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STORE Capital (NYSE:STOR)
Q4 2020 Earnings Call
Feb 25, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to STORE Capital’s fourth-quarter 2020 earnings conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Lisa Mueller, investor relations. Please go ahead.

Lisa MuellerInvestor Relations

Thank you, operator, and thank you all for joining us today to discuss STORE Capital’s fourth-quarter 2020 financial results. This afternoon, we issued our earnings release and quarterly investor presentation, which includes supplemental information for today’s call. These documents are available in the Investor Relations section of our website at ir.storecapital.com under News and Results, Quarterly Results. On today’s call, management will provide prepared remarks, and then we will open up the call 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 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 2021 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 is 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 VolkChief Executive Officer

Thank you, Lisa, and good afternoon, everyone, and welcome to STORE Capital’s fourth-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. 2020 was the most challenging year in our memory.

But STORE concluded the year with balance sheet ratios that deviated little from where we were a year ago prior to the pandemic. In no small way, this strength resulted from our efficiency in collecting a high level of dollars for every dollar we invest or putting it another way, our cash yield on our gross invested dollars embodied our resiliency. Throughout our history, many observers have sought to have STORE endure a recession to test whether our portfolio of diverse profit center properties leads to a large group of nonrated businesses to withstand broad economic pressures while continuing to deliver higher absolute rates of return. Our performance throughout the pandemic should put that debate to rest.

And on an accrual basis, the results will ultimately prove even better. We expect that nearly all the rents that we did not collect during the pandemic via lease deferral notes and lease modifications will be repaid. This has already begun. During the fourth quarter, STORE received more deferred rent repayments than we extended in net deferrals to impacted tenants.

This means that our reported adjusted funds from operations for the fourth quarter, net of changes in deferred rents receivable, was higher than our reported AFFO. We expect this positive trend to continue through 2021. In fact, we expect our dividend payout ratio for 2021 when collections of deferred rents are included. We’ll begin to converge to a point where our dividend payout ratio was prior to the pandemic.

Our sector-leading dividend protection has been important in helping us deliver consistent internal growth over time. And more than this, during 2020, this dividend protection was important to our ability to maintain and then raise our dividend. With the uncertainty imposed by the pandemic, we made a concerted effort to communicate the trends that we saw, regularly disclosing the percentage of portfolio locations open for business, along with monthly rent collections. Our increasing clarity on the market conditions and the health of our many tenants has enabled us to do something on this call that we have not done for about a year, provide estimates for expected AFFO growth during the year.

We will be initiating guidance today and expect to put STORE back on track to provide quarterly updates on our 2020 progress, and again, be able to offer guidance later this year for the following year as we have historically done. While the expected growth of AFFO, that Cathy will provide a little later on in this call, for 2021 is attractive, it’s important to remember that we are still mired in an epidemic. For the months of January and February, our cash rent collections remained below 95%. Viewed in pre-pandemic terms, a 5% or more simultaneous revenue collection shortfall would have been historically high, in fact, a record.

Some of our tenants in impacted industries will simply be unable to perform until sufficient portions of the population are vaccinated as we trend toward herd immunity against this virus. But we and our tenants expect this to start happening in 2021, which should enable us to conclude the year with cash collections converging to more historic normalcy. This will position STORE to enter 2022 with the benefit of more customary portfolio performance, enabling the first performance tailwind since the pandemic began. However, through all of this, STORE has shown itself and our resilient business model to be a safe port in the storm.

We have always said that we succeed if our tenants succeed. We unflinchingly cast our lot with an asset class that we uniquely defined, providing net lease capital solutions to regional and national leading companies that need us, across broad-based industries that we believe in. That strategy, backed by our strong capitalization has literally paid dividends over our history and enabled us to prevail over this pandemic. And with those comments, I’d like to turn this call over to Mary.

Mary FedewaPresident and Chief Operating Officer

Thank you, Chris, and good afternoon, everyone. Before I begin, I hope that you and your families are staying healthy and safe. 2020 was a year like no other, one that both tested and proved the resiliency of our business model. I’ll begin my comments today with an overview of our acquisition activity and our portfolio.

Then I’ll spend a few minutes on how STORE and our customers navigated 2020’s unique challenges to be better positioned for success in 2021. Our fourth-quarter acquisition activity was very strong, reflecting broad demand for net lease financing solutions from both existing customers and new customers. For the quarter, we invested a total of $436 million in 84 properties at an attractive weighted average cap rate of 8.1%, with annual rent escalators of 1.7%, resulting in gross returns of 9.8%. Spread across 40 transactions, our investments continue to be granular with an average transaction size of just under $11 million.

The weighted average lease term of our new investments continues to be long at approximately 18 years. Overall, our weighted average portfolio lease term is approximately 14 years with only 4% of our leases maturing over the next five years. We continue to build on our diversified portfolio strategy by adding 16 new customers, bringing us to a total of 519 customer relationships across 116 industries. For the full-year 2020, we invested a total of $1.1 billion in 214 properties at a weighted average cap rate of 8.1%.

Net of property sales, acquisitions totaled $825 million, exceeding the high end of our guidance range of $750 million. Over the course of the year, we sold 77 properties. About 32% were opportunistic sales with a 19% net gain over cost. Another 25% were strategic sales that resulted in a 2% gain over cost.

Combined, our opportunistic and strategic sales were sold at approximately 80 basis points less than the cap rates we are originating at. The remaining 43% of our properties sold were part of our ongoing property management activities. We were extremely pleased at how resilient our portfolio proved to be in 2020. We attribute this to many factors, not the least of which was the diversity and granularity of our portfolio.

To that end, our portfolio mix remained steady with 64% in service, 18% in experiential retail, and 18% in manufacturing. More than 75% of our portfolio was comprised of customers that accounted for 1% or less of our base rent and interest. Taken together, our top 10 customers accounted for only 18.1% of our base rent and interest. Our portfolio occupancy has remained consistently high since inception.

And in spite of the global pandemic and economic shutdown in 2020, our occupancy remained at 99.7%, with only nine of our more than 2,600 properties vacant at year end. As business openings increased nationwide, our rent collections continued to improve through 2020, and our cash rent collections for the fourth quarter were 90%, rising to 93% in February. We began to see early deferral repayments in the third quarter of 2020. However, scheduled repayments began in force in October and continued steadily.

As of today, our tenants with deferral repayment agreements are performing in accordance with their arrangements. Among our top holdings, two, in particular, are worth a quick mention. We are very excited about our growing partnership with Spring Education Group, a provider of early childhood and K-12 education. The company operates about 230 schools across more than 18 states.

Spring was a well-performing company pre-COVID with strong units and a strong national brand. As a result of their existing online platform, they managed well during the pandemic and are poised to capitalize on post-COVID tailwinds. Accordingly, we increased our exposure by adding eight additional Spring properties in the fourth quarter. While Spring is now our largest customer, they still represent only 3.1% of STORE’s base rent and interest.

We entered the pandemic with one of our top 10 customers, Art Van Furniture, in bankruptcy. Historically, recovery proceeds smoothly. However, the onset of a pandemic and related mandatory business closures shortly after Art Van’s bankruptcy impacted and delayed the recovery of these properties for our new customer, Lowe’s Furniture, who recently filed for bankruptcy themselves. We’ll keep you informed about this ongoing situation.

Overall, our active bankruptcy levels are at historic lows. 2020 was a difficult year for everyone personally and professionally. But it was also a year that presented opportunities to reaffirm the things we’re doing right. Most of all, it proved to us how resilient we could be in the face of adversity.

When COVID first hit, we immediately enabled all of 100 of our employees to work remotely by quickly activating the cloud-based ERP tools we had implemented in 2019 and leveraged our business intelligence platform to manage our portfolio. Virtually overnight, we were fully available to help our customers weather their own COVID storms by structuring rent deferral agreements, updating them on government relief programs, and dealing with other pressing needs. While most of our customers were not severely impacted by COVID, our team worked continuously with those customers who required tailored lease deferral agreements to ride out the wave of restrictions and shutdowns that primarily impacted fitness clubs, theaters, early childhood education centers, restaurants, and family entertainment centers. Overall, our customers ended 2020 in very good financial health with strong balance sheets and cash positions.

Many of our customers adjusted to the new COVID reality by streamlining their operations, reducing expenses, and introducing new technology and automation. As a result, they are now in a stronger position to operate in a post-COVID world than they were a year ago. As Chris mentioned, the pandemic was the first major economic crisis STORE has faced in its history that both tested and proved the resiliency of our customers, our team, and our business model. Built to endure the test of time, our business model has served us well over the past 10 years and proved critical to managing through COVID.

First, we serve an enormous market. We estimate the market for STORE properties is about $4 trillion, and STORE is uniquely positioned to serve that market. This allows us to be highly selective in the investments we make. Second, our disciplined underwriting process, which considers the long view and factors in considerable margins of safety.

With 15 to 20-year lease terms, we deliberately look for customers that have strong management teams, solid business models, and sustainable business plans. Third, our portfolio is diverse and granular by sector, customer, and geography. We’ve always known that diversification is important, but as COVID closed down entire industries, it became even more obvious that our strategy proved a critical advantage. And finally, our direct relationship model, which fosters close working relationships has been especially important during this time of business disruption where we’ve been able to provide our customers with increased service.

This direct relationship model has many other benefits, including our ability to receive unit-level financial statements from our customers to help them monitor the long-term health of their businesses and make our own informed portfolio management decisions, create our own lease contracts on our own terms, generate attractive lease yields that reflect the value we add to our customers and expand our customer relationships, which is important since one-third of our business consistently comes from repeat customers. Looking ahead, as COVID vaccination ramps up, and another round of government stimulus becomes increasingly likely, we and our customers are looking forward to 2021 with optimism. We are in active dialogue with many of our customers who are planning for a strong recovery, especially in the second half of the year. Based on our strong pipeline, we expect to see increasing opportunities and robust activity as our customers look to accelerate organic growth, and explore merger and acquisitions activities.

Having weathered the COVID storm, we are confident about the long-term health of our customers, the resilience of our portfolio, and the strength of our business model. I am extremely proud of our team who stepped up and worked incredibly hard on behalf of all of our stakeholders in 2020. We learned many important lessons along the way that will help position STORE for whatever is in-store for the future. Now I’ll turn the call over to Cathy to discuss our financial results.

Cathy LongChief Financial Officer

Thank you, Mary. I’ll discuss our financial results for the fourth quarter and full-year 2020, followed by an update on how our capital markets activity and balance sheet positions us well for the year ahead. Then I’ll provide our guidance for 2021. Our fourth-quarter revenues of $173 million were essentially flat with the year-ago quarter.

Sequentially, revenue decreased $2.4 million from Q3. Revenue from net acquisition activity increased approximately $2.7 million, representing a full quarter’s revenue from Q3 acquisition activity but only a small contribution from the large volume of Q4 acquisitions, which were heavily back-end weighted. 85% of our Q4 acquisitions closed in December with two-thirds of that volume closing in the last few days of the month. Offsetting increased revenues from acquisitions were write-offs related to our non-cash straight-line rent receivables of approximately $2.5 million.

Reserves taken in Q4 as a result of the pandemic and other underperforming contracts were approximately $1.8 million higher than the amount recognized in Q3. A meaningful portion of this revenue reduction is attributable to the delayed recovery on the original Art Van properties that Mary mentioned in her remarks. The remaining component of the revenue bridge is a decrease in other income, which was about $750,000 lower in Q4 due to higher onetime fee income in Q3. All these factors, but the straight-line rent adjustment impacted AFFO for the quarter.

During the fourth quarter, we granted $5.8 million of rent deferrals net of reserves, down from $13 million in the third quarter. Continued deferrals were requested by the same tenants in the same industries that were highly impacted by COVID. At year end, COVID rent receivables stood at $47 million. This represents total COVID rent deferrals of approximately $67 million, less $10 million in repayments and net of reserves of $10 million.

Rent deferral repayments began in earnest in the fourth quarter, with the majority scheduled to be collected by the end of 2021 and the remainder scheduled to be repaid over the next 36 months. Now turning to expenses. Interest expense increased by $300,000 from the year-ago quarter due to our third issuance of senior unsecured public notes in November. The increase was offset by debt paydowns we made with the proceeds from this transaction, which resulted in a reduction of our weighted average interest rate from 4.3% to 4.2%.

Property costs for the fourth quarter increased $4.4 million year over year to $7.4 million, primarily related to property tax accruals on tenant locations where we expect the tenant may not be able to pay them when due. The delayed recovery on our former Art Van properties represented about half of the increase in property costs during the quarter. G&A expenses decreased by just over $500,000 from the year-ago quarter. As a percentage of average portfolio assets, G&A expenses, excluding the impact of non-cash equity compensation, declined to 46 basis points.

This is down from 50 basis points a year ago, reflecting decreased acquisition-related expenses on lower acquisition volume, along with lower travel expenses. We expect G&A expenses to rise somewhat in 2021 as we return to historical levels of acquisition activity. During the quarter, we recognized an aggregate $12 million in impairment provision, primarily attributable to 4 properties. AFFO for the fourth quarter decreased to $115 million from $120 million a year ago.

Increases in AFFO due to our portfolio growth were offset by lower revenue and increased property costs related to government-mandated business closures on our tenants’ businesses. On a per-share basis, AFFO was $0.44 per diluted share, down from $0.50 a year ago. AFFO per share for the quarter was impacted by social distancing mandates as well as a short-term change in our capital allocation strategy as we funded acquisitions with equity. This allowed us to maintain prudent levels of leverage during the pandemic and drove our share count to 266 million shares outstanding by year end.

Full-year 2020 AFFO increased to $463 million or $1.83 per basic and diluted share. Sequentially, FFO per diluted share declined from $0.46 in Q3. A little over half of the change from Q3 was related to lower revenues for the quarter that I described earlier, and the remaining change was primarily due to higher property costs. We declared a fourth-quarter 2020 dividend of $0.36 per share, which we paid on January 15, and to shareholders of record on December 31.

Now turning to acquisition activity and our balance sheet. We funded strong fourth-quarter acquisition activity with equity, along with cash proceeds from asset sales. Since the vast majority of the $436 million in acquisitions in the quarter closed in the last half of December, but with the full expense load for commissions, these acquisitions contributed little to AFFO for the quarter. We expect the full impact of this external growth will be felt in Q1 of 2021.

For the full year, we closed nearly $1.1 billion of acquisitions, with about 40% of the acquisition activity closing in Q4. Our ATM program continues to be an effective way to raise capital, given the granular size of our acquisitions. And we continued to raise equity through our ATM program throughout the pandemic. During the fourth quarter, we renewed our ATM program in the amount of $900 million.

We used this program to issue about 5 million shares of common stock at an average price of $31.10 per share, raising net equity proceeds of approximately $146 million in Q4. Over the course of 2020, we issued more than 25 million shares of common stock at an average price of $27.08 per share, raising net proceeds of approximately $686 million. As a result, most of our 2020 net acquisition activity was funded with equity, and our leverage has trended to a historically low level of 37% on a net debt to portfolio cost basis. In November, we took advantage of an attractive debt market by issuing $350 million of 2.75% senior unsecured investment-grade rated notes due in 2030.

We used a large portion of the net proceeds to prepay without penalty one of our $100 million bank term loans and $92.5 million of Master Funding notes with an interest rate of 3.75% that were scheduled to mature in 2022. At December 31, we had approximately $3.8 billion of long-term debt with a weighted average maturity of 6.6 years and a weighted average interest rate of 4.2%. Our leverage remains low, approximately 63% of our gross real estate portfolio was unencumbered at year end, and our ratio of unencumbered NOI to unencumbered interest expense remains exceptional at just under seven times. We have no significant debt maturities until 2024 and three series of Master Funding notes will become available for prepayment without penalty during 2021.

These notes have a 24-month prepayment window and they bear interest at a weighted average rate of 5.06%, giving us an opportunity to continue to reduce debt costs in 2021. Going into the new year, we have approximately $166 million in cash, about $800 million available under our ATM program, and full access to our $600 million credit facility, which also has an $800 million accordion feature. We are well-positioned to address the strong acquisition opportunities our direct origination team is seeing with substantial financing flexibility, conservative leverage and access to a variety of attractive debt and equity financing options. Now turning to our guidance.

In November, we provided initial guidance for 2021 acquisition volume in the range of $1 billion to $1.2 billion, net of anticipated sales. And we remain confident in our ability to achieve that level of volume at attractive cap rates. We currently expect 2021 AFFO per share in the range of $1.90 to $1.96 based on this projected net acquisition volume. Our AFFO guidance is based on a weighted average cap rate on new acquisitions of 7.7% and a target leverage ratio in the range of 5.5 to six times run-rate net debt to EBITDA.

As I mentioned earlier, we anticipate the G&A expense will trend up slightly as compared to 2020 due to a combination of the return to normal acquisition activities and the investments in personnel we’re making to support our next level of portfolio growth. Our AFFO per share guidance for 2021 reflects anticipated net income, excluding gains or losses on property sales of $0.83 to $0.88 per share, plus $0.97 to $0.98 per share of expected real estate depreciation and amortization, plus approximately $0.10 per share related to items such as straight-line rents, equity compensation, and deferred financing cost and amortization. It’s still early in the year, and as always, we’ll reassess guidance as the year progresses. And now I’ll turn the call back to Chris.

Chris VolkChief Executive Officer

Thank you, Cathy. Before turning the call over to the operator, I’d like to make a few additional comments. First, I would draw your attention to our investor presentation, which has undergone a complete makeover for the first time in five years. We’ve sought to shorten and sharpen the presentation.

We welcome your comments and hope you like the results. Periodic corporate presentation revisions are an important undertaking, and the ultimate work is a credit to a large team. Secondly, my annual letter to stockholders will be released tomorrow concurrent with our 10-K filing and will be available on STORE’s website. My letters have tended to be long, and this year is no exception.

2020 was among the most eventful business years of my career. Finally, today, we are announcing a corporate passage. Shortly after this call, we will issue a press release announcing the planned retirement of our fellow co-founder and chief financial officer, Cathy Long. Cathy was instrumental in STORE’s conception and our working relationship spans decades.

For many of you on this call who have invested with us or analyzed us, you know Cathy embodies the best of STORE. She’s unfailingly gracious, reliable and has proved a role model to us and our fellow teammates as she leads by example. Cathy plans to stay on until she can transition her role to her successor. We have engaged the executive search firm, Russell Reynolds, to seek a replacement, and Cathy is playing a key role in this process in transition.

Meanwhile, she and her team have built the finance accounting, financial reporting, and tax group that we can remember, across our three healthy traded successful net lease platforms. Needless to say, we will all miss seeing and working with Cathy every day, though I can assure you that we will see her. We wish her the very best as she deservedly moves on to new adventures. And with these comments, operator, I now turn the call over to you for any questions.

Questions & Answers:

Operator

[Operator instructions] The first question is from Nate Crossett of Berenberg. Please go ahead.

Nate CrossettBerenberg — Analyst

Good evening, guys, and congratulations on the retirement, Cathy. It’s good to see the acquisition volumes ramping again. I was just hoping you could comment on the deal flow. So far in Q1 ’20, are you guys seeing consistent levels that you saw toward the end of last year? And also, it looks like you upped your estimate of the total addressable market in the deck so I’m curious how much of that target 26,000 potential customers have you guys worked through so far?

Mary FedewaPresident and Chief Operating Officer

Nate, this is Mary. So I’ll take that. Yes, I’d say deal flow has definitely ramped up in the fourth quarter, as you saw, and we’re still seeing that level of activity. And in terms of the market, we do update the op market opportunity once a year, and we do a pretty detailed study on that.

We have a prospecting database here of over 26,000 companies that we’re working through as clearly, the market is so large, it will be difficult to ever cover even really scratching the surface of that. So lots of runway there.

Nate CrossettBerenberg — Analyst

OK. I wanted to also ask about your tolerance to add to, I guess, Spring Education. Obviously, that’s moved up to 10 at list throughout 2020. And it looks like there’s a lot of other properties that they have that you currently don’t own.

So I guess, what’s kind of your upward tolerance in terms of the top tenant exposure here?

Chris VolkChief Executive Officer

3% of that area tends to be about it, they’re at 3.1%, but they’ll be dialing back to 3%, just through balance sheet growth if nothing else, but they’ll definitely be dialing back down to 3%, but that’s where we’ve been with our top tenants.

Mary FedewaPresident and Chief Operating Officer

Yes. And, Nate, this is Mary. Like, I’ll talk a little bit about that transaction. We’re really excited that we got to do a transaction with an existing customer.

Spring Education Group, they’re an integrated education platform, and they work across from early childhood education all the way through K-12 grade, and they’re really kind of a pure-play in that sort of span of care for children. We provided a comprehensive solution that was centered in the K-12 space. And the K-12 space is a private — it’s a private education space with contractual tuition. So it’s very sticky.

So not only are they diverse in the offerings from early childhood education through K-12, but they’re also diverse in the channels of how they offer the education. And they have an already existing really superior online platform that really served them well in COVID. So they had a lot of traction from a lot of new enrollment from that particular platform. So they did well.

During pre-COVID, they were great. They did well during COVID, and we’re pleased to have them up at the top of our top 10 list.

Operator

The next question is from Sheila McGrath of Evercore. Please go ahead.

Sheila McGrathEvercore ISI — Analyst

Yes. Chris, I was wondering if you could take the opportunity now that the market’s a little bit spooked about rates moving. Just your thoughts on how STORE and your previous companies operate in changing interest rate environments and how you think about the investment opportunities in a rising rate environment?

Chris VolkChief Executive Officer

Sure, Sheila. I’ll do this from two angles. The first is, if you look at our portfolio, let’s say, you look at last year, our weighted average cap rate was 8.10%. Our average escalator was 1.9%.

So you get to a total, if you add these two together, a gross return around 10%. If you were to compare that to our predecessor company, it was public around 2006, 2005, the 10-year treasury was 4.50% at the time, and our gross yield was probably 10.2% or something like that or 10.3%. So really, we’re kind of on top of where that company was and also it points out to know that our investors during the time we ran that company during 4.50% interest rate was similar types of gross returns, generated a 19% rate of return. So we have tried not to chase rates downward.

We’ve tried to avoid the temptation at the bubble inflation, where you have low rates that just what would cause you to justify a higher price for assets. We’ve stayed away from that. We’ve been pretty disciplined. So this company has been, from the outset, designed for long-term rates.

We’re really mindful of the long-term 10-year treasury during most of our working career has been kind of in the 4.50% range, 4%. We should be able to survive. We’re there. We shouldn’t be getting hurt at all.

On an acquisition note, I would say that one of the things that you want, one of the things I like about, for example, today’s move in interest rates is that it adds volatility to interest rates. And volatility is good because if you have volatility, then it’s going to make people a little bit more reticent not to chase cap rates downward. It’s going to make financing a little bit more variable in terms of where financing is. If the 10-year treasury by contrast stays at 1.50% for the whole year, you may end up with a risk on the type of environment where people are chasing after deals because the borrowing rate is so low that they can push the cap rates down, and that can happen.

And so hopefully, the economy starts to do the v-shaped recovery that people are talking about. We wouldn’t be sad to see interest rates go up a little bit as a result of that. And I think that it would help to — on the one hand, it would — maybe some of our spreads were compressed. Last year, we had just ginormous spreads.

So we borrowed money at 2.75%, we put out the money at 8.10%. So you’re talking north of 500 basis points, which is historically wicked high. If this year, it comes in as a result of that, that’s OK. There’s plenty of room for solid return on equity, and we’d like to see rates go a little bit higher if were up to us.

Sheila McGrathEvercore ISI — Analyst

OK. That’s great. And one other quick question. In your new presentation on Page 38, you give portfolio resilience during COVID.

Just wondered if you could explain a little bit more of that top — the graph in the top right or relative portfolio yield versus peers?

Chris VolkChief Executive Officer

OK. So top right, yes. It’s this one. So basically, we’re here today, unusually for us, being one of the last providers of results for the year.

So we’re able to kind of pull out a lot of 10-K and 10-Q filings and back into sort of cash yields that everybody has generated — that we’ve generated and other people have generated. And so one thing about the year that we’ve noticed is that there’s a lot of attention being paid to the percentage of rents being collected. Are you at 93%, 90%, 95%, 99%? And there’s less attention being paid to what’s the absolute return, like what’s the absolute cash yield that you’re doing. And of course, STORE is starting off with a much higher yield to begin with than most people.

So we have a lot of margin for error built into that yield. So as it turns out, it’s our belief that STORE led last year in terms of what we collected relative to every dollar invested, i.e., we had a higher yield although we did not have the highest percentage of rents collected. And that second piece is actually kind of interesting because this year, that percentage of rents collected is going to go up, whereas we had a high percentage of rents collected, it has nowhere to go up. Right? So this year, it’s going to go up.

And next year, of course, in 2022, you’ll have a full year of that, so you’ll have a tailwind. So the spread between our cash yields and then other peer groups will just tend to gap out even further. So I think that we’re excited about it, and that’s what that chart is designed to show.

Operator

The next question is from Rob Stevenson of Janney. Please go ahead.

Rob StevensonJanney Montgomery Scott — Analyst

Good evening, guys. Mary, can you remind us what the average size of your remaining Loves, Art Van boxes are? And can you talk about how robust the tenant demand is in those markets for boxes of that size? And how you think about the trade-off between potentially multi-tenanting assets like this and releasing them versus just selling the real estate and moving on? I think you sold four of them in the quarter?

Mary FedewaPresident and Chief Operating Officer

Yes. Absolutely, Rob. Nice to hear from you. A good question.

I’ll talk about Loves. You’re correct. We did release four of the sites in the fourth quarter here. So we have an experienced furniture operator who took on our lease form, and they’re going to remain as furniture stores.

So they’ll remain a customer of ours. And Loves is still in bankruptcy. They are paying rent during bankruptcy. We do like the core footprint.

And the ones we released were outside the core footprint, but this core footprint in the Midwest here, we like they’ve been profitable in the past. They made money when they were Art Van stores. And even when Loves started to open them. As they started to open them up, they were also doing really well from a sales perspective.

And as you know, furniture was actually one of the hotter sectors during COVID, and we think that that trend will continue. So I would say it is early. They’re in bankruptcy still, but we would look to release most of these boxes. And I think we could really release most of these boxes, you might sell some on the fringe or something like that.

But for the most part, I think we’ll have good interest in them, and we have some interest now, actually.

Chris VolkChief Executive Officer

Boxes have really sold pretty well, too, Rob. I mean, from day one, even when Art Van filed for bankruptcy, these things were making quite a bit of money. So we feel good about them from that standpoint too.

Rob StevensonJanney Montgomery Scott — Analyst

OK. And then one for Cathy. Can’t let you go without one last one here. From an earnings standpoint, what are you attributing the combined — both the expense — higher expenses and lower revenues from Loves as well as the weighting of the acquisitions into December.

What was the drag between just those two buckets on fourth-quarter AFFO per share?

Cathy LongChief Financial Officer

Well, for Loves by itself, the drag by the time you add together the revenue drag and the expense drag because we did accrue some property taxes as well, Loves for the fourth quarter was $0.015 by itself. We did also move some people to cash basis accounting. And that was another couple of pennies. And then the back end weighting, it was almost as though for acquisitions, there was almost a zero impact because most of the acquisitions weren’t even in-house for a couple of weeks.

And when you consider the fact that the full commissions expense and other closing costs that are expensed, hit, but the revenue only hit for a few days, really, that was a wash. So when you think about — it depends on how you would have modeled it. And if you would have modeled a net $325 million at an 8% cap in a mid-quarter convention, then you can do the math, and that’s how much it would have really hit that quarter.

Rob StevensonJanney Montgomery Scott — Analyst

OK. And how much was the expense part? The paying — that you wound up out the door that you said was offset by the revenue?

Cathy LongChief Financial Officer

Yes. That’s about 25 basis points, I guess, about that.

Rob StevensonJanney Montgomery Scott — Analyst

OK. Very helpful. Congratulations, and good luck with what’s next for you.

Cathy LongChief Financial Officer

Thank you.

Operator

The next question is from Caitlin Burrows of Goldman Sachs. Please go ahead.

Caitlin BurrowsGoldman Sachs — Analyst

Hi. Good evening, everyone. And, yes, Cathy, congrats on your retirement. I was wondering if you, as a team, could go through just in terms of guidance, what you’re assuming in terms of following up on the last question and one from earlier, what guidance assumes in terms of rent collections increasing over the course of 2021 and tenants possibly moving off of cash accounting?

Cathy LongChief Financial Officer

OK. I’ll start that and Mary or Chris can chime in if they want. So if you think about where we ended the year, and you think of like a pie chart of collections, about 91% — by the end of the year, we reported 90% for December. But by the time — the end of the year, it was actually rounding to 91% collections in cash.

So 91% of the pie is going to be cash collections. Another 3% of the pie is deferrals, net of reserves. So those deferrals would be things that we are recognizing as revenue and accounts receivable and have put a reserve against what we think might not be collectible. So that’s another 3%.

OK? Then there’s another 1% that’s unresolved, meaning we recognize the revenue, but we haven’t penned a deal with them on timing of when they’re going to pay it. And then the remaining 5% is unrecognized, and that is people we moved to cash basis either in third quarter or fourth quarter. And people who are on cash basis because we flipped them to a percentage rent instead. In other words, they don’t have a fixed monthly base rent, but instead, it’s a percentage of their sales, which you can’t record until you actually know what their sales are.

So does that help? So you have a 5% bucket, if you will, that carrying into 2021. And then over time, you expect to have the normal 70% recovery of that bucket. And remember, these are people who are in those highly impacted industries. Right? So if you look, for example, at the people who are in the cash basis bucket, that would be things like movie theaters, some full-service restaurants, health clubs, a little bit of family entertainment.

The industries that we talked about the entire time during COVID, it’s that group that’s in there. And so they are reliant somewhat on the vaccination process continuing and things like that. Many, many of our restaurants were able to reopen, most of them, but some of the sit-down restaurants just are not meant to have hot food that’s pickup. If you’re serving something like Alaskan King crab legs or something, this is not stuff that’s easy to do in takeout.

Right? So some of them just were not able to reopen or reopen fully. And that’s the group that we’re talking about. So it’s a matter of — they’re in their locations, they are either partly open — but they’re waiting for really this social distancing to get a little bit more expansive before they can really come back. Does that help?

Caitlin BurrowsGoldman Sachs — Analyst

It does. And then I guess I’m just wondering, if I had like 10 minutes to think about it, I might have a more interesting follow-up on this. But just on the spot, then given those pieces that you outlined, could you talk about how guidance assumes that they change over the course of 2021?

Cathy LongChief Financial Officer

It’s just a ramp-up with most of the ramp-up happening a little bit more toward June, more from the perspective of expecting that the vaccination process is further along by then. Plus some of our tenants are a little more seasonal where summer’s a big thing for them. And so we would expect that the recouping of this rent would be more toward the beginning of summer.

Chris VolkChief Executive Officer

Caitlin, it’s Chris. Ways we can outperform, obviously are we could collect more. We have a lot of reserves that we’ve been taking, so we could be over reserved.

Cathy LongChief Financial Officer

And you can have recoveries that we’ve thankfully written off.

Chris VolkChief Executive Officer

We could have increased recoveries. So this last year was dreadful in terms of recoveries relative to where we’ve been. And the Art Van was a prime example of that, where we just got a drag for recoveries for the year. So the timing of a lot of this could happen.

And then, of course, our team could do more in originations. So we have, I mean, be — want to be in two net, as an estimate, we could exceed that. Those are all things that might be able to help us on the other side. But what we know is, as we get into 2022, we don’t have complete clarity with what’s happening in 2021.

We’re still kind of in the middle of the pandemic as we all sit here and talk. But as we get through this, what we’re pretty convinced of, as we get through this, 2022 is going to start to look more like a normal year. And that’s when you get into — strip more tailwinds. So I think the story about this call is not just a ’21 story, it’s a ’22 story.

Cathy LongChief Financial Officer

And, Caitlin, the one other thing to point out is that when we had moved some people to cash basis, not only are you writing off whatever accounts receivable that they would have had at the moment when you switched them over. But we also accrued property taxes for them. Now we didn’t pay their property taxes, but we accrued them with the thought that they might not be likely to pay them. So that’s also where there can be some recovery where we may have accrued a property tax and then this tenant ends up working something out with their state to pay taxes on a payment plan or something like that.

Caitlin BurrowsGoldman Sachs — Analyst

Got it. OK. And then maybe just one more on Page 10, you guys show the history of the median unit level of fixed charge coverage. And that number is at 2.1 times now, which is pretty much at pre-pandemic levels, which seems surprising.

So I was just wondering if you could go through that. Is it that tenants have been able to keep up sales? Or is there something else going on with that metric?

Mary FedewaPresident and Chief Operating Officer

Caitlin, this is Mary. I can give you a little short answer on that. The coverage is, as you know, most of our tenants really were not impacted by COVID. So there are only like six or seven highly impacted industries, and we have 116 industries.

So many of our tenants actually prospered during COVID or a lot of them have had a really quick sort of v-shaped recovery if you will. So the diversity of our portfolio has really held up, and we’ve benefited from that, and you can see it in the metric you’re looking at.

Operator

The next question is from Frank Lee of BMO. Please go ahead.

Frank LeeBMO Capital Markets — Analyst

Good evening, everyone, and congrats, Cathy. Just have a follow-up on the ’21 AFFO guidance. How should we think about financing for acquisitions, given your commentary on where leverage levels stands today? And should we expect deals to be overequitized similar to 2020? Any additional color would be helpful.

Cathy LongChief Financial Officer

Thank you, Frank. Yes. We don’t expect to fund with equity as we did during the pandemic. I think part of that was being prudent to make sure that we kept leverage low during the pandemic due to the uncertainty.

And part of it in Q4 was ramping up because acquisitions were ramping up fairly quickly. And it was a good time to get equity and get out ahead of it. So if you look at where we ended up the year, how we positioned ourselves for 2021, we ended up with nothing outstanding on our revolver. So we have that full amount available to us.

We did the senior unsecured debt deal in November, which also put cash on the balance sheet and allowed us to lower our overall cost of debt by paying off some debt that was at higher interest rates. And as I mentioned in my script there, three more opportunities during 2021, where we have a series of Master Funding bonds that will be in prepayment mode with no penalty. And those are at 5% — it’s almost 5.1% interest rate. So there’s some opportunity there.

So you’ll see us being more active in the debt market with our leverage being kind of abnormally low even if we trend back to normal levels, which would be a little closer to 39% or 40% on a loan to — or a net debt to cost basis. So you’ll see definitely a little more capital markets activity. And the interest rates right now are still attractive. Spreads are coming in and still attractive for long-term debt.

Chris VolkChief Executive Officer

So, Frank, we funded last year — we funded our investments with roughly 80% equity. With any luck, the pendulum will start to swing back, we’re basically truing up our leverage. I mean, the leverage will — the funded debt-to-EBITDA is going to look the same because the EBITDA is going to pick up as expenses drop back and as revenues keep coming in, and when that happens, it’s going to afford us to be able to true it up. So it gives us basically more dry powder to acquire without having share dilution, which means your external growth becomes more potent.

Frank LeeBMO Capital Markets — Analyst

OK. That was very helpful. And then if we look at your investment pipeline sector distribution, the pie charts, it looks like the other service bucket declined quite a bit from the last quarter. Can you talk about some of the drivers behind this? Or which type of industry groups have fallen out of favor?

Mary FedewaPresident and Chief Operating Officer

Yes. This is Mary. Frank, we actually took some stuff out of other service, and we popped it out into the pie. So auto maintenance was actually in other service, and we popped that out.

So that actually moved some of the percentages around. And other service still considers — has a put a few things in there from repair services, imaging centers, rental centers, things like that. But it was just a sort of a — you can see we mixed some things around here and pulled some things out, that got to be over 5% like auto maintenance.

Operator

The next question is from Linda Tsai of Jefferies. Please go ahead.

Linda TsaiJefferies — Analyst

Hi, Cathy. Congratulations as well and wishing you the best in your next endeavor. I think you said 5% of your ABR is on cash basis accounting. Of that pool, how much do you collect from cash basis tenants in 2Q, 3Q, and 4Q? Just wondering how that’s trended over the past few quarters.

Cathy LongChief Financial Officer

So how much of the cash basis do we collect?

Linda TsaiJefferies — Analyst

Yes.

Cathy LongChief Financial Officer

I don’t have that number right in front of me, but I can give you some anecdotal information off the top of my head. For example, remember, I said there are some that are on cash basis where we’ve flipped them to a percentage of sales instead of a regular monthly amount. For Q4, we recognized about $3 million in contingent — that type of contingent rent. And for the whole year, we had only recognized $4 million.

So the pace has really gone up from doing — bearing more than a couple of hundred thousand a quarter to doing $3 million in a quarter. So it is picking up but as you recall too, a lot of these deals weren’t working out where people started paying back and really being reopened again until around the end of Q3. So Q4 was always going to be our big start to paybacks of deferrals and the contingent rent starting and all that. So I think that Q1 and Q2 will probably be a little more robust than even what you’re seeing in Q4.

Linda TsaiJefferies — Analyst

Got it. And then the 14 new tenants, what industries did they fall in?

Mary FedewaPresident and Chief Operating Officer

Linda, this is Mary. I’ll tell you. In the fourth quarter, our mix went about 20% in manufacturing. We did some food processing and some metal fabrication.

We had a little — only about 5% in retail. The Marvy dealerships, and about 78-or-so percent — 77% was in service. And these were really a non — sort of COVID-resistant nondiscretionary type services, specialty medical, dental, eye care, pet care, Spring Education Group, of course, and some urgent care stuff. So that was really sort of the mix for fourth quarter.

Operator

The next question is from Haendel St. Juste of Mizuho. Please go ahead.

Unknown speaker

Hi. This is Leah Jayne on behalf of Haendel. Can you provide more clarity on the $3.5 million of income from non-real estate equity method investment on your income statement? Specifically, what is it tied to? And is this something we can expect more of in 2021?

Cathy LongChief Financial Officer

No. This is Cathy. That was sort of a onetime situation. During COVID, there was a lot of negotiation to — it’s a two-way street.

Right? You’re providing people some rent relief, but you’re also getting something in return. And in this particular situation, we got a small equity stake in a company. And it’s not a real estate company. It’s just a regular operating company.

So that stake is what you’re seeing. It’s an investment, and we got it, and that is the value, the estimated value of what that stake is worth. Does that help? And it will be accounted for on the equity method, but it’s not a normal part of the business, and you won’t see us necessarily reaching to do that. And it’s nothing we actually paid cash for per se.

Chris VolkChief Executive Officer

And because it’s on the equity method, the income and/or losses resulting from the operation will be added to or deducted from AFFO because they’re really noncash.

Cathy LongChief Financial Officer

Correct.

Chris VolkChief Executive Officer

Unless they give us a cash contribution.

Unknown speaker

That’s very helpful. And can you talk about the credit profile of the new furniture store tenant that signed leases for the four of the Loves boxes? And comment on how the rent — this new furniture operator is paying versus the former Art Vans and Lowe’s print?

Mary FedewaPresident and Chief Operating Officer

So this is Mary. We don’t disclose a specific deal when we have a release here. But what I will tell you is that this is in a very experienced furniture operator, a very strong, very experienced furniture operator who has signed up on a long-term lease with us.

Operator

The next question is from Todd Stender of Wells Fargo. Please go ahead.

Todd StenderWells Fargo Securities — Analyst

And, Cathy, we’re going to miss you. So wish you all the best. Looking at your acquisition guidance, it assumes a 7.7% initial cap rate. It’s just something we haven’t seen go that low for a while.

I wonder if that’s just an abundance of caution or maybe your rent levels? What’s going into that forecast?

Mary FedewaPresident and Chief Operating Officer

So, Todd, this is Mary. Actually, we actually were at that level in 2019, it’s 7.75% or so. But I will tell you that there is some compression and we’re seeing compression in the marketplace. There’s still a bit of a supply demand sort of imbalance out there where there’s a lot of demand for some of the more desirable asset classes, as you can imagine, as it relates to COVID essential or nonessential and manufacturing as well.

So we are seeing that compression. And again, I think we’ll even see our guidance as sort of in the range of back to 2019 levels. And I think that’s where you’re going to see the cap rates going back to — obviously, we always hope to do better than that, but that’s where we think we’ll be.

Todd StenderWells Fargo Securities — Analyst

Understood. And did I miss it, did you give a disposition range at all? I know your acquisitions are net of dispositions. Any color there?

Cathy LongChief Financial Officer

It’s Cathy. Last year was kind of an abnormal year in that we were on the low side. Normally, we do 3% to 5% of the beginning balance of portfolio is sold during the year. We were actually, I think, a little below 3% last year.

You’ll see us trending back fully into that range and perhaps even toward the high end of that range. You maybe can think about it that way.

Operator

The next question comes from John Massocca of Ladenburg Thalman. Please go ahead.

John MassoccaLadenburg Thalmann — Analyst

Good afternoon. So pushing on dispositions again, and at kind of the disclosure in the presentation, the disposition cap rate has remained pretty much flat over the years. But the total gain or loss on kind of the original cost trended down in 2020. Is that just a consequence of maybe selling out of some vacancy and particularly related to maybe some of the headwinds from the pandemic? Or is there something else going on there? And if it is, is selling some vacancy now as your more mature portfolio is going to be more part of the mix going forward?

Chris VolkChief Executive Officer

OK. So, John, this is Chris. And Mary and I will answer this together. But the answer is that last year, we sold the assets as an aggregate 8% economic loss, basically a loss over cost, which worked out to $21 million from a loss perspective.

If you look at us, by the way, over the last six years, five years, I mean, we’ve made gains over cost, and we disclose that every single year. So it’s the first time we’ve actually had a loss over cost. And a lot of it is just due to the mix of what we did from a portfolio management opportunistic strategic perspective. So last year, we did a lot more on the portfolio management side and some of them were vacant assets, some of them were occupied assets.

But they were obviously underperforming assets. So that caused the frictional — the loss. We did not sell as many opportunistic and strategic assets as we had in years past. Had we done that, I think you would have seen us make money last year.

This year, I think it will be much more of a normal year where we’re going to do a blend. And the cool thing is that STORE has a very good history of when we sell assets that are occupied performing assets, which is the vast majority of them, we have a very good track record of being able to sell at cap rates that are lower than the cap rates we’re investing in. So together, that sort of creates added internal growth accretion, which is something you want to see. Overall, if you look at the history for the last four or five years, that accretion works out to somewhere in the neighborhood of $6 million and added net revenues to the company.

So it’s like minor accretion every year, but $6 million is $6 million, that’s recurring. So we look at that as kind of almost like a negative default. Right? It’s another way of adding growth to the company, and we’ve paid attention to that every single year. So you’ll see us do that.

And last year, I would say it was not because — it wasn’t the losses weren’t all just related to COVID, though some might have been related to COVID.

Mary FedewaPresident and Chief Operating Officer

Yes. I would say — yes, John, mostly because it’s opportunistic and strategic, we’re lower last year because of COVID, in way that there was a big slowdown in the marketplace when COVID first hit. So that was really the reason for a step-less opportunistic in strategic sales than we normally have, and they pretty much have happened at the end of the year.

Chris VolkChief Executive Officer

And the final thing is that we’re sitting on today, a whopping total of nine vacant and non-paying properties. So this is not to do with the age of STORE’s portfolio or the seasoning of the portfolio. And in fact, our weighted average lease term is still 14 years. So we’ve been really good at keeping the lease terms super long.

So it has nothing to do with any age or life cycle of the company.

John MassoccaLadenburg Thalmann — Analyst

OK. Understood. And then as I look at the portfolio pipeline disclosure, it’s kind of notable that entertainment is still kind of held a pretty large place in the pipeline. Is that maybe based on your view of where we’re getting to kind of in a post-vaccinated world? Or have those assets kind of proven to be maybe more resilient than the initial headlines would have indicated?

Mary FedewaPresident and Chief Operating Officer

Yes. This is Mary. I would say that these assets have proved resilient. I think that they will especially become even more resilient with the vaccinations and all of that.

But families like to go out and do things. I think we’ll see a really good recovery in the second half of the year on those. I will tell you that the pipeline is very — it’s a pipeline that has a lot of opportunities on it. It’s very dynamic.

And these are — a lot of these are opportunities that the relationships that we have with customers, and we’re keeping these relationships warm and the opportunity will present itself when the timing is right. So we are still interested in this space. And so we like to keep it — we’ll keep the pipeline — included in the pipeline.

Operator

And the last question comes from Wes Golladay from Baird. Please go ahead.

Wes GolladayBaird — Analyst

Hi. Good evening, everyone, and, Cathy, congratulations. I just want to maybe follow-up on one of those last questions. You mentioned selling the vacant and not-paying properties, but do you ever look to sell the vacant and paying, maybe to strengthen the tenant and potentially substitute assets in your leases?

Mary FedewaPresident and Chief Operating Officer

You bet. Yes. This is Mary. We absolutely work with our tenants quite often.

As you know, most of our multi — we have mostly multiunit transactions and they’re mostly in master leases, and we work closely with all of our tenants. They have a property in there that’s not working for them. We can help pull that out and substitute something else in. And we do work closely with our tenants for assets that are paying, but they want to get out of them for sure.

Chris VolkChief Executive Officer

And we disclosed the vacant and not-paying for you to be totally transparent on this. So I think one of the two people to do that. And also because it forces us all to pay a lot of attention to it. And so from a residual value perspective, you just still want to have vacant properties of any kind, whether they’re paying or not paying.

And so we’re working with our customers to be able to effectuate the sale of those assets?

Mary FedewaPresident and Chief Operating Officer

Yes. So, Chris, as he mentioned in his script when our customers do well, we do well. So we want to — we’re really aligned with helping to make sure that they have a really nice performing portfolio.

Wes GolladayBaird — Analyst

Great. And then maybe I’ll just end with Cathy. For your last call, I guess, you mentioned going on prepayment mode. Do you have a timing and dollar amount for that?

Cathy LongChief Financial Officer

The timing during the year for the prepayments is varied. So we have some that will be early Q1, some that will be Q3, some that will be early Q4. But so we’ll pick a time that we can wrap as many of that in as we can and kind of think about it that way. So you’re thinking more like midyear, really.

Operator

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

Chris VolkChief Executive Officer

So thank you all for attending the call today. Mary, Cathy, and I will be available for any follow-up questions. I’ll just also note, we will be participating in the upcoming Raymond James Investor conference next week on March 3. And then the week after that, there’ll be Citi’s Global Property Conference, which will be March 8 through March 10.

Both of those events are virtual, of course. But if you’re interested in getting on our schedule, just please let us know. And you all have a great day. Thank you so much.

Operator

[Operator signoff]

Duration: 68 minutes

Call participants:

Lisa MuellerInvestor Relations

Chris VolkChief Executive Officer

Mary FedewaPresident and Chief Operating Officer

Cathy LongChief Financial Officer

Nate CrossettBerenberg — Analyst

Sheila McGrathEvercore ISI — Analyst

Rob StevensonJanney Montgomery Scott — Analyst

Caitlin BurrowsGoldman Sachs — Analyst

Frank LeeBMO Capital Markets — Analyst

Linda TsaiJefferies — Analyst

Unknown speaker

Todd StenderWells Fargo Securities — Analyst

John MassoccaLadenburg Thalmann — Analyst

Wes GolladayBaird — Analyst

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