Q4 2020 Spirit Realty Capital Inc Earnings Call
Greetings and welcome to the Spirit Realty capital fourth quarter 2020 earnings call. At this time, all participants on a listen only mode. A question and answer session will follow the formal presentation. She would like to ask a question you May press star one on your telephone keypad.
On should require operator assistance during the conference. Please press Star zero.
So on your telephone keypad as a reminder, this conference is being recorded it is now my pleasure to introduce your host Mr per at all.
On your Vice President of corporate Finance and Investor Relations. Thank you Sir Please go ahead.
Thank you operator, and thank you everyone for joining us this morning for spirit Q for 2020 earnings call.
Presenting today's call will be president and Chief Executive Officer Jackson share.
And Chief Financial Officer, Michael Hughes, Ken Heimlich, Chief investment officer will be available for Q&A.
Before we get started I would like to remind everyone that this presentation contains forward looking statements.
Although the company.
These forward looking statements are based upon reasonable assumptions.
Subject to known and unknown risks and uncertainties that could cause 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 and Q4.
Any belief on the investor presentation.
Whereas for most recent filing with the SEC for a detailed discussion of the risk factors relating to these forward looking statements.
This presentation also contains certain non-GAAP measures for reconciliation of non-GAAP financial measures to most directly comparable GAAP measures are included.
20 days release supplement supplemental information in Q4 2020 investor presentation for.
Initially the SEC under form 8-K.
Today's materials are available on the Investor Relations page of the company's website.
For our prepared remarks, and now police or do you use Mr. Jackson share Jackson.
<unk> here.
On welcome everyone.
It's hard to believe that just a little over a year ago, we held our Investor day in New York.
For those of you who attended or had the chance to watch the webcast. It was a turning point for spirit.
We had finally become a simplified triple net REIT from a competitive cost of.
Thanks, Paul and we outlined our plans to take spirit forward and create value for our shareholders.
As I was preparing for this call I reflected on several of the key objectives, we talked about.
What we have accomplished on what is still left to do.
On previous earnings call I will revisit.
Capital those objectives in the context of our 2020 results.
So let's start with our portfolio.
At our Investor day, we laid out our medium term portfolio targets.
One of which was the overweight on investments and large sophisticated operators with a particular focus on public.
Manuel Noninvasive low investment grade credits.
Well, we find attractive yields on lease terms.
We like these tenants because of their scale and operating sophistication.
Access to permanent capital.
<unk> leverage policies on governance.
And believe these types of credits.
Brian.
For supply portfolio.
We will provide better risk adjusted returns on.
On a purely investment grade focus strategy.
Our credit thesis held up well during 2020 and not only did we experience very few to tenant defaults.
We actually saw many credit improvement.
And our most recent investor presentation, we added on slide called credits on the move where.
When we provided examples of credit improvements across 15 cash.
As you'll see.
Several have received credit recent credit upgrades, including at home Bj's track.
Thank you, Brian and Petsmart.
A few of our larger private tenants became public like Albertsons GPM investments on the cash.
Sports.
On a few are being consolidated through M&A to for larger companies.
Including bass pro shops acquisition of Sportsman's warehouse.
And Callaway.
The acquisition of top golf.
We're already seeing many of these credit improvements translating into cap rate compression.
And these operators along with several more across spirit diverse portfolio.
Good examples of how our rigorous.
Credit analysis, Inc.
<unk> investments.
Decisions that add value.
Another Investor day target was to further diversify our asset allocation by layering in a higher percentage of industrial assets.
Given the nature of our industrial portfolio on the attractive acquisition opportunities.
<unk> in 2020.
Our strategy proved both timely and fortuitous.
During the fourth quarter and the full year 56, 5% and 57, 7% of our acquisitions.
<unk>.
We're in the industrial asset category.
On 14, 9% of our portfolio.
It is now comprised of this asset type.
Compared to $9 five per cent one year ago.
I should also note that we collected 100 per cent of rents from our industrial tenants during the fourth quarter.
Overall.
Spirit's portfolio was put through the Ulta.
Gross tests in 2020.
And I believe that proved itself.
As you saw on our release during the year, we sold 18 income producing properties.
For $76 $7 million on proceeds and on a blended cash cap rate.
A $5 eight 9%.
We also sold 20 vacant properties.
Net of $27 7 million.
Producing a net gain of $1 3 million.
Further demonstrating the granularity liquidity.
In institutional demand for our properties.
Even during periods of economic dislocation.
We also achieved 99, 6% occupancy.
<unk> across 1800 60 properties.
Ending the year with only seven vacant assets.
On cash rent collections increased to 94% in the fourth quarter.
And if you exclude movie theaters and cash.
Cash rent collection rate was 98%.
In addition, we have no <unk>.
Bankruptcies across our top 20 tenants since the Covid pandemic began.
In fact, you would have to go to our 39 tenant studio movie Grill to find a bankruptcy and spirit portfolio.
Bottom line, our portfolio strategy is working our asset based on stable.
As we enter the new year, we see upside of the vaccine rollout gains momentum.
Some important growth oriented goals, we laid out at Investor day, we are to expand the acquisitions team.
Increased deal flow and return to $600 million rents by 2022.
We added key members to the acquisitions team in April.
On May and plan to add a couple more support.
Support personnel this year.
Spanning our bandwidth to source and process new business.
We were one of the earlier institutional players to pivot back to growth in 2020.
And as you can see on our most recent quarterly results our acquisition paces ramp.
That meaningfully.
For the quarter, we added 99 properties across 15 transaction.
On a cash yield of six 7%.
On economic yield of 745%.
The weighted average lease term for our acquisitions was $15 two years.
<unk> increased our total portfolio Walt.
To 10, one years.
You May remember our original pre Covid 2020 capital deployment guidance for $700 million to $900 million.
And even with pausing in the second quarter, we deployed $878 million near the top end of our pre Covid guidance range.
We.
We also grew on annualized base rent to $510 million from $461 million last year on increase of 10, 6%.
Despite the impact of COVID-19, we stay right on plan to meet our growth targets.
Another key goal was to further integrate our asset management and acquisition teams.
On our Investor day, we talked extensively about how our teams work together to close acquisitions.
I've always believed.
<unk> integration is critical.
Not only for transacting efficiently, but for developing tenant relationships that ultimately result in new business.
To that.
And we recently completed on important realignment within the organization that has formally folded.
Acquisitions and asset management teams together.
Ken Heimlich moved from the head of asset management to Chief investment officer, with both the acquisitions and asset management departments reporting to him.
Rosenberg.
<unk> previously moved from asset management, so had acquisitions in 2018.
Now we have the asset management function on returns direction.
These changes bring Danny extensive tenant relationship building experience.
Came through as multiple roles for that.
To the asset management team.
And he will spearhead the initiative to develop business from existing tenants, bringing.
Bringing up Ken time to focus more on new tenant underwriting on the deal pipeline.
From a tenant relationship building standpoint, we've continued to make headway.
The circumstances, we faced in 2020 allowed us to deepen relationships.
Simply with tenants.
Which resulted in new acquisitions with lifetime.
On P J for name a few.
In fact, you can see from our recent disclosure lifetime is now our number one tenant.
In 2018, we purchased five lifetime locations from Blackstone.
On since that time.
We've cultivated a deep direct relationship with lifetime.
Those efforts allowed us to add two more properties under a new direct sale leaseback during the fourth quarter.
We believe lifetime is a best in class health and fitness operator on.
On the resort like health clubs are well located.
We have a variety of offerings that make them an attractive destination for their customers.
While providing skiff barriers to entry for our competitors.
This transaction is an example of the type of relationship business, we are expanding upon.
A couple of other important goals that I will briefly touch on for.
Yesterday.
We're improving our credit rating and enhancing our scalability with technology tools.
I will let Mike discuss our credit profile and progress in detail during his remarks.
But I will just say that our balance sheet is stronger now than before the COVID-19 pandemic.
As for the technology.
That's something we have continued to refine and investing every day.
We have integrated power apps to RBI tools, which are used for every acquisition and predictive analytics are becoming more developed and widely adopted across the company.
Our accounting legal and operational systems.
From our excellent as demonstrated by our ability to release earnings sooner and provide sector leading disclosures.
Executing 238 deferral agreements on hitting the high end of our pre Covid acquisition guidance.
All possible because of the continued efficiency gained from our technology tools.
So we are continuing to move the ball forward and we accomplished a lot in 2020 for <unk>.
What's left.
For us not surprisingly, it's simply the recovery of movie theaters, which represents five 1% of our annualized base rent.
While the industry remains challenged it is worth noting that the liquidity and survivability.
<unk> of our operators has improved on.
May improve even further.
Most of our regional operators have access to main street lending program.
Which provided five year unsecured financing.
And we believe all of our regional operators are eligible for $10 million in grants under save our stage.
<unk> relief plan approved by Congress in December.
Outside of the regional operators or national operators have always substantial amounts of capital significantly.
Significantly improving our liquidity positions.
Regarding our two operators that filed in 2020 good Richard.
And studio movie Grill, there are some positive developments there as well.
As we previously disclosed.
For former Goodrich locations are now under a master lease and are being converted to a strong regional concept imagine.
The tenant plants.
Or to invest approximately $10 million.
Into the renovation to those for theaters starting in the next few months.
Our studio movie Grill site in Georgia is being assumed in the bankruptcy.
And we are in LOI negotiations with a new operator for.
For the three farmers studio movie Grill sites in California.
While we only recognized 30.
34, 5% of movie theater rental revenues during the fourth quarter.
By the end of 2021, we may have all of our operators within the movie theater segment paying rent.
Regardless, I don't believe theaters or zero for spirit.
They will come back it's just a question of when and how much.
In the meantime, we are moving forward and growing the SSO in the theaters will just have to catch up to us.
When I first started thinking about where we are today versus where we were a year ago and the impact Covid had on our progress initially focused on our 2020 <unk> per share of $2 95.
Which is ironically the same pro forma number we guided to for 2019 at our Investor day.
So for a moment I thought Wow we.
Loss per year of progress.
But when I walk through the rest of our goals and objectives.
I realized that we didn't actually lose a year.
Yes.
Our earnings took a hit which I believe is just transient.
But we achieved every other goal and benchmark that we set out to do and more.
Good day at Spirit, we have a proven portfolio with strong tenants and tested underwriting.
Our fully integrated asset management and acquisitions platform that is producing results.
Deeper relationships with our tenant base.
Enhanced tools to support our underwriting forecasting and monitoring.
Our pristine balance sheet.
And the opportunity to substantially accelerate earnings growth over and above our expectations, depending upon the shape of the movie theater.
Other industries recovery.
Finally, I believe our team is best in class and I hope, we have demonstrated that over the past three years.
Spirit is much stronger and better positioned company than just a year ago and.
And our team portfolio and platform.
A position to create the value we outlined at our Investor day.
I'll just end by saying if you attended or listened to our Investor day in 2019.
Would you like to spirit story and the value creation opportunity then you should really like it now with that I'll turn it over to Mike Mike.
On a great Jacqueline.
We compound the growth for began last quarter by more than doubling our capital deployment volume during the fourth quarter, which increased annualized base rent by $29 million slightly offset by accretive dispositions for a net increase of $26 3 million.
Fourth quarter rental income, which included base cash rent of 100.
$17 9 million increased $15 5 million to $128 4 million.
The increase was driven by acquisitions completed in both the third and fourth quarters and recoveries of prior period cash rents of 600000 on the fourth quarter compared to write offs of prior period cash rents of $2 9 million in the third quarter net.
For recoveries this quarter versus prior quarter losses reflect the better cash collections trajectory, we are continuing to experience.
Other income was very small this quarter contributing only 68000 earnings.
As I mentioned last quarter, our two remaining mortgage loan receivables totaling $29 million were repaid in full.
Greatly simplified.
Refining our income streams.
Going forward other income will primarily be generated by our one remaining direct financing lease interest income on invested cash and any lease termination fees.
Property cost leakage defined as unreimbursed property cost as a percentage of base rents improved to one 9% in the fourth quarter compared to $2 seven.
7% in the third quarter and for 1% in the second quarter for you.
Target, 2% is our long term average run rate.
This improvement was driven by the continued stabilization in our tenants' operations and balance sheets, enabling them to stay current on their lessee obligations such as property taxes.
Corporate G&A remained low this quarter at 12.
And we reported $48 4 million for 2020 for 4 million less in 2019.
We do expect that G&A will moderately increase in 2021 due to normalization of travel office expenses performance for compensation and additional ESG initiatives.
Finally, while modest I do want to point.
12 million income tax expense was a positive 133000 this quarter versus the normal run rate expense of around 150000 due to a onetime tax liability true up related to the termination for external management agreement with essence yet.
Now I'll turn to everyone's favorite topic rent collections as Jackson mentioned, we collected.
Out there for percent of our base rent during the fourth quarter for 98%, excluding theaters and that collections rate was very steady over all three months of the quarter.
We've also seen an uptick in January with cash rent collections currently standing at 95%.
We believe that percentage may go higher.
Please note that our collections metric.
It does not include any recoveries from prior quarters for any repayments of deferred rent.
Regarding movie theaters, we recognized in earnings $2 3 million of movie theater rents during the fourth quarter out of a base of $6 6 million or 35% of movie Theater ABR.
Of that $2 3 million, we collected 44% in the fourth quarter.
90 slight increase from the 40% collection rate we reported during the third quarter we.
We have not place any additional movie theater tenants on cash recognition.
For the year, we deferred $31 9 million in rent.
Of which $5 6 million was deemed not probable of collection or said another way.
Not recognized in our earnings.
We have also abated $6 3 million of rent.
During 2020, we received $6 1 million in deferral repayments and ended the year with a deferred rent receivable balance of $20 2 million.
Our deferred rent balance is primarily comprised of for industries, 20% movie theaters, 18% health and fitness.
18% casual dining and 16% entertainment.
During 2021, we expect deferred rent repayments of approximately $12 9 million net.
We expect to incur additional rent deferrals, primarily through percentage rent agreements with certain movie theater tenants.
On the actual amount of those deferrals will depend on each since 2021 revenues.
On the maximum amount of visitor for us as currently structured would equate to $9 2 million. We are also currently agreed to abate 1 million rent during 2021.
Given the stability in our tenant base and rent collections with the remaining area of recovery primarily confined to movie theaters, we are returning to our pre COVID-19 operating metrics.
Word on tenant health.
As such you will see us mornings reporting materials inclusion of loss rent, which as a percentage of contractual rent that we deemed not probable of collection.
For the fourth quarter, our loss for <unk> was three 4% for 1% excluding movie theaters, the delta between our fourth quarter cash.
We're on collections of 94% and base rent is the $3 four per cent of law strength to percent of recognize rent deferrals and <unk>, 6% of rent abatements.
Now turning to the balance sheet during the quarter, we entered for contracts to issue $6 4 million shares at a weighted average price of $36 85 per share.
Also during the quarter, we settled $8 9 million shares under for contracts, resulting in net proceeds of $310 9 million.
As of year end unsettled forward contracts for $4 1 million shares of common stock.
We ended the year with corporate liquidity of 1 billion, leaving us on a great position to start 2021.
Share credit metrics also improved from the third for the fourth quarter.
Average decline from five six times to five three times or five times pro forma for the unsettled forward equity are.
Our fixed charge coverage ratio rose from for two to four four times and our unencumbered asset ratio improved from two six to two eight times as.
As a result of our.
Our core balance sheet and stabilize operations.
We received two outlook changes from the rating agencies, including an outlook upgrade from negative to neutral from Fitch and an upgrade from neutral to positive for Moody's we are.
We're pleased that both outcomes.
Regarding our upcoming maturities, we paid off our 2020 term loan in January anticipate paying.
Our conservative convertible notes from they mature in mid May.
After the convertible note maturity and excluding our revolving credit facility, we will have no unsecured debt maturities until the second half of 2026.
Now turning to guidance for 2021, we forecast net capital deployment, which includes acquisitions and revenue producing capital.
<unk> net of dispositions of $700 million to $900 million.
We forecast <unk> per share of $3 for $3 10.
Implying a year over year growth rate of 2% to 5% on.
Also wanted to note that we are maintaining a higher loss reserve and our forecast this year, which we believe is prudent to have further clarity around the economic recovery.
<unk> vaccine rollout and government stimulus.
And finally, I just want to reiterate with Jackson said earlier that spirit is in a better position now than we were a year ago.
Earnings growth was stunted last year I believe we will recover for quickly and older loans rod shareholders with the value creation that we originally laid out at our Investor day, So with that I will turn the call back to the operator.
Covered to open up for Q&A.
Operator.
Thank you ladies and gentlemen, the floor is now open for questions. If you would like to ask a question. Please press star one on your.
At this time.
A confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
Operator participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
The interest of time, we are asking people for please limit yourself to one question and one follow up once again that is star one to register a question.
First question is coming from Handel St. Juste of Mizuho. Please go ahead.
Hey, Good morning Hope you guys are low.
From warm down there in Texas.
Thanks for taking my question.
First I guess is on rent collection from deferrals, how much of the three 4% of lost rent is reserved against.
Did you move any tenants.
The cash basis.
In the fourth quarter.
January.
Mike do you want to go ahead.
Yeah.
So I mean, all of the three 4% of loss trend is reserved against.
<unk>.
We didn't have any material changes in terms of tenants moving to a cash based on the fourth quarter.
Can't think of any.
That actually moved in the fourth quarter.
Yes.
Okay. Thanks.
The million dollars of abatement.
You mentioned in 2021 can you give us little bit of color on maybe what was.
Some of them from and does that $1 billion included at both the upper and lower end of your guidance range for sure.
Yes.
Is it isn't all the range is on the up on the lower end.
And those are set that's going to be permanent on the theater industry and those are just abatements that we exchanged for lease.
These enhancements.
Yes.
Got it got it and then on <unk>.
We do this asset and 5% of rents here I'm curious if we didn't hit your comments that you.
Would be more willing to transact for the sector and perhaps engage with on the larger national operators and how should we think about that 5% of exposure there.
And I guess as part of that.
AMC, having recently done some recapitalization just curious on your level of comfort with not only the sector, but larger national.
Operators like AMC.
Yes, maybe I'll take that good morning handle Jackson so.
Yes, I'd say.
More than likely our theater exposure.
Net increase in the short term.
They'll try it.
Make sure we work with our.
Diverse portfolio of operators.
I did see the AMC reference.
Can't really comment on it obviously went through it would be great but.
The other anecdotal information that we saw last weekend was in China.
On the opening weekend of Chinese new year.
Yeah.
It's a tremendous amount of business out there.
775.
Million.
Dollars of revenue. So it's the theaters are doing well on China, and obviously they are handling the pandemic quite admirably in terms.
A containment.
In China, there are still booking seats online and things like that so people are going to the theaters and theyre not really see any new big content as well with a more local driven content. So as my comment said people are going to go to the theaters and with the stimulus that's been put.
They did two main street lending and hopefully our state <unk> stage grants and those grants by the way was $10 million grants are just grant you don't have to be repaid.
We think that's going to give both our regional and national for the time.
Obviously, the national operators don't get.
That 10 million.
But we think theyre going to get for time to be able to get that content. That's on the shelf come out so.
For you to answer your question I don't see any new net investment in theaters for us for the short term, but we'll evaluate it as time goes on.
Got it thanks for the thoughts.
Thank you our next.
Glenn is coming from Vikram Malhotra of Morgan Stanley. Please go ahead.
Thanks for taking the question and I hope everyone's well and safe.
Just maybe Jackson, you've talked a lot about sort of the goals that you had set out for the year and if you look back you know you've achieved most of them I'm just wondering given sort of the push in acquisitions.
<unk> the hiring as you look.
Into the next year or two and given the hiring you've done on the acquisitions team. What areas are you sort of focused on that where may be similar to what you were doing pre COVID-19 and then can you talk a little bit about where you're making changes in terms of either property types geographies.
Just.
Question, the if there's any changes from the approach.
Sure.
Thanks for that.
Well first on the.
Let me just spend a minute on the on what how were doing the business.
As it relates to the current team that that realignment that we talked about with Ken.
In practice.
Maybe even started to happen in the middle of last year.
As we restarted our.
Investment.
Our investment process again after the second quarter on bright.
Ken.
Two the acquisition pipeline meetings.
Well as Travis and so they were.
Integrally involved in just even the formation of of what we're going to pursue.
As you remember a lot of our.
Acquisitions people were also.
<unk> on rent deferrals, so Danny was running one of the asset management teams.
And it just became really clear as we continued on on that process.
Process that so this was like a natural move to have Danny do what he does best which is asset management.
Those client relationships with our existing tenant base and Ken's leadership on the investment side to make that final.
<unk> as we talked about moving image on the Chief investment officer role.
So I want to make sure people understand that we've been doing this already for a good half year.
This past year. So it just was a natural adjunct.
In terms of.
Investment approach.
You've heard us talk a lot about.
Our sweet spot being public tenants in the single B.
That will be area, we put that slide if you get a chance to look at it later on thank you to slide eight in our investor deck.
It's about those top 20 public tenants.
And the spirit portfolio, but the other interesting stat is if you looked at.
Our publicly on tenants and looked at it compared to 2017.
Second quarter net.
You remember that was about 37% shopko surprisingly was our number one tenant that damn low today.
Today, we're at 51%.
In terms of public ownership, and we love that because that's permanent capital.
That's tenants Delever.
So as we think about.
Our investment approach, we're looking at not only good real estate good credit, but we're looking at tenants that can benefit from positive.
Uplift so to speak and that's why we really loved that page on page nine that talks about these credits on the move.
If you look at that page, that's 19% of our contractual rent.
<unk> looked at that.
Just read the little comments on see what's happened.
It's quite.
It's quite good to be honest with you and that's what.
Well it wasn't luck was very deliberate and intentional on our part. So so we think that that continued work on focusing on the heat map focusing.
Please state rankings, focusing on credit being really deliberate about.
Asset allocation is going to pay off and I think finally.
And for the long winded answer but if.
If you just look at our investment in the fourth quarter average.
Investment size is about $4 million right, we did 99 property.
If you do the math, but the range of asset that we acquired was 1 million to average at a low.
North of $40 million in terms of size. So there was a lot of diversification within the portfolio do you look at the average.
Deal size transaction size for.
Property.
It's kind of core.
Right around $30 million. So if you look at the at the mouth. So so we're going to continue to try to build diversity.
We are very focused on these industries very deliberate and gesture to the business I don't think we have to do very much organization. This year just add a couple more.
Or I'll call it junior level support into that team to support Ken that would be in good shape.
Okay, Great and then just.
To get your sense of sort of the earnings power of spirit in a post Covid World you mentioned the balance sheet is in a better position versus pre COVID-19. So can you can you touch upon sort of where would you like sort.
The year is to be on a 12 18 month period, and then if we think about a.
Target for cash flow growth engines from call it a target, but the ability to grow.
<unk> from here on a multi year period is do you think there's a change in that in that range in terms of what what spirit can achieve.
Well I'm going to let I'm going to Pat before I pass it over to Mike to answer some of this one thing I would just say is that.
Portfolio is very stable and.
I don't know if we could have said that for years ago was more challenging we have a very very stable tenant and portfolio base. So you have to have that as a starting point.
And then we also have the benefit of the portfolio is improving right like credits are improving so that's a really good thing.
Ben it's simply just acquiring and acquiring with acquiring assets, where there is no surprises and one thing that we did in 2020.
We had no different we had one deferral request.
And from the acquisitions that we did in 2020 and that deferral requests was ultimately retracted by the tenant so so they're all current on their obligations.
If you keep doing that and you sort of our deliberate about what you do on your finance appropriately. Yeah. You can really just this is a really powerful earnings machine and Microsoft.
Mike will go into the nuance of of the movie theaters, which I've told you that they will come back and we expect them to have really.
Help us as we move on through the course of the year I don't know, Mike do you want to add on for somebody.
I'll add on on a couple of things, let me start on the balance sheet.
Jack So on the portfolio, we are a very stable base.
I think our acquisition strategy is going to produce a lot of growth I think that's the key I mean, if you look at us today.
We can produce F for growth and our cost of capital is not as good as a lot of our peers moving so preset growth with our acquisition strategy, we get good yields.
So our balance sheet will continue to improve I mean, you saw the ratings Act.
Actions.
And the last couple of quarters I believe that with Moody's we were only one or two.
People on their universe of day rate that they took a positive ratings action on the lot since COVID-19 hit some pretty impressive, but we're going to continue to improve in our cost of capital improves I think that's a different thing we can produce <unk> growth today with our.
Our existing strategy comparable to all of our peers.
As our equity multiple catches up which I think it will as people see that growth and our cost of debt continues to improve with continued ratings improvement continue size build with a company. That's our spreads continue to compress on our bond side, you've seen that materially over the last couple of years all of that's going to.
Continued to widen the investment spreads, we can get it which will accelerate our growth and we're thinking about our balance sheet and I think about just every time, we should take as cheaper and cheaper I look forward, we saw some legacy.
Piece of paper and on our capital stack, where these converts coming due.
And on May 15th and you know when I started as CFO about three years ago dosing.
Those seemed pretty cheap today.
On three after some paper seems really expensive for us.
And I think forward, we have CME S debt still on the books at over five 5%, we have preferreds that we issued at 6% from callable next year in 2022.
And so I started thinking about it with our even our current cost.
Of that we could those are very accretive refinancing opportunities that we have today, because our cost of capital for so much and now I'll continue improve more so I think.
The Big thing that spirit has that our acquisition model works to grow and so on our cost of capital because you can get better and then on theaters as Jackson mentioned I look we've taken a very conservative.
And on a theater revenue recognition I think more concern than some.
And that really leaves you a lot of upside when you look at our Q4 numbers and you know that 70% of our theater revenues not in there.
And knowing the diversification of our theater tenant base is very diversified lottery operators.
For promotion a lot of.
Government stimulus interaction in pretty good shape.
A lot of upside as those earnings return, we're not kind of banking on those today and so I think when you take all that into account I think it's a very good multiyear growth trajectory for spirit that could really surprise people.
One last thing I'll add you talked about years.
Theyre getting from and I think that ultimately.
And the Camino on my former career before he came to spirit.
I was on the banking side. So it was all about trying to solve clients.
Really trying to work with clients objectives and trying to help them.
What we do here at spirit.
And as we kind of continue to.
Align our.
Our organization with our tenants and our tenants are our partners right, we want to really help them grow.
That conversation is happening now and doing repeat business with existing tenants, it's a very powerful and day.
Image for us.
Not just from a.
Predictability standpoint, as you can kind of map out for future in terms of our acquisition pipeline, but how we can shift the allocation on the portfolio.
And then does it as well as anyone and so on.
We are trying to aspire to do it that way and I believe we have the right people in place.
Losses.
In some places we're still not there yet I think we're really gaining a lot of momentum but that's.
When we really pulled up piece of the puzzle together youre going to see some tremendous.
Earnings acquisition power off the platform.
Great. Thanks, so much for all the color.
Thank you. Our next question is coming from harsh.
<unk> of Green Street Advisors. Please go ahead.
Thank you.
Just talk about the industrial line this quarter about half of the deal.
And so I'm just.
Trying to understand your appetite for the.
Property day going forward, given all the capital or using it right now so what kind of capital sourcing and you're still looking to acquire going forward.
Good morning.
Yes, the answer is yes.
Or should we.
We still have we do have an appetite.
Industrial we will do more.
We're not going on we don't have a particular target.
In mind.
Part of this of what we're doing is.
Trying to find the best risk adjusted returns for our capital right. So.
It's going to fluctuate I mean, it was obviously high this year this past.
<unk> primary on high, particularly high on the fourth quarter.
But what I will tell you is it's going to continue to moderate going forward.
Still like a lot of interest we still like what we do with the in terms of the other industries that we invest heavily gyms you saws.
From fitness will absolutely excited about what we did.
Last year's time and did it we did another property on the on.
On the high volume low cost operator side. So yes, we're I wouldn't say, there's any new shift in what we do but industrial has been we've talked about it for a while and we've continued to.
Increase our investment activity and that's that's going to be in.
Part of what we do I think the piece of the puzzle thats, a little bit different and nuance for us is.
For the type of industrial properties that we're buying they tend to be.
Long long dated direct sale leasebacks with fixed escalations.
We're not buying multi tenant industrial we're not.
With lightning industrial value add that's that's not really the.
That's not in our wheelhouse, where we think we can add value is really understanding kind of the credit profile on upside of a particular tenant and hopefully getting in at a very good basis with.
With long term.
Long term lease and we've already seen that.
Five our industrial acquisitions, where you've seen real credit upgrades and that's such a big positive for us. So so I'd say that our industrial is very narrow defined line right now we're not competing.
With the broader based some of the broader based on value add and core industrial buyers right now.
On some of them. Thank you and then on line on.
On the Hudson fitness side you.
You talked about the late stage Deane Elizabeth.
And obviously, we haven't seen a lot of public market capital flow into wood, the Hudson fitness property day I was just wondering how is the bidding process.
Was that a lot of competition.
What kind of GAAP it youre seeing on that property day, because you can shed for it.
Yes, im not going on because well I can tell you on that particular transaction that we talked about it being a direct.
Lifetime was a direct.
Deal there was.
The broker right so.
They had a desire to do something by year end, we had similar desire. We know these properties well, we know that credit well.
Uh huh.
What's great about what they do all of their facilities are open today in the United States.
They have a very very unique business.
There was little its almost like country club like.
And in terms of their data that day.
Data that they have on who's coming into their gyms, who got COVID-19. If they did you know there it's.
It's very impressive data and it's not there.
They're very very safe and what we like about them is they've been.
It was margin adjust their business model to be very profitable, even with some of the space constraints that were put upon them by different municipalities and.
I don't know if you I can tell you, but me personally I really want to go back to the gym.
I'm tired of writing peloton at all it's really kind of getting a little bit annoying. So.
Been able I believe that.
People will vote with their feet when they can and not all operators are going to do well, we we really like lifetime, we like I said, we made an investment in the fourth quarter on a high volume low cost operator, which is equally gonna be super successful we believe.
So yes.
<unk>.
We still are very favorable on that industry, because we believe that the COVID-19 vaccines are are going to essentially get us back to on some some semblance of normalcy.
Thank you.
And then in terms of cap rates I would just say they were they were wider than a year.
No.
Just to state the obvious from an investment standpoint. So we also thought that that was kind of an interesting time for us to make those investments and we believe there will be cash cap rate compression in that segment.
Time goes on this year.
Thank you. Our next question is coming from Keybanc Kim of true. Please go ahead.
Thanks, Good morning.
Hi.
In terms of for your 2021 guidance.
For $2 $3 million of movie theaters that you are currently booking recognizing the revenue what is implicit in.
On guidance.
Right.
Yes.
When we dig too much on the details Kevin but I can tell you. It assumes a modest very modest recovery in the back half of the year and so said another way.
It would be that recovery trajectory.
From an impact on the low and the high end, but it will not make or break our guidance as normal in a normal year. Our guidance is going to really hinge on our acquisition volume timing and GAAP rate.
Okay.
And in terms on the acquisitions and dispositions can you just provide a little more details and parents alike cap.
So next on your acquisitions in discussion.
And on.
For acquisitions, what type of what type of assets for targeting.
Uh huh.
Keep it as Jackson, I mean, I think for us.
I think it's going to look a lot like what it looked like in the fourth quarter.
We usually talk about trying to target.
Somewhere between a high 607 going in cap rate and thats going in cap rate not economic cap rate right because most of our deals have very long dated lease terms with escalations. So the.
Yield is much higher but.
Economic yield.
But I would say you know if you look at our heat map, where we're we're just going to continue to do what we do I think one of the things Thats interesting about spirit. If you look at our top.
Five tenants.
From a.
Percentage of total ABR or contractual rent I mean, they're right on top of each other there's very.
Little spread.
In terms of like 2% for three to five per cent for 3% of ABR in that top five tenancy and figure it out on the top 10 sort of similar I think there's like a 100 basis points of difference between the 10th tenant on the largest tenant lifetime fitness.
So I like what.
I would tell you is our top tenancy is going to move just given as we deploy a move and what I can tell you exactly what they are right now, but but we will in time, but it's a you know the industries are if you look at our heat map, we were pretty disciplined it's all pretty transparent there. So yeah look we look.
Forward to doing more car washes.
I think you'll see us to continue to do industrial light manufacturing, you'll see us hopefully do more casual dining Jos ours are challenging because of pricing, but we think there's going to be some interest in casual dining opportunity left health and fitness, we loved the sporting goods area, We love warehouse.
Our warehouse.
Clubs.
At home, let those guys right.
Continue to do more at homes, it's such a good story.
And so a lot of the things that we had acquired had been real beneficiaries of Covid and as we come out of Covid will will shift some of that allocation into.
For more what I'll call real estate that relies on high touch aggregation.
Of people right now so so you'll see us make that shift as the year goes on.
Got it thank you.
Thank you. Our next question is coming from Wes Golladay of Baird. Please go.
Yeah.
Hey, good morning, guys and thanks for taking the questions.
Yes.
On the capital allocation is it a fair assumption to say that you're willing to move up the risk curve for a certain segment of what youre going to allocate this year or I guess do you view as maybe not as high risk based on the quality of the real estate and I'm looking specifically.
Go ahead, the lifetime fitness as she has been under pressure from the rating agencies, but maybe you could talk about the quality of the real estate.
Yeah.
Sure I mean to us like lifetime is such a unique business model.
If you look at the size of those facilities.
Yeah, they will be.
They they will do what they do because there is demand for those facilities right on that.
Way, we think about it is.
Credit can change obviously given different.
Exogenous events that occur outside.
So even if.
Even if there were a deterioration on the credit I'm not saying.
Specifically lifetime, but just to use them as a hypothetical example.
That facility is going to still be what it is today.
Credit may change the credit may.
Recalibrate restructure and if it did it would still be what it is because once again there is demand for those facilities.
So to me, what we really focus on is.
What is the demand for this particular unit type doesn't have the ability to go through different economic cycles I E 20 years at a minimum right and we believe that like for like that you know have the consumer demand for.
Backdrop.
Cities on it for the kind of propel them for the next two decades. So if you have that youre going to get through it whether a credit changes or not.
Because things do happen in an economic as you go through different economic cycles.
That's an important part of the discussion that we look at when we make an investment like that so it's just a good real estate right obviously.
Dropped real since really important so that's also a consideration, but when you look at the long term demand.
Consumer demand and that's really what it really comes down to and the barriers to entry for those types of facilities on it's really difficult to replicate that so so we think that we're very.
Yes, we're very confident about their abilities and yes, there may be shorter term.
Credit downgrades on things like that but long term, we think the viability of that unit the operator that location.
Because of our consumer demand coming on the top line will support it.
Yeah, maybe Santa Teresa.
And then in terms of other risk, we don't consider ourselves on risk taker I mean, we're buying very long dated steady assets and if you look at our portfolio I mean, like we used to get a lot of comments on quality of the portfolio. It. It is not a risky portfolio, what we have today and we're not.
Going out on the risk curve, that's not that's why when you when we focus on at seven or high six going in cap rate, we think we're taking adequate risk adjusted.
Making risk adjusted benefit up investments based on our cost of capital when you start to go for higher yield obviously, there's a return.
But the higher default rates start to come into play.
And obviously, we're not in that low six area, which is best.
That's my grade. So so we think we've our sweet spot we think we understand it we know what we've got history behind it and we're going to sort of stay on that lane.
Got it I guess, maybe another way to frame up for questions I look at your.
And you obviously had a lot of credit improvements and there are some you know maybe some tenants that are when the rating agencies look at them, maybe a little bit higher credit, but may be you see improvement and to be fair to the lifetime looks like even the rating agencies sit on that credit is likely to improve over the next few years. So do you see opportunity to invest in stuff that you see will make it to slide nine over the next call it year or two.
Slide absolutely absolutely if you're sitting in our investment process that that's a huge part of what we talk about.
I'll look over to Dave Wagman, I'll look at Travis Ken.
We're making real estate decisions, but the credit is huge and it's not good for current credit what would a credit b.
And obviously.
Obviously, we had the hindsight of Covid so.
Without getting specific I can tell you that the things that we invested in 2020 if.
If those tenants had closed for business.
Shouldn't assume that we were able to get structure protection for us in the event those facilities had to be closed and so there was no rentals.
Option for us.
Got it isn't a can you talk about what is the embedded bad debt reserve in.
Guidance for this year than maybe what it was for the fourth quarter last year 2020.
Good morning, Doug.
Talking about that.
Rent disrupt so.
I was talking about this back at our Investor day, we typically.
Have a 1% loss rent reserve built into our forecasting.
We took we have taken that up in our guidance for 2021, excluding theaters, that's a whole another animal so ex theaters, we've taken it up over 50 basis points.
We're running.
And that's embedded in our guidance at the midpoint right. So you can flex that up or down lower high and then you guys theaters again, we just we assume I mean, you know what we did in the fourth quarter. You know we recognize it's pretty stable and then we have a moderate recovery in the back half of the year. So that's the best way to kind of model that out and think about it with our portfolio stabilizes.
Running a little higher low our reserves.
And very boss recovery on theaters.
Built on there.
Alright, thank you.
Yep. Thank you.
Thank you. Our next question is coming from Brent Thill with UBS. Please go ahead.
Hey, good morning, everyone. This is simple in place for Brent.
Most of my questions have been answered already but I was wondering if you could provide any detailed metrics deal metrics around the.
Industrial assets, you've acquired in the fourth quarter anything around yields cap rates location and the types of the underlying tenants.
I mean, I would say that a good number of them were public chats.
A good number of them.
What's interesting about our industrial acquisitions.
Without getting into super detail on the named for the tenants.
<unk> could be smaller mission critical facilities.
Well I E 4 million dollar size.
$30 million size facilities, but they all sort of have a common theme for them, we really believe in the fundamental underlying credit behind them.
We believe in the long term prospects of the industry that day.
And we think that the facilities that.
That they operate in that we've acquired are pretty mission critical for them, we think that the basis per square foot.
Makes sense as it relates to if we had to release that facility and we generally think of all of the buildings that were buying.
Our.
Straight up industrial buildings sheds right. So.
So that's but the other fundamental.
Attribute is that they generally all have long term leases I mean, we are not buying things to release value add. These are these are really critical facilities for good tenants and all they wanted to do is just pass around.
Ron do what they.
And we will.
We support for those of those are the kinds of Thats, how I would describe it.
Hmm.
Lay out on that portfolio.
Okay, great. Thank you for taking my question.
Mhm.
Thank you. Our next question is coming from Linda Tsai of Jefferies. Please go ahead.
Hi.
Any thoughts on growing the dividend in 2021 should it mirror low to mid single digit ASP growth you've outlined.
Mike is smiling right now suddenly let him.
Okay.
Yeah, Linda we actually talked about this.
Back before Covid it actually I think goes on our Q.
For 19 earnings call in February.
Last year and you're on.
Our goal is to get to 75 per cent for sure.
Your payout ratio for sugar on the dividend so.
I think.
Is that achievable in 'twenty one.
Obviously, that's our guidance stays but again there is upside.
Good morning, and theater some of the things that could drive us there.
But yes, it's not that far away I mean, certainly when I think back to where we were at Investor day in the forecast we were talking about that in kind of the timeline for hitting that 75% payout ratio on growing the dividend.
It feels like we're kind of at that point again, so I think it's definitely near term, where there's 21 or not.
I'd say not impossible, but we'll we'll see.
Yeah.
And then in terms of the 1.5% rent escalators vary across industry type in terms of retail distribution or manufacturing.
Ken do you want to take that Ken I'll, let you.
You're on mute.
Yeah, I couldn't hear the question.
Oh, the one five per cent restaurants, the layers variation across retail distribution or manufacturing.
Well, what I would say is all the acquisitions that we're looking at now tend to have obviously rent bumps escalators and then industrial.
Lean more towards the upside on that in the 2%, maybe even a little more.
So the industrial escalations tend to be a little higher than the other.
The retail type of escalators, but low.
That's an important feature on what we look for on all of our <unk>.
Acquisitions.
All your goods that answer your question.
Yes, Thanks, and then on just the last one on ESG initiatives, you know whats the focus as it relates to E S or G and what are some key benchmarks you're working towards.
Well I think when.
When you were on a proxy comes out you will see some commentary on.
For the rating improvement.
I'll focus on.
Asks for a minute.
We we did a lot of things during Covid actually which was really proud of.
Had a companywide.
Diversity Symposium, we had an outside consultant come in.
On somebody at our board to participate.
And really the purpose of it was to talk about implicit bias.
It was a great day, we were able to do it on zoom.
And like I said it was moderated in participant participatory buy the whole company.
We since then created that diversity.
Initiative Committee.
And they are moving forward with some initiatives this year for the company diversity.
And then for on the womens side, we have done.
We've created we've really made a big effort to try it.
Instill gender diversity as well as racial diversity within the company so.
We have on initiative there as well.
On the E side, it's a little bit harder for us just given the nature of what we do.
We're not developers we we are.
We have a capital providers and sometimes we are doing take out financing and we're looking at different ways, where we can advance the E side.
So what we do but I can tell you on that on the social side we are.
Very very active and committed.
The senior leadership team and that goes down throughout the organization. So.
And New York I think during Covid, we tried to find ways for interesting ways to bring the company together have more funds two things together.
<unk> I think that's that's really helped build our community just within our company. So.
Thanks, maybe just as a follow up when you underwrite acquisitions do you look at the resiliency of the buildings Youre buying.
Absolutely Ken once you got to take that Ken.
Whether I don't know.
On the answer would be absolutely a we've talked about before we feel like we have a a very nuanced property ranking model that every single acquisition, we do it that's one on the first steps when we're.
In the early stages, when we're still exploring the opportunity.
As we have the asset management.
Yes.
Every potential property through our property ranking model and a big piece of that model is specifically that.
Is the building in real estate that the building sits on so yes, it's absolutely.
And ingredient in our acquisitions and underwriting.
Team.
And one last thing Linda 50, 50%.
Our organization's pits is almost 50% split gender.
No.
Great. Thank you.
Thank you. Our next question is coming from Joshua that a line of bank.
Of America. Please go ahead.
Yeah. Thanks, Scott.
For one as well Ken congrats on the new role on CIO.
Because I'm kind of curious to hear your thoughts on how this new structure will help src accelerated acquisition growth in the coming years and maybe.
And maybe also how you think youll spend most of your.
Time under this new structure.
Thank you very much.
I would say I'm going to be spending a lot more time working with our acquisitions team.
As Jackson mentioned, Danny we're very fortunate Danny can come over.
And really focus on.
On a very important initiative for us, which is continuing to grow with our existing tenants.
Through Covid.
One <unk>.
Silver lining if you will was how close we got to our tenants.
So we know exactly what's tenants that we like which ones.
Grow with and where we're doing that.
In the fourth quarter over 40% of our acquisitions for with existing tenants. So that's just kind of a start.
But I would say the a lot of my time will be spent on the acquisition side.
We've made a lot of improvement to our processes.
We will continue to do that.
Excuse me.
And we're laying the foundation of the <unk>.
Targeted sources that we wanted to do business with which is not just our existing tenants theres. Other targeted sources that we feel like we've got the flywheel spinning and we're in a position now we can put a lot of focus time.
We want to go on on building those processes.
Great.
That's it for me.
Yes, Josh I would just I would just add one more thing Josh on that from front. The exciting thing I can tell you without being specific is.
Touching on tenants get through Covid. The next for me says Hey, you guys were really good to work with I kept this new idea I am thinking about doing that.
And when we can get on early in that conversation this might be I want to acquire this other operator, how do I do that or what can you do for me.
And if you go.
Listen what we said in the past in terms of some of our values.
When we do what we say for Tennant.
That goes along way because I think that.
While people talk about cap rates going down and people buying.
It's people want certainty, especially on the operator side they want to know.
Who's on the other end, if I get into trouble or I need capital for a see a fantastic opportunity.
I think theyre going to make.
Different decisions about who their financing partners.
Who their financial partners are going to be going forward. So.
Alright, I think thats the cell line.
Back to those conversations have accelerated a lot recently and I think will only continue to accelerate as the year progresses with our tenants. So I'm excited about that.
That's great for the exciting to watch.
I appreciate that guys.
Thank you. Our next question is coming from Greg Mcginniss.
On a loop of Scotia Bank. Please go ahead.
Hey, good morning, everyone.
And lots from Taiwan, So far so it's probably just one question for me today, but spirit had a busy fourth quarter for productive year. Despite the pandemic, you're expanding the acquisitions team and I'm not trying to take away from the strong 'twenty one 'twenty.
Guidance for all but what prevents you from being more bullish on net investments or if we might consider that target to be I don't want to say conservative, but maybe the high end of their age is very reasonable and if the transaction market doesn't shift much.
I think what would change it would.
'twenty one.
We're very disciplined about this allocation, we were very focused on industry allocation and concentration and diversification.
So I'd say, that's one thing that could change it.
I think the second is our work.
So it is not past there have been from.
Could be some portfolios that we looked at last year.
One in particular, where we weren't successful.
We're always looking at.
We have the ability to kind of size up the big portfolios, given our technology tools quite efficiently.
So if we did a larger portfolio that would obviously impact.
The current guidance that doesn't.
Current guidance for next year for this year it doesn't assume any portfolio acquisitions, so that that could kind of move the needle a bit.
So.
Yes.
We're open for business.
Keep so but I think this is a this.
This is a reasonable range that we put out there and we feel good about acquisition size wise.
Okay. Thank you and I guess I lied actually I do have follow up.
What's a reasonable level of dispositions to assume within the net investment guidance and you anticipate harvesting more of those kind of lower cap rate assets.
Can you sell over the last couple of quarters.
Well I think first and foremost when we and I'm going to pass it to Ken Xie.
Remember that we talked about this proof of concept so low.
We decided to.
Structure, our disposition program last year 2020.
It was in the depths of Covid right. So we wanted to have a proof of concept this year.
You might see some theres some pretty.
Ken ill take Thunder from your body for some real cap rate compression in some parts of our portfolio right now.
That we're evaluating.
Yeah. It's.
What I said.
The level of inbound unsolicited inbound inquiries into our existing portfolio as it's been interesting and it's definitely elevated.
But what I, what you know a couple of things I would throw out is.
<unk>.
We like to look at our acquisition or disposition ratio.
Sure.
Six to 110 to one somewhere in that range. So I would say that dispositions are always going to be a smaller inc.
Greeting.
Based on just simply based on that ratio that we're kind of targeting but.
But we do believe dispositions are really important for our portfolio.
Folio shaping so throughout the year, it's still early we will identify both.
Risk mitigation dispositions and will identify opportunistic or offensive dispositions net that make a lot of sense when we're getting some compelling inbound inquiries.
But at the end of the day on what I would suggest is it's.
It's much more focus on acquisitions.
Alright, Thanks, Ken Thanks, Jason.
Okay.
Thank you. Our next question is coming from Chris Lucas of capital One Securities. Please go ahead.
Hey, good morning, everybody, Hey, Jackson, just one one question for you.
On the high yield market has been incredibly.
Liquid I guess to say it.
It's certainly helped some liquidity for for some of your tenants.
The past several months I guess my question is does the.
Aggressive yield.
<unk> financing availability in the high yield market.
Act as a as a potential.
Competitive.
Source of funds for those companies relative to sale leasebacks on is that a concern of yours at all.
Yeah.
It's certainly something that we talk with those.
Tenants is is on their menu as they look at their <unk>.
Most efficient way to financial business.
I guess the way I would describe it as.
We we can fit.
In <unk>, we can be very complementary to the high yield market, especially as.
Some of these companies look at <unk>.
Types of trends, particularly in that business, where theyre looking at sale leaseback high yield leveraged loans.
That's not the main part of what we do but.
For sure like look lower.
Lower leveraged lending spreads do affect our cap rates, that's for sure but them.
Yeah.
I think theres still.
So our sweet spot is $500 million of revenue 500 to a billion in terms of our company's revenue. So while spreads have tightened that they haven't really compressed dramatically in this area.
But I would say like we.
It's not as aggressive as it was cap rate wise for what we're looking at as I would.
Acquisition last year this time, but we watch it carefully and we think it can be complementary of times for us as well.
Okay. Thank you that's all I on this morning.
Thank you at this time I'd like to turn the floor back over to management for closing comments.
Okay.
Okay.
I want to just once again I'm very proud of our entire organization. The senior leadership team. The board. We are in very very good position to move forward. This year and I'm very excited about the companys prospects. So look for to meeting many of you next week at the upcoming.
On the conference.
Conference and look forward to your continued support thank you.
Thank you ladies and gentlemen, thank you for your interest you may now disconnect your lines and log off the webcast and have a wonderful day.
Okay.
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Yes.
Okay.
Right.
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