Q2 2020 Spirit Realty Capital Inc Earnings Call
Greetings and welcome to Spirit Realtys.
Excuse me once.
Greetings and welcome to Spirit Realty Capital Q2, 2020, <unk> earnings Conference call.
At this time all participants are on the listen only mode. A question answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference call is being recorded.
I'd now like to turn the call off do you host PR rubble senior Vice President strategy planning and IR. Thank you you may begin.
Thank you operator, thank you everyone for joining us.
Presenting on today's call will be president and Chief Executive Officer, Mr. Jackson Sherry.
<unk> Chief Financial Officer, Mr., Michael Hughes.
And hard like head of asset management will be available for Q1.
Before we get started I would like to remind everyone that this presentation contains forward looking statements.
Although the company believes these forward looking statements are based upon reasonable assumptions.
They are subject to known and unknown risks and uncertainties that can cause actual results to differ materially does currently anticipated due to a number of doctors.
I'd refer you to the Safe Harbor statement in todays earnings release, Supple supplemental information and July uptick.
As well as her most recent filings with yes, you see for a detailed discussion at the risk factors relating to these forward looking statements.
This presentation also contain certain non-GAAP measures.
Conciliation of non-GAAP financial measures to most directly comparable GAAP measures are included in today's release supplemental information and July uptick.
Furnished to the FCC under form 8-K.
Both todays earnings release supplemental information in July uptick duck are available on the Investor Relations page of the company's website.
Well prepared remarks, I'm now pleased to introduce Mr. Jackson Shack chapter.
Thanks, Peter and welcome everyone to our second quarter call.
As most of you know we decided to move up this call permits originally scheduled date.
Since called did not change at.
Spirit has made a concerted effort to provide our stakeholders with more robust and granular information more often.
Our portfolio health recollection.
The tenants.
We believe this approach has not only warranted given the circumstances.
But also aligns with our culture and the way we approach or business every day.
One of the models all of US work by is that there isn't good news there isn't bad news, there's just Ms.
We believe moving up our call to provide more timely information is just the right thing to do it in the spirit of that model.
Our people prophecies.
Technology.
I really made it possible to provide enhanced timely disclosures, oh, well running the day to day operations remotely.
Today, My update well focus on number one cash collections deferrals.
True kinda performance.
Three active portfolio management, and four or external growth pipeline.
Mike will then discuss our financials the revenue recognition treatment somewhere deferrals and provide you with an update on our capital markets activities.
First cash collections and deferrals.
Monthly cash wed collections have continued to improve.
Reaching approximately 78% in April 71% in May and 77% in June.
An increase of 18%, 6% and 1% respectively. Since each month was initially reported.
Aggregating to 75% for the second quarter.
For July when collections were 85%.
And all of our top 10 tenets paid with.
The improvement of Red collection has been primarily driven by more tenants reopening.
Returning to business.
And completing the term of rent deferral contractual arrangements.
That's at the end of July 92.4% of our real estate assets are fully or partially open.
<unk>, 85.8%, that's about maybe meetings at the beginning of June.
Going forward, we expect already collections to improve throughout the remainder of the year.
Generally following the path laid out by our default agreements.
With made being the trough <unk> deferrals, where most heavily concentrated.
Furthermore, the initial contracts, we negotiated have changed very little.
Thus far we have only executed one short term extension.
Deferral agreement for a movie theater today.
As of June Thirtyth 1.4 billion of contractual with remains abated, a 9.7 million of contractual work remains deferred.
Of which 4.6 million is subject to percentage was based upon itself.
Giving us an opportunity to capture some or all of the coupled with this year, depending on what kind of performance.
Second kinda performance.
Cobot has certainly changed the way we live at least for now.
There have been several clear winters within our portfolio and some more challenged industries.
It's probably not surprising that our tenants who provide essential staples supplies and services are doing extremely well.
Such as supermarkets dollar stores drugstores and home improvement.
In many cases these tenants have seen their sales increase since covert head.
As traffic patterns recovered in May and June our auto related tenants saw their businesses begin to thrive again.
Such a C stores auto service auto parts in car washes.
Sporting goods has become another bright spot as leisure recreation shifted.
Predominantly the outdoor activities.
Like biking, camping and alike.
Not surprisingly quick serve restaurants have proved a mainstay post cobot world.
And despite a few early hiccups that's operators figured out how to adjust their labor model for drive through a pick up only.
I believe this segment will emerge as a real what are they more profitable business model.
The real dark horse winters have been home decor at home furnishings.
At home.
One of our top tenants with a perfect example.
We gave a business update earlier this week on their fiscal second quarter results and crushed it.
Despite being shut down a bit of states for some period at home has performed remarkably well.
Hardly fuel by pent up consumer demand and investment in their omni channel initiatives.
But they have seen continued growth and captured new customers on a steady pace since reopening.
Indicating that consumers are willing to return to bricks and mortar retailers, who provide selection and value as well as large square footage conducive to social different thing.
Article that well get conviction around the home decor and furnishings industry.
And we are even more confident about their prospects going forward.
Youre still some industries that remain challenged.
A casual dining tenants are still operating under limited capacity guidelines in many states and municipalities.
As our health and fitness tenants.
In addition entertainment is still struggling to find its footing, which state the regional regulations.
That's why movie theaters, which are being impacted from creeping delays the new studio concept release dates.
Maybe with these challenges we are seeing some green shoots.
For casual dining health and fitness and then entertainment tenants that have been able to reopen and operate with limited capacity.
We have seen strong demand for their business and profitability at lower levels of occupancy.
The consumer demand, we assumed for entertainment assets bodes well for movie theaters, when they're finally able to reopen and gain access to major film releases.
In addition.
Some studios have not released any blockbuster films this year.
There should be a prodigious amount of content that will drive movie goer demand once reopenings occur.
Well I can't predict the Lincoln breath of cold in my team.
Every state regional governmental response.
I am confident that or tenants businesses are relevant and in demand.
The vast majority of our operators are meeting the challenges put upon them.
And that when consumers can go to them they will.
I also take comfort in the fact that within each of our more challenge segments.
We are diversified regionally and amongst operators.
At our tenants tend to be large operators or public companies that are sophisticated.
Have access to capital and most importantly.
The staying power either right out cobot for adapt to it.
Additionally, our four goodrich quality theaters purchase because part of the SPC transaction late last year received multiple offers during their bankruptcy proceedings.
We're in the final negotiations with a strong credit worthy regional operator quick 20, your absolute net master lease on all four theaters.
Terms discussed include a position funding tenant improvements with the return in the low 80% range.
And percentage rent commencement to occur in the fourth quarter.
Third active portfolio management.
I don't Investor Day last year, we talked about the importance of portfolio shaping and building a fortress portfolio and one of the key tools in that process is targeted dispositions.
Given my previous remarks about the industries that are winning right now we have seen pricing for certain assets compressed considerably.
Thank you know an opportune time to exit targeted exposures in grocery and drug stores.
As of today or under contract for El Allied to sell for grocery stores.
For drugstores amounting to $90 million, 85.75%.
Weighted average cash yield.
[laughter] dispositions further evidence to liquidity within our portfolio and the robust demand for high quality freestanding retail properties.
Finally external growth and pipeline.
As you may recall in our last quarterly remarks, I stated, we shifted many of our acquisition team members to their prior roles as asset managers.
Having completed the majority of went to fold agreements with better visibility for wet collections. We began moving team members back to transactions that we put on hold and sourcing new opportunities.
During the second quarter, we closed on only one transaction.
Texas based sausage processing packaging distribution company, whose products can be found at AHGP.
Costco and Walmart to name a feel.
As Mike will discuss more in his remarks.
We have total available liquidity of $1.2 billion.
Allowing us to be offensive and we are seeing attractive opportunities that meet our investment criteria.
With less competition as compared to pre covered.
We do you expect to see more normalized acquisition one rate levels in the third and fourth quarter.
Pricing for the same assets that we pursued in Q1 2020.
It's become more attractive in many cases.
And with the experience of covered my team, we have seen our strategy of investing in public non investment grade companies validated.
Before I hand, it over to Mike I wanted to remind you of a point I made at our Investor day.
There are several misconceived notions around a triple net rate.
It takes a great deal of active management.
Fortress balance sheet.
Operating system outstanding people.
At the fine and disciplined investment strategy and a high quality portfolio.
We have these it's good I believe they will drive our success for years to come.
Mike.
Thanks, Jack and good morning.
And finally report on second quarter after months of incremental updates.
As you've probably seen this morning, we have given you a lot of information as we did last quarter. In addition to the earnings release earnings supplemental and 10-Q repos your investor deck.
Detail.
Koby night is impacting our tenants industries or rent collections in our property costs.
If you find information helpful.
Given the rural or questions around the revenue recognition accounting for deferred and a bid rant I'll just start there.
Heartcode 19 subsequent changes the lease payments that were not provided for in the original lease were generally accounted for as a lease modification or S. C topical 42.
As part of the current circumstances, unless the lease contract already contained explicit plus enforceable rights and obligations the required the western world to defer rent for the last C and D event of a pandemic or somewhere hardship.
The deferral provided by the lesser would be considered a lease modification.
Not a bad the deferred rent would not be recognized during the deferral period, [noise], but instead woman actually paid for the rent schedule under modified lease.
In response to the large volume rent deferrals caused by cover 19 Indian Practicability analyzing every impact at least perea C topical 42.
The fast be provided some relief through new accounting guidance for less worse than last season.
In short the guidance provides that.
If the least concession related effects of the Koby 19 pandemic does not result in a substantial increase in the rights of the less or or the obligations of the let's see.
The lesser unless you can treat the modification as though we were already enforceable.
Said another way the lease modification accounting would not apply.
We apply the guidance to our deferrals recognizing revenues for the second quarter and falling manner.
First the deferred written must be repaid within the original lease truck.
Second the original lease term rather significant lease terms cannot be materially modified.
And finally, there's a minimum 75% probability.
The tenant will repay the deferred rent as agreed take into consideration tenants credit worthiness liquidity and the impact of Koby 19 Arts business.
The probability of collection for deferred rent amounts will be re evaluate each quarter and the revenue treatment for each tenant is subject to change based on the facts and circumstances at the time devaluation.
We recorded 110.2 million of based cash rent during the second quarter.
Which 22.3 million was deferred.
We deferred approximately 300000 rents that did not meet revenue recognition criteria, specifically the probability of collection hurdle.
The deferred rent there was recognized in our revenue is awesome included in our non-GAAP metrics.
As that deferred rent is repaid.
The cash will be booked you can see rent receivable on our balance sheet.
Therefore, there was repayments will not flow through our GAAP income or non-GAAP metrics in the future.
Deferrals not recognized are booked on a cash basis and will only be recognized in our income statement and our non-GAAP metrics once that rent is pay.
'cause abated rent is generally forgiven and never repaid there's no revenue recognition for abatements.
They did 2.4 go interbrand during the second quarter.
Finally, we evaluate a rental income for collectability by assessing our cancer risk of payment based upon their industry historical experience payment history and financial condition.
According to GAAP recorded provision for losses against rent to income for those amounts that are not probable of question [noise].
We commonly referred as provision as lost Rep.
Our lost rent for the second quarter was 4.2 billion EUR, 3.6% of second quarter base rent.
Approximately 500000 resulted from bankruptcies 1 billion from lease restructures, the rent was permanently reduced.
And 2.7 million from 10 to remain default at quarter end.
The break down these numbers for Q2 as well as July can be found on page four in our investor presentation, which we posted on our website. This morning.
Just to be clear the son of lost rent deferrals unrecognized and abatements is the total amount of base rent not recognized in revenue or non-GAAP metrics.
Now turning to our piano.
As you know, we're no longer providing earnings guidance for the year, but reported second quarter asked FFO per share of 71 cents.
Annualized base rent, which annualizes the written place at quarter end was 469.6 million.
Down 6.8 million compared to last quarter.
The bulk of the reduction was due the restructuring of the four goodrich theaters with dip lender filing bankruptcy temporarily reducing the rent on those theaters by 90% during the quarter offset by only limited Q2 acquisitions.
Jackson mentioned, we are working on finalizing a lease within U.S.C. for Goodrich theaters and hope that they will return to more normalized rent levels later this year.
Property costs leakage or unreimbursed property costs high for us this quarter.
4.1%, primarily driven by the accrual property tax reserves for the current and prior periods.
For tenants that have either defaulted for which in our belief there is sufficient doubt regarding and its ability to meet their obligations.
Provide you with additional detail on or property cost leakage on page seven of our investor presentation.
A couple of follow things to note on our income statement Junaid was lower this quarter, primarily due to reduction in bonus accruals and travel expenses.
And you also knows a new line item add back the episode you, but are you called cost related to cover 19.
These charges are premier it to legal costs associated with negotiating executing to for own debate and agreements for tennis impacted by the pandemic.
Finally, I'll end with the balance sheet.
Encode 19 hit the U.S. moved quickly to enhance our liquidity by partnering with our relationship lenders to secure a new 400 million to your term loan with a borrowing rate of one month, LIBOR plus 150 basis points.
Following the written early June you raised 303 million equity proceeds, bringing our quarter in leverage down to 4.9 times inclusive of our unsold four contracts.
Keep in mind that we raised the 730 million of capital after Koby Nike hit.
Real to raise the debt and equity at a weighted average cost 4.4%.
I think the ability to raise well priced capital even in a ton of great uncertainty speaks to the strength of our company and the triple net lease sector.
We currently have approximately 1.2 billion of liquidity consisting of the Ford equity 29 million in cash.
800 million Undrawn revolver capacity.
The balance sheet is an exceptionally great shape.
Despite what can only be characterized as a challenging environment [noise].
We spirit is a well position company in a steady and durable industry with a replenished bouncy capacity I look forward to pivoting to offense building and accretive acquisition pipeline again.
With that I will open up the call for questions.
Thank you at this time will be conducting a question and answer session. If you'd like to ask your question. Please press star one on your telephone keypad <unk>.
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My first question comes from Shibani stood with Deutsche Bank. Please proceed with your question.
Hey, Good morning, you guys highlighted the good liquidity position at more attractive asset pricing I understand the market can you give us a sense of what you might be looking for in the pipeline and then just given the uncertainty about where thought I'd be curious to hear 15 is looking for additional credit enhancement or anything in terms of the underwriting.
Hi, good morning should on its Jackson I'll try to start with that.
Anecdotally give you Kinda example, I could cause actual we closed on the second quarter.
That deal got pushed one quarter and.
Yeah, the pricing what I've said it was about 45 ish basis points wider than we originally credits they during the first quarter when cobot first three kids upon us.
I'd say at that.
Assets under that so they would be either non investment grade public.
Or private industrial slashed manufacturing look into its good food manufacturing distribution that you're kind of true.
We're seeing those assets.
About 40 to 50 basis points wider and what we experienced the pre cobot environment.
So that's where we're putting a lot of our time and attention right now.
It's really an investment grade side, especially given the 10 31 markets still functioning.
We're pursuing pepperidge compression that area.
Yeah in terms of our growth posture, we obviously get a lot of work in the front end trying to get the balance sheet ready.
Two we start.
Acquisition pipeline.
So what that put in place and our ability to get more visibility on when collections.
Very helpful portfolio, which by the way has continued to increase since we started getting these updates and they Paul.
Current giving us the conviction that we were going to move forward and like I said I talked about this normalized.
Acquisition run rate, which in my mind, if you look at what we did last year.
And stripped out the SBC transaction that was about 800 million pretty here. So what's so we can think of that it's sort of the normal 200 million dollar per quarter as I've sort of normalized run rate for our company. So feel good about that for the balance of the year third and fourth quarter.
A big part of what we didn't talk about too much I just put it out there is.
Yeah was as Kobin sort of <unk> and golf. The organization you know, we moved a lot of or asset manager or acquisition team.
But there was obviously.
A lot of experiences that are in that group.
Well, we had also make commitments to bring on board to very experienced acquisition numbers in a one that has a very focused industrial orientation is resonating experience and the other years of experience of C stores.
Came on board as we were sort of going through this whole rent deferral process.
And obviously, we didn't move them into that into that deferral team, but they continue to advance the pipelines going so.
I feel really good about what we're seeing given the kind of liquidity that's out there for those types of businesses that fit in that category of small publics non investment grade.
Sure we like.
As it relates to sit to security deposits and things like that.
[noise] areas that have.
What I'd say.
Challenge performance, where they may have asked for a deferral.
I think you can expect that people are looking at acquisitions, but those types industries that there is gonna be some type of security deposit put in place like E. L. Three months six months, maybe even a year.
Oh rent that potentially held in escrow takes that.
Nothing close down again.
We're sort of sema anecdotally and we expect that.
Continue for certain types of industries in China, So spreads like entertainment area. If you were looking at a gym today. If you were looking at anything that was not essential that was close to encoded my guess is assets like that if they're going to.
If there would be transactions like that this year, we'll see them have some form with a security deposit for for rent takes that there's a closure.
Thanks for that excellent color and then just one clarifying lines for you mentioned you're opening remarks, I think is where that number is 9.7 million up right. I mean from four point <unk> Dot is Ah, but just the percentage right.
So can you clarify our those tenants only paying percentage rents that's how bad the part amounts are occur or are recovered or is the defer to Mount Rick Rubin payable to present different.
So it's a way to think about its.
Yeah, we we kind of what you're pretty methodically each deferral requests and important even notice.
Yeah, I think we have like 36 kind of asked for deferrals, but retracted I'm just because it's got better.
So that's important concept not play collection, but but as it relates to the way we entered into personally shred it sort of whats evolving discussion.
In April May when these rent collection wouldn't just let the thrill conversation starter strike up.
You know our go to idea was you know one to three months the breadth deferral, depending on the circumstances complex run the tenet and you've got a payback.
Within you know on a 12 month schedule starting either in October of this year or beginning of next year, depending on sort of liquidity, whether they were up or not it was kept the factors.
I'll give you a good example, like in the movie segment.
We had one tenet that.
Agreed to a deferral just like that.
And with you know to meet you know what the studios pushing these release dates out and states pushing reopening.
No. They came back if you look we think it like make make more sense to put us on some form of percentage of sales rep between now and say yearend and then we'll kick back to a more normalized rent.
So there there's not a there's not a one size fits all as it relates to a person this right but.
We we approached percentage rent is trying to sort of match up what the challenges were for that particular industry or turn that were business.
For instance, like shut in in our movie segment.
You know only about.
About half of our multi tenants on percentage right structures right now so.
Now that may continue to evolve and increase but as time goes on contributes a lot of its depending on sort of what rig state regulations municipalities, you're doing with theaters going studio release dates but.
I will give you some color as though what that how we enter there.
And so those sorry, just one last one in the right collection by industry that page six on the Investor presentation are those amounts the percentage rents included those collection amount I'm.
So.
Yeah. They did they are so like if you're looking at ally Yep.
And what kind of it kinda note, which I think it's more like one final point on that page.
Yeah, when we were at or near <unk> presentation. You know if you look in our retail industry category there were htwo.
[noise] sub industries within retail that had some form of deferral or whatever you want to call it sort of some deferral structure in place.
Well, that's now reduced <unk> eight and you know it's again, it's continued to drop down as we go forward every month.
So so it's not just the percentage, it's going down at the actual kind of industries that are.
That said within each of these buckets that 'cause, it's producing as well.
Okay, great. Thanks, a lot color.
Thanks.
Our next question comes some Ki bin Kim with Suntrust Suntrust. Please proceed with your question, Thanks, and sorry, if I missed this but.
You just talk about the rent write off activity I noticed there. Thank you you wrote off about 5.6 million of rent and tenant reimbursements.
Which accounts for about 4.6% up here.
<unk> rental income a run rate.
Hi, So I'm just curious how did you come up at that high point $6 million right off.
And.
When I compare that to.
Sure I'm, sorry July loss rank of 2.2% if I compare that to Twoq you saw sorento's grew by 6%.
Hi.
And if I deducted from that 4.6%, but you wrote off it doesn't leave you much of a reserve.
So I'm not sure if that matches perfectly correct, but can you just talk a little more about that.
Like your other try to some of his comments.
Some of this but maybe you could do it again.
Yeah, I mean, yeah, keeping the way that we.
We approach our reserves.
So with my prepared remarks, and we evaluate tenets every quarter and they're based on.
The situation summer test, whether they're somewhat bankrupt or some of it were behind a rat.
Or you know we had gone say three months and it really haven't struck an agreement.
We started reserving right so.
We we spell out.
I pretty clear a page page four exactly that's what really [noise].
Joe the large increase in our rent reserves this quarter.
I'm not sure if that answers. Your question that there are new tests. This quarter that are driving that should the detail on page four down below the kind of breakout that's sort of got lost Fred we break out in that bucket.
What makes set up with its restructure driven but bankruptcy or the other bucket, which the other buckets the biggest bucket and that includes tenets that.
You know either week, we're reserving because we don't think they're going to be able to continue paying rent or really haven't paid rent you said not struck an agreement yet.
Okay, and 85% ranked second in July is there any change from the denominator or is the denominator any smaller due to the second heard.
Ah rent that was lost do bankruptcies or restructuring.
Yes, if you actually look and the footnotes we give the you gave your daughter actually if you look at from Q2 two July.
Have you are actually went up due to some red bobs.
We have 117 million Q2, and that went up to 39.3 in July which the annualize that it's a fairly large increase but not really.
The denominator, we're including me sure lost rent, we show abatement and all that were actually including all of that denominator. So we're not you know manipulating the dominated by taking out a bit mr. kick out a lot stronger trying to give you a clearer picture of look if you start with what everything we should have gotten contractually before we started to say reserve or are they.
And whatnot.
This is the clearest picture that we can give you based on where we where the starting point should about.
Okay. Thank you.
Well.
Our next question comes from Handhelds Centrus with Mizuho. Please proceed with your question.
<unk>. Thank you good morning, everyone.
[laughter], So Jackson Ah things have changed a bit since we last thought that they read your tone seems a bit more measured or maybe it's just earlier in the day.
But in all seriousness your your stock your peers stock prices are down since then koby cases are up and you have about 30% of your revenue from the Cobot Hotspot States, Florida, California, Arizona, Texas I'm curious.
How that impacts your near term view.
Oh, I guess, how your near term you all the different have evolved.
Since then I think last month or you guys optimistic.
And then how does all of its play into your your piece of capital deployment person preserving balance sheet liquidity you talked about the play I think 200 million.
Per quarter here with a couple of quarters I look at the Ford 350 million or so I thought that would have been deployed a bit more sooner. So I'm just curious on sort of the views you your views at the evolution.
We didn't near term capital deployment.
Yeah, I mean, I would say overall very I'm still very positive, we there's really no but given the conversations we're having to fill in the portfolio with the operators. It shifts will work very positive.
Yeah, I would say that you think about just the temperature of what we see I mean April was kind of a disaster right just not really clue.
Co there, but the government was gonna do.
Closures.
In general the sort of the opposite in some ways you know stay true aggressively reopening there's real pent up demand people open people are showing up and then sort of the got tempered in late June.
I caught early July with this case numbers going up.
What I feel good about today is that the operators that we have sort of real estate that we own a police structures that we have the nature of the liquidity of or <unk>. The large majority of our tenant base.
I figured out how to perform encoded they figured out how to protect their employees they figured out how to do their purchasing.
Figured out how to up if they have to we manage their balance sheet, not just rent deferrals, but if it related to debt exchanges, where we don't term loans or sale leasebacks Trump works you elaborate.
So it gives us.
A lot of comfort that.
We've got a pretty sophisticated kinda basin diversified industry base.
And we've got.
We'll pick but people real demand from consumers. So I would say overall when I look at sort of the totality of Oh, we sold since may rate every month Cookie cutter, given an update since April it's gotten better just notionally. The top 10 top 20 percentage of right click the by public.
Industry deferrals for going down.
And yet case numbers are going up but.
Sort of not fundamentally stopping people generally that we're participating in a lot of the up the businesses for our tenants.
And so yes of course, we're not gonna.
So yeah, we're going to be very.
Prudent about deploying capital, but we also she had a great opportunity to get well called very very attractive risk adjusted returns for things that we liked before covered and.
I like what we did what we did in the first quarter loved industrial, especially in the food area and we see opportunities to continue to deploy which we want to jail and.
The pace of our acquisitions really are gonna be dependent on making sure we get the right assets that we want to put the right operators restructures at the white price.
So the nice thing about not having guidance out there. It's we think this is what it is gonna be but at the mortgage is not there, though we won't chasing right. So that there's more we'll do more but.
I think we feel.
They comped at this point about.
You know he.
Systems and though.
Strategies that we put in place for the upside has really protect 'cause it's on the downside with Covance, that's what really believed.
You know where we are today.
Organizationally, we're sort of everything back into the growth mode.
Got it thank you for that and maybe just some color on the near term outlook for disposition I'm, assuming you close on I think the 90 million mentioned before assets are you done for the year and just curious on the the demand for those assets overall in the marketplace or did you see more demand than you thought and then where those.
Flat leases I think you mentioned ever drugstores and grocery just curious on these are the core growth profile this assets.
Yeah, let me take care of quality of it but it was very robust demand, but also there do you like you ever comment on how we <unk>. The blend extends the most drugstores and the nature of a super yes.
A couple of the short answer is yes see what we've seen so far has exceeded our expectations in both pricing and trimming of how quick the interest was in the depth of the interest even on the drug store job. They are a flat lease they some of them are actually in I think.
The call for maybe double that so these are again asset types in lease structures that weve previously identified that we're we're okay letting go of them, especially with.
We kind of cap rates, you're seeing for those types of industries today.
Okay and would that be it for the year. Then are you planning, perhaps to maybe be opportunistic if the demand or pricing comes in a bit more just curious on deal at the level of dispositions, we should expect near term.
I would suggest that that's the bulk of it.
So we wouldn't if somebody makes you a an offer that is compelling.
Obviously in the assets that we have targeted you know, we're going to respond to that but I'd suggest that the bulk of the disposition.
Got it thank you and then and the one thing once yep.
Handle it was going to say like in terms of.
Our total no its interest so like.
Yeah. The teams just phenomenal job can then the credit team legal team just working through the that but very very judiciously.
A number of were well above the pro request.
And next take anecdotally when you see a large number like 36 retract deferrals or we also say no you're not getting a deferral and then they pay rent, but that's sort of a good factor.
And then you see things like tenants I won't name names, but.
You agree on a deferral.
We're ready to go papered up and then they come back and they kept for like no one businesses exceeding our expectations, which is going to settle up all the right right now.
And you know larger tenants I would say fit that category.
Yeah, I think just sort of gives us a lot of comfort that you know country is dealing with the co. The challenge as best they can people people in this country sure they're locked down, but I think that kind of figured out but the mascot careful wash your hands, whatever but there, but they're not going to stay home and like they're going to go out the supermarket, they're going to.
Go to the home decor store and we fit out that real big going to that's come up we're going to go those entertainment assets.
Some of the some of them are definitely going to movie Theater say, we have movie theaters that are open right now so.
In states that they're allowed to so I think that yeah, we're all ever want to sort of moving forward and disaster. There's there's no hopefully we'll have a new fiscal stimulus package at some point.
Comes down to.
How people that are on the economic slump.
We try to try and buy there.
Well well for our tenants.
Since you mentioned movies again I was curious any thoughts you wanted to share on perhaps the AMC universal yeah.
I mean, I don't know it's.
From what I can see from afar, just understand a little bit about it.
I mean, I don't know if I would read a wholesale change and so the way movie theaters or or or there's I don't think there's quite a quick game changers little said.
I mean, this universal agreement with AMC is a very isolated agreement with them now.
Obviously universal is going to try to go to other operators big ones and small ones to try to do a summer. Thanks.
Well, what they affectively Dot did was just opened up a bear a new window.
You know score.
On a film by film basis that they they to choose that premium 20 dollar service you know directly to the consumer.
Well the DVD hard drive copy you know theatrical structure hasn't been changed.
I'm not sure if universal is going to get full adoption by all of the movie operators do not just the one and done thing.
I'm not sure how.
Significant it's going to be anyway, but how do you think about 20 Bucks I mean, if a person can go to a movie theater by two tickets.
You know they might want to just go and do that versus just stay home and everybody ticket staying home anyway, just watched the movie so.
My personal belief is I do believe that movie theaters are still relevant I think they want to content comes up people will go.
I actually think that.
The the movie theaters, you're going to be smart, how they bring people I know people were masks that they'll they'll they'll see certain away or do you think about movie theater everybody's facing forward, they're not yelling at screening, they're not drinking and trying to talk over people. There's good ventilation. So I think that when people actually finally get into a movie theater and they.
Do it in a safe way, you'll see this go back.
Some form of a little bit normality, that's that's what I believe.
I appreciate the thoughts thanks exit.
As a reminder, we ask that you keep it to one question and one follow up. Please. Our next question comes from Nate Cross It with Baron Burke. Please proceed with your question.
Hey, good morning, guys dishonest <unk>, what's the percentage of your yet or is that are open right now.
And we've seen some of these guys get funding from P.E.. So I'm just wondering have you noticed the change in the conversation after that funding has occurred.
We can't do I have one I mean, we have.
And you can see what see it actually says 100% looking at the charter, but I know we have one in Georgia that that's open.
Yes the.
Good.
The majority of the conversations we're having with the theaters as how they're playing for the reopen obviously, they you're having to be head on the swivel and adapt that they are continued push in the release date.
But a onetime a couple of things that we we do like is it's allowed them to put plans in place whether that be how they're going to clean the theaters and whatnot and how they're going to staff.
It's built up a.
Very large backlog of tent pole films that will now get released later in the year 2021 and into 2022.
So what you know were when we talked our tenants there really focused on the next 18 months, but but here's what I would suggest to is the you look at the Goodrich that was went into bankruptcy before coven.
Midwest or regional operator.
We have a four year master lease we had at least four five different regional operators make offers for our fourth theaters.
We were very very pleasantly surprised that the interest.
We have operators that we are talking to that are willing to put millions of dollars into these buildings and this is that you know what do you would think is you know the lowest point in the theater industry. So.
It kind of reinforces our belief that the theater industry is going to be there you know it's going to go through you know some changes and whatnot, but fundamentally it's still there.
Okay. That's helpful. And then just one on the acquisition deal that you said that pricing was I think about 50 basis points wider post call that was that just because of less competition and do you think you use. It then that the increase in pricing is going to be a temporary phenomenon.
Or I'm, just wondering because the 10 year keep going lower [noise].
Yeah, I mean, I think you know to me at the the pricing phenomenon.
Yeah for tenants that are like I'd call. It like manufacturing tenant that smaller like middle market small tenants or even a public tenet.
Anything about coated right probably comes in April may things start to reopen again.
Yes, which companies got the liquidity most liquid the most investment grade and then have moved to non investment grade, but liquidate companies sort of see spreads come in capital, we could see their cost of funding normalized.
Oh use even anecdotally our spreads were triple B rated company our spreads were kind of honestly like a joke in April may and continue to compress today, so the more normalized level.
Right now I would say that for smaller companies smaller revenue based companies.
I've been liquidity is still challenging for them.
So that makes like a sale leaseback opportunities they pretty attractive.
You remember work, we're not doing three year.
Financing. Some of these are 15 20 year long term financing on what we'll go to hopefully mission critical assets. So so we can't we adjust our pricing just like you know I've got a short term lender can.
But I do think that we offer a very compelling.
Of long term capital, that's really not there right now personally for for a lot of companies that's fit in what I. Just described like book Like example, we talk about.
Based company.
My guess is as lenders get back to business that that that liquidity is going to continue to fall down into non investment grade smaller revenue kind of company spread just started at Titan and then also said it'll get more competitive but for right now I think it.
We were not the only one competing but it's a lot less than what it was earlier today that.
Yes. It did 10 31 exchange program goes away that you guys due to less competition or.
Oh, you know that the took 31 market like yeah, I would say 10, most of the buyers of our supermarkets and truck surgery cylinder recovery or exchange buyers.
For me like.
What that would sort of imply is maybe pricing starts to look a little bit more attractive where we can become more competitive there potentially if 10 31 where to go away.
Okay. Thanks, guys.
Sure.
Our next question comes someone to say with Jefferies. Please proceed with your question.
Oh, Yes, hi, with P.S. security deposits, where any of those applied for QQ or July payments.
None none no no.
Hi, I can tell you that did when we talk about the security deposits you know some of the things that we're looking at third quarter that workloads that we expect to close will have.
Somebody structures like that in place, whether let's take a deposit that.
Covers for certain period of time.
To the extent, there's some form of nonperformance and then after a certain period current that security deposits were released about to the operator.
So just to go and give us a bridge between now and suits or melody.
Thanks, and then on page five the Investor presentation. It looks like there was higher variation in the monthly collection from private equity versus public tenants in the retail category well I have the P.E. collections like that of the price of the public tenants.
Uh huh.
No. It's it's interesting like if you look not all PE firms are the same.
If you go so generalities.
Now lets me about public companies is there.
They're generally in the and the Campo I want to lower Mike My permanent cost capital.
And they're basically for many companies right. So high leverage is not necessarily good. So we generally systematic they're trying to reduce leverage and improve profitability.
He is different because you know right. So there are more transitory either they're going to hold that sell it.
Merger recap, but no something's going to happen there would be I've been traveling [noise].
Issue.
No, we probably have more challenge in the private equity negotiations in the beginning.
As it related to collections so.
But but generally.
It's one of the case by case basis on the sponsor situation versus an overall trend but.
But what I will tell you it's like public strategy of investing in public tenants Kinda Republic or investment grade has has helped us quite a bit <unk> performance standpoint.
The rent deferral degree agreements with the PE firms are there any different from the public ones.
Let us yeah, I would say that.
Probably yeah, let me caterpillar describing them in some more it really depends on the industry and the end the leverage situation that that's at the peak.
Portfolio company, it is sort of sitting.
Yeah, I mean I'll go back to my Old example, like using all time.
When I came on board here in 2016, Shopko been an asset that had been owned by this company for a long time.
This piece sponsor head.
Dividend recap the company's several times over pick all its capital out and then some.
So when they can can kind of pick that there were like Wow, you know that do whatever you want to do you know were if there's something that didn't have that's interesting first of all well do something.
So so a lot of the private equity.
The things that we look at what we're doing a private equity deals what's the nature of the sponsor how long they've been investment they still have capital do they still have skin in the game.
Because at some point when they start to not have that.
I think it tends to be more challenging.
When you're talking about a rent deferral like you know if you don't do does feel better kinda conversation.
Thanks, just one last one I'm proud of topic targets for industrial and C stores, we heard about cap rate compression and industrial I'm. You know what are you seeing how do you source these assets.
L C stores for really highly sought after C stores I mean, there were no real socially competitor.
Really low five cap hi, four cap for prime Prime can store assets no in the white marketplace with the right when sales.
And just show for Us we.
The industrial we're focused on is not multi tenant industrial and multi tenant industrial with shorter term leases from these major.
Industrial nodes. Those are those are not that things were buying obviously, a those are fairly competitive.
Are driving to be regional jets and things like that.
The did the industrial that we categorize our mission critical assets, but those particular tenants.
They may be I know you know in a major node or major market generally, but it's been something unique to that business and so it's a combination of a real estate as well as credit underwriting.
We're looking at buildings.
For industry that or is really way out location, but that's a totally different kind of risk profile will be evaluated so.
I would say just generally the industrial but looking at.
Demanding a higher cap rate because.
It's not designed to be Youre kind of main and main class a core industrial asset but.
Starting set up for returning to maybe it's an a minus could be a b plus.
It could be a b plus building really a location, but overriding there's a great tenant great industry.
And then I'll go back like you know our deal we give a party city its major distribution center. It's like if there are other distribution centers in Chester, which have been west show up in Westchester County.
But.
These critical facility for that company you know even during Kobe, but stayed open as they were distributing their goods out. So when we look at this industrial sector, we look at it.
Food couple of different lenses versus say what.
Your bread and butter industrial would focus on.
Our next question comes from Joshua Dennerlein with Bank of America. Please proceed with your question.
Yeah, Hey, Hey, guys I guess, you mentioned you hired.
You folks on the acquisition team one is going to focus on C stores, one on industrial I'm curious to learn more about their backgrounds and then are there any other areas Oh focus that you're going to hire and for the acquisition team.
Oh, Yeah, when we talk about Johnson and industry. I think we you had highlighted we were we were looking at adding on more yep into that pool and so we we have we're obviously when we made that statement we had been.
Yeah, that's involved in that process.
Yeah. These are beazer individuals, which you know it later in the year will get chips for <unk> get more back on that but you know, they're very experienced very tenured in their respective industry.
Expertise to consider.
And we obviously in industrial that's a major area of focus for us.
So that that was obviously very logical and that person has done a great job and there's.
Very well.
Well.
Well see a lot of opportunity to survive a bunch was effort.
And the individual that had seashore experience someone else worked for operators on development and as you know C stores is a big portion of our portfolio and we felt that there are a lot of ability to actually improved the quality and direction of all of our existing C store portfolio. So.
Well that individuals working on that right now so you might see some distribution some.
Some more condition in that segment overtime, as well and more acquisition as well so once again overall improvement in the quality of it so.
And I think in terms of new people after that I think for now team as we read balance the team.
There.
Think work in pretty good shape right now in terms of numbers of people when that effort right now what we're trying to do.
Got it thanks, Jack and that's it for me quite of of course there.
Our next question comes from Vikram Malhotra with Morgan Stanley. Please proceed with your question.
Hi, guys. Thanks for taking the questions I'm, just maybe first I wanted to clarify I heard a comment earlier about.
Percentage rent sort of being included in the 85%.
Metric, a it's probably a very small amount, but if you were to just include rental income what would that percentage beat.
[noise] because you Mike.
You asked a question finally get I, just didn't catch half of that somebody like.
You said the 85% included 10 instead also were just on a percentage rent bases and.
I know, it's a small amount, but just what's the well because percentage rent if something is a new thing you've now entered into versus what you had seen me or a in June I guess, what is the percentage of just pure rent connection.
So that's sort of 85% lets just contractual or Mike so not much like just fixed wet came in so that the percentage right we're talking about.
He is sitting in that no. If you look on that page four become you know the a this base rent uncollected.
I mean basically sitting in there so God I made this made this reference to Tony of 9.7 million of deferred rent.
Or 4.6 million [laughter] less than nine southern that's the those or restructured those are structured deferrals that have this percentage rent component.
For a period of time, they're limited, they're not present drift forever the kind of.
And so think about why we did percentage, but generally it's probably because the test shutdown close and so when they reopen.
They they think there's a lot of ramp time or like a movie theater that might be challenges with distribution of movies. So so we're trying to find out a bridge to get them to.
To get them from.
Yeah, Thanks, a payment and by the way you know things could do better and.
Let me comment about does feel we can get paid back hopefully sooner.
Got it you know I guess I was confused because I think you had mentioned on the page where do you get the industry. Chris collection I think in that page you have the percentage of include those tenants that aren't percentage rent if I'm if I'm not call you know where you might want to station six.
Okay Index a deck the July recollection that you're talking about 85% that does not have any sort of collection that we didnt <unk> percentage rent in July.
Okay fine.
So just on the collection I guess I you know obviously, a bull case would be you know in in the code caught off what your end you go back to kind of normal has you know regular collections prequaled bad, but given sort of now you know you've seen a pickup in cases in some of the key states, Florida exit.
No we're not even out 85, I'm, assuming kind of your base case.
For the next few months. So next two quarters would be some percent lower is that the case are you planning for.
A certain amount of you know deferrals to just continue into year end.
Yeah look we don't want to get predictions as to what it's going to happen but.
I would tell you there like I made a comment earlier since we started these little interim updates and.
These quarterly reports since April this year, we've seen our collections increase.
I expect August could be higher than July and looks like September to be harder than August.
And that's partly because of just contractual deferrals of operating.
But also.
Yeah.
A lot of or tenets of sort of figured out.
So how to deal with some of the challenges are put on them.
No. It's not perfect like you have to think about Jim's today.
You know it 10% of our gyms are in California guess, what they should the jumped out again I'm not sure when they're going to reopen but.
Yeah. So so those particular Jim's that are set in California are experiencing contain but but the other jobs that have reopened or actually performing well so.
We're not we're internally as a team we're not expecting to go down from this point in July retching.
We expect collection to continue to increase.
Albeit we're not going to be up until we get a 100% I've already collected yesterday so.
Okay Fair enough and then maybe just last one.
You know in it just cyclical impacts of the recession you see obviously you you started to see some bankruptcies just some lost rent et cetera.
What are you can you give us a rough sense sort of being sort of what are you baking in for occupancy at year end.
Well just talk just coming on the recession really no great. Examples like you know look at companies like had all among they are the what's cobot in some ways has really accelerated what we thought.
They would be doing maybe a couple of your show, but in terms of their rollouts and omni channel, but a lot of our tenant actually or going to perform well if the economy turnstile people going to travel less they got to fly loves they're going to meet some form of better caleb or staple goods or services.
So we go no we don't have a lot of luxury thing in our in our real estate and we don't have a lot of urban exposure a lot of its suburban.
So if you think about that quote recession case.
You know, we think that the suburbs, we'll probably talk a little bit better we think that tenants that are providing essential services that experience for we'll do better.
You know urban maybe more challenged right. So so we think that.
Were position as well as you could be.
From an I'm just a portfolio standpoint, if there's a down like a further down like and then the things that we're buying.
In the third and fourth quarter, you should expect them to have some ability to withstand and economic downturn.
Right. So we're buying things that are essential food type businesses essential technology essential services type businesses right now those those are things that really focused on.
Our next question comes we're Gonna Stuka with Ladenburg Thalmann. Please proceed with like did you.
Like did you want to follow up with one rather come up yeah, I, just I want to call. Her what one thing I'll just lost right because recommissioning I think it it's worth clarifying.
Just your loss rate is high this quarter I think near pre Kobe at our last year. It was very very low sub 1% and typically we have lost Fred we don't expect it had to pay their typically on the way out we did provide additional each on our loss route based for this quarter because last right. It's just it's a little different and the covert world Yes.
So just to kind of come back the loss right.
3.6% for Eni per se, we're subject to restructuring. So good that is right that there has been restructured so that as topics.
We do have suggested bankruptcy that bankruptcy bucket, there will be tends to come out there with some kind of always restructure so even though we've reserved for that today. There are some some opportunity recapture some of that and the other bucket, which is kind of a new bucket, which is the largest driver lost rent this quarter.
Lot of that or tenants that haven't paid ramp through the quarter and we just haven't wish agreement with yet so there will be some sort recapture there as well. So when you think about the forecasting other future I know Schofield Mitch loss write off first of all different characteristic this time a different field because there is gonna be some recapture and I was trying to stop.
Just gone forever as it would be traditionally when Bob.
Just want a point that out.
Thanks.
Oh, Okay. Our next person in Q. Our next participant is John Massocca with Ladenburg Thalmann. Please proceed with your question.
Good morning, everyone.
John could you guys I can just thinking on the acquisition side of things there's lot much changed maybe what you're kind of return threshold is going forward and I guess to that same kind of I think kind of vein and are there opportunities maybe for kind of contrary investments out.
There and I don't think it's really constraint anymore, but you had mentioned how home decor had rebounded significantly and you are there other places that maybe habit rebounded yet, but maybe you see an opportunity to to get it kind of above market cap rates or or relatively higher cap rate did you hear good long term place.
[noise] I mean, I think just like what we're seeing today is it the stuff that we liked before covered that that's working allowing covered.
We're getting better returns to straight out so.
So we're we're diligently working through that kinda opportunity and that that to me is like.
The safest because it's sort of proven we understand what they do you know portfolio, it's more predictable and we're getting went better yield so that that to me like you want to do that.
We're always looking at different segments.
We have.
Research effort I spent a lot of time with with Dave and Travis or credit kind of credit.
I'm confident we sort of we were looking at what works what that's a work how how do things affect you know how we look at our heat map our rankings, how does a recession and pack. So yeah. We are looking at those.
Those lending to those lenses, but I would say do they were like we're not making kind of wholesale changes in what we do yeah. We think we said in the first quarter. We're just we're trying to add more industrial focused efforts.
Into our portfolio that hasn't changed yeah, we obviously, if we pursue things that have.
Central closure risk and we're comfortable with those industries and tenants, you'll likely see security deposits in place.
Joe So, but I don't I don't think it we're not wholesale changing if it were doing right now.
We will continue to evaluate your opportunities <unk> segment.
Understood and then maybe with kind of the in place portfolio and apologies if I missed this that has prepared remarks.
Do you provide some color on the makeup of of the tenants you received abatements and I guess me I think about kind of traditional abatement conversations going on where it's usually kind of term for forgiving rent I mean, what what gives you confidence that those tenants are going to kind of continue to operate the payout right through that additional term.
Oh can hit that because we have very few abatements and American like I said, if the case by case, though.
Yeah, Yeah. So there were some very what I would call tactical strategic turns we felt an abatement.
Made sense because.
The vast majority of the small abatements that we did do we got a much stronger lease structure, but that could be term it couldn't be master leased it could be a lot of different things, but we felt like hey, you know if you want to trade one month of abatement that is in the past and we come out of this with a better law.
Longer term lease.
Were there were times when we said, we're going to make that trade and we did and it just it just makes a lot of census is not about hey, how that's going to affect us. This quarter. This is about how do we improved the portfolio long term.
Were there any particular industries that are overweight doesn't payments that's my final.
And.
I'd suggest that it was not any particular industry, where it was weighted there was you know us several different industries. It was more not about the industry more about the tenets position in the long term outlook of the portfolio.
[laughter].
That's it for me thank you very much.
Our next question comes from Greg Mcginnis with Scotia Bank. Please proceed with your question.
Hey, Good morning, everyone. Jackson first on transaction you mentioned that you expect to see a more normalized acquisition levels. In Q3, Q4, I know you mentioned that you're happy to not be providing guidance, but does the 300 million quarterly average that we saw ahead of the pandemic seem reasonable based on what you seem to market today is.
Trying to get a sense for how deep the transaction environment as compared to last year.
Well that feel more comfortable like 200 per quarter.
From here on out I consider that more of a normalized because.
300, a quarter included that one large portfolio. We did late last year. So ill take that out that's kind of more like 800, so well 200 a quarter.
And obviously, it's a question say that that means we've been working on things well the tail.
So.
Okay. Thank you.
Yep.
Yeah, and then for a second it's my second question here. So based on the Sun deferrals based on the disclosures on page four regarding the expected second half the for animals is the right way to interpret the 4.6 million number versus the 39.3 million until I rent that basically there's no deferrals in place for August and such.
I remember.
No no I think the way I would think what I would look on page. Four is you know you've got 4.6 million in the second half at up average period of six months. So the next six months.
We're gonna have kind of variable.
Yeah, right collection on that 4.6 million to the second half.
Then I would look at that 5.1 million on that page, that's just a straight and they'll a you know X deferral that has a pretty short duration I know, it's less than two months. So if you think about July that's August September we have become but at 5.1 million.
And then it's going to be sort of TBD on the 4.6, then you've got the abated 1.3 million there. So in the second half. So that's that's kinda like that's how we get to 100%.
When you really think about this.
It's going to be the pace about 4.6 million.
We sort of highlighted there which is the percentage rent.
And that percentage right by the way.
Ken down there we are going to like I've done this but that actually reverts back to a fixed rent at some point.
Oh, no 100% not yet it's not I'd, probably thought a permanent none of long term percentage rent. It's it's a very short window that gives us an opportunity to win was telling the opportunity if it's not so good but but but those deferrals go back to a normalized.
Some of them will flip right back to what normalized yet start paying rent period at the date certain and then sort of catch up portal.
For the rent.
We're accruing Scott.
So I don't be fixed that'll be fixed cost additional deferral on top.
Well its percent rent payment.
I mean, the way I think about the the percentage threat is let's say.
Yeah, we could have structured a tenant say no.
Well the for the next three months wet.
Did that that's fixed right.
All the percentage what does in some cases is it just helps us get current let to except there is but we still got a meter going on the three months they gotta catch up.
And then there's others, where it's just straight percentage.
With that with up with a fixed.
Deferral of date, certain let kids are committed or simple way to describe it though I think I'll try to get to cool, but yeah, and then I'd just add I would say the highlights are all of these percent rent features our time limited the vast majority expire by the end of this year.
And any.
Whatever rent they pay based on that percent rent just to be clear.
Any shortfall between that and contractual rent is deferred.
So that you know that they that will come back.
At some point typically that's paybacks getting started in 2021.
[noise] Okay. Thank you appreciate the clarity there.
We have reached the end of the question and answer session. At this time I'd like to turn it back the Jackson shape for closing comments, Okay. Luckily, we all want to thank you for rearranging schedules to to participate in recall and.
The headline here if you take we'll use that we feel very good about the current status of our portfolio and obviously our balance sheet.
And the entire organization is it's very excited to be re pivoting back to what I'll call. It normalized acquisition.
Growth posture going forward so well. Thank you guys. Thank you also participate.
Take care.
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