Spirit Realty Capital, Inc.

Thank you, Operator, and thank you, everyone, for joining us for SPIRITS.

first quarter 2021 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 risk and uncertainties, that can cause actual results to differ materially from those currently anticipated due to a number of factors. I would refer you to the Safe Harbor Statement in yesterday's earnings release, supplemental information, and Q1 investor presentation, 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 and non-GAAP financial measures to most directly comparable GAAP measures are included in yesterday's release and supplemental information versus the SEC under Form 8K. Yesterday's earnings release, supplemental information, and Q1 investor presentation are available on the investor relations page of the company's website. For our prepared remarks, I'm now pleased to introduce Mr. Jackson Shea. Jackson?

Thank you, Pierre, and good morning, everyone. On our last call, I revisited the goals we laid out for Spirit at our investor day in December of 2019. I talked about our portfolio strategy, acquisition targets, balance sheet, team integration and technology, and the company was the strongest it has ever been. I also noted that the last pieces of the puzzle were for our hardest hit tenants to recover and to continue layering in creative acquisitions so we could accelerate

our earnings growth.

I'm happy to say that those last pieces are falling into place, and I'm more positive in my outlook today than I was just a few months ago. As you saw in our earnings release last night, we are significantly increasing our 2021 AFFO per share guidance, which is primarily driven by stronger tenant performance and better spreads on our relationship-driven acquisitions. Before I talk about SPIRIT's results, I want to highlight how the net lease model is proving to be a clear winner in the current economy. Net lease properties are granular and are generally located outside of CBD locations. Because the properties are single tenant and fully controlled by the operator, tenants can adjust their operations and use of their space to adapt with changing circumstances and consumer demand. COVID was the ultimate stress test to the net lease model and showcased its durability. In addition, the transaction market is very deep, and there is tremendous diversity of opportunities across industries, asset types, and tenants. This dynamic provides net lease investors, like Spirit, ample opportunities to acquire real estate that is critical to an operator's profit generation under long-term leases. For Spirit in particular, the impact of the vaccine rollout, government stimulus, and robust jobs recovery has resulted in meaningful credit improvements across many of our tenant industries. Many of our public tenants continue to access the capital markets and produce great results, while our private operators are also experiencing improved performance, especially across lifestyle and experiential categories like gyms, restaurants, and entertainment, as customers are returning with pent-up demand. During the quarter, our lost rent, which we define as base rent not probable of collection, fell to 40 basis points, excluding movie theaters, a 60 basis point improvement compared to the fourth quarter. Our rent collection has also steadily increased to 96% for the first quarter, and we expect further improvement throughout the year, particularly as theaters recover. Another important metric is occupancy, which stands at 99.5%. and hasn't dropped below 99% since the spinoff of SMTA. A key factor for Spirit's portfolio resiliency has been our focus on large, sophisticated operators. A great example of one of these tenants is GPM Investments, a top tenant for Spirit who we hosted at our latest town hall. For those of you unfamiliar with GPM, It is the seventh largest convenience store chain in the U.S., with approximately 3,000 stores operating under various brands, and they just went public last year. Like many large convenience store operators, they derived their income from fuel and merchandise. In the last three quarters of 2020, GPM delivered over 4% merchandise same-store sales growth. where they derive a majority of their profit. And that strength has continued into the first quarter of 2021, where the growth rate remains above 4%. As a sophisticated operator in a highly fragmented industry, they're using technology to better understand how merchandise preferences differ across regions. Furthermore, they are addressing the e-vehicle trend through a JV, with an Israeli EV charging company, allowing them to be better positioned in the future regardless of what type of vehicles people drive. We're seeing many examples like GPM across our tenant base, and we will continue to partner with these types of operators as a core part of our portfolio strategy. As I mentioned earlier, one of the last puzzle pieces is the recovery of our hardest hit tenants. And no industry in our portfolio has been hit harder than theaters. However, as you can see on page nine of our investor presentation, our movie theater portfolio representing 4.4% of ABR is showing signs of improvement. First, our public theater tenants representing 8.7 million of ABR have raised over 5.6 billion in public capital and are in a much better position to meet their obligations. Second, our private theater tenants, representing 14 million of ABR, are beneficiaries of various government programs, including the CARES Act, Main Street lending, and the Shuttered Venue Operators Grant, which we believe will add a significant amount of liquidity to all our regional operators. Finally, as highlighted by box office trends, we are seeing consumers go back to the movies with theaters open and new content coming to market. The recent releases of Godzilla vs. Kong and Mortal Kombat are salient indicators, and even though they were released simultaneously via streaming, the box office did very well. One last note to point out on our theaters. Our Q1 ABR does not reflect the new leases in place on our four former Goodrich theaters, as those theaters are under renovation and will not open until later this year. Upon reopening, they will be subject to percentage rent arrangements for an interim ramp-up period. In addition, we are in the process of retenting the three former studio movie grill locations in Southern California, which were rejected in bankruptcy during the first quarter, and we'll update you once those agreements are finalized. Overall, the combination of improving balance sheets, better box office performance, and successful re-tenanting has made us more positive on theaters. While movie theaters were a headwind throughout 2020, As we move into 2021 and beyond, theaters could become a meaningful source of earnings acceleration. Turning to acquisitions, this quarter we acquired 25 properties for $190.5 million, with an initial cash capitalization rate of 7.57%, an economic yield of 8.44%, and a weighted average lease term of 17.7 years. Of the deals we closed in the first quarter, 70% were sourced through existing relationships. The industrial assets we bought were a mix of distribution centers and light manufacturing that are mission critical for the tenants. The retail acquisitions added to existing relationships with Lifetime Fitness BJ's wholesale, Kohl's, and other existing tenants within our auto service, dollar store, and entertainment portfolios. The second quarter is off to a good start. Quarter to date, we have closed on 166 million of investments, with an initial cash capitalization rate of 7%, resulting in year-to-date acquisitions of 356 million with an initial cash capitalization rate of 7.3 percent and weighted average lease term of 15 years. The investment market remains competitive, and we're certainly seeing cap rate compression in many pockets, yet we continue to find deals that make sense for our underwriting with spreads that are attractive. In fact, over the last 12 months, we have acquired over 850 million of assets. with a weighted average lease term of over 15 years, a blended cash capitalization rate of 7%, and a blended economic yield of 7.75%. The mix over the last 12 months has been evenly split between retail and industrial assets. We believe our early move into industrial assets has generated substantial alpha for our investors. as cap rate compression for these property types has been meaningful. Our team is acutely focused on finding assets that meet our criteria for industry strength, tenant credit worthiness, and good real estate. And our pipeline remains healthy. Before I turn it over to Mike, I will just repeat that the company is in the best position I've seen during my entire tenure at Spirit. Our portfolio is performing well. we have cemented the processes and procedures we talked about extensively at our investor day, and we have deep relationships with our tenants. Finally, as you saw last week, we issued a press release in recognition of Earth Day, stating that we are developing a standalone ESG report aligned with investor favorite disclosures, SASB, and TCFD, and we will release this report before our 2022 annual shareholder meeting. We are pleased to be one of the earlier adopters within the net lease space on this front, and we look forward to updating you on our ESG efforts as we go through the year. With that, I'll pass it to Mike.

Thanks, Jackson. As you can see by our results, it was a solid quarter. Pays cash rent grew $7.3 million, driven by net acquisitions and better tenant performance. Acquisitions contributed $5.7 million of this growth, and our lost rent, which is a reduction of base rent, was only 2.2%, or 120 basis point improvement over the last quarter. More importantly, our lost rent excluding theaters fell to only 0.4% compared to 1% last quarter, which is better than our historically forecasted range. Our rent collections also improved, rising to 96% during the first quarter compared to 94% last quarter. In addition to rent collections, we received $4.2 million in deferred rent repayments during the quarter, which is close to 100% of what was owed. At quarter end, our accounts receivable balance related to deferred rent was $18.5 million, which excludes $6.5 million of deferred rent payables deemed not probable for collection. On the expense side, property cost leakage remains stable at approximately 2%, which is in line with our medium-term forecast. Our G&A, while seasonally higher in the first quarter, was still 3.3% lower compared to the same period last year. As I mentioned during our last update, we do expect G&A to normalize closer to 2019 levels throughout the rest of this year. Finally, our interest expense rose modestly in the first quarter as we accessed the debt markets with a fairly large raise, carrying over $260 million in cash a quarter in. The cash will be used to fund acquisitions and the upcoming convertible debt maturity. Now turning to the balance sheet, we remained active in the capital markets. During the first quarter, we entered into forward contracts to issue an additional 1.4 million shares of common stock at a weighted average price of $41.13 per share. As of March 31st, we have 5.5 million shares available under forward contracts. We issued an aggregate 800 million in senior unsecured notes in early March, comprised of a 450 million seven-year and 350 million 11-year issuance. bearing coupons of 2.1 and 2.7% respectively. It is worth highlighting that our unsecured borrowing costs continue to meaningfully improve, with our spread to 10-year treasuries tightening over 150 basis points since our first 2016 issuance. We used a portion of the proceeds to repay $207 million of CMBS loans, which bore interest at a weighted average rate of 5.46%, and repay our revolver, which had been previously drawn in January, to repay the outstanding $178 million term loan. We ended the quarter with $1.3 billion in liquidity, which leaves us well-positioned to fund our acquisition pipeline and retire our remaining $190 million, 3.75% convertible notes due on the 15th. This is by far the cleanest balance sheet in Spirit's history, with 99.8% of our debt unsecured, leaving only two properties encumbered by mortgages. And after the repayment of the convertible notes, Our next debt maturity will not occur until the second half of 2026. Now, turning to guidance, for 2021, we are maintaining our net capital deployment forecast of 700 to 900 million, which includes acquisitions and revenue-producing capital expenditures net positions. However, we have meaningfully increased our AFFO per share forecast from $3 to $3.10 to $3.06 to $3.14. applying year-over-year growth of 4% to 6%. Given the large increase, I do want to spend a few minutes walking through the critical drivers of our outlook change. The first driver results from our tenants most negatively impacted by COVID recovering faster than expected. As we discussed, loss during the first quarter, excluding theaters, was only 0.4%, significantly ahead of our expectations. Due to our first quarter results and the improvements we are seeing across our tenant base, We have reduced our assumptions for lost rent for the remainder of the year. We have not changed our assumptions for a modest recovery in the back half of 2021 for theaters. However as illustrated on page 9 of our investor presentation cash collections from our theater tenants did improve during the first quarter. That improvement has continued into April. So our actual and forecasted revenue contributions from our theater tenant have risen in the front half of the year. Finally And despite the competitiveness in the acquisition market, we have achieved higher acquisition cap rates than we initially expected, resulting in improved spreads. So the combination of improving tenant health, including the near-term improvements in our theater tenants, coupled with higher cap rates on acquisitions, are the primary drivers of our revised AFO per share forecast. In conclusion, I'll echo Jackson's comments that our company is in the best position it has ever been in to meet our objectives, which should result in accelerating earnings growth for our investors. And we look forward to providing updates throughout the year. With that, I will open it up for questions.

And at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your lines in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please. Our first question is from Wes Galladay with Bayard. Please proceed with your question.

Hey, good morning, guys. Congrats on all the stuff on the balance sheet. I do agree it's in very nice shape now. A quick question for you on the industrial assets. You mentioned a potential cap rate compression. Have you seen that yet? And can you give us an update on where you're buying industrial right now?

Hey, good morning, Wes. This is Jackson. Without getting into too much specifics, yeah, obviously we're finding attractive cap rates, depending on the type of credit, type of industry, in a range of, I'll call it low six cap range to mid-sevenths. I can tell you that a lot of the assets that we've, some of the assets that we have acquired in the last couple years, we've actually gotten reverse inquiry. just reverse inbounds on potential to sell those assets. And they've been meaningfully inside of where we've purchased in that range.

Gotcha. And do you get repeat business from those type of customers? I know you can get it with, I mean, I see you doing it with some of your traditional retail focused in this, but is that a source of business for you on industrial?

Actually, yes. You know, there's The Shiloh opportunity was really from an existing private equity relationship that we had done on another platform investment with them last year. You know, MacPapers, we've had follow-on investments. That was the paper deal we did in the early 2020, where we've done additional follow-on opportunities. So, yeah, it's a big part of what we're trying to do, trying to take that skill in retail and overlay it into, into the industrial area because a lot of these companies are still growing and looking for capital.

Got it. And then maybe one quick one for you on the main event acquisition. It looks like you got an extra unit, but your exposure might have went down. Did anything go on there?

Ken, I'll let you pick that up. No, not really.

I think that's more a higher base rent. We are working with main event on a new unit of theirs that we're I'm very happy to work with them on, again, growing our relationship with the tenants that we know and we like.

Got it. Thanks, everyone.

And our next question is from Greg McGinnis with GoShipBank. Please proceed with your question.

Hey, good morning. I just want to dig into the wider cap rates that you're achieving than initially expected. I know you mentioned relationship-driven transactions are helping to widen those cap rates. Are there any other factors that are pushing those up? And then how much of a benefit do you think the relationships are able to provide, and has there been a change in that contribution over the last year?

Okay, thanks, Craig. I'll take it. Look, relationships help. They give you kind of insight into what it potentially takes to win. But tenants are pretty sophisticated. They're going to get the best deal out there. But having a relationship is better than being literally outside the room. So I'd always argue that relationships are important. In terms of cap rate, I talked about that Shiloh transaction. Really interesting. It's a company that focuses on lightweight, reducing weight. in cars. That's a big factor for EV and for fuel efficiency. So we'd love that part of the business. That's what this company does. Case in point, as part of the underwriting for this transaction, we closed on eight properties with this company, long-term leases. And post first quarter, they were able to assign two of those units to another business. So it just shows you that the reason they can do that is the rents were set at a very, very reasonable level. It's good real estate, good buildings. It shows you that there's fundamental demand for this type of property from users. As part of our underwriting there, we like the credit, we like the basis, like what they did. The opportunity set was really attractive for us. I would say the difference that helps us is that we spend a lot of time on the particular industry credit as well as real estate. And that really, that combination helps us really, I think, get conviction around certain opportunities. And once we do, we really dig into it.

So is it a shift in terms of the types of assets that you're looking to acquire this year, which is why you're expecting a wider cap rate range then?

Well, you know, our cap rate ranges, the guidance I think was out there at six and a half to seven percent. So the answer would be no. But and I think we did a good job securing. I think we were early on coming back into the market. So that helped us quite a bit. But I think, you know, I think that the market is competitive from a cap rate standpoint, as you've heard from other peers. And so we're going to continue to kind of do what we do. We think we could be being very selective and we'll find good opportunities.

Thanks. And then just one more from me. In light of the recent varied acquisition, just wondering how you're thinking about larger portfolio acquisitions at this time. And if you're comfortable with the second part of this question, maybe touch on your willingness to combine with another public platform.

Well, on the portfolio question, we always have been looking at portfolios since I've joined this company. And as I've said, when you look at a portfolio, There's always good property, middle property, and there's always usually some challenging properties, i.e. the dogs. And so the challenge for us is, you know, we're able to do new sale leasebacks with existing customers at attractive cap rates on our lease term, annual bumps. We do the underwriting. And you know what? That's hard work, but I think we're doing a great job generating high-quality assets, you know, for our shareholders. So anytime we look at a portfolio, we've got to measure it against that. And so to date, either the portfolio didn't match up or the pricing didn't sort of make sense. As it relates to the combination question, when I took over as CEO back in 2017, I get that question almost every quarter. And the answer is the same. We will always look at those opportunities. But today, to be honest with you, there's so much upside in our business in order to kind of just get back to a market multiple, we believe that's the best for our shareholders at this point. So, yeah, look, companies, think about this. If we had sold back in 2017, that would have been sort of a mistake, right? The company is far better today, balance sheet, assets, the people, the platform. So we're just going to kind of keep going. We think we've got a good path here to keep beating and raising.

All right. Thank you, Jackson. Appreciate it.

Our next question is from Chris Lucas with Capital One Securities. Please proceed with your question.

Good morning, guys. Nice quarter. I guess let me start with this, Mike. Just on the forward equity, stock prices run well past the price that you had executed on. Are you required to execute on those forwards or is there an out for you given the significant appreciation above that forward price level at this point?

Yeah, I know. We're contractually obligated to execute on those contracts in some form, right? I mean, we could unwind them, but we'd have to then settle them. And actually, that net settlement does affect our earnings. So, you know, there was some dilution in Q1 related to those unsold forward equity contracts because our stock price has run up ahead of where we struck those. And that's the treasury stock method. That gap in valuation is what impacts your dilution on those unsettled shares. So we could unwind them. We could not take all the shares in, but there would be a cost. I mean, we are obligated to essentially take those in at some point.

So not likely worth the effort, right?

Yeah. I mean, you end up in the same place, honestly. So whether you take them all in or you net settle them, you end up economically you're in the same place.

Okay. And then Jackson, there's news out this morning on At Home that they have agreed to be acquired by a private equity shop. I guess bigger picture question, given the environment that a number of the public retailers have experienced over the last year, i.e. improved balance sheet, improved leverage metrics, et cetera. Are there things in your lease contracts that provide some insulation from potential losses you know, private equity transaction that typically, you know, uses a lot more leverage in the pro forma company?

Yeah, I would say the simple answer is no. I mean, that's always something that is a possibility, right? So one of the things that we try to focus on is if you look at our ABR today, it's over 52% of public companies and, you know, around 25%, 27% are PE-backed. Um, specifically on at home, that's a great company. You know, we, we loved the company when we first met them as a public company. And at that time there were rumors about Coles potentially acquiring them. That was the chatter that was before investor day. Um, one of the reasons why we were so interested in them and that opportunity in that company was they just had a great business model and this is pre COVID. Right. Um, the model that what they were offering customers was very, very unique. They were able to really reduce G&A in order to deliver that kind of warehouse discount home decor opportunity to customers. And we just thought, look, whether it's public or private, this is a winner, right? We love the concept. We love the management team. And, you know, obviously they had a misstep on their earnings and through COVID they've recovered. So it's not surprising to me that someone has sort of said, hey, I want to take your I want to execute your business plan faster because that, to me, if I were sitting there, as a public company, they can kind of roll out opportunities at a certain pace. You know, with a PE-backed company, you know, they may be able to accelerate that. So my guess is we'll continue to look at them, whether they're public or private, because we like the business concept. We really like the team. And obviously we'll be focused on what the credit looks like. Credit today looks great. pre-buyout and if there is a presumed room of buyout, obviously there might be more leverage in the future, but don't you question, we don't have gates on leverage in our typical lease, so.

And then last question for me, I think subsequent to the quarter end, you acquired a headquarters campus, just kind of curious as to what was unique or interesting about that relative to sort of your more traditional sort of industrial retail focus.

Yeah, so, I mean, I think we talked about it. You know, we bought, if you recall, a couple quarters ago, a B of A office building in Hunt Valley, Maryland. You know, we really liked it. It has very unique characteristics. And this Tupperware opportunity sort of is very similar. You know, Tupperware obviously is a public company. They generate, you know, north of just shy of $2 billion in revenues. They're a public company. They had really good earnings, as you can see. They're public sources. I won't mention their earnings, but we like the industry because it's related to food prep and food storage. As you know, we've been looking at food manufacturing opportunities as well, so we like that segment. But I think what attracted to us on this opportunity was there was a change in management about 13 months ago. We had a new leadership team there. We also really like the real estate opportunity. This is in Ken's former neighborhood in Orlando, so he knows the asset well. It's a campus opportunity. It's located right on a rail system. It's on rail system, so its proximity to transportation is excellent. You know, we like the fact that it's in a very strong sub-market within that Orlando market, and it's got unique building features related to what Tupperware does. There's some research and development facilities in there. And it's also got a very good rent per square foot, so long-term lease. So it had a lot of characteristics that made us feel like it's a very sticky opportunity with a good credit, in the right industry, going the right direction. And most importantly, that if we had to re-tenant it, we felt confident about that, given the sub-market. So we will continue to look at those opportunities very selectively. Like I said, professional office is only 2.5 percent of our ABR, so it's not going to be a significant portion of our overall ABR, but we're very selective, and we'll continue to look at those opportunities.

Thank you for your responses.

Thanks. Our next question is from Brent Dills with UBS. Please proceed with your question.

Hey, guys. Just a couple on movie theaters. Do you know what percent of your theater base was open as of the end of 1Q and just what percent is expected to reopen in 2Q as restrictions get lifted?

Well, Ted, you can take it. The regals are not open yet.

Yeah, we're about 85% of all of our theaters are open today, and that will be 100% by the end of this month.

And, Brad, one thing on the movie theaters, I think if you listen to my comments, we talked about we're getting more positive about what's happening there. And if you listen very carefully to Mike's comments on his earnings new guidance, you know, there is a lot of meaningful upside to our earnings picture if we're able to have success within that portfolio. You know, we love the fact that our public companies, as you know, raised a bunch of money, like $5.5 billion, right, for leverage and deleveraging. We love the fact that our regional operators have all received CARES money and PPP, and they're in the process of getting those SPA grants, which are really important for them. So if you just look at our theaters and just think about the rent from our cash-based movie tenants, and we haven't made any adjustments to those, that's about $10 million of incremental run rate earnings that can come in from that group. We're not putting in the forecast because, like I said, we're still very cautiously optimistic about that. Then you look at the seven movie theaters, the four former Goodrich theaters that are being converted to Imagine, and the three former studio movie grills assets, which we're negotiating a lease with a new operator on. When those properties come online, you know, if you were to use rough justice, it's probably like $5.5 million of incremental revenue, right, that that is not really in our forecast. So when I think about this opportunity, we talk about earnings acceleration. You know, it could be like 15 million of run rate revenue, i.e. earnings coming through the P&L. That's not going to happen this year, but it's kind of more of a 22 and beyond or form of impact. We love the fact that if you look at 2019 box office revenues, it was just north of 11 billion in 2019, as you know. And if you kind of factor in the slate of movies coming out, you know, you could estimate $4 to $5 billion in potential box office revenues between now and the year end. So, look, we're cautiously optimistic here. And, look, if this comes into being, we'll continue to beat and raise as we go forward. So the April numbers are a lot better than March for our theaters. And so that's the real booster rocket. in my opinion, for our earnings beyond the normal, we're doing everything great, acquisitions, operations, et cetera.

Okay. Thanks, Jackson. You headed off a lot of follow-up questions I had related to that. So the only other thing I just want to clarify, I think you cited 96% of rents were collected in the first quarter. Is the 4% uncollected? Is that pretty much all movie theater at this point, just to clarify? Pretty much.

There's a couple other things in there, but yeah. the large majority is movie theaters. And that's why, you know, the collections are 98% ex-movie theaters. So we have a couple other things in there.

Okay. All right. That's it for me, guys. Thank you.

Our next question is from Hendu St. Just with Mizuho. Please proceed with your question.

Hey, good morning. Thank you for taking my question. Jackson, can you talk a bit about the fitness acquisitions in the first quarter here? It looks like about 35 million. What was the cap rate? How did you underwrite those? And maybe you could talk more broadly about how your view on some of the COVID challenge and experiential sectors like theaters and gyms may be changing here as we shift our view to a world and economy post-vaccine and with the economy on an upward trajectory. And what your appetite for more or adding exposure to those types of sectors could be. Thanks.

Thanks, Randall. So, you know, we bought another Lifetime Fitness opportunity in Arizona in the first quarter. You know, Lifetime is interesting. You know, they're really a country club, you know, and they're almost, they're really, I mentioned in my comments, it's a lifestyle asset. It's not really experiential retail. I mean, people really use those facilities, not just for exercise, but there's daycare, indoor tennis, there's dining facilities, They have like work, you know, there's workplaces within those facilities. So they're very much destination oriented, not just go run on a Peloton or exercise on a Peloton machine. And so that's, it's a really intriguing concept for us, given what we've learned out of COVID. So we're evaluating actually, you know, other lifestyle opportunities today. I think they look really interesting given changes in people's work-life balance, need to get outside, need to do things that are not just going inside into endorphin-type facilities. So that was, I would say, one of the leading factors in us pursuing that lifetime opportunity. I won't get into cap rates. We don't really like to disclose that on specific units. We did close on a main event in the first quarter. We love that concept. They're doing a great job. Look, you know there's a lot of pent-up The balance sheets of people in the United States are quite good with all the stimulus. So there's a lot of pent-up demand for people who want to get out and do things, whether that's experiential retail. So that would be the main event. But that lifetime is, you know, we love that country club type opportunity.

It's stickier.

It's more captive around different, you know, neighborhoods. So I think that's an area we're going to continue to evaluate and and potentially look to add more in that segment.

Got it, got it. I think like you're drawing a bit of a distinction here between the lifetime and the more conventional fitness. I just want to make sure I'm reading that correctly. So anything near... Yeah, yeah.

Yeah, because, you know, those lifetime facilities dollar-wise are much more significant than a typical gym. I mean, you're talking about, you know, much more expensive build-out, much larger facilities, you know, $30 to $40 million dollars. per unit versus, you know, a Vasa gym, which is, which is going to be sub 10 million. So, and it's a different business model. It's really a, so, but we still like regional gyms. We're not getting away from that, but the lifetime was kind of an eye opener given how it's performed, how it's, how their membership has rebounded so quickly and what they're trying to offer. And especially with, more potential work from remote work flexibility. You know, that's going to help those kinds of businesses, we believe, going forward.

Got it, got it. Thanks. And I understand you don't want to get into specific cap rates so much, but maybe you could talk about the first quarter cap rates in general. I was a bit surprised by the 7.6, I think. Overall, maybe you could talk about what skewed that up, especially because you seem to require a lot of mission-critical manufacturing and industrial this quarter. Thanks.

I don't know. We looked at a lot of stuff to get those cap rates and those opportunities. Look, if we wanted to do more, the cap rate would be lower. I'll just tell you that. There's no secret sauce, but it's just being really selective. It's picking the right operators. And we look at, you know, there's, I don't, have a score sheet of billions of things that we turn over. We look at a lot of things. But we're very fortunate to have buttoned down these assets earlier. My guess is if I were to kind of look out for the balance of the year, it's definitely getting more competitive. So I would assume that our cap rates will kind of continue to shift downwards on a quarter-over-quarter basis to kind of blend into that 6.5% to 7% weighted average cap rate by year-end. I think one of the things that we're able to do, we haven't talked a lot about this process. We have a very holistic way of doing acquisitions. Credits involved very early on. Research is involved very early on. Whether it emanates from our asset management team or from our acquisitions team, we're able to size it up very quickly. That's you know, we're not just buying investment grade off the run assets. That's not our business strategy. So again, work a little harder, turn over more stones. But when you dig in and find those opportunities, sometimes there's some, you know, when you really spend the time and get under that buyer interview call where we can talk to management, find out what's going on, find out what's motivating. You know, I was on one with Ken and the team yesterday, a smaller deal. You learn a phenomenal about a lot about what's going on, what's driving their business And, you know, that's one of the reasons why in our monthly town hall meetings, I bring a tenant in every month. We've done that since COVID started. And my guess is we'll continue to do that going forward. You know, we learn so much about these trends. And I think that we're small enough of a team where we can be very, you know, very flexible, you know, and move very quickly. So once we learn this information. And look, we started off with this recent acquisition I talked about in the second quarter. So we're off to a good start. So our pipeline is really solid. So we're excited about it.

Got it. Got it. Thank you.

Our next question is from Ronald Camden with Morgan Stanley. Please proceed with your question. Great.

Congrats on the great quarter. Just a couple quick ones from me. One, taking the tenant's help, clearly feeling a lot better today than three to six months ago. Can you just remind us what the percentage of tenants on cash basis and what were the assumptions for collections and how did that change and the impact on the guidance? So what was the collections assumptions before and did that change with the updated guidance and what did it provide? Hopefully that made sense.

Mike? Yeah, you want me to take that? Sure. Yeah, go ahead. Yeah, so about 5% of our tenants are on a cash basis right now. We collected quite a bit of that in the first quarter, and that's why our loss rate was so low. Last quarter, I talked about our general assumption on loss rate reserves is about 1% going into the year. We added 50 basis points to that this year just because of COVID and uncertainty around that. our lost rent, and that was ex-theaters, so excluding theaters. So ex-theaters, we were at 0.4% on lost rent in the first quarter. And we've basically taken our assumption down to the 1% kind of normal assumption for the rest of the year. And all that results in, you know, about $0.03 to pick up an AFO per share, right? So if you kind of think midpoint to midpoint, you know, that's $0.03. We also talked about theaters, and we have that page in on, we put in our investor deck. If you look at that, since Q4 to Q1, we've picked up $800,000 of additional cash rent collection from theater tenants that are on a cash basis. That was more than we expected. We did forecast some modest improvement, but that was more than we expected. And you can see we're trending in April even more than that. And so I talked about that in my remarks about the front half of the year, we've also now forecasted additional rents. cash rent collection from, you know, cash basis theater tenants, right? We haven't changed the back half of the year assumption on that, but that's, that's picking up another, you know, call it pending half. And then, you know, you have the improved spreads and acquisitions on what we've done year to date, right? So we're running over a seven cap on our year to date acquisitions. You know, even though that we expect that to moderate and maybe tighten up later in the year, you know, you get a lot more AFO contribution from the acquisitions in the front part of the year, obviously then in the back part of the year. So, That's adding some ASFO as well. So that's kind of the change in the forecast assumptions generally.

Great. And then just switching back to industrial, you know, obviously there's a net leak deal announced in the market. I guess my question is, number one, when you think about manufacturing versus distribution, is there a material difference? spread in those cap rates? Number two, who are you sort of competing against when you're buying assets? And then number three, when you're thinking about the difference between IG and non-IG, do you think that spread has gotten too wide and it's a really fat spread right now? And we can see that, and we can see that compress.

Okay. I'll try to start with that, and maybe, Ken, you can follow it if I miss something. But On the first question, first of all, for the manufacturing that we focus on, it's light manufacturing. So it's bending, assembly. So the cap rate differential between what I'll call a run-of-the-mill industrial distribution versus light manufacturing, you know, I think it's like probably I'd say 100 to 150 basis points. You know, heavy manufacturing. where there's real smelting, real heavy-duty manufacturing, which are very specific kinds of facilities for those tenants, that's not a focus area for us. The real estate is not fungible enough, very specific generally. There, I think the cap rate range you could see could be in the 150 to 225 basis point premium over what I'll call a a straight up industrial type facility. You know, agnostic for the credit, right? But just generally. You know, in terms of who we're competing against, it's a lot of people. It's private equity firms, small private equity shops, other public competitors, obviously. So I think for us, where we have to decide early on and how we kind of manage our pipeline through prescreens is First of all, if it's an existing customer, it's a huge priority. We will move the organization to do potential follow-on business with either an existing customer or a PE firm or owner of existing business. So that's first and foremost. But as it relates to just competing in what I'll call the brokerage market, you have to be very efficient with your time. And so I think our screening process is very good. We get to the essence of Is this something we like? Is this something we can be competitive on? What do we think the buyer universe looks like here? Does it make sense for our timing and the weighting of what we're looking at? So is the seller really a seller? You know, sometimes you spend a lot of time and people don't transact, right? So there's a lot of things that go into that calculus. So we don't spend a tremendous amount of time wasting it. So that's an area that we look at. And then finally on the spreads, I'm assuming you're talking about, like, industrial. I'm not sure if it was industrial or retail, but... Yeah, so industrial, which is interesting, is, you know, if you looked at a core multi-tenant industrial facility, I mean, those are going at super aggressive cap rates, right? I mean, you could be in a low force. And in some cases, you know, if you looked at a long-term 15-year lease on a distribution center, you might not have the same bumps. You actually don't get as much credit as you think you might, right? So, look, if you took a FedEx facility, right, 15-year FedEx on a great distribution center, those are really attractive, but you actually won't see as much spread between that opportunity and, say, you know, a core industrial distribution center facility in the I would say the Inland Empire facility might have more cap rate compression, lower cap rate, because you've got the ability to increase rents. And so it's kind of a bifurcated market in that area. And so we typically will look at the more long-dated opportunities. We don't necessarily focus on investment grade. It's really, if you were to take away what we do, I think we really try to identify industries and credits that move upward, you know, i.e. credits on the move. So that's an area where we think differentiates us, where we can see an opportunity of a credit change. And we think if we do our homework right, we'll see cap rate compression in that asset. And we've been able to do that a number of different times. So I think that's one area that we have an advantage.

Great. That's super helpful. The movie theater slide and your commentary were very helpful and actually answer all my questions, so I'll spare you. Congrats on a great quarter.

Thanks. Thanks. These guys worked really hard on that page.

Our next question is from Linda Jai with Jefferies. Please proceed with your question.

Hi. Just to follow up on industrial, is there crossover in terms of the manufacturing also already being tenants in your portfolio on the retail side?

Not really. I don't think, Ken. I would say maybe, no, not really. I mean, Party City, we don't have any retail facilities for Party City, but that's kind of a balloon manufacturing and gigantic distribution center. So, but no.

Thanks. And then just to follow up on collections, so 96% rent collections in one queue. What was April rent collections like?

Yeah, we don't have those numbers tallied yet because we do have about 4% of our tenants that are subject to percentage rent agreements, and we don't tally those. They're going to be based off of their April revenues, right? There's going to be a component of their rent. We don't get that information until really middle of May. So, you know, we expect things to continue to incrementally trend higher. Just for example, if you look at that page nine, the movie theater slide, that improvement you see there in April in the cash collections from the cash theater tenants, you know, a lot of that's driven off percentage rent. And that is actually driven off of March revenues. So that doesn't have, you know, the big releases and the impact of the, you know, the box office revenue increase that we've seen Kong, Godzilla, you know, Mortal Kombat. And so, you know, we'd expect things to continue to trend higher because movie theater tenants are, you know, a big component of that gap in rent collections.

Thanks.

Our next question is from Harsh Hanadi with Green Street. Please proceed with your question.

Thank you. Jackson, you mentioned in the past that you're more interested in underwriting public company tenants on the off chance that you do underwrite tenants owned by private equity businesses. Is there anything additional in terms of underwriting that you look at over there to maybe hedge against the additional risk that you see?

Yeah, so I mean, we really look at the history of the sponsor. That's really important. Is this a PE sponsor that has made investment, for instance, in this industry? Or is it the first time? That's important to understand. Because if they have history, they generally sort of know what to look for. They know how to add value. They know how to bring management teams into the business. the real estate underwriting becomes much more critical when we're doing something with a, well, it's always important, but it's also much more important as it relates to a private company because, you know, the credit can change overnight given, you know, if they do a lever recap or something like that. So, so setting the rents is really important, making sure the property scores are good the way we do it in our business, all really important. And I guess, What I'd also say is, you know, when you get a relationship with a good private equity sponsor, you know, private equity sponsors, you know, they do a great job. I mean, they're willing to really push management teams, be aggressive on new initiatives. They're probably more aggressive than a public company can do it. And so what we look at is their track record. It's really important for us because, you know, like at the end of the day, they may not be there 10 years from now. And so that's important. But the other thing is, is that what we found is when we can perform for someone, and like MacPapers is a great example, they needed to close that acquisition at the end of the first quarter of 2020. And that was right when COVID was sort of starting to really flare up. You could see it. And we closed for that group. And it was important. And that's given us the opportunity to do more with them because people want predictable counterparties. that do what you say. So yeah, look, it's an important component, but we look at it very carefully. Also the industry too. Because look, at the end of the day for us, Harsh, it's really simple math. We make an investment. We want the tenant to stay there for the length of the lease term. If they can hit their extension options, it's a home run for us. That's the math for us. So we have to be able to underwrite that real estate, the credit, the industry for the long term. And we've had a lot of success in that. So that's the business model.

Okay. And then just following up on your comments on office, given that, you know, you're sort of looking into options on office, have you looked at the combined varied and realty income spun off office portfolio? Is there anything you found interesting in that? And would you be a marginal buyer of those assets?

No. No and no. We have a look at it, and we wouldn't. And that's not to say – the reason is that, like you said, we have very specific criteria in our office lens, and scale is not important for us. It's really finding that right. If the office building has low-market leases with a really strong tenant or is a sub-market that's super tight So, I mean, first of all, we have to have a lot more weighted average lease maturity to it. So, yeah, that situation is not for us. I'm sure other folks will look at it, but that's not really for us.

Great. Thank you.

And our next question is from Joshua Dennewine with Bank of America. Please proceed with your question.

Yes. Hey, Jackson. Paul as well.

Let me just follow up on at home. Can some going private change your view on how you'll grow with the tenant at all?

We'll certainly want to understand what the new owner, assuming they're new, you know, like this is public company, so it's not done, right? So who knows? Right. Yeah, sure. I mean, we'll want to know what the business plan is, who the new owner is, what the management team is doing. Like I said, one of the nice things about that business model is theirs is an opportunity to capture market share, right? It's a great business. The idea is they want to roll out more units. There's clearly customer demand for it. So, yeah, we'll certainly be open to it. Assuming that transaction moves forward.

Got it. That's it. All my other questions have been answered. Thanks, Jackson.

And also, just as a quick reminder, if you have any questions, you may press star one on your telephone keypad. Our next question is from John Masaka with Lattenberg-Dalman. Please proceed with your question.

Good morning. Hi, John. Just wanted to clarify. How's it going? I just wanted to clarify something from the prepared remarks. Are you just viewing the upside from feeders coming from the in-place portfolio as those move more fully back into the rent-paying bucket? Or was that also an indication that feeders might be interesting targets for acquisitions as the industry potentially starts to stabilize?

It was really the former. You know, we think there's a lot of we want to get that. We want to stabilize our current kind of base within the movie theater segment. That's that 10 million I refer to, which is the rent from our movie tenants are basically on a cash basis, the incremental rent. And then we have those seven vacant properties that are being occupied. Right. Which that's a good sign. People want to occupy our movie theaters because they're good locations, good real estate. And we think there's a five and a half-ish kind of area incremental rent coming from those when they're open and finally up and running. So that's the high priority right now. It's not buying new movie theaters. It's really capturing because that's the best thing we can do for shareholders. Capture that, call it 15 million of potential incremental rent slash earnings coming to the P&L. Very easy. We keep up the weight. The factors look really good right now, today. given economy's reopening and the movie slate looks great. People are willing to go into these theaters, as you know. You can look all over other places like China. We've seen success there. So it's starting to happen. But at the end of the day, look, the studios release these movies. So that's the part that's a little trickier for us to underwrite. But the thing that gives us comfort is the operators have the time and they have the capital to get through it, we think. point so we're cautiously optimistic about it but in kind of the intermediate term no real interest i guess on your end to add to that exposure yeah that's a that's a good point yeah that's a fair point yeah we're not we're not looking to increase uh investment in the movie theater segment at this point okay and then i know you already gave some color on the shiloh transaction but

Maybe could you provide some information on the underwriting and the credit there? I'm just thinking of a context of some of the issues that business ran into when it was a public company before the reorg and the new ownership came in that you've transacted with.

Yeah, I mean, well, first and foremost, we love the business, right? We think it's reducing weight in cars and metal materials. I mean, they're materially agnostic. But that's a major area as we continue to get more fuel efficiency and EV vehicles. The lighter the vehicle, the better efficiency it has. But then you need to have the safety and strength. So it's an industry that we think is very important. These guys provide materials to really support the auto industry, so the OEMs. So they focus on frame structure. So we like the industry. Start with that. they came out of bankruptcy with basically very little debt, you know, two times debt to EBITDA. The sponsor was very experienced. They came in and put a new management team in place. You know, the revenues are significant, you know, north of 500 million for sure. We liked the basis in the assets and the rent structure that we put in place. And again, Like I said, they're primarily in the Midwest where these facilities are located. But as part of the underwriting, we shifted two of those units out of the Shiloh credit into other users with the same lease term, basically. That was part of the transaction. So you'll see them drop out of our top 20. And I guess the last thing is they're doing better on a pro forma basis. today coming out of the reorg than we had initially on the road. So, like I said, it's the right industry. It's the right real estate and a very good sponsor.

Okay. I appreciate the color, and that is it for me. Thank you all very much.

And we have reached the end of the question and answer session, and I'll now turn the call over to Jackson Hayes for closing remarks.

Thank you very much. I'd like to just have a shout out to two of our directors, Shelly Rosenberg and Tom Sankville, who are not renominating for a new tenure on our board. They've done a tremendous service to the company and they're great partners with me as we've gotten through a lot since I've been at this company. So I want to thank them for their service. We're excited about our three new directors coming on, potentially, that precede Michelle and Tom. And so that will be exciting for us at AGM. But I also want to thank our people. The flywheel is moving. Our portfolio is great. And we think our future is bright. So appreciate all your support. Thanks.

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