Spirit Realty Capital, Inc.

Greetings. Welcome to the second quarter 2021 Spirit Realty Capital Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll now turn the conference over to Pierre Raval, Senior Vice President, Corporate Finance and Investor Relations. Pierre, you may now begin.

Thank you, operator, and thank you, everyone, for joining us for SPIRIT's second quarter 2021 earnings call. Presenting today's call will be President and Chief Executive Officer Jackson Hsieh 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 that differ materially from those currently anticipated due to a number of factors. I'd refer you to the safe harbor statement in yesterday's earnings release, supplemental information, and Q2 investor presentation, as well as our 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 yesterday's release and supplemental information furnished to the SEC under Form 8K. Yesterday's earnings release, supplemental information, and Q2 investor presentation are available in the investor relations page of the company's website. For prepared remarks, I'm now pleased to introduce Mr. Jackson Shea. Jackson?

Thank you, Pierre, and good morning, everyone. As you saw in our results released this morning, we had another solid quarter and have once again substantially raised our 2021 earnings guidance with AFFO per share now forecasted to increase by 11% at the midpoint of our range compared to last year. In addition, we're raising our net capital deployment guidance as our acquisition volumes and weighted average cap rates have accelerated beyond our initial expectations. Most importantly, today marks SPIRIT's return to dividend growth with a third-quarter dividend increase of 2 percent. While these results might come as a surprise to many, they're actually the product of the methodical execution of SPIRIT's medium-term plan laid out at our investor day and the adherence to one of our core values that is best summarized by the words, Do what you say. While COVID took our operating results on a brief detour, it has not kept us from reaching our target destination. Given what we have and are set to accomplish this year, I'm confident that we can reach the 2022 AFFO per share range originally laid out at our investor day in 2019. So let's talk about how we're going to make that happen. One factor contributing to our performance is the success of our tenants. Lost rent across our entire portfolio was less than 1% during the second quarter, and cash rent collections, excluding theaters, improved to 99%. At the end of the quarter, less than 1% of annual base rent was accounted for on a cash basis, and we received 100% of deferred rent repayments owed during the quarter. The vast majority of our tenants in industries most severely impacted by COVID, such as casual dining, early childhood education, entertainment and fitness, have fully recovered and in some cases are growing and gaining market share. Theaters are also on the path to recovery. with recent box office successes like F9 and Black Widow. As you can see on page seven of our latest investor presentation, our rent collections from theaters continue to improve, and we expect this trend to accelerate as percentage rent agreements benefit from the strong release calendar and the remaining deferral agreements begin to expire. Given the trajectory of theater revenues, and recent balance sheet enhancements that many of our theater tenants have completed, either through equity raises or by accessing government programs, none of our theaters are currently being accounted for on a cash basis. In addition, we have signed leases with new operators on all the former California Studio Movie Grill locations and Goodrich Theaters that will add approximately 5.6 million in ABR after a period of percentage rent. As I mentioned earlier, because of the COVID-driven rent abatements and deferrals, our earnings took a brief detour. While I would have preferred our growth trajectory to remain in a straight line, it is important to reiterate that our tenants and our earnings are back on track, and the permanent disruption to our rents will be minimal. As it stands today, our total permanent rent degradation due to COVID equates to only 1% of our annual base rents. Our integrated credit and research-driven underwriting focus on large, sophisticated operators with good real estate and implementation of technology tools have enabled us to construct a highly durable and diversified portfolio that has endured through substantial economic volatility while continually improving in credit quality and value. We believe the tail of the tape has demonstrated that our strategy provides outside yields with very low default risk. Or said another way, superior risk-adjusted returns for our investors. Another factor is our accretive capital recycling. As you have seen with our disposition cap rates, we have effectively taken advantage of tighter market pricing for certain asset classes to further reshape our portfolio accretively. Over the quarter, we have disposed of $61.5 million in income-producing properties at a weighted average cash cap rate of 4%. While previous quarter's dispositions consisted of retail assets such as C-stores, grocery, and drugstores, and industrial asset sale drove the bulk of our disposition proceeds in the second quarter. Now, given that we get a lot of questions about our industrial portfolio and its underlying value, I want to give some color around the characteristics of this particular industrial asset and the sale execution, which is also included in our latest investor presentation, along with some good information about our industrial holdings. This particular asset was a 286,000 square foot beverage manufacturing and warehouse facility for one of the nation's leading independent beverage companies located in New Jersey. We bought this site in late 2016, and the building was well located with rail access, contained freezer and cooler space, and had excess land for future expansion. We initially paid $27.4 million for the building. which represented an initial cash cap rate of 7.7%. After receiving 10.2 million in rents over a little less than five years, we sold it for $59.4 million, representing a 3.89% cash cap rate on today's rent, and realized an unlevered IRR of 25.1%. While we like the property, there was less than six years remaining on the lease, and given the pricing we were able to achieve, it made sense to lock in this gain and redeploy the proceeds into other attractive opportunities. Now, obviously, this was a great investment for Spirit, but I can also say that this property only ranked in the middle of our industrial portfolio. The quality of our industrial assets can also be seen in some of our recent lease renewals, As you can see in our latest investor materials, our 2023 lease expirations as a percentage of ABR dropped from 6.1 percent at the end of the last quarter to 5.1 percent at the end of the second quarter. That reduction was driven by two early industrial property renewals with FedEx and Ferguson Partners, both which are investment grade. For FedEx, we added five years to the lease with a 5% base rent increase. And for Ferguson, we added 10 years to the lease with attractive 1.5% escalators. These early renewals, extensions, and enhancements were achieved with very minor concessions, mainly small TI allowances, and are good examples of the value that can be created with properties that are mission critical to tenants in healthy industries. Overall, we're very pleased with our industrial exposure and have benefited from our concerted effort, which began two years ago, to increase our portfolio weighting in this sector. The final factor that has kept Spirit on track to do what we say is our acquisition platform, which, since we rebooted the company post-spinoff, has delivered consistent acquisition volumes and yields. even in an environment of increasing competition and compressing cap rates. In fact, over the past few months, several of you have asked me, what is Spirit's secret sauce when it comes to acquisitions? The secret sauce resides in our unique platform, which is based on highly disciplined and transparent processes that utilize data and research to deep dive into tenant credits, industries, and the residual real estate value for every acquisition we make. Our technology tools allow us to immediately see the impact of any acquisition we consider on the overall portfolio, including how that acquisition affects diversification across geography, industry, credit risk, and benchmark the improvement to our exposure in each industry and asset type. This approach affords us the ability to pursue a wider breadth of opportunities with better risk-adjusted returns while maintaining proactive control over the portfolio. The way we apply our capabilities can be seen in what we buy. You may notice that each quarter we acquire what I call middle-of-the-fairway opportunities. These are simply the bread-and-butter assets for net lease, like a BJ's Wholesale Club, a dollar store, or a Kohl's store. They're not particularly time-intensive to underwrite or price. Then there are the opportunities that are less obvious, often mispriced, and take more time to understand and underwrite, but provide better risk-adjusted returns if you get them right. Sometimes this can be moving early into a tenant or industry where you develop deep conviction before the market sees it, like at-home or lifetimes. or seeing the upward trajectory of a credit before it has become fully realized, as we showed you with our credits on the move page a few quarters ago, or digging into a more complex situation like we sometimes see in the industrial space. We found that allocating some bandwidth to dig into the less obvious opportunities allows us to generate real alpha. An example of a less obvious opportunity was the 83 million, eight property Shiloh acquisition we made in the first quarter. We were able to secure 20 year leases with attractive fixed annual escalators at an 8.2% cash cap rate. Shiloh had recently emerged from bankruptcy with a PE sponsor, Middle Ground Capital as the new owner. Now on the surface, one might look at this situation and think, auto industry just emerged from bankruptcy, PE backed, and just move on. But we dug in. We looked at the importance of lightweighting cars, Shiloh's primary business, for increasing the gas mileage and range of traditional and electric vehicles. We spent time with the sponsor, who's an experienced B2B owner with a focus on industrial and distribution sectors, and the management team, who were former Toyota executives. In digging into the financials, we saw that the business was doing better now than before COVID, but with much lower leverage. And the real estate was well located in attractive submarkets across the Midwest with low rents per square foot, and the operations taking place within the properties were strong cash flow generators. We realized that this was a great business with substantial upside that was not being recognized by the market. This thesis proved out much faster than we anticipated. Early in the second quarter, two large strategic buyers purchased pieces of Shiloh's business. As part of those transactions, we agreed to sign the leases associated with those business units to the new owners. The net result is that three properties representing 51.5% of Shiloh's rent, were assigned to Worthington Industries, a 66-year-old company with a BBB credit rating, and three properties representing 17.6% of Shiloh's rent were assigned to Aludine, a global lightweighting solutions and components supplier. With the assignment of these leases and the continued improvement in Shiloh's business, I believe the cap rate compression on this portfolio today would be plus or minus 300 basis points, a meaningful increase in the value of our investment. We continue to find a mix of opportunities this quarter that kept our acquisition yields relatively high, investing $284 million across 18 properties at a weighted average cash cap rate of 7.07%, economic cap rate of 7.84%, and with rent escalators of 1.8%, at a waltz of 13 years. From an industry perspective, we added home improvement, building materials, dollar stores, and home decor, with an asset-type breakdown of 18% retail, 67% industrial, and 15% office. In total, 78% of our acquisitions consisted of public credits with increases to existing public tenants such as Home Depot, At Home, Dollar General, and Family Dollar. We also added four new public credits to our tenant roster, including Tupperware, Bluelinks, L3Harris, and Builders FirstSource. The acquisition of the three Bluelinks distribution facilities was one of our larger acquisitions this quarter. For those of you unfamiliar with Bluelinks, it's a leading wholesale distributor of residential and commercial building products, which has been delivering record operating results supported by the tailwinds driving single-family housing, remodeling activity, and commodity prices of wood. We like the Blue Wings transaction from the start, given the favorable secular trends supporting housing, the tenants improving credit trajectory, and the quality of the distribution facilities, which are all located in submarkets with strong absorption and low vacancy. So again, like other quarters we have posted, many acquisitions are squarely in the fairway and some are more unique and less obvious. Given the competitive landscape, I expect that this trend will continue as we utilize our platform to dig deeper and uncover new opportunities. As I mentioned last quarter, one new area that we have focused on is lifestyle. benefiting from the secular tailwinds of people moving to the suburbs, prioritizing recreation, and enjoying more work flexibility. And we have evaluated many new opportunities, ranging from marinas to ski resorts to RV parks. I'm pleased to announce that we closed on one of these opportunities in July, purchasing 22 golf clubs for $231 million. As you can see on page 16 of our investor presentation, We highlighted the many reasons we are attracted to the golf industry, including the rationalization of courses, increased participation, and the most rounds played since 2007. Our investment is under a master lease agreement with 19 years remaining, and at an initial mid-seven cash cap rate and 9% economic cap rate, which we believe will result in a great risk-adjusted return for our shareholders. From a real estate perspective, these properties are in attractive established communities with a weighted five mile population of 162,000. With a price per acre of only 47,000 and a price per club of only 10.5 million, our basis in this investment is a fraction of replacement costs. In addition, our tenant is Club Corp, the largest owner operator of private golf lifestyle clubs in North America. They have over 400,000 members and more than 218 whole golf courses. As we think about this investment going forward and the multiple tailwinds supporting this industry, we believe this will serve as another example where our early move into an underappreciated asset class will lead to significant value appreciation over time. Before I turn it over to Mike to run through the numbers, I just want to say that I'm extremely proud of the Spirit team and all that we've accomplished together. This was an outstanding quarter. The portfolio is performing, our acquisitions platform is delivering, and we are back to dividend growth. While we're certainly aware that COVID is not yet behind us and we must be thoughtful and vigilant in every step we take, we will continue to execute on the core mission that I highlighted to investors at the onset of COVID, to work with our tenants, to ensure their success, and in turn, success for our shareholders. In short, to do what we say. And with that, I'll turn the call over to Mike.

Thanks, Jackson. Good morning. As Jackson mentioned, we had another great quarter. Rental income, excluding tenant reimbursement, was $160.5 million, an increase of $28.7 million compared to last quarter. This improvement was driven by a $12.8 million increase in cash rent and a $15.9 million increase in non-cash rent. The significant contributors to the cash rent increase were $4.9 million for net acquisitions and $7 million related to the recognition of rent previously deemed not probable for collection. The non-cash rent increase was driven primarily by $13.3 million in reversals of prior period allowances for bad debt. Our annualized base rent, or ABR, increased $17.3 million compared to last quarter, primarily driven by $16.5 million from net acquisitions. In June, we collected 98% of our base rent and 99% excluding movie theaters, with the 1% delta stemming from the remaining percentage of sales agreements in place with some of our theater operators and one lease modification that ended in June. As Jackson mentioned earlier, lost rent for the quarter was a little less than 1%. which is already below our normally forecasted range. Excluding the lease modification that expired in June, under which the theater operator paid full rent in July, lost rent for the quarter was only 20 basis points. In addition, we collected 100% of deferred rent payments owed in the quarter, representing 5.7 million. At quarter end, our deferred rent receivable balance increased 3.5 million to 22 million, with the increase being driven primarily by the reversal of prior period reserves. On the expense side, our property cost leakage improved to 1.9%, falling slightly below our budget of 2%. And G&A increased modestly to $13.5 million, driven mostly by professional service fees. In addition, interest expense declined as a result of extinguishing the CMBS notes in March and the remaining convertible notes in May. Now turn to the balance sheet. We extinguished the remaining $190.4 million of 3.75% convertible notes with cash when they came due, Excluding our revolving line of credit, we have no material debt maturities until 2026. We settled 4.1 million shares of common stock during the quarter under forward contracts, generating $145.5 million in equity proceeds, and ended the quarter with leverage of five times, or 4.9 times, inclusive of our remaining forward equity contracts outstanding as of quarter end. In July, we entered into additional forward contracts to issue 715,000 shares of common stock bringing our total unsettled forward contracts to 2.6 million shares with expected proceeds upon settlement of approximately 113 million. Now turning to guidance, we are raising our 2021 net capital deployment forecast from 700 to 900 million to 800 million to a billion. We are also increasing our AFO per share forecast from $3.06 to $3.14 to $3.24 to $3.30. implying year-over-year growth of 10% to 12%. Keep in mind that during the first half of 2021, we generated $1.62 in AFFO per share, which included $0.06 related to out-of-period earnings. For the remainder of 2021, our revised guidance does not include any additional prior year recoveries. The main drivers of our revised AFFO per share forecast in the back half of the year are the strength and performance of our portfolio, as best illustrated by our low-loss rent, continued climb in cash rent collections, and successful lease renewals, our continued success in finding high-quality acquisitions with attractive risk-adjusted returns and balance sheet enhancements. Finally, and most importantly, as we announced in our earnings release, we are raising the common dividend in the third quarter by 2%, equating to $2.55 per share on an annual basis. This marks a major step for Spirit in our journey to do what we said and puts us on the path to delivering consistent earnings and dividend growth for our shareholders. With that, I will turn the call back over to the operator to begin Q&A.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question today, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd 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, while we poll for questions. Once again, that's star one. Thank you. Our first question comes from the line of Linda Sy with Jefferies. Please proceed with your questions.

Hi. Good morning. Can you give us some more color on how percentage rent deals work? You know, how long do they usually last? And are there percentage rent breaks? Great points.

Okay. I mean, Mike, the percentage rent deals that we have really relate to our movie theater tenants. Some of those were set earlier when we were working on these deferrals. But generally, Mike, if you want to go through how they relate to flips.

Yeah, I mean, you know, our percentage earnings in place really relate primarily to some of our theater tenants, and those will burn off all by the end of this year. And basically, I mean, the way we set those was there was some amount of base rent that tenants were required to pay during the deferral period, and then they pay percentage rent based on, you know, a month in arrears of revenue, so it's a percentage of revenue that they earn. Any differential between, you know, what they pay and what the contractual base rent is gets added to deferred rent to the extent there's a shortfall to that base rent. If they end up earning in excess of the base rent, it goes to pay down that deferred rent. And that will continue through the rest of this year and then stop. But again, some of those have already burned off. I think we have another one burning off in July, another one burning off in December. And so that's when you look at our cash rent collections, a big driver of why we're not collecting 100% is really because those contractual agreements is not that tenants can't pay. It's just really the contractual agreements we put in place nine months ago, given what we saw at that time.

And Linda, on the theaters, it's the ranges on the percentage or 10 to 15% of revenues while they're in this period.

Got it. Thank you for that color. And then Jackson, you mentioned how the industrial sale in your portfolio this quarter was only deemed kind of middle of the road in terms of quality. How do you rank your industry portfolio? And I'm thinking back to that efficient frontier slide from your investor day.

Yeah, I mean, obviously we look at a lot of different factors. You know, we've talked about our property rankings, how the industry relates. The industrial scoring system is a little bit different than the rest of our portfolio. But what I would say is that, you know, a lot of the real estate that we have in our industrial portfolio is very well located. And it's got real criticality to the tenant. And so when you sort of look at, you know, without getting into the specificity of our asset, but we do review each one, we've got some really great properties that we've been fortunate enough to acquire. So when we made the decision to sell this particular asset, you know, it really started with some reverse inquiry that we got from the market, kind of made us look at it. And, you know, we made the decision that, you know, we, you know, there were still upside left in this property. You know, my guess is some of the new buyer may look to potentially expand it in the future. But for what we were looking at, what we think we can deploy, we think we can get, you know, significant returns over our cost of capital. And this is just another way form of raising capital in our minds. And also to just proof of concept. I mean, we've been getting a lot of questions about what we've been buying. And this was done, this was one of the first deals that I was a part of on the acquisition when I joined the company back in September 2016. We acquired this deal in the fall of 2016. So we've been kind of methodically moving through adding properties like this. And like I said, it's in the middle of our portfolio, so we weren't cherry-picking anything.

Our next question is from the line of Elvis Rodriguez with Bank of America.

Please proceed with your question. Good morning and thanks for taking the question. On the golf club investment, can you just share more information on the opportunity to increase your exposure to this category in the future with this particular tenant and if not other tenants?

Yeah, great. Well, first, you know, this is overall part of this lifestyle thesis that we talked about. So, you know, you might see us do some other things outside of golf related to what I'd call lifestyle segment opportunities. But coming back to golf, I think what you're going to see us do, it's very consistent to how we approach investments. You know, obviously it starts with the industry. You know, we like lifestyle. We like golf. Operator is critical. Right. So obviously, we like this operator to the extent we can do more. I'm sure we would do more with them. It was mutual interest. And then the quality of real estate plays a part of it. So not just similar to other, you know, whether they be restaurants or sea stores or gyms, you know, we really focus on those three important criteria. And it's not going to be any different than when we look at lifestyle or golf opportunities going forward. What just got us tremendously excited about this was, you know, if you look at Callaway's equipment sales, you know, in the first quarter globally, I mean, they crushed it. You know, U.S. sales, you know, quarter over quarter, Q1 over 2021 versus 2020, I mean, they were up 70%, over 70%. So, it's just kind of an increasingly addressable market, and that's one of the kind of byproducts of COVID. There's the Just apply demand. You saw the slide, so I don't want to talk too much about it, but we will do more for sure.

Great. And then on the theater business, what's your strategy and thoughts to either increase or decrease exposure to that, you know, segment in the future? And did I hear you correctly on none of your tenants are currently on a cash basis? Thanks.

Yeah, that's right. So one thing that's different about our theater portfolio versus maybe some of our peers, you know, we have a mix of the big three public theater operators, but then we also have a portfolio, what I'll call very strong regional theater tenants that, you know, if you think about the SVOG program as it relates to that regional group, I mean, they've recapped all their balance sheets. I mean, it's just an amazing opportunity And for them and for us, candidly. As Mike said, you know, we'll be through all these percentage rent agreements through the end of this year. And so I think what we'll do, first priority is, you know, we want to get through this year. We want to make sure that, you know, the Studio Movie Grill and Goodrich portfolios are ramped up and stabilized. And I think we'll kind of look at where the theater business is at that point. I mean, we're not making any decisions to sell or buy theaters at this point. It's really just focused on getting them restabilized, making sure that obviously the rents come back in. And so, you know, we're not putting a lot of energy on looking at new theater acquisitions. I can tell you that.

Great. Thank you.

The next question is from the line of Ronald Camden with Morgan Stanley. Please proceed with your questions.

Hey, just sticking with the golf deal, maybe can you just provide a little bit more color? How does, you know, when you're going into a deal like that, how the properties are selected, you know, what the opportunities to maybe get more down the line and any sort of color on sort of the membership trends, any sort of thing that's interesting on that deal to highlight, we'd be curious. Thanks.

Yeah. Well, you know, fortunately being, you know, in partnership with one of the largest operators in the country, we do get very detailed financial information from them. And unfortunately, we're under NDA with that information. So we're really precluded to share any of that with all of you. But I mean, the one thing I would tell you is that their coverage ratios, even through COVID, were north of two times of the master lease. And I think one of the things that is going to be really important for us as we go forward is that these golf courses are not just golf. This portfolio has over 140 tennis courts, pickleball courts within the portfolio. There's a tremendous amount of food and beverage and corporate opportunities that go through these P&Ls. And the way people are going to re-engage out there in the future, we've seen this with Lifetime Fitness and some of the other tennis we have, People are going to just conduct more business and recreation at these facilities. It's not just playing rounds of golf. And so that really attracted us to this opportunity, especially given how well Club Corp is doing. They have a program for juniors called Crush It. And I think they've really harnessed on something that's going to be quite impressive as people change their habits and they do a great job on marketing, full memberships, social memberships, corporate memberships, and we just love the basis. I love the fact, to be honest with you, I love the fact that lenders don't like to lend on this business. I hope it stays like that, but we can get more. But there was a stigma around golf for a long time, but if you look at some of the sheets that we put in, whether it be the supply-demand dynamics, on golf courses per capita, number of golf courses, the number of rounds. We love it. But we're going to be really selective about the operator, really selective about the real estate. You know, is it an infill location? You know, the basis on this land alone is crazy, you know, so in terms of just protecting the downside. So, yeah, we will definitely do more in this area.

Got it. Super helpful. And then just going back to sort of the industrial conversation, I think the slide deck is excellent and very helpful. So two-thirds of the acquisitions are industrial, and I think the initial cap rates are 7.07. Maybe can you talk about sort of what was the cap rate or ballpark for just the industrial specifically, and maybe some commentary in terms of competition and how those are trending and how you guys are able to find such great deals.

Yeah, I mean, in terms of my comments, you know, it's really a, you know, our approach is very collaborative and team oriented. I would not describe us as kind of a flow shop as it relates to when we look at industrial. You know, we really spend a lot of time. And that's one of the things why I know sometimes people say, why can't you do more? in terms of number of transactions, but we do take a lot of time and attention on the front end when reviewing industries and tenants and credit and real estate as it relates to making investments here. But I would say that I'd rather not get into the specifics of actual cap rates in that grouping, but you can just do the math, 67%, so it's probably going to be in the high sixes, right? If you just did that kind of rough math on what we acquired. in the industrial, but it is getting more competitive. I've just, um, I would just, you've heard it from other calls. I've seen it real time last couple of quarters, but I still feel like we can find those diamonds in the rough. Um, whether, you know, I'd love to get more Shiloh's like we talked about on my prepared comments, uh, blue links, you know, they, they had an awesome second quarter. I mean, their sales are up 87% in the second quarter of this year. Gross margins are up 20%. You know, EBITDA went from adjusted EBITDA went from 31 million last year in the quarter to 166 million. Debt EBITDA in the second quarter is down to one and a half times. So when we were looking at this transaction, looking at historical financials, I mean, it was a little rough, right? It was more challenging from the eye, but when we dug into it, we're like, Hey, this is, this is kind of a really unique secular trend right now for this company. And, um, It made a lot of sense for us, and we're really happy with it. But that being said, it's super competitive, and we are out there slugging it out there with everybody else. But I feel very comfortable in our pipeline. I feel really good about our processes and the people that we have in place executing, and I think we're in a great position right now. So I feel very grateful to be in this position.

Helpful. Thank you. Congrats on the quarter.

Thanks. Our next question comes from the line of Harsh Himnani with Green Street. Please proceed with your question.

Thank you. I want to follow up on your thesis on lifestyle assets. You mentioned your interest in marinas, maybe ski resorts. And this cost club acquisitions was one of your larger ones. So I want to ask, will the deal size on these lifestyle assets be generally larger? And did that affect how many of those you might do in a given year?

I don't think we're, I wouldn't say size constrained us. I wouldn't take away that our lifestyle transactions will be large. You know, when we looked at this opportunity, I can tell you honestly, it started off with we thought we might only do half of it. And as we kind of dug into it, I'm like, well, no, I think we need to do all of it because it's a great investment, great risk-adjusted investment. And, yeah, it pops up number one in terms of next quarter. It's going to be pretty high up in our tenant list. It's obviously in 3Q. But, you know, you don't get these opportunities, and it's such a unique investment where we felt the risk was not being represented in sort of what we could get the investment done at. And that, I think, was based on, like I said, historical impressions about the business. And with COVID, you can't be looking at it. You can look at history, but you kind of got to look real time and project in the future, just given changing habits. So, yeah, I would just say I won't lock ourselves into whether we won't do a big deal like that again. I hope what that'll show is we're not constrained by the size of an investment as long as we have what we believe is the right thesis around the industry operator in real estate.

Oh, that's helpful. And then just to follow up on that, the opportunity in this segment, they seem very idiosyncratic. Could you provide some I guess, bands around the yields you would want to deploy capital at in the lifestyle segment?

Yeah, they are different. You know, and the range, I'd say, I don't know, I mean, the way we look at investments generally, you know, we've targeted a six and a half to seven percent cap rate range for investments for the year. And so, at any given time, you know, we'll be inside of that, under it, over it, right, as we look through it. What we don't do is sort of create hard line, it has to be this kind of cap rate for this type of property. I mean, we sort of know what we're solving for, and we try to calibrate, are we getting paid appropriately for the risk in this particular investment? That's what it's all kind of constantly, we're asking ourselves that question. So, I wouldn't do it justice by giving you a range of cap rates on RV parks and marinas and golf courses because they're very dependent on location, operator. But suffice it to say, we're constantly evaluating that 6.5% to 7% range vis-a-vis the tenant, the credit, the real estate, the lease term. All those things factor in. I would describe it as a mosaic. that are based on these guiding principles that we have. And we kind of use our collective wisdom within our investment committee on how to approach those. And it seems to be working, right?

Steve, thank you.

Next question is from the line of John Masosha with Leidenberg-Fellman. Please proceed with your question. Good morning.

So I'll be going back to the... the feeder portfolio, you know, if you kind of look at now, we're pretty much close to almost 100% rent collection from them. How are you thinking about coverages? And I guess maybe, you know, as you look at your portfolio of feeders specifically, where would you kind of need to see box office numbers get relative to maybe some of the pre-pandemic years to get coverages back to a comfortable level, if you will?

I mean, I think, you know, the distribution cycle is so different right now with streaming and some of these other factors. I'm not sure I would sort of benchmark it against pre-pandemic, just given the way. You know, this business obviously is tricky because, you know, you're reliant on release schedules from studios. You've got streaming now happening. And people clearly like to go into the theater, right? So you have that happening. We're not looking at coverages as a target. We know that the theaters will improve and the slate looks really good. The balance sheets of all these operators have enough time to get through it. But I think it's a little bit too early to tell. I mean, we are getting some feedback from some of the smaller regional operators that they're looking at potential

opportunities to grow and so i think um you know we'll we're evaluating it very carefully but i don't know we're not necessarily trying to establish pre-pandemic coverage levels with that with this portfolio okay and i'm trying to remember it and apologies if it's been posted in a presentation um how much of kind of the feeder portfolio if we think about it pre-pandemic is now on kind of a new rent schedule because of you know credit events obviously goodrich and to do a movie grill, but I mean, how much today is on kind of a pre-pandemic rent level when they're paying 100% and how much has been kind of renegotiated since the pandemic, roughly speaking?

Mike, do you want to try to take that one?

Yeah. I mean, how do I do that? I mean, really, it's really just the theaters that we retended that went to a different rent schedule. I mean, we had, I think there was one other theater that existing theater crosshold portfolio that we, we did one modification to, um, where we did a modification on portfolio. We got additional term. And as part of that, I think one theater, we did a slight, um, small rent adjustment. Um, so very minimal. Um, so really we're just talking about the, uh, you know, the other, the theaters, the studio movie grills, the, uh, the Goodrich that had changed. And, and I can also, so I can also tell you that, you know, all of our public, uh, theater tents are back to paying full rent. So, I mean, everything's really getting back online very quickly. And, you know, across our regional theaters with the SVOG grants, I mean, they've been able to recap those, our balance sheets and our rent collections today are really a function of the agreements we struck. Knowing what we know today with the recovery and how well people's balance sheets look, you know, we wouldn't strike those agreements today. I mean, those were done nine months ago. But the health we're seeing in our theater tenants is very, very good. And, you know, we think they're going to get back on track very quickly.

Okay. And I know you've discussed kind of the industrial portfolio a little bit already, but what is the appetite for more dispositions given some of the pricing you're seeing out there? I mean, obviously, if you could repeat the New Jersey deal, it would seem like it's a very attractive way to recycle capital, and maybe why not continue to kind of work through some of those maybe more mature industrial assets to continue funding growth in other segments.

Well, look, I mean, I think, you know, look, at the end of the day, we are a REIT. You know, we're not an opportunity fund, obviously, even though we generated really high IR on that sale. I mean, to be honest, if we could sell the entire industrial portfolio, it would be massively accretive to us, but that's not what we're going to do. I mean, we're at about 18% industrial right now as a percentage of ABR, and that's only going to get larger as we continue to get better at this business and uncover really interesting opportunities. Look, the industrial buying and selling market is pretty wide. People have very different ways of approaching acquisitions. Some are core, some are multi-tenant, some are just buying duration, some are just buying investment grade. I think that what makes us unique is I think we put the appropriate balance on industry, credit, operator, real estate, and I think we do spend time kind of trying to get below the surface of things where there might be an opportunity. So, yeah, look, I don't expect us to be selling a lot of industrial at this point, to be honest with you. We're trying to grow this part of the business, as well as, you know, our retail. So, yeah, I wouldn't expect you to see that much more dispos on the industrial side.

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

Thank you. At this time, we've reached the end of the question and answer session. I'll now turn the call back to Jackson Tate for closing remarks.

Thank you, operator. Well, I just want to make sure just a couple of key messages that hopefully people will come away from our call is, first and foremost, I think we have proven that our quality of portfolio is very solid, just given where we were a year ago to where we are today. I won't remind you of all the metrics. We are completely back on track as it relates to acquisitions, deploying capital, raising capital. We're excited about the ability to start raising dividends again. And the team is performing extremely well, and our pipeline is continuing to build. So excited about that and look forward to talking to you in the future. Thank you.

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