Q3 2020 Spirit Realty Capital Inc Earnings Call
[music].
Greetings and welcome to <unk> third quarter, 2020 Spirit Realty capital earnings.
Earnings Conference call at this time, all participants are in a listen only mode a quick.
Right and then answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host yeah.
Yeah, Russell Vice President of strategic planning and Investor Relations. Thank you you may begin.
Operator.
Everyone for joining us this afternoon.
Presenting on todays call will be president and Chief Executive Officer, Mr., Jackson Chair, and Chief Financial Officer, Mr., Michael Scherer.
Hi, My head of asset management will be available for <unk>.
Before we get started I would like to remind everyone that this presentation contains forward looking statements.
The company believes these forward looking statements are based upon reasonable assumptions, they are subject to known and unknown risks and uncertainties.
<unk> actual results to differ materially from those currently anticipated due to a number of factors.
I'd refer you to the Safe Harbor statement in today's earnings release supplemental information Q3, investor presentation as well as our most recent filings with the EPS you see for a detailed discussion of the risk factors relating to these forward looking statements.
This presentation also contains certain non-GAAP measures.
Reconciliation of non-GAAP financial measures to most directly comparable GAAP measures are rooted in today's release and supplemental information furnish the FCC under form 8-K.
Today's earnings release supplemental information in Q3 Investor presentation are available on the Investor Relations page at the company's website.
For our prepared remarks, I'm now pleased to introduce Mr. Johnson <unk> Johnson.
Pierre and welcome everyone to our third quarter call.
Before we get into the details of the quarter I want to share an update I recently received from one of our tenants.
A couple of weeks ago, we hosted a casual dining operator.
Actual all town employee meeting.
We all 13 of their units representing a little over 20% of their operations.
At the initial onset of the pandemic they focused on addressing the immediate concerns.
Protecting their employees and guests.
Conserving capital strengthening their liquidity position.
But within a short time period.
No offense.
Yeah, we focused on developing their omni channel presence.
Increasing their online growth by 150% year over year.
Rationalizing their menu offerings and optimizing the use of their store footprint.
Because they make good tactical and strategic decisions over the past few months.
Not only will they survived the pandemic.
But likely thrive and gain market share.
And spirit will participate in the growth.
I shared the story with you because it is emblematic of how many of our operators are adapting their business model to the changing landscape and how their focus in most cases has shifted from survival back to success.
Like our tenet, we choose the opportunity and have shifted back to offense.
During the third quarter, we purchased $214.3 million of assets across 18 properties.
An initial cash yield of 7%.
And an economic yield of 7.7%.
The acquisitions this quarter included a mix of existing and new tenants.
The weighted average lease term of 14.8 years and annual escalators of 1.2%.
Based on <unk>.
Somebody 38.1% of the acquisitions are publicly list tenants.
And 19.8% a rated investment grade.
Yes, it takes away to 58.4% retail and 41.6% industrial.
Which we think is a healthy mix for our intermediate term growth.
New tenets acquired during the quarter include off lease only.
Florida used car dealership and Shutterfly.
Market leader in personalized products.
Office only it is the largest volume independent used car dealership in the U.S.
Selling thousands of cars and its for Florida locations.
And around the world to their website.
We bought these high performing locations under one master lease and they are in the top quartile for auto dealership portfolio across all our metrics.
Including our property rankings.
The Shutterfly property is a built to suit mission critical light manufacturing assets that serves as their only facility in the south central region of the United States.
This building is a brand is brand new and sits in a very healthy and growing submarket, but then the DFW metroplex.
We secure both of these opportunities after other institutional buyers pull back on their capital commitments during the second quarter.
Well, our liquidity and balance sheet position allowed us to step in and buy these great assets strong tenants.
At yields that are accretive to our shareholders.
The existing tenant acquisitions included at home that paper Fedex dollar general properties.
All performed exceptionally well during 2020 and this move Fedex into our top 20.
Overall, we're finding attractive opportunities that fit our underwriting and risk return framework.
And as a result, we are raising our 2020 capital deployment guidance by 100 million.
Shifting to the portfolio the health of our tenant base continues to improve our.
Our cash collections for the third quarter were 90%.
In October is that 93%.
If you exclude movie theaters, which I'll discuss in a few minutes.
Our cash collections were 94% for the third quarter and 98% in October.
It is worth noting our properties are primarily located in suburban and rural markets. None cbds.
Which had been more acutely impacted by COVID-19.
And our operators are predominantly large and sophisticated.
Approximately 85% of our tenants generate annual revenues in excess of 100 million and half for public companies.
In addition, we made significant progress on both 2020 and 2021 explorations.
Since the beginning of the year, we have renewed 17 leases expiring in 2020.
And excluding one movie theatre property.
What do we need the remaining 16 leases at a recapture of 101%.
Higher rents.
For our 2021 expirations, we renewed 25 leases with a 97% recapture of prior rents.
Reducing the rent expiring in 2021 from 27 million at the beginning of the year to 18.8 million.
We anticipate the remaining 2021 maturities well follow the same trend we have seen thus far and the percentage expiring, we'll continue to drop each quarter.
There are four industries that I am constantly asked about.
Casual dining Jim's entertainment and movie theaters, so I'd like to take a few moments to update you on how these tenants are performing within our portfolio.
Our casual dining concepts are fully opened with indoor dining.
Our 39 tenants are geographically spread across 32 states, but no tenants in California, or New York City.
Well there are many challenge casual dining operators out there and no doubt many will close.
Our tenants are doing very well.
In fact, we believe our tenants will ultimately be winners and pick up additional market share.
Our seventh or 17, Jim operators.
Recovering quickly and seeing a tenants and new memberships surpass their expectations.
And similar to casual dining.
Rent collections have improved from 21.8% in the second quarter to 95.1% in October.
The only major hurdle, we have seen for Jim operators has been local or state government regulations, preventing them from opening and limited cases.
When they are open people are choosing to go to the gym.
Our entertainment assets or a mix of outdoor and indoor venues.
The large majority are seeing healthy consumer demand.
And their financial performance is above target for the units that are fully opened an operating.
As you can see the materials, we released this afternoon we.
We experienced a 71.8% increase in cash rent collection in this segment for October.
And we remain bullish about the near term entertainment outlook.
Movie theaters is the only segment within our portfolio that is still being materially impacted by government closures.
The continued shutdown of theaters in key markets like New York City in L.A. Ashley.
Built in studios holding back content.
Most major releases now pushed back until the spring of 2021.
This of course has made it challenging for theaters that are open to attract moviegoers and generate sufficient revenue.
To be clear, we do not believe this is a demand issue.
We believe people will go back to the movies when content is available.
But the key markets need to open and the content needs to be released which is outside the control of theater operators.
As such we have structured most of our rent to fertile arrangements agreements with our movie theater tenants as a percentage of sales arrangements, giving them time to conserve capital until contempt against flowing.
I would note that our 5.4% rent exposure in theaters is comprised of 2.7% regional and 2.7% national operators.
And we have seen better financial performance from our regional operators this year.
Primarily driven by more nimble operations and better pre called their balance sheets.
On a positive note we entered into a new lease this quarter with a strong regional operator.
The four former Goodrich theaters.
The new long term master lease as a healthy stabilize yield after a period of percentage rent.
And the operator plans to invest significant capital to modernize these theaters.
Similar to our casual dining tenants the winners in this space will ultimately benefit from gaining market share and we believe we have winning operators and real estate.
I'll close by saying that I'm very optimistic about the future of spirit and our path back to earnings growth.
Over the last six months, we've gotten incredibly close to our tenants.
Further invested in our technology platform.
And we have developed a healthy pipeline of opportunities to pursue.
These actions.
Along with raising 1.2 billion of capital.
Have put us in a great position to execute our plan.
And set us up for success in 2021.
As we move forward.
We will continue to execute.
Our strategy of delivering operational excellence steady and high quality acquisitions.
With a focus on organic revenue growth.
While maintaining a conservative balance sheet.
We believe this approach will result in predictable and steady earnings and dividend growth for years to come.
With that I'll pass it off to Mike for his remarks.
Thanks Jack.
As we've done all year. In addition to our regular reporting materials, we provided investor presentation that contains incremental detail and disclosures about the health of our portfolio.
This presentation is available on the Investor Relations section of our website. We hope you will find the additional information helpful.
There are a lot of positive developments during the third quarter we.
We saw a 90% of our tenants reopen the.
They continue to ramp up their operations.
Our cash rent collections follow the same trend currently standing at 93.3% in October.
Sections of 100% from our top 20 tenants, 96.5% from public guidance.
In addition to improving recollections, we collected 3.2 million deferred rent payments, representing 100% what was oh during the quarter.
The combination of improving rent and deferral collections increased total cash collections by 21.4 million compared to the second quarter revenue.
<unk> operating cash after dividends of 9.1 million.
The repayment of deferred revenue with a weighted average payback period of 13.3 months.
Provide additional cash flow for the next several quarters, helping to support our cash flow available for acquisitions and dividends.
The third quarter also marked a return to growth with FBR, increasing 13.7 million to 483.3 million.
Primarily driven by 15.1 million from acquisitions slightly offset by a creed of dispositions.
Our unreimbursed property costs also improved to 2% a rental revenues inclusive of 840000 in prior quarter property tax recoveries.
Fair to 4.1% in the second quarter.
We also made strides in simplifying our income statement, our two remaining mortgage loan receivables totaling 29 million were repaid in full.
These loans were secured by casual dining QSR portfolios and the repayment for the original terms of the loans speak to the strength in the underlying operators and the recovery of their businesses.
We also completed the final separation of our management arrangement with essence, yet in September.
As a result of these two milestones or future earnings will be completely driven by rental revenues.
As Jackson discuss the one area of opportunity within our portfolio continues to be movie theaters.
Now last quarter I talked to you in length about yes, the topic, if we do and the relief provided by the Fas view through new accounting guidance and one of the key considerations to recognizing deferred rent and revenues is that there is a minimum 75% probability.
Tim would repay the deferred rent as agreed.
Given the elongated recovery, we forecast for theater operators were now recognizing approximately 70% of our theater revenues on a cash basis.
So the 3% of theater revenues, which are being recognized in earnings approximately 40% are being paid in cash.
Keep in mind that our analysis and decision to recognize theater rents on a cash basis only pertains to the probability of full deferred recollection not to the ultimate recovery of the tenants or the industry.
We still believe that once the irrs have content to provide they will begin their recovery in our theaters, which are well located high quality locations should ultimately participate in that recovery, providing a substantial rebound to earnings.
Please note that for all tenants third quarter rental income was reduced by 7.8 million of write offs related to prior periods of which 2.9 million refer cash rents and 4.9 million for straight line rents.
In the meantime, the rest of our portfolio is recovering rapidly.
Excluding theaters or October rent collections, which are provided for on page three of our Investor day.
98% and our reserves, excluding theaters or 1%, which is inline with our original 2020 guidance provided in December is.
This performance really speaks to the quality of our tenants credit underwriting and real estate.
We were also active in the capital markets again this quarter, we issued 450 million and senior unsecured notes due February 2031, the coupon of 3.2% and.
Repaid $222 million over 400 million term loan repurchase to 155 million of these 3.75% convertible notes due may 2021.
We settled 2.8 million shares of open forward equity contract during the quarter generating net proceeds of 100 million.
In October we settled 2.9 million shares of open forward equity contracts generating an additional 100 million net proceeds.
In addition, during the quarter we.
Entering into four contracts for 313000 shares through our ATM program at a weighted average price of $37.06 per share.
We currently have 1.1 billion of available liquidity, including cash undrawn revolver capacity on sell for equity.
I mentioned earlier, how we made additional strides and simplifying our income statement.
I'm also pleased with the simplification of our balance sheet.
We started the transformation of spirit, almost three years ago right Triple B minus rated issuer one series of senior unsecured notes outstanding and only 31.4% of unsecured debt.
Today, we are triple B rated 91% were debt is unsecured and 77% of our debt spread across cross five series unsecured bonds.
We believe the simplification, but the balance sheet in the income statement is a culmination of several years of work that's the spirit in a great position to focus on growth and opportunity.
The Jackson, Michigan, we are finding attractive acquisition opportunities.
As a result, we are increasing our acquisition guidance for the year from 600 to 650 million to 700 to 750 million and providing disposition guidance of 90 210 million.
As you look forward into the fourth quarter in 2021.
We believe our portfolio is in great shape with embedded growth opportunity in movie theaters recover.
Our acquisition pipeline is robust and compelling opportunities across various industries and asset types that meet our rigorous underwriting criteria and.
And our balance sheet and operating platform leave us well positioned to capitalize on those opportunities.
With that operator, let's open up the wind for questions.
Thank you.
I would like to ask a question. Please press star one on your telephone keypad. It's tough for me to tell indicate your line is in the question queue.
You May press star two if he would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Our first question is from Anthony Hello.
With JP Morgan. Please proceed.
Okay. Thank you.
I guess, maybe first question for Mike on on the accounting side in the quarter.
Oh for an AFFO purposes, or did that 4.9 million and straight line write offs that didn't impact I prefer to do that.
No. That's correct one of the 2.9 million of the cash rent that I've mentioned I could ask so.
Okay and that 2.9 that that takes the movie theaters I guess in other items that you mentioned.
Down to sort of that 70% for instance level or are you just trying to think about what the roll forward as or as a run rate.
Yeah, I mean movie theaters. So you know our Hbr 26.2 million recognized about 30%, it's about 2.19 a quarter.
Movie theaters of which 40% has been paid in cash for a run rate.
Going forward.
Okay. So the bulk of that 2.9 is that the movie theater piece of it that you're not recognizing.
That's.
Correct right I mean, there is there is a few other ins and outs in there.
You know in total.
Yeah. There is about 3.4 million of a rent that was reserved from the third quarter. There were some that we reversed went the other way that we reserved previously that we're we're an unreserved fuel.
Also keep in mind, you I mentioned the property tax you think about the impact if so there are 2.9 million of cash rents deficit others also 800.
Thousand dollar your tax recovery to that went the other way on EPS, so as well.
Okay got it and then just more broadly on on the deal for sorry, all right. It sounds like things are pretty strong can you talk about just how broad based or the activity levels are that you're seeing and whether this this pickup in transactions for you. All is some larger trades that seem to be hitting or.
As the market just really bad.
Back to being up we would.
Hey, Tony just Jackson I'm, not there's still more there's there's actually quite healthy deal flow out there right now and it's really come at a pretty high velocity bus last month and a half two months.
So you know in our.
Transaction bucket in the third quarter, you know we had a larger deal in there and you know what I want to talk about the great. Yeah. The shape of the fourth quarter, but obviously, we increased our guidance up were confident about.
You know the the transactions that we feel are under control at this point in the fourth quarter revenue.
No. It's it's quite it's quite robust activity.
And can you maybe break out a little bit of what you're seeing out there in terms of our cap rates among investment grade and non investment grade or some of the broader categories of tenants.
I would sort of say generally like if if you had an asset that was working during covet.
You're seeing really competitive entry.
Interest from buyers and seemed quite.
Significant cap rate compression.
If you've got assets that we're somehow impacted by colder than it maybe normalized right sized.
Today, you know theres, a widening there that that there's a big there's a divergence between those two general groups.
I'd also say that the industrial.
That's what we've been focused on and like manufacturer night light manufacturing.
That's been extremely competitive you know.
In the last couple of months.
We're done there that's really <unk> and it relates to so I'd say the range for non investment grade industrial you know, we're still finding high sixs low seven cap for the kinds of tenancy that we like but.
But the right real estate.
Yes.
And if they think it's a credits or even.
More attractive from a prominent national grade standpoint.
Those same company industrial assets, you'll be seeing things the low sixs high fives.
On the retail front.
Excellent great Yeah, Capex, if they're pretty aggressive.
We haven't really done that much in that area, but.
I'd say that'd be in the mid Sixs low sixs, depending on the length and duration of the lease.
Where we're focused on is once again, we do like some of that non investment grade.
Those little higher revenue types of businesses and so there were still seeing attractive yields say call it not low sevens.
Oh seven cap rate area.
Got it thanks, and just last one real quick for me.
Oh on the DNA side, it went down a bunch from Twoq to Threeq you I think too he was already down a bunch from one Q just.
Where should we think about that settling out as a run rate.
Mike Sorry, Yeah, Yeah, we're probably about a 1.3 million light and third quarter from a run rate you know weve just seen some of that was just timing of certain expenses. Some of it was some stuff from last year that didn't repeat.
At least didn't repeat in this quarter. So again from a timing standpoint, and there are there are some savings that we've been picking up.
All year, you know from just less travel less offs expense and things like that so I would expect that to come up here, probably 1.3 million in the fourth quarter and then you know just keep my first quarter.
Is is our heaviest gene a quarter. If you look at past years, just because you know the slot of expenses annual audit fees.
More employer payroll.
Payroll tax things like that that do hit in the first quarter. So that's always give your habeas street think about modeling you can kind of look back at the cadence from.
Our orders prior years and see that.
Yeah, we definitely got 1.29 light third quarter.
As a as Leidos <unk> ride this stuff.
Our next question is from Haendel St Juste.
Securities. Please proceed.
Hey, good evening.
You know so.
I wanted to ask you guys about the right way to think about capital deployment here going forward. So should we be thinking of the new run rate. Here is you know 200 $250 million per quarter, and then looking at your remaining availability from the floor. It looked like there I think another $250 million of capital that.
To go so $500 million I think it could leverage so you know just kind of thinking about you know what the right way to think about the run rate for acquisitions here in the near term and then I guess Ah.
What role.
The equity leverage Gleeson, the funding of next year's acquisition opportunity.
Mike do you want to take that one.
Yeah, I mean, yeah, we're obviously in our guidance in acquisitions for this year and we all have given for next year, we'll see how that plays out but just from a capacity do acquisition standpoint, yeah. The midpoint of our guidance implies fourth quarter about 35 million.
We spent half of that and say with equity and 40 million ish.
Yeah, we've drawn down 100 million so far in the fourth quarter to do that to draw. Another 40 that leaves us with.
80, 90 million of equity left plus reducing disposed in the fourth quarter and I was you have lots of liquidity. So I think we're you know from that standpoint, we're pretty good through the first quarter. We will I think leverage will come down as rates come back. So that gives us some flexibility optionality on where we need to go back to capital markets, but we'll see how the acquisition pipeline stacks up as we continue to see opportunities now.
They determine how much runway, we have doctors and capital, but you know we always have the ability to flex Libre just when you do and we've been pretty disciplined about wonder as capital. We'll just continue to do that and move you know can you just pace of acquisitions, we cannot read using more leverage we can always continue to be opportunistic yet disciplined on the capital issuance side.
I think we've got some runway.
Got it got it. Thank you for that and then just looking at your collections here. It looks like that's about 92 weeks I'm just curious you know after.
Keep in mind. This is a good it's going to get or how much was that it gets you there and then how do we balance or how you think about the risk of Nazi Toby.
Secondly, two years in the industry that may be more at a at a disadvantage. So you know the opportunity for upside from here how much better can you get can you get the 90, 899% how much of a role perhaps maybe some acquisitions playing out so as we sit here, perhaps next quarter or next.
Bring arena at a point, where we can be in that in that upper ninetys category. Thank you.
And I'll I'll start I mean, I think one way to think about it and this is why we broke out.
The portfolio with movie theaters and without so, let's let's talk about movies that are in a minute.
If you look at our portfolio excluding movie theaters in October we're collecting 98%.
So I.
Certainly close the gap on that last 200 basis points.
Or 2%, sorry, and we get to 100% there right. So we're pretty close and.
And that's for.
Yeah, a lot of tenancy right in the portfolio.
And then let's talk about the movie theaters, which is a smaller piece it's 5.4%.
What we think we've done and we look at this analysis very carefully we have nine operators that operate movie theaters for us. The ninth is is that.
Managers, that's taken over the Goodrich scarce.
No. We we believe we've reset the rents and up.
And the cash collection and the cash recognition at the appropriate level right now given some of the extended timing of these major release windows.
Look if there's any type of modest.
Improvement in movie theaters, and that's going to be related to health right.
I think you'll see a lot of that flow through into our piano.
And on movies, you know, it's it's been challenging right they've been pushing out piece.
Really states for the major tent pole films, but.
Sure you look at that but if you look at what's going on in China, and Japan, where the infection rates for coal, but are a lot lower than <unk>.
Yeah, just the western.
Countries.
You know China joint Golden week, I mean, they had to have IMAX reported great numbers, you know not not fully recover but very very strong numbers.
I think they hit $600 million in U.S. box office receipts somebody eight day period over Golden week, and remember, that's that's basically at 75% feet limitation.
In Japan they'd be shattered a record for the opening weekend of a demon flare, which is the animated film.
And for the first two days in October October 16 to 18.
That film opened at $44 million, a U.S. receipts.
And in the 10 day, such grossed over 100 million.
That's the best 10 days for a film like that as you know for US a record basically in Japan. So now these are all local films that are being distributed.
In Finland, and Sweden, you know they've also had good recovery for locally distributed films and releases, but then you know look at what's happening in France, Germany UK, Yeah. There now in a four week shutdown.
So.
I guess, what I take away from this is if you've got good content you got decent health people going into the centers in a movie theaters.
And I believe that bodes well generally for theater.
Theater venue operators, we just have to we just have to kind of see how how these infection rates work and so we felt like we put them down and that's why we're segmenting them differently. So people can understand that we're not a movie theater right. You know, we we have 5.5%.
The movie theater exposure, but if you looked at the performance you think we own a lot more so.
Hopefully that gives you some idea of how we're seeing it.
Our next question is from Ivan Kim with Suntrust. Please proceed.
I think the recollection number of 90% and 90.3% for October I did that have any kind of change your denominator from tenants that were already bankrupt. So maybe it removes the denominator.
And that any asset acquisitions or it doesn't listen it seems that number.
Mike you want to go so yeah, [laughter] I mean, it's really that there been changes in a b R. Even throughout the year, we actually put.
Oh, good page in our Investor deck I ever has a chance to look at but if you look at page seven of the deck. We put out. This afternoon. We did a walk me be our walk to address the specific questions. I know you asked about source confusion with lot of companies.
Rewalk Hbr from Q1, you know pre coded to current.
And we actually I think showed exactly what you're asking we show okay, Here's our starting hbr here's how it's an increase from acquisitions lease escalators Your house, here's how it's been reduced by bankruptcies dispositions and restructurings as well as vacancies.
And then within that chart on page seven we also broke out in the bankruptcies, we show how much of its movie theaters, which is the largest lions share of the bankruptcy section also in the restructuring the lion's share is movies as well. So you can really see that and so yes. The denominator is changed you know our Hbr was 476.4 million.
Before kind of it. It's currently 43.3, which is what all our recollection is based on today, but you know as far as you know disclosure I don't think writing the ball I think we're definitely trying to make sure people are aware of how or if you are has changed and when we you remember something from the yard means that leases either he has been restructured and changed where it's gone in the case of bankruptcy.
He's daughter exist so comes out of our universe, but yeah, we do not reduce our hbr. We've now reduced denominator for a day mansour rent deferrals and things of that nature and only a few tenants gone and the leases actually gone or it's been fairly restructure where obviously sold so that.
That's what we show on page seven so feel find that helpful.
Okay, just want to clarify one thing so on page seven you show won't pay per cent loss through the bankruptcy and then 50 basis points lost due to.
<unk> reductions and or modification is how you call. It so called out 2.3%.
Is that on top of the 5% write off for sure, but you took this quarter a.
Combining them no rent of 2.8, plus 2.2 [laughter].
[laughter].
No no when we talk about reserves reserves are four leases that are in place. So our reserves in the third quarter in total were 5.9%.
And those reserves are rent that we should have gotten.
In either in our Hbr, but we didn't get that so that's that's how we think about reserves.
Different from when they release actually goes away.
Right. So we need to look internally to actually looking at the pot pie charts, you're looking at are actually for October.
Which is october reserves or 5%.
And when you look at that they're getting those are all those are leases that are in place should be being paid on and so we're reserving that right. That's different then when a lease actually goes away comes out of our Hbr universe.
Okay. So I have looked.
Got that.
Recall that a perspective, they'll probably tolbert cypress that was that is that right.
That's right.
So if I try to look at the Perclot performance.
Recall that the right way to think about it 5% reserve plus.
You know the 1.8% currency, and then 50 basis points or other model isn't that the right way to look at it.
Yeah, I mean, that's definitely one way to look at to be thinking about how much rent is currently not here.
Obviously, the five present reserve is you know hopefully something that we will get back over time.
Stuff are shown on page seven where somebody went bankrupt and it's gone well, obviously never come back so that'd be the difference.
Okay. Thank you I.
Yep.
Our next question is from the course with Baird. Please proceed.
Hey, good evening guys.
I appreciate the comments on the pipeline I'm, just curious in the higher velocity, because yeah, let Shane and maybe sometimes with X. CNG.
Or is it more on a Q2 and I'm just curious for your perspective, if we go back into a lock down what the impact would potentially be on the pipeline.
[noise], Oh, well, let me I'll start with if we go into a lot on how that impacts pipeline. We were the beneficiary of the third quarter of.
Picking up deals, where we had not been the highest.
You know offer on those assets at that time, you know they had sort of find up with more aggressive pricing and.
Let's just say, we pick them up at more attractive cap rates from our standpoint.
25, Bips roughly right.
If we get another kind of air pocket.
I don't believe that's going to change our strategy because I think what we learned is where we're going to kind of.
Yeah, we'll we'll pause a weight potentially be opportunistic, but we're going to stick to moving forward with our pipeline.
You know there was some motivation for some.
Issuers or that were that we were negotiating with to try to get things done before the election and.
And we're seeing some of that in our fourth quarter pipeline.
But for the most part you.
No we.
Look we're a long term investor we want to we believe we have a really high quality portfolio here over the numbers put that out we are dealing with movie theaters, which are 5.4%.
But those will those what kinda sort themselves out some point.
At least for the later, but we have a.
Yes, if you recall, our investor day back in 2019.
You know, we basically told you guys. We had a we have a high quality real estate portfolio high quality tenancy.
Which is 98% rent collections in October right.
We laid out a very specific investment strategy. We are moving forward on that if you just picked up took out the second quarter look at the totality of what's going to happen. This year, probably say was pretty good and were really actually started work on the first quarter already for next year. So that's kind of the plan.
Obviously, if there's a major pullback in the markets will obviously reevaluate, but right now we feel very comfortable in what we're doing feels very manageable.
Okay. That's helpful. I'm, just curious what your guys appetite to add to casual dining exposure here.
You know I appreciate and Endo in your prepared remarks.
Just curious there that yeah.
If we went back into a lot down did that is that and then in a much better position to pay in their stores, where it gets closed.
Well you know it depends on what you know and this is like trying to try to forecast what to lock down would look like right. I think people have a I think we have a better understanding of how the disease spreads that wasn't maybe the case back in April and there was all kinds of pressure on P.P. any PPPC.
So today or you know just.
Just a quick casual dining our operators are bigger peers, either national or Super regionals. They.
They have really made a significant changes to their operating strategy no they've reduced their menus Dan.
They are working on that are efficient online delivery and service.
The third party delivery venues that really good work jordache and things like that but they cost these guys quite a bit oh.
And ability you know.
Municipalities are being much more flexible on pop up drive throughs. So some people are being very creative those that have the ability to kind of manage through this.
And what was interesting about that one operator, we talked about.
They are going to start moving on off that's not right away but.
Oh, certainly well evaluate pretty carefully with them if they see opportunity.
But I would say probably for us on casual dining.
Don't expect us.
[laughter] to do much this calendar year, but I could see maybe.
Potentially next year, it could be an opportunity for us.
Okay. Thank you.
Our next question is from Linda.
Linda say with Jefferies. Please proceed.
Hi, Thanks.
I was just wondering in what ways might your underwriting criteria criteria have changed since kobin.
Linda I mean, I would say first of all our our credit underwriting has not changed obviously, we broke <unk> fundamental.
Well the joint fundamental credit analysis is obviously quite significant.
Analyze it real estate the rankings is significant and the one thing that we have made changes to is our heat map and if you go to that page you know we have.
We have added.
No. If you look on the top portion on technological distribution, we've added the historical and forecast supply and demand impacts you know into the calculus on that horizontal access on the vertical access we on the Porter's five we introduced this concept of essential services impacted the waiting.
So that's just more about kind of top line.
You know, how we think about the portfolio, but when it gets down to the nuts and bolts of credit analysis or do they have liquidity, if it's a public company private company.
How how resistance would they be did they differ rent during cold. It obviously those are all questions that we answer we ask ourselves.
I would look at just if you can think about the two deals that we did one of the bigger ones. We mentioned like the Shutterfly facility human the company if its a very large company. It was taken private by Apollo.
If you looked at 'em off lease that's also from a revenue standpoint, multibillion dollar revenue operation Big Company and you know, it's really great business model. So so we're looking for things that are large sophisticated.
Yeah obvious.
That's not does not experience all types of operations and they're seeing their business improve but.
Let's say that you know in the in our heat map, we've made some changes.
And look we're continuing to evaluate what we've learned out of coal that we you have a robust credit and research function here and you know we've been evaluating this and having this discussion internally.
For the past several months actually cope it's going on so so this is pretty much the net effect of all that you can see.
On page 12 of our deck.
Thanks, and then are you required any extra guarantees such as you know higher security deposits.
And in some cases, we have actually asked for security deposits I wouldn't say for all businesses.
But if there was a business that how to disruption because of it.
That's something and rent was deferred and we believe that.
The opportunity makes sense or where we're evaluating it. We're we're restructuring we've structured some of those transactions with a reserve.
Escrow.
Got it just one last one could you talk about your year to date disposition disposition activity you know what type of tenants who are you selling out of this year and then to what extent would you expect dispositions to ramp in 2021.
I'll, let Mike can give a little flavor on that they cannot do you want to take that on.
I'd say this year was a little different than what we've historically done a week earlier in the year, we specifically targeted at a small number of small bucket.
Let's see grocery stores and drug stores that we went to market with.
And we the reality is we executed quicker and at lower cap rates than we initially expected.
You know the.
One thing I would say about our dispositions thus far we we've been able to take advantage of a great cap rates, yeah, and those two spaces wallet.
While at the same time, you know we chose assets. It had a few risk characteristics that we thought it made a lot of sense to go ahead and exit now given the low cap rates as far as 21, no. It's the expectation would be it's more back to a regular disposition.
Program more portfolio shaping.
Just to follow up on that when you talk about risk characteristic is that in terms of just like a lease coming up for renewal or is that bankruptcy.
No no I wouldn't say it was more <unk> more about if we felt like a particular property was oh overread it.
Maybe it's a tenant that is not investment grade and that for long term, we'd prefer given the window. We had to had an exit a property. So that's some of the characteristics we looked at.
Our next question is from John I says okay.
Please proceed.
Good evening.
Yeah. So you talk a little bit of a casual dining.
And maybe not doing too many more investments in that space at least near term. If you look at some of the other categories that you mentioned that were kind of impacted but ever covered are those all probably out of the question in terms of near term acquisition activity or is there may be some opportunity there giving.
You did have a differentiated investment thesis.
Oh, well I mean look the easy ones are obviously things were doing car washes distribution. The dollar stores home decor pet surfaces sporting goods those are all.
Things that are right in our wheelhouse right now I.
I mean look entertainment.
The performance within some of our operators with entertainment.
Yeah, there was a pretty interesting and pretty positive and so that might be an area that we'll evaluate.
In the more near term potentially made.
May not be that obvious to people, but there's people are in those venues now obviously I think if we thought about those they would have to have some form of rent.
Reserve in place for Us.
Movie theaters.
Okay. John I don't think we're going to go movie theaters for a while let's see how this plays out with our existing investment.
And I make sure I mentioned casual dining look on Jim's that's another area gyms for us our experience has been.
Better than expected and there are some high volume low price operators that.
Look pretty interesting right now we're looking at some opportunities right now, but you know people people are definitely going back into the gym, you have to be very selective with the operator terms that their value thesis.
Got it and things like that but but that that's another industry.
Industry group that you could see us doing more potentially in the near term.
Okay and.
And then maybe touching on each is a little bit you go to page six of the the the presentation of that kind of 13.6% of the pad from accounts receivable.
That it's had yeah.
Net of reserves 18, how is the split of that between the big three operators and some of the more regional operators and then specifically.
Essentially I just want to say that the studio movie Grill any read there are any receivables they're all fairly.
Ah, Yes, net reserve against it.
Is that a fair statement.
Well thank you.
Yeah [noise].
And I get too far in the weeds on individual attached I mean, obviously you need to grow you can assume its reserve and what you're looking at in the bottom chart net of reserves. So that's what's actually you know our balance sheet great net of reserves. So we had 2.1 million of theater revenues deferred rent receivables our balance sheet at the end of.
Q3, yeah debtor in receivables right there none of those reserves. So that is still we show those are for the tenants that we are not recognized on a cash basis. So it's the it's the other piece that we reserve for and so when you think about our Hbr 26.2 million of theater revenue.
70% you know I've been reserved for so it's all it's a lot of tenants yeah, I'll, let you guys make assumptions on what they are but we did obviously tenant by tenant analysis and the tenants that we did not reserve for we still have strong balance sheets and nimble operations. They can weather the elongated Rick.
I really expect theaters to have to do it and again, 40% of the theater revenue either we are recognizing is actually being paid in cash right. So the 2.19 per quarter.
Only 1.4 million ish, that's that's noncash in there. So we feel good about that but yeah, we want to get a naming specific tenants on who's reserved but you could obviously seems to be really is one of the ones we've reserved for.
Right there and then one last detail one.
Well then we'll let you tell 'em question yeah.
Property operating costs came down pretty nicely quarter over quarter.
Wondering why that was and sorry, if I missed that in the prepared remarks that was already way.
Yeah, I mean, it came down from 4.1% Oh go leakage at 2%.
It would be about 2.7% normalized we did have you know a little over 800000 of property tax recoveries come in from the prior quarter.
Recognized in this quarter. So if you net that out it'd be 2.7% still obviously, a big improvement you know compared to last quarter and that's just a function of tenants doing better you know less tenants.
Kinda workout bucket and so we don't have and they're paying taxes. So its tens getting current on their taxes tenants paying rent. It tends to be we are arguing with fighting with whatever reaching deferral agreements and getting a good standing. It's just simply the result of that.
Our next question is from Brent.
With <unk>. Please proceed.
Hey, guys I have a couple of questions around the election since we've already done some pretty deep digging elsewhere. The first is what key changes to your business do you expect under each administration.
And the second if we get a blue suite, how do you think that might impact. The 10 31 market given its an area that was included in the Biden cabs high level tax plan.
Well look out.
<unk> forecast the election, but tenthirty ones, an easy one it doesn't really.
In fact, our strategy you know, we're selectively selling assets.
Many times will we will sell assets into that particular market.
But you know.
Thing is it about penthirty ones is that it's made a lot of things that we want to buy.
Noncompetitive, maybe if you think about our business model, we're really a long term investor we're not a churn or other assets in this business model. So if there were changes to 10 31 market I I could see that giving us more opportunity to increase our QSR.
Portfolio, you know be more competitive on C stores, where today, it's not doesn't really work for you know sort of for a cost of capital and business strategy at least on the QSR side that the stuff that the.
At 10 31 buyers are chasing after.
And in terms of you know where our portfolio's positions like if you look at the distribution map of our assets.
They tend to be in the lower sunbelt areas of the country.
Most of our.
Assets are in very suburban kind of market places.
So one of theirs blue or Red I mean.
The the big takeaway as these operators have been able to get a deal with the first.
Onslaught of of sort of these challenges if they have to go back again, they've they've made adjustments.
You know the World didn't fall you know Scott didn't fall for us on our head.
So so I believe that they'll manage through it.
Like I said, we have we actually have talked about that internally about how that might impact us, but but generally I think what we can say is you know it's really more local municipalities that have more stroke over where the things are open or closed versus at the state level and so far we've been.
We've been positively surprised with the recovery pace of our portfolio and just.
It's really really that entrepreneurial and some of our operators I'm just very impressive and so I think if if there's another setback yeah, we'll get through it with those operators just like we did the first time.
Okay, Great. That's it for me thanks, guys.
Mhm.
I have one follow up question.
Hi, Ben Please proceed.
Thanks.
So we.
Ed you know that a result of Covidien, how has created some workers under the different retail.
Have you thought about maybe taking advantage of.
The Winterson cobot, which mean you know whatever forever I'm thinking about tenants like furniture retailers called the core you know weren't particularly <unk> did well drink, but I'm just curious if you think that there's more opportunity.
Topically to yeah.
Or sell some of these assets.
[noise] I don't know keep them I don't I don't think we would necessarily.
So I mean, we we like I could use a good example, like going home decor at home, we like that before covered we like that you know that at our Investor day.
What cobot has done is just being able to execute accelerate their success and market share and they've been able to make more investment in their omni channel and membership well yeah members part of their business to help them on the sales side. So.
So no I mean look we're not real flippers, I mean, I think we have a very high.
Deliberate strategy. If you go to our heat map you know we're going to you know we're going to stay on that middle to upper right quadrant of that field of industries.
Focus on good real estate focus on good operators focused on good rent.
Rent to rent per square foot kind of relationships.
Bill its duration steadiness like you know portfolio that's really.
Kind of like the game plan.
And look there are opportunities to buy things in distressed right now, but that's not really our business model really trying to really trying to create more steady cash flow growth and looked at the movie Theater part is just something that is going to take a little bit more time, just just given their release schedules.
Got it thank you.
Yeah.
I would like to.
The conference back over to Jackson for closing remarks.
Well look I'd say first of all I'd like to thank our associates here at spirit who've had to deal with all the number of different challenges that cobalt has brought not just to our operations, but to our tenants operations. So a big shout out to them I like to thank everyone for participating on our call. This late afternoon, and just let you all know that we.
<unk>, Yeah, we weren't great position right now to execute our business strategy.
The one that we laid out at our Investor day presentation.
Back in December of 2019.
And I can tell you that myself and the board were extremely excited here at the company and we look forward to moving forward.
Thanks.
This concludes today's conference you may disconnect your lines at this time and thank you for you.
<unk>.
Yeah.