Q3 2020 Netstreit Corp Earnings Call
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Greetings and welcome to the net Street Corp, third quarter 2020 earnings call at.
At this time all participants are in a listen only mode. A question and 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 is being recorded I would now like to turn the conference over to your host Mr., Randy how senior Vice President of Finance.
Please proceed.
Thank you for joining us for not streets third quarter 2020, <unk> earnings Conference call.
In addition to the press release distributed yesterday after market close we posted a supplemental package and an updated investor presentation in the investors you got some presentations section of the company's website at <unk>.
W. W Dot net street Dot com.
On todays call management management's remarks, and answers to your questions may contain forward looking statements as defined in the private Securities Litigation Reform Act what 1995.
Forward looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today.
For more information about these risk factors. We encourage you to review our prospectus dated August 13, 2020, and our other FCC filings.
All forward looking statements are made as up to date hereof that street assumes no obligation to update any forward looking statements in the future.
In addition, certain financial information presented on this call includes non-GAAP financial measures.
Please refer to our earnings release and supplemental package for definitions and reconciliations and an explanation of why we believe such non-GAAP financial measures are useful to investors.
Today's conference call is hosted by not streets, Chief Executive Officer, Mark Manheimer, and Chief Financial Officer, Andy Blocher.
They will make some prepared remarks, then we will open the call for your questions now I will turn the call over to Mark.
Good morning, everyone and thank you for joining us today for net street inaugural quarterly earnings call.
This all find you and your family as well and we are pleased to be here with you today.
Well, we met with many investors during our IPO marketing efforts over the past several months, let me begin with a brief overview of industry then.
Then I will discuss our acquisition external growth activity and close with a word on our commitment to you our shareholders.
And he will provide more detail on our quarterly results balance sheet and fourth quarter outlook. We will then open the call for questions.
Leading up to our former formation transactions in December 2019, and everyday since then we have been focused on creating a high quality diversified and defensive net lease retail portfolio.
It conservatively capitalized balance sheet scalable platform to support accretive and consistent long term cash flow growth.
Well. This is that's rates first conference call as a publicly traded company and then I have a likely track record within the net lease business and that publicly traded reach and have surrounded ourselves with a seasoned leadership team to support our future growth and our commitment to success as a public company.
Would it be more proud of the success of our 19 team members that got us to where we are today.
Let me take a moment to briefly discuss our history.
Our predecessor was a private real estate fund, which holiday net leased portfolio valued at approximately $350 million by asset value consisting of approximately 50% investment grade rated tenants.
Prior to our formation transactions that portfolio was then called down to reduce exposure to certain tenants in the sectors that we did not feel were desirable long term.
In December 2019, and into January 2020, we raised $220 million of capital from institutional investors via a private rule 144, a offering and internalized our management team and other formation transactions forming industry.
We also concurrently closed on a new term loan and revolver to refinance our outstanding debt and fund future growth.
We then completed our IPO raising an additional $227 million in August and September of 2020.
Today, our portfolio contains a 189 single tenant properties, comprising 3.4 million square feet in 37 states with a diversified tenant roster of 53 tenants in 24 industries.
Our weighted average lease term is 11.1 years, and we are 100% occupied with no lease expirations until 2022, and only 1.4% of leases expiring before 2025.
Based on our Hbr, our Tennessee, 68% investment grade with an additional 6.4% classified as high quality unrated and 90% of our industry exposure is what we refer to as defensive.
These tenants operate in industries, where their physical location is critical to the generation of sales and profit where they focus on necessity goods and essential services, including discount stores grocers drug stores and pharmacies home improvement automotive service and quick service restaurants.
It's high quality kind of decrease bond like leases with high quality rent collections and times of disruption, including what we most recently seen in 2020.
Well, we certainly cannot take credit for having predicted the cove. It 19 pandemic, we designed our portfolio and balance sheet strategy for long term stability and strength before the pandemic was even contemplated.
We have long believed that retail will continue to evolve both in ways that we can predict and in ways that we can not with that backdrop, we have been and continue to be focused on the retailers in industries that are well protected from threats that we can anticipate such as E. Commerce pressures, but also have balance sheet strength and access to capital.
To be able to reinvest in their businesses and adapt the changing retail landscape.
We're also focused on acquiring real estate that is fungible and attractive to other retail uses and at a basis that we can continue to replicate cash flows in a downside scenario.
Additionally, given our portfolio was recently constructed that street has not had to work through legacy tenants endorsed struggling categories that may have felt an outsize impact from the from the pandemic.
Proof of this isn't our cash rent collections, which have been strong and consistent with 100% cash rent collections in both September and October and October Andy will provide further details momentarily.
With respect to external growth, we are committed to a disciplined acquisitions and focused on underwriting underlying tenant credit locations, what's fungible real estate with strong market fundamentals and locations that provide strong cash flows to the parent time.
The single tenant retail net lease sector is large and highly liquid and we believe we can bring our deep industry relationships to bear as we seek to execute on our pipeline of acquisition opportunities.
We were able to continue to execute through market disruption during two of it with $327 million of acquisitions completed in 2020 through the end of the third quarter.
For the third quarter, we completed $103 million of acquisitions at an initial cash capitalization rate of 6.5%.
These acquisitions had a weighted average remaining lease term of 10.9 years and 100% of the properties are occupied by investment grade rated tenants.
We would note that $15 million of this activity. It was originally targeted to close in the fourth quarter, but we were able to accelerate these closings to September thirtyth.
In July we acquired a Walmart Supercenter, and Sam's club and Tupelo, Mississippi at an initial cap rate of 6.6% and a remaining lease term of 12 years.
There, we provided a solution to the seller by partnering with a shopping center buyer, who concurrently purchased the remainder of the center that does and as a result, we were able to increase our exposure to what we believe is a blue chip defensive tenant.
In August we acquired a portfolio of seven a well located in strong performing O'reilly auto parts.
Hey, Glenn locations with more than 11 years of remaining lease term at a 6.9% initial cash cap rate.
From a transparency perspective note that when we discuss cap rates on acquisitions that street will provide cash cap rates on total acquisition cost.
We completed one disposition in the third quarter at a sales price of $1.9 million at casual dining restaurant that we felt could have trouble competing in the future and wanted to eliminate that exposure from our portfolio.
Casual dining is not a sector that we plan on adding to the portfolio and we continue to reduce that small exposure in the portfolio through dispositions overtime.
As we look ahead, we are targeting an average of $80 million or more of acquisitions per quarter or $160 million for the last two quarters of 2020.
Well, 100% of our third quarter acquisitions, we're investment grade overtime, we intend to target an appropriate balance for our risk tolerance and growth objectives, we expect that approximately 70% of our investment activity will be in with investment grade test the balance will be with non investment grade tenants at a slightly higher yield including high.
Quality unrated tenants and selectively targeted sub investment grade tenants, where we have a high level of confidence and the tenants industry. The retail retailers management team the trajectory of that retailers business as well as the quality of the real estate, we are acquiring before.
Before I turn the call over to Andy I'd like to make a few comments regarding the philosophy with which we approach our business.
When we embarked on our IPO, we met with many of you through our marketing process and we were humbled by the strong institutional support we received when we finalized our order book, we recognize that you weren't trusting us with your capital and we want to we want you to know that you can count on us.
We're committed to providing a clear straightforward disclosures remaining accessible to investors and analysts and finally to fulfill our obligations as corporate citizens by establishing a strong DSG program.
Regarding U.S.G., we are committed to creating a strong internal culture that promotes inclusion and employee wellbeing and are pleased with the initial steps. We have taken to date. Finally, we are proud of our shareholder friendly corporate governance structure, including our diverse majority independent board I will now turn the call over to Andy Andy.
It's mark and thank you everyone for joining us on our call today.
I'm incredibly happy to be joining you as CFO at Street.
As Mark noted earlier and we discuss frequently during our IPO process.
We are committed to building and maintaining a conservative capital structure, providing transparency with respect to our business.
We believe that these initiatives coupled with successfully executing our business strategy will build shareholder confidence and overtime support a competitive cost to capital.
Let me begin with our results for the quarter yesterday in our press release, we reported a net loss of 11 cents core AFFO of 15 cents and I guess, that's out 21 cents per share.
As of September Thirtyth, 2020, Nineth Street portfolio contributed 38.9 million band bites base run rate be art, after giving effect to acquisitions and dispositions completed in the quarter.
Because the collections perspective, we're pleased to report that prior to giving any consideration to defer or beacon arrangements granted as a result, because the 19, we collected 100% of September rent payments, bringing total third quarter rent collections to 98.1% [laughter] slight increase from a previous disclosure as their only tenant being recognized.
Cash basis paid their September read shortly following our publishing business update bringing the current through the third quarter.
On a related note based on the payment history of our tenants. We currently have zero bad debt reserves and recognize your bad debt in the quarter or year to date.
Finally, as Mark mentioned the month of October we also received 100% of cash rents.
With respect to deferrals and the big $108000 of renovations granted in third quarter were generally condition and lease extensions, which averaged approximately one three quarters or years of additional term for each month and debated right.
Year to date, we granted under 750000 of renovations generally conditioned on lease extensions, which averaged approximately 1.4 years of additional trial for each month of the beta grant.
With respect to deferrals, we deferred 261000 of Red year to date of which 75000 has been repaid leaving a net rent deferral balance of 186000 a quarter right.
The remaining deferred balance will be repaid over the lifetime of the leases and therefore, we expect the quarterly impact on our business as we collected the calls would be very small was $4000 in the third quarter.
As demonstrated by a 100% rent collections in September and October we provided no deferral or basis after August.
We currently have eight assets classified as held for sale and took $363000 of impairments in the third quarter to bring our GAAP net book value from two of those eight assets, including our single asset being recognized on a cash basis in line with the anticipated net proceeds from those sales.
A couple of items, resulting from our successful IPO impacted our financial statements in the third quarter, we had zero point $9 million of expenses in the third quarter and 2.2 million year to date related to 144, a and IPO related transaction costs.
These costs largely reflect consulting services as we staffed up pre IPO to put appropriate public company processes and reporting place.
In addition, we recognized 1.8 million of non cash compensation expense from two sources in the quarter.
First is 1.7 million, resulting from a catch up related to 4.8 million a performance based equity awards at the time of the 144, a with a shelf registration performance criteria.
The nature of that performance criteria didn't allow us to recognize any expense until the product forms criteria, that's Matt and as a result, a significant catch up was recognized in the quarter.
An additional $74000 was recognized from the 3.1 million time based awards granted to employees and board members at the time of the IPO. These.
These awards will be recognized on a straight line basis over there are three to five year lives.
The transaction expenses and the non cash equity compensation catch up resulting in the largest nonrecurring adjustments to our key financial matters in the third quarter.
Turning to our capital markets activity.
On August 13, 2020, we completed our IPO and including the overall overallotment option in September if you'd just under 14 million common shares at $18 per share generating net proceeds of approximately $227.3 million after deducting the underwriting discount on operating expenses.
In connection with the IPO, we repaid the $50 million outstanding balance some of the company's revolving line of credit and retired the outstanding series a preferred shares with the remaining proceeds utilized on future acquisitions and for general corporate purposes.
In September the company completed a $175 million or LIBOR swap to hedge floating rate exposure on the entire balance or the company's term loan at an effective rate of 21 basis points through the maturity of the term loan in December 2020.
As of September Thirtyth, we had 137 million of cash I remain fully undrawn on our $250 million revolving line of credit.
We have no debt maturities until the maturity of our revolver in December 2023, which are subject to a one year extension option in.
In addition, our net debt annualized adjusted EBITDA ratio was 1.4 times, well below our four and a half to five and a half times long term target.
With respect to dividend in August we declared an inaugural cash dividends on our common stock of 10 cents per share for the IPO stub period in the third quarter of 2020.
The dividend amount was pro rated to reflect a period of time from the IPO quarter revenue.
Yesterday with our earnings release, the board declared a 20 cents regular cash dividend to be payable in December reflecting an annualized dividend rate of 80 cents per share.
Before I turn it back over to Mark Let me just take a few minutes to discuss our outlook on a couple of fourth quarter items and provide some forward looking perspective.
First as Mark mentioned consistent with our average expected post IPO acquisition volumes of $80 million per quarter, and after giving consideration to the 15 million in the fourth quarter acquisitions that we accelerated to September Thirtyth, we could we expect to complete at least an additional $65 million of acquisitions in the fourth quarter, bringing your tone.
<unk> 2020 acquisition acquisition volumes to approximately $400 million.
With a LIBOR hedge in place and with current cash balances exceeding our fourth quarter acquisition expectations.
We would expect no incremental borrowings under our revolver.
And resulting fourth quarter interest expense, including $300000 of quarterly deferred financing fee amortization, an undrawn fees to be approximately a million bucks.
We expect our fourth quarter cash DNA to better approximate our forward looking run rate of $11 million to $12 million annually combined with an additional $3 million of noncash compensation expense annually.
As discussed during our IPO process. We believe this amount reflects the appropriate staffing to execute our business strategy and to effectively run as a public company.
As a result, we would expect increases DNA overtime to be marginal as we grow approximately 10 basis points on the incremental acquisition volumes should be a pretty good estimate.
Finally, consistent with the board's dividend declaration, we're targeting an 80 cents annualized dividend rate for the near term.
Dividend growth expected once we stabilize at a 65% to 75%.
Yeah.
Now I'll turn the call back over to Mark.
Thanks, Andy and thank you all for joining us today as we prepared for IPO in August we made sure that we not only had high quality assets and the right portfolio in place to successfully entered the public markets, but the best people and platform as well.
To that end I'm very proud of our portfolios performance amid a pandemic know us as well as our team.
Andy and I are very grateful to them for their hard work and dedication we.
We would also like to thank our board for their valued advice and counsel.
Look forward to growing this business and speaking with you all each quarter to update you on our progress.
Concludes our prepared remarks, we will now open the line for questions operator.
Thank you at this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
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Your first question comes from line of Nate Cross it with Berenberg. Please proceed with your question.
Hey, good morning, guys.
Morning, and thanks, and thanks for that color on the call so far.
I wanted to kind of get your commentary just on the activity so far in October and what it looks like for the next two months sounds like 65 million is that leads be Dan is that a conservative estimate and just curious if you're seeing any more deal activity because it would be.
Upcoming election and potential for a tax code changes.
Yeah. Thanks, Nate Yeah. So I mean, so far this quarter, yeah, we we've been targeting 80 million per quarter since ever third and fourth quarter and we did pull forward.
And in the neighborhood of $15 million of transactions to September Thirtyth, we had initially targeted.
Targeted for the fourth quarter.
That being said you know, we still have a pretty robust pipeline and it really will come down to the timing on some of the transactions. We continue to see you know similar deal flow that we saw coming into.
The IPO that we discussed on the road show with our investors and you know actually very very happy about the you know what the pipeline looks like from the fourth quarter, we should get a couple of new names in the in the portfolio that I think that will certainly certainly like the tenant line up that we think should close to <unk> of units could slip into January.
We're hopeful that we can.
Kinda Guy and a similar number.
Here in the fourth quarter and I guess you know another thing of note are 100% or you have investment grade you know a.
For the for the third quarter is probably the first and only time or that you will see a 100% acquisition to be all investment grade you know the mix of what we're looking at buying it's probably more in that 70% range of investment grade.
Of course second kind of shift around depending on what closes in December or January, but certainly you know kind of adding a little bit more to that high quality Nonrated bucket, which is you know as we we define up more than $1 billion of revenues and less than two times debt to EBITDA. So kind of Tennessee that would have an investment grade rating if they were to go out.
And get a rating and so really it really jump pretty good about the pipeline today.
Okay. Thanks. That's helpful. Maybe you guys can just also touch on competition in pricing and has there been any changes that you've seen since the.
The IPO you know obviously you guys are targeting concepts that are highly sought after so I'm just.
It's kind of what you're seeing on the ground.
Yeah, you know its not really you know when we think about the other institutional investors most of them have a different you know your credit profile that that they're really chasing most of our competition continues to be really kind of your mom and pop Tenthirty, one type investor and we haven't really seen.
Being too much of a change I you know, maybe we'll see after Tuesday affect the results come in and and that changes you know people and how aggressive they want to guess, but even with the 10 31 I would anticipate you know there's certainly a lot of strong lobbyists out there and regardless of how the election turns out I would imagine that's going to take some time, so I wouldn't I'd be surprised if there was just a massive rush.
For people to get some tenthirty ones, then, but you know well, we'll we'll certainly be monitoring that.
Okay, and just last question quickly and <unk> E assets that are held for sale I'm just curious what in that mix is there any common theme in there.
Yeah, So I mean, I'll I'll stop short of giving exactly what they are just because where you know we're relying on third parties to close on those so it's a little bit out of our control, but I think what you'll see is you know the big focus for us is going to be on monitoring risk in the portfolio. So yeah and in most cases, it's going to be kind of getting out ahead.
Some some potential credit risk we are looking at a decreasing our exposure specifically to casual dining.
Maybe to a lesser extent the everbank exposure.
Overtime. So there is no I'd expect to see a little bit of that and then yeah. We do have a number one tenant that has a little bit of an outside.
Exposure in the portfolio. So there there could be a little bit about mixed in there.
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Okay. Thanks, guys.
Your next question comes from the line of Todd Thomas with Keybanc. Please proceed with your question.
Hi, Thanks. Good morning, just a first question following up on the investments and in terms of pricing are you seeing any compression in cap rates or do you feel comfortable that you'll be able to continue to buy in that sort of 6.5% to 7% range and then mark you talked about striking a balance between investment grade.
Great attendance and saw by GE or non rated tenants with higher yields a what's the difference in yield like there and is that added risk I'm being compensated for in higher yield in this environment.
Yeah sure so as it relates to yes, the mix outside of investment grade.
Yeah keep in mind, we're really targeting very high quality tenants. So it's certainly not a barbell approach of buying a bunch of really high yield assets and then you know trying to get some quality the kind of blend and blend in cap rates.
It's really more there's a limited universe of tenants that were very comfortable with that don't happen to not carry an investment grade rating you know quarter to quarter that can certainly shifts, but I would expect to see maybe you know at least through the first nine months of this year and the $327 million that we've closed on a into for in the first nine months of the year or there has been about a 40 basis.
His point difference between kind of that high quality bucket, you know versus our investment <unk> investment grade bucket.
Hey, Todd pick up in a magazine part of your question.
Hey, Todd it's Andy if I could just add to that you just from our perspective since it's really the first time, we're disclosing it as a public company when we talk about cap rate on acquisitions just to make sure. We're all on the same page that's cash cap rate on fully loaded acquisition costs.
Okay, that's helpful and.
In terms of the pipeline and what you're seeing out there and sort of the various channels that you source deals.
You know so the existing assets I guess build to suit sale leasebacks Where's the biggest opportunity today and.
You know you mentioned you know the Walmart acquisition.
Is that is that an area, where where you continue to see an increase in offerings either from mall Reits or other retail property owners is that an area of focus for the company.
Yeah, absolutely. So you know we're you know our acquisition targets I think are fairly modest in terms of volume.
And so it allows us to be very selective I mean, we've got about 500 or $550 million of of acquisitions in our pipeline most of which we will not get there on pricing.
But you know we pride ourselves on being extremely creative really trying to find you know a situation, where our surety of close or whatever we bring to the table is valued or could be speed to close could be you know how.
During the cash already raised could be a relationship that we have certainly as you mentioned on the on the Walmart transaction, where we partnered with a Dallas based shopping center buyer that focuses more on kind of junior boxes, and shop space and and things that we view as a little bit riskier, but being able to kind of bring that that type of transaction to this to the seller a that's out there and.
Your problem, rather than us just kind of pulling out the credit.
The deal and leaving them enough now to where spot to sell the rest of the center a certainly yeah, we're seeing more and more of those those types of opportunities are you know working more and more with developers and seeing seeing some more opportunity there as well.
Okay, and Todd and once again.
Hey, Todd It Sandy I guess, you know when you think about the idea of you know whether its shopping center owners. You know is a spitting off some of those triple net tenants you know certainly for Mark in my experience you know you really need to dig into the details there whether that's co tenancy provisions restricted uses so on and so forth. So.
The Devil's in the details on those deals.
Okay, and where we're extraordinarily derivative what that what that we underwrite those so we're not taking on any co tenancy risk or or or.
Yeah restricted use if that's going to create a problem first in the future.
Okay got it and then just one last question Andy you know in terms of collections, you know just a little less than 2% not collecting the quarter I realize you're at a 100% in September and October but is that all resolved in your view do you feel that you know those those tenants you know in your tenant base agenda.
Charles is on better footing going forward here or is there some risk that you know and tenants could come back looking for relief or deferral deferrals of some sort or do you see any risk of that you know heading into a further into the fourth quarter.
Yeah, I mean to me anyway kind of a lot yeah, hi, sorry, Mark Yeah. I guess, you know taught a lot of that's going to depend on you know what the future brings with respect to coded selling and so forth I think that we demonstrated that our portfolio was extremely defensive a you know during the second quarter.
Based on the collections, we showed there and going into the third quarter I'm certainly feel like you know if if we are kind of in the current environment I feel very very good about collections not just of odd and you know the legacy assets, but the assets, we have acquired and what it is that we see in the pipeline. So yeah I mean as good.
As you can feel on that in the current environment, we feel like that.
Yeah, and it's the only thing I would add there is you know we cut all of our deals as it relates to go bid back in April and May and then everyone has got along with Oh, yeah with those agreements and has paid 100% Yeah you know starting in June.
So we just haven't had conversations with tenants as it relates to go bad or not paying rent or rent relief running at any of those types of situations, but yeah. I mean, I think if there's a you know a reemergence of Covance second wave or whatever you want to call. It I think there is the possibility that we have a those steps conversations but in reality the deals that we.
Did cut we ended up getting a lot of lease extensions and a lot more value came back to us than what we had then what we gave up a and so really showed the commitment to the locations that our tenants have in the areas that were impacted by Covance. So I'm pretty optimistic that well continue to collect 100%, but you know we're certainly open to working with our tenants.
In the event that there you know the government shut them down or things that outside of their control impact their ability to generate profit.
Yes, so Todd just to kind of quantify.
On what Mark said, you know for the I. I said in my prepared remarks, you know year to date, we have been just under three quarters of that million dollars of rent abatement to our tenants in exchange for that if you were to quantify what we got with extended term that equates to about 14 and a half a million dollars.
Of additional rent payments at the end of the term.
Alright, great. That's helpful. Thank you.
Your next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.
Hi, Good morning disposition you made this quarter was that in casual dining and then where do you think cap rates might trend for de risking these one off assets going forward.
Yes, sure Linda Yeah. So yeah that was the casual dining restaurant that was probably the one property most impacted by like open in Hutchinson, Kansas.
Hey, I location without a drive through a without much of a network that is really driving breached or in any of those types of platforms. So they closed in and we're unlikely to reopen and so we thought what the term of the lease now is the time, where we'd get some value we felt like if we waited longer.
You know it would be a much uglier situation. So it was a way for us to de risk the portfolio certainly it was something that we did prior to the just you know to the IPO at least you know that was the we had agreed to that fail to really try to clean that up to you know have as clean a portfolio on a go forward basis.
I'll never say never but you know keep in mind, we did start out with a 350 million dollar portfolio really called out you know the things that we thought were going to be.
Potential problems down the road of about $90 million pulled out the portfolio and then it really built up you know most of the portfolio since the initial capital raise back in December and January and so really feeling very good about the portfolio. There may be a one off situation here or there you know we do have the one casual dining restaurant that.
You know that has been typically pays about three weeks late.
Which is which is what the difference was between you know our business update on October 1st where we had 99.5% of rent collected in September and now that's up to 100% in this because they paid so that's yeah. That's one where we may look to to move at some point in time. We went we just want to make sure that we're maximizing value and getting the best economic outcome that we possibly can in nature.
Those situations.
Thanks, and then give an increased market interest in investment grade tenants you know, what's the best strategy to navigate potentially increase competition and still achieve the cap rates in your targeted range.
Yeah sure no absolutely. So I mean, obviously, it's the strategy that we think makes the most sense. So a you know a as we start to head into yeah, maybe a period of uncertainty there may be more interest there, but it very much you know, it's a very fragmented business very much a relationship business.
You take the Walmart example, that we talked about earlier, that's very difficult for Joe a private buyer to step in and do a if they're not in the end the business you know each and every day like we are.
And you know, we've got 500 or so million dollars in our pipeline, but we just yeah. We just have to call down the one of the ones that work for us and it's just such a large fragmented market that we really feel strongly that we will continue to continue to be able to execute.
But at this point in the future.
Thanks.
Your next question comes from line of Katy Mcconnell with Citi. Please proceed with your question.
Great. Thanks.
Can you provide some more color around the debt deal that you walked away from this quarter to get a sense for how your underwriting rescued acquisition.
And then on the disposition side would you expect to see some wide pricing held for sale assets first that's instant death.
Yeah sure so I'll take the first one.
Yeah, first but to the dead deal costs that really had to do with you know a deal that we had cut a pre coven and then we're able to continue to kick the can on the under contract or until the seller actually didn't allow us to keep picking up again on that and that had to do with a specific tenant where we're buying a couple of properties.
And had a had a hard deposit yeah back being a back door in coated.
And you know, there's a credit really had deteriorated a bit due to go of it and then they also were undertaking a pretty large.
You know a capital markets transaction that we felt was going to add leverage to the balance sheet and wouldn't you know could potentially.
Add additional risks to the to that particular acquisition. So we elected to walk from that from that particular transaction I think that's going to be very abnormal was really a coded oh, yeah related type type deal, but we felt like it was more important for us to not take in an asset that could potentially lead to problems down the road than it would be to you know to walk away from a couple of years.
That $1, obviously, something we don't want to do in the future, but yeah. I think you know covered definitely had a lot to do with that and then as it relates to dispositions you know I I would think of the 10.4% cap rate on the one.
Dark casual dining location to be you know very much an anomaly.
You know as we look at our dispositions in the future. Yeah. We think the cap rate should be significantly inside of that depending on you know what that mix looks like how much or how many of those are you know getting out ahead of risk. How many of those are diversification sales like I you know like a 711, so but I I would imagine those would be significantly less than the 10.
10.4% cap rate.
Yeah, just just to kind of follow you just got to follow up on that I mean, you know for everybody else. You know, we had 1.2 million of transaction costs in the quarter. You know we add back the 144, a an IPO related expenses as I discussed in my prepared remarks of 900.
So you know to quantify that that 300000 of you know dead deal costs in the quarter and as Mark said, you know, we'd anticipate yeah, we'd anticipate that to be lost.
Okay. Thank you.
Your next question comes from line of Todd Stender with Wells Fargo. Please proceed with your question.
Hi, Thanks, just to go back to cap rates, we've been focusing on the cap rate compression direction really at the peer group, but.
When you look at the stuff you guys have been buying it's been fairly steady with good investment grade rated tenants, but with where the 10 year Treasury is it's it's been fairly range bound you know below 1% would you say, there's a natural floor in cap rates. You know you just got to account for some level of risk on top of that risk free rate maybe that accounts for.
Some of the reason why cap rates seem to be pretty steady for you guys.
Yeah, I think that's right Todd I think there is generally going to before I mean, you look at cap rates overtime over the past 20 years.
People tend to think that there is a massive correlation to interest rates. It yeah. There really isn't I think it certainly had a you know you know theres been some gravity to Brett to bring those down over time due to you know a prolonged low interest rate environment that we've been in a but I think the only situations where it really yes. It.
It has an impact as you know, sometimes you'll see a very large sale lease back that could be a a structured financing or you know type execution, where you have some of that you know a secured debt can you know can come into play where someone could get pretty aggressive, but really in kind of the the 10 31, yeah mom and pop smaller transaction market you know there's really just.
We don't expect to see massive moves in cap rate, which we really haven't seen over the past 20 years I'd say, it's been extraordinarily stable. So I think that's a fair assessment.
Thanks, Mark maybe this is for Andy obviously with your proceeds from the IPO still still sitting there your plenty liquid debt to EBITDA on a sub two times what can we probably see you guys tap the capital markets would that come next book certainly.
It's a little premature probably have until the second quarter of next year to deploy the IPO proceeds maybe how you're thinking about the capital structure.
Yeah sure Todd. Thank you Yep plenty liquid that you know I like that expression I mean, where we stand right. Now you know we're sitting on 137 million of cash we've got roughly $30 million worth of assets that are currently held for sale $250 million on drawn on the credit facility. So you know as you said printing plenty liquid for the near term you know.
Our belief you know was through the 140 foray into the IPO and two today is that you know continued execution of the business plan is going to result in improvements to our overall cost of capital over time yeah.
Mark and I are constantly talking about you just keep executing just keep executing kinda like Dorian finding nemo or it just keeps women you know were no rush to raise additional equity at this point, but you know obviously, we're constantly evaluating funding alternatives on a go forward basis, just from where we sit right now you know.
I don't think it's in anybody's best interest to start speculating on what type of capital size timing, you know or price, but just know that we're really focused on executing the business got our eyes wide open and are hopeful.
Hopefully the you know the market's trust us to make the appropriate decisions at the appropriate time.
That's helpful. Thank you.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
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Your next question comes from line of Alexander Pernock is with Bank of America. Please proceed with your question.
Hey, good morning, guys and congrats on your first quarter. The public company. Just just one question what are your thoughts on providing official guidance for Q results for for 2021.
Yeah, Alex you know look I mean, its something that were you know were regularly thinking about you know what we tried to do this quarter was really to give you guys you know.
Whether it's you know on the Abbey Artline, you know some guidance with respect to acquisitions interest expense pretty locked in with our what's now fixed rate debt on on our term loan.
With respect to dividends and Gionee, which are really the biggest driver is there you know we will we will continue to evaluate and try to you know we're here to best practices as best as we can you know as you know we continue to gain greater clarity around the business, but you know if you're asking for are we going to commit to providing.
Hey, AFFO per share guidance, you know for 2021, you know at this point I think it's too soon to sell to the extent that people feel like you know, we're not giving you. The basic building blocks, which you know I think that you. We went directly to do this quarter. You know please feel free to reach out on a one off basis and we're happy to discuss.
Got it. Thank you that's it for me.
Your next question comes from line of Ki bin Kim with Truest Securities. Please proceed with your question.
Thanks, Good morning, and congratulations on your IPO.
Could you discuss your investment philosophy I'm sure. There's a host of variables that you consider when you buy an asset or what's your pecking order and if you could just provide some details around that.
Yeah, absolutely yeah. So I mean, yeah, our first and primary focus is going to be on the corporate credit and making sure that we're going to get rent you know during the during the lease term a you know we think in a in a world where a retail continues to evolve. We think is extraordinarily important to have a strong management team that has access.
Yeah, the capital and access to cash that will allow them to continue to reinvest in their business and allow them to adapt to.
<unk> to the change that we will continue to come I mean, I think that's the one thing. That's that's never sure of is that there will be change and so I'm being prepared with you know for that and not having you know tenants that are continually taking cash out of the business, but rather reinvesting in the business. We think is very important which happened to be a lot of investment grade credits and tenants that we.
That we focus on that have strong access to capital with lower leverage a you know the next piece that is very important to us is making sure that we're buying the real estate right and so you know there will be disruption or we hope to get everything right, but you know probably foolish to think we'll get everything right. So really our backstop is effectively what are we act.
The buying and that's of course, the real estate, what can we do with that real estate, how attractive is that going to be to other uses.
You know looking at the demographics and and ago traffic counts and ingress egress signage.
And what's the other traffic drivers are in the area. We think is very important and really trying to analyze what happens if we do get it back what can we do it do with it how much money is that kind of are we gonna have to put into the building if any and you know what type of rent you know should we be able to get replacing the you know the rent that were getting at at the time that we initially.
Ah do an acquisition and so we also think it's important to you have to focus on locations that generate positive cash flow no. Further tenants certainly we've seen that be important as it relates to renewals, but that's probably third in the packing order behind corporate credit and real estate.
Okay, and Mark you and both <unk> and do you have had a lot of experience and fourth looked at public companies in the past I'm just curious on how that nets Street, what kind of no corporate culture, you're trying to create.
Yeah, absolutely. So a you know we think corporate culture is often overlooked.
And it's something that we focus on every day, making sure that we've got people that are excited to come to work I like what they're doing or are valued and yeah. We yeah. We think that will continue to drive them to to you know to do the best that they can do really built a I think right now we've got a lot of momentum.
Behind the culture, where people are yeah really excited about what we've accomplished but you know I think it's going to get harder and harder as we continue to scale the business to make sure that we've got the right people in the right seats or that kind of have that team mentality.
We aren't looking to point fingers, better or trying to find solutions to issues as they come up and you know so far. So good you know we feel obviously, what's been accomplished a buyer 19 team members to date or how are you thinking about we were you know a smaller private entity or you know less than a year ago and really what we've been able to accomplish on the acquisitions front.
Asset management front.
Very heavy lift on the accounting side, a and what we've been able to accomplish I don't think could have been done in a bad culture and Heathrow Covenant a mix you know really would have been difficult, but people have held them themselves accountable through this whole process from what you know a lot of working from home and you know we think that is a you know certainly a testament to the to the culture that we've built.
Right.
Yes. It came in I would I would also say you know look to the board right I mean, it's as Mark and I were looking to build out. The board you know basically there's you know we kind of broke it down to its simple its forms right. You know there's the three things that we believe you can make or read successful are you know no.
In this order, but the real state the balance sheet and the people right and I think that what happens is a lot of time you get a lot of folks on board Super Super focused on the first two not a lot on the last time, we have I keep calling or our secret weapon as Heidi Everett.
Who is one of our new board members came on as part of the IPO. You know who is really really engaged in you know culture morale employee maximization and Mark and I very much look forward to working with her you know in order to make sure that we are getting everything that we can.
Out of our people and that we are being you know as responsive as we can you know to our employees needs right. Now were 19 employees. At this point you know the idea that you know I joke, you know Marc and I had our first conversation like just over a year ago. We've raised two up two rounds of capital you know we.
Got her books and records you now in place we were able to report a pretty early in the cycle you know and feel like you know, we're we're setting ourselves up for success you can't do that without you know the best quality people and yeah. We just couldn't be prouder of the team that we have so hopefully that answers your question.
Yes. Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr. Mark Manheimer for closing remarks.
Well. Thank you everybody for joining today, you know certainly an exciting day for US you know where they are with their first call as a public company also we do plan on attending they read in a few weeks in and hope we can find some time to discuss our progress yeah. Thanks, again and have a great day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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