Spirit Realty Capital Inc

F:21S1

Earnings Call Transcript 2021-Q2

[Operator]

Greetings, welcome to the Second Quarter 2021 Spirit Realty Capital Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

At this time I will now turn the conference over to Pierre Revol, Senior Vice President, Corporate Finance and Investor Relations. Pierre, you may now begin.

[Pierre Revol]

Thank you, operator, and thank you, everyone, for joining us for Spirit's second quarter 2021 earnings call. Presenting today's call will be President and Chief Executive Officer, Jackson Hsieh; and Chief Financial Officer, Michael Hughes. Ken Heimlich, Chief Investment Officer, will be available for Q&A.

Before we get started, I would like to remind everyone that this presentation contains forward-looking statements. Although the company believes these forward-looking statements are based upon reasonable assumptions, they are subject to known and unknown risks and uncertainties 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 yesterday's earnings release, supplemental information and Q2 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 yesterday's release and supplemental information for the SEC under Form 8-K. Yesterday's earnings release, supplemental information and Q2 investor presentation, are available on the Investor Relations page of the company's website.

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

[Jackson Hsieh, President and Chief Executive Officer]

Thank you, Pierre, and good morning, everyone. As you saw on our results released this morning, we had another solid quarter and have once again substantially raised our 2021 earnings guidance with AFFO per share now forecasted to increase by 11% at the midpoint of our range, compared to last year. In addition, we're raising our net capital deployment guidance as our acquisition volumes and weighted average cap rates have accelerated beyond our initial expectations, most importantly, today Sprit's return to dividend growth, with a third quarter dividend increase of 2%.

While these results might come as a surprise to many, they're actually the product of the methodical execution of Spirit's medium term plan laid out at our Investor Day. And the adherence to one of our core values that is best summarized by the words, do what you say. While, COVID took our operating results on a brief detour, it has not kept us from reaching our target destination. Given what we have and are set to accomplish this year, I'm confident that we can reach the 2022 AFFO per share range originally laid out at our Investor Day in 2019.

So let's talk about how we're going to make that happen. One factor contributing to our performance is the success of our tenants. Lost rent across our entire portfolio was less than 1% during the second quarter, and cash rent collections, excluding theatres improved to 99%. At the end of the quarter, less than 1% of annual base rent was accounted for on a cash basis. And we received 100% of deferred rent repayments owed during the quarter. The vast majority of our tenants in industries most severely impacted by COVID, such as casual dining, early childhood education, entertainment and fitness, have fully recovered and in some cases, are growing and gaining market share.

Theatres are also on the path to recovery. With recent box office successes, like F9 and Black Widow. As you can see on Page 7 of our latest investor presentation, our rent collections from theatres continue to improve. And we expect this trend to accelerate as percentage rent agreements benefit from the strong release calendar and the remaining deferral agreements begin to expire. Given the trajectory of theatre revenues and recent balance sheet enhancements that many of our theatre tenants have completed, either through equity raises, or by accessing government programs, none of our theatres are currently being accounted for on a cash basis.

In addition, we have signed leases with new operators on all the former California Studio Movie Grill locations, and Goodrich theatres. That will add approximately 5.6 million in ABR after a period of percentage rent. As I mentioned earlier, because of the COVID driven rent abatements and deferrals, our earnings took a brief detour. While I would have preferred our growth trajectory to remain in a straight line, it is important to reiterate that our tenants and our earnings are back on track, and the permanent disruption to our rents will be minimal. As it stands today, our total permanent rent segregation due to COVID equates to only 1% of our annual base rents.

Our integrated credit and research driven underwriting focused on large, sophisticated operators with good real estate and the implementation of technology tools have enabled us to construct a highly durable and diversified portfolio that has endured through substantial economic volatility, while continually improving in credit quality and value. We believe the tail of the tape has demonstrated that our strategy provides outside yields with very low default risk, or said another way, superior risk adjusted returns for our investors.

Another factor is our accretive capital recycling. As you have seen with our disposition cap rates, we have effectively taken advantage of tighter market pricing for certain asset classes to further reshape our portfolio accretively. Over the quarter, we have disposed of 61.5 million in income producing properties at a weighted average cash cap rate of 4%. While previous quarters dispositions consisted of retail assets, such as C-Stores, grocery and drugstores and industrial asset sale drove the bulk of our disposition proceeds in the second quarter.

Now, given that we get a lot of questions about our industrial portfolio and its underlying value, I want to give some color around the characteristics of this particular industrial asset and the sale execution, which is also included in our latest investor presentation along with some good information about our industrial holdings. This particular asset was a 286,000 square foot beverage manufacturing and warehouse facility for one of the nation's leading independent beverage companies located in New Jersey. We bought this site in late 2016 and the building was well located with rail access, contained freezer and cooler space and had excess land for future expansion.

We initially paid 27.4 million for the building, which represented an initial cash cap rate of 7.7%. After receiving 10.2 million in rents over a little less than five years, we sold it for $59.4 million, representing a 3.89% cash cap rate on today's rent and realized an unlevered IRR of 25.1%. While we liked the property, it was less than six years remaining on the lease. And given the pricing we were able to achieve, it makes sense to lock in this gain and redeploy the proceeds into other attractive opportunities. Now obviously, this was a great investment for Spirit. But I can also say that this property only ranked in the middle of our industrial portfolio.

The quality of our industrial assets can also be seen in some of our recent lease renewals. As you can see in our latest investor materials our 2023 lease expirations, as a percentage of ABR dropped from 6.1% at the end of the last quarter to 5.1% at the end of the second quarter. That reduction was driven by too early industrial property windows, with FedEx and Ferguson Partners, those which are investment grade.

For FedEx, we added five years to the lease with a 5% base rent increase and for Ferguson, we added 10 years of lease with attractive 1.5% rent escalators. These early renewals, extensions and enhancements were achieved with very minor concessions, mainly small TI allowances, and are good examples of the value that can be created with properties that are mission critical to tenants in healthy industries. Overall, we're very pleased with our industrial exposure, and have benefited from our concerted effort, which began two years ago to increase our portfolio weighting in this sector.

The final factor that has kept Spirit on track to do what we say is our acquisition platform, which since we rebooted the company post spin off, has delivered consistent acquisition volumes and yields even in an environment of increasing competition, and compressing cap rates. In fact, over the past few months, several of you have asked me what is Spirit's secret sauce when it comes to acquisitions. The secret sauce resides in our unique platform, which is based on highly disciplined and transparent processes that utilize data and research to deep dive into tenant credits, industries and the residual real estate value for every acquisition we make.

Our technology tools allow us to immediately see the impact of any acquisition we consider on the overall portfolio, including how that acquisition affects diversification across geography, industry, credit risk, and benchmark the improvement to our exposure in each industry and asset site. This approach affords us the ability to pursue a wider breadth of opportunities with better risk adjusted returns, while maintaining proactive control over the portfolio. The way we apply our capabilities can be seen on what we buy. You may notice that each quarter we acquire what I call middle of the fairway opportunities.

These are simply the bread and butter assets for net lease, like a BJ's Wholesale Club, Dollar Store or a Cold Store. They're not particularly time intensive to underwrite or price. Then there are the opportunities that are less obvious, often mispriced, and take more time to understand and underwrite or provide better risk adjusted returns if you get them right. Sometimes this can be moving early into a tenant or industry where you develop deep conviction before the market season, like At Home or Life Time, or seeing the upward trajectory of a credit before it has become fully realized, as we showed you with our credits on the move page few quarters ago, or digging into a more complex situation, like we sometimes see in the international space.

We've found that allocating some bandwidth to dig into the less obvious opportunities allows us to generate real alpha. An example of a less obvious opportunity was the 83.08 million property Shiloh acquisition we made in the first quarter. We were able to secure 20 year leases with attractive fixed annual escalators at an 8.2% cash cap rate. Shiloh had recently emerged from bankruptcy with a PE sponsor, middle ground capital as a new owner. Now on the surface, one might look at this situation and think, auto industry just emerged from bankruptcy, PE backed and just move on. So we dug in, we looked at the importance of lightweighting cars, Shiloh's primary business for increasing the gas mileage and range of traditional and electric vehicles.

We spent time with the sponsor, who's an experienced B2B owner, with a focus on industrial and distribution sectors and the management team who were former Toyota executives. In digging into the financials, we saw that the business was doing better now than before COVID, but with much lower leverage and the real estate was well located in attractive sub markets across the Midwest, with low rents per square foot. And the operations taking place within the properties were strong cash flow generators. We realized that this was a great business with substantial upside that was not being recognized by the market. This thesis proved out much faster than we anticipated.

Early in the second quarter, two large strategic buyers purchased pieces of Shiloh's business. As part of those transactions, we agreed to sign leases associated with those business units to the new owners. The net result is that three properties representing 51.5% of Shiloh's rent were assigned to Worthington Industries, a 66 year old company with a Triple B credit rating, and three properties, representing 17.6% of Shiloh's were assigned to Aludyne, a global lightweighting solutions and components supplier. With the assignment of these leases and the continued improvement in Shiloh's business, I believe the cap rate compression on this portfolio today would be plus or minus 300 basis points, a meaningful increase in the value of our investment.

We continue to find a mix of opportunities this quarter that kept our acquisition yields relatively high, investing 284 million across 18 properties at a weighted average cash cap rate of 7.07%, economic cap rate 7.84% and with rent escalators of 1.8% and a wallet of 13 years. From an industry perspective, we added Home Improvement, Building Materials, Dollar Stores and Home Decor with an asset type breakdown of 18%, retail, 67% industrial and 15% office. In total 78% of our acquisitions consisted of public credits, with increases to existing public tenants, such as Home Depot, At Home, Dollar General and Family Dollar.

We also added four new public credits to our tenant roster, including Tupperware, BlueLinx, L3Harris, and Builders FirstSource. The acquisition of the three BlueLinx distribution facilities was one of our larger acquisitions this quarter. For those of you unfamiliar with BlueLinx, it's a leading wholesale distributor of residential and commercial building products, which has been delivering record operating results supported by the tailwinds driving single family housing, remodeling activity and commodity prices of wood. We liked the BlueLinx transaction from the store given the favorable secular trends supporting housing, the tenant's improving credit trajectory and the quality of the distribution facilities, which are all located in sub markets with strong absorption and low vacancy.

So again, like other quarters we have posted, many acquisitions are squarely in the fairway and some are more unique and less obvious. Given the competitive landscape, expect that this trend will continue as we utilize our platform to dig deeper and uncover new opportunities. As I mentioned last quarter, one new area that we have focused on is lifestyle, benefiting from the secular tailwinds of people moving to the suburbs, prioritizing recreation and enjoying more work flexibility, and we have evaluated many new opportunities, ranging from Marinas to Ski Resorts to RV parks. I'm pleased to announce that we closed on one of these opportunities in July, purchasing 22 golf clubs for $231 million.

As you can see on Page 16 of our investor presentation, we highlighted the many reasons we are attracted to the golf industry, including the rationalization of courses, increased participation, and the most rounds played since 2007. Our investment is under a master lease agreement with 19 years remaining at an initial mid seven cash cap rate, and 9% economic cap rate, which we believe will result in a great risk adjusted return for our shareholders. From a real estate perspective, these properties are in attractive established communities with a weighted five mile population of 160,000.

With a price per acre of only 47,000, and a price per club of only 10.5 million, our basis in this investment is a fraction of replacement costs. In addition, our tenant is ClubCorp, the largest owner operator of private golf lifestyle clubs in North America. They have over 400,000 members and more than 218 hole golf courses. As we think about this investment going forward, and the multiple tailwind supporting this industry, we believe this will serve as another example, where our early moves into an underappreciated asset class will lead to significant value appreciation over time.

Before I turn it over to Mike to run through the numbers, I just want to say that I'm extremely proud of the Spirit team and all that we've accomplished together. This was an outstanding quarter, the portfolio is performing, our acquisitions platform is delivering and we are back to dividend growth. While we're certainly aware that COVID is not yet behind us, and we must be thoughtful and vigilant in every step we take, we will continue to execute on the core mission that I highlighted to investors at the onset of COVID to work with our tenants to ensure their success and in turn success for our shareholders, in short to do what we say.

And with that, I'll turn the call over to Mike.

[Michael Hughes]

Thanks Jackson. Good morning. As Jackson mentioned we had another great quarter. Rental income excluding tenant reimbursements is 160.5 million, an increase of 28.7 million compared to last quarter. This improvement was driven by 12.8 million increase in cash rent and 15.9 million increase in non-cash rent.

The significant contributors to the cash rent increase were 4.9 million from net acquisitions, 7 million related to the recognition of rent previously deemed not probable for collection. The non-cash rent increase was driven primarily by 13.3 million in reversals of prior period allowances for bad debt

Our annualized base rent or ABR increased 17.3 million compared to last quarter, primarily driven by 16.5 million from net acquisitions. In June, we collected 98% of our base rent and 99% excluding movie theatres with the 1% delta stemming from the remaining percentage of sales agreements in place with some of our theatre operators, and one lease modification that ended in June.

As Jackson mentioned earlier, lost rent for the quarter was a little less than 1%, which is already below our normally forecasted range. Excluding the lease modification that expired in June, under which the theatre offer paid full rent in July, lost rent for the quarter was only 20 basis points.

In addition, we collected 100% of deferred rent payments owed in the quarter, representing 5.7 million. At quarter end our deferred rent receivable balance increased 3.5 million to 22 million, with the increase being driven primarily by the reversal of prior period reserves.

On the expense side, our property cost leakage improved to 1.9%, falling slightly below our budget of 2% and G&A increased modestly to 13.5 million driven mostly by professional service fees. In addition, interest expense declined as a result of extinguishing the CMBS notes in March and the remaining convertible notes in May.

Now turning to the balance sheet, we extinguished the remaining 190.4 million of 3.75% convertible notes with cash when they came due and excluding our revolving line of credit, we have no material debt maturities until 2026.

We sold 4.1 million shares of common stock during the quarter under forward contracts, generating 145.5 million in equity proceeds and ended the quarter with leverage of five times or 4.9 times inclusive of our remaining forward equity contracts outstanding as at quarter end. In July, we entered into additional forward contracts to issue 715,000 shares of common stock, bringing our total unsettled forward contracts to 2.6 million shares with expected proceeds upon settlement of approximately 113 million.

Now turning to guidance, we are raising our 2021 net capital deployment forecast from 700 million to 900 million to 800 million to a billion. We're also increasing our AFFO per share forecast from $3.06 to $3.14 to $3.24 to $3.30, implying year-over-year growth of 10% to 12%. Keep in mind that during the first half 2021, we generated $1.62 in AFFO per share, which included $0.06 related to out of period earnings.

For the remainder of 2021, our revised guidance does not include any additional prior year recoveries. Within drivers of our revised AFFO per share forecasts in the back half of the year are the strength and performance of our portfolio as best illustrated by our low lost rent, continued client and cash rent collections, and successful lease renewals. Our continued success in finding high quality acquisitions with attractive risk adjusted returns and balance sheet enhancements.

Finally, and most importantly, as we announced in our earnings release, we are raising the common dividend the third quarter by 2%, equating to $2.55 per share on an annual basis. This marks a major step for Spirit in our journey to do what we say and puts us on the path to delivering consistent earnings and dividend growth for our shareholders.

With that, I will turn the call back over to the operator to begin Q&A.

[Operator]

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Linda Tsai with Jefferies. Pleased proceed with your questions.

[Linda Tsai, Jefferies]

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

[Jackson Hsieh, President and Chief Executive Officer]

Okay, might be one of the percentage rent deals that we have really related to our movie theatre tenants. Some of those were set earlier in the - what we're working on these deferrals. But generally, Mike, do you want to go through how they relate to slip might be helpful.

[Michael Hughes]

Sure. Yeah, I mean, our percentage earning agreements in place really relate primarily to some of our theatre tenants. And those will burn off all by the end of this year. And basically, the way we set those was there were some amount of base rent that tenant's required to pay during the deferral period, and then they pay a percentage rent based on a month in arrears of revenue. So it's a percentage of revenue that they earn. Any differential between what they pay and what the contractual base rent is gets added to deferred rent to extent there's a shortfall to that base rent. If they end up earning in excess of the base rent, it goes to pay down that deferred rent. Now, we'll continue to do the rest of this year, and then stop. But again, some of those have already burned off. I think we have no one burning off in July and another burning off in December. And so that's when you look at our cash rent collections, a big driver, why we're not collecting 100% is really, because those contractual agreements is not that tenants can't pay. It's just really the contractual agreements we've put in place nine months ago given what we saw at that time.

[Jackson Hsieh, President and Chief Executive Officer]

And Linda on the theatres it's - the range is on the percentage or 10% to 15% of revenues while they're in this period.

[Linda Tsai, Jefferies]

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

[Jackson Hsieh, President and Chief Executive Officer]

Yeah, I mean, obviously, we look at a lot of different factors. We talked about our property rankings. How the industry relates? The industrial scoring system is a bit different than the rest of our portfolio. But what I would say is that a lot of the real estate that we have in our industrial portfolio is very well located. And it's got real criticality to the tenant. And so when you sort of look at - without getting into specifics of our asset, but we do review each one. We've got some really great properties that we've been fortunate to acquire. So when we made the decision to sell this particular asset - it really started with some reverse inquiry that we got from the market, kind of made us look at it. And we made a decision that we - there were still upside left in this property.

My guess is the new buyer may look to potentially expand it in the future. But for what we were looking at - what we think we can deploy, we think we can get significant returns over our cost of capital. And this is another white form of raising capital in our minds. And also to just proof of concept, I mean, we got - we've been getting a lot of questions about what we've been buying. And this was done. This was one of the first deals that I was a part of on the acquisition, when I joined the company, back in September 2016. We acquired this deal in the fall of 2016, so it is a kind of methodically moving through adding properties like this. And like I said, it's in the middle of our portfolio. So we weren't cherry picking.

[Linda Tsai, Jefferies]

Thanks.

[Operator]

Our next question is from the line of Elvis Rodriguez with Bank of America. Please proceed with your questions.

[Elvis Rodriguez, Bank of America]

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

[Jackson Hsieh, President and Chief Executive Officer]

Yeah, great, well, first this is overall part of this lifestyle thesis that we talked about. So you might see us do some other things outside of golf, related to what I'd call lifestyle segment opportunities. But coming back to golf, I think what you're going to see us do. It's very consistent to how we approach investments. Obviously, it starts with the industry. We like lifestyle, we like golf, operator is critical, right, so obviously, we like this operator, to accept, we can do more, I'm sure we would do more with them, there was mutual interest. And then the quality of real estate plays a part of it. So not dissimilar to other - whether they be restaurants or C-Stores or gyms, we're really focused on those three important criteria.

And the second would be any different than when we look at lifestyle or golf opportunities going forward. What just got us tremendously excited about this was if you look at Callaway's equipment sales in the first quarter globally, they crushed it. US sales, quarter-over-quarter, Q1 over 2021 versus 2020, I mean, they were up 70%, over 70%. So, they've just done - it's just kind of an increasingly addressable market. And that's one of the kind of byproducts of COVID in terms of the supply demand. You saw the slide. So I don't want to talk too much about it. But we will do more, for sure.

[Elvis Rodriguez, Bank of America]

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

[Jackson Hsieh, President and Chief Executive Officer]

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

[Elvis Rodriguez, Bank of America]

Great, thank you.

[Operator]

The next question is from the wine of Ronald Kamdem with Morgan Stanley. Please proceed with your third questions.

[Ronald Kamdem, Morgan Stanley]

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

[Jackson Hsieh, President and Chief Executive Officer]

Yeah, well, fortunately, being in partnership with one of the largest operators in the country, we do get very detailed financial information for them. And unfortunately, we're under NDA with that information, so really precluded to share any of that with all of you. But I mean the one thing I would tell you is that their coverage ratios even through COVID were north of two times at the mass release. And I think one of the things that is going to be really important for us as we go forward, is that these golf courses are not just golf. This portfolio has over 140 tennis courts, pickleball courts within the portfolio, there's a tremendous amount of food and beverage and corporate opportunities that goes through these P&Ls. And the way people are going to reengage out there in the future, we've seen this with Life Time Fitness and some of the other tenants we have, people are going to just conduct more business and recreation at these facilities. It's not just playing rounds of golf.

So that really attracted us to this opportunity, especially given how well ClubCorp is doing. Like they have a program for juniors called CRUSH IT. And it's just - they just - they really - I think they've really harnessed on something that's going to be quite impressive as sort of people change their habits. And they do a great job on marketing full memberships, social memberships and corporate memberships. And we just love the basis. I love the fact to be honest with you. I love the fact that lenders don't like to lend on this business. Hope it stays like that, well, we can get more. But there's - there was a stigma around golf for a long time. But if you look at some of the sheets that we put in, whether it be the supply, demand dynamics on golf courses per capita, number of golf courses, the number of rounds, we love it, we're going to be really selective, but the operator really selective about the real estate info location. The basis of this land alone is crazy so in terms of just protecting the downside. So yeah, we will definitely do more. Sure.

[Ronald Kamdem, Morgan Stanley]

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

[Jackson Hsieh, President and Chief Executive Officer]

Yeah, I mean, in terms of my comments it's really a - our approach is very collaborative and team oriented. I would not describe us as kind of a flow shop as it relates to what we look at industrial. We really spend a lot of time and that's one of the things why I noticed sometimes people say why can't you do more in terms of number of transactions, but we do take a lot of time and attention on the front end when we're dealing industries and tenants and credit and real estate as it relates to making investments here. But I would say that - I'd rather not get into the specifics of actual cap rates in that grouping, but you can just do the math 67%. So it's probably going to be in the high sixes, right. If you just did that kind of rough math on what we acquired in the industrial. But it is getting more competitive of just - I've just heard it from other calls. I've seen it real time, last couple of quarters. But I still feel like we can find those diamonds in the rough. I'd love to get more Shiloh's, like we talked about in my prepared comments.

BlueLinx, they had an awesome second quarter, I mean, their sales are up 87% in the second quarter of this year, gross margins are up 20%, EBITDA went from - adjusted EBITDA went from 31 million last year in the quarter to 166 million, debt to EBITDA in the second quarter is down to one and a half times. So when we were looking at this transaction, looking at historical financials, I mean, it was a little rough, right, it was more challenging from the eye. But when we dug into it, we're like this is kind of a really unique secular trend right now for this company and made a lot of sense for us. And we're really happy with it. But that being said, it's super competitive. And we are up there slugging it out there with everybody else. But I feel very comfortable on our pipeline. Feel really good about our processes and the people that we have in place executing. And I think we're in great position right now, so feel really - feel very grateful to be in this position.

[Ronald Kamdem, Morgan Stanley]

Helpful. Thank you. Congrats on the quarter.

[Jackson Hsieh, President and Chief Executive Officer]

Thanks.

[Operator]

Our next question comes in line of Harsh Hemnani with Green Street. Please proceed with your third question.

[Harsh Hemnani, Green Street]

Thank you. So I want to follow up on your thesis on lifestyle assets. You mentioned you're interested in Marinas maybe Ski Resorts. And this golf club acquisitions was one of your larger ones. So I wanted to ask, will the deal size on these lifestyle assets be generally larger? And does that affect how many of those you might do in a given year?

[Jackson Hsieh, President and Chief Executive Officer]

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

[Harsh Hemnani, Green Street]

That's helpful. And then just a follow up on that, the opportunity in the segment seem very idiosyncratic or could you provide some I guess bands around the need you would want it to deploy capital in the lifestyle segment.

[Jackson Hsieh, President and Chief Executive Officer]

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

[Harsh Hemnani, Green Street]

Great, thank you.

[Operator]

Our next question is from the line of John Massocca with Ladenburg Thalmann. Please proceed with your questions.

[John Massocca, Ladenburg Thalmann]

Good morning. Going back to the theatre portfolio, if you kind of look at how, pretty much close to almost 100% rent collection from them, how are you thinking about coverages? And I guess, maybe as you look at your portfolio of theatre specifically, where would you kind of need to see box office numbers get relative to maybe some of the pre-pandemic years to get covered just back to a comfortable level, if you will.

[Jackson Hsieh, President and Chief Executive Officer]

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

[John Massocca, Ladenburg Thalmann]

Okay and as I'm trying to remember it and it probably if it's been posted in a presentation. How much of kind of the theatre portfolio if you think about it pre-pandemic is now on kind of a new rent schedule because of credit events, obviously, Goodrich and Studio Movie Grill? But I mean, how much today is on kind of a pre-pandemic rent level when they're paying 100% and how much has been kind of renegotiated since the pandemic, roughly speaking?

[Jackson Hsieh, President and Chief Executive Officer]

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

[Ken Heimlich]

Yeah.

[Michael Hughes]

I mean, I have to do that. I mean, really, it's really just the theatres have been re-tendered that went to different rent schedule. I mean, we had, I think there were there was one other theatre existed theatre across our portfolio that we did one modification to where we did a modification of portfolio. We got additional term and as part of that, I think one theatre, we did a slight, small rent adjustment, so very minimal. So really, we're just talking about the other theatres, the Studio Movie Grills, the Goodrich that had changed. And I can also tell you that the older public theatre chants are back paying for rent. So I mean everything's really being back online very quickly. And across the regional theatres, with yes, big grants, and they've no recap as our balance sheets and our rent collection stay are really function agreements, we struck. We know today with the recovery and how well people's balance sheets look and we wouldn't strike those agreements today. These were done nine months ago. But the health we're seeing in our theatre tenants is very, very good. And, yeah, we think they're going to get back on track pretty quickly.

[John Massocca, Ladenburg Thalmann]

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

[Jackson Hsieh, President and Chief Executive Officer]

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

[John Massocca, Ladenburg Thalmann]

Okay, that's it for me. Thank you very much.

[Jackson Hsieh, President and Chief Executive Officer]

Okay.

[Operator]

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

[Jackson Hsieh, President and Chief Executive Officer]

Thank you, operator. Well, I just want to make sure just a couple of key messages that hopefully people will come away from our callers. First and foremost, I think we have proven that our quality of portfolio is very solid just given where we were a year ago to where we are today. We'll remind you of all the metrics. We're completely back on track as it relates to acquisitions, deploying capital, raising capital, we're excited about the ability to start raising dividends again and the team is performing extremely well and our pipeline is continuing to build, so excited about that and look forward to talking to you in the future. Thank you.

[Operator]

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