Q2 2019 Earnings Call

At this time, all participants Arnie listen only mode. A question answer session will follow the formal presentation. If anyone should require operator, let's turn 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.

Hello.

That's the beauty of strategic planning and the IR Mr. <unk> you may begin.

Thank you operator.

Thank you everyone for joining us today.

Present, today's call will be president and Chief Executive Officer, Mr. Jackson shape.

<unk>, Chief Financial Officer, Mr., Michael Hughes and high much head of asset management will be available for queuing up.

Before we get started.

I would like to remind everyone that this presentation contains forward looking statements.

Although the company believes that these forward looking statements are based upon reasonable assumptions. They are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from does currently anticipated between number of doctors.

I'd refer you to the Safe Harbor statement in today's earnings release, and supplemental information as well as your most recent filings with the FCC.

For a detailed discussion of the risk factors relating to these forward looking statements.

This presentation also contains certain non-GAAP measures.

Conciliation of non-GAAP financial measures to most directly comparable GAAP measures.

Quit at today's release and supplemental information first the FCC under form 8-K.

Today's earnings release and supplemental information.

Our available in the Investor Relations page of the company's website.

Every pad remarks, I'm now pleased to introduce Mr. Jackson Chad.

That's it.

Thanks, Peter and good morning, everyone.

Before I talk about the quarter I wanted to remind you what we've been trying to solve for as a company since I became CEO .

Achieve a long term competitive cost of capital.

You'll recall from my comments on our first quarter Investor call that our team has been focused on the execution of our acquisition and disposition targets.

Maintaining high quality operations and financial results.

And assisting from T.H. independent trustees.

But there are accelerated strategic process.

I'm very pleased with the progress towards those 2019 critical initiatives.

We achieved with our second quarter results.

As an operating team.

We are continuing to see the benefits of the many people and process changes we put in place over the last two years.

During the second quarter.

We exceeded our acquisition expectations.

Continue to improve operations across the majority of our business units.

Translating into improved metrics.

And assisted that's on T.A., securing a $2.4 billion sale transaction.

The properties with them.

Master Trust 2014 portfolio.

We also executed several important capital transactions.

With nearly 500 million in equity issued or available to be issued through our ATM program.

An underwritten public offering.

400 million of senior unsecured notes.

And extinguishing 402.5 million of convertible notes and the remaining 158.5 million.

Secured Master Trust 2013 notes.

I don't covering over $400 million in properties.

In addition, our unsecured credit rating was upgraded from triple B minus or Triple B.

At both S&P and Fitch.

We expect to receive approximately 247 million in proceeds related to the termination of the asset and property management contracts with some T.J.

Redemption of our preferred equity investment.

The sale of the flying J's and the redemption of our Master Trust 2014 notes.

The timing is currently expected on September 20.

We're very excited.

Because these key accomplishments result in us revising upwards.

Our acquisition and F. our earnings guidance.

Assuming a full year of S.M.T.A. income, which Mike will cover in more detail during his prepared remarks.

These actions are providing spirit with a competitive cost of capital.

That brings us another step closer to becoming a simplified triple net lease rate.

The diverse revenue base and steady earnings growth.

I referenced in our first quarter call that we were at 90% of the way towards this goal.

That number is now 95%.

Here's a rundown of our second quarter operating results.

And key financial metrics.

We generated AFFO per diluted share of 86 cents.

Improved operational performance on all fronts.

Portfolio occupancy of 99.6%.

Lost rent below 0.1%.

And less than 1.6% property cost leakage.

Grew same store sales by 1.3%.

Sure he'll by health and fitness movie theaters and medical office.

Ended the quarter with leverage calculated as adjusted debt to annualized adjusted EBITDA Ari the 5.1 times.

Increased our master lease rent contribution from 39% to 42%.

And enhanced our available capacity for growth.

With a fully undrawn revolver and attractively priced unsettled.

Oh, it equity at our disposal.

Turning to capital allocation.

We acquired 104 properties during the quarter.

Totaling 286.9 million.

And invested an additional 6 million in revenue producing capital.

With an initial yield cash yield of 6.85%.

An economic yield of 7.85%.

Weighted average lease term of 15.6 years.

An average annual rent escalators of 1.9%.

The investment activity for the quarter was both accretive to our property rankings in each of their respective industries.

And in large part represent a key attributes that we look for.

Including larger.

[laughter] publicly listed tenants.

And are aligned with our industry view.

Accreted to our rankings.

Provide higher organic loan growth.

Investment investment categories included a vertically integrated party goods manufacturer distributor and retailer.

Discount retail.

Manufacturing.

All our stores.

Health and fitness.

C store and QSR.

Approximately 83% of the total investment was derived from public issuers.

And represent key real estate in their underlying business.

The split and rents from service retail traditional retail and industrial other.

17%.

28%.

55% respectively.

Since the spin off.

That same split or something closer to 47% surface retail.

26%.

For additional.

28% industrial another.

Our top 15 tenants he will continue to evolve as we execute our investment strategy.

Notable additions to our top 15 tenants our party city at dollar tree.

We're especially excited about the investment and party city.

Who is now our number nine kinda.

Party City is the largest vertically integrated global producer Mylar balloons and party goods around the world.

We own one of their key 870000 square foot distribution facilities Chester New York.

They're mylar balloon manufacturing facility in Eden Prairie, Minnesota.

Last let us know Mexico.

All mission critical facilities for this leader in the party goods sector.

We're 60% of the world's mylar balloons are manufactured in the Eden Prairie facility.

Under their proprietary based although manufacturing processes.

The dollar tree stores, we acquired for all structure several pools of assets under master leases.

The unit level sales reporting and CP I rent escalators.

Our tree has moved into our top 15 currently number 12.

Like the dollar store position and growth.

And were particularly in trade the strong we structure these portfolios offered us.

The dollar tree stores rate higher than our existing dollar store portfolio.

During the quarter, we dispose of 83 million in occupied properties at a 7.2% cap rate and 31 million and vacant properties.

Characteristics of the disposed assets included a multi tenant property.

Flat double net leases.

Risk mitigation.

In credit enhancement of the master lease.

Notable dispositions in the second quarter included the Petsmart distribution facility.

Moving it from our number 11 to our number 59 tenet.

Which we discussed briefly on our last quarter call.

[laughter] a vacant former Haggen store in Las Vegas, Nevada, and a Walgreens drugstore.

All of these dispositions are examples of the type of assets. We described as part of our longer term disposition strategy.

We expect to continue portfolio shaping throughout the rest of the year.

Sale activity in the second quarter marks the peak of our disposition volume for the year.

We have also clear all hurdles to sell the reef flying j's to HBP or 55 million.

5.7% cap rate as part of the S.M.T. a transaction.

I realize that we are still relatively new team and operating platform.

And the passage of time and more quarters like Q1 and Q2.

Well build even more investor confidence.

Well, we do have a competitive cost of capital.

We are honored and excited to be back in growth business.

Focusing on our existing tenants as well as new targeted tenants.

As we deploy capital into real estate.

We will continue to pursue quality real estate opportunities.

It rank well within our property ranking process.

But financially strong tenants that operate in industries that are well positioned in the heat map.

Our investment focus well continue to add real estate assets to our portfolio.

Enhance our current rental escalations.

Weighted average lease duration property ranking scores.

With that I'll turn the call over to Mike.

Thanks, Jack and good morning, everyone.

It was a very exciting quarter for spirit highlighted by capital markets activity and substantial capital deployment.

Given the capital issuances and debt repayments well start with the balance sheet.

For the first six days of the quarter, we issued 1.4 million shares under our ATM program for 57.4 million in gross proceeds.

Block trades executed the reverse inquiries accounted for 42 million of the total proceeds.

On may 2nd we issued shares through an underwritten public offering.

Man for the offering was very strong after upsizing, the initial offering and the underwriters exercise of their over allotment.

We issued 11.5 million shares under forward contracts.

Virginia 31.9 million of these shares have been settled generating gross proceeds of 76, but.

Approximately 375 million and expected net proceeds remain undrawn as of June Thirtyth.

They account for the unsettled shares using the Treasury stock method.

On May 15th we drew 400 million our delayed draw a two term loan and repaid 402.5 million outstanding balance of our 2.875% convertible notes that were due.

This leaves us with only one outstanding convertible traunch of 3.75% notes due in 2021.

June 27th we issued 400 million of 4% 10 year unsecured notes and used the proceeds to extinguish the remaining 158.5 million outstanding balance the Master Trust 2013 notes to repay the outstanding draws on our revolving line of credit.

The transaction on the heels of our credit ratings upgrade by S&P was very well received by investors and oversubscribed.

We were able to reprice, our credit spreads 35 basis points tighter where 2026 bonds were trading at the time.

Since the issuance or credit spreads have continued to compress further enhance our weighted average cost of capital.

Transactions. This quarter also had a positive impact on our credit metrics.

Under net acquisitions of 180 million with 130 million of net equity proceeds were 72%.

Bring leverage down to 5.1 times compared to 5.2 times last quarter.

Improved our fixed charge coverage ratio.

Extended our weighted average debt maturities to 5.2 years.

And number 267 properties, bringing our unencumbered to total assets ratio to 89.3%.

On July 26, our senior unsecured credit rating was upgraded by Fitch to Triple B the stable outlook.

We also continue to maintain a high level of liquidity with an 800 million undrawn revolving facility and the remaining equity available on the outstanding forward contracts.

Turning to the key operating metrics during the second quarter annualized contractual rent, which annualizes the rent in place at quarter end were 11.7 million compared to last quarter.

Approximately 20.9 million to the increase was attributable to acquisitions and contractual rent increases offset by a reduction of 9.2 million attributable dispositions.

Unreimbursed property costs were leakage declined by 117000 compared to first quarter driven by property tax recoveries.

As Jackson mentioned loss trend was effectively nonexistent.

There are few other items to note this quarter that impacted our numbers.

DNA was negatively impacted by two items.

First yes, Jay board of trustees.

Share based awards through a CEO , who is an employee of spirit.

As our employee benefit from this award in accordance with the accounting rules on share based payments recorded noncash asset management fee revenues of approximately 400000 with a corresponding offset the GNS.

Recording of this non cash transaction did not impact our net income or any of our non-GAAP earnings metrics.

Second due to the timing of the annual equity awards for our board of directors as well as a performance share awards for our executive team you recognize an additional 300000 in stock compensation expense during the quarter.

Other income was also higher by 545000, driven by the recovery of two lease termination payments is terminations occurred in prior periods.

Now turning to our guidance.

Due to the announced sale of SNG as Master Trust 2014 portfolio and the resulting termination of our existing management agreement with essence year expected to occur near the end of the third quarter.

You are providing updated guidance with and without the impact of that transaction.

For the full year 2019, and excluding the sale of Essences Master Trust portfolio.

We are raising our projected if so per share range from $3 and 35 to $3.39 to $3 and 39 to $3.43.

We are raising our projected capital deployment, comprising acquisitions revenue producing capital and redevelopment or 450 to 600 million to 700 to 900 million.

We are lowering our projected asset dispositions from 225 to 325 million to 225 to 275 million.

We are maintaining our adjusted debt to annualized adjusted EBITDA Ari range of five to 5.4 times.

The full year 2019, assuming the SNG transaction occurs on September Twentyth.

Projected AFFO per share range is $3 and 27 to $3.31.

This projection assumes that upon the sale of the Master Trust 2014.

Spirit will terminate the existing asset management and property management agreements with SJ currently provide for spirit to receive approximately $27 million in fees per annum.

And receive approximately $48 million termination fees were 35 million net of estimated tax payments.

Enter into an interim asset management agreement with us up SMTC, whereby the company will receive 1 million in fees brand them. During the initial one year term.

Plus certain cost reimbursements.

So the fee interest in three spirit on properties for 55 million in gross proceeds of 5.7% cap rate.

Receive a $150 million for the repurchase of spirits preferred equity interest in essence yet.

It's currently provide spirit with 15 million and dividend payments for Adam.

Receive approximately $33.5 million for the redemption of spirits Master Trust 2014 nodes currently paying spirit interest at a rate of 4.6% per annum.

Extinguished approximately 26.4 million related party notes bear a coupon of 1% per annum.

Please be aware that the timing of the frontier transaction is subject to change and the transaction requires extinguishment of the Master Trust 2014 notes.

The only occur on a payment that.

The timing of the transaction shift pass the September Twentyth payment that the next available date to close the transaction would be October twentyth.

The impact to our guidance inclusive of the transaction for one month shift in the closing date equates to approximately four cents of AFFO per share.

In addition, as I noted on our previous calls.

The repayment of the 2.875% convertible notes in May.

Cause approximately one cents per share per quarter earnings dilution for the remainder of the year. So please keep that in mind for your earnings models.

With that I'll open up the call for questions.

At this time, we'll be conducting a question and answer session.

If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we pull for questions.

Our first question is from Handhelds St Juste.

At Mizuho.

Please proceed with your question.

Thank you. Thank you.

Good morning, Thanks for taking my question.

Yes. The first question on investment volume I guess most of US on the call are surprised by the increase in the acquisition guidance to the new range 700 to 900 million I guess I'm curious is that more the annual volume that we should be thinking near term and maybe as part of that you can talk a bit about what is perhaps new or interesting today in light of your heat map analysis and the decision to.

Increase your at party City at Party city exposure and some color around the.

Maybe the rent coverage rent bumps cap rates than what colour on that party city. Thanks.

Okay. Thanks Handouts Jackson.

Not a lot has changed in terms of our investment outlook and if you go look on pages 27 and 28.

Of our Investor presentation that we have been on our website.

Layout or heat map in our spirit of friendship efficient frontier.

And if you look at the categories that we feel like we have we see interest and no. They fall into a couple of different segments industrial distribution home furnishings warehouse clubs discount retailers building materials.

So we feel like there's plenty of opportunity for us to add into industries and areas that we think are constructive from a quarter's five horses and.

Got it Amazon effect, you will recall that.

As it relates to party city, one of the things that was really unique about this opportunity.

Was it's really two businesses, there's a business called M. scam.

M. scan is the largest source or distributor of party goods in the world. So they sell originate loans and cups, and napkins and they sell to Amazon Walmart target I mean, they're the largest in the world.

Perhaps multiple factor.

They also own party city, which is the retail operation, which owns and operates about 900 stores in North America.

So the way to think about this company is its very unique its a vertically integrated business that.

It was about two and a half Dana revenues of 400 million of adjusted EBIT.

There number one.

They're about Fourx.

In sales between them and the number two.

Competitor in the in the World and if you think about that market share. If you were look at other consumer goods companies like Adidas and under armour that ratio is more like 1.5% or one of the half time. So like the dominant share. We think people are going to continue to have parties for the rent for a long time.

The balloon manufacturing that they do is really are done.

I visited both the Chester and the Eden Prairie facility above facilities. There. So is it really entered very very nice company.

They happen to be public, which is also a big benefit for us.

And so we really like the business and you get your final question as it relates to a longer term guidance like we haven't given next year's guidance, but.

Im not feel pretty comfortable that that's a that's a pretty good range for us as we chart. We are moving forward with this cost of capital that we have right now.

That's helpful. Thank you and certainly I I can share your thoughts on party city, where there are quite a few times a year for for birthday parties for our kids.

A question on the disposition side, perhaps I know in the past you've talked about being opportunistic there and that you weren't selling troubled assets.

But also improving your cost of ACA cost of equity also made that a favorable alternative sources.

Capital, So maybe a bit more color on the volume of asset sale in the quarter. It seemed a bit higher than people are expecting especially again in light of the spinoff of SMTC.

You know I think that.

You know the Petsmart facility had a big impact obviously that was a large asset your next quarter or the third quarter. The flying J is going to be a larger portion of the disposition.

Activity.

But as Ken has said in the past. So we've said there are certain assets that we see inadequately wed like to sell multi tenants don't really federal portfolio not like double net leases flattening houses. So if we have opportunity to.

The cycle out of those kinds of properties.

Especially in combination with a blend and extend or some other type of transaction like that it creates value we're going to try to take advantage of that even though we might have a strong cost capital. We think it's the right thing to do.

To kind of build the duration.

And the ramp up and run the escalators in our portfolio.

But I think the second quarter volume is going to be a peak for for what we expect going forward.

Okay. That's helpful. Thank you.

All right.

Our next question is from Ki bin Kim.

Suntrust Robinson Humphrey.

Please proceed with your question.

Thanks, Tom Good morning.

I guess a couple of follow up on the acquisition of the party city.

Related warehouses that one's ever for manufacturing is that the only two that they have in the entire company or is it like two out of a couple more.

And on the dollar stores can you just give varied provide a little more color on the investment merits and things like rent basis rent coverage things like that.

Okay well.

And party city should they they have too large a called classic distribution facilities, we own one of the two now they have a separate b to B facility, which is not part of these two.

And in terms of their manufacturing facilities, they own several manufacturing facilities in the United States.

The two properties that we own are principally the metallic balloons, which is one of their bigger profit segment sales. So these are like you know and I saw balloons.

You know the.

And be a balloons.

And so one of the things that's another thing I didn't mention on pretty serious but what's unique about them is about 20% of their business is all license business, So they'll license with Disney and be a and the NHL and basically produce balloons with what those thematic costumes and stuff like that so it's really unique business and it's so dominant.

And like I said, we feel like we've got the critical facilities.

To ship the questions on the dollar stores you know we.

Our our existing dollar store portfolio is primarily.

No single site flat leases.

That's more of a historical legacy.

Portfolio that we acquired through the cole merger.

These new dollar tree portfolios that we acquired.

Yeah, we're pretty unique you know they they were under master leases. They provided unit financials, they had rent escalators.

Just really different than the kinds of.

We structure is that we had in our in our existing portfolio and I think I've said deal. We've we have looked at dollar opportunities, but we sort of shied away from what I call the single site.

Typical developer type opportunities and so when this opportunity popped up.

We thought it was a pretty unique opportunity for us to kind of add that it's our segment and we like it. So now, but we don't you have obviously individual rent coverage like.

Right so but.

That was the principal driver for what attracted us here.

Yeah, and what are some of the other investment verticals, you're looking at I know, you've done hotels or things like that so anything.

No because we didn't want to purchase two yeah, one or whatever [laughter].

No I think I said to him handles we are.

Yeah, I feel like our.

If you go to page 20, 728, you know in our Investor deck, you can see it's it's like where we're going to be fishing is on the far right of page 28. So you know you would expect us probably to see more warehouse clubs coming.

Continue to see more discount retail like the Kohl's opportunities dollar tree, Burlington and things like that.

We like building materials, we continue to focus.

Effort on that area still like home Entertainment home furnishings.

No you'll continue to see us do.

Industrial distribution manufacturing.

Select office officers auto Serbia, so all that stuff here and there there is a lot of different things out there as you know.

Alright, thank you.

Our next question is from Brian Hawthorne RBC capital markets.

Please proceed with your question.

Hi, Good morning, how do you guys underwrite bomb when we have large interest rate movements like we have seen recently like how does that impact here.

Your you know investment analysis.

[noise].

I guess it starts with.

I'll start with the kind of the credit first.

You know when you sort of see changes in interest rates changes in liquidity.

To me. The first question I'd ask is can your tenant operate for 20 years, that's the first.

Are they in the right business vertical do they have liquidity they have the access to capital. That's obviously really important second is.

How does the industry that we're investing in.

Correspond to changes in rates no and it's not just rates its competition tariffs obviously, there's a lot of different factors do you want to make sure that they are durable and then finally, you get down to the specific quarter is it a good piece of real estate is that the right rent.

How mission critical is this asset relative to lets us operators dealing with.

If things were to get into trouble for whatever reason.

Is this going to be the surviving real estate that.

That will come out in a restructuring.

So it's not just rates is kind of all those things, but I think it starts with kind of the operator's ability in my mind.

20 years, that's that's the first fundamental question, we'll asking and there's obviously a lot of things that can impact that.

Okay.

Sure Okay, Great and then I guess across your different asset types, where do you see the deepest buyer pool.

Wow.

Well.

You know, we just went through the sale process for the Master Trust portfolio.

The way I would describe the market is.

It's very deep you know there is it's not just.

It's not just us public triple net Reits buying assets out there, there's there's private funds.

Theres Tenthirty one there's there's there's private capital sources out there, it's very very diverse funding sources out there and.

You know I said there is no real one area that is it just seems like there's this is very fragmented so.

Transactions are both large and small.

And what we find is that there seems to be ample.

Kind of opportunities within the segments that we're looking at.

We're up for good risk adjusted opportunities, it's a very liquid market.

Sure Okay, great. Thanks for taking my questions.

Thank you thanks.

Our next question is from.

Mcginnis.

Scotia Bank. Please proceed with your question.

Hey, good morning.

Jackson as handle mentioned the increased acquisition guidance is now a huge price based on prior messaging, but considering some of your peers maintained acquisition ranges for the year, while spirit raised guidance by 50% I'm curious if the increase was due to a few specific deals we are able to close or its becoming more capable of sourcing and closing deals versus initial expectations any details on specific drivers for the increase the guidance would be helpful.

Yeah, I've looked at the Mike Yeah, Yeah. Greg. This is Mike I think it's more from a capital availability standpoint, if you go back to the beginning of the year you back to our original guidance.

Our capital was a bit more constraint or cost capital is more constrained than it is today.

As we move forward through the year, we raised a lot of equity raise debt.

Flush with cash right now we've got some SJ proceeds coming in so really when we kind of hit that window, starting really in early may.

And we have the capital to actually deploy and we're able to really bring up our our acquisition pipeline. So I think it's really a function of having the availability of capital how do we have that capital.

Getting a year then our guidance for acquisitions would have frankly been higher so it is not.

We're seeing more opportunities than we did earlier in the year. Many of the marks fruit liquid there's lots of stuff out there you have that have the capital to to go by and.

So the opportunities are always there once we got the capital we're able to really deploy that and that's what really drove the increase in guidance.

All right. That's helpful. Thanks, and then based on what's going on with rate cuts. This year is there any opportunity to refinance debt in the near term at lower rates I'm just trying to understand.

What the next steps might be regarding the balance sheet.

Or how you might take advantage of the low rate environment.

Yeah look I mean, we're watching the rates go down I mean, a couple of things for us It really changed one our spreads have come down significantly since we did our last bond deal and those are done it yet.

Keep us 200.

We could probably borrow it cheap us when 75 today and so our spreads have come in 25 basis points. Obviously, we're all seeing what the 10 year Treasury has done.

So we're definitely looking at that.

I'd say.

We've got some term loans that we took out early in the year, which we always come back and take one of those out there prepared but we have this converts due in 2021, which you're now I think our borrowing cost is below where those are so that becomes very interesting.

Those are a little tricky, because they're not call but.

Certainly something we could look to attack so I'd say, we'll be opportunistic and.

It's not lost on me where rates are and we still have balance sheet work, we want to do it there is a window guys you've seen us do throughout the year Theres a window, we tend to be pretty active.

Great. Thanks, and congrats on the 52 week high right now.

Thanks, Ken Thank you.

Our next question is from Shivani Sood Deutsche Bank.

Please proceed with your question.

Hi, good morning.

So on the acquisition channel or you've been building that pipeline for almost two years now. So just curious if you're seeing any change in terms of the quality and the depth there and can you give us an amount of an idea of the amount you're ultimately closing in terms of in regards to what you're presented Matt.

I would say the.

With this.

This drop in interest rates.

I think you're seeing if people are looking to you sale lease backs right now our capital transactions, obviously, they've they've kind of gotten the joke in and they are out there are exploring it so I would say that the volume of.

Opportunities has increased dramatically from from where I can see.

For instance, compared to a year ago. This just.

In terms of quantum and exploration, which is a good thing.

I think for us.

You know, we've we've really in earnest started the acquisition process.

Middle of last year with this with the closing of the spinoff of SMTC earnest. So I feel like I feel that our acquisition effort really.

Really began in earnest about a year a year ago, and Jim and it's just continuing to build and its building every quarter, it's getting better or the teams are more integrated working better with the asset management teams.

So I feel really good about directionally, where we're going and we're fortunate to have.

The market constructive where theres lot of different opportunities.

For us to look at it evaluate.

Well without giving you specific volumes and things like that.

You did ask the question of of how many deals are sort of.

We're doing and I would say like today I'm not sure. This is where the run rate's going to be but were probably targeting.

By an average of 10 transactions a quarter you think about it that's about what we have been sort of trending at or targeting as we've come out in this first full year of acquisitions, obviously that's.

A lot less than some of our peers.

So so you should expect that we're looking at a lot of different things and not a lot of things get to that top 10 for us hopefully in time, we'll be able to increase that.

That number of transactions, but right now it seems to be.

Feel right at about 10 per quarter and I think in time it will continue to increase.

Okay. Thanks for that color and apologies if I missed this in the press release at this time.

What was the recapture rate on leases in the quarter.

Well.

Hey.

We don't we don't give quarterly we do that annually, but I can tell you through mid point in the year, we're tracking right around 100% Mark.

Great. Thanks, so much that's it for me.

Thank you.

Our next question is from cash.

Generally.

Bank of America Merrill Lynch. Please proceed with your question.

Hey, guys.

On the one Q call you guys talked about expanded relationship with at home.

Sounds like the situation might change a little bit over there how how do you feel about at home today and.

Is there anything.

You might have changed post at home transaction.

I'm in your underwriting.

No look at home.

First of all we like to segment the rent, we talked about home furnishings as being one of those verticals.

At home as you know as a public company. They I think the next earnings announcement is on September 4th.

We like the business that we spoke to management management team after their last.

Quarterly call. It looked it wasn't a great call that drove their stock price down, but and we've certainly.

We certainly have experienced that from our seat but.

But the business itself is is still in our estimation.

Very solid you know they just opened their 200 store in San Diego, California, The West Coast as it is a very large.

Development opportunity for them.

They just increase their abbeel back in June by another $75 million.

Our.

Our two portfolios we have two master lease portfolios. So we had an existing one and then we added this last transaction with them.

Both or north of four times unit coverage.

There are two times north of corporate coverage in other real estate scores were too too low to Dot Hill for these portfolios.

The properties ranked in our top quartile rents were below $7 a square foot.

Long term leases so we really.

Same store sales were up the sales there were.

Or at least.

Were good in these units.

So all things are right just the stock price for them. Unfortunately was a negative reaction, but you still think that the business is relevant we like what they do and obviously, we'll learn more when they use.

Talk about their quarter, but.

We did have a call with senior management recently and.

We think we still feel good about our real estate underwriting at this point.

And their ability to pay rent for a long time.

Okay awesome.

And then just maybe could you update us on what's on your watch list as anything on there.

Change recently.

And you want to take that Hey, Josh This is Ken yes, there's.

I used the word stable continues to these.

We grow a few folks on there we take a closer look at and we removed some folks that we've had a chance to do a deep dive on that overall it remains stable.

Okay. Thanks, guys appreciate it.

Our next question is from John Misaka.

Ladenburg Thalmann.

Please proceed with your question.

Good morning.

Morning.

Should we maybe expect the given the industrial assets that you acquired in the quarter and the amount of the acquisition activity in the quarter that was industrial.

What should we kind of expect with regards to that mix as part of your acquisition strategy going forward should it kind of be pared back starting maybe in Threeq, you or is that really going to be a focus.

Well like I kind of have to go back to Jon on page 20.

I think it's 28, you know in our in our deck.

It's.

Your manufacturing industrial and there are other segments in there.

There's a lot of room, there for us relative to how we see our efficient frontier for their asset allocation standpoint, going where we can add more in that area.

Industrial assets were about seven just under 8% of our rent.

In the last quarter.

My guess is you know we're going to continue to see more of those opportunities I mean were.

What's the right industries like a party city.

When you get mission critical facilities, you get long term leases you get annual escalators, you get really good visibility from unit.

Visibility on it from a corporate standpoint.

So so I think you'll see us continue to do that and I don't think were going to.

Wholesale change our allocations, but there is a lot of room, there relative to where we see.

You know our efficient frontier to add more selectively yet if they fit the right criteria for us and there is a bigger portfolio against of acquisitions, you know from a price you know from a price perspective, given even improved cost of capital, but still industrials in a pretty.

In demand sector. I mean is it just be manufacturing is more of a focus and that's where you can get kind of an appropriate yield for your cost of capital.

I think we're we're seeing probably better opportunity that manufacturing is tricky you have to be very selective as to what how were you I would say, it's more industrial distribution.

But for US we're focused on sort of long term leases with certain industrial assets and yes.

Quite frankly.

I think a lot of the really low cap rate.

Industrial you're seeing out there from core buyers is actually shorter lease term opportunities where they feel like they can.

You know release at higher rates. So that's that's kind of not the typical opportunity. We're focused on we're looking at much more of a direct sale leaseback.

With a critical.

But a good company good industry, good fundamentals, where it's a mission critical assets.

They're doing kind of a.

Your balance sheet work to try to.

We'd be their balance sheet, where we can kind of locked into a 20 year lease. That's that's really what we're looking for and so we don't feel like we're competing with what I call. The really large wedge that's buying industrial up there in the five to six year weighted average lease duration, where they're looking at buying industrial parks and looking to release and move Tennessee around that's that's not the kind of industrial that we're looking at.

Okay, and then shifting gears to the kind of in place portfolio given all the news around Walgreens kind of looking to optimize its its real estate footprint are there any walgreens kind of in the portfolio that are on on a shorter lease term potentially and then maybe kind of the what's the rough weighted average lease term for that tenant in your portfolio.

Hey, this is Ken.

We were.

We definitely are we engage with Walgreens constantly on renewals, we have a mixed out from.

We got we've already taken care of all of our 2020 renewals were already talking about 2021, and 22 cohorts. We have it's kind of spread out all the way out to 2035.

But we have a great relationship with them and we there's nothing in that pipeline that concerns us.

Okay, and then lastly on the disposition side you mentioned the Hagen the vacant Hagan in Vegas that was sold but anything else on the vacant side, just kind of color on what what was being sold in the quarter.

It's just simply continuing to.

Keep an eye on how many vacancies we have.

We we prefer to re let them when the opportunities arise and we continue to pursue that but sometimes there comes a point in time, when we feel like it makes a lot more sense to go ahead and exit given.

The costs and whatnot, but.

I don't know that there was anything.

Crazy going on its just simply trying to keep our eye on it.

Okay. We we've always maintained our desire to maintain at least a 99% occupancy and so thats kind of a guiding light for us.

Okay. That's it for me. Thank you guys very much.

Yes.

As a reminder, we are now conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

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One on the please while we pull for questions.

Thanks.

There are no further questions at this time and I will now turn the call back over to Jackson, Jay for closing remarks.

Thank you and thank you all for participating in this morning's quarterly earnings call.

Just one final statement as we get closer to completion of the sale of the Master Trust.

Out of SMC, a and ultimately the flannel.

Completion of the liquidation of the assets in that company.

I do want to make sure I remind all of you that.

We're going to be able to dedicate obviously, 100% of our time to the spirit assets and that's a couple of we're all really looking forward to do as we get closer to the end of this year. So we're very excited about that and and our prospects. So thank you very much.

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.