is really aligned together and understands how we make money and how we address the marketplace and why we exist and how we add value to our customers and our shareholders.

Todd Thomas

Okay. And then with regards to the acquisition yields and sort of the slight increase that you're starting to see, so the guidance assumes 7% to 7.2%. But it sounds like there could be upside to that based on what you're seeing. Is that the right read? Or would you not expect acquisition yields to really trend above that range, at least this year, based on the time it takes to get deals done and a lag in price changes?

Mary Fedewa

Yes, Todd, I think you're thinking about it right. I think you can think towards the high end of that, and hopefully, it will be higher than that. But because of the timing of acquisitions and because of the time like what we're negotiating today, we'll close 60 days, maybe later -- out into the future. I think you have to -- that's why we did -- we looked at that, but we didn't change it. So I think you're thinking about it right. It's a possibility, but the high end is probably the best place to be.

Operator

The next question comes from Harsh Hemnani with Green Street.

Harsh Hemnani

So the acquisition guidance increased meaningfully this quarter relative to last quarter. And the last time -- last couple of times we spoke, you mentioned that there were no portfolio transactions contemplated in this guidance. Is there any portfolio acquisitions baked into that now?

And to that point, the last time we also discussed the competitive environment for these kinds of portfolio, saying that the cap rates on these deals are lower, there's more private capital coming in. Have you seen that change at all and could that change your view?

Mary Fedewa

Harsh, thank you. So a couple of things on the portfolio transactions. So first of all, our guidance has never included any portfolio transactions. And in first quarter, they -- what was available on first quarter was still out of reach from an accretion or a cap rate perspective as well as a lease term perspective. So we have not seen anything that is interesting. And again, I want to just mention that any portfolio transactions would need to fit into our business model of granular and diverse and so on. And so nothing there to report.

And as it relates to the competition, we saw a lot of money come into the space. We've all talked about that. And I think what's happened recently is that you've seen some of the money that is really reliant on asset-based financing, has had to take somewhat -- a little bit of a pause or a sideline because they've seen -- we've seen the debt costs arise so substantially and cap rates were compressing. So those margins were getting quite thin.

So we've seen a little pause there, but that money coming in, we weren't really -- we weren't competing with. These were not folks that tended to be in our lane of $8 million to $12 million deal sizes. But that's just some color on the money in the space that we were seeing come in.

Harsh Hemnani

That's helpful. And then you mentioned in the prepared remarks that both the cap rate is starting to go up and lease escalators are starting to go up. So when you enter new negotiations with tenants, what are they more comfortable with? Are they comfortable with lower prices on their real estate today in exchange for lower rent growth? Or do they still want to have higher prices with higher rent growth? So yes, if you can give us any color on that.

Mary Fedewa

Okay. So Harsh, I apologize. I'm -- I want to need you to repeat that last part just a little bit. You're talking about real estate prices as a level of them.

Harsh Hemnani

Yes. You mentioned cap rates are moving up and escalators are moving up, too. And so what's the interplay between those 2 when you speak with tenants? What are they more willing to compromise on? Are they willing to give you higher cap rate or higher rent comps?

Mary Fedewa

Harsh, we're actually both, actually. There's no real trade-off there for us. I mean we're actually talking about both with them, and we're not giving -- there's not an option between the 2. So we're actually talking to them about both of them and getting what the market will bear on both.

Operator

The next question comes from Ronald Kamdem with Morgan Stanley.

Ronald Kamdem

Just sticking on that question, really interesting comments about both sort of higher escalators as well as higher cap rates. Maybe asking it a little bit differently, you provided color in terms of maybe the segments, whether it's services versus manufacturing. Is there -- is it across the board? Are there sort of subsectors or subindustries where you're seeing more ability to push versus less? Just more color on that would be great.

Mary Fedewa

Yes, it's across the board. We're not seeing any -- in terms of the rate -- in terms of the upward movement in both across the board. Now, of course, I said, industrial is still -- has a lower cap rate in terms of -- in the space, if you will, but still, there's upward pressure there, too. So across the space, we're seeing upward movement.

Ronald Kamdem

Great. And then the next one, just on the bigger deal comment, again, bouncing off of that. I know there's nothing contemplated in the guidance. But is that still something the company is thinking about? And how to foster those opportunities? How is it coming along?

Mary Fedewa

If there's a -- the good news about STORE is we're $11 billion. So we're big enough. If we see -- I like to talk about having built this business brick-by-brick, which is what we've done primarily. And I'd like to talk about the fact that if a bag of brick shows up here, we're $11 billion, and we can process that. And we can integrate that in and not dilute the story here of granularity and diversity. But the really good news is, we don't need to. That we have an acquisition front-end engine, well-oiled machine that is calling on a very, very large universe of opportunities. And we can grow based on our objectives doing that all day long.

Operator

The next question comes from John Massocca with Ladenburg Thalmann.

John Massocca

So maybe going back to guidance just a little bit. If my back-of-the-envelope math is right, you did basically 30% at the high end of the new net investment volume guidance in 1Q already. So I guess, maybe what is driving the conservatism relative to kind of 1Q performance? Is it just visibility into the tail end of the year or maybe more disposition volume that's expected over the course of the year? Just any color there would be helpful.

Mary Fedewa

Okay. Yes. This is Mary. So I would say definitely, John, as you know, we have some visibility into a short-time period looking forward, but we don't have total visibility into the whole year. So I would say that first quarter was extremely strong. It was our highest quarter -- first quarter ever and our second highest quarter in our history.

So we're expecting that second, third and fourth will probably go back to a more normal -- potentially a more normal pace and stuff. So that's how the kind of the thought process that was put into the acquisition raise or acquisition guidance raise. Just like the force that you really have -- again, it's a slow business, and we can't see all the way through the year.

John Massocca

On the disposition front, I mean, was that typical 1Q versus what you're expecting?

Mary Fedewa

Yes. So on dispositions, we've kind of -- we've always sort of guided to 3% to 5% of the portfolio, and I would say that we would likely be at the lower end of that -- low to mid-range of that.

Operator

The next question comes from Ki Bin Kim with Truist.

Ki Bin Kim

Just want to go back to some of the prior questions around acquisitions. I know this isn't like a video game where you're going to stop and start and reset. But given your commentary, and not just yours, but the entire sector, is about expecting higher cap rates. How do you balance doing more acquisitions, like your guidance implies this year, versus maybe holding back a little bit with the prospects of maybe better deals ahead?

Mary Fedewa

Okay, Ki Bin, this is Mary. So actually, you're correct. It's not like playing a video game. And -- but I'll go back to the business model. And I'll tell you that our -- we have such a big market, and we can go out and directly acquire accretive acquisitions. And we can do that today, and we can do that tomorrow. So there is -- that's what's we're focused on. We're focused on executing every single day. And again, this market is just so big and our ability to get accretion.

But we're mindful. We're mindful of our cost of capital. We're mindful of making accretive acquisitions. So -- and it's kind of neat that we have this business model that really helps us control our destiny on the spread side, because we're out there knocking on doors and asking further rate and aligning with customers as in the current market and the current environment. And so we have that flexibility of a nimble, big market, big lane, and we can do that today, and we're going to do that every day we wake up.

Ki Bin Kim

And it's an interesting dynamic in triple-net where the more you buy, the better that you do, the tougher it gets next year, right, because you're -- not inflating, but your asset base is growing. How does that configure into some of the calculus that you think about when you do deals and increasing the size of the company? Because it does get tougher to move the earnings needle. Does that -- how does that factor into some of the decisions that you make?

Mary Fedewa

Yes, great question. Very true. And again, what I'll say is what's really important is the internal growth to start with, and we have 5% of that. So we could sort of think about that. And the other thing really to think about is the fact that we are creating deal flow. We're not sitting, waiting for something to get listed. Or we're not sitting and waiting for someone to come knocking on our door. We're creating it, and the market is huge. So that's how we think about it is -- our ability to granularly acquire businesses or real estate every day with businesses, it's what we do.

It's what this business model is designed to do, and it's what we do. And we have a lot of repeat business, too, by the way. So the loyalty program that we've created in this business has really been neat. Like 1/3 of our business consistently has been repeat business. So we price the new business there, too. So it's not on the old cap rate. So any repeat business is priced as well.

Operator

The next question comes from Wes Golladay with Baird.

Wes Golladay

Do you expect any change in deal flow composition as the year progresses based on your tenant conversations, more so looking -- are they talking about maybe slowing down M&A, they picking up organic expansion or just looking at the loss of the value of real estate more now?

Mary Fedewa

A really short answer to that is no. Yes, I'm looking at Tyler. He says no. You want to say a few words?

Tyler Maertz

Yes, Wes, it's Tyler. So basically, we're still, like Mary said earlier, playing in our lane and having conversations with our existing customers and our prospects. And -- it's a very big market. So we're finding customers that are looking to grow. And it's -- and we're just sticking with that. Like Mary said, a very big market, a lot of opportunities. So even if there are some people on the fringes that are changing their plans as a result of what they're seeing, we're finding -- we're definitely partnering with existing customers and new ones that are looking to grow and that we can help with that effort.

Wes Golladay

Got it. And then a few of the REITs have mentioned maybe stepping up dispositions to, I guess, a little bit of the price differential between the public and private pricing. I know you have a lot on your equity funded for this year. But to the extent the market just takes another leg down lower, would you step up the dispositions to kind of set up extra from the equity perspective?

Mary Fedewa

A couple of thoughts on that. So we have, again, a long runway to grow in keeping NOI and here at STORE and performing assets is really what we're focused on doing. So we're going to do dispositions very strategically to improve our portfolio. And we're going to keep -- continue to keep the NOI here now. And the things that we dispose of strategically are -- again, our assets are granular, the way we make acquisitions with the higher cap rates above market, we have embedded gains.

So we've been very successful in being able to dispose when we needed to. But as it relates to disposing to raise equity or to use as a substitute for equity or acquire the equity, that we would not -- that's not something that we would be thinking about doing. Because we have the sources of equity, and we will dispose of our properties strategically as we need to and keep the NOI here and go get more of that.

Operator

The next question is a follow-up from Ki Bin Kim with Truist.

Ki Bin Kim

A quick one on guidance. So it went up about $0.015, which is the same amount of that onetime items. I was just curious if there were other onetime items that were embedded in guidance? And if you can comment on any other line items that might be but a potential drag?

Sherry Rexroad

Okay. So Ki Bin, the $0.015 is really revenue because our acquisitions are so healthy this quarter. We achieved the revenue in this quarter, and it's considered recurring, so it will go throughout the year. So it's $0.015 of that recurring kind of revenue and some cost savings.

The other onetime things are mentioned in the guidance. And I think that the -- when you have termination fees and things like that, we can't predict those, but yes, we anticipate that through time, there will be recurrences of that, but those are onetime events.

Ki Bin Kim

Is there any kind of prior period rents that you're expecting for 2Q to 4Q?

Sherry Rexroad

So I think you're referring to like COVID deferrals, and we are continuing to receive payments on those. We estimate by the end of this year, we should have about 85% of them. And into 2023, all of them should be returned.

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

Thank you. 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 investor conferences, including NAREIT over the next few months. And I would also like to thank our dedicated team for their hard work and contributions to STORE. Please feel free to reach out if you -- if we can answer any additional questions, and have a great day. Thank you.

Operator

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

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