U.S. markets open in 5 hours 51 minutes
  • S&P Futures

    -0.25 (-0.01%)
  • Dow Futures

    -11.00 (-0.04%)
  • Nasdaq Futures

    +25.75 (+0.21%)
  • Russell 2000 Futures

    -1.10 (-0.06%)
  • Crude Oil

    +0.03 (+0.07%)
  • Gold

    +12.20 (+0.67%)
  • Silver

    +0.22 (+0.91%)

    +0.0010 (+0.08%)
  • 10-Yr Bond

    0.0000 (0.00%)
  • Vix

    +0.39 (+1.88%)

    +0.0023 (+0.17%)

    -0.1210 (-0.12%)

    +463.46 (+2.45%)
  • CMC Crypto 200

    +15.64 (+4.28%)
  • FTSE 100

    +9.19 (+0.14%)
  • Nikkei 225

    +8.39 (+0.03%)

Edited Transcript of SRC.N earnings conference call or presentation 2-Nov-20 10:00pm GMT

·48 min read

Q3 2020 Spirit Realty Capital Inc Earnings Call SCOTTSDALE Dec 1, 2020 (Thomson StreetEvents) -- Edited Transcript of Spirit Realty Capital Inc earnings conference call or presentation Monday, November 2, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jackson Hsieh Spirit Realty Capital, Inc. - President, CEO & Director * Kenneth Heimlich Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management * Michael C. Hughes Spirit Realty Capital, Inc. - Executive VP & CFO * Pierre Revol Spirit Realty Capital, Inc. - SVP of Corporate Finance & IR ================================================================================ Conference Call Participants ================================================================================ * Anthony Paolone JPMorgan Chase & Co, Research Division - Senior Analyst * Brent Ryan Dilts UBS Investment Bank, Research Division - Equity Research Analyst of Large cap banks and brokers, asset managers and trust banks * Haendel Emmanuel St. Juste Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst * John James Massocca Ladenburg Thalmann & Co. Inc., Research Division - Associate * Ki Bin Kim Truist Securities, Inc., Research Division - MD * Linda Tsai Jefferies LLC, Research Division - Equity Analyst * Nathan Daniel Crossett Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, and welcome to Third Quarter 2020 Spirit Realty Capital Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to your host, Pierre Revol, Vice President of Strategic Planning and Investor Relations. Thank you. You may begin. -------------------------------------------------------------------------------- Pierre Revol, Spirit Realty Capital, Inc. - SVP of Corporate Finance & IR [2] -------------------------------------------------------------------------------- Thank you, operator, and thank you, everyone, for joining us this afternoon. Presenting on today's call will be President and Chief Executive Officer, Mr. Jackson Hsieh; and Chief Financial Officer, Mr. Michael Hughes. Ken Heimlich, Head of Asset Management, will be available for Q&A. Before we get started, I would like to remind everyone that this presentation contains forward-looking statements. Although the company believes these forward-looking statements are based upon reasonable assumptions, they are subject to known and unknown risks and uncertainties, and that can cause actual results to differ materially from those currently anticipated due to a number of factors. I'd refer you to the safe harbor statement in today's earnings release, supplemental information, Q3 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 of non-GAAP financial measures to most directly comparable GAAP measures are included in today's release and supplemental information furnished to the SEC under Form 8-K. Today's earnings release, supplemental information and Q3 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 Hsieh. Jackson? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thanks, Peter, and welcome, everyone, to our third quarter call. Before we get into the details of the quarter, I want to share an update I recently received from one of our tenants. A couple of weeks ago, we hosted a casual dining operator at our virtual all town employee meeting. We own 13 of their units, representing a little over 20% of their operations. At the initial onset of the pandemic, they focused on addressing the immediate concerns, protecting their employees and guests, conserving capital and strengthening their liquidity position. But within a short time, they pivoted to offense. They refocused on developing their omnichannel presence, increasing their online growth by 150% year-over-year, rationalizing their menu offerings and optimizing the use of their store footprint. Because they made good tactical and strategic decisions over the past few months, not only will they survive the pandemic, but likely thrive and gain market share. And Spirit will participate in their growth. I shared this story with you because it is emblematic of how many of our operators are adapting their business model to the changing landscape and how their focus, in most cases, has shifted from survival back to success. Like our tenant, we choose the opportunity and have shifted back to offense. During the third quarter, we purchased 214.3 million of assets across 18 properties, with an initial cash yield of 7% and an economic yield of 7.7%. The acquisitions this quarter included a mix of existing and new tenants, with a weighted average lease term of 14.8 years and annual escalators of 1.2%. Based on rent, approximately 38.1% of the acquisitions are publicly-listed tenants and 19.8% are rated investment grade. The asset types were weighted 58.4% retail and 41.6% industrial, which we think is a healthy mix for our intermediate term growth. New tenants acquired during the quarter include Off Lease Only, a Florida used car dealership, and Shutterfly, a market leader in personalized products. Off Lease Only is the largest volume independent used car dealership in the U.S., selling thousands of cars in its 4 Florida locations and around the world through their website. We bought these high-performing locations under one master lease, and they are in the top quartile of our auto dealership portfolio across all our metrics, including our property rankings. The Shutterfly property is a build-to-suit, mission-critical light manufacturing asset that serves as their only facility in the South Central region of the United States. This building is brand-new and sits in a very healthy and growing submarket within the DFW Metroplex. We secured both of these opportunities after other institutional buyers pulled back on their capital commitments during the second quarter, while our liquidity and balance sheet position allowed us to step in and buy these great assets with strong tenants at yields that are accretive to our shareholders. The existing tenant acquisitions included At Home, Mac Paper, FedEx and Dollar General properties. All performed exceptionally well during 2020 and this moved FedEx into our Top 20. Overall, we're finding attractive opportunities that fit our underwriting and risk return framework. And as a result, we are raising our 2020 capital deployment guidance by $100 million. Shifting to the portfolio. The health of our tenant base continues to improve. Our cash collections for the third quarter were 90%, and October is at 93%. If you exclude movie theaters, which I'll discuss in a few minutes, our cash collections were 94% for the third quarter and 98% in October. It is worth noting, our properties are primarily located in suburban and rural markets, not in CBDs, which have been more acutely impacted by COVID-19, and our operators are predominantly large and sophisticated. Approximately 85% of our tenants generate annual revenues in excess of $100 million and half for public companies. In addition, we made significant progress on both 2020 and 2021 expirations. Since the beginning of the year, we have renewed 17 leases expiring in 2020 and excluding one movie theater property, we renewed the remaining 16 leases at a recapture of 101% of prior rents. For our 2021 expirations, we renewed 25 leases with a 97% recapture of prior rents, reducing the rent expiring in 2021 from $27 million at the beginning of the year to $18.8 million. We anticipate the remaining 2021 maturities will follow the same trend we have seen thus far and the percentage expiring will continue to drop each quarter. There are 4 industries that I am constantly asked about: casual dining, gyms, entertainment and movie theaters. So I'd like to take a few moments to update you on how these tenants are performing within our portfolio. Our casual dining concepts are fully open with indoor dining. Our 39 tenants are geographically spread across 32 states with no tenants in California or New York City. While there are many challenged casual dining operators out there and no doubt many will close, our tenants are doing very well. In fact, we believe our tenants will ultimately be winners and pick up additional market share. Our 17 gym operators are recovering quickly and seeing attendance and new memberships surpass their expectations. And similar to casual dining, rent collections have improved from 21.8% in the second quarter to 95.1% in October. The only major hurdle we have seen for our gym operators has been local or state government regulations, preventing them from opening in limited cases. When they are open, people are choosing to go to the gym. Our entertainment assets are a mix of outdoor and indoor venues. The large majority are seeing healthy consumer demand. And their financial performance is above target for the units that are fully open and operating. As you can see in the materials we released this afternoon, we experienced a 71.8% increase in cash rent collection in this segment for October, and we remain bullish about the near-term entertainment outlook. Movie theaters is the only segment within our portfolio that is still being materially impacted by government closures. The continued shutdown of theaters in key markets like New York City and L.A. has resulted in studios holding back content, with most major releases now pushed back until the spring of 2021. This, of course, has made it challenging for theaters that are open to attract moviegoers and generate sufficient revenues. To be clear, we do not believe this is a demand issue. We believe people will go back to the movies when content is available, but the key markets need to open and the content needs to be released, which is outside the control of theater operators. As such, we have structured most of our rent deferral arrangement -- agreements with our movie theater tenants as a percentage of sales arrangements, giving them time to conserve capital until content begins flowing. I would note that our 5.4% rent exposure in theaters is comprised of 2.7% regional and 2.7% national operators. And we have seen better financial performance from our regional operators this year, primarily driven by more nimble operations and better pre-COVID balance sheets. On a positive note, we entered into a new lease this quarter with a strong regional operator for the 4 former Goodrich theaters. The new long-term master lease has a healthy stabilized yield after a period of percentage rent, and the operator plans to invest significant capital to modernize these theaters. Similar to our casual dining tenants, the winners in the space will ultimately benefit from gaining market share, and we believe we have winning operators and real estate. I'll close out by saying that I'm very optimistic about the future of Spirit and our path back to earnings growth. Over the last 6 months, we have gotten incredibly close to our tenants, further invested in our technology platform, and we have developed a healthy pipeline of opportunities to pursue. These actions along with raising $1.2 billion of capital, have put us in a great position to execute our plan and set us up for success in 2021. As we move forward, we will continue to execute our strategy of delivering operational excellence, steady and high-quality acquisitions with a focus on organic rent growth, while maintaining a conservative balance sheet. We believe this approach will result in predictable and steady earnings and dividend growth for years to come. With that, I'll pass it off to Mike for his remarks. -------------------------------------------------------------------------------- Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [4] -------------------------------------------------------------------------------- Thanks, Jackson. As we've done all the year, in addition to our regular reporting materials, we've provided an investor presentation that contains incremental detail and disclosures about the health of our portfolio. This presentation is available in the Investor Relations section of our website, and we hope you will find the additional information helpful. There were a lot of positive developments during the third quarter. We saw 98% of our tenants reopened and the continued ramp-up of their operations. Our cash rent collections follow the same trend, currently standing at 93.3% in October, with collections of 100% from our top 20 tenants and 96.5% from public tenants. In addition to improving rent collections, we collected $3.2 million in deferred rent payments, representing 100% of what was owed during the quarter. The combination of improving rent and deferral collections increased total cash collections by $21.4 million compared to the second quarter, providing operating cash after dividends of $9.1 million. The repayment of deferred rent with a weighted average payback period of 13.3 months, will provide additional cash flow for the next several quarters, helping to support our cash flow available for acquisitions and dividends. The third quarter also marked a return to growth, with ABR increasing $13.7 million to $483.3 million, primarily driven by $15.1 million from acquisitions, slightly offset by accretive dispositions. Our unreimbursed property costs also improved to 2% of rental revenues, inclusive of $840,000 in prior quarter property tax recoveries compared to 4.1% in the second quarter. We also made strides in simplifying our income statement. Our 2 remaining mortgage loan receivables totaling $29 million were repaid in full. These loans were secured by casual dining and QSR portfolios. And the repayment, per the original terms of the loans, speak to the strength in the underlying operators and the recovery of their businesses. We also completed the final separation of our management arrangement with SMTA in September. As a result of these 2 milestones, our future earnings will be completely driven by rental revenues. As Jackson discussed, the one area of opportunity within our portfolio continues to be movie theaters. Now last quarter, I talked to you in length about ASC Topic 842 and the relief provided by the FASB through new accounting guidance. And one of the key considerations to recognizing deferred rent and revenues is that there is a minimum 75% probability that a tenant would repay the deferred rent as agreed. Given the elongated recovery we forecast for theater operators, we're now recognizing approximately 70% of our theater revenues on a cash basis. So the 30% of theater revenues, which are being recognized in earnings, approximately 40% are being paid in cash. Keep in mind that our analysis and decision to recognize theater rents on a cash basis only pertains to the probability of full deferred rent collection, not to the ultimate recovery of the tenant or the industry. We still believe that once theaters have content to provide, they will begin their recovery. And our theaters, which are well-located at high-quality locations, should ultimately participate in that recovery, providing a substantial rebound to our earnings. Please note that for all tenants, third quarter rental income was reduced by $7.8 million of write-offs related to prior periods. Of which $2.9 million were for cash rents and $4.9 million was for straight line rents. In the meantime, the rest of our portfolio is recovering rapidly. Excluding theaters, our October rent collections, which are provided for on Page 3 of our investor deck, are 98%, and our reserves, excluding theaters, are 1%, which is in line with our original 2020 guidance provided in December. This performance really speaks to the quality of our tenants, credit underwriting and real estate. We were also active in the capital markets again this quarter. We issued $450 million in senior unsecured notes due February 2031 with a coupon of 3.2% and repaid $222 million of our $400 million term loan and repurchased $155 million of the 3.75% convertible notes due May 2021. We settled 2.8 million shares of open forward equity contracts during the quarter, generating net proceeds of $100 million. In October, we settled 2.9 million shares of open forward equity contracts, generating an additional $100 million in net proceeds. In addition, during the quarter, we entered into 4 contracts for 313,000 shares through our ATM program at a weighted average price of $37.06 per share. We currently have $1.1 billion of available liquidity, including cash, undrawn revolver capacity in unsold forward equity. I mentioned earlier how we've made additional strides in simplifying our income statement. But I'm also pleased with the simplification of our balance sheet. When we started the transformation of Spirit almost 3 years ago, we were a BBB- rated issuer with one series of senior unsecured notes outstanding and only 31.4% of unsecured debt. Today, we are BBB rated, 91% of our debt is unsecured and 77% of our debt is spread across 5 series of unsecured bonds. We believe this simplification of both the balance sheet and the income statement is a culmination of several years of work that puts Spirit in a great position to focus on growth and opportunity. As Jackson mentioned, we are finding attractive acquisition opportunities. As a result, we are increasing our acquisition guidance for the year from $600 million to $650 million to $700 million to $750 million, and providing disposition guidance of $90 million to $110 million. As we look forward into the fourth quarter in 2021, we believe our portfolio is in great shape, with embedded growth opportunities in movie theaters recover. Our acquisition pipeline is robust, with compelling opportunities across various industries and asset types that meet our rigorous underwriting criteria. And our balance sheet and operating platform leave us well positioned to capitalize on those opportunities. With that, operator, let's open up the line for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question is from Anthony Paolone with JPMorgan. -------------------------------------------------------------------------------- Anthony Paolone, JPMorgan Chase & Co, Research Division - Senior Analyst [2] -------------------------------------------------------------------------------- Okay. I guess, maybe first question for Mike on the accounting side in the quarter. What -- for AFFO purposes, did that $4.9 million in straight-line write-offs that didn't impact AFFO. Did it? -------------------------------------------------------------------------------- Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [3] -------------------------------------------------------------------------------- No, that's correct. Only the $2.9 million of the cash rent that I've mentioned impacted AFFO. -------------------------------------------------------------------------------- Anthony Paolone, JPMorgan Chase & Co, Research Division - Senior Analyst [4] -------------------------------------------------------------------------------- Okay. And that $2.9 million, that takes the movie theaters, I guess, and other items that you mentioned down to sort of that 70%, first hand, for instance, level? Or like just trying to think about what to roll forward as a run rate? -------------------------------------------------------------------------------- Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [5] -------------------------------------------------------------------------------- Yes. I mean, movie theaters -- so our ABR is $26.2 million, and we're recognizing about 30%. It's about $2.1 million a quarter in movie theaters, of which 40% is being paid in cash for a run rate going forward. -------------------------------------------------------------------------------- Anthony Paolone, JPMorgan Chase & Co, Research Division - Senior Analyst [6] -------------------------------------------------------------------------------- Okay. So the bulk of that $2.9 million is the movie bid or piece of it that you're not recognizing. Is that… -------------------------------------------------------------------------------- Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [7] -------------------------------------------------------------------------------- Correct. You're right. I mean, there was a few other ins and outs in there. In total, there is about $3.4 million of rent that was reserved from the third quarter. There are some that we reversed, went the other way that we reserved previously that were unreserved, if you will. Also keep in mind, I mentioned the property tax, if you think about the impact to AFFO, there was $2.9 million of cash rents AFFO. There's also $800,000-plus tax recovery too that went the other way on AFFO as well. -------------------------------------------------------------------------------- Anthony Paolone, JPMorgan Chase & Co, Research Division - Senior Analyst [8] -------------------------------------------------------------------------------- Okay. Got it. And then just more broadly on the deal flow side. It sounds like things are pretty strong. Can you talk about just how broad-based the activity levels are that you're seeing and whether this pickup in transactions for you all is some larger trades that seem to be hitting? Or is the market just really that -- back to being that fluid? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [9] -------------------------------------------------------------------------------- Tony, this is Jackson. There's actually quite healthy deal flow out there right now. And it's really come at a pretty high velocity in the last 1.5 months, 2 months. So in our transaction bucket in the third quarter, we had a larger deal in there. And I really want to talk about the shape of the fourth quarter. But obviously, we increased our guidance that we're confident about the transactions that we feel are under control at this point in the fourth quarter. But I would say, no, it's quite robust activity. -------------------------------------------------------------------------------- Anthony Paolone, JPMorgan Chase & Co, Research Division - Senior Analyst [10] -------------------------------------------------------------------------------- Can you maybe break out a little bit of what you're seeing out there in terms of cap rates among investment grade, non-investment grade or some of the broader categories of tenants? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [11] -------------------------------------------------------------------------------- I would sort of say, generally, like if you have an asset that was working during COVID, you're seeing really competitive interest from buyers and seeing quite significant cap rate compression. If you've got assets that were somehow impacted by COVID and it may be normalized or rightsized today, there's a widening there. There's a big dose of divergence between those 2 general groups. I'd also say that the industrial assets that we've been focused on and light manufacturing, that's been extremely competitive in the last couple of months. And as it relates to -- so I'd say the range for non-investment grade, industrial, we're still finding high 6s, low-7 cap for the kinds of tenancy that we like with the right real estate. And if the credits are even more attractive from an investment grade standpoint for those same company industrial assets, you'll be seeing things in low 6s, high 5s. On the retail front, investment grade, cap rates have been pretty aggressive. We haven't really done that much in that area. But I'd say that be in the mid 6s, low 6s depending on the length and duration of the lease. Where we're focused on is, once again, we do like some of that non-investment grade, those little higher revenue types of businesses. And so there, we're still seeing attractive yields, they call it, in the low-7s -- low-7 cap rate area. -------------------------------------------------------------------------------- Anthony Paolone, JPMorgan Chase & Co, Research Division - Senior Analyst [12] -------------------------------------------------------------------------------- Got it. And just last one real quick for me. On the G&A side, it went down a bunch from 2Q to 3Q. I think 2Q was already down a bunch from 1Q. Just where should we think about that settling out as a run rate? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [13] -------------------------------------------------------------------------------- Mike, do you want to… -------------------------------------------------------------------------------- Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [14] -------------------------------------------------------------------------------- Yes. We're probably about $1.3 million light in the third quarter from a run rate. We've just seen -- some of that was just timing of certain expenses. Some of it was some stuff from last year that didn't repeat. At least, didn't repeat in this quarter. So again, from a timing standpoint. And there are some savings that we've been picking up all year from just less travel, less office expense and things like that. So I would expect that to come up probably $1.3 million in the fourth quarter. And then, just keep in mind, first quarter is our heaviest G&A quarter. And if you look at past years, just because there's a lot of expenses, annual audit fees, more employer payroll tax, things like that, that do hit in the first quarter. So that's always going to be our heaviest, when you think about modeling. You kind of look back at the cadence from prior quarters, prior years and see that. But yes, we're definitely about $1.2 million light in the third quarter. It's a variety of stuff. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- Our next question is from Haendel St. Juste with Mizuho Securities. -------------------------------------------------------------------------------- Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [16] -------------------------------------------------------------------------------- So I wanted to ask you guys about the right way to think about capital deployment here going forward. So should we be thinking of the new run rate here is $200 million, $250 million-ish per quarter. And then looking at your remaining availability from the forward, it looks like there is, I think, another $250 million-ish of capital left to go. So $500 million, is I think, including some leverage. So just kind of thinking about what's the right way to think about the run rate for acquisitions here near term. And then, I guess, what will perhaps equity leverage played in the funding of next year's acquisition opportunity? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [17] -------------------------------------------------------------------------------- Mike, do you want to take that one? -------------------------------------------------------------------------------- Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [18] -------------------------------------------------------------------------------- Yes. I mean, obviously, our guidance and acquisitions for this year, and we have given it for next year. We'll see how that plays out. But just from a capacity to acquisition standpoint, the midpoint of our guidance applied in the fourth quarter is about $285 million. We fund half of that, say, with equity, $140 million-ish. We've drawn down $100 million so far in the fourth quarter to do that. So we draw another $40 million. That leaves us with $89 million of equity left, plus we're doing some dispose in the fourth quarter. And obviously, have lots of liquidity. So I think we're -- from that standpoint, we're pretty good through the first quarter. And we will -- I think leverage will come down as rents come back. So that gives us some flexibility and optionality on when we would need to go back to capital markets. But we'll see how the acquisition pipeline stacks up as we see opportunities now really determine how much runway we have with our decent capital. But we always have the ability to flex leverage if we need to. And we've been pretty disciplined about when we raise capital, and we'll just continue to do that. And we'll -- when you adjust the pace of acquisitions, we can, if we need to use a little more leverage we can. And we'll continue to be opportunistic and get discipline on the capital issuance side. I think we've got some runway. -------------------------------------------------------------------------------- Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [19] -------------------------------------------------------------------------------- Got it. Got it. And then just looking at your collections here, it looks like you're up to about 93%. I'm just curious, after 7 months, if this is as good as it's going to get, how much more upside potentially do you see there? And then how do we balance or how you think about the risk of actually COVID second wave here, some of the industry that may be more at a disadvantage. So the opportunity for upside from here, how much better can you get? Can you get to 98%, 99%? How much of a roll perhaps maybe some acquisitions play in that. So as we sit here perhaps next quarter or next spring? Are you at a point where we can be in that upper 90s category? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [20] -------------------------------------------------------------------------------- Haendel, I'll start. I mean, I think one way to think about it, and this is why we broke out the portfolio with movie theaters and without. So let's talk about movie theaters a minute. If you look at our portfolio, excluding movie theaters, in October, we're collecting 98%. So assume we close the gap on that last 200 basis points or 2%, sorry, and we get to 100% there, right? So we're pretty close. And that's for a lot of tenancy, right, in the portfolio? And then let's talk about the movie theaters, which is a smaller piece, it's 5.4%. What we think we've done, and we look at this analysis very carefully. We have 9 operators that operate movie theaters for us. The ninth is that manager that's taken over the Goodrich Theaters. We believe we've reset the rents and the cash collection and the cash recognition at the appropriate level right now, given some of the extended timing of these major release windows. Look, if there's any type of modest improvement in movie theaters, and that's going to be related to health, right? I think you'll see a lot of that flow through into our P&L. And on movies, it's been challenging, right? They've been pushing out these release dates for the major tentpole films, but I'm sure you look at this, but if you look at what's going on in China and in Japan, where the infection rates for COVID are a lot lower than the Western countries. China during Golden Week, I mean they have IMAX reported great numbers. Not fully recover, but very, very strong numbers. I think they hit $600 million in U.S. box office receipts over the 8 day period over Golden Week. And remember, that's basically at 75% seat limitation. In Japan, they shattered the record for the opening weekend of The Demon Slayer, which is the animated film. And for the first 2 days, in October -- October 16 through 18, that film opened at $44 million at the U.S. receipts and in the 10 days, it's grossed over $100million. That's the best 10 days for a film like that for -- it's a record, basically, in Japan. So now these are all local films that are being distributed. In Finland and Sweden, they've also had good recovery for locally distributed films and releases, but then look at what's happening in France, Germany, U.K., they're now in a 4-week shutdown. So I guess what I take away from this is, if you've got good content, you got decent health. People are going into the centers, in the movie theaters, and I believe that bodes well generally for theater venue operators. We just have to kind of see how these infection rates work. And so we felt like we put them down, and that's why we're segmenting them differently. So people can understand that we're not a movie theater REIT. We have 5.5% of movie theater exposure. But if you looked at the performance, you think we own a lot more. So hopefully, that gives you some idea of how we're seeing it. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Our next question is from Ki Bin Kim with SunTrust. -------------------------------------------------------------------------------- Ki Bin Kim, Truist Securities, Inc., Research Division - MD [22] -------------------------------------------------------------------------------- The rent collection numbers of 90% and 92.3% for October. Did that happening on changing denominators from tenants that were already bankrupt are maybe removed the denominator? And did any asset acquisitions or definitions change that number? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [23] -------------------------------------------------------------------------------- Mike, do you want to go through that? -------------------------------------------------------------------------------- Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [24] -------------------------------------------------------------------------------- Yes. I mean, surely, there have been changes in ABR even throughout the year. We actually put a good page in our investor deck. And you probably haven't had a chance to look at. But if you look at Page 7 of the deck we put out this afternoon, we did a walk, an ABR walk, to address this specific question because I know it's been a source of confusion with a lot of companies. Where we walk ABR from Q1 pre-COVID to current. And we actually, I think, showed exactly what you're asking. We show, okay, here's our starting ABR. Here's how it's increased from acquisitions, lease escalators. Here's how it's been reduced, by bankruptcy dispositions and restructurings as well as vacancies. And then within that chart, on Page 7, we also broke out in the bankruptcies, we show how much of it's movie theaters, which is the largest lion's share in the bankruptcy section, also in restructuring. The lion's share is movies as well. So you can really see that. So yes, the denominator's changed. Our ABR was $476.4 million before COVID. It's currently $483.3 million, which is what all our rent collection is based on today. But as far as disclosure, I don't think we're hiding the ball. I think we're definitely trying to make sure people are aware of how our ABR has changed. And when we remove something from ABR, I mean, that lease is either has been restructured and changed or it's gone in the case of bankruptcy or at least no longer exists. So it comes out of our universe. But we do not reduce our ABR. We've not reduced the denominator for abatements or rent deferrals and things of that nature. Only if a tenant's gone and the lease is actually gone or has been currently restructured or obviously sold. So -- and that's what we show on Page 7. So hopefully you'll find that helpful. -------------------------------------------------------------------------------- Ki Bin Kim, Truist Securities, Inc., Research Division - MD [25] -------------------------------------------------------------------------------- Okay. Just want to clarify one thing. So on this Page 7, you show 1.8% loss due to bankruptcy and then 50 basis points loss due to reductions and/or modifications, is how you call it. So call it 2.3%, is that on top of the 5% write-off or reserve that you took this quarter? And combining that with this rent of $2.8 million, plus $2.2 million? -------------------------------------------------------------------------------- Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [26] -------------------------------------------------------------------------------- No. No. When we talk about reserves, reserves are for leases that are in place. So our reserves in the third quarter in total were 5.9%. And those reserves are rent that we should have gotten either in our ABR, but we didn't get it. So that's how we think about reserves. Different from when a lease actually goes away, right? So if you're looking at our deck, if you're looking at the -- the pie charts you're looking at are actually for October, which is October reserves are 5%. When you look at that, again, those are all leases that are in place, should be being paid on, and so we're reserving that rent. That's different than when a lease actually goes away, it comes out of our ABR universe. -------------------------------------------------------------------------------- Ki Bin Kim, Truist Securities, Inc., Research Division - MD [27] -------------------------------------------------------------------------------- Okay. So I just want to look at this from a pre-COVID perspective. So for October, it's 5% reserve, right? -------------------------------------------------------------------------------- Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [28] -------------------------------------------------------------------------------- That's right. -------------------------------------------------------------------------------- Ki Bin Kim, Truist Securities, Inc., Research Division - MD [29] -------------------------------------------------------------------------------- So if I try to look at this performance, pre-COVID today, is the right way to think about it, 5% reserve plus the 1.8% [due to bankruptcy] and then 50 basis points for other modifications? Is that the right way to look at it? -------------------------------------------------------------------------------- Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [30] -------------------------------------------------------------------------------- Yes. I mean, that's definitely one way to look at it, when you think about how much rent is currently not here. Obviously, the 5% reserve is hopefully something that we will get back over time. The stuff we're showing on Page 7 where something went bankrupt and it's gone, will obviously, never come back. So that would be the difference. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Our next question is from Nate Crossett with Berenberg. -------------------------------------------------------------------------------- Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [32] -------------------------------------------------------------------------------- I appreciate the comments on the pipeline. I'm just curious, is the higher velocity because of the election and maybe some potential tax changes? Or is it more an unthaw of Q2. And I'm just curious for your perspective, if we go back into a lockdown, what the impact would potentially be on the pipeline? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [33] -------------------------------------------------------------------------------- Well, let me -- I'll start with -- if we go into a lockdown, how that impacts pipeline. We were the beneficiary in the third quarter of picking up deals where we had not been the highest offer on those assets at that time. They had sort of signed up with more aggressive pricing. And let's just say we picked them up at more attractive cap rates from our standpoint. 25 bps roughly, right? If we get another kind of air pocket, I don't believe that's going to change our strategy because I think what we learned is we're going to kind of -- we'll pause and wait, potentially be opportunistic, but we're going to stick to moving forward with our pipeline. There was some motivation for some issuers that we were negotiating with to try to get things done before the election, and we're seeing some of that in our fourth quarter pipeline. But for the most part, we -- look, we're a long-term investor. We want to -- we believe we have a really high-quality portfolio here. Hopefully, the numbers prove that out. We are dealing with movie theaters, which are 5.4%. But those will kind of sort themselves out at some point, hopefully sooner than later. But we have -- we had a -- if you recall our Investor Day back in 2019, we've basically told you guys, we have a high-quality real estate portfolio, high-quality tenant fee, which is 98% rent collections in October, right? We laid out a very specific investment strategy. We are moving forward on that. If you just take out -- took out the second quarter, look at the totality of what's going to happen this year. I'd probably say, wow, that's pretty good. And we're really actually starting to work on the first quarter already for next year. So that's kind of the plan. Obviously, if there's a major pullback in the markets, we'll obviously reevaluate. But right now, we feel very comfortable with what we're doing. It feels very manageable. -------------------------------------------------------------------------------- Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [34] -------------------------------------------------------------------------------- Okay. That's helpful. I'm just curious, what's you guys' appetite to add to casual dining exposure here? I appreciate the antidote in your prepared remarks. So I'm just curious to that specifically. If we went back into a lockdown, does that -- is that tenant in a much better position to pay if their stores were, I guess, closed? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [35] -------------------------------------------------------------------------------- Well, it depends on what the -- and this is like trying to forecast what a lockdown would look like, right? I think people have -- I think we have a better understanding of how the disease spreads. That wasn't maybe the case back in April. And there was all kinds of pressure on PP&E -- PPPs. So today, our just to pick casual dining, our operators are bigger. There are national or super regionals. They have really made significant changes to their operating strategy. They produced their menus. They are working on better efficient online delivery and service. Look, the third-party delivery venues, they're really good. They work, DoorDash and things like that, but they cost these guys quite a bit of profitability. Municipalities are being much more flexible on pop-up drive-throughs. So people are being very creative. Those that have the ability to kind of manage through this. And what was interesting about that one operator we talked about, they are going to start moving on offense, not right away, but certainly, people evaluate very carefully with them to face the opportunity. But I would say probably for us on casual dining, I wouldn't expect us to do much this calendar year, but I could see maybe potentially next year that, that could be an opportunity for us. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- Our next question is from Linda Tsai with Jefferies. -------------------------------------------------------------------------------- Linda Tsai, Jefferies LLC, Research Division - Equity Analyst [37] -------------------------------------------------------------------------------- I was just wondering, in what ways might your underwriting criteria have changed since COVID? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [38] -------------------------------------------------------------------------------- So Linda, I mean, I would say, first of all, our credit underwriting has not changed. Obviously, we love to push fundamental -- fundamental credit analysis is obviously quite significant. Analyzing real estate, the rankings is significant. The one thing that we have made changes to is our heat map. And if you go to that page, we have added -- if you look on the top portion on technological distribution, we've added the historical and forecast supply and demand impacts into the calculus on that horizontal access. And on the vertical access, we -- on the Porter's Five, we introduced this concept of essential services impact to the weighting. So that's just more about kind of top line how we think about the portfolio. But when it gets down to the nuts and bolts of credit analysis, do they have liquidity? If it's a public company, private company, how resistant would they be? Did they defer rent during COVID? Obviously, those are all questions that we answer -- we ask ourselves. I mean, I would look at just -- if you think about the 2 deals that we did, one of the bigger ones we mentioned like the Shutterfly facility, I mean, that company is a very large company. It was taken private by Apollo. If you looked at Off Lease, that's also from a revenue standpoint, multibillion-dollar revenue operation. It's a big company. And it's a really great business model. So we're looking for things that are large, sophisticated. Obviously, that's not -- those are not experiential types of operations, and they're seeing their business improve. But I would say that in our heat map, we've made some changes and look, we're continuing to evaluate what we've learned out of COVID. We have a robust credit and research function here. And we've been evaluating this and having this discussion internally for the past several months, actually, COVID's going on. So this is pretty much the net effect of all that you can see on Page 12 of our deck. -------------------------------------------------------------------------------- Linda Tsai, Jefferies LLC, Research Division - Equity Analyst [39] -------------------------------------------------------------------------------- And then are you requiring any extra guarantees such as higher security deposits? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [40] -------------------------------------------------------------------------------- In some cases, we have actually asked for security deposits. I wouldn't say for all businesses, but if there was a business that had a disruption because of COVID, that's something -- and rent was deferred, and we believe that the opportunity makes sense or we're evaluating it. We're structuring -- we've structured some of those transactions with the rent reserve escrow. -------------------------------------------------------------------------------- Linda Tsai, Jefferies LLC, Research Division - Equity Analyst [41] -------------------------------------------------------------------------------- Got it. Just one last one. Could you talk about your year-to-date disposition activity? What type of tenants were you selling out of this year? And then to what extent would you expect dispositions to ramp in 2021? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [42] -------------------------------------------------------------------------------- I'll let Ken give a little flavor on that. Maybe, Ken, if you want to take that on? -------------------------------------------------------------------------------- Kenneth Heimlich, Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management [43] -------------------------------------------------------------------------------- I'd say this year was a little different than what we've historically done. We, earlier in the year, we specifically targeted a small number, a small bucket of some grocery stores and drugstores that we went to market with. And we -- the reality is we executed quicker and at lower cap rates than we initially expected. The one thing I would say about our dispositions thus far, we've been able to take advantage of a great cap rates in those 2 spaces. While at the same time, we chose assets that had a few risk characteristics that we thought it made a lot of sense to go ahead and exit now, given the low cap rates. As far as '21, no, it's -- the expectation would be it's more back to a regular disposition program, more portfolio shaping. -------------------------------------------------------------------------------- Linda Tsai, Jefferies LLC, Research Division - Equity Analyst [44] -------------------------------------------------------------------------------- Just a follow-up on that. When you talk about risk characteristic, is that in terms of just like a lease coming up for renewal? Or is it bankruptcy? -------------------------------------------------------------------------------- Kenneth Heimlich, Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management [45] -------------------------------------------------------------------------------- No. No. I would say it was more about if we felt like a particular property was over rented. Maybe it's a tenant that is not investment grade and that for the long term, we'd prefer given the window we had to head and exit a property. So that's some of the characteristics we looked at. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Our next question is from John Massocca with Ladenburg Thalmann. -------------------------------------------------------------------------------- John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [47] -------------------------------------------------------------------------------- So you talked a little bit about casual dining and maybe not doing too many more investments in that space, at least near term. As you look at some of the other categories that you mentioned that were kind of impacted, but have recovered. Are those all probably out of the question in terms of near-term acquisition activity? Or is there maybe some opportunity there given -- be a bit of a differentiated investment thesis? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [48] -------------------------------------------------------------------------------- Well, I mean, look, the easy ones are obviously and things that we're doing, car washes, distribution, the Dollar Stores, home decor, pet services, sporting goods, those are all things that are right in our wheelhouse right now. I mean, look, entertainment, the performance within some of our operators with entertainment, they're pretty interesting and very positive. And so that might be an area that we'll evaluate in the more near term, potentially, may not be that obvious to people, but there's -- people are in those venues now. Obviously, I think if we thought about those, they would have to have some form of a rent reserve in place for us. Movie theaters? John, I don't think we're going to be doing movie theaters for a while. We'll see how this plays out with our existing investment. And I mentioned casual dining. Look, on gyms, that's another area. Gyms, for us, our experience has been better than expected. And there are some high volume, low price operators that are -- look pretty interesting right now. We're looking at some opportunities right now. But people are definitely going back into the gym. You have to be very selective with the operator in terms of their value thesis and credit and things like that. But that's another industry group that you could see us doing more, potentially, in the near term. -------------------------------------------------------------------------------- John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [49] -------------------------------------------------------------------------------- Okay. And then maybe a question on theaters a little bit. If you look at Page 6 of the presentation, of that kind of 13.6% of kind of deferred accounts receivable that kind of net of reserves. I mean, how is the split of that maybe between the big 3 operators and some of the more regional operators? And then, specifically, essentially, I just want to say, the studio movie grill, earning rent there, earning receivables there are all fully net of -- are reserved against, essentially. Is that a fair statement to assume? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [50] -------------------------------------------------------------------------------- Mike, do you want to… -------------------------------------------------------------------------------- Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [51] -------------------------------------------------------------------------------- Yes. We're not going to get too far in the weeds on individual tenants. I mean, obviously, it's [too early] to assume it's reserved. And what you're looking at in the bottom chart, net of reserves, that's what's actually on our balance sheet, right, net of reserves. So we have $2.8 million of theater revenues of deferred rent receivables, our balance at the end of Q3 that are in receivables, right, that are net of those reserves. So that is still -- we feel -- those are for the tenants that we are not recognizing on a cash basis. So it's the other piece that we reserve for. So when you think about our ABR, $26.2 million of theater revenues, 70% have been reserved for. So it's a lot of tenants. And I'll let you guys make assumptions on what they are, but we did obviously a tenant by tenant analysis and the tenants that we did not reserve for, we feel have strong balance sheets, nimble operations. They can weather the elongated recovery we expect theaters will have to deal with. And again, 40% of the theater revenue that we are recognizing is actually being paid in cash, right? So the $2.1 million per quarter. And there's really only $1.4 million-ish that's noncash in there. So we feel good about that. But we don't want to get into naming specific tenants on these reserves, but you could obviously assume [just to know] is one of the ones we reserve for. -------------------------------------------------------------------------------- John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [52] -------------------------------------------------------------------------------- Okay. Then one last detailed one -- and then one last detail question. Property operating costs came down pretty decent quarter-over-quarter. And I'm just wondering why that was, and sorry if I missed that in the prepared remarks if that was already explained. -------------------------------------------------------------------------------- Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [53] -------------------------------------------------------------------------------- Yes. It came down from 4.1%, we call leakage to 2%. It would be about 2.7% normalized. We did have a little over $800,000 of property tax recoveries coming in from the prior quarter that we recognized in this quarter. So if you net that out, it would be 2.7%, still obviously a big improvement compared to last quarter. And that's just a function of tenants doing better, less tenants, kind of the workout bucket. And so we don't have -- and they're paying their taxes. So it's tenants getting current on their taxes, tenants paying rent. Tenants who -- maybe were arguing or fighting with whatever, reaching deferral agreements and getting a good standing. That's just simply the result of that. -------------------------------------------------------------------------------- Operator [54] -------------------------------------------------------------------------------- Our next question is from Brent Dilts with UBS. -------------------------------------------------------------------------------- Brent Ryan Dilts, UBS Investment Bank, Research Division - Equity Research Analyst of Large cap banks and brokers, asset managers and trust banks [55] -------------------------------------------------------------------------------- I have a couple of questions around the election since we've already done some pretty deep digging elsewhere. The first is what key changes to your business do you expect under each administration? And the second, if we get a blue sweep, how do you think that might impact the 1031 market, given it's an area that was included in the Biden camp's high-level tax plan? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [56] -------------------------------------------------------------------------------- Look, I'll -- I'm not going to forecast election. But 1031 is an easy one. It doesn't really impact our strategy. We're selectively selling assets, many times, we will sell assets into that particular market. But the thinking about 1031s is it's made a lot of things that we want to buy a noncompetitive. Meaning, if you think about our business model, we're really a long-term investor. We're not a churner of assets in this business model. So if there were changes to 1031 market, I could see that giving us more opportunity to increase our QSR portfolio, be more competitive on c-stores, where today, it doesn't really work for sort of for our kind of cost of capital and business strategy, at least on the QSR side, the stuff that the 1031 buyers are chasing after. And in terms of where our portfolio is positioned, like if you look at the distribution map of our assets, they tend to be in the lower sun belt areas of the country. Most of our assets are in very suburban kind of marketplaces. So whether there's blue or red, I mean, the big takeaway is these operators have been able to deal with the first onslaught of sort of these challenges. If they have to go back again, they've made adjustments. The world didn't fall -- sky didn't fall for us on our head. So I believe that they'll manage through it. And like I said, we actually have talked about that internally about how that might impact us. But generally, I think what we can say is it's really more the local municipalities that have more stroke over whether things are opened or closed versus at the state level. And so far, we've been positively surprised with the recovery pace of our portfolio. And just -- it's really that entrepreneurialism of our operators. They're just very impressive. And so I think if there's another setback, we'll get through it with those operators just like we did the first time. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- And we have one follow-up question from Ki Bin Kim. -------------------------------------------------------------------------------- Ki Bin Kim, Truist Securities, Inc., Research Division - MD [58] -------------------------------------------------------------------------------- So when we act at the result of COVID and how it's created some winners, some losers in retail. Have you thought about maybe taking advantage of the winners from COVID, which not may be winners forever? I'm thinking about tenants like pressured retailers on home decor, weren't particularly doing well pre-COVID, did well during COVID. I'm just curious if you think this is more of an opportunity to sell some of these assets? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [59] -------------------------------------------------------------------------------- I don't know, Ki Bin. I don't think we would necessarily sell. I mean we -- like I'll give you some example, like on home decor at home. We like it before COVID. We liked it at our Investor Day. What COVID has done is just been able to accelerate their success and market share, and they've been able to make more investment in their omnichannel and membership. Members part of their business to help them on the sales side. So no, I mean, look, we're not real flippers. I mean, I think we have a very deliberate strategy. If you go to our heat map, we're going to stay on that middle to upper right quadrant of that field of industries, focus on good real estate, focus on good operators, focus on good rent to -- rent per square foot kind of relationships. And build duration and steadiness like in our portfolio. That's really kind of like the game plan. And look, there are opportunities to buy things in distress right now, but that's not really our business model. We're really trying to create more steady cash flow growth. And look, the movie theater part is something that is going to take a little bit more time, just given their release schedules. -------------------------------------------------------------------------------- Operator [60] -------------------------------------------------------------------------------- We have reached the end of our question-and-answer session. I would like to turn the conference back over to Jackson for closing remarks. -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [61] -------------------------------------------------------------------------------- Well, look, first of all, I'd like to thank our associates here at Spirit, who've had to deal with all the number of different challenges that COVID has brought, not just to our operations but to our tenants' operations. So a big shout out to them. I'd like to thank everyone for participating on our call this late afternoon. And just let you all know that we're in a great position right now to execute our business strategy. The one that we laid out in our Investor Day presentation back in December of 2019. And I can tell you or myself and the Board, we're extremely excited here at the company, and we look forward to moving forward. Thanks. -------------------------------------------------------------------------------- Operator [62] -------------------------------------------------------------------------------- This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation. -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [63] -------------------------------------------------------------------------------- Thank you.