Q3 2021 Spirit Realty Capital Inc Earnings Call
Greetings and welcome to the Spirit Realty Capital's third quarter 2021 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the final presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
I will now turn the conference over to your host pair of all senior Vice President of corporate Finance and Investor Relations. Thank you you may begin.
Thank you operator, and thank you everyone for joining us for spirit third quarter 2021 earnings call.
Presenting on today's call will be President and Chief Executive Officer, Mr. Jackson, Shea Chief Financial Officer, Mr. Michael Hughes, Ken Heimlich, Chief investment officer will be available for Q&A.
Before we get started I would like to remind everyone that this presentation contains forward looking statements.
Although the company believes these forward looking statements are based upon reasonable assumptions. They are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from those currently anticipated due to a number of factors.
I'd refer you to the Safe Harbor statement in yesterday's earnings release and supplemental information as.
As well as our most recent filings with the SEC for a detailed discussion of the risk factors relating to these forward looking statements.
This presentation also contains certain non-GAAP measures reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures.
Rooted in yesterday's release and supplemental information furnished to the SEC under form 8-K.
Yesterday's earnings release, and supplemental information are available on the Investor Relations page of the company's website.
Our prepared remarks, I'm now pleased to reduce Mr. Jackson Hsieh Jackson.
Thank you Pierre and good morning.
As you saw last night, we reported another solid quarter.
Portfolio continues to perform exceptionally well.
With occupancy remaining at 99, 7%.
Lost rent declined to only 0.1%.
And unreimbursed property costs decreased to one 4%.
A quarter over quarter improvement of 80% and 50 basis points respectively.
It is important to note that our loss trend was primarily generated by.
Finally, one of our 312 tenants that operates 10 of our properties.
Several of which we are close to finalizing agreements to sell or re let to strong national tenants.
We collected 99% of our rent during the third quarter.
With fourth quarter collections projected to approach 100%.
We're very pleased with the health of our tenant base, which continues to only get better.
As I mentioned in our last call.
We look for tenants that operate in mission critical facilities.
Within durable industries.
And where the real estate characteristics are strong.
In addition, using our research and underwriting capabilities.
We seek to identify tenants that we believe have an upward sloping credit trajectory.
Or what we call credits on the move.
And we continue to see many of our tenants experienced improvements in their business models profitability and balance sheets.
For example in the last month, our number one tenant lifetime fitness.
Excessively completed their initial public offering.
With a market capitalization of $3 4 billion.
And received a credit rating upgrade from Moody's.
As you know we were an earlier mover on lifetime during the pandemic.
We're proud of their continued growth and success.
The quality of our asset base is the strongest it has ever been but.
But this is not by accident.
Since I became CEO.
Deliberately and methodically remove structural impediments and reconstructed spirits portfolio spin.
Spinning and selling off $3 $8 billion of assets.
In acquiring three $5 billion of assets.
This reconstruction has doubled our exposure to the industrial sector.
Doubled our exposure to investment grade rated tenants.
And increased our exposure to publicly listed tenants from 37% to 54%.
In addition, our portfolio is now one of the most diversified across industries asset types and.
And top tenant concentration within the net lease sector.
Our portfolio is extremely well positioned today and we believe its performance over the last 18 months speaks volumes.
On the acquisition front.
We deployed $294 million in acquisition and revenue producing capital.
With a weighted average cash cap rate of 727%.
Our weighted average lease term of.
At $18 four years.
And weighted average rent escalators of one 9%.
Popcorn.
Represented the lion's share of it.
This activity while the other nine transactions were heavily weighted towards retail transactions.
Looking into the fourth quarter.
Very good about our pipeline and expect more transaction activity and then in the third quarter.
With that I'll turn the call over to Mike.
Thanks, Jackson and good morning.
We were pleased with our third quarter performance in all respects.
We reported <unk> per share of 84 cents compared to 80 since last quarter, excluding the six cents a recognized out of good earnings that we highlighted on the last call.
There were no such adjustments this quarter as we noted in our last guidance update we do not expect nor are we forecasting any such adjustments going forward.
As Jackson mentioned rent collections are approaching 100% lost rent is negligible.
In addition, unreimbursed property cost and impairments are the lowest in spirits history.
Which is indicative of the high quality of our portfolio.
Our deferred rent balance declined to $16 8 million from 22 million last quarter.
With $3 3 million of the reduction attributable to an early repayment of one of our regional theater operators.
We currently have only one tenant remaining under a deferral arrangement, which is on a percentage of rent basis expires at year end.
Since the onset of the Delta there no tenants have asked for any rent relief whatsoever.
Our re tenant theaters imagine and look cinemas began coming online this quarter.
Of the seven theatres under new leases six are now open and we expect the last one to be fully up and running by the second quarter of 2022.
We recognized 260000 rents for these theatres during the quarter, which represents 19% of their fully stabilized AVR.
Turning to the balance sheet during the third quarter, we entered into new Ford contracts tissue $3 9 million shares of common stock at a weighted average floor price of $48 72 per share and issued four 2 million shares of common stock to settle certain forward contracts generating net proceeds of $190 million.
As of quarter end, we have unsettled forward contracts for $1 6 million shares of common stock with a current weighted average floor price of $48 64 per share.
We ended the quarter with leverage of five times or four nine times inclusive of our remaining forward equity contracts outstanding in total corporate liquidity of approximately $840 million.
I'm also pleased to announce that last week, Moody's upgraded our corporate credit rating to be double H, two giving us a triple b rating from all three rating agencies.
Turning to guidance, we raised both the low end and high end of our net capital deployment forecast by $100 million.
And the low end of our <unk> per share forecast by <unk>, making.
Making our revised net capital deployment forecast $900 million to $1 1 billion and a revised <unk> per share forecast $3 29 to $3 30.
To reiterate Jackson's remarks, we feel very good about our pipeline and the opportunities we're seeing as we close out a very strong year.
With that I will turn the call over to the operator to open up for questions.
Thank you at this time.
We will be conducting a question and answer session.
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We ask that you limit yourself to one question and one follow up per person.
One moment. Please I'll then call for a question.
Our first question is from Ronald Camden of Morgan Stanley.
With your question.
Hey, congrats on a great quarter I just wanted to ask about the acquisition pipeline.
I think in the past you talked about experiential deals just trying to get a sense of.
How you guys are thinking about that and so forth.
Good morning. Thanks.
Ms Jackson.
So we made a couple of comments in our prepared remarks about our fourth quarter.
Our fourth quarter pipeline as we look at it at this moment today is is the largest in terms of total number of transactions.
Either been approved.
Our investment committee or under LOI or.
In process I would say at this point.
Good thing is it's the most granular in terms of size of transaction.
There was no what I call anchor deals by definition deals over $100 million.
We're already building part of that pipeline is going to affect Q1, 'twenty, two which we're very excited about.
But the thing that most excited about is the sourcing of these transactions has been the most diverse come.
Come from our acquisition teams our retail team.
Industrial teams come from our asset management teams that we have in place and also.
From our senior leadership team, we're all these sourcing potential opportunities.
So it's we're excited about it but its obviously why we bumped up our year end acquisition guidance.
The other thing I can tell you is there are no lifestyle transactions in the fourth quarter I have to say that that was on purpose, but.
We evaluate.
Lifestyle opportunities on a very select basis.
I think what you would see.
Candidly is more transactions that are kind of down the fairway in terms of retail and industrial for us.
Great that's it for me thanks.
Thank you.
Our next question is from Lindsay Duncan.
Bank of America. Please proceed with your question.
Hi, Good morning, Thank you I'm on for Josh their lineup.
I was wondering about.
Physician corner and nowadays.
That three vacant assets.
If you could just provide more color around that and kind of talk about like your usual next lease.
Hold.
It's our and kind of where you guys see.
The best opportunity for capital recycling going forward.
Yes. Thank you good morning.
Yes, the number is obviously lower this quarter.
When you see a small number of vacant properties being sold.
Yeah, that's always a good thing that means either we've re let properties or sold properties.
But that will not take it.
Just as it relates to the attractiveness of the portfolio.
But I would say that if you focus on the dispositions that we.
Completed in the first half of the year, so that was very intentional.
We saw very attractive opportunities to sell low cap assets.
Generate a really high IRR for us.
That was one issue and the second was sort of a proof of concept tissue.
And I think that.
What also.
What we're trying to solve for obviously is trying to improve our cost of capital. That's really the bottom line. So dispositions are part of that what I'll call strategic dispositions and I would tell you today, our cost of capital is okay and.
In terms of the absolute terms, we believe it's in the high 4% area, including free cash flow.
But it's actually relatively poor relative to our peer set.
Our model works this past quarter than what we see today.
We're achieving the highest spreads to our WAC in terms of what we're buying right now so that that's really.
Positive and exciting for us.
I think the real opportunity for us and for shareholders is.
If you look at historically or cost of capital or multiple.
Looking at 2019 2020 in 2021 year to date.
We've sort of consistently traded at 19%, 20% discount to our peer companies.
In spite of like massive reconstruction of this portfolio of the company.
So we.
We think we're really poised.
Into 2022 everything is working great.
And yes.
We will continue to look at select dispositions I mean, we have as I mentioned on the last call last quarter. The industrial asset that we sold that's like in the middle of the pack and was very very attractive. So we know we've been able to.
Assemble in that $3 5 billion of acquisitions that will probably end up close to 4 billion by year end.
Since since I came on board here, we've acquired some really good property and so.
If we kick.
Improve our multiple will always look at capital recycling as another area to try to drive.
<unk> per share growth.
So boring answer but.
No that's helpful.
Thank you.
Thanks.
Our next question is from the handoff. Thank you Hal.
With your question.
Hey, good morning, guys.
Hi, good morning.
So a question I guess, a follow up on the pipeline I guess buying those lifestyle I assume that means no more country club deals and then also with your 3%. Its exposure are you hold for now.
Part one and then also with the shift to the retail and industrial.
And the pipeline as you mentioned does that suggest cap rates in the next quarter or so it's a bit lower so some color on cap rates are in the pipeline would be helpful, especially as we've heard lots of chatter about the increased competition for assets in the space.
Yes, Thanks Hello.
I mean, if you.
We've talked in the beginning of this year about targeting.
Cap rate range of six 5% to 7% for the year.
The way, we look at investing as you know, we don't look at it necessarily on a spot basis.
We do look at what we said earlier in the year and we do really try to do what we mean, let's say.
So what I would tell you is that.
We will comfortably.
Paul into the ranges that we've talked about.
That kind of six 5% to 7% for the year.
There is increased competition.
One of the things that I like about trying to increase transaction count just volume in that in that way.
Is that it helps to smooth out our acquisition pace.
I think it diversifies, our our deal sourcing and I think we can have a little bit more control over our pipeline versus relying on say larger transactions to complete a quarter.
Other thing handle is <unk>.
Timing wise, it's very hard to control timing of closing of real estate transactions.
Not like buying securities. So theres title surveys environmental due diligence.
All kinds of things that.
We're negotiating contracts and leases.
So it's not.
It's it's it's we're constantly closing here so.
I would tell you that without giving quarterly guidance on where cap rates are going to be we're very comfortable with the guide the guide rails, we put out for this year.
In terms of that cap rate range.
That's fair.
Exposure to country club, the 3% is that about as much as you want for now or is that something youll continue to maybe has more room for error.
Yeah. So one of the things that we talked about is doing repeat business with existing relationships.
I'm excited to say that club Corp is an existing relationship.
I'm excited to tell you that our senior leadership team.
Considerable amount of time with them.
I can tell you that.
We can't disclose the performance of.
The master lease.
What I can tell you if you looked at September <unk>.
This year versus September 2019, so pre pandemic.
National reach total revenue was up.
Master lease EBITA is up.
Master lease F&B is up month over month pre pandemic.
So we're excited about that coverage has improved.
The one opportunity as their party group revenue is down substantially.
Relative to historical experience in 2019, so that's the real upside as groups start to the group business start stop growth.
I hope, we can do more with them in the future. So I wouldn't say that we've stopped there.
But the other things that are.
Is that we don't necessarily target like a golf has to be 5%, that's not really how we do it.
So if we see a compelling opportunity.
With our existing relationship, especially with existing relationships.
Relationship, where it lines up with the industry in credit and real estate, we're gonna be all in and so yes, I would expect hopefully will do more with them.
I wouldn't suspect.
We would we're not chasing golf transactions I would say that so we're being very opportunistic we'd like the industry, but it's very operator dependent very real estate.
And then very.
Very dependent upon trade area, what's supporting the membership so.
I guess the answer is yes, we would but.
So it depends.
So it's very hard for us to tell you what this quarter or next quarter. So, but we are looking at it.
Well I'd be happy to help you with any due diligence.
But in all seriousness.
Yeah, well when people can get together.
Talked about having a big group, adding that one of the courses here in Dallas.
One more if I could on the.
Michael maybe for you on the reserves didn't notice any reversals this quarter.
Maybe some color on what you're waiting for lots of positive trends in the movie industry.
Success with a lot of the more recent film so curious on the outlook or perhaps what's holding you back.
Yes.
We really cleaned out a reserve last quarter and that was the <unk> that we've talked about.
The out of period earnings to be recognized in Q2.
There's really not much left I mean, there's a lot less than half million of reserves in total.
Unrecognized I would.
Expect that to come back anytime soon and it's really just one one operator one unit.
And that's really yet so we don't have any reserves for movie theaters.
As we mentioned today.
All of our movie theaters are paying rent, we're going one movie theater tenants, that's even under a deferral agreement, they're paying percentage rent.
As a percentage of revenue and that will end at the end of this year and even under that percentage rent agreement theyre paying about two thirds of their base rent just based on the revenue performance. So.
They are all performing really well as we also mentioned we had one of our regional operators. Just go ahead and pay back all the deferred rent in the third quarter.
Over $3 million because they were so flushed with cash so we feel good about our movie theaters and our tenants and.
That's why I said, we don't have any anything our forecast with reserves coming back because theres RNA.
Q3 was a very clean quarter.
I think our guidance is very clean and guidance with you out in 'twenty two is very clean and you don't expect any.
Noise in the numbers going forward.
Great. Thank you.
Thanks, Andrew.
Our next question is from Greg Mcginniss Scotiabank. Please proceed with your question.
Hey, good morning, Jack.
Jackson I wanted to touch on lifestyle investments maybe tomorrow.
Ingo.
Are there opportunities already out there or are these deals that you're going to need to manufacturers seeking with owner operators and structuring sale leasebacks also there any metrics you can share on that industry.
I mean I think.
I would say we have a preference towards first of all in this particular segment.
Structuring new sale leasebacks.
The club Corp transaction.
As I said last quarter.
We have been opportunistic we this transaction.
Like in the depths of Covid with with another buyer.
But I suspect going forward, if we can.
To do something here, it's going to be.
Really structured new sale leasebacks.
I would say the other piece of the puzzle is.
We have a preference towards private golf courses right now.
Let's say, we would never do a public one but yes.
I can tell you that the private golf course that I belong to.
And the New York area has been around for.
At over 100 years. So these things things that you think stick around for a long time, if they are in the right areas.
Really successful so yes look it's it's good real estate, it's got to be very selective and like I said we.
We get this question a lifestyle a lot and I just want to make sure you understand that.
It's going to be a probably a small portion of what we do it gets a lot of attention.
I'd, rather not talk about it too much because I want to buy more so.
Eventually maybe most people so.
Alright, I appreciate that thank you.
Some of your peers have provided 2022 earnings guidance and I realize we will likely need to wait until next quarter for specifics, but could you provide us some context in how to think about future acquisition volumes and cap rate, especially considering that.
The record pipeline you talked about.
Yes, so I mean.
The guide we.
We have a board meeting coming up and we'll put out guidance early next year for the 2022.
But if you just look at what we've done.
So.
You look at the trailing 12 months.
Acquisition volume that we've completed it's about it's $1 2 billion at a seven.
Seven seven cap rate.
If you look at the fourth quarter in 2020, the volume was north of $400 million.
The reason why we increased that range is if you sort of do the math on what we did.
We have to kind of solve for somewhere in the area of $230 million to $430 million of acquisitions in the fourth quarter that kind of line up with.
Our year end expectation.
If you look at what we've done historically.
We've averaged 10 to 12 transactions a quarter.
Ended up around 200 to 250.
One of my.
Principle concepts.
Back in Investor Day, If you go back look at page 18, where we laid out very clear.
Goals for 'twenty 2022.
One of those was to get to $600 million rents were going to get there earlier than year end 2022.
We wanted to source a third to half of our deals with existing tenants and relationships that percentage has actually been performing at a higher level. If you stripped out the club Corp deal with 60% acquisitions with the with our existing tenant base. If you go back a quarter before same thing.
And then finally, we wanted to achieve a triple B plus credit rating.
I think we're probably a year behind.
Just given Moody's upgraded us to triple date.
But.
Our pipeline of what we do is all kind of based around.
Those goals.
And one of the I've gotten some but some commentary well hey, why don't you guys buy more.
If you think about our operating strategy is quite simple its operational excellence I think we'd been able to demonstrate that.
It's steady and high quality acquisitions.
Use that word study, we're not trying to go up and down we're trying to kind of provide steady output.
Its to achieve organic growth in.
In the fourth operating strategies conservative balance sheet maintenance so.
So long way of saying that we're not just trying to Pi E at any given time.
We really can't time the market really.
You can only buy it at a pace that makes sense for what we're looking for.
And our cost of capital is improving on an absolute basis.
And it can only get better in terms of returns for our shareholders as we close the gap to our peers.
So we're mindful of that as well.
Thank you Jackson.
Yes.
But.
Thank you.
Okay.
Our next question is from Linda Tsai of Jefferies.
Proceed with your question.
Hi, good morning, Jack.
Jackson you mentioned that you think your cost of capital is okay, but not great.
But that's one thing you'll have some control over.
If the stock multiple continues to lag what do you think are some potential catalysts to make that multiple in flat tire.
Well first and foremost I think it's.
Doing what you say go back we'll go back to that Investor day will.
Well, we talked the reason why we've been able to at least perform the way we have been over the last several quarters.
Talk about integrating our asset management acquisition teams, we've done that and it is starting to bear fruit.
We've expanded our acquisition teams that's resulted increased deal flow.
And our.
Scalability relative to our technology tools that we have in place.
Give us an ability to really course, correct at any given time.
So my belief is is if you are able to demonstrate that on a very consistent basis.
Investors want good growth steady earnings very predictable.
Outcomes I think they look for management teams that do what they say.
I think one of the things that's misunderstood about our company today.
And I kind of referenced it earlier in the comments, we bought $3 8 billion of real estate.
I am sorry, we sold or spun $3 8 billion of real estate, if we hit the midpoint of our guidance. We will have bought $3 8 billion. So if you think about that it's been a full cycle almost turnover of 45%.
Our company.
But the story is really.
More deeper than that I think we talked about doubling industrial doubling investment grade since I got here.
Increasing our public owned.
Public tenants is as Counterparties.
But if you go further and look at the reconstruction are top five if you look at our top 10 compared in the first quarter of 2018 five of the top 10 are different.
So we removed shopko, AMC, Regal Cvs and Carmax.
And replace them with lifetime Fitness Club Corp, Bj's GPM at dollar tree.
If you look at.
Our <unk>.
Number 11 through 20 and compare it today versus what it looked like the beginning of 2018, we've turned over.
A number of different tenants.
United Supermarkets, Mister car wash Goodrich theaters.
Sportsman's warehouse Ferguson, Petsmarts, and la fitness, where swap for party city Bluelinx Banc of America Mac papers Kohl's main event in off lease.
Good companies.
That was very intentional.
I personally don't think it's appreciated.
Sometimes.
People think of whatever old spirit was and yes, there were some issues in <unk>.
Portfolio situate problems that we had to deal with but we've removed them.
So I.
I believe that if people understand what they are seeing dig in a little further you'll see that that this is a great platform. There is really to take off.
But as you say, we can't control the stock price.
Our bond pricing has come in substantially.
Bringing our.
Including free cash flow our WAC is in the mid fours right now.
But still can be better.
And if it were better it just creates that higher growth rate as we deploy capital and probably positions us to be more competitive in what I would call larger portfolio opportunities.
We've kind of scrubbed down more than I can explain to you but in the end you know the math doesn't work for us. So you can't do it.
So yeah, we're still punching alone, but we think that what we've created.
As you know phenomenal portfolio, which we constructed.
Almost completed and the way we want it still some more tweaks, but that's that's happened since COVID-19 and all this other kind of stuff. So.
I'm very proud.
Part of what the team has accomplished so far but I think there's more to come.
Maybe just on the tweaks, having cycled through $3 8 billion.
<unk>.
Besides supermarkets are there a couple of other categories you'd like to trim down more.
Generally like flat leases aren't great. We also will continue to.
We've been chipping away at that.
Reducing drugstore places like drugstore exposure.
To generate what I'll call longer term stickier opportunities that have better rent escalations.
Yes, I would say.
I Wouldnt say Theres, a wholesale big change at this point just on the margin and then we also.
Consistently trying to improve our portfolio.
Well some of the companies that have had more historic track record of operating versus us.
By that time, the decades that it helps you with your kind of cycled through a real estate well, we don't do this stuff like really fast I mean, just didn't have the time.
So I would say, there's still opportunity to cycle through assets get blend and extend sell them off at good irr's redeploy that capital into maybe other areas, where we see some credit upside or industry upside.
We've been able to do that pretty successfully so yes, we're going to continue to.
Build and tweak and improve its portfolio.
Thank you.
Thank you.
Our next question is from Wes Golladay of Baird.
And with your question.
Yes, good morning, everyone Jackson I wanted to go back to that comment of credits on the move we've seen that the bond market have tight spreads for over a year now are you starting to see the cap rates for those I guess more riskier assets start to tighten in the private market for net lease assets.
Absolutely.
Yeah, absolutely it's not just.
It's not just their cost of funding as they look at sale leaseback opt.
Opportunities.
When a company does the sale leaseback they look at their unsecured debt spreads.
The cost of capital because as you know doing a sale leaseback as just really another form of long term financing.
But I think there's been a lot more private capital coming in supporting private buyers.
We used to talk about these $2 31 buyers well there is no institutional.
Funds that have been set up for net lease which is by the way a great thing on the one hand, because it's kind of underpin the values that are sitting in all of our respective portfolios my peers portfolios grew ourselves.
On the one hand debt spreads have improved but the businesses of these companies that have improved as well so.
We will pick and choose our spots, we don't have to buy a huge amount to drive earnings here. So.
We can be very selective so thank.
Pick our spots got it and then you didn't mention maybe you have more opportunity to pass on some opportunities.
And it makes sense based on where your WAC was mainly due to the cost of equity.
If you were to get your cost of capital down further I guess, how much more could that Tam open up for you.
Like I said I think some of the portfolio situations, we've looked at over the past.
A number of quarters.
The end of the day.
It just didnt kind of lineup with getting the right returns, even though we believe that the pricing makes sense.
Makes sense deal like the pricing of these portfolios was attractive.
But from looking at just what it would do in terms of its creating dilution.
We didn't pursue it.
Just executed what I'll call more smaller acquisitions, I would say if our cost of capital improves.
Along the lines of getting closer to our peers I think the end result would be you'd see more industrial assets being acquired.
Now those are little more challenging for us given the pricing compression that we've seen.
You'd see us be more competitive on portfolio opportunities.
And we were just getting wider spreads on the things that we do today, which we like I mean, we really believe.
We've tested let's just look at the metrics.
I don't get we don't get credit watch list.
Discussions I'm kind of smiling because it's.
Yes.
Every quarter I keep saying, it's the best it's ever been.
Lebanon, and so I think our thesis what we're doing makes sense.
Just to make sure the market really understands it.
Because we got it thanks for taking the time, how it spreads.
Alright.
Thanks, Jackson I appreciate it.
Yes.
Our next question is from John and the soccer of Ladenburg Thalmann. Please proceed with your question.
Good morning.
So maybe building on that theme of kind of.
Ed.
Proving kind of portfolio performance quarter over quarter.
Can you hear me.
Maybe kind of build on Nuomi.
Can you hear me, Okay, we are going to jump to the next.
Question, if you wants to recycle through Rebecca.
Yes.
Yes.
Okay.
Our next question is from Harsha <unk> of Green Street. Please proceed.
With your question.
Thank you.
Jack you guys provided it.
This quarter PURA Vida.
Real exposure or breaking that down in Brazil, this discretionary and non discretionary.
Looking forward in your pipeline I guess, which part are 30 days would you be looking to expand their portfolio.
I Wouldnt say that were.
Seeking to make big changes harsh in this area.
We do look we look top down and bottom up at different opportunities.
One of my principle goals that you if you remember from the Investor day was to do more business with our existing tenant base.
So if you kind of look down of our top 20 tenants.
<unk> do more with them and you can sort of see how they fit some of them are in the discretionary retail some of them are in the service retail. So I wouldn't say, we're looking to match up or increase any particular area.
At this stage.
At our evolution cycle, where we have tenants that.
That we've done a lot with the last 36 months and we want to do more with them we are.
Treating them like.
Like real partners.
Clients some degree because it's competitive they can do business with other people that provide money. So we're trying to be best in class across the platform, whether it's acquisitions asset management legal lease administration property management like literally we're trying to organize ourselves to basically.
When once we get a client or industry that we like in our portfolio. So I would say that yes.
<unk>.
These these buckets can change at any given time given.
How we're deploying capital with our existing tenant base.
Got it.
Maybe thinking about that.
Lease structure.
It seems that it has had.
Over 40% exposure to master leases, which has been well in excess.
Nike with industry for everybody.
I guess could you.
Could you outline the benefits you see.
For your portfolio.
Sure.
<unk>.
So I think I think if you understand the nature of the master lease it.
It provides a landlord with significant credit protection.
Because it's a unitary lease ups, if a tenant wants to do something.
Bring a property in or take a property out.
But they've got to kind of come back to the landlord if they want to make changes that's got to come back to the landlord.
So on the one hand, it provides us great credit protection increases.
Increases the theoretical credit worthiness of that underlying tenants unsecured rating.
But the other thing that it does.
We're seeing the benefits of this.
Is you really have the ability to work with the tenants.
<unk> zelle.
We construct properties, we set different issues that gives you a good opportunity to.
Achieve what they're trying to achieve because it's a big unitary lease rate if they want to add a portfolio and I don't want to sell a portfolio or if the tenant wants to do an M&A transaction all of those things benefit.
Like that Shiloh transaction is a great example that was the.
The light weighting company that we bought earlier this year theyre coming out of bankruptcy the credit was obviously speculative.
But they were acquired by an investment grade counterparty Worthington industries.
And Worthington had to step into the master lease structure. So in the future of Worthington wants to do more business in.
Particularly the way, we'll approach them and so we think it does a lot.
In terms of.
The way, we like to see the business.
Buying a vessel great units, yes.
Whether you do sale leasebacks or buy existing leases, that's almost more of a commodity type of operation.
It's not hard it's hard to execute the careful but it's just a different kind of calculus, we think we get better returns by finding.
Credits industries, we will state assets that can be secured under this kind of nationally structure. So I think it will always be a big part of what we do.
Got it great. Thank you so much.
Mhm.
Our next question is from John <unk> of Ladenburg Thalmann. Please proceed with your question.
Can you hear me.
Yes.
Great.
You bet.
Yes.
I think it was a headset issue on my end so.
Anyway.
In terms of acquisitions, just given <unk> is kind of front end loaded.
What's the outlook on the cadence for investments in <unk> as it also probably going to be.
Is it going to be more backend loaded over there are things that.
Sure.
Kind of sell through to maybe the start of the quarter.
Ah.
Things fell through.
Deals have a different sort of lifecycle to them.
If you look at what we completed in the quarter just Takeout Club Corp.
The businesses that we acquired were basically a weighted average cap rate of six and three quarters, which is right in the sweet spot of what we've talked about doing.
I think that what youll see in the fourth quarter as I said, it's much higher number of transactions that are going to close or it's closed already and so I think youll see a more smoother deployment of capital that doesn't say, we won't do a portfolio at different times in the future, but what I'm trying to really create with the.
Team here is a more steady.
<unk> kind of flow.
Acquisition cycle, because I think historically we attended to.
Close later in the quarter and we're trying to actually.
Flip that to be a little bit more front ended in the quarter and also be more consistent and then portfolios drop in when they drop it. So so that is a major thing that we talked about.
At the Investor day, and we are really well positioned to.
Replicated sustainably going forward the way we structure our teams.
I guess I said sell through I really kind of anything that was going to close by <unk> and it just ended up falling into October.
No nothing like that.
With that.
Okay.
And then you talked a little bit about how portfolio metrics improved pretty much every quarter.
Since you've been here I guess as I look at that kind of unreimbursed Opex number I know, we're splitting hairs, but is there any further downside to that maybe some of the last bits of the portfolio that were most impacted by the pandemic.
Get it fully up and running or is that really probably the floor as to how low that unreimbursed opex can go.
I mean, I'll, let Ken take that one.
What I would say is that number I don't see risk from.
Covid in Delta in any of that but I'm not going to tell you, 100% that one 4% is the normalized run rate going forward.
A lot of little ingredients that roll up into that number.
Yes.
Right.
A very meaningful improvement from what it's been historically.
I'm not.
I don't think Mike either will be prepared to say that that's a normalized run rate. Yes. There could also be some seasonality to it on the timing of when some unreimbursed property cost should do but it is certainly a big improvement I think historically if you go back to Investor day, we used to model, 2% I do feel like going forward that number is coming down, but yes, we're not quite well.
And to say, it's one or the normalized rate, but definitely I'm starting to feel that it's below 2%.
Fewer vacancies just less leakage better tenant health is a big part of that so.
It's somewhere between that $1 42.
As we kind of go through the rest of this year.
And you can bet as Jackson said, we turned this portfolio. So we're kind of still getting used to the new spirit, new portfolio and what it produces.
More clarity going through 'twenty two.
So at some point, we'll kind of get a better feeling on what that is so probably be conservative with our forecast for next year.
It may not as conservative as we were last year.
Okay.
Makes sense and that's it for me. Thank you very much for taking the question.
Hi, James.
Our next question is from Steve Domanski of Janney. Please proceed with your question, yes, good morning going back to the acquisition front. What is the current cap rates spread range between investment grade and non <unk> tenants and also has that spread been narrowing or a widening recently.
I would say just generally its narrow.
There really is no we saw more compression in the non investment grade.
Investment grade also compressed, but they were already coming off of a lower base.
And I think Thats a function <unk>.
<unk>.
What's happening in the high yield market, yes, if you look at pricing of high yield debt high yield index.
The double B term loan index those things are just like crushing partially low right now.
So yes spreads are compressing.
Tenants are smart they look at cost of capital just like we do so.
I don't know Ken is there anything else.
No wonder it could it can vary between asset classes.
If you look at.
<unk> corporate.
Franchise restaurant.
<unk> is a franchise, it's pretty thin, we don't play in that area right now because the cap rates are really aggressive.
But it's going to depend across asset class, but by and large it's relatively thin.
Got it. Thank you David was very helpful. And also just regarding club Corp. If corporate to have issues what are your thoughts of the potential.
Repositioning of those properties.
So.
<unk> still great I'll, just tell you I gave you those stats.
When we underwrote this transaction.
What we.
The way, we think about this investment.
The credit statistics.
The basis of the golf courses for patients per acre.
The scale of the properties within the master lease quality of the mass release.
We actually think the credit quality of that master lease.
It's actually <unk>.
Higher than club Corp.
That makes sense.
And so.
We're very comfortable with the underlying collateral if something were to.
To happen.
<unk>.
That's.
Negative so the corporate tenant we'd be in great shape with.
A lot of different options.
Thank you Jackson that was very beneficial.
Sure.
Our next question is from Chris Lucas with capital One. Please proceed with your question.
Hey, Good morning, guys, Hey, Jackson I'm going to go back to the Investor day presentation as well.
Back then one of the comments you made was that.
One of the gating items to your ability to do more acquisitions was just your ability to do more actual transactions. So in 2019, you did 30.
Last 12 months, you've done 45 are you at a point now with your systems and people where the number of transactions is not the gating factor for acquisition volume or do you feel like you have more.
Work to do on your efficiency on that front.
I'd say, where we were.
Were there I mean, we I can't tell you what the number is going to be a tiny next.
The next time, we report earnings it's going to have a much higher pace.
<unk> of transactions per quarter, and it's going to be well, it's going to be.
Repeatable is what I'd say.
Let me Ken you can.
Bringing can into the role of CIO and we brought Danny who was doing acquisitions.
Back into running asset management, and everything kind of rolls up under Ken maybe you can describe.
So in your world.
Jackson's alluded to the work we did starting back in 2019 was about.
Building a prop processes that we felt not only add value to the acquisition process, but it is extremely scalable.
We truly do operate our acquisitions asset management credit and legal.
They each have their own roles that we are one team effort and our acquisitions.
And since 2019, we continue to refine it.
And whatnot that no more transactions does not a gate.
Okay, Great and then just I mean, I will say one thing Chris just a follow up on that comment.
I would say since Investor day, there was a lot of work.
Like I'll call it like internal plumbing strategy.
And then obviously COVID-19 happened that that was not great for us timing wise, but if you look at what we've done exactly what we said.
And I, just think we're going to do a better and faster in the coming quarters.
It's pretty much ready to go.
It really is.
Okay. Thank you for that and then I guess just a quick one you had mentioned about.
The spread narrowing between investment grade and non investment grade as you think about where we are with <unk>.
Activities and likely actions do you anticipate that that widens or is this something that is just.
The amount of capital out there searching for opportunities is going to continue to keep that.
Spread under pressure.
I think for the time being it's going to stay like this I don't see any absolute some economic.
Mobile economic issue that creates changes.
In the fixed income market.
Yes.
Lot of capital lot of debt capital public private.
Public.
There's a lot of public buyers in this kind of stuff there's private.
There's always there's almost a private one every other week private groups setting up these platforms.
On the one hand you.
You say, Oh, that's scary, but on the other hand, the asset classes getting more institutionalized which is always a good thing. So I think cap rates in the net lease area.
Phil are wider than if you look at other asset classes.
In the commercial real estate landscape and I think as people start to get a better appreciation.
On the quality of these assets.
The ability to.
Kind of restructure weighted average lease term, especially if youre in a master lease situations, where you can work with a tenant.
Ability to improve tenant.
Ratings as the as the <unk>.
Portfolio evolves.
Ross the platform.
And then the ability to southeast properties at any given time to blend and extends and things like that can generate a lot of IRR and a lot of steady.
Earnings and growth that way and I still think theres not everybody really understands this business and as more <unk>.
The performance happens I think.
My suspicion is.
You'll see the peer set cost of capital.
Come down in lockstep with what we're seeing just across.
What's happening our tenants.
Great. Thank you that's all I had this morning.
Thanks, Chris.
Our next question is from Keybanc Kim of truth.
With your question.
Thanks, and good morning.
Just a couple.
Catch up questions.