Q4 2020 STORE Capital Corp Earnings Call
Good afternoon, and welcome to store Capital's fourth quarter 2020 earnings Conference call. All participants will be on listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask that.
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Note. This event is being recorded I would now like to turn the conference over to Lisa Mueller Investor Relations. Please go ahead.
Thank you operator, and thank you all for joining us today to discuss store Capital's fourth quarter 2020 financial results. This afternoon, we issued our earnings release on quarterly Investor presentation, which includes supplemental information for today's call. These documents are available in the Investor Relations section of our website at IR Dot store.
Our capital Dot Com under news on results quarterly results on.
On today's call management will provide prepared remarks, and then we will open up the call for your questions in order to maximize participation, while keeping our call to on our we will be observing a two question limit during the Q&A portion of the call participants can then reenter the queue. If you have follow up questions before we begin I would like to remind you that today's.
Comments will include forward looking statements under the federal Securities laws.
Forward looking statements are identified by words, such as will be intend believe expect anticipate or other comparable words and phrases statements.
Statements that are not historical facts, such as statements about our expected acquisitions dispositions or our E. F. F O per share guidance for 'twenty 'twenty. One are also forward looking statements our actual financial condition and results of operations may vary materially from those contemplated by such forward looking statements discussion.
Other factors that could cause our results to differ materially from these forward looking statements are contained in our SEC filings, including our reports on form 10-K and 10-Q.
With that I would now like to turn the call over to Chris Volk Store's Chief Executive Officer, Chris. Please go ahead.
Thank you Lisa and good afternoon, everyone and welcome to store capital fourth quarter 2020 earnings call with me today on a repeat of what our president and Chief operating Officer, Cathy long, our Chief Financial Officer.
As always we welcome the opportunity to speak to you today and hope you and your families continue to be healthy and safe.
2020 was the most challenging year in our memory.
Store concluded the year with balance sheet ratios the deviate a little from where we were a year ago prior to the pandemic.
In no small way the strength resulted from our efficiency and collecting at a high level of dollars for every dollar we invest work putting it another way our cash yield on a gross invested dollars embodied our resiliency.
Throughout our history. Many of servers have thought that store endure a recession to test whether our portfolio of diverse profit center properties leased to a large group of non res businesses can withstand broad economic pressures, while continuing to deliver higher absolute rates of return.
Our performance throughout the pandemic should put that to rest and on.
On an accrual basis, the results will ultimately prove even better.
We expect that nearly all of the rents that we did not collect during the pandemic via lease deferral notes at lease modifications will be repaid.
This has already begun during the fourth quarter historically more on deferred rent repayments and we extended and net deferrals impacted tenants.
This means that our reported adjusted funds from operations for the fourth quarter net of changes in deferred rents receivable was higher than on a reported after fall.
We expect this positive trend to continue through 2021.
In fact, we expect that our dividend payout ratio for 2021 on collections of preferred rents are included will begin to converge to a point, where our dividend payout ratio was prior to the pandemic.
Our sector, leading dividend protection has been important in helping us deliver consistent internal growth over time.
And more than this during 2020 this dividend protection was important to our ability to maintain and then raise our dividend.
With the uncertainty posed by the pandemic, we made a concerted effort to communicate the trends that we saw Berklee school is the percentage of portfolio locations opened for business along with monthly rent collections.
Our increasing clarity on the market conditions on the health of our many tenants has enabled us to do something on this call who have not done for about a year.
I'd estimate for expected <unk> growth during the year.
We will be initiating guidance today and expect to put store back on track to provide quarterly updates on our 2020 progress and again be able to offer guidance later this year for the following year as we have historically done.
While the expected gross with apropos, the Kathy will provide a little later on on this call for 2021 is attractive it's important to remember that we're still mired in a pandemic.
For the months of January and February our cash rent collections remained below 95%.
Viewed in pre pandemic terms, a 5% or more simultaneous revenue collection shortfall would've been historically high in fact, a record some of our tenants in impacted industries will simply be unable to perform until sufficient portions of the population are vaccinated.
We trend towards herd immunity against this virus.
But we and our tenants expect this to start happening in 2021, which should enable us to conclude the year with cash collections are converging to more historic normalcy.
This will position store to enter 2022 with the benefit of a more customary portfolio performance, enabling the first performance tailwind since the pandemic began.
However through all of this store has shown itself in a resilient business model to be a same port in the storm well.
We have always said that we succeed if our tenants succeed.
We unflinchingly cash or a lot with an asset class that we uniquely defined providing net lease capital solutions to regional and national leading companies that need us across broad based industries that we believe in that.
Strategy backed by our strong capitalization is literally pay dividends over our history and enabled us to prevail over this pandemic.
And with those comments I'd like to turn this call over to Mary.
Thank you, Chris and good afternoon, everyone before I begin I hope that you and your families are staying healthy and safe 2020 was a year like no. Other one that both tested and proved the resiliency of our business model I'll begin my comments today with an overview of our acquisition activity and our portfolio.
I'll spend a few minutes on how store and our customers navigated 2000, twenty's unique challenges to be better positioned for success in 2021.
Our fourth quarter acquisition activity was very strong reflecting broad demand for net lease financing solutions from both existing customers and new customers.
For the quarter, we invested a total of $436 million and 84 properties at an attractive weighted average cap rate of eight 1% with annual rent escalators of one 7%, resulting in gross returns of nine 8%.
Spread across 40 transactions or investments continues to be granular with an average transaction size of just under $11 million.
The weighted average lease term of our new investments continues to be long at approximately 18 years overall, our weighted average portfolio lease term is approximately 14 years with only 4% of our leases maturing over the next five years.
We continue to build on our diversified portfolio strategy by adding 16, new customers, bringing us to a total of 519 customer relationships across 116 industry.
For the full year 'twenty, we invested a total of $1 $1 billion and 214 properties at a weighted average cap rate of eight 1%.
Net of property sales acquisitions totaled $825 million exceeding the high end of our guidance range of $750 million.
Over the course of the year, we sold 77 properties about 32% were opportunistic sales with a 19% net gain over cost.
Another 25% or strategic sales that resulted in a 2% gain over cost.
Combined our opportunistic and strategic sales were sold at approximately 80 basis points left from the cap rates, we are originating out.
The remaining 43% of our properties sold were part of our ongoing property management activities.
We were extremely pleased at how resilient our portfolio proved to be in 2020, we attribute this to many factors not the least of which funds the diversity and granularity of our portfolio to that end our portfolio mix remained steady with 64% and survey, 18% in experiential retail and 18.
Percentage of manufacturing.
More than 75% of our portfolio was comprised of customers that accounted for 1% or less of our base rent and interest.
Together, our top 10 customers accounted for only 18, 1% of our base rent and interest.
Our portfolio occupancy has remained consistently high since inception.
Part of the global pandemic and economic shutdown in 2020, our occupancy remained at 99, 7% with only nine of our more than 2600 properties Bacon at year end.
As a business openings increased nationwide our rent collections continue to improve through 2020, and our cash rent collections for the fourth quarter were 90% rising to 93% in February.
We began to see early deferral repayments in the third quarter of 2020. However, scheduled repayments began in force in October and continued steadily.
As of today, our tenants with deferral repayment agreements are performing in accordance with their arrangements.
Among our top holdings two in particular are worth a quick mention.
We are very excited about our growing partnership with spring Education group a provider of early childhood and K through 12 education.
The company operates about 230 schools across more than 18 states.
Grain was a well performing company pre COVID-19 with John units and a strong national brand as a result of their existing online platform. They managed well during the pandemic and are poised to capitalize on post COVID-19 tailwind.
Accordingly, we increased our exposure by adding eight additional spring properties in the fourth quarter.
Spring is now our largest customer they still represent only three 1% of stores base rent and interest.
We entered the pandemic with one of our top 10 customers art van furniture and bankruptcy.
Historically recovery proceeds smoothly. However, the on front of the pandemic and related mandatory business closures. Shortly after art van bankruptcy impacted and delayed recovery of these properties for a new customer loves furniture for Reed's.
They filed for bankruptcy themselves.
We'll keep you informed about this ongoing situation.
Overall, our active bankruptcy levels are at historic lows.
2020 was a difficult year for everyone personally and professionally but it was also a year that presented opportunities to reaffirm the things we're doing right. Most of all it proved to us how resilient we could be in the face of adversity.
When Covid first hit we immediately enabled all 100 of our employees to work remotely by quickly activating the cloud based ERP tools, we had implemented in 2019 and leveraged our business intelligent platform to manage our portfolio.
Virtually overnight, we were fully available to help our customers whether they're on Covid storm by structuring a rent deferral agreements.
Updating them on government relief programs and dealing with other pressing need.
While most of our customers really not severely impacted by Covid. Our team were continuously with those customers who require tailored lease deferral agreements to ride out the wave of restrictions and shutdowns that primarily impacted fitness clubs theaters early childhood education centers restaurants and family Entertainment Center.
Yeah.
Overall, our customers ended 2020, and very good financial health with strong balance sheets and cash position.
Any of our customers adjusted to the new Covid reality by streamlining their operations, reducing expenses and introducing new technology and automation as a result, they are now in a stronger position to operate in a post COVID-19 world and they were a year ago.
As Chris mentioned, the pandemic was the first major economic crisis store has faced in its history, both tested and proved the resiliency of our customers our team and our business model.
Built to under other test of time, our business model has served us well over the past 10 years and proved critical to managing through Covid.
First we serve an enormous market we estimate the market for store properties is about four trillion dollars and store is uniquely positioned to serve that market. This allows us to be highly selective in the investments we make.
Our disciplined underwriting process, which considers the long view and factors and considerable margin of safety with 15 to 20 year lease term, we deliberately look for customers that have strong management teams.
<unk> business model and sustainable business plans.
Third our portfolio is diverse and granular by sector customer and geography.
No on that diversification is important but as COVID-19 closed down entire industries. It became even more obvious that our strategy proved a critical advantage and.
Finally, our direct relationship model, which fosters close working relationships has been especially important during this time of business disruption, where we've been able to provide our customers with increased service.
This direct relationship model has many other benefits, including our ability to receive unit level financial statements from our customers to help them monitor the long term health of their businesses and make our own informed portfolio management decisions.
Create our own lease contracts on our own terms.
Generate attractive lease yield that reflect the value, we add to our customers and expand our customer relationships, which is important since one third of our business consistently come from repeat customers.
Looking ahead as Covid vaccination ramps up and another round of government stimulus becomes increasingly likely we and our customers are looking forward to 2021 with optimism. We are in active dialogue with many of our customers who are planning for a strong recovery, especially in the second half of the year.
Based on our strong pipeline, we expect to see increasing opportunities and robust activity as our customers look to accelerate organic growth and explore merger and acquisition activities.
I mean weather the Covid storm, we are confident about the long term health of our customers the resilience of our portfolio and the strength of our business model I am extremely proud of our team who stepped up and worked incredibly hard on behalf of all of our stakeholders. In 2020, we learned many important lessons along the way that will help cause.
<unk> store for whatever is in store for the future now I'll turn the call over to Cathy to discuss our financial results.
Thank you Mary I'll discuss our financial results for the fourth quarter and full year 2020, followed by an update on how our capital markets activity and balance sheet position us well for the year ahead.
Then I'll provide our guidance for 2021.
Our fourth quarter revenues of $173 million were essentially flat with the year ago quarter.
Sequentially revenue decreased $2 $4 million from Q3.
Revenue from net acquisition activity increased approximately $2 $7 million, representing a full quarter's revenue from Q3 acquisition activity, but only a small contribution from the large volume of Q4 acquisitions, which were heavily back end weighted.
85% of our Q4 acquisitions closed in December with two thirds of that volume closing in the last few days of the month.
Offsetting increased revenues from acquisitions were write offs related to our noncash straight line rent receivables of approximately $2 $5 million.
Reserve taken in Q4 as a result of the pandemic and other underperforming contracts were approximately $1 $8 million higher than the amount recognized in Q3.
A meaningful portion of this revenue reduction is attributable to the delayed recovery on the original art van properties that Mary mentioned in her remarks.
The remaining component of the revenue bridge is a decrease in other income which was about three quarters of a million dollars lower than Q4 due to higher one time fee income in Q3 on.
These factors, but the straight line rent adjustment impacted <unk> for the quarter.
During the fourth quarter, we granted $5 $8 million of rent deferrals net of reserves down from $13 million in the third quarter.
Continued deferrals were requested by the same tenants in the same industries that were highly impacted by Covid.
At year end Covid rent receivables stood at $47 million. This represents total COVID-19 rent deferrals of approximately $67 million less $10 million in repayments and net of reserves of $10 million rent deferral repayments began in <unk>.
Ernest in the fourth quarter with the majority is scheduled to be collected by the end of 'twenty 'twenty, one and the remainder is scheduled to be repaid over the next 36 months.
Now turning to expenses.
Interest expense increased by $300000 from the year ago quarter due to our third issuance of senior unsecured public notes in November.
The increase was offset by debt Paydowns, we made with the proceeds from this transaction, which resulted in a reduction of our weighted average interest rate from four 3% to four 2%.
Property costs for the fourth quarter increased $4 $4 million year over year to $7 $4 million, primarily related to property tax accruals on tenant locations, where we expect the tenant may not be able to pay them when due.
The delayed recovery on our former art van properties represented about half of the increase in property costs during the quarter.
G&A expenses decreased by just over $500000 from the year ago quarter.
As a percentage of average portfolio assets G&A expenses, excluding the impact of noncash equity compensation declined to 46 basis points. This was down from 50 basis points, a year ago, reflecting decreased acquisition related expenses on lower acquisition volume.
Along with lower travel expenses.
We expect G&A expenses to rise somewhat in 'twenty and 'twenty, one as we return to historical levels of acquisition activity.
During the quarter, we recognized an aggregate $12 million in impairment provision primarily attributable to core properties.
Hey, if a BOE for the fourth quarter decreased to $115 million from $120 million a year ago.
Increases in <unk> due to our portfolio growth were offset by lower revenue and increased property costs related to government mandated business closures on our tenants' businesses on a per share basis assets was 44 per diluted share down from 50, a year ago.
<unk> per share for the quarter was impacted by social distancing mandates as well as a short term change in our capital allocation strategy as we funded acquisitions with equity.
Allowed us to maintain prudent levels of leverage during the pandemic and drove our share count to 266 million shares outstanding by year end.
Full year, 2028th ago increased to $463 million or $1 83 per basic and diluted share.
Sequentially <unk> <unk> per diluted share declined from 46 cents in Q3, a little over half of the change from Q3 was related to lower revenues for the quarter that I described earlier and the remaining change was primarily due to higher property costs.
We declared a fourth quarter 2020 dividend of 36 per share, which we paid on January 15th to shareholders of record on December 31st.
Now turning to acquisition activity and our balance sheet.
We funded strong fourth quarter acquisition activity with equity along with cash proceeds from asset sales since.
Since the vast majority of the $436 million on acquisitions in the quarter closed in the last half of December but with the full expense load for commissions. These acquisitions contributed little to <unk> for the quarter.
We expect the full impact of this external growth will be felt in Q1 of 2021.
For the full year, we closed nearly $1 $1 billion of acquisitions with about 40% of the acquisition activity closing in Q4.
Our ATM program continues to be an effective way to raise capital given the granular size of our acquisitions and we continued to raise equity through our ATM program throughout the pandemic.
During the fourth quarter, we renewed our ATM program and the amount of $900 million.
We use this program to issue about 5 million shares of common stock at an average price of $31.10 per share raising net equity proceeds of approximately $146 million in Q4.
Over the course of 2020, we issued more than 25 million shares of common stock at an average price of 27 O eight per share raising net proceeds of approximately $686 million.
As a result, most of our 2020 net acquisition activity was funded with equity and our leverage has trended to a historically low level of 37% on a net debt to portfolio cost basis.
In November we took advantage of an attractive debt market by issuing $350 million of 275% senior unsecured investment grade rated notes due in 2030.
We used a large portion of the net proceeds to prepay without penalty one of our $100 million bank term loans and $92 $5 million of Master funding notes with an interest rate of 375% that were scheduled to mature in 2022.
At December 31, we had approximately $3 $8 billion of long term debt with a weighted average maturity of six six years and a weighted average interest rate of four 2%.
Our leverage remains low approximately 63% of our gross real estate portfolio was unencumbered at year end.
And our ratio of unencumbered NOI unencumbered interest expense remains exceptional at just under seven times.
We have no significant debt maturities until 2024.
And three series of Master funding notes will become available for prepayment without penalty during 2021.
These notes have a 24 month prepayment window and they bear interest at a weighted average rate of 5.6%, giving us an opportunity to continue to reduce debt costs in 2021.
Going into the new year, we have approximately $166 million on cash.
About $800 million available under our ATM program and.
And full access to our $600 million credit facility, which also has an $800 million accordion feature.
We are well positioned to address the strong acquisition opportunities our direct origination team is seeing the substantial financing flexibility conservative leverage and access to a variety of attractive debt and equity financing options.
Now turning to our guidance.
November we provided initial guidance for 2021 acquisition volume in the range of a billion two 1 billion to net of anticipated sales and we remain confident in our ability to achieve that level of volume at attractive cap rates.
We currently expect 2021 <unk> per share in the range of $1 90 to $1 96 based on this projected net acquisition volume.
Our <unk> guidance is based on a weighted average cap rate on new acquisitions of seven 7% and.
And a target leverage ratio in the range of five five to six times run rate net debt to EBITDA.
As I mentioned earlier, we anticipate that G&A expense will trend up slightly as compared to 2020.
Due to a combination of the return to normal acquisition activities.
On the investments in personnel, we're making to support our next level of portfolio growth.
Our <unk> per share guidance for 2021 reflect anticipated net income excluding gains or losses on property sales.
83 to 88 cents per share.
97% to 98 cents per share of expected real estate depreciation and amortization.
Plus approximately <unk> 10 per share related to items, such as straight line rents equity compensation and deferred financing cost amortization.
It's still early in the year and as always we'll reassess guidance as the year progresses, and now I'll turn the call back to Chris.
Yeah.
Thank you Kathy.
Before turning the call over to the operator, I would like to make a few additional comments.
First I would draw your attention to our investor presentation, which has undergone a complete makeover for the first time in five years.
We've talked to shorten and sharpen the presentation, we will.
Welcome your comments on the hope you liked the result here.
Periodically corporate presentation revisions are an important undertaking and the ultimate work as a credit to a large team.
Secondly, my annual letter to stockholders will be released tomorrow concurrent with our 10-K filing and will be available on stores website.
My letters have tended to be long and this year is no exception 2020 was among the most eventful business years of my career.
Finally today, we are announcing a corporate passage.
Shortly after this call we will issue a press release announcing the planned retirement of our fellow co founder and Chief Financial Officer, Cathy long.
Kathy was instrumental in stores conception, and our working relationship spans decades.
For many of you on this call who invested with us were analyzed.
Kathy embodies the best store she is unfair on winning gracious reliable and has proved a role model to us on our fellow teammates as she leads by example.
Property plants to stay on until she can transition her role to her successor we.
We have engaged the executive search firm Russell Reynolds to secret replacement and cash.
He is playing a key role in this process and transition.
She and her team have built the finest accounting financial reporting and tax group that we can remember across our three publicly traded successful net lease platforms.
Needless to say, we will all miss seeing on working with coffee every day.
I can assure you that we will see her.
Wish her the very best as she did certainly moves on to new adventures.
And with these comments operator, I'll now turn the call over to you for any questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speaker phone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then two as a reminder, we ask that you limit yourself to two questions. If you have additional <unk>.
<unk> you can reenter the question queue.
The first question is from Nate Crossett of Bahrenburg. Please go ahead.
Hey, good evening, guys and congratulations on the retirement and Kathy.
It's nice to see.
Yes.
It's good to see the acquisition volumes ramping again I was just hoping you could comment on the deal flow. So far in Q1 'twenty are you guys seeing consistent levels that you saw towards the end of last year.
And also it looks like you upped your estimate of the total addressable market in the back.
I'm curious how much of that target 26000 potential customers have you guys worked through so far.
Hey, Nate this is Mary.
So I'll take that.
The deal flow definitely ramped up in the fourth quarter as you saw on we're still seeing that level of activity. So and in terms of the market. We do update the market opportunity once a year and we do a pretty detailed study on that we have a prospecting database here of over 26000 companies that we're working through it cleared.
The market is so large is that it will be difficult to ever cover even we're just scratching the surface of that so on lots of runway there.
Okay.
I wanted to also ask them on your tolerance.
To add to I guess spring education, obviously, that's moved up to 10 analyst throughout 2020, and it looks like there's a lot of other properties.
Debt they have that you currently don't.
So I guess, what's kind of your upward tolerance in terms of the top tenant exposure here.
Three 3% on that area tends to be about it there are $2, one, but there'll be dialing back of three just through balance sheet growth, if nothing else, but they'll definitely be dialing back to under free.
But that's where we've been with our top tons. Yeah. Nate. This is Mary like I'll talk a little bit about that transaction. We're really excited on that we got to do a transaction with an existing customer.
Free Education group, there on integrated education platform and they they work across from early childhood education, all the way through K through 12th grade and they are really kind of a pure play and that sort of stand of care for children and we provided a comprehensive solution that was centered in the K through 12 space from the K through 12 states as a private.
There is a private education space with contractual tuition so it's very sticky.
Not only they are on a diverse and the offerings from early childhood education through K 12, but theyre also diverse in the channels of how they offer the education and they have an already existing really superior online platform that really serve them well on COVID-19. So they did.
So you had a lot of traction from a lot of new enrollment from that particular platform. So they did well during the pre COVID-19 there were grade to do well during COVID-19 and we're pleased to have them up at the top of our.
Low.
The next question is from Sheila Mcgrath of Evercore. Please go ahead.
Yes, Chris I was wondering if you could take the opportunity now that the market is a little bit spooked about rates moving just your thoughts on.
How store and your previous companies operate in changing interest rate environments, and how you think about.
The other.
On investment opportunities on.
Rising rate environment.
Sure Sheila I'll I'll do this from two angles. The first is if.
If you look at our portfolio, let's say you look at last year, our weighted average cap rate was eight and our average escalator was one nine so you get to a total if you add those two together a gross return of around 10%.
Compare that to our predecessor company.
It was public around 2006 2005.
The 10 year Treasury was at $4 50 at the time and our gross yield was probably 10, two or something like that are temporary so so really were.
We're kind of on top of where that company was on it and also as <unk> pointed out to know that our investors during that kind of at the time, we ran that company. During a 450 interest rate with similar types of gross returns are generated a 19% rate of return so.
We have tried not to chase rates downward we've tried to avoid.
On the temptation for asset bubble of inflation.
Low rates that cannot just.
Cause you to justify a higher price for assets.
We've stayed away from that we've been pretty disciplined.
This company has been from the outset designed for long term rates, we're really mindful of the long term 10 year Treasury. During most of my working career, it's been kind of in the $4 50 range 4%.
We should be able to survive if we're there we shouldnt be getting a hurdle.
On the on our acquisition note I would say that one thing that you want one thing I like about for example, today's move in interest rates is it an add volatility of interest rates and volatility is good because if you have volatility then it's going to make people a little bit more reticent not to chase cap rates downward, it's going to make financing a little bit more variable in terms of.
We're financing is if the 10 year treasury by contract stays at $1 50 for the whole year, you may end up with a risk on type of environment, where people are chasing after deals because the rates. The cabinet. The borrowing rate is so low that they could push the cap rates down.
And that can happen and so.
Hopefully the economy starts to do the V shape recovery that people were talking about we wouldn't be sad to see interest rates go up a little bit as a result of that and I think that it would help to.
On the one hand it would.
You know maybe some of our spreads will compress last year, we had just ginormous spreads when we borrowed money at 275, we put out the money at it.
So so you're talking north of 500 basis points, which is historically wicked hi.
This year it comes in as a result of that that's okay, well, there's plenty of room for.
Solid return on equity and we'd like to see rates go up on the higher if it were up to us.
Okay, that's great and one other quick question on in your new presentation on page 38, you give them portfolio resilience during COVID-19.
Just wondering if you could explain a little bit more that top the graph on the top right tore relative portfolio yields versus peers.
Okay. So okay.
It's a tough price yes.
So basically.
We're here today.
Unusually for us being one of the last.
On providers of results for the year. So we're able to kind of pull out a lot of 10-K, and 10-Q filings back into sort of cash yields that everybody's generated we've generated and other people are generated and.
And so one thing is about.
The year that we've noticed is that theres a lot of attention being paid to the percentage of rents being collected or you're at 90, 390, $95 99, and theres less attention being paid to whats the absolute return like what's the absolute cash yield that youre doing and a core.
The store starting off with a much higher yields to begin with the most people. So we have a lot of margin for error.
Built into that yield so as it turns out on a store.
It's our belief that store level last year in terms of what we collected relative to every dollar invested our yeah.
We had a higher yield.
Although we did not have a highest percentage of rents collected.
And the second piece is actually kind of interesting because this year that percentage of rents collected is going to go up whereas we had a high percentage gross collected it has nowhere to go out price. So this year, it's going to go up in next year of course of 2022, you'll have a full year of that so you'll have a tailwind so on so the spread between our cash yields and then other peer groups, which is.
Tend to GAAP out even further so I think that we're excited about it and that's what the charts designed to show.
The next question is from Rob Stevenson of Janney. Please go ahead.
Good evening guys.
Mary can you remind us what the average size of your remaining loves art van boxes are and can you talk about how robust the tenant demand is in those markets for boxes of that size and how you think about the tradeoff between potentially multi tenant assets like this and releasing them versus just selling the real estate moving on I think you saw.
Hold four of them in the quarter.
Yeah, absolutely Ross on nice to hear from you. Good question I'll talk about love Youre correct.
We did release a relief for other sites in the fourth quarter here. So we have an experienced furniture, operator, who took on our lease form and they're going to remain as furniture store. So they remain a customer of ours.
So and I loved is still in bankruptcy. They are paying rent during bankruptcy, we do like the core footprint and the ones. We released were outside the core footprint that this core footprint in the Midwest here, we like.
They've been profitable in the past they've made money when they were art van stores and even when loves started to open them as they started to open them up. They were also doing really well from a sales perspective, so and as you know furniture was actually I'm one of the hottest sectors. During COVID-19 and we think that that trend will continue.
But so I would say you know it is early there in bankruptcy still but we would look to release most of these boxes I think we could really released most of these boxes you might sell some on the fringe or something like that but for the most carnival I think we'll have good interest in them and we have some interest now actually.
There's always definitely well too Rob I mean from from day.
Day, one even when our favorite soccer bankruptcy. These things, we're making quite a bit of money so on us.
Feel good about them from that standpoint too.
Okay, and then one for Kathy can't let you.
Go without one last one here.
From a earnings standpoint, what are you attributing the combined.
Both the expense higher expenses and lower revenues from loves as well as the waiting of the acquisitions into December what was the drag between just those two buckets on fourth quarter <unk> per share.
Well for loves by itself the dragged by the time you add together the revenue drag and the expense drag because we did accrue some property taxes as well as for the fourth quarter was depending on a half by itself.
We did also moves from people to cash basis accounting.
And that.
That was another.
You know couple of pennies.
And then the backend weighting it was it was almost as though for acquisitions. There was almost a zero impact because most of the acquisitions weren't even in house for a couple of weeks and when you consider the fact that the full commissions expense and other closing.
Costs that are Expensed kit, but the revenue you know only hit for a few days really that was a wash. So when you think about.
It depends on how you would have modeled it if you would have modeled a net $325 million at an eight cap in a mid quarter Convention. Then you can do the math and Thats, how much you know would've really hit that quarter.
Okay, how much was the expense part.
They're paying debt you wound up out the door.
But you said it was offset by the revenue.
Oh, Yeah, that's about 25 basis points I guess thought that okay very helpful. Congratulations and good luck with what's next for you.
Thank you.
The next question is from Caitlin Burrows of Goldman Sachs. Please go ahead.
Hi, good evening, everyone on yes, Kathy congrats on your retirement thanks.
Thanks, Caitlin wondering yeah I was wondering if U S.
The team I could go through just in terms of guidance, what you're assuming in terms of following up on the last question and one from earlier what guidance assumes in terms of rent collections, increasing over the course of 2021 and tenants, possibly moving off of a cash accounting.
Okay, I'll start that and Mary Chris can chime in if they want them.
So if you think about where we ended the year.
And you think of like a pie a pie chart of collections.
About 91% by the end of the year, we reported 90% for December but but by the time the end of the year. It was it was actually rounding to 91% collections and cash so 91% other pie is gonna be cash collections.
Another 3% or the pie is.
Is deferrals net of reserves, so those deferrals would be.
You know things that we are recognizing as revenue.
And accounts receivable and it put a reserve against what we think might.
Not be collectible that's the three another 3%. Okay. Then there is another 1% that's unresolved, meaning we recognize the revenue, but we haven't penned a deal with them on timing of when they're going to pay it and.
And then the remaining 5% is unrecognized and that is people, we moved to cash basis.
In third quarter fourth quarter.
And people who.
Our on cash basis, because we flipped them too.
Percentage rent instead in other words, they don't have a fixed monthly base rent, but instead, it's a percentage of their sales, which you can't record until you actually know what their sales are so does that help. So you have a 5% bucket. If you will that's carrying into 'twenty.
'twenty, one and then over time, you expect to have the normal 70% recovery of that bucket.
And remember these are people who are in those highly impacted industries right. So so if you look for example at the people who are and the cash basis bucket that would be on us.
Things like movie theaters.
Some full service restaurants health clubs, a little bit of family Entertainment debt. The industries that we talked about the entire time during COVID-19, it's that group that's in there.
And so they are reliant somewhat on the vaccination process, continuing and things like that.
Many many of our restaurants, we're able to reopen most of them, but some other sit down restaurants, just are not meant to have a heart.
Hot food that's pick up you know, if you're serving something like Alaskan King crab legs or something this is not stuff that's easy to do in take out right. So some of them just were not able to reopen our reopened fully and that's the group that we're talking about so it's a matter of.
There they're in there they're in their locations. They are you know.
Either currently open but they are waiting for really the social distancing.
To get a little bit more expansive before they can.
Can't really come back does.
Does that help.
It does and then I guess I'm just wondering.
If I had like 10 minutes to think about it I might have a more interesting.
Interesting to follow up on it.
On this slide then given those pieces that you outlined on could you talk about how our guidance assumes that they change over the course of 2021.
It's just a ramp up with most of the ramp up happening a little bit more towards June.
More from the more from the perspective on it.
Expecting that the vaccination process is further along by them.
Some of our.
Tenants are a little more seasonal where summer is a big thing for them and so we would expect that the recouping of of this rent would be more towards the beginning of summer.
Okay got it it's Chris.
D wave.
On a waste we can outperform obviously or we could collect more.
We have a lot of reserves that we've been taking so we could be over reserved and you could have recoveries.
And then he and increased recoveries. So this last year was dreadful in terms of recoveries relative to where we've been in the arc bandwidth is a prime example of that where we just got to drag on for <unk>.
Recoveries for the year.
So this is the timing of a lot of this could happen and then of course.
Our team could do more on an origination so we haven't been want to be into net price and estimate we could exceed that those are all things that might be able to help us on the other side, but what we know is as we get into 2022.
We don't have complete clarity with what's happening in 'twenty 'twenty, one we're still kind of in the middle of a pandemic as we all sit here and talk but as we get through this what we're pretty convinced stop as we get through this 2022 is going to start to look more like a normal year and that's when you get into sort of more tailwind. So I think the story about this call. It's not just the 21 store is 22 story and Caitlin.
One other thing to point out is that when we had moved some people to cash basis.
Not only are you writing off of whatever accounts receivable that they would have had at the moment. So when you switched them over but we also accrued property taxes for them now that now we didn't pay their property taxes, but we accrued them.
With the thought that they might.
Not be likely to pay them. So that's also where there can be some recovery, where we may have accrued a property taxes on the tenant ends up working something out with their state to pay taxes on a on a payment plan or something like that.
Got it okay.
And then maybe just one more on page 10, you guys showed that.
History of the median unit level fixed charge coverage and debt.
That number is at $2, one times now which is pretty much at pre pandemic levels, which seemed surprising. So I was just wondering if you could go through that is it that tenants have been able to keep up sales or is there something else going on with that metric.
Hey, Caitlin this is Mary I can give you a real short answer on that but the coverage is as you know most of our tenants really were not impacted by COVID-19. So they're all have six or seven highly impacted industries and we have on a 116 industries. So many of our tenants actually prospered during COVID-19 or a lot of them have had a really quick sort of V shaped recovery if you will.
So.
The diversity of our portfolio has really held up and we benefited from that and you can see it in the metric you're looking at.
The next question is from frankly of BMO. Please go ahead.
Hi, good evening, everyone and congrats Kathy.
On the follow up on the <unk>.
One <unk> guidance.
How should we think about financing for acquisitions given your commentary on.
We're leveraged level stands today and should we expect deals to be over Ecuador echoed is similar to 2020.
Any additional color would be helpful. Thanks.
Oh, Thank you Frank yes.
We don't expect to fund with equity as we did during the pandemic I think part of that was.
Being prudent to make sure that we kept our leverage low during the pandemic due to the uncertainty.
And part of it in Q4 was ramping up because the acquisitions were ramping up fairly quickly and it was a good time to get equity and get out ahead of it. So if you look at where we ended up the year, how we positioned ourselves for 2021, we ended up with nothing outstanding on our revolver.
Do we have that full amount.
Bailable to us we did the.
The senior unsecured debt deal in November, which also put cash on the balance sheet and allowed us to.
Lower our overall cost of debt by.
Paying off some debt that was at higher interest rates and as I mentioned in my script. There three more opportunities during 2021, where we have series of master funding bonds.
That will be in prepayment mode with with no penalty and those are at a you know a 5% it's on.
On the five 1% interest rate so there's some opportunity there so you'll see us being more active in the debt market you know with our leverage being kind of abnormally low even if we trend back to normal levels, which would be a little closer to 39 or 40% on our loans too.
Our net debt to cost basis.
So you'll see definitely a little more capital markets activity in the in the <unk>.
On the interest rates right now are still attractive.
Breads are coming in and and still attractive for long term debt on it but frankly were funded last year, we funded our investments with roughly 80% equity.
With any luck, depending on when we'll start to swing back where we're basically truing up our leverage I mean, the leverage on the funded debt to EBITDA is going to look the same because the EBITDA is going to pick up.
And interest expenses dropped back in as revenues keep coming in.
And and when that happens is going to afford us to be able to true. It up so it gives us basically more dry powder to acquire without having share dilution, which means your external growth becomes more potent.
Okay. Thanks that was very helpful.
And then if we look at your investment pipeline sector distribution Pie chart.
It looks like the other service bucket declined quite a bit from the last quarter can you talk about some other drivers behind this or which type of interest.
Industry groups have fallen out of favor.
Yes, Hey, this is Mary.
Frank on my oldest we actually we took some stuff out of other service and we popped it out into the pie. So auto maintenance was actually on other other service and we popped that out so that actually moved some of the percentages around in other service still considers has a quite a few things in there from repair services imaging centers are rental center.
Things like that but it was just a sort of you you can see we make some things around here and pulled some things out they got to be over 5% like auto maintenance.
The next question is from Linda Tsai of Jefferies. Please go ahead.
Hi, Kathy congratulations as well and wishing you the best in your next endeavor.
Thank you.
I think you said, 5% of your a b ours on cash basis accounting of that pool, how much do you collect from cash basis tenants in two Q3 Q4, Q just wondering how that's trended over.
Over the past few quarters.
So how much other cash basis do we collect yes.
Yes.
I don't have that number right in front of me, but I, but I can give you some anecdotal information off the top of my head for example.
Remember I said there are some that are on cash basis, where.
We've slipped them to a percentage of sales instead of a regular monthly amount.
For for Q4, we recognized about $3 million in contingent that type of contingent rent and for the whole year, we had only recognized $4 million.
So.
The pace.
As you know really gone up from doing barely more than you know.
A couple of hundred thousand a quarter or two doing $3 million in a quarter. So it is picking up but as you recall too a lot of these deals weren't working out where people.
Started paying back and really being a.
Reopened again until around the end of Q3, So Q4 was always going to be our big start to.
Paybacks of deferrals and the contingent rent starting in all that so I think that our.
Q1, and Q2 will probably be a little more.
Robust than even what you're seeing in Q4.
Got it and then the 14, new tenants what industries did they fallen.
Linda This is Mary I'll tell you in the fourth quarter.
<unk> about 20% in manufacturing, we did some food processing and some metal fabrication, we had a little only about 5% in retail some RV dealerships and about 78 or so percent, 77% was on service and these were really a non sort of COVID-19 resistant non discretionary type services specialty medical dental eye care pet care.
Education group of core since emergent care stuff, so that was really sort of the mix for fourth quarter.
The next question is from Handel St. Jude of Mizuho. Please go ahead.
Hi, This is Lee Chang on behalf of <unk>. Thank you for taking my question can you provide more clarity on T $3 5 million of income from non real estate equity method investment on your income statement.
What is it tied to and is this something we can expect more of in 2021.
No. This is cathy that was sort of a onetime situation. During COVID-19. There was a lot of negotiation to you.
You know, it's a it's a two way street right, you're providing people some rent relief, but you're also getting something in return and in this particular situation, we got a small equity stake in a company.
And it's not a real estate company. It's just your regular operating company. So that stake is what you're seeing it's an investment.
And we got it.
And that is the value the estimated value of what that stake is worth.
Does that help and it will be it will be accounted for on the equity method, but it's not a normal part of the business and you won't see us necessarily reaching to do that and it's nothing we actually paid.
Paid cash for per se because it's on the equity method.
Income.
Or losses, resulting from the operation will be added to or deducted from our focus every non cash right.
Unless they give us a kind of an institution.
That's very helpful. Thank you.
And can you talk about the credit profile of the new furniture store tenants that signed leases for the fourth net loss boxes and comment on how the rent. This new furniture, operator is paying versus the former art vans and low rent.
So this is Mary we don't disclose the specific deal when we have.
On a released here, but what I will tell you is that this isn't a very experienced furniture, operator, very strong spirit experienced furniture, operator, who had signed up on a long term lease with us.
The next question is from Todd Stender of Wells Fargo. Please go ahead.
Hi, Thanks, and Kathy we're going to Miss you. So wish you all the best.
Thank you.
Sure.
Looking at your acquisition guidance. It assumes a seven seven initial cap rate. It's just something we haven't seen go that low for a while I wonder if that's just an abundance of caution.
Maybe your rent levels with what's going into that forecast.
So hey, Todd This is Mary actually you know, we actually were at that level in 2019, or 775, or so so but I will tell you that there is some compression were seeing compression in the marketplace.
There is still a bit of a supply demand imbalance out there where there's a lot of there's a lot of demand for some of the more desirable asset classes as you can imagine as it relates to COVID-19 essential or nonessential.
Manufacturing as well, so where you are seeing that compression and again I think you'll even see our guidance is sort of in the range of back to 2019 levels and I think that's where you'll kind of see the cap rates are going back to.
Obviously, we always hope to do better than that but that's where we think it will be.
Understood and did I Miss It did you give a disposition range at all I know your acquisitions are net of dispositions any any color there.
It's Cathy.
Last year was a kind of an abnormal year in that we were on the low side normally we do 3% to 5% of the beginning balance of portfolio is sold during the year on.
We were actually I think a little below 3% last year, you'll see us trending back fully into that range and perhaps even towards the high end of that range. So maybe you can think about it that way.
The next question comes from John The Saka of Ladenburg Thalmann. Please go ahead.
Good afternoon.
Yes.
So, especially on acquisitions again.
So, especially on dispositions again.
Look part of the disclosure on the presentation.
Additionally, on cap rate has remained pretty much flat over the years, but.
The total gain or loss on kind of your original cost trended down in 2020 is that just a consequence of maybe selling out of some vacancy and you know, particularly related to maybe some of the headwinds from the pandemic or is there something else.
Going on there and if it is is filling some vacancy now that you're in more of a mature portfolio. That's more part of the mix going forward.
Okay. So John this is Chris on morale will answer this together, but.
On the answer is yes.
Last year, we sold.
The assets as an aggregate, 8% economic loss basically lost over cost, which worked out to $21 million from a loss perspective.
If you look at it is by the way over the last six years five years.
We've made gains over costs when we disclose that every single year. So this is the first time, we've actually had a loss over cost and a lot of it is just due to the mix of what.
What we did from a portfolio management opportunistic strategic perspective so.
Last year, we did a lot more on the portfolio management side and some of them were taken assets.
Some of them are occupied assets.
But they were obviously underperforming assets so that our.
Cause the personal philosophy, we did not sell as many opportunistic and strategic assets as we had in years past. We've done that I think you would've seen us make money last year.
This year I think it'll be much more of a normal year, where we're going to do a blend in.
On the cool thing is that store has a very good history of when we sell assets that are high performing assets, which is the vast majority of them. We have a very good on track record of being able to sell at cap rates that are lower than the cap rates, we're investing in so.
Together that sort of creates added internal growth accretion, which is something you want to see overall, if you look at the history for the last four or five years, we've been on net accretion works out to somewhere on the neighborhood of 6 million Bucks from added net.
Net revenues for the company. So it's like minor accretion every year, but 6 million 6 million that's recurring so.
So we look at that as kind of almost like a negative default rate.
It's another wave.
Adding gross to the company and we.
Paid attention to that every single year, so youll see us do that.
Last year I would say it was not because it.
It wasn't the losses weren't all just related to COVID-19 on some might have been related to COVID-19.
Yeah, I would say yeah, yeah, John mostly because it's opportunistic and strategic were lower last year because of Covid, where there was a big slowdown in the marketplace when COVID-19 first pits on the.
That was really the reason for us to have less opportunistic on street strategic sales than we normally have and they pretty much have happened at the end of the year and the final thing is that we're sitting on today, a whopping total of nine bacon and non paying properties. So this is not to do with the age of store's portfolio, where the seasoning of the portfolio and in fact, our weighted average lease term.
Still 14 years, who have been really good at keeping the lease term super long.
So it has nothing to do with any age or cycle lifecycle of the company.
Okay understood and then.
I look at the portfolio pipeline disclosure standard.
On the entertainment still kind of.
Hell of a pretty large placed in the pipeline is that maybe based on your view of where we're getting to kind of in a post vaccinated world orders have those assets kind of proven to be maybe more resilient than the initial headlines would have indicated.
Yeah. This is Mary I would say that these assets have proved resilient.
Think that they will especially become even more resilient with the vaccinations and all of that but they.
Families like to go out and do things that I think we'll see a really good recovery on the second half of the year on those I would tell you that the pipeline is very it's a pipeline that is has a lot of opportunities on it is very dynamic and these are a lot of these are opportunities that you know the relationships that we have with customers and we're keeping these relationships warm.
And the opportunity will present itself when the timing is right. So.
So interested in this space and so we would we like to keep it on you know, we'll keep the pipeline.
<unk> in the pipeline.
And cash.
And the last question comes from Wes Golladay from Baird. Please go ahead.
Hi, good evening, everyone and Kathy congratulations.
Just wanted to maybe follow up on line one of those last questions you mentioned selling the vacant and not paying properties, but do you ever look to sell the vacant and paying maybe to strengthen the tenant and particularly substitute assets in your leases.
You bet. Yeah. This is Mary we absolutely work with our tenants.
Quite often as you know most of our multi we have mostly multi unit transactions in there mostly on master leases and we work closely with all of our tenants if they have a property in there that's not working for them, we can help pull that out and substitute something else in.
And we do work closely with our tenants for a paint.
Hey.
Et cetera pain, but they want to get out of them for sure and we disclosed the bacon and not paying for you to be totally transparent on this so I think one of the two people to do that.
And also because it forces us all to pay a lot of attention to it and so from a residual value perspective, you just don't want to have vacant properties of any time, whether they are paying or not paying and so we're working with other.
Customers to be able to to fluctuate with sales and stuff. So you you know Chris as he mentioned in his script when our customers do well, we do well. So we want to we're really aligned with helping to make sure that they.
We have a really nice performing portfolio.
Portfolio.
Great and then maybe I'll just end with Kathy for your last call I guess.
You mentioned going on prepayment mode do you have a timing and dollar amount for that.
The timing during the year for the prepayments is varied. So we have some that'll be early Q1 from that'll be Q3, some that'll be late early Q4, but.
So we will pick a time that we can wrap as many of that and as we can and kind of think about it that way. So that you know youre thinking more like mid year really.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Chris Volk for closing remarks.
So thank you all for attending the call today, Mary Cathy and I will be available for any follow up questions. On just also note we will be participating in the upcoming Raymond James Investor Conference next week on March the third and then the week after that there'll be cities Global property conference, which will be March eight through March 10, both of those events are virtual of course.
But if you're interested in getting on our schedule. Just please let us know and you all have a great day. Thank you so much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.