Q1 2021 Spirit Realty Capital Inc Earnings Call
Greetings and welcome to the Spirit Realty Q1, 2021 earnings conference call. At this time, all participants are in a listen only mode.
You didn't answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host favorable Vice President of strategic planning and Investor Relations you may begin.
Thank you operator, and thank you everyone for joining us for spirit first quarter 2021 earnings call.
Presenting on today's call will be president and Chief Executive Officer, Jackson check and see.
Financial Officer, Michael Hughes, and finally, Chief investment officer will be available for Q&A.
Before we get started.
I'd like to remind everyone that this presentation its forward looking statements on.
For the company believes these forward looking statements are based upon reasonable assumptions.
They are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from those currently anticipated due to a number of factors.
I refer you to the Safe Harbor statement and yesterday's earnings release supplemental information and Q1 investor presentation as well as our most recent filings with the SEC for a detailed discussion of the risk factors relating to these forward looking statements.
This presentation and often contain certain non-GAAP measures and reconciliation of non-GAAP financial measures to most directly comparable GAAP measures are included in yesterday's release and supplemental information furnished to the SEC under form 8-K.
Yesterday's earnings release, and supplemental information and she wouldn't investor presentation are available on the Investor Relations page at the company's website.
And for prepared remarks, I'm now pleased to introduce Mr. Jackson check Jackson.
Thank you Pierre and good morning, everyone.
On our last call I revisit it the goals, we laid out for spirit at our Investor Day in December of 2019.
I talked about our portfolio strategy acquisition targets balance sheet team integration and technology.
And the company was the strongest it has ever been.
And I also noted that the last pieces of the puzzle where for our hardest hit tennis to recover.
And to continue layering in accretive acquisitions, so we could accelerate our earnings growth.
I'm happy to say that those last pieces are falling into place and on.
More positive on my outlook today, and I was just a few months ago.
As you saw on our earnings release last night, we are significantly increasing our 2021 <unk> per share guidance, which is primarily driven by stronger tenant performance and better spreads on a relationship driven acquisitions.
Before I talk about spirits results.
Want to highlight how the net lease model has proven to be a clear winner and the current economy.
And that lease properties are granular.
And are generally located outside of CBD locations.
Because the properties are single tenant.
And fully controlled by the operator.
And then just kind of adjust their operations.
And use of their space to adapt with changing circumstances and consumer demand.
COVID-19 Ulta.
Ultimate stress test for the net lease model.
And showcase its durability.
In addition, the transaction market is very deep.
And there is tremendous diversity of opportunities across industries and also types on tonnage.
This dynamic provides not least from buster's like spirit.
Ample opportunities to acquire real estate that is critical to and operators of profit generation.
On the long term leases.
For spirit and particular, the impact of the vaccine rollout government stimulus and robust jobs recovery as a result, and a meaningful credit improvements across many of our tenant industries.
Many of our public tenants continue to access the capital markets on <unk>.
Produce great results.
Well on private operators are also experiencing improved performance.
Especially across lifestyle and experiential categories.
Like Jim's restaurants and entertainment.
As customers are returning with pent up demand.
During the quarter, our lost rent, which we define as base rent not probable of collection.
Fell to 40 basis points.
Excluding movie theaters.
And 60 basis point improvement compared to the fourth quarter.
Our rent collection is also steadily increased to 96 per cent for the first quarter and.
And we expect further improvement throughout the year.
Particularly as theaters recover.
Another important metric is occupancy.
Which stands at 99, 5%.
And hasn't dropped below 99% book to spinoff and that's not yet.
A key factor for spirits portfolio resiliency has been our focus on large sophisticated operators.
A great example of one of these tenants is G. P M investments.
Top tenant for spirit.
And we hosted at our latest town Hall.
For those of you on familiar with G. P M.
And is the seventh largest convenience store chain and the U S.
With approximately 3000 stores.
Operating under various brands.
And they just went public last year.
Like many large convenience store operators.
Did you arrived there income from fuel and merchandise.
In the last three quarters of 2020.
G P M delivered over 4% merchandise same store sales growth.
Where they derive a majority of their profit.
And that strength has continued into the first quarter of 2021 with a growth rate remains above 4%.
And so sophisticated operator, and a highly fragmented industry.
They're using technology to better understand how merchandise preferences differ across regions.
Furthermore.
We are addressing the E vehicle trend through a JV with and Israeli EV charging company, allowing them to.
To be better positioned in the future regardless of what type of vehicles people drive.
We're seeing many examples like G. P M across our tenant base and we will continue to partner with these types of operators.
A core part of our portfolio strategy.
And as I mentioned earlier, one of the last hustled pieces is the recovery of our hardest for tenants.
And no industry and our portfolio has been hit harder than theaters.
However, as you can see on page nine of our Investor presentation are moving theater portfolio, representing four 4% of ABR is showing signs of improvement.
First.
Our public theater tenants, representing $8 7 million of ABR.
And I've raised over $5 6 billion and public capital.
And on a much better position to meet their obligations.
Second our private theater tenants, representing 14 million and a b R are beneficiaries of various government programs.
Crude and the cares Act main street lending on the shuttered venue operators grant.
Which we believe will add significant amount of liquidity for all our regional operators.
Finally, as highlighted by box office trends were and are seeing consumers go back to the movies with theaters open and new content coming to market.
The recent releases of Godzilla vs Com and Mortal Kombat Australian indicators.
And even though they were released simultaneously via streaming.
The box office did very well.
One last note to point out on our theaters.
Our Q1, a b R does not reflect the new leases in place on our for former good which theaters.
Those theatres are under renovation and.
Will not open until later this year.
Upon reopening they will be subject to percentage rent arrangements for them and they'll ramp up ramp up period.
In addition, we are in the process of retention and the three former studio movie Grill locations and Southern California.
And which were rejected in bankruptcy during the first quarter and.
And we'll update you once those agreements are finalized.
Overall, the combination of improving balance sheet.
Box office performance.
And successful re tenant Inc has made us more positive on theaters.
Well movie theaters were a headwind throughout 2020.
As we move into 'twenty, 'twenty, one and beyond.
Theaters could become a meaningful source of earnings acceleration.
Turning to acquisitions.
This quarter, we acquired 25 properties for $195 million.
With an initial cash capitalization rate of 757%.
And economic yield at 844%.
And a weighted average lease term of $17 seven years.
On the deals we closed and the first quarter, 70% were sourced through existing relationships.
The industrial assets, we bought were a mix of distribution centers.
And light manufacturing and our mission critical for the tenants.
The retail acquisitions added to existing relationships with lifetime fitness bj's wholesale coal and.
And other existing tenants within our auto service dollar store and entertainment portfolios.
And second quarter is off to a good start.
Quarter to date, we have closed on $166 million of investments.
With an initial cash capitalization rate of 7%.
Resulting in year to date acquisitions of $356 million.
With an initial cash capitalization rate of seven 3%.
And weighted average lease term for 15 years.
The investment market remains competitive.
And we're certainly seeing cap rate compression and many pockets.
Yet we continue to find deals that make sense for our underwriting with spreads that are attractive.
And in fact over the last 12 months, we have acquired over $850 million of assets.
For the weighted average lease term of over 15 years.
Our blended cash capitalization rate of 7%.
On a blended economic yield of $7 75 per cent.
The mix over the last 12 months and it's been evenly split between retail and industrial assets.
We believe our early move into industrial assets and has generated substantial alpha for our investors.
And if cap rate compression for these property types has been meaningful.
Our team is acutely focused on finding assets that meet our criteria for industry strength.
Tenant credit worthiness and good real estate.
And our pipeline remains healthy.
Before I turn it over to Mike I will just repeat that the company is in the best position I've seen during my entire tenure at spirit.
Our portfolio is performing well, we have cemented the processes and procedures, we talked about extensively at our Investor day, and we have deep relationships with our tenants.
Finally, as you saw last week, we issued a press release and recognition and a birthday.
Stating that we are developing a standalone ESG report.
Aligned with Investor favorite disclosures Fuzzby on P.
CFT and we will release this book report before our 2020 two annual shareholder meeting.
We are pleased to be one of the earlier adopters within the net lease space on this front and we look forward to updating you on our ESG efforts as we go through the year with that I'll pass on for Mike.
Thanks Jackson.
And you can see by our results it was a solid quarter.
Cash rent grew 7.3 million driven by net acquisitions and better tenant performance.
Acquisitions contributed $5 7 million of this growth and our loss rent, which is reduction of base rent, there's only 2.2 per cent for.
For 120 basis point improvement over last quarter.
More importantly, our lost rent excluding theaters felt the only point for per cent compared to 1% last quarter, which is better than our historically forecasted range.
Our rent collections also improved rising to 96% during the first quarter compared to 94 per cent last quarter.
In addition to rent collections, we received $4 2 million and deferred rent repayments during the quarter.
Which is close to a 100 per cent of what was that.
At quarter, and our accounts receivable balance related to deferred rent.
$2 5 million.
Which excludes $6 5 million of deferred rent payable steam not probable for collection.
On the expense side property cost leakage remained stable at approximately 2%, which is in line with our medium term forecasts are.
Our G&A on seasonally higher and the first quarter, we're still three three per cent lower compared to the same period last year.
And as I mentioned during our last update do you expect G&A to normalize closer to 2019 levels throughout the rest of this year.
Finally, our interest expense rose modestly in the first quarter as we access the debt markets with a fairly large raise share.
And over 260 million and cash at quarter end.
The cash will be used to fund acquisitions and the upcoming convertible debt maturity.
Now turning to the balance sheet remained active and the capital markets and.
The first quarter, we entered into for contracts to issue an additional one 4 million shares of common stock at a weighted average price of $41 13 per share.
As of March 31, we have $5 5 million shares available under for contracts.
We issued an aggregate 800 million and senior unsecured notes in early March comprised of a $450 million seven year and $350 million 11 year issuance bearing coupons of 2.1, and two 7% respectively.
It is worth highlighting that our unsecured borrowing costs continue to meaningfully improve their spreads for 10 year treasuries tightening over 150 basis points since our first 2016 issuance.
We used the portion of the proceeds to repay 207 million of CBS loans.
For interest at a weighted average rate of five point for 6% Andrew.
And repay our revolver, which had been previously drawn January to repay the outstanding 178 million term loan.
We ended the quarter with $1 3 billion and liquidity squeezes.
It leaves us well positioned to fund our acquisition pipeline and retire our remaining 190 million three seven and 5% convertible notes due on the 15th.
This is by far the cleanest balance sheet and spirits history with 99.8 per cent of our debt unsecured, leaving only two properties encumbered by mortgages and after the repayment of the convertible notes. Our next debt maturity will not occur until the second half of 2026.
Now turning to guidance for 2021.
Maintaining our net capital deployment for gas of 700, and 900 million, which.
Which includes acquisitions and revenue producing capital expenditures net of dispositions.
We have meaningfully increased our F vote per share forecasts from $3 for $3.10 to $3 six and $3.14th per.
And your your growth for 6%.
Given the large increase I do you want to spend a few minutes walking through the critical drivers of our outlook change.
The first drive results from our chance was negatively impacted by COVID-19 recovering faster than expected.
As we discussed last rent during the first quarter, excluding theaters, there's only 0.4% significantly ahead of our expectations.
Our first quarter results and the improvements we're seeing across our tenant base, we have reduced our assumptions for lost rent for the remainder of the year.
We have not changed our assumptions for a modest recovery in the back half for 2021 for theaters.
Ever as illustrated on page nine of our Investor presentation cash.
Cash collections from our theater tenants did improve during the first quarter.
And has continued into April so on.
Our actual and forecasted revenue contributions from our theater tenants have risen and the front half of the year.
Finally, and despite the competitiveness and the acquisition market.
Have achieved higher acquisition cap rates and we initially expected resulting in improved spreads so.
So the combination of improving tenant health, including the near term improvements and our theater tenants.
Coupled with higher cap rates on acquisitions are the primary drivers of our revised F O per share forecasts and.
Conclusion, I'll Echo Jackson's comments that our companies and the best position has ever been and to meet our objectives for should result, and accelerating earnings growth for our investors and we look forward to providing updates throughout the year.
With that I'll open up for questions.
And at this time and will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is and the question queue you.
You may price starting to if you'd like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
My mom and Cleveland poll for question.
Our first question from Wes Golladay with Baird. Please proceed with your question.
Hey, Yeah, good morning, guys and congrats on all the stuff on the balance sheet and getting and I do agree it's art and very nice shape now a quick question for you on the industrial assets you mentioned a potential cap rate compression have you seen that yet and can you get used and update on where you are buying industrial right now.
Hey, good morning, West Jackson.
Without getting into too much specifics yes.
Yeah, obviously were.
And we're finding attractive cap rates, depending on the type of credit type of industry.
And a range of I'll call it low six cap range too.
Mid sevens.
I can tell you that a lot of the assets that we have some of the assets and we have acquired and the last couple of years, we've got and actually got and reverse inquiry.
Just reversed and bonds on potential.
To sell those assets and they've been meaningfully inside of where we purchased and that range.
Got you and do you get repeat business from those type of customers and I know you can get on with U S. How are you doing it with some of your traditional retail focused and this but is that a source of business for you on industrial.
Actually yes.
And just the.
The channel opportunity was.
Really from an existing private equity relationship that we had.
On a on a on another platform and Thats, what with them last year.
Knock papers, we've had follow on investments that was the pay per deal we did and the early 2020. We've done additional follow on opportunity and so it's a big and it's a big part of what we're trying to do on and.
Take that skill and retail and overlay it and Ted.
And the industrial area because a lot of these companies are still growing and and looking for capital.
Got it and then maybe one quick one for you on on the the main have been acquisition. It looks like you got and extra unit, but your exposure might have went down anything go on there.
Ken I'll, let you pick that up not not really just where we are.
No I think that's more.
More of a higher base rent and we are working with main event on a new unit and others that were.
Happy to.
And to work with them on and again growing on our relationship with the tenants that we know that we know and we like.
Got it thanks for everyone.
And our next question is from Greg Mcginniss with Deutsche Bank. Please proceed with your question.
Hey, good morning.
And I just wanted to dig into the wider cap rates that you're achieving the initially expected I know you mentioned relationship driven transactions and helping to widened those cap rates are there any other factors that are pushing those off and then.
How much of a benefit do you think the relationships are able to provide and has there been a change in that contribution over the last year.
Yeah.
Okay. Thanks, Greg I'll take it.
Relationships help.
They they give you kind of insight into what it potentially takes time to win but.
And as tenants are pretty sophisticated they they're going to get the best deal out there, but having a relationship is better than being literally outside the room. So I would always argue that relationships are important.
In terms of cap rate.
And I talked about at Shiloh and transaction.
And really interesting.
It's a company that focuses on.
Lightweight.
Reducing weight and cars.
Big factor rate for EV and for fuel efficiency, So we'd love that part of the business. That's what this company does.
Case in point, you know as per.
Part of the underwriting for this transaction, we closed on eight properties with this company long term leases and.
And post first quarter, they were able to assign two of those units to another to another business. So it just shows you that the reason they can do that as you know the rents were set at a very very reasonable level.
It's good real estate good buildings and.
So it shows you that there's a fundamental demand for for this type of property from from users.
And and that's part of our underwriting there, we like to credit and like the basis like what they did.
If the opportunity set is pretty attractive for us.
So I would say the difference up for helps US is that we spend a lot of time on the particular industry credit as well as real estate and that's and that really that combination helps us really I think get conviction around certain opportunities and once we did we really dig into it.
Yeah.
So is that a shift in terms of the types of assets that youre looking to acquire this year, which is why are you expecting a wider cap rate range and.
Well you know on a cap rate range is the guidance I think was out there at six 5% to 7%. So the answer would be no but and.
And I think we did a good job securing I think we were early on and tell me back into the market. So that helps us quite a book.
But.
And I think I think that as the on the market is competitive from a cap rate standpoint, as you've heard from other of our peers and.
So we're going to continue to kind of do what we do we think we can we are being very selective and we'll find good opportunities.
Thanks, and then just one more for me and.
Light of the recent buried acquisition just wondering how you're thinking about larger portfolio acquisitions at this time and if you're comfortable with the second part of this question maybe touch on your willingness to combine with another public platform.
Well on the portfolio question, we always have been we have.
Looking at portfolio since I joined this company and as I said when you look at our portfolio.
Yeah, there's always good property middle property and Theres always usually some challenging properties I E. The dogs.
And so the challenge for US is we're able to do new sale leasebacks with existing customers at attractive cap rates on our lease term annual bumps, we do the underwriting.
And you know what if that's that's hard work but.
And we're doing a great job generating.
High quality assets for our shareholders.
So anytime we look on our portfolio, we've got a measured against that and and so to date is that the portfolio didn't match up at a price and did it sort of makes sense.
You know as it relates to the combination question.
And when I took over as CEO back and seven 2017 and get the question almost every quarter and the answer is the same we will always look.
Look at those opportunities, but the day to be honest with you, there's so much upside and our business.
In order to kind of just get back to a market multiple we believe that's the best for our shareholders. At this point so yeah. The company's thinking about this if we had sold back in 2017 that would have been sort of a mistake Wright the companys for better today balance sheet assets for people to platform. So we're just going to kind of keep going.
And we think we've got a good path here to keep beating and raising.
Alright, Thank you Jackson appreciate it.
Our next question is from Chris Lucas with capital One Securities. Please proceed with your question.
Oh, good morning, guys nice quarter.
And I guess, let me start with this Mike just on the forward equity stock price as well and well pass the price that you had executed on.
Are you required to execute on those forwards or is there and out for you given the significant appreciation above that for a price level at this point.
Yeah, No we're contractually obligated to ask.
On those contracts and some form right I mean, we get we get unwind them and we'd have to settle them.
And actually that net settlement does affect our earnings. So you know there was some dilution in Q1 related to this and sell forward equity contracts because our stock price has run up and ahead of where we struck those.
And now the Treasury stock method is that that gap and valuation is what impacts you're on your dilution on does that settle shares.
So we could on one them, who cannot take all the shares and but there would be a cost I mean, we are obligated to do.
You take those out and some form.
So not likely worth the effort and time.
Yeah, I mean, you end up on the same place honestly, so whether you take them all and are you on net set on and you end up economically you are on the sandbox.
And then Johnson and.
There was news out this morning on at home that they are I have agreed to be acquired by a private equity shop, I guess bigger picture question given the environment.
A number of the public retailers have experienced over the last year I E improved balance sheet improve leverage metrics et cetera.
Are there things and your lease contracts that.
Provide some insulation from <unk>.
Potential price.
And equity transaction that typically uses a lot more leverage on the pro forma company.
Yeah, I would say the simple answer is now and that's always that's always something that.
It's a possibility right. So one of the things that we try to focus on is.
And if you look at our ABR today, it's over 52 per cent of public companies and you know.
Around 2025 27 per cent RPE back.
Specifically on AD volume.
That's a great company, we loved the company when we first met them as a public company and at that time, there were rumors about kohl's potentially acquiring them that was the chatter that was before on Investor day.
On the one of the reasons why we were so interested in them and that opportunity and that company was they just had a great business model and this is pre COVID-19 right.
On the models of what they were offering customers was very very unique.
And we're able to really reduce.
G&A in order to deliver that kind of warehouse discount home decor opportunity for customers and win.
Look whether it's public or private this is winter right, we'd love the concept, we'd love the management team.
And obviously they had a misstep on their earnings and.
Two COVID-19 they've recovered so it's not surprising to me that someone has sort of said hey, I want to take your I want to execute your business plan and faster.
Does that start to me.
And we're sitting there if there is a public company they can kind of rollout opportunities on a certain pace.
The PE backed companies.
It may be able to accelerate that so.
My guess is we'll continue to look at them, whether they're public or private because we liked the business concept, we really liked the team.
And obviously, we'll be focused on what the credit looks like credit today looks great pre buy out and if there is a presumed rumored buyout.
Obviously, there might be more leveraged and the future but to answer your question, we don't have a gates on leverage and a clip.
The gold leaf so.
Okay and.
And last question for me I think subsequent to the quarter and you acquired a headquarters.
Campus, just kind of curious as to what was unique or interesting about that relative to sort of your more traditional sort of industrial and retail.
Focus.
Yes, so I mean, I think we've talked about it we bought if you recall a couple of quarters ago.
Our bofa.
Office building and Hunt Valley, Maryland, we really liked it and it's very unique characteristics.
And this tupperware opportunity sort of very similar.
Tupperware of obviously as a public company they they generate.
North of just shy of $2 billion and revenues are public company single B. They had really good earnings as you can see they are public so I'll just I won't mention their earnings but.
We like the industry because it's it's a it's related to food prep and food storage.
As you know we've been looking at food manufacturing on.
Opportunities as well so we like that segment.
And then what attracted to us and this opportunity was that there wasn't change and management about 13 months ago, New leadership team there.
We also like really like the real estate opportunity. This is and Ken's former neighborhood and orlando's. So he knows the asset well its a if a campus to opportunity. It's wrote located right on a rail system.
The Sun rail system. So its proximity to transportation is excellent.
And we like the fact that it isn't.
It's in a in a very strong sub market within that Orlando market and.
It's got unique building.
Building features related to what couple of Tupperware. It does there's some research and development facilities and their.
And it's also got a very good rent per square foot. So long term range. So it had a lot on characteristics that made us feel like it's very sticky opportunity and the weather.
With a good credit and the REIT industry going the right direction on <unk>.
Most importantly that if.
If we had to re tenant and we felt confident about that given the sub market.
So we will continue to look at those opportunities very selectively like I said professional office is only two five per cent of our ABR. So it's not going to be a significant portion of our overall ABR, but.
But we're very selective and we and we'll continue to look at those opportunities.
Super Thank you for your responses.
Our next question is from Brian deals.
Sales with UBS. Please proceed with your question.
Hey, guys.
Just a couple on movie theaters do you know what percent of your theater base was open as of the end of <unk> and just what percentage is expected to reopen and <unk> as restrictions get lifted.
Well the barricade you could take it the recalls are not open yet.
Yeah, we're about 85% of all of our theaters are open today and that will be 100% by the end of this month and.
And Brad one thing on the movie theaters.
I think if you listen to my comments, we talked about we're getting more positive about what's happening there.
And if you listen very carefully to mikes comments on his earnings new guidance.
You know there there is there is a lot of meaningful upside to our earnings picture. If if we're able to have success within that portfolio.
We love the fact that our public companies, usually as you know raised a bunch of a bunch of money like $5 5 billion right.
For leverage and deleveraging, we love the fact that on a regional operators have all receive care's money on PPP and they're in the process of getting those spa grants, which are really important for them.
So if you just look at our theaters and just think about.
The rent from our cash based movie tenants and we haven't made any adjustments for this.
And that's about $10 million of call it incremental run rate earnings that can come in from that group.
We're not putting in the forecast because like I said, we're still very cautious.
Cautiously optimistic about that.
And then you look at the seven movie theaters are for student former good words theaters that are being converted to imagine and and three former studio movie growth.
Assets, which we are negotiating a lease with a new operating on.
When those properties come online.
If you were to use rough justice, it's probably like five and a half million of incremental revenue right that that is.
Not really on our forecast so when I think about this opportunity and we talk about earnings acceleration you know it could be like $15 million of run rate.
Revenue I E earnings coming through the P&L.
That's not going to happen this year, but it's kind of more of a 'twenty two and beyond.
On the impact.
We love the fact that and if you look at our 2019 box office revenues. It was just north of 11 billion and 2019 as you know and.
And if you kind of factor in that book.
On the slate of movies coming out.
You you could estimate 45 billion and potential box office revenues between now and the year and.
So look we love that we're cautiously optimistic here and looked like it just comes into being we will continue to beat and raise as we go forward. So.
The April numbers are a lot better than March for our theatres and so that's that's the real booster rocket.
And my opinion for for our earnings beyond the normal we're doing everything great.
Acquisitions operations et cetera.
Okay. Thanks, Jack and you had an awful lot of follow up questions I had related to that so the only other thing I just want to clarify that I think you've cited and 96 per cent of rents were collected and the first quarter.
It's the four per cent uncollected does that pretty much all movie theater at this point just to clarify.
Pretty much pretty much for love because theres, a couple of other things and there but yeah.
The large majority of movie theaters and.
That's right.
And it.
And the collections are 98% ex movie theaters. So we have a couple on things on there.
Okay, Alright, that's it for me and thank you.
Our next question is from <unk>, St Juste with Mizuho.
Mizuno and people will see with your question.
Hey, good morning, Thank you for taking my question.
Warning and can you talk a bit about the fitness acquisitions and the first quarter here. It looks like about 35 million what was the cap rate.
Did you underwrite those and maybe you could talk more broadly about how your view on some of the COVID-19 challenge and experiential sectors like theaters and Jim's maybe changing here as we sit there for you to a world and a comedy post vaccine and with the economy on an upward trajectory.
And what's your appetite for more.
More or adding exposure to those types of sectors could be thanks.
Thanks and all.
So the we bought another lifetime fitness opportunity in Arizona.
And the first quarter.
And the lifetime is interesting and are there, they're really they're really a country club.
You know and and they're almost there really I mentioned on my comments, it's a lifestyle assets, it's not really experiential retail and the people really use those facilities not just for exercise, but there's daycare indoor tennis theres dining facilities they have like work.
Theres workplaces within those facilities.
So they're very much destination oriented and not just go run on a peloton.
Exercise on our pellets on machine.
And so that's it's a really intriguing concept for us given what we've learned out of COVID-19. So so we're evaluating actually other lifestyle.
Opportunities today.
They and they look really interesting given changes on peoples work life balance the need to get outside and need to do things.
That are just not just you know going inside into endorphin type facilities.
And so that was.
I'd say the.
One of the leading factors and are pursuing that lifetime opportunity I won't get into cap rates, we don't really like to disclose that on specific units.
We did close on a on a main event and the first quarter, we loved that concept and what they're doing a great job people look you know theres a lot of pent up.
The balance sheets of our people and the United States are quite good with all the stimulus so theres a lot of pent up.
The man for people and wanted to get out and do things.
So whether that's experiential retail so that would be the main event.
But that lifetime as we loved that country club type opportunities and stickier for.
And for captive around.
On different ne.
Neighborhood. So so I think that's an area where can it continue to evaluate and and potentially look to add more.
And that segment.
Got it got it.
You're talking a bit of distinction here between the lifetime and the more conventional.
Fitness, that's why I'm, if I'm reading that correctly, so anything yeah, yeah yeah.
Yeah, and you know cause and all.
The those lifetime facilities dollar wise or much more significant than a typical Jim I mean, you're talking about much more expensive build out much larger facilities.
30, $30 million to $40 million per unit versus you know a buffet, Jim which is which is gonna be sub 10 million. So.
And it's a different business model it really is and so but.
But we still like regional gems, and we're not getting away from that but.
On the lifetime was kind of an eye opener given all its formed how it's.
How their membership has rebounded so quickly and what they're trying to offer.
And especially with.
More potential work from remote work flexibility.
That's going to help those kinds of businesses, we believe going forward.
Got it got it thanks, and I understand you don't want to get into specific tenants that cap rates are so much but maybe you could talk about the first quarter Capex and general with a bit surprised by the seven six I think overall and maybe you could talk about what skewed that up, especially because he seem to require a lot of.
Mission critical manufacturing and industrial this quarter. Thanks.
And really we looked at a lot of stuff.
And to get those cap rates and those opportunities.
If we if we wanted to do more or the cap rate would be lower I'd just tell you that for me.
And so there's no secret sauce, but interesting and really selective.
And it's picking the right operators.
And that's it.
And we look at.
There's.
Cabot score sheet of billions of things that we turnover, we look at a lot of things.
<unk>.
We're very fortunate to have buttoned down and these assets earlier my guess is if I heard on kind of look out for the balance of the year. It sounds like any more competitive so.
And I would assume that.
Cap rates will kind of continue that just downwards on a quarter over quarter basis to kind of blend into that six 5% to 7% weighted.
Weighted average cap rate by year end.
Alright, I have to take that.
Yeah. The team I think one of the things that we're able to do.
We have from here and talk a lot about this process, we have a very holistic way of doing acquisitions.
Credits involved very early on researches are involved very early on.
Whether it emanates from our asset management team or from our acquisitions team.
We're able to size it up very quickly.
We're not just buying investment grade off the run assets. That's on our business strategy. So you can take on work little harder turnover more stones, but when you dig in on and find those opportunities.
Times Theres, some and when you really spend the time and get on to that.
Buyer interview call, where we can talk to management and find out what's going on and find out what's motivating and you know I was on one which Ken and the team yesterday.
Smaller deal you'll learn a phenomenal about a lot about what's going on what's driving their business.
And that's one of the reasons why.
And our monthly town Hall meetings I bring a tenant into every month since we've done that since COVID-19 started and my guess is we'll continue to do that going forward. We learned so much about these trends and.
And I think that we're small enough of a team where we can be very.
Barry.
Very.
Flexible and move very quickly so once we learned this information.
And look we started off with this recent acquisition and I talked about.
And the second quarter, so retro could start so and we are our pipeline is really solid so we're excited about it.
Got it got it thank you.
Our next question is from Ronald Camden with Morgan Stanley. Please go and see what's your question.
Great Congrats on a great quarter and just a couple of quick ones from me one they can turn on until clearly feeling and a lot better today than three to six months ago can.
Can you just remind us what the.
The percentage of tenants on on cash basis, and what was the assumptions for collections.
And and how did that change and and the impact on on the guidance. So so what was the collections assumptions before and did that change with the updated guidance.
On what.
And to provide hopefully that makes sense.
Mike Yeah.
Sure Okay.
Yeah, so about 5% of our tenants on them on a cash basis right now.
And we collected quite a bit of that and first quarter and thats more loss share and was so low last quarter I talked about our general assumption on on loss rent reserves about one per cent going into the year. We added 50 basis points to that this year just because of COVID-19.
COVID-19 and uncertainty around that.
Our loss rent and that that was ex theaters alright, so excluding theaters. So ex theatres were up 4% on loss rent and the first quarter.
And we've basically taken our assumption down to the 1% kind of normal assumption for the rest of the year.
And that all of that results and you know about <unk> pickup for sure alright, So if you've got a midpoint to midpoint.
That's three cents and we all talk about theaters and we have that page nine we put on our investor deck and.
If you look at that since Q4 to Q1, we've had we picked up 800000 of additional rent cash rent collection from theater tenants that are on a cash basis.
And that was more than we expected we did forecast some modest improvement, but that was more than we expected and you can see we're trending in April even more than that and so I'll talk about that and my remarks about the front half of the year. We are also now forecasted additional cash.
Cash rent collection from cash basis theater tenants right, we haven't changed the back half of the year assumption on that but that's that's picking up another call. It <unk> and then you know you have the improved spreads on acquisitions.
And what we've done year to date right. So we're running over a seven cap on our year to date acquisitions.
Even though that we expect that to moderate and maybe tighten up later in the year you get a lot more air for a contribution from the acquisitions and the front part of the year, obviously than in the back part of the year. So.
That's adding some Nashville as well so that's kind of on that the change and the forecast assumptions generally.
Great.
And then just.
Switching back to industrial and obviously there there there was a net lease deal announced in the market.
And I guess my question is number one when and when you think about manufacturing versus distribution and there is there a material spread and those cap rates.
And two who are you sort of competing against when you're buying assets and then number three when you're thinking about the difference between <unk> and non Nike do you think that spread gun too wide and it and it does it does.
Really fact spread right now and we can see that and we can see that compress.
Yes.
Okay.
Charlie I'll try to start with that and maybe Ken you can follow and if I Miss something but.
On the first question.
First of all for the for the manufacturing that we focus on.
Its light manufacturing, so it's sort of pending assembly.
So the cap rate differential between what I'll call a run of the mill industrial distribution versus light manufacturing and I.
And I think it's like probably I'd say 100 to 150 basis points.
Heavy manufacturing, where there's real smelting real real heavy duty manufacturing, which are very specific kinds of facilities for those tenants. That's that's not on that's not a focus area for us.
Real estate is not fungible enough for a specific generally yeah. There I think the cap rate range, you could see could be in the 150 to.
225 basis point premium over what I'll call it eight Meg.
Straight up industrial type facility.
And also for the credit right.
Just generally.
And.
In terms of who we're competing against a lot of it's a lot of people. It's it's private equity firms small private equity shops.
And other public competitors obviously.
So I think for US we have to decide early on and.
And we kind of manage our pipeline to prescreen says first of all the puts and existing customer takes huge priority.
We will move the organization to do potential follow on business with either an existing customer or a PE firm or owner of existing business. So that's first and foremost.
Right.
As it relates to just competing and the what I'll call. The brokerage market you have to be very efficient with your time and so I think our screening process is very good we get to them and get to the essence of.
This is something we like is there something we can be competitive on what do we think the buyer universe looks like here.
Does it make sense for our timing and the weighting of what we're looking at is the seller really seller. Sometimes you spent a lot of time and people don't transact right. So there's a lot of things that go into that calculus. So we don't spend a tremendous amount of time wasting it and so that's that's an area that we'd look at.
And then finally on the spreads.
I'm, assuming you're talking about like industrial I'm not sure if it was industrial and retail but index.
And.
Yeah, So so industrial which is interesting is.
If you looked at a core.
Multi tenant industrial facility.
And those are those are going and super aggressive cap rates right.
You could be and a low force.
And in some cases.
We looked at on long term 15 year lease.
At least for on a distribution center.
And not have the same bumps.
You don't get as much credit as you think you might right. So so look if you took a fedex facility right 15 year Fedex.
<unk> distribution center.
And those are really attractive, but you you actually wont see as much.
Spread between that opportunity and say.
Core industrial and distribution center facility and the inland Empire.
And so if anything I would say the union and inland Empire facility might have more cap rate compression and lower cap rate because.
You've got the ability to increase rents and so.
It's kind of a bifurcated market and that area.
And so we typically will look at the more long dated opportunities we.
Don't necessarily focus on index investment grade, it's really deep.
We were to take away what we do.
We really tried to identify industries and credits that move upward.
And I E credits on the move so that's some area, where we think differentiates us where we can.
Yeah.
She and opportunity for credit change and we think that that we do our homework right, we'll see cap rate compression on that asset and we've been able to do that members are a number of different times. So I think that's one area and we have an advantage.
Great that's super.
For.
On the movie theater side and your commentary.
Very helpful and actually answer on my question thoughts there you.
Congrats on a great quarter.
Thanks.
Thanks.
These guys worked really hard on that page.
[laughter].
Our next question is from Linda.
And with Jefferies. Please proceed with your question.
Hi, just to follow up on industrial and is there crossover in terms of the manufacturing also already being tenants and your portfolio on the retail side.
Okay.
Not really I don't think Kevin.
And maybe no not really I mean party city, and we don't own any retail facilities for party city, but that's that's kind of a balloon manufacturing and <unk>.
<unk> distribution center.
And now.
Thanks, and then just to follow up on collections from 96% rent collections and once you what was April rent collections like.
Yes, we don't have those numbers tallied yet because we do have.
And 4% of our tenants that are subject to percentage of on agreements and we don't have all of those are based off of took me based off of their April revenues right Theres going be a component of their rent, we don't get that information until really middle of May.
So we expect and continue to incrementally trend higher just for example, and if you look at that page nine the movie theater side.
That improvement you see there in April and the cash collections from the cash theater tenants.
And that's driven off percentage rent and that has actually driven off of March revenues.
And so that doesn't have the big releases and the impact of the.
The box office revenue increase that we've seen from Kong Godzilla and Mortal Kombat, and so we'd expect things Catania and higher because movie theater tenants are in a big component of that that gap and rent collections.
Thanks.
Okay.
And our next question is from harsh and Matt and <unk>.
And he with Green Street. Please proceed with your question.
Thank you Oh, Jackson, you mentioned and the box that you're more interested and underwriting public company then on the off John that you do underwrite.
And so on by private equity businesses.
Is that anything Edison and inbound so and.
And I think that you would look and over that to maybe hedge against that.
Additionally, the risk that you see.
Ah yes.
Yes, harsh I mean, we we really look at that.
And the history and the sponsor that's really important.
Is this a PE sponsor that.
His main investment for instance in this industry or is it the first time that's important to understand.
Because if they have history, they generally sort of know what to look for it they know how to add value. They know how to bring management teams and.
And see the into the business.
The real estate on.
Underwriting becomes much more critical when were doing something with a well it's always important but it's also a much more important as it relates to a price.
The company because you know the credit can change overnight.
Given we don't figure a levered recap or something like that so so setting the rents is really important making sure.
The property scores are good and when we do it and our business.
All really important.
And I guess.
And what I'd also say as you know.
Now when you get a relationship with a good private equity sponsor.
Private equity sponsors.
They do a great job I mean, they're willing to really push management teams.
Aggressive on new initiatives.
Well, let me I'll be more aggressive than a public company can do it and so what we look at is.
They are on track record and it's really important for us because you know.
At the end of the day, we may be they may not be there or 10 years from now and so that's important.
And the thing is is that what we found is when we can perform.
For someone like math paper is a great example, they did need to close that acquisition and.
And the first at the end of the first quarter of 2020 and that was right. When COVID-19 was sort of starting to really flare up you could see it and when we close for them and for.
And for that group and it was important and that's that's given us GAAP percentage of more with them because when people want predictable counterparties.
Do what you say so yes.
It's an important component, but we look at it very very carefully.
Also the industry channel.
And the other day for US harsh, it's really simple math and make an investment we want to turn it to stay there for later on lease term.
And if they can hit their extension options. It's a home run for US that's the math for us. So so we have to be able to underwrite that real estate the credit the industry for the long term and we've.
I had a lot of success and that so that's the business model.
Okay and then just following up on your comments on Opex.
And given that you know you're sort of looking into options on on.
And would you.
Have you looked at.
Combined varied and income quite and office portfolio or is that anything you found interesting and that and would you be your margin and buyer of those assets.
No.
No and no we havent looked at it and we wouldn't.
And that's not to say it but the reason is is that.
Like I said, we have very specific criteria.
And our office lens and and scale is not important for us, it's really finding that right now.
If the if the office building has.
Below market leases and a with a really strong.
Tenant or is a sub market thats super tight so.
And first of all we have to have a lot more weighted average lease maturity. John so yeah that that that that situation is not for us and I'm sure.
And on folks will look at it but that's not really for us.
Okay. Thank you.
And our next question is from Joshua on Dental wind with Bank of America. Please proceed with your question.
Yeah, Hey, Jackson hole as well good morning, maybe just just to follow up on at home and cause some.
Friday change your view on how youll grow with the tenant at all.
Yeah.
Well, we'll certainly want to understand what the new owner assuming that the new law.
And as public company, so it's not done right, so and who knows right.
Right right, but.
Yeah sure I mean, we'll we'll want to know what the business plan is for the new owner is what the management team is doing.
Like I said, one of the nice things about that business model is.
Theres This day.
On opportunity to capture market share right. It's it's a great business.
And the ideas and they want to rollout more units.
Clearly customer demand for it so yeah, we'll certainly be open to it.
Assuming that transaction moves forward.
Got it.
All my other questions have been answered thanks Jackson.
And also just.
A quick reminder, if you have any questions you May press star one on your telephone keypad.
Our next question is from John Osaka with.
And break down and please proceed with your question.
Good morning.
Hey, John just wanted to clarify.
And just wanted to clarify something from the prepared remarks are you just viewing the upside from theaters coming from the in place portfolio as those move more fully back into the tank bucket or was that also an indication that theatres might be interesting targets for <unk>.
Acquisitions, and the industry potentially starts to stabilize.
It was really the former.
We think theres a lot of we want to get that we want to stabilize.
On tenant base.
Within the movie Theater segment, that's that 10 million I referred to which is the rent from.
We're moving tenants are basically that on a cash basis the incremental rent.
And then we had those seven vacant properties that are being occupied right, which that's a good sign people want I'll argue about movie theaters because they are good locations good real estate.
And we think Theres, a five and a half ish on a area incremental rent coming from us when they are open and finally up and running.
So that's the high priority right now, it's not buying new movie theaters really capturing does that that's what we that's the best thing we can do for shareholders capture that call it $15 million of potential incremental and.
Our rent slash earnings coming through the P&L very easy which is up.
Wait the factors look really good right now today.
And given economies reopening and the movie slate looks great people are willing to go into these theaters as you know.
You can look all over other places like China, and you're seeing success there.
So it's starting to happen.
But at the end of the day look for the studios released these movies. So that's the part that's a little tricky for us to underwrite but.
And that gives us comfort is.
The operators have the time and they have the capital to get through and we think at this point so.
And I, especially optimistic about it.
But I think kind of the intermediate term no real interest I guess on your own to add to that exposure.
Yeah, that's a that's a good point yeah. That's a fair point, yeah, we're not we're not looking to increase our.
Investment and the movie Theater segment at this point Okay.
And then I know you already gave some color on the Shiloh transaction, but 88 could you provide some information on on the underwriting and the credit there I'm just thinking of a context for some of the issues.
And that business ran into what it was a public company before and the re org and the new ownership came in and you've transacted with.
Yeah, well first and foremost we love the business right.
We think us reducing weight and in cars and metal materials, I mean, they're material agnostic.
But that's that's a major area as we continue to get more fuel efficiency and ship EV vehicles, the lighter the vehicle.
The better efficiency at <unk>, and then you need to have for safety and strength.
So it's a it's an industry that's that we think is very important.
Did you guys provide materials to the.
Support the auto industry. So the Oems so they focus on frame structure. So we like the industry and start with that.
They came out of bankruptcy.
With basically very little debt, you know two times debt to EBITDA.
The sponsor was very experienced they came in and put a new management team in place.
And the revenues are significant.
North of $500 million for sure.
And we liked the basis and the assets and the rent structure that we put in place and.
And like I said, they're primarily in the Midwest, where these facilities are located but that's part of the underwriting we shifted two of those units out of the Shiloh credit and to other users with the same lease term basically that was part of the transaction. So you'll see them drop out of our top 10.
<unk>.
And and I guess, the last thing is they're doing better on a pro forma basis.
And today coming out of the Reorder then and we had initially underwrote. So is it because like I said, it's the right and industry.
And it's the right real estate and break and sponsor.
Okay I appreciate the color and that's it for me. Thank you all very much.
And we have reached the end of the question and answer session and I'll now turn the call over to Jackson I used to work for closing remarks.
Hello, and thank you very much I'd like to just have a shout out to two of our directors Shelly Rosenberg and Tom St. Though who are not.
We nominating for for a new tenure on our board sales.
They've done a tremendous service to for the company and that's great.
Partners with me as we've gotten through a lot since I've been at this company. So I want to thank them for their service and we're excited about our three new directors coming on and potentially the perceived Michel and Tom.
And so that will be exciting for us at the AGM.
But I also want to thank our people.
And for flywheel is moving our portfolio is great and we think there's more features bright so appreciate all your support thanks.
Yes.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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Yes.
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