Spirit Realty Capital Inc (SRC) 2021 Q3 法說會逐字稿

Greetings. Welcome to the Spirit Realty Capital Third Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to your host, 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 for Spirit's Third Quarter 2021 Earnings Call. Presenting on today's call will be President and Chief Executive Officer, Mr. 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 yesterday's earnings release and supplemental information as well as our most recent filings with the SEC for a detailed discussion of the risk factors relating to these forward-looking statements.

This presentation also contains certain non-GAAP measures. Reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures are included in yesterday's release and supplemental information furnished to the SEC under Form 8-K. Yesterday's earnings release and supplemental information 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?

Thank you, Pierre, and good morning. As you saw last night, we reported another solid quarter. Our portfolio continues to perform exceptionally well with occupancy remaining at 99.7%. Lost rent declined to only 0.1% and unreimbursed property costs decreased to 1.4%, a quarter-over-quarter improvement of 80 and 50 basis points, respectively. It's important to note that our lost rent was primarily generated by only 1 of our 312 tenants that operates 10 of our properties, several of which we are close to finalizing agreements to sell or relet to strong national tenants. We collected 99% of our rent during the third quarter, with fourth quarter collections projected to approach 100%. We're very pleased with the health of our tenant base, which continues to only get better.

As I mentioned in our last call, we look for tenants that operate in mission-critical facilities within durable industries and where the real estate characteristics are strong. In addition, using our research and underwriting capabilities, we seek to identify tenants that we believe have an upward sloping credit trajectory or what we call credits on the move.

And we continue to see many of our tenants experience improvements in their business models, profitability and balance sheets. For example, in the last month, our #1 tenant, Life Time Fitness, successfully completed their initial public offering with a market capitalization of $3.4 billion and received a credit rating upgrade from Moody's. As you know, we were an earlier mover on Life Time during the pandemic, and we're proud of their continued growth and success.

The quality of our asset base is the strongest it has ever been, but this is not by accident. Since I became CEO, we would deliberately and methodically remove structural impediments and reconstructed Spirit's portfolio, spinning and selling off $3.8 billion of assets and acquiring $3.5 billion of assets.

This reconstruction has doubled our exposure to the industrial sector, doubled our exposure to investment-grade rated tenants and increased our exposure to publicly listed tenants from 37% to 54%.

In addition, our portfolio is now one of the most diversified across industries, asset types and top tenant concentration within the net lease sector. Our portfolio is extremely well positioned today, and we believe its performance over the last 18 months speaks volumes.

On the acquisition front, we deployed $294 million in acquisitions and revenue-producing capital with a weighted average cash cap rate of 7.27%, a weighted average lease term of 18.4 years and weighted average rent escalators of 1.9%. ClubCorp represented the lion's share of this activity, while the other 9 transactions were heavily weighted towards retail transactions.

Looking into the fourth quarter, we feel very good about our pipeline and expect more transaction activity than in the third quarter.

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

Thanks, Jack, and good morning. We are pleased with our third quarter performance in all respects. We reported AFFO per share of $0.84 compared to $0.80 last quarter, excluding the $0.06 of recognized out-of-period earnings that we highlighted on the last call. There were no such adjustments this quarter, and as we noted in our last guidance update, we do not expect nor are we forecasting any such adjustments going forward.

As Jackson mentioned, rent collections are approaching 100% and lost rent is negligible. In addition, unreimbursed property costs and impairments are the lowest in Spirit's history, which is indicative of the high quality of our portfolio. Our deferred rent balance declined to $16.8 million from $22 million last quarter with $3.3 million of the reduction attributable to an early repayment by one of our regional theater operators.

We currently have only one tenant remaining under a deferral arrangement, which is on a percentage of rent basis and expires at year-end. Since the onset of the Delta variant no tenants have asked for any rent relief whatsoever. Our retenanted theaters, Emagine and LOOK Cinemas, began coming online this quarter. Of the 7 theaters under new leases, 6 are now open, we expect the last one to be fully up and running by second quarter of 2022. We recognized $260,000 in rents for these theaters during the quarter, which represents 19% of their fully stabilized ADR.

Turning to the balance sheet. During the third quarter, we entered into new forward contracts to issue 3.9 million shares of common stock at a weighted average forward price of $48.72 per share and issued 4.2 million shares of common stock to settle certain forward contracts, generating net proceeds of $190 million. As of quarter end, we have unsettled forward contracts for 1.6 million shares of common stock with a current weighted average forward price of $48.64 per share. We ended the quarter with leverage of 5x, or 4.9x inclusive of our remaining forward equity contracts outstanding and total corporate liquidity of approximately $840 million.

I'm also pleased to announce that last week, Moody's upgraded our corporate credit rating to Baa2, giving us a BBB rating from all 3 rating agencies.

Turning to guidance. We raised both the low end and high end of our net capital deployment forecast by $100 million and the low end of our AFFO per share forecast by $0.05, making our revised net capital deployment forecast $900 million to $1.1 billion, and our revised AFFO per share forecast $3.29 to $3.30. To reiterate Jackson's remarks, we feel very good about our pipeline and the opportunities we are seeing as we close out a very strong year.

With that, I will turn the call over to the operator to open up for questions.

(Operator Instructions) Our first question is from Ronald Kamdem of Morgan Stanley.

Congrats on a great quarter. I just wanted to ask about the acquisition pipeline. I think in the past, you talked about experiential deals. Just trying to get a sense of how you guys are thinking about that and so forth.

Ronald, thanks. This is Jackson. So we -- I made a couple of comments in our prepared remarks about our fourth quarter. Our fourth quarter pipeline, as we look at it at this moment today, is the largest in terms of total number of transactions that have either been approved by our Investment Committee or under LOI or in process, I would say, at this point.

Second thing is it's the most granular in terms of size of transaction. So there's no, what I call, anchor deals, by definition, deals over $100 million. We're already building -- part of that pipeline is going to affect Q1 '22, which we're very excited about.

But the thing I am most excited about is the sourcing of these transactions has been the most diverse. It's come from our acquisition teams, our retail team, industrial teams. It's come from our asset management teams that we have in place, and also from our senior leadership team, we're always sourcing potential opportunities. So it's -- we're excited about it. That's obviously why we bumped up our year-end acquisition guidance.

The other thing I can tell you is there are no lifestyle transactions in the fourth quarter. I have to say that, that was on purpose. But we evaluate lifestyle opportunities on a very select basis. And I think what you would see candidly is more transactions that are kind of down the fairway in terms of retail and industrial for us.

Our next question is from Lizzy Doykan of Bank of America.

I'm on for Josh Dennerlein. I was wondering about the dispositions this quarter. I noticed there was just 3 vacant assets. If you could just provide more color around that and kind of talk about what your usual mix, if they're getting leased, sold assets are and kind of where you guys see the best opportunities for capital recycling going forward.

Yes. Thank you. Yes, the number is obviously lower this quarter. When you see a small number of vacant properties being sold, that's always a good thing. That means either we've relet properties or sold properties that did -- that were not vacant just as it relates to attractiveness of the portfolio. But I would say that if you focus on the dispositions that we completed in the first half of the year, that was very intentional. I mean we saw very attractive opportunities to sell low-cap assets that generated really high IRRs for us. That was one issue.

The second was sort of proof-of-concept issue. And I think that what also -- what we're trying to solve for, obviously, is trying to improve our cost of capital. That's really the bottom line. So dispositions are part of that, what I'll call strategic dispositions. And I would tell you today, our cost of capital is okay in terms of absolute terms. We believe it's in the high 4% area, including free cash flow. But it's actually relatively poor relative to our peer set. Our model works this past quarter and what we see today, we're achieving the highest spreads to our WACC in terms of what we're buying right now. So that's really positive and exciting for us.

But I think the real opportunity for us and for shareholders is if you look at historically our cost of capital and multiple, looking at it between 2019, 2020 and 2021 year-to-date, we've sort of consistently traded at 19% to 20% discount to our peer companies in spite of like massive reconstruction of this portfolio and the company. So we think we're really poised going into 2022. Everything is working great. And we'll continue to look at select dispositions.

I mean we have as I mentioned on the last call last quarter, the industrial asset that we sold, that's like in the middle of the pack and was very, very attractive. So we know we've been able to assemble in that $3.5 billion of acquisitions that will probably end at close to $4 billion by year-end since I came on board here. We've acquired some really good property. And so if we can't improve our multiple, we'll always look at capital recycling as another area to try to drive AFFO per share growth. Sorry, it's a long answer but...

Our next question is from Haendel St. Juste of Mizuho.

So a question, I guess, a follow-up on the pipeline. I guess by lifestyle, I assume that means no more country club deals in there. So with your 3% exposure, are you full for now, part one? And then also, with the shift to the retail industrial in the pipeline, as you mentioned, does that suggest cap rates in the next quarter or so will edge a bit lower? So some color on cap rate in the pipeline would be helpful, especially as we've heard some chatter about the increased competition for assets in the space.

Yes. Thanks, Haendel. I mean if you -- we talked in the beginning of this year about targeting a cap rate range of 6.5% to 7% for the year. The way we look at investing is we don't look at it necessarily on a spot basis. We do look at what we said earlier in the year, and we do really try to do what we mean and say.

So what I would tell you is that we will comfortably fall into the ranges that we talked about, in that kind of 6.5% to 7% for the year. There is increased competition. One of the things that I like about trying to increase transaction count, just volume in that way, is that it helps us smooth out our acquisition pace. I think it diversifies our deal sourcing. And I think we can have a little bit more control over our pipeline versus relying on, say, larger transactions to complete a quarter.

The other thing, Haendel, is you -- timing wise, it's very hard to control timing of closing real estate transactions. It's not like buying securities. So there's title, surveys, environmental due diligence, all kinds of things that -- negotiating contracts and leases. So it's not -- it's -- we're constantly closing here. So I would tell you that without giving quarterly guidance on where cap rates are going to be, we're very comfortable with the guide rails we put out for this year in terms of that cap rate range.

That's fair. And exposure to country club at 3%, is that about as much as you want for now? Or is that something you'll continue to accelerate and maybe has more room for?

Yes. So one of the things that we talked about is doing repeat business with existing relationships. I'm excited to say that ClubCorp is an existing relationship. I'm excited to tell you that our senior leadership team has spent a considerable amount of time with them.

I can tell you that there are -- we can't disclose the performance of the master lease. But what I can tell you, if you looked at September of this year versus September 2019, so prepandemic, the master lease total revenue is up. The master lease EBITDA is up. The master lease F&B is up month-over-month prepandemic. So we're excited about that. Coverage has improved.

The one opportunity is that party group revenue is down substantially relative to historical experienced in 2019. So that's the real upside as groups start to -- the group business starts to improve. I hope we can do more with them in the future. So I wouldn't say that we stop there.

But the other things are -- is that we don't necessarily target like golf has to be 5%. That's not really how we do it. So if we see a compelling opportunity with an existing relationship, especially the existing relationship where it lines up with the industry and credit and real estate, we're going to be all in. And so yes, I would expect, hopefully, we'll do more with them. I wouldn't suspect that we would -- we're not chasing golf transactions, I would say that.

So we're being very opportunistic. We like the industry, but it's very operator dependent, very real estate dependent, very, very dependent upon trade area, what's supporting the membership. So I guess the answer is yes, we would, but it's very -- that depends. So it's very hard for us to tell you what it looks like this quarter or next quarter. So -- but we are looking at it.

One more, if I could, on the -- Michael, maybe for you, on the reserves. I didn't notice any reversal this quarter. Maybe some color on what you're waiting for. We've seen lots of positive trends in the movie industry, success with a lot of the more recent films. So curious on the outlook or perhaps what's holding you back?

Yes, we really cleaned out our reserves last quarter. That was the $0.06 that we've talked about of out-of-period earnings we recognized in Q2. There's really not much left. I mean there's less than $0.5 million of reserves in total unrecognized. I wouldn't expect that to come back anytime soon. It's really just with one operator with one unit, and that's really it. So we don't have any reserves for movie theaters.

As we mentioned today, all of our movie theaters are paying rent. We have only one movie theater tenant that's even under deferral agreement. They're paying percentage rent and that's percentage of revenue, and that will end at the end of this year. And even under that percentage rent agreement, they're paying about 2/3 of their base rent just based on the revenue performance.

So they're all performing really well. And as we also mentioned, we had one regional operator just go ahead and pay back all their deferred rent in the third quarter, over $3 million, because they were so flush with cash. So we feel good about our movie theaters and our tenants.

And that's why I said we don't have any -- anything in our forecast with reserves coming back because there's aren't any. So Q3 was a very clean quarter, and I think our guidance is very clean and guidance out in '22 is very clean and you don't expect any noise in the numbers going forward.

Our next question is from Greg McGinniss of Scotiabank.

Jackson, I wanted to touch on lifestyle investments, maybe from a slightly different angle. Are there opportunities already out there? Or are these deals that you're going to need to manufacture speaking with owner operators and structuring sale leasebacks? Also, are there any metrics you can share on the DEPA industry?

I mean I think I would say we have a preference towards -- first of all, in this particular segment, structuring new sale-leasebacks. The ClubCorp transaction, as I said last quarter, we're a bit opportunistic. We -- this transaction closed like in the depths of COVID with another buyer. But I suspect going forward, if we're going to do something here, it's going to be highly structured new sale-leasebacks.

I would say the other piece of the puzzle is we have a preference towards private golf courses right now. Not to say we would never do a public one, but I can tell you that the private golf course that I belong to in the New York area has been around for over 100 years. So these things stick around for a long time, if they're in the right areas, to be very successful.

So yes, look, it's good real estate. You get to be very selective. And like I said, we get this question on lifestyle a lot, and I just want to make sure you understand that it's going to be probably a small portion of what we do. It gets a lot of attention. And I'd rather not talk about it too much because I want to buy more. So potentially maybe more people.

All right. I appreciate that. Some of your peers have provided 2022 earnings guidance, and I realize we'll likely need to wait until next quarter for specifics. So could you provide us some context on how to think about future acquisition volumes and cap rates, especially considering the record future pipeline you talked about?

Yes. So I mean, look, the -- we have to -- our Board meeting is coming up and we'll put out guidance early next year for 2022. But if you just look at what we've done, if you look at the trailing 12 months' acquisition volume that we've completed, it's about -- it's $1.2 billion at a 7.07 cap rate.

If you look at the fourth quarter in 2020, the volume was north of $400 million. The reason why we increased that range is if you sort of do the math on what we did, we have to kind of solve for somewhere in the area of $230 million, so $430 million of acquisitions in the fourth quarter to kind of line up with our year-end expectation.

If you look at what we've done historically, we've averaged 10 to 12 transactions a quarter and have kind of ended up around 200 to 250. One of my principal concepts back in Investor Day, if you go back, look at Page 18, we laid out very clear goals for 2022. One of those was to get to $600 million in rents. We're going to get there earlier than year-end 2022.

We wanted to source 1/3 to half of our deals with existing tenants and relationships. That percentage has actually been performing at a higher level. If you stripped out the ClubCorp deal, it's 60% acquisitions with the -- with our existing tenant base. If you go back to quarter before, same thing.

And then finally, we wanted to achieve a BBB+ credit rating. Now I don't know -- I think we're probably a year behind just given Moody's just upgraded us to BBB. But our pipeline and what we do is all kind of based around those goals. And one of the -- I've gotten some -- led some commentary, well, hey, why don't you guys buy more?

If you think about our operating strategy, it's quite simple. It's operational excellence. I think we've been able to demonstrate that. It's steady and high-quality acquisitions, and I use that word steady. We're not trying to go up and down. We're trying to kind of provide steady output. It's to achieve organic growth.

And the fourth operating strategy is a conservative balance sheet maintenance. So a long way of saying that we're not just trying to pied at any given time. We really can't time the market really so you can only buy at a pace that makes sense for what we're looking for. And our cost of capital is improving on an absolute basis, and it can only get better in terms of returns for our shareholders as we close the gap to our peers. So we're mindful of that as well.

Our next question is from Linda Tsai of Jefferies.

Jackson, you mentioned that you think your cost of capital is okay but not great. And that's one thing you have some control over. If the stock multiple continues to lag, what do you think are some potential catalysts to make the multiple inflect higher?

Well, first and foremost, I think it's kind of doing what you say, go back to -- we'll go back to that Investor Day. What we talked -- the reason why we've been able to at least perform the way we have been over the last several quarters, we talked about integrating our asset management acquisition teams. We've done that, and it is starting to bear fruit. We've expanded our acquisition teams. That's resulted in increased deal flow. And our scalability relative to our technology tools that we have in place give us an ability to really course correct at any given time.

But -- so my belief is if you are able to demonstrate that on a very consistent basis, investors want good growth, steady earnings, very predictable outcomes. I think they look for management teams that do what they say. I think one of the things that's misunderstood about our company today, and I kind of referenced it earlier in the comments, we bought $3.8 billion of real estate. I'm sorry, we sold or spun $3.8 billion of real estate. If we hit the midpoint of our guidance, we will have bought $3.8 billion. So if you think about that, it's been a full cycle, almost turnover of 45% of our company. But the story is really more deeper than that, I think.

We talked about doubling industrial, doubling investment grade since I got here, increasing our public-owned -- public tenants as counterparties. But if you go further and look at the reconstruction, our top 5 -- if you look at our top 10 compared in the first quarter of 2018, 5 of the top 10 are different. So we removed Shopko, AMC, Regal, CBS and CarMax and replaced them with Life Time Fitness, ClubCorp, BJ's, GPM and Dollar Tree.

If you look at our #11 through 20 and compare it today versus what it looked like at the beginning of 2018, we've turned over a number of different tenants: United Supermarkets, Mister Car Wash, Goodrich Theaters, Sportsman's Warehouse, Ferguson, PetSmart and LA Fitness, were swapped for Party City, BlueLinx, Bank of America, Mac Papers, Kohl's, Main Event and Off Lease. Like these are really good companies, that was very intentional. I personally don't think it's appreciated.

I think sometimes people think of whatever old Spirit was. And yes, there were some issues and portfolio -- problems that we had to deal with, but we removed them. So I believe that if people understand what they're seeing, dig in a little further, they'll see that this is a great platform that's ready to take off. But as you say, we can't control the stock price.

Our bond pricing has come in substantially to bring our -- including free cash flow, our WACC is in the mid-4s right now, but still can be better. And if it were better, it just creates that higher growth rate as we deploy capital and probably positions us to be more competitive in what I would call larger portfolio opportunities.

We've kind of scrubbed down more than I can explain to you, but in the end, the math doesn't work for us, they can't do it. So yes, we're still punching along, but we think that what we've created is phenomenal portfolios, which we constructed, almost completed in the way we want it, still some more tweaks, but that's happened since COVID and all those other kind of stuff. So I'm very proud of what the team has accomplished so far. So I think there's more to come.

Maybe just on the tweaks, having cycled through $3.8 billion of assets. Besides supermarkets, are there a couple of other categories you'd like to trim down more?

Generally, like, flat leases aren't great. So we'll continue to -- we've been chipping away at reducing drug stores, things like drug store exposure, to generate what I'll call longer-term, stickier opportunities that have better rent escalations. So yes, I would say -- I wouldn't say there's a wholesale big change at this point, just on the margin.

And then we also are consistently trying to improve our portfolio. Some of the companies that have had more historic track record operating versus us. I've had that time for decades, it helps you just kind of cycle through real estate. We had to do the stuff like really fast. I mean we just didn't have the time. So I would say there's still opportunity to cycle through assets, get blend and extend, sell them off at good IRRs, redeploy that capital into maybe other areas where we see some credit upside or industry upside. I think we've been able to do that pretty successfully. So yes, we're going to continue to build and tweak and improve this portfolio.

Our next question is from Wes Golladay of Baird.

Yes. Jackson, I want to go back to that comment of credits on the move. We've seen that the bond market have tight spreads for over a year now. Are you starting to see the cap rates for those, I guess, more riskier assets start to tighten in the private market for net lease assets?

Absolutely, yes. Absolutely. It's not just their cost of funding as they look at sale-leaseback opportunities. I mean when a company does a sale-leaseback, they look at their unsecured debt spreads as a cost of capital because, as you know, doing a sale-leaseback is just really another form of long-term financing. But I think there's been a lot more private capital coming in supporting private buyers.

We used to talk about these 1031 buyers as well. There's now institutional funds that have been set up for net lease, which is, by the way, a great thing on the one hand because it's going to underpin the values that are sitting in all of our respective portfolios, my peers' portfolios, cleaning ourselves.

But on the one hand, debt spreads have improved, but the businesses of these companies have improved as well. So we'll pick and choose our spots. We won't have to buy a huge amount to drive earnings here. So it's -- we can be very selective still, pick our spots.

Got it. And then you did mention like maybe you have more opportunity, you passed on some opportunity. The numbers didn't make sense based on where your WACC was mainly due to the cost of equity. If you were to get your cost of capital down further, I guess, how much more could that TAM open up for you?

Like I said, I think some of the portfolio situations we've looked at over the past number of quarters. At the end of the day, it just didn't kind of line up with getting the right returns, even though we believe that the pricing made sense, if that makes sense to you, like the pricing of these portfolios was attractive. But from looking at just what it would do in terms of creating dilution, we didn't pursue it. And we've just executed what I'll call more smaller acquisitions.

I would say if our cost of capital improved along the lines of getting closer to our peers, I think the end result would be you'd see more industrial assets being acquired. Right now, those are a little more challenging for us, given the pricing compression that we've seen. You'd see us be more competitive on portfolio opportunities.

And we would just get wider spreads on the things that we do today, which we like. I mean, we really believe -- I think we've tested -- let's just look at the metrics. I don't get -- we don't get credit watch list discussions. I'm kind of smirking because it's -- every quarter, I keep saying it's the best it's ever been. Well, that's ever been in our business. And so I think our thesis, what we're doing makes sense. We just have to make sure the market really understands it. Because we still think...

Our next question is from John Massocca of Ladenburg Thalmann.

So maybe building on that theme of kind of improving kind of portfolio performance quarter after quarter -- can you hear me? Maybe kind of build around that theme of kind of -- can you hear me?

Okay. We're going to jump to the next question if he wants to recycle through go back up.

Our next question is from Harsh Hemnani of Green Street.

Jackson, you guys provided a breakdown this quarter of your retail exposure or taking that down into service discretionary and nondiscretionary. Looking forward in your pipeline, I guess, which part of retail would you be looking to expand in your portfolio?

I wouldn't say that we're seeking to make big changes, Harsh, in this area. We do look -- we look top down and bottom up at different opportunities. And one of my principal goals, if you kind of remember from the Investor Day, was to do more business with our existing tenant base. So if you kind of look down at our top 20 tenants, our goal is to do more with them. And you can sort of see how they fit. Some of them are in the discretionary retail. Some of them are in the service retail.

So I wouldn't say we're looking to match up or increase any particular area. At this stage, we're at our evolution cycle where we have tenants that we've done a lot with in the last 36 months, and we want to do more with. And we are treating them like real partners, clients to some degree, because it's competitive. They can do business with other people that provide money.

So we're trying to be best-in-class across the platform, whether it's acquisitions, asset management, legal, lease administration, property management, like literally we're trying to organize ourselves to basically win once we get a client or industry that we like in our portfolio. So I would say that these buckets can change at any given time, given how we're deploying capital with our existing tenant base.

Got it. Maybe thinking about the lease structure. It seems that Spirit has had over 40% exposure to master leases, which has been well in excess of the net lease industry for a while. I guess, could you outline the benefits you see there for your portfolio?

Sure. So I think if you understand the nature of a master lease, it provides a landlord with significant credit protection because it's a unitary lease. If the tenant wants to do something, bring a property in or take a property out, they've got to kind of come back to the landlord. If they want to make changes, they've got to come back to the landlord. So on the one hand, it provides us great credit protection, increases the theoretical creditworthiness of that underlying tenant's unsecured rating.

But the other thing that it does, and we're seeing the benefits of this, is you really have the ability to work with a tenant, add properties in. We construct properties, reset different issues. It gives you a good opportunity to achieve what they're trying to achieve because it's a big unitary lease, right?

If they want to add a portfolio or they want to sell a portfolio or if the tenant wants to do an M&A transaction, all those things benefit. Like that Shiloh transaction is a great example. That was the lightweighting company that we bought earlier this year. They're coming out of bankruptcy. The credit was obviously speculative. But they were acquired by an investment-grade counterparty, Worthington Industries, and Worthington have to step into the master lease structure. So in the future if Worthington wants to do more business in a particular way, we'll approach them. So we think it does a lot in terms of the way we like to see the business.

If you're just buying investment-grade units, that's -- whether you do sale-leasebacks or buy existing leases, that's almost more of a commodity type of operation. But say, it's hard to execute, be careful, but it's just a different kind of calculus. We think we get better returns by finding credits, industries, real estate assets that can be secured under this kind of master lease structure. So I think it will always be a big part of what we do.

Our next question is from John Massocca of Ladenburg Thalmann.

Can you hear me?

Yes.

Great. I think it was a headset issue on my end. So anyway, in terms of acquisitions, just given 3Q was kind of front-end loaded, I mean, what's the outlook on the cadence for investments in 4Q? Is it also probably going to be -- or I guess, is it going to be more back-end loaded? Or were there things that kind of fell through to maybe the start of the quarter?

Let's say things fell through. I mean deals have a different sort of life cycle to them. If you look at what we completed in the quarter, just take out ClubCorp, the businesses that we acquired were basically a weighted average cap rate of 6.75%, which is right in the sweet spot of what we've talked about doing.

I think that what you'll see in the fourth quarter, as I said, it's a much higher number of transactions that are going to close or have closed already. And so I think you'll see a more smoother deployment of capital. And look, that doesn't say we won't do a portfolio at different times in the future.

But what I'm trying to really create with the team here is a more steady, repeatable kind of flow acquisition cycle. Because I think historically, we had tended to close later in the quarter. And we're trying to actually flip that to be a little bit more front ended in the quarter and also be more consistent.

And then portfolios drop in when they drop in. So that is a major thing that we talked about at the Investor Day, and we are really well positioned to replicate it sustainably going forward, the way we structured our teams.

I guess when I said fell through, I really kind of meant anything that was going to close by 3Q end that just ended up falling into October.

No, nothing like that. No, nothing like that.

Great. And then you talked a little bit about how portfolio metrics improved pretty much every quarter since you've been here. I guess as I look at that kind of unreimbursed OpEx number, I know we're splitting hairs, but is there any further downside to that, maybe some of the last bits of the portfolio that were most impacted by the pandemic kind of get up fully up and running? Or is that really probably the floor of how low that unreimbursed OpEx can go?

I mean I'll let Ken take that one on.

What I would say is that number, I don't see risk from COVID and Delta and any of that, but I'm not going to tell you 100% that 1.4% is the normalized run rate going forward. There's a lot of little ingredients that roll up into that number. It's a very meaningful improvement from what it's been historically. I'm not -- I don't think Mike either would be prepared to say that's it, that's a normalized run rate.

Yes. There can also be some seasonality to it on the timing of when some unreimbursed property costs are due, but it's certainly a big improvement. I think historically, if you go back to Investor Day, we used to model 2%. I do feel like going forward, that number is coming down. But yes, we're not quite willing to say it's 1.4% as a normalized rate. But definitely, I'm starting to feel that it's below 2%. Fewer vacancies, just less leakage, better tenant health is a big part of that. So it's somewhere between that 1.4% and 2%.

And as we kind of go through the rest of this year, and as Jackson said, we turned this portfolio. So we're kind of still getting used to the new Spirit and new portfolio and what it produces. And we'll get more clarity going through '22. And at some point, we'll kind of get a better feel on what that is. So probably be conservative with our forecast for the next year but may not be as conservative as we were last year.

Our next question is from Steve Dumanski of Janney.

Going back to the acquisition front, what is the current cap rate spread range between investment grade and non-IG tenants? And also, has that spread been narrowing or widening recently?

I would say just generally, it's narrow. It really has narrowed. We saw more compression in a non-investment grade. Investment grade also compressed, but they were already coming off of a lower base. And I think that's a function candidly of what's happening in the high-yield market.

If you look at pricing of high-yield debt, high-yield index, this BB term loan index, those things are just like crushing partially low right now. So yes, spreads are compressing and tenants are smart. They look at cost of capital just like we do. So I don't know, Ken, is there anything else?

It can vary between asset classes. If you look at a corporate franchise restaurant, corporate versus a franchise, it's pretty thin. We don't play in that area right now because the cap rates are really aggressive. But it's going to depend across asset class, but by and large, it's relatively thin.

Got it. That was very helpful. And also just regarding ClubCorp. If ClubCorp were to have issues, what are your thoughts of the potential repositioning of those properties?

Well, ClubCorp is doing great. Let me just tell you, I gave you those stats. When we underwrote this transaction, what we -- the way we think about this investment, the credit statistics, the basis of the golf courses, the basis per acre, the scale of the properties within the master lease, quality of the master lease, we actually think the credit quality of that master lease is actually higher than ClubCorp Corp., if that makes sense. And so we're very comfortable with the underlying collateral, if something were to happen that's negative to the corporate tenant, we'd be in great shape. There's a lot of different options.

Our next question is from Chris Lucas of Capital One.

Jackson, I'm going to go back to the Investor Day presentation as well. Back then, one of the comments you made was that your -- one of the gating items to your ability to do more acquisitions was just your ability to do more actual transactions. So in 2019, you did 30. Last 12 months, you've done 45. Are you at a point now with your systems and people where the number of transactions is not the gating factor for acquisition volume? Or do you feel like you have more work to do on your efficiency on that front?

I'd say we were there. I mean I can't tell you what the number is going to be. I'll tell you the next time we report earnings, but it's going to have a much higher pace of transactions per quarter and it's going to be repeatable is what I'd say.

I mean, Ken, you can -- bringing Ken into the role of CIO and we brought Danny, who was doing acquisitions, back into running asset management and everything kind of rolls up under -- Ken, maybe you can describe what is happening in your world.

Yes. So as Jackson's alluded to, the work we did starting back in 2019 was about building processes that we felt not only added value to the acquisition process, but it's extremely scalable. We truly do operate our acquisitions, asset management, credit and legal. They each have their own roles, but we -- it's a one-team effort in our acquisitions. And since 2019, we continue to refine it and whatnot that, no, more transactions is not a gate.

Okay. Great. And then just...

Yes. I mean I would say one thing, Chris, just to follow up on that comment. I would say since Investor Day, there was a lot of work, like, I'd call it, like internal plumbing, strategy and then, obviously, COVID happened. That was not great for us timing wise. But if you look at what we've done, it is exactly what we said. And I just think we're going to do it better and faster in the coming quarters. It's pretty much ready to go. It really is, yes.

Okay. And then I guess just a quick one. You mentioned about the spread narrowing between investment grade and non-investment grade. As you think about where we are with Fed activities and likely actions, do you anticipate that, that widens? Or is this something that is just the amount of capital out there searching for opportunities is going to continue to keep that spread under pressure?

I think for the time being, it's going to stay like this. I don't see any, absent some economic -- global economic issue that creates changes in the fixed income market. There's a lot of capital, a lot of debt capital, public, private, a lot of public -- there's a lot of public buyers in this kind of stuff.

There's private -- there's almost a private one every other week, private groups setting up these platforms. On the one hand, you'd say, oh, that's scary. But on the other hand, the asset class is getting more institutionalized, which is always a good thing. So I think cap rates in the net lease area still are wider than if you look at other asset classes in the commercial real estate landscape.

And I think as people start to get a better appreciation on the quality of these assets, the ability to kind of restructure weighted average lease term, especially if you're in a master lease situation where you can work with a tenant, the ability to improve tenant ratings as the portfolio evolves across the platform.

And then the ability to sell these properties at any given time through blended extends and things like that, you can generate a lot of IRR and a lot of steady earnings and growth that way. And I still think there's -- not everybody really understands this business.

And as more time and performance happens, I think it will -- my suspicion is you'll see the peer set cost of capital come down in lockstep with what we're seeing just across what's happening in our tenants.

Our next question is from Ki Bin Kim of Truist.

Just a couple of catch-up questions here. I'm not sure if I missed it, but the unit level coverage of 2.7x, I know this is looking arrears and there's a lag in reporting, but it didn't seem to change from the previous quarter. I'm not sure if you already talked about this.

Is flat, yes. That was flat. There was no...

Right. I mean, I would think just given the recovery in the sales volume that you've seen in this country that there should be upward migration to that metric. Is it just a lag issue? Was it a mix issue? Like anything -- any color you can provide.

I think it's -- yes. I mean I think it's a -- we gave you a trailing 12 months' coverage number, Ki Bin. So part of it is it takes a while for it to move. So we may have seen that experience within the quarter, but we don't break it down in that way.

A slight increase in the combined unit and corporate from 2.9 to 3.0. So it just takes time for some of those metrics to work through.

I mean I kind of referenced, Ki Bin, like just -- like the ClubCorp deal, like we don't report publicly that, but I just gave you that snapshot, September '21 compared to September 2019, pre-pandemic across a number of different metrics, unit coverage, improved revenue, EBITDA, food and beverage. So that's just a microcosm of kind of what's happening. But that's September. So we don't report monthly coverage or quarterly coverage.

Okay. And you have about 3% of leases expiring from now to the end of 2022. Just curious if -- how those conversations are going and if there's anything that we should be aware of.

Ken, do you want to take that?

Yes. So what I would throw out real quick is if you look back to 2019, we were looking at a 2021 exploration cohort of about roughly 6% of our portfolio rent. And as you can now see, we worked through that with renewals in the 90%, recaptures 95%, give or take.

We don't expect any meaningful changes to that. You'll also notice that the 2023 cohort, because that's kind of one that sticks out, in 1 quarter, we went from 5.1% down to 4.5%. So I guess the answer is, we've already engaged with some of the larger expirations in that quarter. As an example, Advance Auto. We've already renewed that one. We not only got rent increases, we got 10 years at current. So we're pretty happy with how that's looking.

Last thing I'll throw out is, if you go back 3, 4 quarters, look at the percent of the portfolio that is in that last bucket beyond 10 years, it's growing every single quarter. So no, we think we have a very good system to deal with expirations.

Okay. Operator, it looks like there are no more questions. I'll just close by saying thank you for taking the time to listen to this call. And just let you know, we are very confident about our pipeline and performance as we come into year-end, but we're equally more excited about our prospects for 2022 and being able to demonstrate the leverage of this platform that we've created, just beginning to see the true signs of the fruits of that labor that we set out a couple of years ago.

So thank you all. I look forward to talking to you at NAREIT next week, hopefully. Take care.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.