Spirit Realty Capital, Inc. (NYSE:SRC) Q1 2023 Earnings Call Transcript

Spirit Realty Capital, Inc. (NYSE:SRC) Q1 2023 Earnings Call Transcript May 4, 2023

Operator: Good day, and welcome to the Spirit Realty Capital First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Pierre Revol, Senior Vice President of Corporate Finance and Investor Relations. Please go ahead.

Pierre Revol: Thank you, operator, and thanks, everyone, for joining us for Spirit’s first quarter 2023 earnings call. Presenting today’s call will be President and Chief Executive Officer, Jackson Hsieh; and Chief Financial Officer, Michael Hughes. In addition, our Chief Investment Officer, Ken Heimlich, will be available for Q&A. Before we start, I want to remind everyone that this presentation contains forward-looking statements. Although, we believe these forward-looking statements are based on reasonable assumptions, they are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from those currently anticipated due to several factors. I refer you to Safe Harbor statements in 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 specific non-GAAP measures. Reconciliation of non-GAAP financial measures to most directly comparable GAAP measures are included in the exhibits furnished to the SEC under Form 8-K, which include our earnings release and supplemental investor presentation. These materials are also available on the Investor Relations page of our website. For our prepared remarks, I am now pleased to introduce Jackson Hsieh. Jackson?

Jackson Hsieh: Thanks, Pierre, and good morning, everyone. I’m pleased to report that Spirit had another quarter of strong operating performance. Our diversified real estate portfolio produced steady results with high occupancy and no lost rent, and our capital deployment strategy produced accretive earning spreads and improved our industry diversification mix. We completed four sale leaseback transactions totaling $182.7 million at a weighted average cash capitalization rate of 7.57%, representing a 116 basis point increase from the same period last year. Additionally, we invested $55.1 million in revenue producing expenditures at a weighted average capitalization rate of 9.04%, which included a $33 million seller note related to the disposition of four movie theaters.

The resulting overall, the capital deployment cash capitalization rate was 7.91%, an increase of 149 basis points from the same period last year. Our acquisitions consisted of a newly renovated lifetime fitness property located in McKinney, Texas. Five industrial properties leased to large food and building materials manufacturers and iOS facility in Odessa, Texas. The weighted average lease term on these transactions was 19.1 years. The weighted average annual escalators were 2.4%, which is 80 basis points higher than the escalators we acquired during the same period last year. We continued to successfully sell smaller, predominantly retail properties, which generated positive returns on capital and proved our portfolio mix. We divested 39 income producing properties including Red Lobsters, movie theaters, C-stores, QSRs, drug stores, a data center, a distribution facility, and a diverse mix of other retail assets.

Our key portfolio metrics such as asset mix and weighted average rental escalators saw improvements with these sales. Additionally, excluding the theater sale, they also had a positive impact on our portfolio loss . Excluding the movie theater transaction, we generated a total of $107.8 million in sale proceeds at a weighted average disposition capitalization rate of 6.13% with a weighted average lease term of only nine years. In terms of size, our dispositions averaged 3.8 million per property or 3.1 million, excluding movie theaters. Overall, the rental escalators on our dispositions were lower than our acquisitions and several of the disposed properties had flat leases. We continue to see healthy demand from 1031 buyers, family offices, and other institutional bidders and expect continued success from our disposition program through the remainder of the year.

I’m also pleased to highlight another industrial success story resulting from the recent distribution building sale. We acquired the property for $3.8 million in December, 2019 at a cash capitalization rate of 6.85% and sold at this quarter for $5.8 million at a disposition capitalization rate of 4.75%. From acquisition through disposition, we achieved a return of more than 50% and cap rate compression of 210 basis points. Excluding the theater sales and corresponding loan, we deployed $98.1 million net of dispositions at an effective cap rate of 9.19%. Including theaters, the effective capitalization rate was 10.2%. Despite the headwinds in the capital markets and our elevated cost of capital, this year’s disciplined investment strategy is producing great results that are accretive to shareholder value.

As I mentioned earlier, we completed the sale of four movie theaters during the first quarter. Given theater sales, a rare in this environment, I want to provide a brief overview of this transaction and a history of the four sites. In November, 2019, we acquired the four theaters for $44 million as part of a $435 million portfolio acquisition, representing a 12.4% cash capitalization rate on the theater properties. While the underlying real estate locations were good for theater use, a high cap rate represented our belief that the rents were above market and the operator at that time, Goodrich Theaters was struggling. In February, 2020, Goodrich filed for bankruptcy and vacated the properties. In September of 2020, when virtually all theaters in the U.S. were closed, an operator of Emagine Theaters signed a new lease for all four theaters, which provided for a period of percentage rent that converted to base contractual rent in the fourth quarter of 2022.

In January of 2023, the operator approached Spirit to purchase the four theaters for $44 million, paying $11 million in cash with the remainder financed through a $33 million loan secured by the properties and a personal guarantee from the operator. The resulting disposition cap rate on the new rents was 7.84%, and the sales price was slightly higher than our original acquisition price. While theaters have been one of the more challenged industries since the onset of COVID-19, this is a good example of how our real estate underwriting help mitigate loss given default and ultimately secure a good outcome for shareholders. Before I pass the call to Mike, I want to reiterate this year’s plan that we laid out on our last call. First, set forth a fully financed capital deployment plan, utilizing free cash flow, asset dispositions, and in-place debt to produce investment spreads in a volatile capital markets environment.

Second, showcase our portfolio’s strength and diversity through consistent and strong operating performance. I firmly believe we have the people, processes and carefully underwritten real estate portfolio to be successful, even in a challenging macroeconomic environment. And I look forward to proving that out this year. With that, I’ll hand it over to Mike to go over the financial highlights. Mike?

Michael Hughes: Thank you, Jackson. Good morning, everyone. The first quarter of 2023 was one of the cleanest quarters we’ve had since I joined Spirit. Our occupancy remained high at 99.8%. Our weighted average lease term remained unchanged at 10.4 years, and our unreimbursed property costs were 1.5%. Additionally, we recorded no loss rent improving from the modest 0.1% in the fourth quarter. Our ABR increased by $8.2 million, reaching $689.1 million. This increase was driven by net acquisitions and organic rent growth, which contributed $3.6 million and $4.6 million of ABR respectively. Our forward same-store sales remained constant at 1.6%. Other income was significantly lower than prior quarters, as we had no substantial interest income from cash balances or large one-time settlements during the quarter.

Regarding G&A, the headline increase of $1.2 million compared to the same period last year was primarily related to this year’s market-based share awards granted to the executive team and the final investing of time-based awards issued three years ago. All executive stock awards are now 100% market based. Time based awards are valued using the stock price on the grant date, whereas market based awards are valued using a fair value based measure that results in a higher valuation and thus, higher expense amortization over the life of the grant. Cash G&A, which excludes stock grant amortization expense remain relatively flat year-over-year, despite the inflationary pressures observed across the economy. AFFO per share was $0.89 compared to $0.88 in the fourth quarter, primarily due to the net increases in rents and the resulting positive flow through to earnings, strong portfolio performance and accretive net capital deployment execution.

Turning to our balance sheet, we ended the quarter at 5.3x leverage with liquidity of $1.6 billion comprised of cash and cash equivalents, cash held in 1031 exchange accounts and availability under our credit facility and delayed draw term loan. We did not issue any shares during the quarter. In mid-March, we took advantage of the sharp decline in the forward SOFR curve and entered into forward SOFR swaps. We anticipate will be fully utilized to fix our $500 million delayed draw term loan at 4.75% once fully drawn. Our floating rate exposure is now limited to our revolving line of credit, which we anticipate fully repaying when we draw on the term loan. Regarding our guidance, we’re increasing our AFFO per share range to $3.54 to $3.60, increasing our disposition range to $325 million to $375 million and maintaining our capital deployment range of $700 million to $900 million.

As Jackson mentioned, we are pleased with our results during the first quarter and believe our plan will demonstrate the strength of our portfolio while maintaining a low leverage balance sheet without reliance on the capital markets. With that, I will turn the call back over to the operator to open up for Q&A. Operator?

Q&A Session

Operator: We will now begin the question-and-answer session. First question comes from Michael Goldsmith with UBS. Please go ahead.

Michael Goldsmith: Good morning. Thanks a lot for taking my question. Jackson, pretty considerable slowdown in the deal activity, I guess what sort of visibility do you have that your acquisitions can pick up? And can you just talk a little bit about raising the disposition expectations and you’ve been doing a good job with the capital recycling, but there isn’t an offsetting increase in the acquisition. So can you just talk a little bit about the interplay between those two factors?

Jackson Hsieh: Sure. First of all, our acquisition pipeline continues to be very consistent, so don’t expect us to have any challenge meeting the guidance that we put out for the rest of the year. But just a little color on the four deals that we acquired this past quarter, two of them were actually deals that we had pursued in the third quarter of last year in 2022, and were not the highest bidder. And so the seller during the sale leaseback pursued another bidder at a much lower cap rate. Just given some of the challenges in the financing market, those deals came back around to us. So we were able to secure those transactions at wider cap rates candidly than we bid in the third quarter back in 2022. So I felt like that was a good opportunistic – opportunity for us.

If you look at the shape of our acquisitions this quarter, there were two PE backed acquisitions. There was one private company and obviously one public company in the lifetime transaction where we have a very strong relationship with that company. I would just tell you like we are continuing to evaluate a number – large number of retail and industrial opportunities. And the governor for us has really – we think cap rates at this point have begun to find a stable point at this point. I think they’ve moved a bit from the third quarter last year to first quarter. And we expect probably a little bit more increased deal opportunity in the second half of this year just given the things that we’re seeing. So that’s just on the top line.

On the dispositions, look the dispositions are an important part of our strategy this year, just given where our equity multiple is trading right now. We’re just not going to issue stock at this level if this doesn’t make sense. And what makes more sense is to sell what I’ll call these granular assets that are created for us. So if you think about what we disclosed to you all on the call, those were 27 separate transactions that we completed in the first quarter. A very – about a quarter of it was investment grade concentrated with Circle K, AT&T and CVS, we sold the data center as part of one of those transactions. 30% of the rents excluding the movie theaters were flat, right? So no escalations, and of the 25% or so IG, the way average lease term of those leases were 5.5 years.

So you think about what we did, we increased spread, we increased duration. The average rent escalators that we acquired in the first quarter are 2.4%. So we’re going to continue just to do that. We’re just going to continue to recycle up, increase WALT, increase mix, increase duration and increase escalations. And I think we’ll be continuing to be successful there. The assets that we sold were very liquid. I mean, they were sold in the 1031 market. You can see the math on it. It was – we sold a lot of sonics , the Red Lobsters and CVS drugstore and a couple of other retail assets, but they’re all sold with varying different buyers all over the country. So that we think we’re going to continue that playbook this year, and we’ve got a number of different assets that we think fit the criteria where they’re saleable.

They’re not our best assets by far. And they just make sense given the opportunity we see on the investment side. I think you’ve done math, so our net cap rate on the net deployment, I mentioned on my call is north of 10%. So that’s obviously a really good number. I think it’s very accretive. And if we’re able to accomplish all the things I’ve talked about, increased WALT, increase mix, increase rent escalations, get rid of flat leases, build WALT in the overall portfolio, I think that’s a pretty good accomplishment if we’re able to do that, continue to do that this year.

Michael Goldsmith: That’s really helpful color, Jackson. And just to follow-up, right the cash cap rate picked up 30 basis points sequentially, so you’re now acquiring in the 7.6% range. Is that a function of moving higher up the risk curve or cap rate for the product that you’re looking for? Has that kind of stepped up at that 30 basis points a quarter type of movement?

Jackson Hsieh: I’d say absolutely we have not taken risk up. Like I said, two of the deals that we’ve bid on the last quarter, we were probably 50 basis points inside. So in other words, we’ve bid 50 points – 50 basis points tighter in the third quarter of last year, and we were able to secure these deals this in the first quarter 50 wider, same transaction, same credit. So I think it’s just a step function of where cap rates are moving right now as opposed to us incrementally chasing more risk.

Michael Goldsmith: Thank you very much.

Operator: The next question comes from Haendel St. Juste with Mizuho. Please go ahead.

Ravi Vaidya: Hi, good morning. This is Ravi Vaidya on the line for Haendel. Hope you guys are doing well. Just one another question about the acquisition cap rates here. We noticed that it increased heading into 1Q from 4Q, but over that same time period debt costs have come down. Can you comment a bit about the competitive landscape and are you seeing less competition for these assets right now given that it’s – we’re past the end of the year and there might be less demand from the 1031?

Jackson Hsieh: Look, I feel like the things that we’re buying are – we’re not competing with 1031 buyers just given the size of the assets that we’re pursuing. From what we can see from our lens, there’s a reasonable amount of competition. Clearly sellers that people that are looking to do sale leasebacks if they’re dealing with someone that needs bank debt or financing, they’re probably going to look more to a company like ourselves or one of our peer companies that, that don’t finance with secured mortgage debt. We have the ability, obviously, to buy property unencumbered through our line of credit. And I think we have a higher degree of certainty and I use the reference of the two deals that we were able to secure on the industrial side.

Those were deals where basically the seller didn’t perform. And the sale leaseback party, tenants still needed to do a transaction. So I do think that I would say companies like ourselves and our peers probably are a preferred bidder today. Not necessarily the highest bidder, but a preferred bidder. I also think that the 1031 market is very active as we’ve continued to demonstrate over the last several quarters. We plan on kind of launching a new tranche of assets soon that that that’s the reason for increasing our guidance. So we think we’ve developed a good rhythm, good relationship with brokers across the country and kind of a good idea of what really works relative to the marketplace and what makes sense for us to sell.

Ravi Vaidya: Got it. That’s helpful. Just one more here. Can you discuss your watch list what is it as a percentage of the ABR and what are some notable 10 categories that you’re currently monitoring?

Jackson Hsieh: So I’m going to hand that over to Ken.

Ken Heimlich: Hey Ravi, so our watch list is actually very stable. I’ve mentioned this before, what you tend to see we had an expansion of our watch list in the fall of last year, obviously getting everything going on. But since then it’s a typical every month we’re reviewing that watch list and there are folks that we take off the watch list and maybe we add one or two folks. So overall, it’s pretty steady.

Ravi Vaidya: What is it as a percentage of ABR?

Ken Heimlich: We don’t really frame it that way, Ravi. I think what we look at is the typical operating metrics that everybody can see our loss rent, our leakage, which have been extremely good. Just probably doesn’t make sense to go into what it is as a percent of the base rent of the portfolio.

Ravi Vaidya: Okay. Thank you.

Operator: The next question comes from Ki Bin Kim with Truist. Please go ahead.

Ki Bin Kim: Hi, good morning. Can you just talk about the total basket of lower cap rate assets that you think over time you can sell? What does that total basket look like? And second from a practical standpoint, obviously, you probably wouldn’t want to sell all of it. So when you think about what is realistic to assume how much dry powder do you have in terms of dispositions?

Jackson Hsieh: Well, we obviously have a lot of properties. Just if you think about – if we disclose our retail properties, in our supplemental, and you can see, it’s quite a large number of opportunities. I guess what I’d stepping back, what I’d say is obviously we don’t – we think our portfolio is a lot more diverse and stable than what the market must think at this point. So we’ve designed this plan Ki Bin that we think doesn’t need equity. We can be opportunistic, improve the portfolio, do all those things that we talked about and still actually grow earnings. And actually, this plan does work going out into the future. Wouldn’t want do this forever? It wouldn’t be very fun. But this plan does continue to work, because we’ve got such a large asset base across this country in retail where that’s – it just gives us good opportunity to kind continue to improve our portfolio.

So you think about the things that I mentioned I sold – we talked about, we sold, they’re all shorter dated WALT properties – shorter data WALT properties doesn’t mean they’re bad, right? They’re just – we’re trying to maintain a certain level of portfolio weighted average lease term in the portfolio. So you have to sort of wait for your natural opportunity to do a blended extend. Well, we’re able to actually sell a really attractive pricing with WALT that’s sub-six years, right, so we’ve proven that. So I think we’ll continue to pursue this year. My hope is as the year progresses and we continue to show very little volatility in our rent stream, which we believe we will that the market will start to appreciate the benefits of the diversification of the portfolio and the opportunities that we’re able to secure with our tenant base on the growth side.

Ki Bin Kim: Okay. And I might have missed this, but what was the interest rate on the loan just for theaters? And if you can talk about the – I guess a medium term game plan, are those – is the – imagine, are they planning to refinance that loan at some point? What is the end game?

Jackson Hsieh: Sure. So look, the – amend those comments on the call, but we – the reality is we’ve got 25% of our basis back in cash. Imagine operator basically got a bridge loan for us. It’s a two-year loan. It’s personally guaranteed by the operator, the individual. Our expectation is he’s going to refinance the loan, because obviously it’s a very high interest rate. But that being said, we’ve reduced our basis in the asset. The other thing is, we said this a lot of times or said in past calls. Our theater portfolio of operators is very different than maybe some of our peers. We have 10 – we have nine tenants, separate operators, now an additional 10 with the mortgage to imagine. We’ve said in the past that these operators that were regional, we’re able to recapitalize our balance sheets during COVID and are candidly in really good shape financially probably better shape than some of the larger national players, international players.

So we just saw this is an opportunistic opportunity to sort of recycle these assets out. We believe that the operator has the ability to refinance those assets. And I think like just kill you the end game, we put this new slide in Page 4, which is what titled progress at Spirit portfolio and balance sheet. If you got a chance to look at that, it’s a pretty interesting slide, actually, one of our shareholders helped us put that together. I think it’s a great idea. So we took it. But just – if you focus on what Spirit was like at the IPO, movie theaters were one of our top five industries. In 2018 after the spinoff, movie theaters were still a top five industry. Obviously today, they’re not and they’re continuing to reduce, they’re about 3.5% of our ABR right now.

So we’re continuing to reshape this portfolio. We love the distribution manufacturing that’s increasing. We also love a lot of the retail tenants that we’re focused on that make sense for the diversification mix in our portfolio. But we’ve – we’ll continue to evaluate creative opportunities to monetize some of our theater exposure. And I think this is a good one. It mitigates risk. We’ve got the operator that’s got the ability to come up with the cash, they’re incentivized to refinance our mortgage and we believe they will be able to. So we think it’s a real win-win for both us and imagine, imagine operator.

Ki Bin Kim: Okay. Thanks, Jackson.

Operator: Our next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.

Ronald Kamdem: Great. Just a couple quick ones on the raise disposition guidance, apologies if you mentioned already. But is there a certain – is there going to be more retail, some industrial, have you guys sort of given a little bit of color on what’s on the selling block and sort of cap rate thoughts would be helpful?

Jackson Hsieh: Sure, I’ll pass it on to Ken. He’s very involved in this right now.

Ken Heimlich: I’d say, the expectation that – obviously, it’s lean retail, granular type retail and would expect it would kind of continue down that road. If an opportunity presents itself on the industrial side or any of the other assets, obviously, we’re going to look at that, like, we’ve done in the past, last quarter, we sold an industrial property for sub-5% cap rate, that just made a lot of sense. But in general, I would expect it to lean to the retail granular type properties. Last comment though, we are – it’s not dependent on that retail granular investment grade type of properties. You go back to the fourth quarter, we had a $50 million sale of medical property that at a – in accretive cap rate. We – Jackson mentioned, we sold a data center at a very – an accretive cap rate. So it’s not dependent on any one particular asset, but because we have such a diverse portfolio, it allows us to be selected.

Jackson Hsieh: Yes. Keep it like, we don’t disclose our cap rates, but the lowest cap rate sale in the first quarter was actually not – the industrial deal was actually a sonic location. It was a four cap with 7.5 year WALT, right. So individual buyer, like the location. So there’s – I’m just saying like, there’s a lot of different ideas about what people think sells or doesn’t sell. We have pretty good handle on it. And so we’re kind of trying to utilize our rankings and all the work that we do. We’ve talked about in the past, we’ve got rankings, BI tools, all this stuff. We’ve kind of don’t just randomly sell stuff. It’s very, very intentional on the disposition pools that we create. One that fits the market, what the market wants, and also what makes sense for us, making sure it’s accretive for us.

Ronald Kamdem: Great. Sir, my next one was just on the cap rate, so 7.9 in the quarter. I know the company had sort of been focused on waiting for cap rates to move more or just where are we in that sort of process, how much have they moved? How much more do you expect to move from here? Or have we sort of leveled out and so forth?

Jackson Hsieh: Well, like – anecdotally, like I mentioned, like the two deals we did in the first quarter that were industrial, they were deals that were originally – we were chasing after the third quarter of 2022, and they widened out, let’s call it, an average of 50 basis points, the two of them. I think today what we’re seeing is, candidly, we’re getting beat out by other bidders. We’re bidding on things, where we think fair value is. So there’s definitely a market that’s out there. It’s – I wouldn’t call this a robust buying market, but I think there’s – what I would say right now, there feel like there’s more – there’s limited quality opportunities. So when those show up, there are definitely people that come, but our expectation is that later this year, as companies continue to look at their financing needs, we just think there’s going to be more volume, quality volume coming.

Whether that means cap rates move out or get wider, hard to say, I think there’s a lot of other factors that impact that, but our belief is that there’s going to be a higher volume of actionable opportunities that fit our risk criteria and tenant criteria and industry mixed criteria. But so I don’t know if that’s a – if that answers that for you.

Ronald Kamdem: Great. That’s helpful. That’s it for me. Thanks.

Jackson Hsieh: Thanks.

Operator: Our next question comes from Linda Tsai with Jefferies. Please go ahead.

Linda Tsai: Hi, thanks for taking my question. In terms of dispositions, I guess, you said you’re selling more retail, but then you also sold some industrial. But on the flip side, in terms of wanting to increase WALT and going after higher escalators, does that lend itself more so to industrial?

Jackson Hsieh: Well, the industrial asset that we sold had less than nine years of WALT, and the escalators were 2%. So we’re actually doing better on the industrial bills we’re doing now. They’re actually 2.5% to 3% escalators. That one just was – just a – another proof-of-concept that we want to try to continue to show people sort of have the ability, we think we’ve developed an ability to improve our aptitude on industrial acquisitions at this point. But look, the retail is the easiest. It’s the largest fire base out there. So I think that’s a no-brainer for us. We’re going to continue to look at opportunities where they make sense. I mean, like, we sold a camping dealer – a camping world dealership last quarter sold a supermarket, right? A couple supermarkets, LA fitness location. So we’ll continue like to find things that we think make sense to sell without getting into details about those properties, those made sense for us to sell.

Linda Tsai: But in terms of what you’re buying, is it with a higher rent escalators, does that fall naturally into industrial?

Jackson Hsieh: I’d say, yes, with a little, but we still think owning retail is important. We’ve got obviously a lot of retail tenants and capability. I think what you’ll see us probably start to really lean into is more repeat business with our existing retail tenants. The challenge we’re finding right now is that retail opportunities that come by that are just where we don’t have a relationship with the tenant, just the math is just not as compelling from an escalating standpoint or a cap rate based on the perceived risk we think we’re – that we’re – that’s involved in the transaction.

Linda Tsai: And then just between manufacturing and industrial where’s your pipeline bigger and where do you see the better opportunities near-term?

Jackson Hsieh: I’m sure it’s very credit dependent and locational. So look, we – I candidly would like to do more distribution. It’s just trying to be able to line up our cost of capital and win those opportunities. We certainly have – we have certainly pursued a number of different distribution real estate opportunities. We’re not successful this past quarter, just given kind of where we are pricing things right now. So, in time maybe we’ll be able to increase that hopefully over the rest of this year. But if I were to tell you, I think we’re going to continue to do retail. We’re going to do sort of a good mix of distribution on light manufacturing throughout the rest of the year. So I think that fit our cap rates in that mid-7 area.

Linda Tsai: Thank you.

Operator: Our next question comes from Josh Dennerlein with Bank of America. Please go ahead.

Josh Dennerlein: Hey guys, it’s Josh Dennerlein. I think last quarter you mentioned in guidance there was $0.05 of reserves. Did that change at all from last quarter? And did you – I don’t think you had to use any of that in 1Q, but if you confirm that, that would be great.

Michael Hughes: Yes. Josh, this is Mike. I mean, that’s come down a little bit. So I’d say we’re a little less than 1%. We didn’t post any loss rent in the first quarter. We did talk about last quarter that that was a little more back half weighted in the year that’s where we have less visibility. But we did have some of that reserve in the first quarter and we didn’t use it. So, we have taken that down a little bit. So it’s a little bit less than 1% at this point.

Josh Dennerlein: Okay. And then I wanted to follow-up on the seller financing on the theater sales. Was the usage of the seller finance driven just by like just what the theater market is like today, or was it something different like going on with maybe just like the banking sector in general for debt at the time?

Ken Heimlich: It was more of that the latter. It’s just really hard – it’s hard to get financing out there in the bank market at the moment. I believe that our belief is that, that this borrower has the ability to finance it. It just been a – been kind of a rough month in bank land last couple months. And so our expectation is that this operator that’s closed on the property, we refinance that loan. It’s a reasonable loan to value. I think you can get it done.

Josh Dennerlein: Actually, maybe one final…

Ken Heimlich: So it was really more of an accommodation by us.

Josh Dennerlein: Do you expect to use a little bit or utilize seller financing a little bit more in this environment for the dispositions that you’re talking about? I guess, I’m just asking just to see if it’s something we should kind of be on the watch out for just to kind of expect?

Ken Heimlich: I would say that’s more – this’s a very unusual one-off situation. Like we’re not really in the business of making loans like that. This just happened to be, like I said, like this win-win. This operator’s got obviously liquidity. It makes a lot of sense for that operator to basically cancel the lease, right? That’s what they’re doing. And they’ll basically refinance either with a mortgage or corporately later. I mean, don’t forget, this is a larger operator, regional operator, so they have the ability to finance at the corporate level. So our expectation is, we just saw this as kind of a win-win for both of us in a kind of very unsettled debt market. So I don’t expect us to be, this is not a strategy of like providing seller financing. That’s not really what we’re going to do. Josh, you want to talk about trying to get theater sold, they’re not easy to sell right now.

Josh Dennerlein: Okay. Thank you.

Operator: The next question comes from Brad Heffern with RBC Capital Markets. Please go ahead.

Brad Heffern: Thanks. Good morning, everyone. I think you owned another nine theaters where Emagine as the tenant. Is there a potential for more deals like this, or was this a special situation some regard?

Jackson Hsieh: I would submit that that was the transaction that we did was very germane to that relationship and that dynamic. We’re very happy with our other Emagine theaters and that operator, phenomenal operator. So right now there’s no expectation.

Brad Heffern: Okay. Got it. And then Michael, on the increasing guide, can you just go through sort of the underlying reason for that? Obviously the dispositions number went up, presumably that would actually take the guide down. So what was the offsetting factor there?

Michael Hughes: Yes. I mean, the main reasons for the increase for guide were, one, the performance in the first quarter. We didn’t have any loss for rent, right? So we have some reserves set aside for that that we didn’t use. And then we had very accretive acquisitions in the first quarter that flow through the rest of the year, saying, what you do in the first quarter does have an impact on the rest of the year. The dispositions really aren’t – the increase in dispositions really aren’t an offset, we’re shaping up those additional incremental dispositions to take out to market now, by the time you get those out to market and get them done, that’s going to be in the latter part of the year. So it doesn’t really have a big impact to earnings this year.

What it really does is it positions our balance sheet well, going into 2024, which we think will be a very good year for us. But those dispositions don’t have a huge impact on our earnings this year. But again, the opposition in the first quarter coupled with just good operating performance is what really drove the increase in the guide.

Brad Heffern: Okay. Thanks.

Michael Hughes: Yep.

Operator: The next question comes from Wes Golladay with Baird. Please go ahead.

Wes Golladay: Good morning, everyone. Sticking with the theatre, how should we think about percent rent going forward? You did only sell the four theaters as Brad was talking about this question. Were these theaters different in any way, like the next-generation theaters? And then when you look at your vacancy, you only have a few. Are those any Regal’s in there and how should we think about a fully loaded loss given default for those theaters?

Ken Heimlich: What I can tell you is, one part of that answer is the five vacant that we had at the end of the quarter, none of those were theaters, and I’m not sure what the other…

Michael Hughes: Yes. And on percent rent, I mean, the – we did have percent rent on the four that we sold. That was a special situation because we did re-tenant those during COVID. So with the new operator coming, they did have a ramp up period. That period ended at the end of last year. We don’t have any other situations like that. So none of our other theaters are on a percent rent basis that was a little unique to that particular tenant, which obviously now we’ve sold those properties.

Wes Golladay: Yes. I guess, what I’m trying ask, when you take that written down for the second quarter from the first quarter run rate?

Michael Hughes: Yes. Well, that rent is not part of our ABR at the end of the first quarter since they were sold. So our ABR is snapshot at the end of the quarter. So our ABR does not include those four theaters.

Wes Golladay: And then on the – I guess, the loss given default, I guess you don’t have any theaters for Regal, so that’s a moot question at the point. My next question…

Jackson Hsieh: Yes, we do have theaters with Regal, but we’re still in the process with the bankruptcy with those guys. So at some point when they’re done, we’ll explain it. But as we’ve said, we expect to get – we expect to lose a couple theaters.

Wes Golladay: Okay. And then you have ClubCorp, they’re debt trading a little bit weaker, but from what I recall on past calls, you have pretty good operational momentum at the assets you bought. And so could you maybe give us an update there on how they’re performing operationally for you?

Jackson Hsieh: Sure. Look as you guys know, Invited, they’re headquartered here in Dallas. We are very, very closely aligned with them. And Apollo, candidly, we’ve spent time with both entities. We are very bullish on the golf business, very bullish on the industry, very bullish on those guys. The performance of our master lease has continued to strengthen. So our master lease coverage right now is 2.8x. That’s 0.4x higher than 2019. So you should sort of imply revenues are higher than pre-COVID levels right now for those – for our properties. Those – our lease generates about 10% of Invited’s corporate EBITDA, so it’s a meaningful part of their business. And our units on the top line have increased 28% – 28% since 2019.

So I can tell you like the performance of the units that we bought are very, very strong. And candidly, they’re very consistent with – I believe the experience with the rest of their portfolio. And so I personally am very confident in their ability to refinance that debt, which is due in September of 2024. I know there’s some whatever articles out there, but we have pretty good insight into their business and believe that they have – they will be able to refinance that. And so we’re not worried about it.

Wes Golladay: Got it and if I could sneak just one more. You do have that $500 million delayed draw term loan, how should we think about drawing that down in the use of proceeds for that?

Jackson Hsieh: Yes, I would model that we mask that with our acquisition needs. We’re in the process of working with our lenders to amend that to be able to push out some of that commitment. So that we don’t have to draw it all in July. So we’ll update you and that is complete. So we’ll be able to better match that with the needs to actually draw it. So I would not assume that we draw the entire $500 million in July. We’ll be able to work, push that commitment out a little bit, stagger it to truly match it up with our funding needs.

Wes Golladay: Thanks for the time, everyone.

Jackson Hsieh: Thank you.

Operator: Next question comes from John Massocca with Ladenburg Thalmann. Please go ahead.

John Massocca: Good morning.

Jackson Hsieh: Good morning.

John Massocca: So maybe kind of just quickly touching on that last point about the debt. Should we kind of assume the goal is to get that to match up with the swap timing? Would that be kind of the ideal situation or is – maybe looking to get it even more granular than that?

Jackson Hsieh: No, I think that’s a fair assumption.

John Massocca: Okay. And then on the theaters, I think Jackson heard it, you were looking to kind of continue monetizing those assets. I mean, what are some kind of creative solutions to monetizing particularly some of your non big three theater assets beyond things like seller financing. Is there any other kind of strategies that you have out there that you’re working on today?

Jackson Hsieh: No, I would say the answer is no. This worked out well for both us and the manager operator because, the performance at his theater is going really well. He’s got other theaters and corporate facilities, that facilities, so just – it was just made a lot of sense. Look, would we sell to other operators? Maybe. And so we’ll continue to see, and we will obviously have a lot of good visibility on performance at the unit level and corporate level for our theater operators. So hey, look, maybe we could do another one like this, or maybe it doesn’t – maybe it’s not seller financing, maybe it’s something else. But there’s clearly as negative as people are out there, some people about movie theaters, our operators are actually quite bullish and especially the regional ones that are not hampered with some of the cost structure of the larger bigger international kind of players.

John Massocca: I guess in that context, it’s fair to assume there aren’t any additional theater dispositions and kind of disposition guidance today?

Jackson Hsieh: Not right now.

Michael Hughes: Yes, yes, yes. I just, I actually want to make a quick correction. I mentioned we had – out of the five vacants we have, there is one small theater. The first Regal that we had previously disclosed that they did reject that it’s got a resolution here within the – a matter of days. But other than that, we’ve got to wait until see the end of the Regal until it gets wrapped up this quarter, probably late this quarter.

John Massocca: Okay. And then, as we think about kind of assumed credit loss through the remainder of the year, is there any kind of change in the outlook for some of the tenants that are undergoing kind of bankruptcy right now? I mean, Regal is the most obvious one, but maybe Party City as well.

Jackson Hsieh: Party City is zero loss for us. So no, we don’t see a lot of pressure there at the moment, so.

John Massocca: Okay. That’s it for me. Thank you very much.

Jackson Hsieh: Thank you.

Operator: The next question comes from Spenser Allaway with Green Street Advisors. Please go ahead.

Spenser Allaway: Thank you. Just circling back to the theater assets that were sold, and I’m sorry to belabor this point, but was there any CapEx that was spent from Spirit’s perspective? Will those were being converted from the Goodrich name?

Jackson Hsieh: No. It was zero. We didn’t do – we didn’t put any money into them.

Spenser Allaway: Okay. And then as it relates, just a general use of proceeds, has there been much consideration around shared buybacks just given where the stock is trading?

Jackson Hsieh: We look at it, talk to the Board about it. And we’ll continue to evaluate it. At this point, we feel like, look, we’re generating 10% incrementally on our dispositions, on our net acquisitions. And like I said, we believe that what we’re doing is improving the overall portfolio from a credit and stability standpoint. Diversification, obviously WACC , I talked about and escalations. So yes, I mean, we’ll always look at buying back stock, but buyback stock doesn’t really improve your portfolio. And these net lease portfolios, if you just leave them be, WACC goes down. So you sort of have to kind of continue to kind of continue to refresh these, mix the – mix of assets in these kinds of companies in my opinion.

But yes, we do look at stock buybacks and we’ll continue to evaluate it. We have done it in the past, obviously, since I’ve been here in a meaningful way. But at this point, we feel like there’s still good work to be done in how we’re thinking about the recycling of assets given the market opportunities to deploy at what we think are really good cap rates and candidly with the duration that we’re buying. We believe that when the Fed eventually finishes and interest rates stabilize, there’s going to be a lot of uplift and pricing if we’ve decided to go sell some of the things that we’ve been buying in the last year.

Spenser Allaway: Okay. Thanks so much for the color, Jackson.

Jackson Hsieh: Sure.

Operator: Next question comes from Greg McGinniss with Scotiabank. Please go ahead.

Greg McGinniss: Hey, good morning.

Jackson Hsieh: Good morning, Greg.

Greg McGinniss: So the portfolio continues to go through some pretty substantial changes with industrial exposure at nearly 25%, up 20% since 2018. How are you thinking about the ultimate diversity of exposure to each asset class or industry?

Jackson Hsieh: Well, I mean, Greg, we don’t have a target out there to be honest with you. Like, we like both, we think, having – at the current mix level, we think it provides a great deal of diversification geographic industry unit, real estate, size of real estate and takes advantage of some of the on showing that’s coming into this country. And we just see a lot of interesting positives in that manufacture – that light manufacturing industrial portfolio. I mean, real, I’m not going to tell you that we’re going to take it significantly higher or lower. It just – we’re going to continue to evaluate that healthy mix. Look, there are certain retail lines of businesses that we’re just not going to be market for anymore.

Either they’re too expensive from a weighted average cost standpoint or don’t match up in our heat map the way we see – the way we kind of want to build this portfolio long term. So that mix, go back to Page 4. Look at it. It’s changing quite a bit. Life Time Fitness for example, I mean, a lot of people were criticizing us about the concentration being number one tenant. Look, we’re big believers in that concept, big believers and the CEO, they’re just – it’s a phenomenal business and a lot of confidence in them. So, that’s very different than Walgreens, right? Walgreens was our number one tenant at the end of the spinoff. And quite honestly, Walgreens, we can’t be a big enough partner with Walgreens to make a difference.

So, why should I go compete to buy developer Walgreens deals, right, just given our size. Whereas with someone like Life Time invited, we can be a real partner, we can help them, and they can help us to have a very additive relationship. So look, we’re looking at our portfolio as a combination of trying to create that diversity, but also those win-win opportunities with what I’ll call best-in-class operators in those industries that we believe have that really long runway for stability, that’s really, that’s kind of what we do, right.

Greg McGinniss: Right. Okay. Thanks. And then…

Jackson Hsieh: I didn’t answer your question about the mix, but that’s how we look at the world right now.

Greg McGinniss: No, that’s fair. And I just wanted to touch on the watchlist again. In regard to specific tenants such as Shutterfly and Tupperware, could you provide any color on ABR exposure to those tenants? And then your thoughts on bankruptcy potential and disposition or releasing expectations on those assets? And finally, just as a reminder, are all the invited club assets under a single master lease?

Jackson Hsieh: Yes. First of all, yes. On the invited, the answer is yes. Look, on the Shutterfly deal, what I can tell you about that is it’s great real estate. Actually the tenant has increased the usage, the manufacturing usage by kind of taking out some of the office component that’s in that building. So that’s a – I think it’ll be a super sticky building. And looking on Tupperware, I’m not going to comment directly on that. I mean, I can just tell you they paid rent this month, and we’re very close – continue to evaluate that situation, and when we have more to say, we’ll do it.

Greg McGinniss: Okay. And are you willing to disclose ABR to the tenants?

Jackson Hsieh: I mean, it’s less than 50%, 50 basis points, sorry. Yes.

Greg McGinniss: Right. Okay. Great. Thank you.

Operator: This concludes the question-and-answer session. I would like to turn the conference over to Jackson Hsieh for any closing remarks.

Jackson Hsieh: Thank you, operator. Thank you very much for participating on our call. And I just bring you back to the new page that we put into our supplemental deck that talks about the progress of Spirit on Page 4 if you look at it. We’re really focused and excited about the progress we’ve made since the IPO. This company is quite different and we’re – we feel quite enthusiastic about the prospects for the rest of this year. Thank you.

Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.