Q2 2021 STORE Capital Corp Earnings Call
Good day and welcome to the store capital second quarter 'twenty 'twenty 1.
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I would now like to turn the conference over to MS. Lisa Mueller Investor Relations for store capital and cause me alert the floor is yours ma'am.
Thank you operator, and thank you all for joining us today to discuss store capital second quarter 'twenty 'twenty..1 financial result, this morning, we issued our earnings release and quarterly Investor presentation, which includes supplemental information for today's call. These documents are available and the Investor Relations section of our website at IR Dot store.
Our capital Dot Com under news and results quarterly results I'm here today with Mary for you to what President and Chief Executive Officer of store, Cathy Long Chief Financial Officer, Craig Barnett EVP of underwriting and portfolio management, and Tyler merits E V P of acquisition.
On today's call management will provide prepared remarks, and then we will open up the call for your questions in order to maximize participation, while keeping our call to an hour and we will be observing a 2 question limit during the Q&A portion of the call participants can then reenter the queue. If you have follow up questions before we begin I would like to remind you that today's.
Comments will include forward looking statements under the federal Securities law for it.
We're looking statements are identified by words, such as will be intend believe expect anticipate or other comparable words and phrases statements that are not historical facts such as statements about our expected acquisitions dispositions or our R. A F O per share guidance for 2020..1 are also.
Forward looking statements.
Our actual financial condition and results of operations may vary materially from those contemplated by such forward looking statements discussion of other factors that could cause our results to differ materially from these forward looking statements are contained in our SEC filings, including our reports on form 10-K and form 10-Q.
With that I would now like to turn the call over to Mary for you to what stores Chief Executive Officer Mary. Please go ahead.
Thank you Lisa good morning, everyone and thank you for joining us today.
I'll begin the call with an overview of our second quarter performance and discuss our growth strategy, Craig will provide an update on what we added to the portfolio this quarter as well as our portfolio management activities and Kathy will review our second quarter financial results. We will then I'll be available to answer your questions.
As you saw in our press release, we delivered strong operational results for the second quarter through our selective acquisition strategy, we attained a weighted average cap rate of 7.8% on our acquisitions of $341 million and profit center real estate.
We also delivered a F F O a 50 cents per share, reflecting the strong level of growth and revenues from our investment portfolio.
We continue to see cash collections, increasing with July cash collections at 98%, reflecting both the strength of our diverse portfolio and our belief that the financial impact from the unprecedented pandemic is now largely behind us.
On the acquisition front, we continue to see increasing demand for our customized financing solutions as businesses are becoming more confident and their outlook and M&A activity is picking up momentum due to continued low interest rates monetary stimulus and pent up demand.
We have a robust investment pipeline of $12.5 billion, which allows us to be highly selective and making acquisitions that are good for our customers good for shareholders and good for store.
Our portfolio is in great shape and remains highly diversified with our largest tenant continuing to account for only 3% of base rent and interest we.
We have contractual built in rent growth from our annual rent Escalations of 1.9%, which provides a nice hedge against inflation are.
Our weighted average lease term remains long at 14 years, and we have virtually no near term lease explorations and.
We closed the quarter with an occupancy rate of 99, 6%, which has remained consistent over the past 5 years.
As you all know sustained low interest rates, coupled with the historic attractive yield opportunities and the net lease sector are serving to attract and influx of new capital.
This is causing some cap rate compression, which can also result in increased real estate prices.
And that store, we are continuing to be deliberate and our acquisition strategy and believe the value add we bring to our customers continued to result, and above market cap rates and attractive risk adjusted returns.
As always we remain committed to our disciplined approach to providing real estate capital to our customers, including an extensive review of the real estate during our underwriting process to ensure we are paying what we believe is the right price.
And last quarter's call as I stepped into the CEO role I provided some broad observations of where we see store heading I mentioned that 1 of my primary objectives is scaling store to the next level of growth and success and collaboration with our experienced leadership team I also mentioned that we'd be open to new avenues of growth today.
Want to provide some additional color on our plans.
Over the past 10 years, we have been focused on building the front end of our business our acquisition engine and developing valuable customer relationships. Today, we have a highly diversified 10 billion dollar real estate portfolio and installed base of more than 500 customer relationships, a proven business model and.
And experienced team of more than 100 professionals and their proprietary leading edge technology platform that supports every aspect of our business.
As we see it store has reached an important inflection point, we can now accelerate our growth by fully leveraging the platform. We have in place today to scale our business through increased volume, while continuing to generate strong risk adjusted returns and we've delivered since our inception to achieve that we have mapped out a 3 pronged approach.
First we will continue to focus on organic growth the addressable market for profit Center real estate is estimated to be about 4 trillion dollars comprised of over 2 million properties, we have a very strong pipeline, which more than exceeds the size of our current portfolio.
Leveraging our proven strategy, we will remain focused on owning profit center real estate, while continuing to take a disciplined approach to build a diverse portfolio with the right real estate assets purchased at the right price with the right cap rates are.
Our direct origination and customer relationship model will always be central to our strategy, it's our secret sauce years, and the making and hard to replicate.
We know our customers and their businesses down to the profitability at the property level every quarter, our team checks and with our customers to evaluate the state of their business mutually identifying issues and opportunities and strengthening our partnership.
This is a high touch approach.
And it mitigates risk and allows us to play a vital role and helping our customers grow their businesses.
Second we now have the scale platform and expertise to consider more transactions from outside our traditional origination channels if opportunities that fit our business model and meet our shareholder return hurdles are presented such as through larger portfolio transactions, we will consider them.
We have the experience and the resources to lead and drive these types of strategic growth initiatives.
Third our strategy includes continuing to invest and our technology platform and leveraging our proprietary data analytics for the past 10 years, we have been building. This proprietary technology platform. We have collected a substantial amount of valuable information that gives us a 360 degree view of our customers and supports every aspect.
And of our business from origination to portfolio management, we are now able to utilize data analytics to drive volume and strong risk adjusted returns.
I want to say that I've never been more excited about store and our prospects for growth and success now turning to our dividend, which has always been and an important part of our total return as you know our board evaluates our dividend policy at each board meeting and considers raising it at least annually and light of our strong operational performance and positive outlook as well as our realm.
Until the low dividend payout ratio you can anticipate that our board will consider a meaningful dividend increase as we complete the third quarter.
And finally before I turn the call over to Craig I want to provide a quick update on our search for Kathy successor, we are on track, we always knew Kathy would be here at least through second quarter earnings. We are pleased with the slate of highly qualified candidates and are moving through the process and a diligent and thorough manner with that I'll turn the call over to <unk>.
Greg.
Thank you Mary I'll take a few minutes to cover our acquisition and portfolio management activities and second quarter.
As Mary mentioned, we originated $341 million and acquisitions across a diverse set of industries. We added 10, new customers and ended the quarter with 529, leading national and regional tenants.
Our customized financing solutions address a wide variety of customer needs.
More than half of our second quarter volume was to help customers Finance acquisition. For example, we hope and early childhood education, operator capitalize on M&A opportunities.
In addition, about 25% was to fund organic growth such as unlock and real estate equity for car wash operator with expansion plans and the remainder was to help customers recapitalize their balance sheets.
Our customers are showing renewed confidence and their outlooks and activity is picking up.
And 2 months into the third quarter, we are seeing more deal flow with a friend and of our sales process, which we expect to translate into more closed transactions and the back half of the year.
Our portfolio mix remained consistent and 64% and service industries, and 17% and experiential retail and 19% and manufacturing.
At quarter end, our portfolio and has more than 2700 properties across a 118 industries.
More than 80% of the portfolio was comprised of businesses, who individually represent less than 1 percentage of our base rent and interest and collectively our top 10 customers accounted for only 18% of base rent and interest.
And design, we have intentionally and built a very diverse portfolio and helps safeguard against market cycles and optimizing risk adjusted returns.
And the second quarter repeat business was very strong as companies reengage for their growth plans following the pandemic.
We expect repeat business will play an increasingly greater role as we continue to acquire new customers and expand relationships with our large installed base.
Our portfolio continues to perform exceedingly well and as our 4 wall unit low fixed charge coverage ratio was 3 times at the end of the second quarter up from 2.7 times last quarter.
Out of our 2700 properties, only 11 or Bacon, which remains in line with pre pandemic levels.
Moving onto our portfolio management activity during the quarter, we sold 13 properties for over $35 million and net proceeds when excluding non core properties, we achieved and cap rate of 6.3% on those sales and the.
And the rent recovery on our non core properties was higher than our historical average.
And give me actively managing the portfolio creates accretive internal growth and demonstrates liquidity for stores and stuff.
I'll now turn the call over to Kathy and discuss our financial results. Thank.
Thank you Craig.
I will discuss our financial results for the second quarter, followed by an overview of our capital markets activity and balance sheet.
And then I'll provide our updated guidance for 2021.
All comparisons are year over year, unless otherwise noted.
Beginning with our income statement second quarter revenues increased 14% from the year ago quarter to $192 million.
And Marilyn reflecting the growth and our real estate portfolio.
Interest expense decreased by $2.3 million from the year ago quarter, when we had a higher level of borrowings on our credit facility at the onset of the pandemic.
The current quarter interest expense also includes approximately $500000 of noncash accelerated amortization related to the prepayment of debt in may.
Property costs for the second quarter declined slightly from the year ago quarter to $5.2 million.
Excluding costs reimbursed by our tenants property costs represented about 15 basis points of our average gross portfolio assets down from 18 basis points a year ago.
G&A expenses increased to $16 million from $13 million in the year ago quarter, primarily due to an increase and stock based performance related compensation expense. Excluding this non cash expense overall G&A costs were relatively flat year over year.
Here at about 46 basis points of average gross portfolio assets.
During the second quarter, we recognized and aggregate $6.6 million dollar impairment provision on properties, we're likely to sell.
This amount was largely offset by a $5.9 million dollar gain recognized on properties sold during the core.
Second quarter and the bow on a per share basis increased 14% to <unk> 50 per diluted share from 40 force after a year ago, and total <unk> increased to $136 million from $109 million.
The increase and <unk>, primarily reflects the increased revenue from our real estate portfolio gross as well as lower interest expense.
As Mary mentioned July cash collections increased to 98% essentially in line with pre COVID-19 levels with respect to Covid deferrals over 40% of our tenants who received deferrals have repaid them and cool as at the end of the quarter. We expect the vast majority of the remaining.
And $40 million and that Covid receivables to be collected by the end of 2020.2.
In June we declared a quarterly cash dividend of 36 cents per share and maintained a conservative dividend payout ratio of 72% for the quarter.
Now turning to our capital markets activity and balance sheet.
We funded our second quarter acquisitions with cash from operations proceeds from the sale of equity through our ATM program and borrowings on our revolving credit facility.
During the quarter, we issued approximately 1.6 million shares of common stock under our ATM program at an average price of $34.17 per share raising net equity proceeds of $55 million.
We took advantage of favorable debt market conditions, and the second quarter to raise attractively price debt and.
In June we completed the issuance of $515 million of 7 and 12 year notes under our store Master funding program at a record low blended interest rate of 2.8%.
This includes $337 million of AAA rated notes.
As planned we used a portion of the proceeds to prepay without penalty $170 million of 2 classes of master funding notes that were scheduled to mature in 2020, 3 and had a weighted average interest rate of 5%.
We're excited about the strong execution of this master funding transaction, which substantially decreases our cost of capital and also speaks to the resiliency of our portfolio through a global pandemic, we were thrilled to welcome back so many of our existing debt investors and there's so many new investors participated and this trans.
Action.
In November 2021, another series of Master funding notes will be available for prepayment without penalty. These notes bear an interest rate of 5.2%, giving us another opportunity to lower our debt cost this year.
Our debt maturities are intentionally well ladder and we have no significant maturities until 2024.
With a flexible prepayment windows under our Master funding program, we have the opportunity to prepay additional series during 2022 and in future years.
In June we also recast our credit facility, increasing the maximum borrowing capacity to $1.6 billion by expanding the accordion feature from $800 million to $1 billion. We also reduced the interest rate by 15 basis points and extended the maturity date of debt.
And <unk> to June 2025, with 2.6 month extension options and.
And finally in April we repaid our remaining $100 million bank term loans.
At June 30, we had approximately $4.1 billion of long term fixed rate debt outstanding with a weighted average interest rate of $4.1% and a weighted average maturity of about 7 years.
Our leverage remains at a very low 38% on a net debt and portfolio cost basis.
Approximately 62% of our gross real estate portfolio was unencumbered and.
And the ratio of NOI to interest expense on the unencumbered portfolio remains exceptional at more than 7 times.
We closed the quarter with a strong balance sheet, we have ample access to a variety of favorably priced debt and equity options to finance, our growing pipeline of acquisition opportunities at very attractive spreads.
At quarter, and we had $169 million and cash more than $610 million available under our ATM program.
And the full availability of our $600 million credit facility.
Now turning to guidance.
We are raising our 2021 <unk> per share guidance on stronger revenues.
From the range of $1.90 to $1.96 to a range of $1.94 to $1.97.
The midpoint of our <unk> guidance is based on projected net acquisition volume of approximately 1 to $1.2 billion at a weighted average cap rate of 7.7% and a target leverage ratio in the range of 5.5 to 6 times run rate net debt to EBITDA.
Our <unk> per share guidance for 2021 reflects anticipated net income excluding gains or losses on property sales of 85 to 87 cents per share plus.
Plus 96 to 97 cents per share of expected real estate depreciation and amortization.
Plus approximately <unk> 13 per share related to items, such as straight line rents and equity compensation and deferred financing cost amortization.
As we move through the second half of the year, we'll continue to assess our outlook and provide updated guidance as appropriate and now I'll turn this back to Mary.
Thank you Kathy and closing we know that people have a lot of choices out there store has a truly differentiated position and the net lease REIT space. We are a pure play and profit center real estate, we have a large granular and diverse portfolio. We have a P&L for every say we own. So we know their profitability, we are setup to mitigate risk.
Through our disciplined lease structures, we have a strong customer base with deep relationships to cultivate new business, we have access to long term capital at attractive rates, creating highly attractive spreads and with that I would like to turn the call over for your questions.
We will now begin the question and answers.
To ask a question you May press Star then 1 on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw your question. Please press Star then 2 please.
Please limit yourself to 2 questions and if you have further questions you may reenter the question queue and at this time, we'll pause momentarily to assemble our roster.
Yeah.
And the first question will come from Sheila Mcgrath with Evercore ISI. Please go ahead.
Yes, good morning, and Mary you mentioned in your 3 prongs of growth considering more portfolio transactions just wondering if that means the acquisition cap rates.
Could move lower as portfolios typically are at lower cap rates.
Yeah, So hey, Sheila I'll answer that and a couple of ways first of all I'll talk a little bit about the approach and then I'll address some cap rate compression here.
As I mentioned and we really think we're at an inflection point here and we've been around over 10 years, we've come through Covid.
Well tested portfolio management team and platform for a size and scale and we've built a highly diverse portfolio. So as a result, we feel like we can really now pursue opportunities to acquire customers and these larger portfolio transactions. Yeah. As you know our business model has always been very customer centric. So it's important to us.
That we are.
Focused on acquiring customers profit center real estate building. These long term relationships with these customers and remaining very disciplined and our approach and focused on that so so we're going to we're going to look at opportunities as they present themselves in terms of cap rate compression and we are seeing some cap rate compression and the marketplace. So.
And as you know there's been a lot of influx of capital into the space, resulting from.
Low interest rates and search for yield and but that being said you know we're really focused on we're really focused on our total return here and cap rate is a big piece of that total return.
But also our cost of capital as well and and second quarter are spread with nearly 400 basis points and we could issue debt today, Sheila and about the mid twos, and so and that would create over nearly a 500 basis point spreads. So we're in a really good place to make very very accretive acquisitions, and we're now ready based on size and scale to take a look at things that come our way.
Okay, Great and my second question is you also mentioned the data analytics platform as a means of gross just wondering if you could give us a little more detail on that or are you planning on selling the data or the platform or.
No no no not selling the data that's for sure, but yes, I will be objective Sheila is can make better decisions more efficiently through the deployment of advanced analytic capabilities and these decisions include prospect targeting as well as continuing to monitor for the portfolio.
Thank you very much.
The next question will come from Caitlin Burrows with Goldman Sachs. Please go ahead.
Hi, everyone.
So just following up in terms of those 3 pronged and so I guess the middle 1 in terms of large portfolios and the supplement shows that about 80% of stores portfolio has been from direct origination as of <unk> 'twenty, 1 'twenty and 19. So just wondering as you scale. The business do you expect that ratio to change or as you grow from here or is there something about the process.
That will change.
No you know what Caitlin I suspect that that will stay in line I suspect the process will not change again, we're acquiring customers and we're gonna change I'm going to have our same process to do that you know our same disciplined approach we're going to look for profit center real estate, we're going to have the same the same foundation that we have here.
So I think you'll see a you'll see that maybe changed a little bit, but you know that a big part of our 3 prong is organic growth and the market. So big you're going to see that'd be a large share of what we do for sure and continue to be.
So then is it just said you'll kind of keep on doing the same thing, but the size of those transactions might happen to get larger and yes, I think thats a good way to think about it Caitlin okay.
And then also in the prepared remarks, you mentioned how stores coverage levels are now above 2020, and even 2019. So just wondering if you could give some commentary is that a function of just strong underlying tenant businesses and it makes it the tenants that you have now or something else.
Hi. This is this is Craig I'll take that question.
Yes, so it's really a function of how diverse.
Our portfolio, who is if you if you recall, we really only had a handful of industries that are highly impacted.
And.
Those.
Tenants within those.
Industry.
You've already opened our collection has actually continued to improve.
And these tenants actually have experienced really strong rebounds.
And their businesses. So for example, and our casual dining restaurant, our operators actually reporting single digit same store sales increases and the first half for this year when actually you're comparing net 20.
2019, and we've actually seen margins improve just because they've.
The streamline their businesses they have simplified menus day.
And you'll have higher profitability to go business.
Investments and technology and they focus they've been focusing on overhead efficiencies.
And regards to our gyms.
Our health coaches are actually experiencing improving membership counts growth between <unk>.
8% to 10% actually and the first half of 2021 and our.
Operators are actually saying that the pandemic has placed a greater emphasis on health and wellbeing and people are investing and gym memberships.
And so I think that's all kind of translates into.
Higher coverages on our highly impacted industries and as well as.
Despite being diverse and being over 118 industries, we had some COVID-19 benefiting and Covid resilience.
And as well Thats helped our coverage increase.
Got it thanks.
The next question will come from Hendel, St. Just with Mizuho. Please go ahead.
Hey, there good.
Good morning.
Hello, and good morning.
I appreciate the comment on the meaningful dividend increase that you are telegraphing here a bit but curious maybe you could talk a bit about what meaningful might perhaps mean can you give us a sense of how large that could be what parameters youre considering.
And if you if you look at besides and the dividend and did I hear you correctly and saying that this increase will be implemented with the third quarter with the next dividend.
Yeah, and Dallas is very yes, you heard the script correct.
So our board our board will determine that as you know, but also as you know that last year. During Covid, we increased the dividend by a penny was slightly under a 3% increase and currently we're seeing a F F O rebounding nicely and.
And we think the board has encouraged by that but it'll be the board that will determine that at the end of the day.
Sure sure and maybe just how youre thinking about it overall as it historically.
Historically, it's been a I.
I guess relative.
2 <unk> growth expectations or is there anything else and that we need to consider perhaps.
And your tax basis or anything to that degree.
Hi, it's Kathy I'll jump in.
You know when we get to a certain payout ratio. This quarter, we were at about 72% after for a payout ratio.
And that's about our target you know around 70%. So once we get there the idea of being that <unk> gross and then translates to dividend growth. So so yes, they're sort of a and AA for Boe component to that as well as the other things they consider overall outlook on the economy.
Outlook on the business and things like that.
Okay fair enough. Thank you Kathy.
And then going back to the yields are 7.8 per se and can you guys talk a bit about what you're buying you mentioned 10, new customer was there any new industries and there and it sounds like you expect cap rates here to stay and that that high 7.
Uh huh.
Range here near term.
Does that mean that there are no portfolio transactions assumed within that.
Current guidance as well thanks.
And all this is Tyler I'll cover that that question. So for Q2, our volume mix was just under 60% service and about 20% each for manufacturing and retail, but very much in line with our overall portfolio composition and its been geared towards companies and industries that have rebounded and are now focused on.
On their own growth.
Couple of examples on the service side a lot of the typical industries like lumber wholesalers Carwash is education and specialty medical as for manufacturing tends to be a comprise comprised of a wide range of industries and this quarter about half of it was actually and food manufacturing and then and retailers primarily in the auto dealership.
Space.
Thank you all day.
I appreciate that.
The next question will come from Ronald Camden with Morgan Stanley. Please go ahead.
Hey, just 2 quick ones. So 1 on just I think the CFO transition I think you mentioned and it's on track just just wondering if there's any more color you could provide there does that is that something we can expect and 3 Q or for you or what round your and just any other I can appreciate it's a fluid.
Situation, but just curious if there's any other color for that comment on being on track.
Yeah, Hey, Ken Hey, Ron It's Mary actually.
And that's about what we can tell you at this point we are on track and we're looking at some really highly qualified candidates, we're lucky to have Kathy and and and long at long last long standing relationship with Kathy and her and her team are here to work through a really really smooth transition and so we're taking our time and we're going to find the right person for the company and.
Kathy is going to be here to make that smooth transition so but we're on it we're on track to do that.
Got it helpful. I'm, just switching gears a little bit.
And just remind us when you take a look back and forth at the portfolio clearly, it's done and done well and recovered just for your mindset in terms of the cash basis tenants are what percentage is still on cash basis is that has that changed at all and maybe what collections.
What collections look like and what you're assuming for guidance.
Yeah. This is cathy for.
For cash basis.
Tenants if you recall at the beginning of the year from about 5% of our annualized base rent and interest.
What's cash basis.
And that's gone down to 4%.
So we've moved about a third of the tenants off of cash basis that were on cash basis.
And you know hopefully, we'll just continue to do that as they continue to pay as agreed and things like that so and <unk>.
Some of the pickup in revenue this quarter was indeed cash basis.
Players you know paying more.
Yeah.
Got it and then just in terms of collections or what are you assuming for guidance makes sense.
Sure.
Yes for.
And for collections.
And my guidance assumes that we stay right around the collection percentage that we reported for July So we're at 98% collections and guidance assumes that that you know if that gets better then we'll pick up more revenue. So there's you know so there's.
Potential upside there or if we.
We can reverse some.
Additional reserves or something like that and we can pick up something there as well.
The next question will come from Spenser Alloway with Green Street Advisors. Please go ahead.
Yeah. Thank you and is it.
It really.
And master funding and issuance can you guys just talk a little bit about your appetite for additional capital raising under this program and then how you either currently thinking about the breakout and funding for acquisitions over the near term.
This is Cathy again.
So we have 2 investment grade debt options share the master funding is 1 of them where we're issuing.
AAA paper and a plus paper under that option.
But we balance that with always going back to the senior unsecured market.
For the more traditional financing 10 year financing.
And if we were to issue for example, soon and senior unsecured notes today.
With with the Treasury being fairly low and spreads are really coming and you know youre looking at a 2.5% coupons. So just.
Just as attractive as the master funding.
The transaction that we recently did.
The idea between keeping 2 of those debt options is to have the broadest group of debt investors. We can have that gives us the most flexibility because those 2 markets for the secured market and the unsecured market don't always act the same way and different economic environments. So we like having.
This flexibility, but the idea would be.
And for the Master funding transactions you know we mentioned there are some.
Tranches that will come due in November not come due come pre payable in November that will give us an opportunity to prepay and replace it with debt that's a less expensive.
We love that part of the Master funding program and the fact that the prepayment windows are so large there are 2 to 3 year prepayment windows. So we can pick our spots in different economic environments to.
And be able to continue to reduce our cost of capital.
And you won't see us.
GAAP too much out of our the way the balances today, where a third of the assets are going to be.
Encumbered by the Master funding program and Master funding debt and then 2 thirds of your assets or basically be unencumbered and we use senior unsecured note on that side. So the balance that you're seeing today is it's pretty much very close to where we think it'll be over time is that how is that house.
Yeah. That's that's great color. Thank you and then just 1 more in terms of your dispositions can you just remind us what percent, we should expect should be opportunistic versus strategic and the near term and then which industries and you're focusing on in terms of the strategic divestments.
I can jump in and so what we're what we have been modeling is the 3% to 5% of our investment.
Investment portfolio at the beginning of the year, 3% to 5% of that would be somehow disbursed during the year and that's really going to be and <unk>.
Mix Spencer it's.
There are always from opportunistic things that come along.
But a lot of it is strategic a lot of it is us rebalancing the portfolio looking too.
I meant the quality of the portfolio as we go along either through reducing exposure to certain.
Industry certain locations certain whatever or or just getting ahead of something that we see based on looking at those quarterly financial statements from our tenants. If we see you know some weakening and and we decided that that tenant is no longer a real core part of the portfolio, we would look to divest of that property. So.
Honestly, it's been sort of.
Across the board there has not been any real trend not even in what type of industry or location or anything it's really just sort of across the board and it's based on just that active portfolio management.
Does that help.
Yeah, great. Thank you so much Cathy.
Mhm.
The next question will come from Todd Thomas with Keybanc capital markets. Please go ahead.
Hi, Thanks, good morning.
First question.
Hi, good morning.
First question I guess, just a quick follow up Kathy on the model were there any reversals of previously reserved amounts and the quarter anything that impacted the quarter that would have an impact on the run rate.
There was a small amount it was less than half a penny.
Of.
Pick up and reversal of reserves.
Okay.
Alright, that's helpful and then Mary just following up on the acquisition.
Commentary and the comments that you made about the platform being in a position to increase investment volume.
Sounds like there should be unexpected ramp from the 1 to $1.2 billion dollar pace of investments as we think about 'twenty..2 is is that the right read and then as we think about investments I think and your comments you mentioned expanding into other industries can you just talk about some examples of other industries that we might see store.
Span and too just to give us a sense of what you're contemplating.
Hey, Todd I'm happy to talk about that so I would say that you know for for now and where we are today halfway through the year on a gross basis, we feel like we're right on track and what I talked about in terms of looking at you know larger portfolios Theres, nothing really specific and the hopper right now, but we're ready and I think the environment might be ripe for some of that is.
Businesses have started to look towards gross as opposed to just managing their business during COVID-19 and other in the growth mode and we're ready for that and you know so we're going to continue to sort of look for things like that and in terms of industries. We're a pure play and profit center interest and profit center assets and that's where.
And we're going to we're going to stay and we're going to look at anything in that space.
When you are there certain industries or segments I, you know I guess manufacturing has been increasing over the last couple of years as and exposure I mean can you just give us a sense of how you're how you're thinking about some of the different areas, where there might be opportunity for you to.
Exploit or take advantage of.
Some of the larger opportunities that you might be considering.
Yeah, I think you know well where again.
God willing and this is continuing to stay pretty granular.
We've been a piece we continue to probably stay about 2 third service manufacturing and your crush has creeped up and that was driven a little bit by Covid and some of the Covid impacted industries that we had less velocity and.
And that we did less of last year, but those are as Tyler mentioned earlier, 60% of our second quarter volume of service. So those businesses have their and vital.
By the industry, they performed well and Covid. They now are able to shift towards M&A activity and store. It and then they have pent up demand for for you know executing on their pipeline of opportunities and stuff. So, but I would say you know as we sit here today.
Going to look to a similar mix that we have today.
The next question will come from Frank Lee with BMO. Please go ahead.
Hi, good morning, everyone.
A follow up.
And just a follow up on the revised guidance.
At the top and the range the dollar 97 and.
And this implies no growth from the defense you posted in the second quarter.
Just wondering are there any items that we should think about debt could be a drag to earnings and the back half for the year or is this.
Partly due to some conservatism baked into the guidance.
Hi, Frank Yes. So this quarter there was about a half a penny a little less than half a penny that was a reversal of reserves. So that would be sort of 1 time. If you think about it that way and not that there couldn't be reversal of reserve next quarter and the quarter after but that's something we're not gonna messenger and really count on and guidance.
If you recall gosh over the years and we've been and this business acquisition activity for <unk> as always the biggest and oftentimes that activity is all falling in December, especially when you have tenants that are doing M&A and M&A transactions. They they oftentimes like the transaction to close right at the end of the year.
So they have a nice cut off for for their reporting and things so that kind of activity oftentimes youre not going to capture a lot of the <unk> per share and this year that doesn't mean, that's not great for next year, but it'll be volume this year, but not really very much revenue coming in.
Because you just don't have it that many days so you know some of the.
Some of the guidance assumes there's some back and waiting to the acquisition activity and you know and there's a little bit of conservatism and Theyre just because you know you're you're not quite out of Covid for you know, we hope to have it and the back in the rearview mirror.
And so just being conservative I think is is appropriate.
Okay, Great and then just a question on the customer revenue revenue distribution and chart you have in your presentation.
It looks like for the customers with $500 million higher it's modestly lower versus last quarter.
Is this mainly due to the financials and capturing more.
For Covid impacted quarters, and your other reasons or anything you read into this.
Hi. This is Craig good question, you're exactly right. It's just a function of as we've received updated financials.
There is.
Covid impacted quarters within those 12 months statements. So we don't see any any issues there and again.
A lot of these tenants have actually rebounded beginning in Q1.
And Q2 of this year. So we're really pleased with how the performance of the portfolio.
Okay, great. Thank you.
Okay.
The next question will come from Linda Tsai with Jefferies. Please go ahead.
Hi, good afternoon.
And the pipeline increasing from $12.4 billion to $12.5 billion, how do you break that down in terms of under LOI versus under contract.
Yeah.
So hey, this is Mary.
And do we actually you know.
We have and internally here and we don't break it down and externally for the pipeline goes all the way from new opportunities.
All the way through credit too close and closing so you have new opportunities.
Debt you are cultivating and looking at these are you know most of our tenants 1 day, they perform and sale leaseback when other at the right time, when they have and events when they have acquisition they need to make her and estate planning and they're trying to do other recapitalizing their balance sheet. So and so that's why we're in constant contact with our tenants all the time and timing matters and so we start with really.
A new opportunity that then goes into an LOI.
And in an LOI signed and then it goes into credit approval and to clothing, and so theres. Many you know, there's many stages and that pipeline, but overall Tyler can provide a little color on the pipeline and hopefully that would be helpful. Sure.
Yeah. So first of all generally the composition of the pipeline remain largely the same.
There is really a few industries ups and downs, but.
And as an example, especially medical went up and it was up 2% this time versus last quarter. So like urgent care behavioral health and it really is mostly kind of up 1 down 1 here pipeline and dynamic our acquisitions team was always calling on customers keeping our relationships warm like Mary was just mentioning.
And when it when it happens and when there happens to be and opportunity.
You can never exactly plan for that at least 1 of our direct origination and seem to always gone out there and and establishing and maintaining relationships with that we're ready to provide that provide capital to our customers when they're when their growth plans are taking hold.
Thanks for that and then a question for Kathy on rent collections, what do you what were our.
<unk> like for movie theaters, and health clubs, and <unk> and how did it compare to <unk>.
So and.
And regards to gyms and movie theaters movie theaters.
<unk>.
Our collections have increased since the beginning of the pandemic from about 40% to nearly 90% today.
However, we see tailwind and that 90%.
And the second half of this year.
And.
<unk> deferrals and for our operators.
Product is actually scheduled to be rolled out and the second half for this year and they are.
Actually seen some early success.
With the current product thats rolled out over the last month or so.
And the <unk>.
Consumer confidence with the vaccine rule rolled out.
And also see some tailwind and our collections and movie theaters.
Due to the additional liquidity on their balance sheets are in better shape.
And the shuttered venue Grant program is bridged.
Operators to get them to the second half.
But again, our theater exposure is not material.
About 3.6% of our annual rent and interest.
And so we definitely see some tailwind and our movie theater collections.
And then health clubs.
And regards to health clubs at right around mid mid 90% as of July.
And again with with <unk>.
Tailwind again, there as they are experiencing improving membership counts and the first half of 2021 and as deferrals are ending with the tenant group there.
The next question will come from Keybanc, Kim with Truest. Please go ahead.
Thanks, Good afternoon.
And I just wanted to go back to the prior questions regarding some non you guys seeking from non traditional origination channels.
And I would imagine for you to put that in your opening remarks, and you have a pretty well laid out thought process and what you are looking at today.
Just wondering if you could go a little bit deeper into that.
When you're when you for you looking at service profit Center and have a real estate. It is a pretty broad definition I was just curious if that includes other things that you haven't traditionally done like entertainment venues concerts or golf clubs.
Trying to free how wide you are thinking about that and that.
And if they keep and it's married so it is a it is a wide.
And I mean honestly today over 10 years, we've come into the 118 industry. So so theres a lot.
Really important to us, though is that we have that the the box and single tenant and it has a P&L attached to it that it's a profit center asset. So we're going to you know even if we begin to look at larger portfolios within that it's about acquiring customers, that's where we can help a customer and by owning their real estate. So they can be better off if we.
And their real estate and focus on their business and grow so we're going to continue to focus on and and that's how we add value to the world as helping customers out there and the middle market and larger space to prosper and their businesses. So when you talk I mean entertainment venues are profit centers generally.
Golf clubs are appropriate and golf courses are profit centers generally so.
And that just other.
And it's a broad range of assets and we're going to look at it what's important though is that we when we when we look at these things that we say that we will stay very disciplined and our underwriting of it and and our lease structures that are important to us. So that's what we're going to take a look at that will be open but again it has to fit our lease structure.
And we're going to fit our underwriting are you know.
Risk adjusted return a good risk adjusted return that we've been delivering since inception, all of those things will come into play and.
When we look at these things, but it is a broad space Youre correct.
So were going for that additional color.
Yes.
A quick question just going back to.
The revenues you posted this quarter and it was up $10 million from the first quarter and Thats pretty big jumped this quarter to quarter. I know you mentioned about half a penny of prior period rents I was just wondering if there's anything else on that.
That was embedded in debt or if it wasn't 92 is a good starting point as we picked price we start modeling out from the rest of the year.
Yes. This is cathy.
So if you kind of look at it from last quarter to this quarter. There there's 3 cent jump in <unk> and about a half a penny of that is.
And on the expense side, just a reduction of expenses.
About 2 and a half since then as the revenue pickup.
And a penny of that is just our acquisition volume.
If you recall in Q1, a lot of the acquisitions were back end weighted so you didn't see a lot of revenue from those acquisitions and Q1 and the full impact hit in Q2. So there is a penny right. There and then the other penny and a half is really you know.
Covid.
And we problems falling off and about little less than half a penny was reversal of reserves just because the portfolio is doing so well now so those are that's kind of how it.
And how it comes out does that does that help.
Yes, it does.
Yes.
And I'm going to question number 3 here, but the opinion and a half of Covid and.
Covid related items flowing off what does that mean does that mean like lower reserves or just for just.
Just trying to understand it.
Is that sustainable from 2 <unk>.
Yeah, just just just less than half a penny was 1 time.
Okay.
Of the Penny and a half less than half a penny was 1 time and the rest is.
You know customers.
Customers paying more but we assume is sustainable.
Does that and that helped.
The next question will come from John Masako with Ladenburg Thalmann. Please go ahead.
Good morning.
And I'll get John maybe.
Maybe just following up a little bit on <unk> question.
Is there anything kind of in the <unk> 'twenty, 1 revenue number and I know you've kind of probably youre always assuming some level of abstract credit loss and guidance for anything.
Where you received rent from a tenant and kind of know that that's maybe not coming into <unk> or even possibly for Q. If maybe there's some downtime on releasing certain assets or something like that.
No.
Other than the half a penny I just talked about.
Okay, and then just specifically I mean the loves.
Boxes, and many of those kind of all been resolved or at least and there is no real impact from them and <unk>.
Yeah, Craig can talk to love, yes, so on loans.
And theres still and bankruptcy, but of our original 23.
We have resolved resolved or have pending resolutions and all but 3.
And the majority of the resolutions are long term leases with experienced furniture operators.
And and the recoveries on those are above our historical rent recovery.
Okay, and if I think of like the <unk> impacts versus what youre going to see and in <unk> and <unk> from then it would be fairly de minimis spending, reflecting somewhat from living and to acute correct.
Yeah. So this is cathy so yes, we would assume that these resolutions will all come to fruition and the second half of the year.
You know not all at the same time because there are several resolutions included in here, but yes, they all come on and so there should be some upswing tailwind going forward.
Yes.
But I think my 1 question probably was a couple and they're so although Steve.
And the floor.
Yeah, Thanks, Dan vs.
Next question will come from Wes Golladay with Baird. Please go ahead.
Hey, good morning to everyone I just have 1 for you as well.
Look at this pipeline and the $12.5 billion that you have at the end of the quarter does that include any of the portfolio deals you are talking about potentially doing.
And then.
And then yes as I mentioned, there's nothing specific and the Hopper now, but we think it might be this time might be ripe for some things to come up and we're poised to take advantage of that.
Got you okay. Thanks, a lot.
Youre welcome.
The next question will come from Nate Crossett with bear and Berger. Please go ahead.
Hey, good morning, Thanks for taking the question.
And the question Hey, maybe.
And maybe a question for Kathy.
How are the credit agencies viewing the master funding program. These days.
Does having it have any.
Adverse effect.
The credit rating they are willing to give you an.
Ultimately the rating you could get and the unsecured market.
We've seen some other peers and this space eliminate this funding source.
I'm just trying to understand if there's any negatives to having our master funding program.
Okay. So that's a that's a good question so how the rating agencies think about it is that.
And historically, they felt that having a lot of secured debt and when I mean, a lot for 20% and their world. There's a lot.
Sure.
They think traditional C M b S debt and flexible type of debt.
And they are.
Sort of concerned about that level of secured debt when we pressed them on it we don't really.
I always get a fulsome answer as to as to why.
Other than traditional secured debt is oftentimes and flexible and it does.
And Ah.
You know difficult scenario and it does.
Take longer to resolve let's put it that way just because of the way secured debt and the C. M bass World is set up.
And the Master funding program is totally different and that it is our own conduit and so we're not relying on selling it into and <unk>.
C N BS type conduit for this was our own conduit and.
And it is entirely flexible the same way that you would have a flexible portfolio. If you had unsecured debt.
So I think that part of what the rating agencies wanted to see was for this portfolio and the master funding portfolio to go through.
Baptism by fire and I think the pandemic.
<unk> fits that bill and master funding.
Came through it just fine and I think that has really helped that.
Them understand better what happens in the draconian scenario, what happens to that vehicles and.
And it and it turns out that it's actually beneficial to the company.
And that if something got worse and the pandemic, which is hard to imagine, but if something got worse and the pandemic you can actually take those subsidiaries and and jettison them.
And then you would be left with a company that had 2 thirds of the assets and only 1 third of the debt.
I think it makes sense that.
And theres less trepidation around something like a master funding transaction and in fact, we're starting to see it.
Outside the public REIT space.
So.
It's a it's and efficient vehicle.
It's a big market and we're seeing more of it. So I think the rating agencies will get more comfortable with it.
Does that help.
Yes, no that's helpful. Thank you.
And then maybe just 1 quick 1 I know there's been a line of questions about.
Portfolio deals.
And you guys just give us kind of a range in terms of size as to what you mean by portfolio deal.
And also I don't know if I missed it but what was the average deal size and the quarter.
And this is Mary the average deal size and the quarter was just consistent and around 99 or $10 million. There. So that's been very consistent in terms of portfolio transactions again.
We want to stay very disciplined to our approach and the foundation and we built here, which is granular and diverse and we like that for our top 10, and a 3% of base rent and interest.
So let me talk about portfolio transactions, you know, we talked there's still about granular and acquire and many customers. While we do these portfolio transactions. So I think.
We're going to stick within our guidelines as it as it relates to granular.
And diverse here and then and when we bought and so our portfolio get you know core.
And B, we are going to be comprised of a lot of new tenants, new customers and granular new type of customers and from from.
And from that for stuff that we'll look at size of those.
This concludes our question and answer session I would like to turn the conference back over to Mary Fedewa, Chief Executive Officer for any closing remarks. Please go ahead.
Thank you. Thank you all for participating in our call today and for your continued support and interest and store. We look forward to seeing some of you next week at the New York Stock Exchange REIT Investor access day, and other and at other upcoming conferences in September please feel free to reach out any time, if we can answer additional questions and <unk>.
Have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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