Q2 2021 Spirit Realty Capital Inc Earnings Call
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At this time I'll now turn the conference over to if he ever of all senior Vice President Corporate Finance and Investor Relations peer you may now begin.
Thank you operator, and thank you everyone for joining us for spirit of second quarter 2021 earnings call for you.
On today's call will be president and Chief Executive Officer Jackson Shay.
And Chief Financial Officer of Michael Hughes.
And the highlight chief investment officer will be available for Q&A.
Before we get started I would like to remind everyone that this presentation contains forward looking statements on.
Although the company believes these forward looking statements are based upon reasonable assumptions.
The are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those currently anticipated due to a number of factors.
They're afraid of the Safe Harbor statement in Yesterdays earnings release supplemental information and Q2 investor presentation as well as our most recent filing with the SEC for a detailed discussion of the risk factors relating to these forward looking statements.
This presentation also contains certain non-GAAP measures reconcile.
A reconciliation of non-GAAP financial measures. The most directly comparable GAAP measures are included in yesterday's release and supplemental information furnished to the FCC under form 8-K.
Yesterday's earnings release supplemental information and Q2 Investor presentation are available on the Investor Relations page of the company's website.
For the prepared remarks, I'm now pleased to introduce Mr. Jackson Hsieh Jackson.
Thank you Pierre and good morning, everyone.
As you saw on our results released this morning, we had another solid quarter net.
Once again substantially raised our 2021earnings guidance.
But the <unk> per share now forecasted to increase by 11% at the midpoint of our range compared to last year.
In addition, we're raising our net capital deployment guidance.
As our acquisition volumes and weighted average cap rates have accelerated beyond our initial expectations.
Most importantly.
Day, Mark spirits returns of dividend growth.
With the third quarter, given an increase of 2 per cent.
While these results my Thomas of surprise to many of their acts.
The product of the methodical execution of spirit medium term plan.
And out at our Investor day and.
And the adherence to 1 of our core values that is best summarized by the words do what you say.
Well the Covid took our operating results on a brief detour.
It has not kept us from reaching our target destination.
Given what we have and are set to accomplish this year.
I'm confident that we can reach the 'twenty 'twenty 2 as a bowl of per share range.
Actually laid out at our Investor day in 2019.
So let's talk about how we're going to make that happen.
1 factor contributing to our performance is the success of our tenants.
Lost rent across our entire portfolio was less than 1% during the second quarter.
And cash rent collections, excluding theaters improved to 99 per se.
At the end of the quarter less than 1%.
On annual base rent was accounted for on the cash basis.
And we received 100% of deferred rent repayments owed during the quarter.
The vast majority of our tenants.
And industries, most severely impacted by Covid.
It shows the casual dining.
Early childhood education Entertainment and fitness.
Has fully recovered.
And in some cases are growing and gaining market share.
Theaters are also on the path to recovery.
With recent box office successes like F 9 black widow.
As you can see on page 7 of our latest investor presentation.
Our rent collections from theaters continue to improve.
And we expect this trend to accelerate as the.
Percentage rent agreements benefit from the strong release calendar.
And the remaining deferral agreements begin to expire.
Given the trajectory of theater revenues.
In recent balance sheet enhancements that many of our theater tenants of completed.
Either through equity raises or by accessing the government programs.
None of them.
The theaters are currently being accounted for on the cash basis.
In addition, we have signed leases with new operators.
On all of the former of California's studio movie Grill locations.
And good which theaters.
That will add approximately $5.6 million.
And a b R.
After a period of percentage rent.
As I mentioned earlier.
Because of the Covid, driven rent abatements and deferrals.
Our earnings took a brief detour.
Well I would have preferred our growth trajectory to remain in the straight line.
It is important to reiterate that our tenants and our earnings are back on track.
And the permanent.
Disruption to our rents will be minimal.
As it stands today.
Our total permanent rent degradation.
Due to Covid.
Equates to only 1%.
Of our annual base rents.
Our integrated credit and research driven underwriting.
Focus on large sophisticated operators with good real estate.
And the implementation of technology tools.
Have enabled us to construct the highly durable and diversified portfolio that has endured through substantial economic volatility.
While continually improving and credit quality and value.
We believe the tale of the tape is demonstrated.
Our strategy provides outside yields.
With very low default risk per se.
The other way superior risk adjusted returns for our investors.
Another factor is the accretive capital recycling.
As you have seen with our disposition cap rates.
We have effectively taken advantage of tighter market pricing for certain asset classes.
The further reshape our portfolio Accretively.
Over the quarter, we have disposed of $61.5 million and income producing properties out of.
Weighted average cash cap rate of 4%.
While the previous quarter's dispositions consisted of retail assets such as C stores.
Suri.
And drugstores.
And industrial asset sales drove the bulk of our disposition proceeds on the second quarter.
Now given that we've got a lot of questions about our industrial portfolio and its underlying value.
I want to give some color around the characteristics of this particular industrial asset on the sale of execution.
Which is also included in our latest investor presentation.
Along with some good information about our industrial holdings.
This particular asset was the 286000 square for beverage manufacturing and warehouse facility.
For 1 of the nations, leading independent average companies located in New Jersey.
We bought the size of late 2016, and the building was well located with rail access.
Freezer and cooler space.
It had excess land for future expansion.
We initially paid 27.4 million for the building.
Which represented an initial cash cap rate of 7.7 per cent.
After receiving $10.2 million and rents over a little less than 5 years.
We sold it for $59.4 million.
Representing a 3.89% cash cap rate on today's rent.
And realized an unlevered IRR of $25.1 per cent.
While we like the property it was less than 6 years remaining on the lease.
And given the pricing we were able to achieve it made sense to lock in this game.
And redeploy the proceeds into other attractive opportunities.
Now obviously this was the great investment for spirit.
But I can also say that this property only ranked in the middle of our industrial portfolio.
The quality of our industrial assets can also be seen on some of our recent lease renewals.
As you can see and of our latest investor materials, our 'twenty 'twenty 3 lease explorations.
As a percentage of ABR.
Dropped from $6.1 per cent at the end of the last quarter.
The 5.1% at the end of the second quarter.
That reduction was driven by true early industrial property windows with Fedex on Fergusson partners.
All of which are investment grade.
For Fedex, we added 5 years the beliefs.
For the 5% base rent increase.
And for Ferguson, we Havent tenures the lease when it's attractive 1.5 per cent escalators.
These early renewals expansions and enhancements were achieved with very minor concessions mainly.
Mainly small ti allowances.
And are good examples of the value of that can be created with properties that are mission critical for tenants and.
In healthy industries.
Overall.
We're very pleased with our industrial exposure.
<unk> benefited from our concerted effort.
Which began 2 years ago to increase our portfolio weighted in this sector.
The final factor there just kept spirit on track to do what we say is our acquisition platform.
Which since we reported the company post spin off.
Has delivered consistent acquisition volumes and yields.
Even in an environment of increasing competition.
Compressing cap rates.
In fact over the past few months. Several do you have asked me what is spirit secret sauce, when it comes to acquisitions.
The secret sauce resides on our unique platform.
Which is based on highly disciplined and transparent processes.
Utilize data and research to deep dive into tenant credits industries.
And the residual real estate value for every acquisition we make.
Our technology tools.
Allow us to immediately see the impact of any acquisition we consider.
On the overall portfolio.
Including how that acquisition effects of diversification across geography industry credit risk.
And benchmark the improvement to our exposure in each industry and asset type.
This approach affords us the ability to pursue a wider breadth of opportunities.
With better risk adjusted returns, while maintaining proactive control over the portfolio.
The way we apply on capabilities can be seen in what we buy.
You may notice that each quarter, we acquire what I call middle of the fairway of opportunities.
These are simply the bread and butter assets for net lease like of Bj's wholesale club of dollar store or a cold store.
They're not particularly time insensitive to underwrite or price.
Then there of the opportunities that are less obvious often mispriced.
Take more time to understand and underwrite but for.
Provide better risk adjusted returns if you get them right.
Sometimes it can be moving early into of tenant or industry.
When you develop deep conviction.
For the market sees it.
Like at home or lifetime.
Were seeing the upward trajectory of our credit before it does become fully realized.
As we showed you with our credits on the move page of few quarters ago.
Or digging into a more complex situation.
Like we sometimes see in the international space.
We've found the allocating some bandwidth to dig into the less obvious opportunities.
Allows us to generate real alpha.
An example of the less obvious opportunity was the 83 million 8 property Shiloh acquisition, we made on the first quarter.
We were able to secure 20 year leases with attractive fixed annual escalators.
8.2% cash cap rate.
Shiloh recently emerged from bankruptcy.
It was the P sponsor middle ground capital as the new owner.
Now on the surface 1 might look at the situation and think Hum.
Auto industry.
Just emerged from bankruptcy.
<unk>.
And just move on.
But we do again.
We looked at the importance of light weighting cars Shiloh is primary business for.
For the increase in the gas mileage and range of traditional on electric vehicles.
We spent time with the sponsor.
Who's an experienced b to b owner with a focus on industrial and distribution sectors.
And the management team.
Who were former Toyota executives.
And digging into the financials, we saw that the business was doing better now than before Covid.
But with much lower leverage.
And the real estate was well located and attractive submarkets across the Midwest.
With low rents per square foot.
And the operations taking place within the properties with strong cash flow generators.
We realized that this was a great business with substantial upside that was not being recognized by the market.
The thesis proved out much faster than we anticipated.
Early in the second quarter, 2 large strategic buyers purchase pieces of Shiloh is business.
And as part of those transactions, we agreed to sign the leases associated with those business units for the new owners.
The net result is that 3 properties, representing 51.5 per cent of Shiloh is rent.
Were assigned to Worthington industries.
The 66 year old company with a triple B the credit rating and.
And 3 properties, representing 17, 6% of salaries went for.
Were assigned to al you're done.
The global light weighting solutions and components supplier.
With the assignment of these leases and the continued improvement of childhood as business I believe the cap rate compression on this portfolio today would be plus or -300 basis points.
A meaningful increase in the value of our investment.
We continue to find the mix of opportunities this quarter that kept on acquisition yields relatively high.
Investing $284 million across 18 properties at a weighted average cash cap rate of 7.7%.
Economic cap rate, 7.84%.
And with rent escalators of 1.8% on it.
Walt of 13 years.
From an industry perspective, we.
We added home improvement building materials dollar stores and home decor.
With an asset type breakdown of 18 per cent retail.
67% of industrial and 15% office.
In total of 78 per cent of our acquisitions consisted of public credits.
With increases to existing public tenants such as home depot at home dollar General and family dollar.
We also added for new public credits to our tenant roster.
Including Tupperware Blue.
Bluelinx L 3 Harris and builders for source.
The acquisition of the 3 blue links distribution facilities.
It was 1 of our larger acquisitions this quarter.
For those of you on familiar with Bluelinx.
It's a leading wholesale distributor of <unk>.
Residential and commercial building products.
Which has been delivering record operating results supported by the tailwind is driving single family housing.
Remodeling activity and commodity prices of boy.
We liked the bluelinx transaction from the start.
Given the favorable secular trends supporting housing the.
Tenants improving credit trajectory.
On the quality of the distribution facilities, which are all located in submarkets with strong absorption on the low vacancy.
So again like the other quarters, we have posted net.
The acquisitions are squarely in the fairway and some are more unique and less obvious.
Given the competitive landscape.
Back that this trend will continue.
We utilize our platform to the deeper and uncover new opportunities.
As I mentioned last quarter, 1 new area that we are focused on his lifestyle.
Benefiting from the secular tailwind of people moving to the suburbs prioritizing recreation.
And enjoy more work flexibility.
And we have evaluated many new opportunities ranging from marinas the ski resorts the RV parks.
I'm pleased to announce that we closed on 1 of these opportunities in July.
Purchasing 22 golf clubs for $231 million.
As you can see on page 16 of our Investor presentation.
We highlighted the many reasons we are attracted to the golf industry.
Including the rationalization of courses.
Increased participation.
And the most rounds played since 2007.
Our investment is under a master lease agreement with 19 years remaining.
And at an initial mid 7 cash cap rate.
The 9% economic cap rate.
Which we believe will result in.
And of Great risk adjusted return for our shareholders.
From a real estate perspective.
These properties are in attractive established the communities.
What's the weighted 5 mile population of 162000.
Well the price per acre of only 47000.
On a price per club of only $10.5 million or basis, and this investment is a fraction of replacement cost.
In addition of our tenants as club Corp.
The largest owner operator.
The private golf lifestyle clubs in North America.
They have over 400000 numbers.
And more than 218 hole golf courses.
As we think about this investment going forward.
And the multiple tailwind supporting this industry we.
We believe this will serve as another example.
Where our early move into an underappreciated asset class.
It will lead to significant value appreciation overtime.
Yeah.
Before I turn it over to Mike to run through the numbers.
I just wanted to say that I'm extremely proud of the spirit team.
And all of that we've accomplished together.
This was an outstanding quarter.
The portfolio was performing.
Our acquisitions platform is delivering and.
And we are back the dividend growth.
Well, we're certainly aware of the Covid is not yet behind us.
We must be thoughtful on digitally and every step we take.
We will continue to execute on the core mission that I highlighted to investors at the onset of Covid.
The work with our tenants.
To ensure their success.
And in turn success for our shareholders.
In short to do what we say.
And with that I'll turn the call over to Mike.
Thanks, Jackson and good morning.
The Jackson mentioned, we had another great quarter.
Rental income excluding tenant reimbursements.
65 million, the increase of $28.7 million compared to last quarter.
This improvement was driven by of $12.8 million increase of cash rent and at $15.9 million increase in non cash rent.
The contributors to the cash rent increase for.
1.9 billion from net acquisitions.
$7 million related to the recognition of rent previously deemed not probable for collection.
The noncash rent increase was driven primarily by $13.3 million of reversals of prior period of allowances for bad debt.
Our annualized base rent or ABR increased $17.3 million compared to last quarter, primarily driven by a $16.5 million from net acquisitions.
In June we collected 98 per cent of our base rent and 99% excluding movie theaters with the 1 per cent delta extending from the remaining percentage of sales agreements in place some of the our theater operators and 1 lease modification of ended in June.
As Jackson mentioned earlier loss range for the quarter was a little less of 1%.
The already below our normally forecasted range.
Excluding the lease modification that expired in June under which the theater operator paid for rent in July.
The loss range for the quarter was the only 20 basis points.
Additionally, we collected 100% of deferred rent payments owed in the quarter.
Representing $5.7 million.
At quarter end, our deferred rent receivable balance increased $3.5 million the $22 million.
With the increase being driven primarily by the reversal of prior period reserves.
On the expense side, our property cost leakage improved to 1.9%.
Falling slightly below our budget of 2 per cent and G&A increased modestly to $13.5 million driven mostly by professional service fees.
In addition interest expense declined as a result of extinguishing the same b S notes in March and the remaining convertible notes of net.
Now turning to the balance sheet, we extinguish the remaining $190.4 million of $3.75 per cent convertible notes with cash when they came due.
Excluding our revolving line of credit we have no material debt maturities until 2026.
We settled for the 1 million shares of common stock during the quarter under forward contracts generating $145.5 million of equity proceeds.
In the quarter with leverage of 5 times.
For 9 times inclusive of all remaining for the equity contracts outstanding as of quarter end.
In July we entered into additional for contracts. The issue 715000 shares of common stock, bringing our total unsettled forward contracts. The 2.6 million shares the expected proceeds upon settlement of approximately of $113 million.
Now turning to guidance.
We are raising our 2021 net capital deployment forecast from 700 to 900 million 800 million to 1 billion.
We're also increasing right, yes, so for share forecast from $3.6 the 3 August 14th.
$3.20 for the $3.30 shots applying year over year growth of 10 to 12 per cent.
Keep in mind that during the first half 2021 generated $1.62 and assets the per share, which included 6 cents related to out of period earnings for.
For the remainder of 2021, our revised guidance does not include any additional prior year recoveries.
The main drivers of our revised so for share forecast in the back half of the year of the.
The strength and performance of our portfolio is best illustrated by our low loss right.
Climb in cash rent collections.
For lease renewals.
Our continued success in finding high quality acquisitions with attractive risk adjusted returns and balance sheet enhancements.
Finally, and most importantly.
As we announced on our earnings release, we are raising the common dividend in the third quarter by 2%.
Equating to $2.55 per share on an annual basis.
This marks a major step for spirit and our journey did you always set.
It puts us on the path of delivering consistent earnings and dividend growth for our shareholders.
With that I will turn the call back over to the operator to begin Q&A.
Thank you for.
Well now be conducting a question and answer session.
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1 moment, please while we poll for questions once again the star 1.
Thank you. Our first question comes from the line of Linda Tsai with Jefferies. Please proceed with your questions.
Hi, good morning.
Give us some more color on how percentage rent deals work, how long do they usually last and or their percentage rent breaks.
Great point.
Okay. It might be 1 of the percentage rent deals that we have really relate to our movie theater tenants. Some of those were set earlier in the when.
While we were working on these deferrals, but.
Generally Mike do you want to go through how they relate to.
Let me share held.
Linda.
Yeah, I mean, you know our percentage of on agreements in place really relate primarily to some of our theater tenants and those will burn off all by the end of this year.
And basically the way we set those was there of some amount of base rent that tends to require to pay during the deferral period and then they pay percentage of rent based on you know a month in arrears of revenues as a percentage of revenue if they earn.
Any differential between you know what they pay and what the contractual base rent is just adds of deferred rent to the extent of the shortfall so that the base rent it for.
The end up earning in excess of the base rent it goes to pay down the deferred right.
And that will continue through the rest of this year and then stop but against some of those of already burned off I think we have none of them bring off in July and of the burnt off in December.
And so that's when you look at our.
You know our cash rent collections are big driver of why we're not collecting 100% is really big.
Cause of those contractual agreements is not the tenants can't pay it's just really the contract parents, who put in place for 9 months ago, given what we saw at the top.
And Linda the AR on the theaters. It's it's the range is on the percentage of 10% to 15% of revenues.
Mhm.
While they are in this period.
Got it thank you for that color and the Jackson you mentioned, how the industrial side on your portfolio of this quarter was the only deemed kind of middle of the road in terms of quality, how do you rank your industry portfolio I'm thinking back to that.
The frontier slide from your Investor Day.
Yeah, I mean of as we look at a lot of different factors you always talked about our property rankings of how the industry relates the industrial.
The scoring system, a little bit different than the rest of our portfolio, but what I would say is is that.
You know a lot of the real estate that we have on our industrial portfolio is very well located.
And it's got real criticality to the to the tenant.
And so when you sort of look at.
Without getting into specifics Huber of asset, but we do review each 1 of them.
We've got some really great properties that we've been fortunate up to acquire so when we made the decision to sell this particular asset you know of really started with some reverse inquiry that we got from <unk> from the market kind of made us look at it.
Sure.
And we made the decision that we yes, there were still upside left in this property.
Guesses.
Some of the new buyer may look to potentially expand it in the future, but for what we were looking at them on what we think we can deploy it we think we can.
Good.
Significant returns over.
Our cost of capital and this is a little white form of raising capital from our minds.
And also to just proof of concept I mean, we got we've been getting a lot of questions about what we've been buying and this was done. This is 1 of the first deals.
That I was a part of on the acquisition when I joined the company back in September 2016, we acquired the steel on the fall 2016, so sort of a kind of methodically moving through adding properties like this.
And.
But like I said, it's in the middle of our portfolio. So we won't share it thinking.
Thanks.
Okay.
Our next question is from the line of of this Rodriguez with Bank of America. Please proceed with your question.
Good morning, and thanks for taking the question.
On the golf club of investment.
Can you just share more information on the opportunity to increase.
On your exposure to this category in the future with this particular tenant and if not.
Other tenants.
Thanks.
Yeah, Great well first you know this is overall part of this lifestyle pieces that we talked about.
So you might see us do some other things outside of golf related to what I'll call lifestyle segment opportunities.
But coming back to golf.
I think what youre going to see US do it's very consistent to how we approach investments.
Obviously it starts for the industry.
Lifestyle, we like golf.
Operators critical right. So obviously, we'd like this operator.
The extent, we can do more I'm sure we would do more with them it was mutual interest.
And then the quality of real estate plays a part of it so.
Not dissimilar to other you know.
Whether they'd be restaurants for C stores or Gms, we really focus on those 3 important criteria.
And the second would be any different than when we look at lifestyle of golf opportunities going forward.
What just got US tremendously excited about this was.
If you look at Calloway's equipment sales on the first quarter globally of the crushed it.
U S sales.
Quarter over quarter of <unk>.
1 of the key towards 2021 versus 'twenty 'twenty I mean, they were up 70% over 70%. So it's.
Just on it's just it's just kind of an increasingly addressable market. That's 1 of the sort of byproducts of Covid.
Some of the supply demand.
You saw the slides so I don't want to talk too much about it but we will do more for sure.
Great and then on on the theater business.
The strategy and thoughts to either increase or decrease exposure.
To that.
The segment in the future and did I hear you correctly on none of your tenants are currently on a cash basis. Thanks.
Yeah, that's right. So 1 thing that's different about our theater portfolio versus maybe some of our peers.
We have a mix of of the big 3 public theater operators of then we also have a.
Portfolio, what I'll call very strong regional.
Theater tenants that if you think about the S V O G program as it relates to that.
That regional group.
They've recapped on their balance sheets of some of its it's just an amazing opportunity.
And for them and for Us candidly.
As Mike said, we will be through all of these percentage rent agreements through the end of this year.
So I think what we'll do the first priority is to get through this year.
To make sure that the.
The studio movie Grill and Goodrich.
Portfolios are ramped up on stabilized.
I think of all kind of look at.
Whereas the theater business is at that point, I mean, we're not making any decisions of sell or buy theaters. At this point, it's really just focused on getting them, we stabilized making sure that.
For the rents come back in.
So.
Yeah, we're not putting a lot of energy on looking at new theater acquisitions I can tell you that.
Great. Thank you.
The next question is from the line of Ronald Camden with Morgan Stanley. Please proceed with your question.
Hey, just sticking with the golf deal maybe can you just provide a little bit more color of how how the as you know when you.
You're going into a deal like that how the properties of selected.
You know what the opportunities to maybe get more down the line.
And any sort of color on sort of the membership trends anything that sort of thing that's interesting on that deal to highlight how we'd be curious thanks.
Yeah, well yeah.
Fortunately being.
In partnership with 1 of the largest operators in the country.
We do get very detailed financial information for them. Unfortunately, we're under NDA with that information, so really precluded to share any of that with all of you but.
The 1 thing I would tell you is that their coverage ratios, even sort of COVID-19, we're north of 2 times of the master lease.
And I think 1 of the things that is going to be really important for us as we go forward.
Is that these golf courses are not just golf.
This portfolio has over 140 tennis courts pickle ball courts.
Within the portfolio.
There's a tremendous amount of food and beverage on corporate opportunities that go through these p&l's.
And the way people are going to re engage out there in the future. We've seen this with lifetime fitness and some of the other tenants we have yes.
People are kind of just conduct more business and recreation at these facilities, it's not just playing rounds of golf and so that really attracted us to this opportunity, especially.
Given.
How well club Corp is doing.
They have a program for juniors called crush it.
And it's just the hotel, they're just they've really I think they've really hardest on something that that's going to be quite impressive as a sort of.
People change their habits.
And they do a great job on marketing for memberships social memberships.
Our corporate memberships.
And we just love the basis, we love a lot of the fact to be honest with you I love. The fact that lenders don't like to lend on this business.
Hope it stays like that while we can get more.
But there was a stigma around golf for a long time, but if you look at some of the sheets that we put in.
But whether it be the supply demand dynamics on golf courses per capita number of golf courses the number of rounds.
We love it.
We're going to be really selective about the operator really selective about the real estate.
Is it of infill location.
On the basis on this on the land alone. It's crazy, yes. So in terms of just protecting the downside so.
Yes, we will definitely do more.
I'm sorry.
Got it that's Super helpful. And then just going back to swirl of the industrial.
The conversation I think the slide deck is excellent and very helpful. I'm sorry of <unk>. So 2 thirds of the acquisitions are industrial and I think the initial cap cap rates are 7.07, maybe can you talk about sort of what is what was the cap rate of ballpark for just the industrial specifically and maybe some <unk>.
Terry in terms of competition.
How those are trending and how you guys are able to find such of such great deals.
Yes.
In terms of my comments here, it's really a.
Our approach is very collaborative.
T more team oriented I would not describe.
Oh says kind of of flow shop as it relates to when we look at industrial we really spend a lot of time and that's 1 of the things why I know, sometimes people say why why can't you do more in terms of number of transactions, but we do take a lot of time and attention on the front end when reviewing industries and tenants on credit and real estate as it relates to.
The making investments here.
But.
I would say that and I'd, rather not get into the specifics of actual cap rates.
And in that grouping, but yeah, you can just do the math.
The 7% so it's probably.
We're gonna be in the high sixes rate interest.
Did that kind of rough math on 1.
We acquired in the industrial but.
It is getting more competitive of just.
You've heard it from other calls of.
Seen it real time last couple of quarters.
But I still feel like we can find those diamonds on the rough.
With the.
I'd love to get more silos.
Like we talked about on my prepared comments.
Lou links.
They they had an awesome second quarter I mean their.
The sales are up 87% from the second quarter of this year.
Gross margins were up 20%.
EBITDA went from adjusted EBITDA went from $31 million last year in the quarter of $166 million.
Our debt to EBITDA in the second quarter is down to 1 of half times. So when we were looking at this transaction looking at historical financials.
The rough right. It was a more challenging from the eye, but when we dug into it. We're like Hey. This is this is kind of a really unique secular trend right now for this company.
And middle of.
Lot of sales force and we're really happy with it.
But that being said, it's super competitive and we are out there of slugging it out there with everybody else.
So.
But feel very comfortable on our pipeline.
Really good about our processes the pea.
People that we have in place executing.
And I think we're in great position right now so really.
So very grateful to be in this position.
Helpful. Thank you congrats on the quarter.
Thanks.
Our next question comes from the line of harsh of <unk> with Green Street. Please proceed with your question.
Thank you I wanted to follow up on your pieces.
Oh on lifestyle assets you mentioned.
The interest in the marine or maybe ski resorts.
And this commscope acquisitions with 1 of your larger ones. So I wonder why.
On to ask will the deep value Oh on the these nice day.
Assets be generally larger and.
Does that affect home many of those you might do.
Given your.
Okay.
I don't think we're I wouldn't say size constrained us.
I wouldn't take away that are lifestyle transactions will be large.
When we looked at this opportunity.
Okay I can tell you honestly it started off with we thought we might only do half of it.
And as we kind of dug into it I'm like well.
No I think when you do all of that because it's the <unk>.
Net investment great risk adjusted investment they've got Pops up number 1.
In terms of net.
The next next quarter, it's going to be pretty high up on our tenant list of obviously thank you.
But you don't get these opportunities and it's such a unique and.
Investment.
Where we felt the risk.
Was was very.
It was not being represented and sort of what would get the investment on that.
And I think it was based on like I said historical.
Impressions about the business and with Covid and you can't look at it you can look at history, but you kind of kind of look real time the project in the future just given on skipping changing habits.
So yeah, I would just say I wont walk ourselves into of what do we won't do a big deal like that again I hope at the show as well.
We're not constrained by the size of an investment as long as we have what we believe is the right thesis around the industry operator of real estate.
Oh, that's actually and then or just the follow up on that piece.
The opportunity in the segment.
They seem bedroom idiosyncratic or could you provide from.
I guess balance it out in the the.
The need if you would want it.
Florida capital.
In the lifestyle segment.
Yes.
They are different.
<unk>.
And the range I'd say.
No I mean, the way we look at investments generally we've targeted for <unk>.
And a half the 7% cap.
Cap rate range for investments for the year.
So at any given time will be inside of that under it over it right as we look through it.
Well, we don't deal with sort of create hard line. It has to be this kind of cap rate for this type of property I mean, we sort of know what we're solving for.
We try to calibrate.
Are we getting paid appropriately for the risk.
In this particular investment.
But that's what it's all kind of constantly work, we're asking ourselves that question.
So I Wouldnt do it justice by giving you a range of cap rates on RV parks of marinas and golf courses because there because they are very dependent on location operator.
But suffice it to say, we're constantly evaluating that that's 6.5% to 7% range.
The beer visa visa the tenor of the credit real estate the lease term all of those things factor in so.
I would describe it as the mosaic that better based on these guiding principles that we have.
The kind of use our collective wisdom within our investment committee on on how to approach those.
But it seems to be working right. So.
Okay. Thank you.
The next question is from the line of John associated with Ladenburg Thalmann. Please proceed with your question.
Good morning.
Thank you Amy going back to the.
The theater portfolio.
Yeah as you kind of look at now pretty much close to almost 100% rent collection from them how.
Are you thinking about coverages and I guess, maybe you know as you look at your portfolio of theater, specifically, where would you kind of need to see box office numbers get relative to maybe some of the pre pandemic years to get covered just back to <unk>.
On a comfortable level if you will.
Okay.
I mean, I think the distribution cycle has still geppert right now with the screaming in some of these other.
Actors.
I'm not sure I would sort of benchmark it against pre pandemic.
Just given the way.
This business, obviously is tricky because you're really you're reliant on release schedules for the studios you've got streaming now happening.
And people clearly I'd like to go into via the right. So you have that happening.
We're not looking at coverages as a target it's it's.
We know that at the theaters will improve in the the slate looks really good the balance sheets of all of these operations have enough time to get through it.
But.
Yeah, I think it's a little bit too early of telling me. We we are getting some feedback from some of the smaller regional operators that they're looking at potential opportunities to grow.
So I think well where the.
You're reading it very carefully but I don't know, we're not necessarily trying to establish pre pandemic coverage.
Levels with that with this portfolio.
Okay.
Im trying to remember it in all of these if it's been posted in the presentation.
How much of kind of the theater portfolio of if we think about it from the pandemic is now on kind of a new rent schedule because of credit events, obviously, Goodrich and you know moving grill, but I mean, how much today is on kind of a pre pandemic rent level. When they are paying a 100% and how much has been kind of renegotiated since the pandemic roughly speaking.
Mike you on trying to take that 1 of them.
Yeah.
I mean, how bad do that I mean really it's it's really just the the.
The theater will be re tenanted that went through the different rent schedule.
I mean, we had I agree with the 1 other theater.
Existing tier across all of portfolio that we.
We did 1 modification to where we did of modification of the portfolio. We got additional term and as part of that I think 1 theater, we did a slight.
On small rent adjustment.
So very minimal so really we're just talking about the the other.
The theaters the steward of movie girls the the Goodrich.
And I can also augment so I got to tell you that all of Republic.
For your chance of or back of paying full rent.
So I mean everything is really the.
The back online very quickly and you know across our regional theatres with yesterday of G grants from they've been able to recapitalize their balance sheets.
Our rent collection stay of really a function of the agreements we struck.
Knowing what we know today with the recovery and how well People's balance sheets book, you know we wouldn't strike those agreements today is we've done 9 months ago.
But the the health we're seeing in our theater tenants is very very good.
And yeah, we think they can get back on track very quickly so.
Okay.
I know you've discussed kind of the industrial portfolio, a little bit already but what.
What is the appetite for more of dispositions, you've given some of the pricing youre seeing out there I mean, obviously you could you could repeat the new Jersey deal and it seemed like the very attractive way to recycle capital in it and maybe why not continue to kind of.
Worked through some of those are maybe more mature industrial assets to continue funding growth in the other segments.
Well look on me I think you know look at the end of the day, we are a REIT.
We're not on opportunity for and obviously, even though we generated really.
Hi high IRR on that sale.
How much of a balance or we could sell the entire industrial portfolio would be massively accretive to us but.
Is that what we're gonna do I mean, we're we're at about 18%.
Industrial right now as a percentage of ABR and that's the only gonna get larger as we continue to get better at this business on.
Uncover really interesting opportunities.
But the industrial.
Buying and selling market is pretty wide people have very different ways of approaching acquisition. The summer core some of the multi tenant some are just buying duration. Some are just part of investment grade.
I think that what makes US unique is we I think we put the appropriate balance.
On the industry credit operator of real estate and I think we will.
Yeah, we do spend time.
And I'm trying to get below the surface of things, where there might be an opportunity. So yeah look I I don't expect us to be selling a lot of industrial at this point the honest with you we're trying to grow this part of the business as.
As well as nor retail but.
So yeah I wouldn't expect.
You did see that.
That much more disposal.
Aerial side.
Okay.
That's it for me thank you very much.
Right.
Thank you at this time of for each end of the question and answer session. I'll now turn the call back to Jackson same for closing remarks.
Thank you operator.
Well I just want to make sure just couple of key message is that.
Hopefully people will come away from our call is first and foremost I think we have proven that our quality of portfolio is very solid just given where we were a year ago to where we are today you can.
Remind you of all of the metrics.
We are completely back on track as it relates to acquisitions deploying capital raising capital. We're excited about the ability to start raising dividends again.
And you know that the team is.
Performing extremely well the pipeline is is continuing to build so excited about that and look forward to talking to you in the future. Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Yeah.