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Greetings and welcome to Spirit Realty Capital Fourth Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Mr. Pierre Revol, Senior Vice President of Corporate Finance and Investor Relations. Thank you. You may begin.
Thank you, operator. And thank you, everyone, for joining us this morning for Spirit's Q4 2020 earnings call. Presenting today’s call will be President and Chief Executive Officer, Jackson Hsieh; and Chief Financial Officer, Mr. 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 today’s earnings release, supplemental information, and Q4 2020 investor presentation, as well as our most recent filings with the SEC for a detailed discussion of the risk factors relating to these forward-looking statements.
This presentation also contains certain non-GAAP measures. Reconciliation of non-GAAP financial measures to most directly comparable GAAP measures are included in today’s release, supplemental information, and Q4 2020 investor presentation furnished to the SEC under Form 8-K. Today’s materials are available on the Investor Relations page of the company’s website.
For our prepared remarks, I’m now pleased to introduce Mr. Jackson Hsieh. Jackson?
Thanks Pierre. Good morning and welcome everyone. It's hard to believe that just a little over a year ago, we held our Investor Day in New York. Those of you who attended or had the chance to watch the webcast, it was a turning point for Spirit. We had finally become a simplified triple net REIT with a competitive cost of capital and we outlined our plans to take Spirit forward and create value for our shareholders.
As I was preparing for this call, I reflected on several of the key objectives we talked about, what we have accomplished and what is still left to do. And for this earnings call, I will revisit many of those objectives in the context of our 2020 results.
So, let's start with our portfolio. At our Investor Day, we laid out our medium term portfolio targets, one of which was to overweigh our investments in large sophisticated operators with a particular focus on public, non-investment grade credits where we find attractive yields and lease terms.
We like these tenants because of their scale and operating sophistication, access to permanent capital, moderate leverage policies and governance and believe these types of credits anchoring a diversified portfolio will provide better risk-adjusted returns than a purely investment grade focused strategy. Our credit thesis held up well during 2020 and not only did we experience very few tenant defaults, we actually saw many credit improvements.
In our most recent investor presentation, we added a slide called credits on the move where we provided examples of credit improvements across 15 tenants. As you'll see, several have received credit -- recent credit upgrades including At Home, BJ's, Tractor Supply, and PetSmart.
A few of our larger private tenants became public like Albertsons, GPM Investments and Academy Sports and a few are being consolidated through M&A to form larger companies, including Bass Pro Shops' acquisition of Sportsman's Warehouse and Callaway's acquisition of Topgolf.
We're already seeing many of these credit improvements translating into cap rate compression and these operators, along with several more across Spirit's diverse portfolio, are good examples of how our rigorous credit analysis informs investment decisions that add value.
Another Investor Day target was to further diversify our asset allocation by layering in a higher percentage of industrial assets. Given the nature of our industrial portfolio and the attractive acquisition opportunities in 2020, this strategy proved both timely and fortuitous.
During the fourth quarter and the full year 56.5% and 57.7% of our acquisitions respectively were in the industrial asset category and 14.9% of our portfolio is now comprised of this asset type compared to 9.5% one year ago.
I should also note that we collected 100% of rents from our industrial tenants during the fourth quarter. Overall, Spirit's portfolio was put through the ultimate stress test in 2020 and I believe that proved itself.
As you saw in our release, during the year we sold 18 income-producing properties for $76.7 million in proceeds and at a blended cash cap rate of 5.89%. We also sold 20 vacant properties for $27.7 million, reducing the net gain of $1.3 million, further demonstrating the granularity, liquidity and institutional demand for our properties even during periods of economic dislocation. We also achieved 99.6% occupancy across 1,860 properties ending the year with only seven vacant assets.
Our cash rent collections increased to 94% in the fourth quarter and if you exclude movie theaters, the cash rent collection rate was 98%. In addition, we have no bankruptcies across our top 20 tenants since the COVID pandemic began.
In fact, you would have to go to our 39th tenant Studio Movie Grill to find a bankruptcy in Spirit's portfolio. Bottom-line, our portfolio strategy is working, our asset base is stable, and as we enter the New Year, we see upside of the vaccine rollout gains momentum.
Some important growth-oriented goals we laid out at Investor Day were to expand the acquisition team, increase deal flow and return to $600 million of rents by 2022. We added key members to the acquisitions team in April and May and plan to add a couple more support personnel this year expanding our bandwidth to source and process new business.
We were one of the earlier institutional players to pivot back to growth in 2020 and as you can see in our most recent quarterly results, our acquisition pace has ramped up meaningfully.
For the quarter, we added 99 properties across 15 transactions at a cash yield of 6.7% and economic yield of 7.45%. The weighted average lease term for our acquisitions was 15.2 years which increased our total portfolio WALT to 10.1 years.
You may remember our original pre-COVID 2020 capital deployment guidance was $700 million to $900 million and even with pausing in the second quarter we deployed $878 million, near the top end of our pre-COVID guidance range.
We also grew our annualized base rent to $510 million from $461 million last year, an increase of 10.6%. Despite the impact of COVID-19, we stayed right on plan to meet our growth targets.
Another key goal was to further integrate our asset management and acquisition teams. At our Investor Day, we talked extensively about how our teams work together to close acquisitions. I've always believed that complete integration is critical, not only for transacting efficiently but for developing tenant relationships that ultimately result in new business.
To that end we recently completed an important realignment within the organization that has formally folded acquisitions and asset management teams together. Ken Heimlich moved from the Head of Asset Management to Chief Investment Officer, with both the acquisitions and asset management departments reporting to him.
Danny Rosenberg, who previously moved from Asset Management to Head Acquisitions in 2018 will now head the asset management function under Ken's direction. These changes bring Danny's extensive tenant relationship building experience gained through his multiple roles back to the asset management team and he will spearhead the initiative to develop business from existing tenants freeing up Ken's time to focus more on new tenant underwriting and the deal pipeline.
From a tenant relationship building standpoint, we have continued to make headway. The circumstances we faced in 2020 allowed us to deepen relationships meaningfully with tenants which resulted in new acquisitions with Lifetime, At Home and BJ's to name a few.
In fact, you can see from our recent disclosure Lifetime is now our number one tenant. In 2018, we purchased five Lifetime locations from Blackstone. And since that time we've cultivated a deep direct relationship with Lifetime. Those efforts allowed us to add two more properties under a new direct sale leaseback during the fourth quarter.
We believe Lifetime is a best-in-class health and fitness operator and the resort-like health clubs are well located and have a variety of offerings that make them an attractive destination for their customers, while providing stiff barriers to entry for their competitors. This transaction is an example of the type of relationship business we are expanding upon.
A couple of other important goals that I will briefly touch on from our Investor Day; we're improving our credit rating and enhancing our scalability with technology tools. I will let Mike discuss our credit profile and progress in detail during his remarks, but I will just say that our balance sheet is stronger now than before the COVID-19 pandemic.
As for the technology, that's something we have continued to refine and invest in every day. We have integrated power-ups to our BI tools which are used for every acquisition and predictive analytics are becoming more developed and widely adopted across the company.
Our accounting, legal and operational systems are excellent as demonstrated by our ability to release earning sooner and provide sector-leading disclosures, while executing 238 deferral agreements and hitting the high end of our pre-COVID acquisition guidance, all possible because of the continued efficiencies gained from our technology tools.
So, we have continued to move the ball forward and we accomplished a lot in 2020. And what's left? For us, not surprisingly, it's simply the recovery of movie theaters, which represents 5.1% of our annualized base rent.
While the industry remains challenged, it is worth noting that the liquidity and survivability of our operators has improved and may improve even further. Most of our regional operators have accessed the Main Street Lending Program, which provided five-year unsecured financing and we believe all of our regional operators are eligible for $10 million in grants under Save Our Stages relief plan approved by Congress in December. Outside of the regional operators, our national operators have always substantial amounts of capital significantly improving their liquidity positions.
Regarding our two operators that filed in 2020, Goodrich and Studio Movie Grill, there are some positive developments there as well. As we previously disclosed, the four former Goodrich locations are now under a master lease and are being converted to a strong regional concept, Imagine. The tenant plans are to invest approximately $10 million into the renovation of those four theaters starting in the next few months.
Our Studio Movie Grill site in Georgia is being assumed in the bankruptcy and we are in LOI negotiations with a new operator for the three former Studio Movie Grill sites in California.
While we only recognized 34.5% of movie theater rental revenues during the fourth quarter, by the end of 2021 we may have all of our operators within the movie theater segment paying rent.
Regardless, I don't believe theaters are at zero for Spirit. They will come back. It's just a question of when and how much. In the meantime, we are moving forward and growing the FFO and the theaters would just have to catch up to us.
When I first started thinking about where we are today versus where we were a year ago and the impact COVID had on our progress, I initially focused on our 2020 AFFO per share of $2.95 which is ironically the same pro forma number we guided to for 2019 at our Investor Day.
So, for a moment I thought, we just lost the year of progress. But when I walked through the rest of our goals and objectives, I realized that we didn't actually lose a year. Yes, our earnings took a hit, which I believe is just transient. But we achieved every other goal and benchmark that we set out to do and more.
Today at Spirit we have a proven portfolio with strong tenants and tested underwriting, a fully integrated asset management and acquisitions platform that is producing results, deeper relationships with our tenant base, enhanced tools to support our underwriting, forecasting and monitoring, a pristine balance sheet, and the opportunity to substantially accelerate earnings growth over and above our expectations depending upon the shape of the movie theater industry's recovery.
Finally, I believe our team is best in class and I hope we have demonstrated that over the past three years. Spirit is much stronger and a better-positioned company than just a year ago and our team, portfolio and platform are in a great position to create the value we outlined at our Investor Day.
I'll just end by saying if you attended or listened to our Investor Day in 2019 and you like the Spirit story and the value creation opportunity then you should really like it now.
With that I'll turn it over to Mike. Mike?
Thanks Jackson. We compounded the growth to begin last quarter by more than doubling our capital deployment volume during the fourth quarter which increased annualized base rent by $29 million, slightly offset by accretive dispositions for a net increase of $26.3 million.
Fourth quarter rental income, which included base cash rent of $117.9 million increased $15.5 million to $128.4 million. The increase was driven by acquisitions completed in both the third and fourth quarters and recoveries of prior period cash rents of $600,000 in the fourth quarter compared to write-offs of prior period cash rents of $2.9 million in the third quarter. The net recoveries this quarter versus prior quarter losses reflect the better cash collections trajectory we are continuing to experience.
Other income was very small this quarter contributing only $68,000 to earnings. As I mentioned last quarter, our two remaining mortgage loan receivables totaling $29 million were repaid in full, greatly simplifying our income streams. Going forward, other income will primarily be generated by our one remaining direct financing lease, interest income on invested cash and any lease termination fees.
Property cost leakage, defined as unreimbursed property costs as a percentage of base rent improved to 1.9% in the fourth quarter compared to 2.7% in the third quarter and 4.1% in the second quarter.
We target 2% as our long-term average run rate. This improvement was driven by the continued stabilization in our tenants' operations and balance sheets, enabling them to be current on their lessee obligations, such as property taxes.
Corporate G&A remained low this quarter at $12 million and we reported $48.4 million for 2020 or $4 million less than 2019. We do expect that G&A will moderately increase in 2021 due to a normalization of travel, office expenses, performance compensation and additional ESG initiatives.
Finally, while modest, I do want to point out that our income tax expense was a positive $133,000 this quarter versus the normal run rate expense of around $150,000 due to a one-time tax liability true-up related to the termination of our external management agreement with SMTA.
Now, let's turn to everyone's favorite topic, rent collections. As Jackson mentioned, we collected 94% of our base rent during the fourth quarter or 98% excluding theaters. The net collections rate was very stable for all three months of the quarter.
We've also seen an uptick in January with cash rent collections currently standing at 95% but we believe that percentage may go higher. Please note that our collections metric does not include any recoveries from prior quarters or any repayments of deferred rent.
Regarding movie theaters, we recognized in earnings $2.3 million of movie theater rents during the fourth quarter out of a base of $6.6 million or 35% of movie theater ABR.
Of that $2.3 million we collected 44% in the fourth quarter, a slight increase from the 40% collection rate we reported during the third quarter. We have not placed any additional movie theater tenants on cash recognition.
For the year, we deferred $31.9 million in rent of which $5.6 million was deemed not probable of collection or said another way it was not recognized in our earnings. We also abated $6.3 million of rent.
During 2020 we received $6.1 million in deferral prepayments and ended the year with a deferred rent receivable balance of $20.2 million. Our deferred rent balance is primarily comprised of four industries, 20% movie theaters, 18% health and fitness, 18% casual dining, and 16% entertainment.
During 2021 we expect deferred rent repayments of approximately $12.9 million and expect to incur additional rent deferrals primarily through percentage rent agreements with certain movie theater tenants.
While the actual amount of those referrals will depend on each tenant 2021 revenues, the maximum amount of those referrals as currently structured would equate to $9.2 million. We've also currently agreed to abate $1 million rent during 2021.
Given the stability in our tenant base and rent collections with the remaining area of recovery primarily confined to movie theaters, we are returning to our pre-COVID operating metrics to report on tenant health. As such, you will see in this morning's reporting materials the inclusion of loss rent which as a percentage of contractual rent that we deem not probable of collection.
For the fourth quarter, our loss rent was 3.4% or 1% excluding movie theaters. The delta between our fourth quarter cash rent collections of 94% and base rent is the 3.4% of loss rent, 2% of recognized rent deferrals, and 0.6% of rent abatements.
Now, turning to the balance sheet. During the quarter, we entered forward contracts to issue 6.4 million shares at a weighted average price of $36.85 per share. Also during the quarter, we settled 8.9 million shares under forward contracts, resulting in net proceeds of $310.9 million.
As of year-end, we got unsettled forward contracts for 4.1 million shares of common stock. We ended the year with corporate liquidity of $1 billion, leaving us in a great position to start 2021.
Our credit metrics also improved from the third to the fourth quarter. Leverage declined from 5.6 times to 5.3 times or five times pro forma for the unsettled forward equity. Our fixed charge coverage ratio rose from 4.2 to 4.4 times and our unencumbered asset ratio improved from 2.6 to 2.8 times.
As a result of our conservative balance sheet and stabilized operations, we received two outlook changes from the rating agencies, including an outlook upgrade from negative to neutral from Fitch and an upgrade from neutral to positive from Moody's. We are very pleased with those outcomes.
Regarding our upcoming maturities, we paid off our 2020 term loan in January, anticipate paying off the convertible notes from immature in mid-May. After the convertible notes maturing and excluding our revolving credit facility, we will have no unsecured debt maturities until the second half of 2026.
Now, turning to guidance. For 2021, we forecast net capital deployment, which includes acquisitions and revenue-producing capital expenditures, net of dispositions of $700 million to $900 million. We forecast AFFO per share of $3 to $3.10 implying a year-over-year growth rate of 2% to 5%.
I also want to note that we are maintaining a higher loss rent reserve in our forecast this year which we believe is prudent until we have further clarity around the economic recovery, COVID vaccine rollout, and government stimulus.
And finally, I just want to reiterate what Jackson said earlier that Spirit is in a better position now than we were a year ago. And while our earnings growth was substantive last year, I believe we will recover more quickly and ultimately provide shareholders with the value creation that we originally laid out at our Investor Day.
So, with that, I will turn the call back to the operator to open up for Q&A. Operator?
Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions]
Our first question is coming from Haendel St. Juste of Mizuho. Please go ahead.
Hey. Good morning. Hope you guys are safe and warm down there in Texas. Thanks for taking my question. First, I guess is on rent collection and deferrals. How much of the 3.4% of loss rent is reserved against? And did you move any tenants to cash basis in the fourth quarter or January?
Mike, do you want to go ahead?
Yes. So, all of 3.4% of loss rent is reserved against and we didn't have any material changes in terms of tenants moving to a cash base in the fourth quarter, but I can't think of any that actually moved in the fourth quarter.
Okay. Thanks. And the $1 million of abatement that you mentioned in 2021, can you give us a little bit of color on maybe what industry coming from and is that $1 million included both the upper and lower end of your guidance range this year?
Yes, the $1 million is in all the ranges, is in the upper and lower and those are set and that's going to be permanent in theater industry and those are just abatements that we exchange for lease enhancements.
Got it. And then on movie theaters. Jackson, 5% of rents here, I'm curious reading into your comments that you would be more willing to transact in the sector and perhaps engage with some of the larger national operators and how should we think about that 5% of exposure there?
And I guess as part of that AMC having recently done some recapitalization, just curious on your level of comfort with not only this sector but larger national operators like AMC. Thanks.
Yes, maybe I'll take that. Good morning, Haendel. This is Jackson. So, -- yes, I'd say more than likely our theater exposure will not increase in the short term. We're still trying to make sure we work with our diverse portfolio of operators. I did see the AMC reference. Can't really comment on it. Obviously, if it went through, it would be great.
But the other anecdotal information that we saw last weekend was in China on the opening weekend of Chinese New Year, they did a tremendous amount of business out there, it is $775 million of revenue. So, it's -- the theaters are doing well in China and obviously, they're handling the pandemic quite admirably in terms of containment.
In China, there is no booking seats online and things like that. So, people are going to the theaters and they're not really seeing any new big content, it will be local driven content. So as my comment said people are going to go to the theaters and with the stimulus that's been put through Main Street Lending and hopefully there are Save Our Stages grants. And those grants, by the way, is $10 million grants, are just grants, they don't have to be repaid. We think that's going to give both our regional and nationals the time.
Obviously, the national operators don't get that $10 million grant, but we think they're going to get the time to be able to get that content that's on the shelf come out. So, to answer your question, I don't see any new net investment theaters for us in the short term, but we'll evaluate it as time goes on.
Got it. Thanks for the thoughts.
Thank you. Our next question is coming from Vikram Malhotra of Morgan Stanley. Please go ahead.
Thanks for taking the question and I hope everyone is well and safe. Just maybe Jackson, you talk a lot about sort of the goals that you had set out for the year and if you look back, you've achieved most of them.
I'm just wondering given sort of the push in acquisitions, the hiring, as you look into the next year or two and given the hiring you've done in the acquisitions team, what areas are you sort of focused on that or maybe similar to what you were doing pre COVID?
And then can you talk a little bit about where you're making changes in terms of either property types, geographies and just maybe even the -- if there's any changes in the approach?
Sure. Thanks, Vikram. Well, first on the -- let me just spend a minute on how we're doing the business as it relates to the current team. That realignment that we talked about with Ken in practice that started to happen in the middle of last year.
As we restarted our investment, our investment process again after the second quarter, I brought Ken into the acquisition pipeline meetings as well as Travis. And so they were integrally involved in just even the formation of what we're going to pursue. As you remember a lot of our acquisitions people were also working on rent deferrals.
So, Danny was running one of the asset management teams and it just became really clear as we continued on that process that this was like a natural move to have Danny do what he does best which is asset management and build those client relationships with our existing tenant base and Ken's leadership on the investment side to make that final shift as we talked about moving him into the Chief Investment Officer role. So, I want to make sure people understand that we've been doing this already for a good half year this past year. So, it just was a natural adjunct.
In terms of investment approach, you've heard us talk a lot about our sweet spot being public tenants in the B, BB area. We put that slide, if you get a chance to look at it later, I think its slide eight in our investor deck, it talks about those top 20 public tenants in the Spirit portfolio.
But the other interesting stat is if you looked at our publicly owned tenants and looked at it compared to 2017 in the second quarter and if you remember that was about 37%. Shopko surprisingly was our number one tenant back then. Today, we're at 51% in terms of public ownership and we love that because that's permanent capital, that's tenants that delever.
So, as we think about our investment approach, we're looking at not only good real estate, good credit, but we're looking at tenants that can benefit from positive uplift, so to speak, and that's why we really love that page on page nine that talks about these credits on the move.
If you look at that page, that's 19% of our contractual rent, if you look at that. And it just needs a little comment and see what happened. It's quite good to be honest with you. And that's what we -- and it wasn't luck, it was very deliberate and intentional on our part.
So, we think that that continued work on focusing on the heat map, focusing on real estate rankings, focusing on credit, being really deliberate about our asset allocation is going to pay off.
And then I think finally, and this is a long-winded answer, but if you just look at our investment in the fourth quarter, our average investment size is about $4 million, right. We did 99 properties if you do the math. The range of asset that we acquired was $1 million to -- average up to north of $30 million in terms of size. So, there was a lot of diversification within the portfolio.
If you look at the average deal size, transaction size for the year, it's right around $30 million, so if you look at the math. So, we're going to continue to try to build diversity, be very focused on these industries, very deliberate and just sort of do the business.
I don't think we have to do very much organizationally this year. Just add a couple more; I'll call it, junior level support into that team to support Ken that would be in good shape.
Okay, great. And then just to get your sense of sort of the earnings power of Spirit in a post-COVID world. You mentioned the balance sheet is in a better position versus pre-COVID.
So, can you touch upon sort of where would you like sort of leverage to be on a 12, 18-month period? And then if we think about target for, say, cash flow growth, I shouldn't call it a target, but the ability to grow AFFO from hereon on a multi-year period, do you think there is a change in that range in terms of what Spirit can achieve?
Well, I'm going to let -- I'm going to -- before I pass it over to Mike to answer some of this, one thing I would just say is the portfolio is very stable. And I don't know if we could have said that four years ago, it was more challenging. We have a very, very stable tenant and portfolio base.
So, you have to have that as a starting point and then we also have the benefit of the portfolios improving, right. Like credits are improving, so that's a really good thing. Then it's simply just acquiring and acquiring with -- acquiring assets where there is no surprises.
And one thing that we did in 2020, we had no -- we had one deferral request from the acquisitions that we did in 2020 and that deferral request was ultimately retracted by the tenant.
So, they're all current on their obligations and if you keep doing that and you're sort of deliberate about what you do and you finance appropriately, yes, you can really -- this is a really powerful earnings machine.
And Mike will go into the nuance of the movie theaters, which I've told you that they will come back and we expect them to really help us as we move on through the course of the year. I don't know Mike, do you want to add on--.
Yes, I'll add on a couple of things. Let me start with balance sheet, I mean actually on the portfolio, we have a very stable base. I think our acquisition strategy is going to produce a lot of growth. I think that's the key. I mean, if you look at us today we can produce AFFO growth and our cost of capital is not as good as a lot of our peers but we still produce that growth with our acquisition strategy. We get good yields.
So, our balance sheet will continue to improve. I mean, you saw the ratings actions in the last couple of quarters. I believe that with Moody's we were only one of two people in their universe that they rate, that they took a positive ratings actions on since COVID hit. So, it's pretty impressive.
But we're going to continue to improve and our cost of capital is going to continue to improve. So, I think that's a different think. We can produce AFFO growth today with our existing strategy compared with all of our peers.
And as our equity multiple catches up, which I think it will, as people see that growth and our cost of debt continues to improve with continued ratings improvement, continued size build of the company, that's our spreads are going to compress on our bond side. You've seen that materially over the last couple of years. All that's going to continue to widen the investment spreads we can get, which will accelerate our growth.
And when I am about our balance sheet, I think that every time we get I guess cheaper and cheaper I look forward, we saw some legacy piece of paper in our capital stack where these converts coming due on May 15.
And when I started as CFO about three years ago, those seemed pretty cheap today, [Indiscernible] really expensive for us. And I think forward we have CMBS debts on the book over 5.5%. We have preferred that we issued at 6% con-callable next year in 2022.
And so I start thinking about with our current cost of debt we could -- those are very accretive financing opportunities that we have today, because our cost of capital has improved so much and that will continue to improve more. So, I think that as big thing that Spirit has that our acquisition model works to grow and our cost of capital continue to get better.
And then on theaters as Jackson mentioned, look, we've taken a very conservative approach on our theater revenue recognition. I think more conservative than some and that really leaves you a lot of upside.
So, when you look at our Q4 numbers and you know that 70% of our theater revenue is not in there and knowing the diversification of our theater tenant base it was very diversified. A lot of regional operators that are getting a lot of government stimulus and they are actually in pretty good shape.
There's a lot of upside as those earnings return. We're not kind of banking on those today. And so I think when you just take all that into account I think it's a very good multi-year growth trajectory for Spirit that could really surprise people.
One last thing I'll add, you talked about the years to come, and I think that ultimately and Camino [ph] former career before I came to Spirit, I was on the banking side. So, it was all about trying to solve clients -- really trying to work with clients' objectives and try to help them.
What we do here at Spirit and as we kind of continue to align our organization with our tenants our tenants are our partners, right. We want to really help them grow. That conversation is happening now. We are doing repeat business with existing tenants. It's a very powerful advantage for us, not just from a predictability standpoint as you kind of map out the future in terms of our acquisition pipeline, but how we can shift the allocation of the portfolio and then does it as well as anyone.
And so we are trying to aspire to do it that way. And I believe we have the right people in place, processes in place. We're still not there yet. I think we're really gaining a lot of momentum. That's when we really pulled that piece of the puzzle together. You're going to see some tremendous earnings acquisition power of the platform.
Great. Thanks so much for all the color.
Thank you. Our next question is coming from Harsh Hemnani of Green Street Advisors. Please go ahead.
Thank you. Just talking about the industrial deals this quarter, about half of the deals you had were industrial. And so I'm just trying to understand your appetite for the property type going forward, given all the capital chasing it right now. So, what kind of cap rates you're seeing and are you still looking to acquire it going forward?
Good morning. Yes, I would say, yeah, the answer is yes. Harsh we still have -- we do have an appetite for industrial. We will do more. We're not going to -- we don't have a particular target in mind. Part of this of what we're doing is trying to find the best risk adjusted returns for our capital, right. So, it's going to fluctuate. I mean it was obviously high this year -- this past year and high -- particularly high in the fourth quarter.
But I will tell you, it's going to continue to moderate going forward. We still like a lot of the industry -- we still like what we do with -- in terms of the other industries that we invest, certainly gyms, you saw us do health and fitness. We are absolutely excited about what we did with Lifetime and we did another property on the high volume low cost operator side.
So, yes, I wouldn't say there is any new shift in what we do, but industrial has been, we talked about it for a while, which continued to increase our investment activity. And that's going to be an important part of what we do. I think the piece of the puzzle that's a little bit different and nuance for us is the type of industrial properties that we're buying, they tend to be long dated direct sale leasebacks with fixed escalations.
We're not buying multi-tenant industrial, we're not buying industrial value add. That's not really the -- that's not in our wheelhouse. Where we think we can add value is really understanding kind of the credit profile and upside of a particular tenant and hopefully giving in at a very good basis with long-term -- with a long-term lease.
And we've already seen that in some of our industrial acquisitions where you've seen real credit upgrades and that's such a big positive for us. So, I'd say that our industrial is very narrow defined lane right now. We're not competing, I would say with the broader based -- some of the broader based value-add and core industrial buyers right now.
Thank you. And then on the health and fitness side, you talked about the Life Style deal a little bit. And obviously we haven't seen a lot of public market capital flowing toward the health and fitness property type. I was just wondering how is the bidding process there, was there a lot of competition and what kind of cap rates you're seeing on that property type, if you can share that?
Yes. I'm not going to -- well, I can tell you on that particular transaction that we talked about it being direct -- Lifetime was a direct deal. There was no broker, right. So, they had a desire to do something by year-end. We had similar desire. We know these properties well. We know that credit well. What's great about what they do all of their facilities are open today in the United States. They have a very, very unique business model with someone like Country Club like.
And in terms of their data, the data that they have on who is coming into their gyms, who got COVID if they did, it's very impressive data and it's not -- there is -- they're very, very safe. And what we like about them is they've been able to adjust their business model to be very profitable even with some of the space constraints that were put upon them by different municipalities and I don't know about you, I can tell you about me personally.
I really want to go back to the gym. I'm tired of riding peloton at home. It's really kind of getting a little bit annoying. So, I believe that people will vote with their feet when they can and not all operators are going to do well. We really like Lifetime.
We -- like I said, we made an investment in the fourth quarter on a high volume low cost operator, which is equally going to be super successful we believe. Yes, we still are very favorable on that industry because we believe that the COVID vaccines are going to eventually get us back to some sort of normalcy.
Thank you.
And in terms of cap rates, I would just say they were -- they were wider than a year ago. Just to state the obvious from an investment standpoint. So, we also felt that that was kind of interesting time for us to make those investments. And we believe that we will be cap rate compression in that segment as time goes on this year.
Thank you. Our next question is coming from Ki Bin Kim of Truist. Please go ahead.
Thanks. Good morning. In terms of your 2021 guidance the $2.3 million of movie theaters that you are currently booking recognizing revenue and what is implicit in 2021 guidance?
Mike?
Yes. We won't dig too much into details, Kim, but I can tell you it assumes a modest -- a very modest recovery in the back half of the year. And so said in another way it would -- that recovery trajectory will have some impact on the low and the high end, but it will not make or break our guidance. As normal -- in a normal year our guidance is going to really hinge on our acquisition volume timing and cap rate.
Okay. And in terms of acquisitions and dispositions, can you just provide a little more detail in terms of like cap rates on your acquisitions and dispositions? And for acquisitions, what type of -- what type of assets you're targeting?
Hello. Hey, Ki Bin, this is Jackson. I mean I think for us I think it's going to look a lot like what it looked like in the fourth quarter. We usually talk about trying to target somewhere between a high six and seven going in cap rate and that's going in cap rate, not economic cap rate, right, because most of our deals are very long dated lease terms with escalations. So, the yield is much higher but economic yield.
But I would say if you look at our heat map we're just going to continue to do what we do. I think one of the things that's interesting about Spirit if you look at our top five tenants, from a percentage of total ABR or contractual rent, I mean they're right on top of each other. There is very little spread in terms of like 2% to 2.5% to 3% of ABR in that top five tenancy.
And if you go down to the top 10, sort of similar, I think there is like a 100 basis points of difference between the 10th tenant and the largest tenant Lifetime Fitness. So, I would -- what I would tell you is our top tenancy is going to move just given as we deploy and move -- and we're not going to tell you exactly what they are right now but we will in time.
The industries are -- if you look at our heat map, we're pretty disciplined. It's all pretty transparent there. So, look, we look forward to doing more car washes. I think you'll see us doing -- continue doing industrial, light manufacturing, you'll see us hopefully do more casual dining. QSRs are challenging because of the pricing, but we think there's going to be some interesting casual dining opportunities.
We love health and fitness. We love the sporting goods area. We love warehouse. Our warehouse clubs, At Home, we love those guys, right. We've continued to do more At Homes. It's such a good story. And so a lot of the things that we had acquired have been real beneficiaries of COVID.
And as we come out of COVID we will shift some of that allocation into more, what I'll call, real estate that relies on high touch aggregation of people right now. So, you'll see us to make that shift as the year goes on.
Got it. Thank you.
Thank you. Our next question is coming from Wes Golladay of Baird. Please go ahead.
Hey, good morning guys. Thanks for taking the questions. I guess a question on the capital allocation. Is it a fair assumption to say that you're willing to move up the risk curve for a certain segment of what you're going to allocate this year or I guess do you view as maybe not as high risk based on the quality of the real estate.
And looking specifically at the Lifetime Fitness, I see it has been under pressure from the rating agencies. But maybe you could talk about the quality of the real estate.
Sure. I mean tenants like Lifetime it's such a unique business model. It's -- if you look at the size of those facilities, they will be -- they will do what they do because there is demand for those facilities, right. And the way we think about it is, credits can change obviously given different exogenous events that occur outside.
And so even if there were deterioration in the credit, I'm not saying specifically Lifetime but just to use them as a hypothetical example that facility is going to still be what it is today. The credit may change, the credit may recalibrate, restructure. And if it did, it would still be what it is because once again there is demand for those facilities.
And to me what we really focus on is what is the demand for this particular unit type. Does it have the ability to go through different economic cycles, i.e. 20 years at a minimum, right? And we believe that like facilities like that have their consumer demand backdrop to kind of propel them for the next two decades.
So, if you have that you're going to get through it whether a credit changes or not because things do happen in an economic -- as you go through different economic cycles.
So, that's an important part of the discussion that we look at when we make an investment like that. So, that's just good real estate, right, obviously real estate is really important. So, that's also a consideration but when you look at the long-term demand -- consumer demand, and that's really what it really comes down to and the barriers to entry for those types of facilities and it's really difficult to replicate that.
So, we think that we're very confident about their abilities and there may be shorter term credit downgrades and things like that, but long-term we think the viability of that unit, the operator, that location because of our consumers' demand coming on the topline will support it.
Yes, maybe saying in--
And in terms of other risk -- yeah, in terms of other risk, yes, we don't consider ourselves a risk taker. I mean we're buying very long dated steady assets. And if you look at our portfolio, I mean, look, we used to get a lot of comments on quality of the portfolio.
It is not a risky portfolio what we have today and we're not going out on the risk curve. That's not -- that's why when we focus on that seven or high six going in cap rate, we think we're taking adequate risk adjusted -- making risk adjusted investments based on our cost of capital.
When you start to go for higher yield, obviously there is better return. But the higher default rates start to come into play. And obviously we're not in that low six area, which is investment grade. So, we think our sweet spot, we think we understand it. We know we've got history behind it and we're going to sort of stay in that lane.
Got it. I guess maybe another way to frame up the question is like looking at your slide nine, you obviously had a lot of credit improvements and there are some, maybe some tenants that are when the rating agencies look at them, maybe a little bit higher credit, but maybe you see improvement.
And to be fair to the Lifetime even the rating agency said that credit is likely to improve over the next few years. So, do you see opportunity to invest in stuff that you see will make it to slide nine over the next, call it, year or two?
Absolutely, absolutely. If you were sitting in our investment process that's a huge part of what we talked about. I look over to Dave Wegman, I look at Travis, Ken, we're making real estate decisions, but the credit is huge and not just the current credit, what would the credit be and obviously we have the hindsight of COVID.
So, without getting specific, I can tell you that the things that we invested in in 2020 if those tenants had closed for business you should assume that we were able to get structured protection for us in the event those facilities had to be closed and so there was no rent disruption for us.
Got it. Can you talk about what is the embedded bad debt reserve in guidance for this year and then maybe what it was for the fourth quarter last year, 2020?
Mike, do you want to -- yes, go ahead?
Yes, I would like to talk a little bit about that. So historically and I was talking about this back at our Investor Day, we typically have a 1% loss rent reserve built into our forecasting. We took -- we've taken that up in our guidance for 2021 excluding theaters. That's a whole another animal. So, ex-theaters, we've taken it up over 50 basis points that we're running -- it's embedded in our guidance at the midpoint right. So, you can flex that up or down, low or high.
And then you have theaters again. We assume -- you know what we did in the fourth quarter, you know we recognized, it's pretty stable. And then we have a moderate recovery in the back half of the year. So, that's the best way to kind of model that out and think about their portfolio state. So, a little higher, a little higher reserves and very modest recovery on theaters built in there.
All right. Thank you.
Thank you.
Thank you. Our next question is coming from Brent Dilts with UBS. Please go ahead.
Hey, good morning everyone. This is [Indiscernible] in place for Brent. Most of my questions have been answered already, but I was wondering if you could provide any detailed metrics, deal metrics around industrial assets you've acquired in the fourth quarter, anything around yields, cap rates, location and the types of the underlying tenants?
I mean I would say that a good number of them were public tenants, a good number of them -- the thing that's interesting about our industrial acquisitions without getting into super detail on the names of the tenants the facilities could be smaller mission critical facilities, i.e. $4 million size to $30 million size facilities. But they all sort of have a common theme to them.
We really believe in the fundamental underlying credit behind them. We believe in the long-term prospects of the industry that they act in. We think that the facilities that they operate in that we've acquired are pretty mission critical for them. We think that the basis per square foot makes sense as it relates to if we had to release that facility. And we generally think that of all the buildings that we are buying, they are straight up industrial buildings right.
So, that's -- but the other fundamental attribute is that they generally all have long-term leases. I mean we are not buying things to release value add. These are really critical facilities for good tenants and all they want to do is just pay us rent do what they do and we support -- those are the kinds -- that's how I would describe the lay out in that in that portfolio.
Okay, great. Thank you for taking my question.
Thank you. Our next question is coming from Linda Tsai of Jefferies. Please go ahead.
Hi. Good morning. Any thoughts on growing the dividend in 2021 should it mirror low to mid-single-digit AFFO growth you outlined?
Mike is smiling right now. So, I am going to let him take that question.
Yes, Linda, we actually talk about this back -- before COVID hit actually, I think, it was our Q4 2019 earnings call in February last year, and our goal is to get to a 75% AFFO per share payout ratio on the dividend. So I think is that achievable in 2021, it's obviously -- that's our guidance base. But again there is upside in theaters so I think that could drive us there.
But, yes, it's not that far away. I mean, certainly when I think back to where we were at Investor Day and the forecast we were talking about then and kind of the timeline to hitting that 75% payout ratio and growing the dividend, it feels like we're kind of at that point again. So, I think it's definitely near term whether it's 2021 or not, I'd say not impossible but we'll see.
And then in terms of the 1.5% escalators, does this vary across industry type in terms of retail distribution or manufacturing?
Ken, do you want to take that? Ken I'll let you--
Yes, I couldn't hear the question.
The 1.5% rent escalators variation across retail distribution or manufacturing.
Well, what I would say is all the acquisitions that we're looking at now tend to have obviously rent bumps escalators in them. Industrial, you're going to lean more to the upside on that in the 2%, maybe even a little more so the industrial escalations tend to be a little higher than the other -- the retail type of that escalators, but that's an important feature, and what we look for in all of our acquisitions. Does that answer your question?
Yes. Thanks. And then just the last one on ESG initiatives. What's the focus as it relates to E, S, or G? And what are some key benchmarks you're working toward?
Well, I think, when you -- when our proxy comes out, you'll see some commentary on some of the rating improvement. I'll focus on S for a minute. We did a lot of things during COVID actually, which was really I'm proud of. We had a companywide diversity symposium. We had an outside consultant come in. We invited our Board to participate.
And really the purpose of that was to talk about implicit bias. It was a great day. We were able to do it on Zoom. And like I said, it was moderated and participatory by the whole company. We since then created a diversity initiative committee and they are moving forward with some initiatives this year for the company diversity.
And then on the women's side, we have done -- we have created -- we've really made a big effort to try to instill gender diversity as well as ratio diversity within the company. So, we have an initiative there as well.
On the E side, it's a little bit harder for us just given the nature of what we do. We're not developers, we are capital providers and sometimes we are doing takeout financing and we're looking at different ways where we can advance the E side of what we do. But I can tell you on the social side, we are very, very active and committed as a senior leadership team and that goes down throughout the organization.
And look, I think during COVID, we tried to find ways -- interesting ways to bring the company together, have more fun doing things together. And I think that's really helped build our community, just within our company.
Thanks. Maybe just as a follow up, when you underwrite acquisitions, do you look at the resiliency of the buildings you're buying?
Absolutely. Well, Ken why don’t you -- take that Ken.
Yes. Days will be absolutely -- we've talked about before, we feel like we have a very nuanced property ranking model that every single acquisition we do. That's one of the first steps when we're -- in the early stages when we're still exploring the opportunity.
As we have the asset management team put every potential property through our property ranking model, a big piece of that model is specifically that -- is the building and the real estate that the building sits on. So, yes, it's absolutely an ingredient in our acquisitions and underwriting.
Thanks.
And one last thing, Linda, you know 50% -- our organizations is almost 50% split gender.
Great. Thank you.
Thank you. Our next question is coming from Joshua Dennerlein of Bank of America. Please go ahead
Yes. Thanks, guys. Good morning as well. Ken, congrats on the new role as CIO, because I'm kind of curious to hear your early thoughts on how this new structure will help SRC accelerate acquisition growth in the coming years. And maybe also how you think you will spend most of your time under this new structure?
Thank you very much. I would say I'm going to be spending a lot more time working with our acquisitions team. As Jackson mentioned in the beginning, we're very fortunate. Danny can come over and we're really focus on -- a very important initiative for us, which is continuing to grow with our existing tenants.
Through COVID, we won several lining, if you will -- was how close we got to our tenants. So, we know exactly what's tenants that we like, which ones we want to grow with and we're doing it. In the fourth quarter, over 40% of our acquisitions were with existing tenants. So, that's just kind of a start.
But I would say that a lot of my timing will be spent on the acquisition side. We've made a lot of improvement to our processes. We'll continue to do that. And I think we're laying the foundation of the targeted sources that we want to do business with, which is not just our existing tenants. There is other targeted sources that we feel like we've got the flywheel spinning, and we're in a position now we can put a lot of focus time on building those processes.
Great. That's it from me. Thanks guys.
Yes, Josh -- I will just add one more thing Josh on that front. The exciting thing I can tell you without being specific is, essentially when tenants get through COVID, the next thing they say is, hey, you guys were really good to work with. I got this new idea. I'm thinking about this. And when we can get an early in that conversation, that this might be, I want to acquire this other operator. How do I do that? What can you do for me?
And if you go back to listen what we've said in the past in terms of some of our values, we do what we say for tenant. That goes a long way, because I think that while people talk about cap rates going down and people buying, it's -- people want certainty, especially on the operator side. They want to know who's on the other end.
If I get into trouble or I need capital or shift fantastic opportunity, I think they're going to make different decisions about who their financing partners are going to be going forward. So, I think that's a sort of line. Those conversations have accelerated a lot recently and I think will only continue to accelerate as the year progresses with our tenants. So, I'm excited about that.
That's great. Could be exciting to watch. I appreciate that guys.
Thank you. Our next question is coming from Greg McGinniss of Scotiabank. Please go ahead.
Hey. Good morning, everyone. Jackson, lots on [Indiscernible] so far. So, probably just one question from me today, but -- Spirit had a busy fourth quarter, the productive year despite the pandemic. You're expanding the acquisitions team. And I'm not trying to take away from the strong 2021 guidance at all, but what prevents you from being more bullish on that investments? Or if we may consider the target to be -- I don't want to say conservative, but maybe the high end of the range is very reasonable as the transaction market doesn't shift much?
I think when we would change, would be -- you know, we're very disciplined about this allocation. We are very focused on industry allocation and concentration and diversification. So, I'd say that's one thing that could change it.
I think the second is -- look, I've said this in the past; there have been some interesting portfolios that we looked at last year, one in particular where we weren't successful. We are always looking at -- we have the ability to kind of size up big portfolios given our technology tools quite efficiently.
So, if we did a larger portfolio that would obviously impact the current guidance that doesn't -- current guidance for next year -- for this year doesn't assume any portfolio acquisitions.
So, that could kind of move the needle a bit. Yes, look, we're open for business and we're going to keep -- so -- but I think this is a reasonable range that we put out there. We feel good about acquisition wise.
Okay. Thank you. And I guess in line actually do have a follow-up. What's a reasonable level of dispositions to assume within the net investment guidance? And you anticipate harvesting more of those kind of lower cap rate assets that we've seen you sell over the last couple of quarters?
Well, I think first and foremost, what we -- and I'm going to pass it to Ken likely. Remember that we talked about this proof of concept. So, we decided to structure our disposition program last year 2020. It was in the depths of COVID, right. So, we wanted to have a proof of concept this year. You might see some -- there is some pretty -- Ken, I won't take thunder from you, but there is some real cap rate compression in some parts of our portfolio right now that we're evaluating.
Yes, it's -- what I -- the level of inbound -- unsolicited inbound inquiries into our existing portfolio is -- it's been interesting, it's definitely elevated. But what -- a couple of things I would throw out is, we like to look at our acquisition to dispositions ratio at 6:1, 10:1 somewhere in that range.
So, I would say that dispositions are always going to be a smaller ingredient -- based -- just simply based on that ratio that will turn to targeting, but we do believe dispositions are really important for portfolio shaping.
So, throughout the year, it's still early. We will identify both risk mitigation dispositions and we'll identify opportunistic or offensive dispositions that make a lot of sense when we're getting some compelling inbound inquiries. But at the end of the day, what I would suggest is, it's much more focused on acquisitions.
All right. Thanks Ken. Thanks Jackson.
Thank you.
Thank you. Our next question is coming from Chris Lucas of Capital One Securities. Please go ahead.
Hey good morning everybody. Hey Jackson, just one question for you. The high yield market has been incredibly liquid, I guess to say it. It's certainly helped some of the liquidity for some of your tenants over the past several months.
I guess my question is, does the aggressive yields and financing availability in the high yield market act as a potential competitive source of funds for those companies relative to sale leasebacks and is that a concern of yours at all?
It's certainly something that when we talk of those types of tenants is on their menu as they look at their most efficient way to financial business. I guess the way I would describe it is, we can fit in -- we can be very complementary to the high yield market, especially as some of these companies look at acquisitions, particularly in that business where they are looking at sale leasebacks, high yield, leveraged loans.
That's not the main part of what we do, but for sure like -- look, lower leverage lending spreads do affect our cap rates, that's for sure. But then I think there's still -- like I said, our sweet spot is $500 million in revenue, $500 million to $1 billion in terms of the company's revenues.
So, while spreads have tightened, they haven't really compressed dramatically in this area. But I would say that we -- it's not as aggressive as it was cap rate-wise for what we're looking at as I would say last year at this time. But we watch it carefully and we think it can be complementary at times for us as well.
Okay. Thank you. That's all I have this morning.
Thank you. At this time, I'd like to turn the floor back over to management for closing comments.
Okay. With that, I want to -- just once again, I'm very proud of our entire organization, the senior leadership team, the Board. We are in very, very good position to move forward this year, and I'm very excited about the company's prospects. So, look forward to meeting many of you next week at the upcoming conference and look forward to your continue support. Thank you.
Thank you. Ladies and gentlemen, thank you for your interest. You may now disconnect your line and log-off the webcast and have a wonderful day.