Spirit Realty Capital, Inc.

Greetings and welcome to the Spirit Realty Capital fourth quarter 2020 earnings call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question, you may press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Pierre Raval, Senior Vice President of Corporate Finance and Investor Relations. Thank you, sir. Please go ahead.

Thank you, operator. And thank you, everyone, for joining us this morning for SPIRIT's Q4 2020 earnings call. Presenting today's call will be President and Chief Executive Officer Jackson Shea and Chief Financial Officer 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 today's earnings release, supplemental information, and Q4 2020 investor presentation, as well as the most recent filing with the SEC for a detailed discussion of the risk factors relating to these forward-looking statements. This presentation also contains certain non-GAAP measures. Reconciliation of non-GAAP financial measures to most directly comparable GAAP measures are included in today's release, supplemental information, and Q4 2020 investor presentation furnished to the SEC under Form 8K. Today's materials are available on the investor relations page of the company's website. For our prepared remarks, I am now pleased to introduce Mr. Jackson Shea. Jackson?

Thanks, Pierre. Good morning and welcome, everyone. It's hard to believe that just a little over a year ago, we held our Investor Day in New York. For those of you who attended or had the chance to watch the webcast, it was a turning point for Spirit. We had finally become a simplified triple net REIT with a competitive cost of capital, and we outlined our plans to take spirit forward and create value for our shareholders. As I was preparing for this call, I reflected on several of the key objectives we talked about, what we have accomplished and what is still left to do. And for this earnings call, I will revisit many of those objectives in the context of our 2020 results. So let's start with our portfolio. At our investor day, we laid out our medium-term portfolio targets. ONE OF WHICH WAS TO OVERWEIGHT OUR INVESTMENTS IN LARGE, SOPHISTICATED OPERATORS WITH A PARTICULAR FOCUS ON PUBLIC, NON-INVESTMENT GRADE CREDITS WHERE WE FIND ATTRACTIVE YIELDS IN LOOSE TERMS. WE LIKE THESE TENANTS BECAUSE OF THEIR SCALE AND OPERATING SOPHISTICATION, ACCESS TO PERMANENT CAPITAL, MODERATE LEVERAGE POLICIES AND GOVERNANCE, AND BELIEVE THESE TYPES OF CREDITS ANCHORING A DIVERSIFIED PORTFOLIO will provide better risk-adjusted returns than a purely investment-grade-focused strategy. Our credit thesis held up well during 2020, and not only did we experience very few dependent defaults, we actually saw many credit improvements. In our most recent investor presentation, we added a slide called Credits on the Move, where we provided examples of credit improvements across 15 tenants. As you'll see, several have received credit, recent credit upgrades, including At Home, BJ's, Tractor Supply, and PetSmart. A few of our larger private tenants became public, like Albertsons, GPM Investments, and Academy Sports. And a few are being consolidated through M&A to form larger companies, including Bass Pro Shops' acquisition of Sportsman's Warehouse and Callaway's acquisition of Topgolf. We're already seeing many of these credit improvements translating into cap rate compression, and these operators, along with several more across Spirit's diverse portfolio, are good examples of how our rigorous credit analysis informs investment decisions that add value. Another investor-day target was to further diversify our asset allocation by layering in a higher percentage of industrial assets. Given the nature of our industrial portfolio and the attractive acquisition opportunities in 2020, the strategy proved both timely and fortuitous. During the fourth quarter and the full year, 56.5% and 57.7% of our acquisitions, respectively, We're in the industrial asset category, and 14.9% of our portfolio is now comprised of this asset type compared to 9.5% one year ago. I should also note that we collected 100% of rents from our industrial tenants during the fourth quarter. Overall, Spirit's portfolio was put through the ultimate stress test in 2020, and I believe it proved itself. As you saw in our relief during the year, we sold 18 income-producing properties for $76.7 million in proceeds and at a blended cash cap rate of 5.89%. We also sold 20 vacant properties for $27.7 million, producing a net gain of $1.3 million, further demonstrating the granularity, liquidity, and institutional demand for our properties, even during periods of economic dislocation. We also achieved 99.6% occupancy across 1,860 properties, ending the year with only seven vacant assets. Our cash rent collections increased to 94% in the fourth quarter. And if you exclude movie theaters, the cash rent collection rate was 98%. In addition, we had no bankruptcies across our top 20 tenants since the COVID pandemic began. In fact, you would have to go to our 39th tenant, Studio Movie Grill, to find a bankruptcy in Spirit's portfolio. Bottom line, our portfolio strategy is working, our asset base is stable, and as we enter the new year, we see upside as the vaccine rollout gains momentum. Some important growth-oriented goals we laid out at Investor Day were to expand the acquisitions team, increase deal flow, and return to 600 million in rents by 2022. We added key members to the acquisitions team in April and May, and plan to add a couple more support personnel this year, expanding our bandwidth to source and process new business. We were one of the earlier institutional players to pivot back to growth in 2020. And as you can see in our most recent quarterly results, our acquisition pace has ramped up immediately. In the quarter, we added 99 properties across 15 transactions, at a cash yield of 6.7% and an economic yield of 7.45%. The weighted average lease term for our acquisitions was 15.2 years, which increased our total portfolio vault to 10.1 years. You may remember our original pre-COVID 2020 capital deployment guidance was $700 to $900 million. And even with pausing in the second quarter, we deployed $878 million. NEAR THE TOP END OF OUR PRECOVID GUIDANCE RANGE. WE ALSO GREW OUR ANNUALIZED BASE RENT TO 510 MILLION FROM 461 MILLION LAST YEAR, AN INCREASE OF 10.6%. DESPITE THE IMPACT OF COVID-19, WE STAY RIGHT ON PLAN TO MEET OUR GROWTH TARGETS. ANOTHER KEY GOAL WAS TO FURTHER INTEGRATE OUR ASSET MANAGEMENT AND ACQUISITION TEAMS. AT OUR INVESTOR DAY, WE TALKED EXTENSIVELY ABOUT HOW our teams work together to close acquisitions. I've always believed their complete integration is critical, not only for transacting efficiently, but for developing tenant relationships that ultimately result in new business. To that end, we recently completed an important realignment within the organization that has formally folded acquisitions and asset management teams together. Ken Heimlich moved from the head of asset management to chief investment officer, with both the acquisitions and asset management departments reporting to him. Danny Rosenberg, who previously moved from asset management to head acquisitions in 2018, will now head the asset management function under Ken's direction. These changes bring Danny's extensive tenant relationship building experience, gained through his multiple roles, back to the asset management team, And he will spearhead the initiative to develop business from existing tenants, bringing up Ken's time to focus more on new tenant underwriting and the deal pipeline. From a tenant relationship building standpoint, we have continued to make headway. The circumstances we faced in 2020 allowed us to deepen relationships meaningfully with tenants, which resulted in new acquisitions with Lifetime, At Home, and BJ's, to name a few. In fact, you can see from our recent disclosure, Lifetime is now our number one tenant. In 2018, we purchased five Lifetime locations from Blackstone. And since that time, we've cultivated a deep, direct relationship with Lifetime. Those efforts allowed us to add two more properties under a new direct sale leaseback during the fourth quarter. We believe Lifetime is a best-in-class health and fitness operator, and the resort-like health clubs are well located, and have a variety of offerings that make them an attractive destination for their customers, while providing stiff barriers to entry for their competitors. This transaction is an example of the type of relationship business we are expanding upon. A couple of other important goals that I will briefly touch on from our investor day were improving our credit rating and enhancing our scalability with technology tools. I will let Mike discuss our credit profile and progress in detail during his remarks. But I will just say that our balance sheet is stronger now than before the COVID-19 pandemic. As for the technology, that's something we have continued to refine and invest in every day. We have integrated power apps to our BI tools, which are used for every acquisition, and predictive analytics are becoming more developed and widely adopted across the company. OUR ACCOUNTING, LEGAL AND OPERATIONAL SYSTEMS ARE EXCELLENT AS DEMONSTRATED BY OUR ABILITY TO RELEASE EARNINGS SOONER AND PROVIDE SECTOR LEADING DISCLOSURES WHILE EXECUTING 238 DEFERRAL AGREEMENTS AND HITTING THE HIGH END OF OUR PRECOVID ACQUISITION GUIDANCE. ALL POSSIBLE BECAUSE OF THE CONTINUED EFFICIENCY GAINED FROM OUR TECHNOLOGY TOOLS. SO WE HAVE CONTINUED TO MOVE THE BALL FORWARD AND WE ACCOMPLISHED A LOT IN 2020. But what's left? For us, not surprisingly, it's simply the recovery of movie theaters, which represents 5.1% of our annualized base rent. While the industry remains challenged, it is worth noting that the liquidity and survivability of our operators has improved and may improve even further. Most of our regional operators have access to Main Street lending program, which provided five-year unsecured financing and we believe all of our regional operators are eligible for $10 million in grants under Save Our Stage relief plan approved by Congress in December. Outside of the regional operators, our national operators have all raised substantial amounts of capital, significantly improving their liquidity positions. Regarding our two operators that filed in 2020, Goodrich and Studio Movie Grill, There are some positive developments there as well. As we previously discussed, the four former Goodrich locations are now under a master lease and are being converted to a strong regional concept. Imagine. The tenant plans are to invest approximately $10 million into the renovation to those four theaters starting in the next few months. Our studio movie girl site in Georgia is being assumed into bankruptcy and we are in LOI negotiations with a new operator for the three former studio movie grill sites in California. While we only recognize 34.5% of movie theater rental revenues during the fourth quarter, by the end of 2021, we may have all of our operators within the movie theater segment paying rent. Regardless, I don't believe theaters are at zero for Spirit. They will come back It's just a question of when and how much. In the meantime, we are moving forward and growing the FFO, and the theaters will just have to catch up to us. When I first started thinking about where we are today versus where we were a year ago and the impact COVID had on our progress, I initially focused on our 2020 AFFO per share of $2.95, which is ironically the same pro forma number we guided to for 2019 at our investor day. So for a moment, I thought, wow, we just lost a year of progress. But when I walked through the rest of our goals and objectives, I realized that we didn't actually lose a year. Yes, our earnings took a hit, which I believe is just transient, but we achieved every other goal and benchmark that we set out to do and more. Today at Spirit, we have a proven portfolio with strong tenants and tested underwritings. A FULLY INTEGRATED ASSET MANAGEMENT AND ACQUISITIONS PLATFORM THAT IS PRODUCING RESULTS. DEEPER RELATIONSHIPS WITH OUR TENANT BASE. ENHANCED TOOLS TO SUPPORT OUR UNDERWRITING, FORECASTING, AND MONITORING. A PRISTINE BALANCE SHEET AND THE OPPORTUNITY TO SUBSTANTIALLY ACCELERATE EARNINGS GROWTH OVER AND ABOVE OUR EXPECTATIONS DEPENDING UPON THE SHAPE OF THE MOVIE THEATER INDUSTRY'S RECOVERY. I believe our team is best in class, and I hope we have demonstrated that over the past three years. Spirit is much stronger and a better positioned company than just a year ago, and our team, portfolio, and platform are in a great position to create the value we outlined at our Investor Day. I'll just end by saying, if you attended or listened to our Investor Day in 2019, and you like the spirit story and the value creation opportunity then, you should really like it now. With that, I'll turn it over to Mike. Mike?