Spirit Realty Capital Inc

F:21S1

Earnings Call Transcript 2019-Q2

[Operator]

Greetings. Welcome to the Spirit Realty Capital second quarter 2019 earnings conference call.. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note, this conference is being recorded.

I would now turn the conference over to your host, Pierre Revol, SVP of Strategic Planning and IR. Mr. Revol, you may begin.

[Pierre Revol]

Thank you operator and thank you everyone for joining us today. Presenting on today's call would 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 that can cause actual results to differ materially from those currently anticipated due to a number of factors. I would refer you to the Safe Harbor statement in today's earnings release and supplemental information 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. Both today's earnings release and supplemental information are available in the Investor Relations page of the company's website.

For prepared remarks, I am now pleased to introduce Mr. Jackson Hsieh. Jackson?

[Jackson Hsieh, President, Chief Executive Officer]

Thanks Pierre and good morning everyone. Before I talk about the quarter, I wanted to remind you what we have been trying to solve for as a company since I became CEO, achieve a long term competitive cost of capital. If you recall from my comments in our first quarter investor call, that our team has been focused on the execution of our acquisition and disposition targets, maintaining high quality operations and financial results and assisting SMTA's independent trustees with their accelerated strategic process. I am very pleased with the progress towards those 2019 critical initiatives that we achieved with our second quarter results. As an operating team, we are continuing to see the benefits of the many people and process changes we put in place over the last two years.

During the second quarter, we exceeded our acquisition expectations, continued to improve operations across the majority of our business units translating into improved metrics and assisted SMTA in securing a $2.4 billion sale transaction for the properties within the Master Trust 2014 portfolio. We also executed several important capital transactions with nearly $500 million in equity issued or available to be issued through our ATM program and underwritten public offering, $400 million of senior unsecured notes and extinguishing $402.5 million of convertible notes and the remaining $158.5 million of secured Master Trust 2013 notes, unencumbering over $400 million in properties.

In addition, our unsecured credit rating was upgraded from BBB- to BBB at both S&P and Fitch. We expect to receive approximately $247 million in proceeds related to the termination of the asset and property management contract with SMTA, redemption of our preferred equity investment, the sale of the Flying J's and the redemption of our Master Trust 2014 notes. The timing is currently expected on September 20.

We are very excited as these key accomplishments results in us revising upward our acquisition and AFFO earnings guidance assuming a full year of SMTA income, which Mike will cover in more detail during his prepared remarks. These actions are providing Spirit with a competitive cost of capital and brings us another step closer to becoming a simplified triple net lease REIT with diverse revenue base and steady earnings growth.

I referenced in our first quarter call that we were at 90% of the way towards this goal. That numbers is now 95%. Here is a rundown of our second quarter operating results and key financial metrics.

We generated AFFO per diluted share of $0.86. We improved operational performance on all fronts with portfolio occupancy of 99.6%, lost rent below 0.1% and less than 1.6% property cost leakage. We grew same-store sales by 1.3% driven by health and fitness, movie theaters and medical office. We ended the quarter with leverage calculated as adjusted debt to annualized adjusted EBITDAre of 5.1 times. We increased our master lease rent contribution from 39% to 42% and enhanced our available capacity for growth with a fully undrawn revolver at attractively priced unsettled forward equity at our disposal.

Turning to capital allocation. We acquired 104 properties during the quarter, totaling $286.9 million and invested an additional $6 million in revenue producing capital with an initial cash yield of 6.85%, an economic yield of 7.85%, weighted average lease term of 15.6 years and average annual rent escalators of 1.9%. The investment activity for the quarter was both accretive to our property rankings in each of the respective industries and in large part represented key attributes that we look for including larger and publicly listed tenants that are aligned with our industry view, accretive to our rankings and provide higher organic rent growth.

Investment categories included a vertically integrated party goods manufacturer, distributor and retailer, discount retail, manufacturing, dollar stores, health and fitness, c-store and QSR. Approximately 83% of the total investment was derived from public issuers and represents key real estate in their underlying business. The split in rents from service retail, traditional retail and industrial and other was 17%, 28% and 55% respectively. Since the spin-off, that same split has been closer to 47% service retail, 26% traditional and 28% industrial and other.

Our top 15 tenancy will continue to evolve as we execute our investment strategy. A few notable additions to our top 15 tenants are Party City and Dollar Tree. We are especially excited about the investment in Party City who is now our number nine tenant. Party City is the largest vertically integrated global producer of mylar balloons and party goods in the world. We own one of their key 878,000 square-foot distribution facilities in Chester, New York, their mylar balloon manufacturing facility in Eden Prairie, Minnesota and Los Lunas, New Mexico, all mission-critical facilities for this leader in the party goods sector. Over 60% of the world's mylar balloons are manufactured in the Eden Prairie facility under their proprietary based balloon manufacturing process.

The Dollar Tree stores we acquired were all structured as several pools of assets under master leases with unit level sales reporting and CPI rent escalators. Dollar Tree has moved into our top 15, currently number 12. We like the Dollar Store position and growth and more particularly intrigued with the strong lease structure that these portfolios offered us. The Dollar Tree stores rank higher than our existing dollar store portfolio.

During the quarter, we disposed of 83 million in occupied properties at a 7.2% cap rate and $31 million in vacant properties. Characteristics of the disposed assets included a multitenant property, flat double net leases, risk mitigation and credit enhancement of the master lease. Notable dispositions in the second quarter included a PetSmart distribution facility moving it from our number 11 to our number 59 tenant, which we discussed briefly on our last quarter call, a vacant former Haggen stores in Las Vegas, Nevada and a Walgreens drugstore.

All of these dispositions are examples of the type of assets we describe as part of our longer term disposition strategy. We expect to continue portfolio shaping throughout the rest of the year. Sale activity in the second quarter marks the peak of our disposition volume for the year. We have also cleared all hurdles to sell the three Flying Js to HPT for $55 million at a 5.7% cap rate as part of the SMTA transaction.

I realize that we are still a relatively new team and operating platform and the passage of time and more quarters like Q1 and Q2 will build even more investor confidence that we do have a competitive cost of capital and we are honored and excited to be back in the growth business, focusing on our existing tenants as well as new targeted tenants. As we deploy capital into real estate, we will continue to pursue quality real estate opportunities that rank well within our property ranking process with financially strong tenants that operate in industries that are well positioned within the heat map. Our investment focus will continue to add real estate assets to our portfolio and enhance our current rental escalations, weighted average lease duration and property rankings scores.

With that, I will turn the call over to Mike.

[Michael Hughes]

Thanks Jackson. Good morning everyone. It was a very exciting quarter for Spirit, powered by a capital markets activity and substantial capital deployment. Given of the capital issuances and debt agreements, I will start with the balance sheet.

During the first six days of the quarter, we issued 1.4 million shares under our ATM program for $57.4 million in gross proceeds. Locked trades executed through reverse increase accounted for $42 million of those total proceeds. On My 2, we issued shares through an underwritten public offering. Demand for the offering was very strong and after upsizing the initial offering and the underwriters exercise of their over-allotment, we issued 11.5 million shares under four contracts.

Through June 30, 1.9 million of the shares have been settled generating gross proceeds of $76 million. Approximately $375 million in expected net proceeds remain undrawn as of June 30. We account for the unsettled shares using the treasury stock method. On May 15, we drew $400 million on our delayed draw A2 term loan and repaid the $402.5 million outstanding balance of our 2.875% convertible notes that were due. This leaves with only one outstanding convertible tranche of 3.75% notes due in 2021.

On June 27, we issued $400 million of 4% senior unsecured notes and used the proceeds to extinguish the remaining $158.5 million outstanding balance for the Master Trust 2013 notes and repaid the outstanding draws on our revolving line of credit. This transaction on the heels of our credit rating upgrade by S&P was very well received by investors and oversubscribed. We were able to reprice our credit spreads 35 basis points tighter to where our 2026 bonds were trading at the time. Since the issuance, our credit spreads have continued to compress to further enhance our weighted average cost of capital.

The transactions this quarter also had a positive impact on our credit metric. We funded our net acquisitions of $180 million with $130 million of net equity proceeds or 72% bringing leverage down to 5.1 times compared to 5.2 times last quarter. We improved our fixed charge coverage ratio, extended our weighted average debt maturities to 5.2 years and encumbered 267 properties bringing our unencumbered to total assets ratio to 89.3%. On July 26, senior unsecured credit rating was upgraded by Fitch to BBB with stable outlook. We also continue to maintain a high level of liquidity with an $800 million undrawn revolving facility and our remaining equity available on the outstanding four contracts.

Turning to the key operating metrics. During the second quarter, annualized contractual rent which annualizes the rents in place at quarter end grew $11.7 million compared to last quarter. Approximately $20.9 million of the increase was attributable to acquisition and contractual rent increases, offset by a reduction of $9.2 million attributable to dispositions. Unreimbursed property costs or leakage declined by $117,000 compared to the first quarter driven by property tax recoveries. As Jackson mentioned, lost rent was effectively nonexistent.

There a few other items to note this quarter that impacted our numbers. G&A was negatively impacted by two items. First, the SMTA Board of Trustees issued share based awards to its CEO who is an employee of Spirit. As our employee benefited from this award in accordance with the accounting rules on share-based payments, we recorded non-cash asset management fee revenues of approximately $400,000 for the corresponding offset to G&A. Recording of this non-cash transaction did not impact our net income or any of our non-GAAP earnings metrics.

Second, due to the timing of the annual equity awards for our Board of Directors as well as the performance share awards for our executive team, we recognized an additional $300,000 of stock compensation expense during the quarter. Other income was also higher by $545,000 driven by the recovery of two lease termination payments whose terminations occurred in prior periods.

Now turning to our guidance. Due to the announced sale of SMTA's Master Trust 2014 portfolio and resulting termination of our existing management agreement with SMTA expected to occur near the end of the third quarter, we are providing updated guidance with and without the impact of that transaction. For the full year 2019 and excluding the sale of SMTA's Master Trust portfolio, we are raising our projected AFFO per share range from $3.35 to $3.39 to $3.39 to $3.43. We are raising our projected capital deployment comprising acquisitions, revenue-producing capital and redevelopments from $450 million to $600 million to $700 million to $900 million. We are lowering our projected asset dispositions from $225 million to $325 million to $225 million of $275 million and we are maintaining our adjusted debt to annualized adjusted EBITDAre range of five to 5.4 times.

For the full year 2019, assuming the SMTA transaction occurs on September 20, our projected AFFO per share range is $3.27 to $3.31. This projection assumes that upon the sale the Master Trust 2014, we will terminate the existing asset management and property management agreements with SMTA which currently provides for Spirit to receive approximately $27 million in fees per annum and receive approximately $48 million in termination fee or $35 million net of estimated tax payments, entered into an interim asset management agreement with SMTA provided the company will receive $1 million fees per annum during the initial one-year term plus certain cost reimbursement, sold the fee interest in three Spirit owned properties for $55 million in gross proceeds at 5.7% cap rate, received $150 million to repurchase the Spirit's preferred equity interests in SMTA, externally provide Spirit with $15 million in dividend payments per annum, receive approximately $33.5 million through the redemption of Spirit's Master Trust 2014, currently paying Spirit interest at a rate of 4.6% per annum and extinguished approximately $26.4 million of related Party notes that bear a coupon of 1% per annum.

You should be aware that the timing of the SMTA transaction is subject to change and the transaction requires extinguishment of the Master Trust 2014 notes and only occur on a payment bid. If the timing of the transaction shifts past the September 20 payment date, the next available date to close the transaction would be October 20. The impact to our guidance, inclusive of the transaction for one month shift in the closing date equates to approximately $0.04 of AFFO per share. In addition, as I noted on our previous calls, the repayment of the 2.875% convertible notes in May will cause approximately $0.01 per share per quarter of earnings dilution for the remainder of the year. So please keep that in mind for your earnings models.

With that, I will open up the call for questions.

[Operator]

[Operator Instructions]. Our first question is from Haendel St. Juste at Mizuho. Please proceed with your question.

[Haendel St. Juste, Mizuho]

Thank you. Good morning. Thanks for taking my question. I guess the first question on invested volume. I guess most of us on the call aren't surprised by the increase in the acquisition guidance to the new range $700 million to $900 million. I guess I am curious, is that more the annual volume that we should be thinking near term? And maybe as part of that you can talk a bit about what is perhaps new or interesting today in light of your heat map analysis and the decision to increase your Party City exposure and some color around maybe the rent coverage, rent bumps, cap rates? A bit more color on that Party City. Thank you.

[Jackson Hsieh, President, Chief Executive Officer]

Okay. Thanks Haendel. It's Jackson. Not a lot has changed in terms of our investment outlook. If you go and look on pages 27 and 28 of our investor presentation that we have on our website, we lay out our heat map in our Spirit efficient frontier. And if you look at the categories that we feel like we have – we see interest in, they fall into a couple of different segments, industrial, distribution, home furnishings, warehouse clubs, discount retailers, building materials. So we feel like there is plenty of opportunity for us to add into the industries and areas that we think are constructive from Porter's 5 Forces and Amazon effect, if you will call that

As is relates to Party City, one of the things that was really unique about this opportunity was it's really two businesses. There is a business called Amscan. Amscan is the largest sourcer and distributor of party goods in the world. So they sell and originate balloons and cups and napkins and they sell to Amazon, Walmart, Target. They are the largest in the world by a multiple factor. They also own Party City which is the retail operation which owns and operates about 900 stores in North America.

So the way I think about this company is it's very unique. It's a vertically integrated business that does about $2.5 billion in revenues, about $400 million of adjusted EBITDA. They are number one. They are about four x in sales between them and the number two competitor in the world. As you think about that market share, if you were to look at other consumer goods companies like, Adidas and Under Armour, that ratio is more like 1.5% or 1.5 times. So we like the dominant share.

We think people are going to continue to have parties for a long time. The balloon manufacturing that they do is really par none. I have visited both the Chester and the Eden Prairie facility, both facilities. They are just a very nice company. They happen to be public, which is also a big benefit for us. And so we really like the business.

And to get to your final question, as it relates to longer term guidance, look, we haven't given next year's guidance. But I feel pretty comfortable that that's a pretty good range for us as we chart moving forward with this cost of capital that we have right now.

[Haendel St. Juste, Mizuho]

That's helpful. Thank you. And certainly I can share your thoughts on Party City, where there are quite a few times a year for a birthday party for our kids. A question on the disposition side, perhaps. I know in the past you have talked about being opportunistic there, that you weren't selling troubled assets. But also you’ve been improving your cost of equity also made that a favorable alternative source of capital. So maybe a bit more color on the volume of assets sold in the quarter? It seemed a bit higher than the people were expecting, especially again in light of the spin-off of SMTA? Thanks.

[Jackson Hsieh, President, Chief Executive Officer]

I think that the PetSmart facility had a big impact obviously and that was a large asset. Next quarter or in the third quarter, the Flying Js are going to be a larger portion of the disposition activity. Look, as Ken has said in the past and we have said, there are certain assets that we inadequately would like to sell, multi-tenants, overly [federal] [ph] portfolio, like we don't like double net leases, flat leases. So if we have opportunity to cycle out of those kind of properties, especially in combination with a blend and extend or some other type of transaction like that that creates value, we are going to try to take advantage of that even though we might have a strong cost of capital, we think it's the right thing to do to build the duration and the rent escalators in our portfolio. But I think the second quarter volume is going to be a peak for what we expect going forward.

[Haendel St. Juste, Mizuho]

Okay. That's helpful. Thank you.

[Operator]

Our next question is from the Ki Bin Kim with SunTrust Robinson Humphrey. Please proceed with your question.

[Ki Bin Kim, SunTrust Robinson Humphrey]

Thanks and good morning. Just a couple of follow-ups on the acquisitions. The Party City related warehouses, the ones that were for manufacturing, is that only two that they have in the entire company? Or is it like two out of a couple more? And on the dollar stores, can you just provide a little more color on the investment merits and things like rent bases, rent coverage, things like that?

[Jackson Hsieh, President, Chief Executive Officer]

Well, on Party City, so they have two large, I will call it, classic distribution facilities. We own one of the two now. They have a separate B2B facility, which is not part of these two. And in terms of their manufacturing facilities, they own several manufacturing facilities in the United States. The two properties that we own are principally the metallic balloons which is one of their bigger profit segments. So these are like NFL balloons, the NBA balloons. And so one of the things, that's another thing I didn't mention on Party City is, what's unique about them is about 20% of their business is all licensed business. So they will license with Disney, NBA and the NHL and basically produce balloons with those thematic costumes and stuff like this. So it's a really unique business and it's so dominant. And like I said, we feel like we have got the critical facilities.

To shift questions on the dollar stores. Our existing dollar store portfolio is primarily, as you know, single site, flat leases. That's more of a historical legacy portfolio that we acquired through the Cole merger. These new Dollar Tree portfolios that we acquired were pretty unique. They were under master leases. They provided unit financials. They had rent escalators. Just really different than the kind of restructures that we had in our existing portfolio. And I think I have said to you, we have looked at dollar opportunities but we have sort of shied away from what I would call the single site typical developer type opportunities. And so when this opportunity popped up, we thought it was a pretty unique opportunity for us to add that into our segment and we like it. So we don't give obviously individual rent and coverage like that. But that was the principal driver for what attracted us here.

[Ki Bin Kim, SunTrust Robinson Humphrey]

And what are some of the other investment verticals you are looking at. I know you have done hotels, things like that. So anything that is a bit different than it used to?

[Jackson Hsieh, President, Chief Executive Officer]

We did one hotel.

[Ki Bin Kim, SunTrust Robinson Humphrey]

Yes. One hotel.

[Jackson Hsieh, President, Chief Executive Officer]

So I think I said to Haendel, if you go to pages 27 and 28 on our investor deck, you can just see it. It's like where we are going to be fishing is on the far right of page 28. So you would expect us obviously more warehouse clubs coming, continue to see more discount retail, like the Kohl’s opportunities, Dollar Tree, Burlington, things like that. We like building materials. We continue to focus our effort on that area. Still like entertainment, home furnishings. You will continue to see us do industrial, distribution, manufacturing, select office.

[Michael Hughes]

Auto service.

[Jackson Hsieh, President, Chief Executive Officer]

Auto service, yes. So all that stuff. And there is a lot of different things out there.

[Ki Bin Kim, SunTrust Robinson Humphrey]

All right. Thank you.

[Operator]

Our next question is from Ryan Hawthorne, RBC Capital Markets. Please proceed with your question.

[Ryan Hawthorne, RBC Capital Markets]

Good morning. How do you guys underwrite when we have large interest rate movements like we have seen recently? Like how does that impact your investment analysis?

[Jackson Hsieh, President, Chief Executive Officer]

I will start with credit first. When you sort of see changes in interest rates, changes in liquidity, to me the first question you have got to ask is, can your tenant operate for 20 years? That's the first. Are they in the right business verticals? Do they have the liquidity? Do they have the access to capital? That's obviously really important.

Second is, how does the industry that we are investing in correspond to changes in rates/ And it's not just rates, it's competition, tariffs, obviously a lot of different factors, if you want to make sure they are durable. And then finally, you get down to the specific quarter, Is it a good piece of real estate? Is it the right rent? How mission-critical is this asset relative to what this operator is dealing with? If things were to get into trouble for whatever reason, is this going to be the surviving real estate that will come out in a restructuring?

So it's not just rates, it's kind of all those things. But I think it starts with, the operator's ability, in my mind, 20 years. That's the first fundamental question I will ask. And there is obviously a lot of things that can impact that.

[Ryan Hawthorne, RBC Capital Markets]

Sure. Okay. Great. And then across your different asset types, where do you see the deepest buyer pool?

[Jackson Hsieh, President, Chief Executive Officer]

Well, as you know, we just went through the sale process for the Master Trust, big portfolio. The way I would describe the market is, it's very deep. It's not just us public triple net REITs buying assets out there, there's private funds, there's 10-31, there's private capital sources out there. It's very, very diverse funding sources out there. And I would say, there is no real one deep area. It seems like this is very fragmented. So transactions are both large and small and what we find is there seems to be ample opportunities within the segments that we are looking at for good risk-adjusted opportunities, very liquid market.

[Ryan Hawthorne, RBC Capital Markets]

Sure. Okay. Great. Thanks for taking my questions.

[Jackson Hsieh, President, Chief Executive Officer]

Thank you.

[Operator]

Our next question is from Greg McGinniss, Scotiabank. Please proceed with your question.

[Greg McGinniss, Scotiabank]

Hi. Good morning. Jackson, as Haendel mentioned, the increased acquisition guidance, was not a huge price based on prior messaging but considering some of your peers maintained acquisition ranges for the year while Spirit raised guidance like 50%. I am curious, if the increase is due to a few specific deals you are able to close? Or it's becoming more capable of sourcing and closing deals versus initial expectations? Any deals on specific drivers for the increased guidance would be helpful.

[Jackson Hsieh, President, Chief Executive Officer]

I will flip that to Mike. Mike?

[Michael Hughes]

Yes. Greg, this is Mike. I think it's more from a capital availability standpoint. Now if you go back to the beginning of the year, you go back to our original guidance, our capital was a bit more constrained, our cost of capital was more constrained than it is today. As we move forward through the year, we raised a lot of equity, we raised debt. We are kind of flush with cash right now. We have got some SMTA proceeds coming. And so it's really when we kind of hit that window starting really in early May and we have the capital to actually deploy, then we are able to really bring up our acquisition pipeline.

So I think it's really a function of having the availability of capital. Had we have that capital at the beginning of the year, then our guidance for acquisitions would have frankly been higher. So it's not that we are seeing opportunities than we did earlier in the year, the market is very liquid. There is lots of stuff out there if you have the capital to go buy them. And so the opportunities are always there. Once we got the capital we were able to really deploy that and that's what really drove the increase in guidance.

[Greg McGinniss, Scotiabank]

All right. That's helpful. Thanks. And then based on what's going on with rates cuts this year, is there any opportunity to refinance debt in near term at lower rates? I am just trying to understand what the next steps might be regarding the balance sheet? Or how you might take advantage of the low rate environment?

[Michael Hughes]

Yes. Look, I mean we are watching the rates go down. I mean the couple of things for us have really changed. One, our spreads come down significantly. Since we did our last bond deal and those were done at T-plus 200. We could probably borrow at T-plus 175 today. And so our spreads have come in 25 basis points. Obviously, we have seen what the 10-year treasury has done. So we are definitely looking at that. I would say, we have got some term loans that we took out early in the year which we would always come back and take one of those out. They are prepayable. We have these converts due in 2021, which now I think our borrowing cost is below where those are. So that seems very interesting. Those are a little tricky because they are not callable but certainly something we could look to attack. So I would say, we would be opportunistic and it is not lost on me where rates are and we still have balance sheet work we want to do and there is a window. And as you have seen us do throughout the year, there is a window we tend to be pretty active.

[Greg McGinniss, Scotiabank]

Great. Thanks and congrats on the 52-week high rate now.

[Michael Hughes]

Thank you.

[Jackson Hsieh, President, Chief Executive Officer]

Thank you.

[Operator]

Our next question is from Shivani Sood, Deutsche Bank. Please proceed with your question.

[Shivani Sood, Deutsche Bank]

Hi. Good morning. So on the acquisition channel, you have building that pipeline for almost a year now. I am just curious if you are seeing any change in terms of the quality and the depth there? And can you give us an idea of the amount you are ultimately closing in regards to what you are presented with?

[Jackson Hsieh, President, Chief Executive Officer]

I would say with this drop in interest rates, I think you are seeing, people are looking to do sale leasebacks right now or capital transactions. Obviously they have kind of gotten the joke and they are out there exploring it. So I would say that the volume of opportunities has increased dramatically from what I can see, for instance, compared to a year ago, just in terms of quantum and exploration, which is a good thing. I think for us, we have really in earnest started the acquisition process about middle of last year with the closing of the spin-off of SMTA, in earnest. So I feel like our acquisition effort really began in earnest about a year ago in June and it's just continuing to build. And it's building every quarter. It's getting better. The teams are more integrated, working better with the asset management teams. So I feel really good about directionally where we are going and we are fortunate to have a market constructive where there is a lot of different opportunities for us to look at and evaluate, without giving any specific volumes and things like that.

You did ask a question of how many deals are sort of we are doing. And I would say like today I am not sure if this is where the run rate is going to be, but we are probably targeting about an average of 10 transactions a quarter, if you think about. It's about what we have been sort of trending at or targeting as we have come out in this first full year of acquisitions. Obviously that's a lot less than some of our peers. So you should expect that we are looking at a lot of different things and not a lot of things get to that top 10, for us. Hopefully, in time we will be able to increase that number of transaction. But for right now, it seems to be, we feel right at about 10 per quarter and I think in time it will continue to increase.

[Shivani Sood, Deutsche Bank]

Okay. Thanks for that color. And apologies if I missed it in the press release and other stuff, but what was the recapture rate on leases in the quarter?

[Michael Hughes]

Hi. We don't give quarterly. We do that annually. But I can tell you through midpoint in the year, we are tracking right around the 100% mark.

[Shivani Sood, Deutsche Bank]

Great. Thanks so much. That's it for me.

[Jackson Hsieh, President, Chief Executive Officer]

Thank you.

[Operator]

Our next question is from Joshua Dennerlein, Bank of America Merrill Lynch. Please proceed with your question.

[Joshua Dennerlein, Bank of America Merrill Lynch]

Hi guys. On the 1Q call, you guys talked about expanded relationship with At Home. It sounds like the situation might change a little bit over there. How do you feel about At Home today? And is there anything you might have changed post At Home transaction on your underwriting?

[Jackson Hsieh, President, Chief Executive Officer]

First of all, we like the segment they are in. we talked about home furnishings as being one of those verticals. At Home, as you know, is a public company. I think their next earnings announcement is on September 4. We like the business and we spoke to management team after their last quarterly call. Look, it wasn't a great call. It drove their stock price down. And we have certainly experienced that from our seat but the business itself is still, in our estimation, very solid. They just opened their 200th store in San Diego, California. The West Coast is a very large development opportunity for them. They just increased their ABL back in June by another $75 million.

Our two portfolios, we have two master lease portfolios. So we had an existing one and then we added in this last transaction with them. Both are north of four times unit coverage. They are two times north of corporate coverage. The real estate scores were two times for these portfolios. The properties ranked in our top quartile. Rents were below $7 a square foot, long term leases. So we really -- same-store sales, the sales were, at least, good in these units.

So all of the things are right. Just the stock price for them, unfortunately, was a negative reaction. But we still think that the business is relevant. We like what they do and obviously we will learn more when they talk about their quarter. But we did have a call with senior management recently and we feel real good about our real estate underwriting at this point and their ability to pay rent for a long time.

[Joshua Dennerlein, Bank of America Merrill Lynch]

Okay. Awesome. And then just maybe if you could update us on what's on your watch list, if anything on there changed recently?

[Jackson Hsieh, President, Chief Executive Officer]

Ken, you want to take that?

[Ken Heimlich]

Hi Joshua, this is Ken. Yes, there is, I would use the word stable. It continues to be stable. [indiscernible] a few folks. We take a closer look at it. And we removed some folks that we have had a chance to do a deep dive on. But overall, it remains stable.

[Joshua Dennerlein, Bank of America Merrill Lynch]

Okay. Thanks Ken. I appreciate it.

[Operator]

Our next question is from John Massocca, Ladenburg Thalmann. Please proceed with your question.

[John Massocca, Ladenburg Thalmann]

Good morning.

[Jackson Hsieh, President, Chief Executive Officer]

Good morning.

[John Massocca, Ladenburg Thalmann]

So should we maybe expect, given the industrial initial assets that you acquired in the quarter and the amount of the acquisition activity in the quarter that was industrial, what should we kind of expect with regards to that mix as part of your acquisition strategy going forward? Should it kind of be paired back starting maybe in 3Q? Or is that really going to be a focus?

[Jackson Hsieh, President, Chief Executive Officer]

Well, look, I will kind of have you go back to, John, on page 28 in our deck. Manufacturing, industrial and there are other segments in there. There is a lot of room there for us, relative to how we feel an efficient frontier from like an asset allocation standpoint knowing where we can add more in that area. Industrial assets were about 7%, just under 8% of our rent in the last quarter. My guess is, we will going to continue to see more of those opportunities. We are with the right industries like the Party City, you get mission-critical facilities, you get long term leases, you get annual escalators, you get really good visibility from unit, visibility from a corporate standpoint. So I think you will see us continue to do that amount. I think we are going to wholesale change our allocations but there is a lot of room there relative to where we see our efficient frontiers to add more selectively that fits the right criteria for us.

[John Massocca, Ladenburg Thalmann]

And as you are bringing the portfolio, I guess, of acquisitions from a price perspective given improved cost of capital, but still industrial has been a pretty in-demand sector. Is it maybe manufacturing is more of a focus and that's where you can get an appropriate yield for your cost of capital?

[Jackson Hsieh, President, Chief Executive Officer]

I think we are seen probably better opportunity. Manufacturing is tricky. You have to be very selective as to how we are -- I would say it's more industrial distribution. But for us, we are focused on long term leases with certain industrial assets. And quite frankly, I think a lot of the really low cap rate industrial you are seeing out there from core buyers is actually shorter lease term opportunities where they feel like they can re-lease at higher rates. That's kind of not the typical opportunity that we are focused on. We are looking at much more of a direct sale leaseback with a critical but a good company, good industry, good fundamentals where it's a mission-critical asset. They are doing kind of a balance sheet work to try to redo their balance sheet, so we can kind of lock in to a 20-year lease. That's really what we are looking for. And so we don't feel like we are competing with, what I call the really large wedge that's buying industrial out there in a five to six year weighted average lease duration where they are there looking at buying industrial parks and looking to re-lease and move tenancy around. That's not the kind of industrial that we are looking at.

[John Massocca, Ladenburg Thalmann]

Okay. And then shifting gears to the in-place portfolio. Given all the news around Walgreens looking to optimize it's real estate footprint, are there any Walgreens in the portfolio that are on a shorter lease term potentially? And then maybe what's the rough weighted average lease term for that tenant in your portfolio?

[Ken Heimlich]

Hi. This is Ken. We definitely engage with Walgreens constantly on renewals. We have a mixed outcome. We have already taken care of all of our 2020 renewals. We are already taking about 2021 and 2022 cohorts. It's kind of spread out all the way out to 2035. But we have a great relationship with them. And there is nothing in that pipeline that concerns us.

[John Massocca, Ladenburg Thalmann]

Okay. And then lastly on the disposition side, you mentioned the vacant Haggen in Vegas that was sold. But anything else on the vacant side, just kind of color on what was being sold in the quarter?

[Jackson Hsieh, President, Chief Executive Officer]

It's just simply continuing to keep an eye on how many vacants we have. We prefer to re-let them when the opportunities arise. And we continue to pursue that. But sometimes there comes a point in time when we feel like it makes lot more sense to go ahead and exit given the cost and whatnot but I don't know that there is anything crazy going on. It's just simply trying to keep our eye on it.

[John Massocca, Ladenburg Thalmann]

Okay.

[Jackson Hsieh, President, Chief Executive Officer]

We have always maintained our desire to maintain at least a 99% occupancy. And so that's kind of a guiding light for us.

[John Massocca, Ladenburg Thalmann]

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

[Jackson Hsieh, President, Chief Executive Officer]

Thank you.

[Operator]

[Operator Instructions]. There are no further questions at this time and I will now turn the call back over to Jackson Hsieh for closing remarks.

[Jackson Hsieh, President, Chief Executive Officer]

Thank you. Thank you all for participating in this morning's quarterly earnings call. Just one final statement, as we get closer to completion of the sale of the Master Trust out of SMTA and ultimately the final completion of the liquidation of the assets in that company, I do want to make sure I remind all of you that we are going to be able to dedicate obviously 100% of our time to the Spirit assets. And that's something we are all really looking forward to do as we get closer to the end of this year. So we are very excited about that and our prospects. So thank you very much.

[Operator]

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