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Spirit Realty Capital Inc (NYSE:SRC)
Q3 2020 Earnings Call
Nov 2, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to Third Quarter 2020 Spirit Realty Capital Earnings Conference Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions]

I will now turn the conference over to your host, Pierre Revol, Vice President of Strategic Planning and Investor Relations. Thank you. You may begin.

Pierre Revol -- Senior Vice President, Head of Strategic Planning and Investor Relations

Thank you, operator and thank you, everyone for joining us this afternoon. Presenting on today's call will be President and Chief Executive Officer, Mr. Jackson Hsieh; and Chief Financial Officer, Mr. Michael Hughes. Ken Heimlich, Head of Asset Management will be available for Q&A.

Before we get started, I would like to remind everyone that this presentation contains forward-looking statements. Although the company believes these forward-looking statements are based upon reasonable assumptions, they are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from those currently anticipated due to a number of factors.

I'd refer you to the safe harbor statement in today's earnings release, supplemental information, Q3 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 sort of non-GAAP measures. Reconciliation of non-GAAP financial measures to most directly comparable GAAP measures are included in today's release, and supplemental information furnished to the SEC under Form 8-K. Today's earnings release, supplemental information and Q3 Investor Presentation 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?

Jackson Hsieh -- President and Chief Executive Officer

Thank you, Pierre and welcome everyone to our third quarter call. Before we get into the details of the quarter, I want to share an update, I recently received from one of our tenants. A couple of weeks ago, we hosted a casual dining operator at our Virtual All Town Employee Meeting. We own 13 of their units representing a little over 20% of their operations. At the initial onset of the pandemic, they focused on addressing the immediate concerns protecting their employees and guests, conserving capital, and strengthening their liquidity position.

But within a short time, they pivoted to oftense. They focused on developing their omnichannel presence, increasing their online growth by 150% year-over-year, rationalizing their menu offerings and optimizing the use of their store footprint. Because they made good tactical and strategic decisions over the past few months, not only will they survive the pandemic but likely thrive and gain market share and Spirit will participate in their growth.

I shared this story with you because it is emblematic of how many of our operators are adapting their business model to the changing landscape and how their focus in most cases has shifted from survival back to success. Like our tenant, we too see opportunity and have shifted back to offense. During the third quarter, we purchased $214.3 million of assets, across 18 properties with an initial cash yield of 7% and an economic yield of 7.7%. The acquisitions this quarter included a mix of existing and new tenants, with a weighted average lease term of 14.8 years and annual escalators of 1.2%. Based on rent approximately 38.1% of the acquisitions are publicly listed tenants and 19.8% are rated investment grade.

The asset types were weighted 58.4% retail and 41.6% industrial, which we think is a healthy mix for our intermediate term growth. New tenants acquired during the quarter include Off Lease Only, a Florida used car dealership and Shutterfly, a market leader in personalized products. Off Lease Only is the largest volume independent used car dealership in the US, selling thousands of cars in its four Florida locations and around the world through their website.

We bought these high-performing locations under one master lease and they are in the top quartile of our auto dealership portfolio across all our metrics, including our property rankings. The Shutterfly property is a built-to-suit, mission critical, light manufacturing asset that serves as their only facility in the south central region of the United States. This building is brand new, and sits in a very healthy and growing submarket within the DFW metroplex. We secured both of these opportunities after other institutional buyers pulled back on their capital commitments during the second quarter, while our liquidity and balance sheet position allowed us to step in and buy these great assets, with strong tenants and yields that are accretive to our shareholders.

The existing tenant acquisitions included At Home, Mac Papers, FedEx and Dollar General properties. All performed exceptionally well during 2020 and this moved FedEx into our top 20. Overall, we are finding attractive opportunities that fit our underwriting and risk return framework. And as a result, we are raising our 2020 capital deployment guidance by $100 million.

Shifting to the portfolio, the health of our tenant base continues to improve. Our cash collections for the third quarter were 90% and October is at 93%. If you exclude movie theaters, which I'll discuss in a few minutes. Our cash collections were 94% for the third quarter and 98% in October. It is worth noting, our properties are primarily located in the suburban and rural markets, not in CBDs which have been more acutely impacted by COVID-19 and our operators are predominately large and sophisticated. Approximately 85% of our tenants generate annual revenues in excess of $100 million and half were public companies. In addition, we made significant progress on both 2020 and 2021 expirations.

Since the beginning of the year, we have renewed 17 leases expiring in 2020 and excluding one movie theater property, we renewed the remaining 16 leases at a recapture of 101% of prior rents. For our 2021 expirations, we renewed 25 leases with a 97% recapture of prior rents, reducing the rent expiring in 2021 from $27 million at the beginning of the year to $18.8 million. We anticipate the remaining 2021 maturities will follow the same trend we have seen thus far and the percentage expiring will continue to drop each quarter.

There are four industries that I'm constantly asked about casual dining, gyms, entertainment and movie theaters. So I'd like to take a few moments to update you on how these tenants are performing within our portfolio. Our casual dining concepts are fully open with in-door dining. Our 39 tenants are geographically spread across 32 state with no tenants in California or New York City. While there are many challenged casual dining operators out there and no doubt many will close our tenants are doing very well. In fact, we believe our tenants will ultimately be winners and pick up additional market share.

Our 17 gym operators are recovering quickly and seeing attendance and new memberships surpassed their expectations. And similar to casual dining, rent collections have improved from 21.8% in the second quarter to 95.1% in October. The only major hurdle we have seen for our gym operators has been local or state government regulations, preventing them from opening in limited cases. When they are open, people are choosing to go to the gym. Our entertainment assets are a mix of outdoor and indoor venues. A large majority are seeing healthy consumer demand and their financial performance is above target for the units that are fully open and operating. As you can see in the materials we have released this afternoon, we experienced a 71.8% increase in cash rent collection in this segment for October and we remain bullish about the near-term entertainment outlook.

Movie theaters is the only segment within our portfolio that is still being materially impacted by government closures. The continued shutdown of theaters in key markets like New York City and LA has resulted in studios holding back content with most major releases now pushed back until the spring of 2021. This of course has made it challenging for theaters that are open to attract moviegoers and generate sufficient revenues.

To be clear, we do not believe this is a demand issue. We believe, people will go back to the movies when content is available, but the key markets need to open and the content needs to be released which is outside the control of theater operators. As such we have structured, most of our rent deferral arrangements agreements with our movie theater tenants as a percentage of sales arrangements giving them time to conserve capital until content begins flowing. I would note that our 5.4% rent exposure in theaters is comprised of 2.7% regional and 2.7% national operators and we have seen better financial performance from our regional operators this year, primarily driven by more nimble operations and better pre-COVID balance sheets.

On a positive note, we entered into a new lease this quarter with a strong regional operator for the four former Goodrich Theaters. The new long-term master lease has a healthy stabilized yield after a period of percentage rent and the operator plans to invest significant capital to modernize these theaters. Similar to our casual dining tenants, the winners in this space will ultimately benefit from gaining market share and we believe we have winning operators and real estate.

I'll close out by saying that I'm very optimistic about the future of Spirit and our path back to earnings growth. Over the last six months, we've gotten incredibly close to our tenants further invested in our technology platform, and we have developed a healthy pipeline of opportunities to pursue. These actions along with raising $1.2 billion of capital have put us in a great position to execute our plan and set us up for success in 2021. As we move forward, we will continue to execute our strategy of delivering operational excellence steady and high-quality acquisitions with a focus on organic rent growth while maintaining a conservative balance sheet. We believe this approach will result in predictable and steady earnings and dividend growth for years to come.

With that I'll pass it off to Mike for his remarks.

Michael Hughes -- Executive Vice President and Chief Financial Officer

Thanks, Jackson. As we've done all year, in addition to our regular reporting materials, we provide an investor presentation that contains incremental detail and disclosures about the health of our portfolio. This presentation is available on the Investor Relations section of our website and we hope you will find the additional information helpful. There were a lot of positive developments during the third quarter. We saw 98% of our tenants reopen and the continued ramp-up of their operations. Our cash rent from collections followed the same trend, currently standing at 93.3% in October with collections of 100% from our top 20 tenants and 96.5% from public tenants.

In addition to improving rent collections, we collected $3.2 million in deferred rent payments, representing 100% of what was owed during the quarter. The combination of improving rents and deferral collections increased total cash collections by $21.4 million compared to the second quarter, providing operating cash after dividends of $9.1 million. The repayment of deferred rent with a weighted average payback period of 13.3 months will provide additional cash flow for the next several quarters, helping to support our cash flow available for acquisitions and dividends. Third quarter also marked a return to growth with ABR increasing $13.7 million to $483.3 million, primarily driven by $15.1 million from acquisitions, slightly offset by accretive dispositions.

Our unreimbursed property costs also improved to 2% of rental revenues, inclusive of $840,000 in prior quarter property tax recoveries compared to 4.1% in the second quarter. We also made strides in simplifying our income statement. Our two remaining mortgage loan receivables totaling $29 million were repaid in full. These loans were secured by casual dining and QSR portfolios and the repayment for the original terms of the loans speak to the strength in the underlying operators and the recovery of their businesses. We also completed the final separation of our management arrangement with SMTA in September. As a result of these two milestones, our future earnings will be completely driven by rental revenues.

As Jackson discussed, the one area of opportunity within our portfolio continues to be movie theaters. Now last quarter I talked to you in length about ASC Topic 842 and the relief provided by the FASB through new accounting guidance. And one of the key considerations to recognizing deferred rent in revenues is that there is a minimum 75% probability that a tenant would repay the deferred rent as agreed. Given the elongated recovery we forecast for theater operators, we're now recognizing approximately 70% of our theater revenues on a cash basis. For the 30% of theater revenues, which are being recognized in earnings, approximately 40% are being paid in cash.

Keep in mind that our analysis and decision to recognize theater rents on a cash basis only pertains to the probability of full deferred rent collection; not to the ultimate recovery of the tenant or the industry. We still believe that once theaters have content to provide, it will begin their recovery, and our theaters, which are well located at high-quality locations, should ultimately participate in that recovery, providing a substantial rebound to our earnings. Please note that for all tenants, third-quarter rental income was reduced by $7.8 million of write-offs related to prior periods, of which $2.9 million were for cash rents and $4.9 million were for straight-line rents.

In the meantime, the rest of our portfolio is recovering rapidly. Excluding theaters, our October rent collections, which are provided for on Page 3 of our investor deck, are 98% and our reserves excluding theaters are 1%, which is in line with our original 2020 guidance provided in December. This performance really speaks to the quality of our tenants, credit underwriting, and real estate. We were also active in the capital markets again this quarter. We issued $450 million in senior unsecured notes due February 2031 with a coupon of 3.2% and repaid $222 million of our $400 million term loan and repurchased $155 million of the 3.75% convertible notes due May 2021.

We settled 2.8 million shares of open forward equity contracts during the quarter, generating net proceeds of $100 million. In October, we settled 2.9 million shares of open forward equity contracts, generating an additional $100 million in net proceeds. In addition, during the quarter, we entered into four contracts for 313,000 shares through our ATM program at a weighted average price of $37.06 per share. We currently have $1.1 billion of available liquidity, including cash, undrawn revolver capacity, and unsettled forward equity.

I mentioned earlier how we've made additional strides in simplifying our income statement, but I'm also pleased with the simplification of our balance sheet. When we started the transformation of Spirit almost three years ago, we were a BBB- rated issuer with one series of senior unsecured notes outstanding and only 31.4% of unsecured debt. Today we are BBB rated; 91% of our debt is unsecured, and 77% of our debt is spread across five series of unsecured bonds. We believe the simplification of both the balance sheet and the income statement is a culmination of several years of work that puts Spirit in a great position to focus on growth and opportunity.

As Jackson mentioned, we are finding attractive acquisition opportunities. As a result, we are increasing our acquisition guidance for the year from $600 million to $650 million to $700 million to $750 million and providing disposition guidance of $90 million to $110 million. As you look forward into the fourth quarter and 2021, we believe our portfolio is in great shape with embedded growth opportunity when movie theaters recover. Our acquisition pipeline is robust with compelling opportunities across various industries and asset types that meet our rigorous underwriting criteria, and our balance sheet and operating platform leave us well positioned to capitalize on those opportunities.

With that, operator, let's open up the line for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is from Anthony Paolone with J.P. Morgan. Please proceed.

Anthony Paolone -- J.P. Morgan -- Analyst

Okay. Thank you. I guess my first question is for Mike on the accounting side in the quarter. When -- for AFFO purposes, did that $4.9 million in straight-line write-offs, that didn't impact AFFO, did it?

Michael Hughes -- Executive Vice President and Chief Financial Officer

No. That's correct. Only the $2.9 million of the cash rent that I mentioned impacted AFFO.

Anthony Paolone -- J.P. Morgan -- Analyst

Okay. And that $2.9 million, that takes the movie theaters, I guess, and other items that you mentioned down to sort of that 70%, for instance, level or I just trying to think about what to roll forward as a run rate.

Michael Hughes -- Executive Vice President and Chief Financial Officer

Yeah. I mean, movie theaters, so our ABR of $26.2 million and we recognized about 30% is about $2.1 million a quarter on movie theaters, of which 40% has been paid in cash for a run rate going forward.

Anthony Paolone -- J.P. Morgan -- Analyst

Okay. So the bulk of that $2.9 million is the movie theater piece of it that you're not recognizing that...

Michael Hughes -- Executive Vice President and Chief Financial Officer

Correct. You're right. I mean, there was a few other ins and outs in there. In total, there was about $3.4 million of rent that was reserved from the third quarter. There were some that we reversed -- went the other way that we reserved previously that were unreserved, if you will. Also keep in mind, I mentioned the property tax. You think about the impact to AFFO, there are $2.9 million of cash rents at the AFFO. There is also an $800,000 [Phonetic] plus in tax recovery too that went the other way on AFFO as well.

Anthony Paolone -- J.P. Morgan -- Analyst

Okay. Got it. And then just more broadly on the deal flow side, it sounds like things were pretty strong. Can you talk about just how broad-based the activity levels are that you're seeing and whether this pickup in transactions for you all is some larger trades that seem to be hitting or is the market just really back to being that fluid?

Jackson Hsieh -- President and Chief Executive Officer

Hey, Tony. This is Jackson. There is actually quite healthy deal flow out there right now and it's really come at a pretty high velocity unless in the last month and a half, two months. So in our transaction bucket in the third quarter, we had a larger deal in there and I really won't talk about the grade, what the shape of the fourth quarter, but obviously. we increased our guidance, so we're confident about the transactions that we feel are under control at this point in the fourth quarter. But I'd say no, it's quite robust, the activity.

Anthony Paolone -- J.P. Morgan -- Analyst

Okay. Can you maybe break out a little bit of what you're seeing out there in terms of cap rates among investment grade, non-investment grade or some of the broader categories of tenants?

Jackson Hsieh -- President and Chief Executive Officer

I would sort of say generally like if you had an asset that was working during COVID, you're seeing really competitive interest from buyers and seeing quite significant cap rate compression. If you've got assets that were somehow impacted by COVID and it may be normalized or right-sized today, there is a widening there. There is a big -- there is a divergence between those two general groups. I'd also say that the industrial assets that we've been focused on and light manufacturer -- light manufacturing, that's been extremely competitive in the last couple of months.

Anthony Paolone -- J.P. Morgan -- Analyst

Where would...

Jackson Hsieh -- President and Chief Executive Officer

And it relates to -- so I'd say the range for non-investment grade industrial, we're still finding high 6s, low 7 cap for the kinds of tenants that we like with the right real estate. And if the credits are even more attractive from an investment grade standpoint. For those same type of industrial assets, you'll be seeing things that are low 6s, high 5s. On the retail front, investment grade cap rates have been pretty aggressive. We haven't really done that much in that area, but I'd say that'd be in the mid-6s, low 6s, depending on the length and duration of the lease. Where we're focused on is once again we do like some of that non-investment grade, those higher revenue types of businesses. And so there we're still seeing attractive yields call it, low 7s, low 7 cap rate area.

Anthony Paolone -- J.P. Morgan -- Analyst

Got it. Thanks. And just last one real quick from me. On the G&A side, it went down a bunch from 2Q to 3Q. I think 2Q was already down a bunch from 1Q. Just where should we think about that leveling out as a run rate?

Jackson Hsieh -- President and Chief Executive Officer

Mike, do you want to...

Michael Hughes -- Executive Vice President and Chief Financial Officer

Yeah. We're probably about $1.3 million light in the third quarter from a run rate. We've just seen -- some of that was just timing of certain expenses; some of it was some stuff from last year that didn't repeat -- at least didn't repeat this quarter, so again, from a timing standpoint. And then there are some savings that we've been picking up all year from just less travel, less office expenses, things like that. So I would expect that to come up to probably $1.3 million in the fourth quarter.

And then just keep in mind, first quarter is our heaviest G&A quarter, if you look at past years just because there's a lot of expenses, annual audit fees, more employer payroll tax, things like that that do hit in the first quarter. So that's always going to be our heaviest. When you think about modeling, you'd kind of look back at the cadence from prior quarters, prior years and see that we definitely run $1.3 million light in the third quarter. It's a variety of stuff.

Operator

Our next question is from Haendel St. Juste with Mizuho Securities. Please proceed.

Haendel St. Juste -- Mizuho Securities -- Analyst

Hey. Good evening.

Michael Hughes -- Executive Vice President and Chief Financial Officer

Hey, Haendel.

Haendel St. Juste -- Mizuho Securities -- Analyst

So wanted to ask you guys about the right way to think about capital deployment here going forward. So should we be thinking of the new run rate here as $200 million, $250 million-ish per quarter? And then looking at your remaining availability from the forward, it looks like there is, I think, another $250 million or so of capital left to go, so $500 million is, I think, including some leverage. So just kind of thinking about what the right way to think about the run rate for acquisitions here is near term, and then I guess what will perhaps the equity and leverage place in the funding of next year's acquisition opportunity? Thank you.

Jackson Hsieh -- President and Chief Executive Officer

Mike, do you want to take that one?

Michael Hughes -- Executive Vice President and Chief Financial Officer

Yeah. I mean, we're obviously, our guidance in acquisitions for this year. We haven't given it for next year. We'll see how that plays out, but just from a capacity of acquisitions standpoint, the midpoint of our guidance provided for fourth quarter is about $285 million. We fund half of that, say, with equity, $140 million-ish. We've drawn down $100 million so far in the fourth quarter to do that, so we've drawn another $40 million. That leaves us with $80 million, [Phonetic] $90 million of equity left, plus we're doing some dispose in the fourth quarter and obviously have lots of liquidity.

So I think we're -- from that standpoint, we're pretty good through the first quarter and we will -- I think leverage will come down as rents come back. So that gives us some flexibility and optionality on when we need to get back to capital markets, but we'll see how the acquisition pipeline stacks up as we continue to see opportunities now, really determine how much runway we have with our existing capital, but we always have the ability to flex leverage if we need to and we're pretty disciplined about when we raise capital and we'll just continue to do that and we'll -- we adjust pace of acquisitions we can, if we need to use a little more leverage, we can. We always continue to be opportunistic and disciplined on the calculation issuance side. So I think we've got some runway.

Haendel St. Juste -- Mizuho Securities -- Analyst

Got it. Thank you for that. And then just looking at your collections here, it looks like you're up to about 93%. I'm just curious, after seven months, is this as good as it's going to get? How much more upside potentially do you see there? And then how do we balance or how you think about the risk of perhaps a COVID second wave here in the industry that may be more at a disadvantage? So the opportunity for upside from here, how much better can you get? Can you get to 98%, 99%? How much of a role perhaps maybe some acquisitions play in that? So as we sit here perhaps next quarter or next spring, at a point where we can be in that upper 90s category. Thank you.

Jackson Hsieh -- President and Chief Executive Officer

Hey, Haendel, I'll start. And then I think one way to think about it, and this is why we broke out the portfolio with movie theaters and without. So let's talk about movie theaters a minute. If you look at our portfolio excluding movie theaters, in October, we were collecting 98%. So assume we close the gap on that last 200 basis points -- or 2%, sorry, and we get to 100% there, right? So we're pretty close. And that's for a lot of tenancy in the portfolio.

So now let's talk about the movie theaters, which is a smaller piece. It's 5.4%. What we think we've done and we look at this analysis very carefully, we have nine operators that operate movie theaters for us. The ninth is that -- managers that's taken over the Goodrich Theaters. We believe we've reset the rents and the cash collection and the cash recognition at the appropriate level right now, given some of the extended timing of these major release windows.

Look, if there is any type of modest improvement in movie theaters, and that's going to be related to health, right. I think you'll see a lot of that flow through into our P&L. And on movies, it's challenging. They have been pushing out these release dates for the major tent pole films, but sure, you look at this, but if you look at what's going on in China and in Japan where the infection rates for COVID are a lot lower than the Western countries, China during Golden Week, I mean, they had -- IMAX reported great numbers, not fully recovered, but very, very strong numbers. I think they hit $600 million in US box office receipts over the eight-day period over Golden Week, and remember, that's basically at 75% seat limitation.

In Japan, they shattered the record for the opening weekend of the Demonflare, which was an animated film, and for the first two days in October, October 16 through 18, that film opened at $44 million of US receipts, and in the 10 days, it grossed over $100 million. That's the best 10 days for a film like that for -- that's a record basically in Japan. So now these are all local films that are being distributed.

In Finland and Sweden, they've also had good recovery for locally distributed films and releases, but then look at what's happening in France, Germany, UK, they are now in a four-week shutdown. So I guess what I take away from this is, if you've got good content, you've got decent health, people are going into the centers -- into movie theaters. And I believe that bodes well generally for theater venue operators. We just have to kind of see how these infection rates work and -- so we feel like we've put them down and that's why we're segmenting them differently, so people can understand that we're not a movie theater really. We have 5.5% of movie theater exposure, but if you looked at the performance, you think we own a lot more. So hopefully that gives you some idea of how we're seeing it.

Operator

Our next question is from Ki Bin Kim with SunTrust. Please proceed.

Ki Bin Kim -- SunTrust -- Analyst

Thanks. The rent collection numbers of 90% and 93.3% for October, did that have any kind of change of denominator from tenants that were already bankrupt, so maybe it removes the denominator and did any asset acquisitions or dispositions change that number?

Jackson Hsieh -- President and Chief Executive Officer

Mike, you want to go through that?

Michael Hughes -- Executive Vice President and Chief Financial Officer

Yeah. I mean, surely there have been changes in ABR given throughout the year. We actually put a good page in our investor deck, and [Indecipherable] chance to look at, but if you look at Page 7 of the deck we put out this afternoon, we did a walk -- maybe our walk to address the specific question because I know it's been a source of confusion with a lot of companies, where we walk ABR from Q1 pre-COVID to current and we actually, I think, show exactly what you're asking. We show, OK, here is our starting ABR; here is how it's increased from acquisitions, lease escalators, here is how it's been reduced by bankruptcies, dispositions and restructurings as well as vacancies.

And then within that chart on Page 7, we also broke out, in the bankruptcies, we show how much of it's movie theaters, which is the largest lion's share in the bankruptcy section. Also in the restructuring, the lion's share is movies as well. So you can really see that. And so yes, the denominator has changed. Our ABR was $476.4 million before COVID. It's currently $483.3 million, which is what all our rent collection is based on today. But as far as disclosure, I don't think we're having the ball. I think we're definitely trying to make sure people are aware of how our ABR has changed.

And when we remove something from ABR, I mean, that lease is either -- it has been restructured and changed or has gone. If there is a bankruptcy, that lease no longer exists, so it comes out of our universe, but we do not reduce our ABR, we do not reduce the denominator for abatements or rent deferrals and things of that nature. Only if a tenant's gone and the lease has actually gone or has been permanently restructured or obviously sold. So -- and that's what we show on Page 7. So hope you'll find that helpful.

Ki Bin Kim -- SunTrust -- Analyst

Okay. Just want to clarify one thing. So on the Page 7, you show 1.8% loss due to bankruptcy and then 50 basis points loss due to reductions and/or modifications, how you call it. So of that 2.3%, is that on top of the 5% write-off or here that you took this quarter and combining that [Speech Overlap] of 2.8% plus 2.2%?

Michael Hughes -- Executive Vice President and Chief Financial Officer

Yeah. No, when we talk about reserves, reserves are four leases that are in place. So our reserves in the third quarter in total were 5.9%, and those reserves are rent that we should have gotten in either -- in our ABR, but we didn't get it. So that's how we think about reserves. Different from when a lease actually goes away, right? So if you're looking at our deck, you're looking at the -- the pie charts you're looking at are actually for October, which is -- October reserves were 5%. And when you look at that, again, these are all leases that are in place should being paid on and so we're reserving that rent. That's different than when a lease actually goes away. It comes out of our ABR universe.

Ki Bin Kim -- SunTrust -- Analyst

Okay. So I just want to look at the pre-COVID [Technical Issues] this, so for October, it's 5% reserve, right?

Michael Hughes -- Executive Vice President and Chief Financial Officer

That's right.

Ki Bin Kim -- SunTrust -- Analyst

So if I try to look at the portfolio performance pre-COVID to today, is the right way to think about it 5% reserve plus the 1.8% full fee and then 50 basis points for other modifications? Is that the right way to look at it?

Michael Hughes -- Executive Vice President and Chief Financial Officer

Yeah. I mean, that's definitely one way to look at, if you think about how much rent is currently not here. Obviously, the 5% reserve is hopefully something that we will get back over time. The stuff we're showing on Page 7 were something went bankrupt and it's gone, will obviously never come back. So that would be the difference.

Ki Bin Kim -- SunTrust -- Analyst

Okay. Thank you, guys.

Michael Hughes -- Executive Vice President and Chief Financial Officer

Yeah.

Operator

Our next question is from Nate Crossett with Berenberg. Please proceed.

Nate Crossett -- Berenberg -- Analyst

Hey. Good evening, guys. Appreciate the comments on the pipeline. I'm just curious in the higher block maybe because of the election and maybe some potential tax changes, or is it more an unthought of Q2 and I'm just curious for your perspective if we go back into a lockdown, what the impact would potentially be on the pipeline.

Jackson Hsieh -- President and Chief Executive Officer

Well, let me -- I'll start with, if we go into a lockdown, how that impacts pipeline. We were the beneficiary in the third quarter of picking up deals where we had not been the highest offer on those assets at that time. They had sort of signed up with more aggressive pricing, and let's just say we picked them up at more attractive cap rates from our standpoint, 25 bps roughly, right. If we get another kind of air pocket, I don't believe that's going to change our strategy because I think what we learned is we're going to kind of -- we'll pause and wait, potentially be opportunistic, but we're going to stick to moving forward with our pipeline.

There was some motivation for some issuers that we were negotiating with to try to get things done before the election and we're seeing some of that in our fourth quarter pipeline, but for the most part, we look -- we're a long-term investor. We want to -- we believe we have a really high quality portfolio here or for the numbers prove that out. We are dealing with movie theaters, which are 5.4%, but those will kind of sort themselves out some point hopefully sooner than later.

But we have a -- if you recall our Investor Day back in 2019, we basically told you guys we have a high quality real estate portfolio, high quality tenancy, which is 98% rent collections in October, right. We laid out a very specific investment strategy. We are moving forward on that. If you just take out -- took out the second quarter, looked at the totality of what's going to happen this year, you'd probably say, well, that's pretty good, and we're really actually starting to work on the first quarter already for next year. So that's kind of the plan. Obviously, if there is a major pullback in the markets, we'll obviously reevaluate, but right now, we feel very comfortable with what we're doing. It feels very manageable.

Nate Crossett -- Berenberg -- Analyst

Okay. That's helpful. I'm just curious what's you guys' appetite to add to casual dining exposure here? I appreciate the anecdote in your prepared remarks. So I'm just curious that, [Technical Issues] if we went back into a lockdown, does that -- is that tenant in a much better position to pay if their stores were I guess closed?

Jackson Hsieh -- President and Chief Executive Officer

Well, it depends on what the -- and this is like trying to forecast what a lockdown would look like, right. I think people have a -- I think we have a better understanding of how the disease spreads. That wasn't maybe the case back in April and there was all kinds of pressure on PP&E -- PPPs. So today, just to pick casual dining, our operators are bigger, they're either national or super-regionals. They have really made significant changes to their operating strategy. They've reduced their menus, they are working on better efficient online delivery and service.

Look, the third-party delivery venues, they're really good, they work, DoorDash and things like that, but they cost these guys quite a bit of profitability. Municipalities are being much more flexible on pop-up drive throughs. So people are being very creative, those that have the ability to kind of manage through this. And what was interesting about that one operator we talked about, they are going to start moving on offense, not right away, but certainly we will evaluate very carefully with them if they see opportunity, but I would say probably for us on casual dining, I wouldn't expect us to do much this calendar year, but I could see maybe potentially next year, that could be an opportunity for us.

Nate Crossett -- Berenberg -- Analyst

Okay. Thank you.

Operator

Our next question is from Linda Tsai with Jefferies. Please proceed.

Linda Tsai -- Jefferies -- Analyst

Hi. Thanks for [Technical Issues] I was just wondering in what ways might your underwriting criteria have changed since COVID.

Jackson Hsieh -- President and Chief Executive Officer

So Linda, I mean, I would say first of all, our credit underwriting has not changed. Obviously we're -- doing fundamental credit analysis is obviously quite significant, analyzing real estate, the rankings is significant. The one thing that we have made changes to is our heat map. And if you go to that page, we have added -- if you look on the top portion on technological distribution, we've added the historical and forecast supply and demand impacts into the calculus on that horizontal axis.

And on the vertical axis, we -- on the Porter's five, we introduced this concept of essential services impact to the weighting. So that's just more of a kind of top line how we think about the portfolio, but when it gets down to the nuts and bolts of credit analysis, do they have liquidity, if it's a public company private company, how resistant would they be, did they differ rent during COVID, obviously those are all questions that we answered -- we ask ourselves.

I mean, I would look at just -- if you think about the two deals that we did, the bigger ones we mentioned like the Shutterfly facility, I mean, a company -- it's a very large company. It was taken private by Apollo. And if you looked at Off Lease, that's also, from a revenue standpoint, multi-billion dollar revenue operations. It's a big company and it's a really great business model. So we're looking for things that are large, sophisticated. Obviously that's not -- those are not experiential types of operations and they're seeing their business improve, but I would say that in the -- in our heat map, we've made some changes.

And look, we're continuing to evaluate what we've learned out of COVID. We have a robust credit and research function here and we've been evaluating this and having this discussion internally for the past several months actually COVID's going on. So this is pretty much the net effect of all that, you can see on Page 12 of our deck.

Linda Tsai -- Jefferies -- Analyst

Thanks. And then are you requiring any extra guarantees such as higher security deposits?

Jackson Hsieh -- President and Chief Executive Officer

In some cases we have actually asked for security deposits. I wouldn't say for all businesses, but if there was a business that had a disruption because of COVID, that's something -- and rent was deferred, and we believe that the opportunity makes sense or we're evaluating it -- we're structuring -- we've structured some of those transactions with a rent reserve escrow.

Linda Tsai -- Jefferies -- Analyst

Got it. Just one last one. Could you talk about your year-to-date disposition activity? What type of tenants were you selling out of this year and then to what extent would you expect dispositions to ramp in 2021?

Jackson Hsieh -- President and Chief Executive Officer

I'll let maybe Ken give a little flavor on that. Hey, Ken, if you want to take that on?

Kenneth Heimlich -- Executive Vice President and Head of Asset Management

I'd say this year was a little different than what we've historically done. Earlier in the year, we specifically targeted at a small number, a small bucket, some grocery stores and drug stores that we went to market with. And we -- the reality is we executed quicker and at lower cap rates than we initially expected. The one thing I would say about our dispositions thus far, we've been able to take advantage of great cap rates in those two spaces, while at the same time, we chose assets that had a few risk characteristics that we thought it made a lot of sense to go ahead and exit now, given the low cap rates. As far as '21, no, it's -- the expectation would be it's more back to a regular disposition program, more portfolio shaping.

Linda Tsai -- Jefferies -- Analyst

Just to follow up on that, when you talk about risk characteristic, is that in terms of just like a lease coming up for renewal or is it bankruptcy?

Kenneth Heimlich -- Executive Vice President and Head of Asset Management

No. I would say it was more about if we felt like a particular property was over-rented, maybe it's a tenant that is not investment grade and that for long-term, we prefer, given the window, we had to go ahead and exit a property. So that's some of the characteristics we looked at.

Operator

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

John Massocca -- Ladenburg Thalmann -- Analyst

Good evening.

Jackson Hsieh -- President and Chief Executive Officer

Hey, John.

John Massocca -- Ladenburg Thalmann -- Analyst

So you talked a little bit about casual dining and maybe not doing too many more investments in that space at least near term. As you look at some of the other categories that you mentioned that were kind of impacted, but ever covered, are those all probably out of the question in terms of near-term acquisition activity or there may be some opportunity there given it'd be a bit of a differentiated investment thesis?

Jackson Hsieh -- President and Chief Executive Officer

Well, I mean, look, the easy ones are obviously -- and things that we're doing, car washes, distribution, the Dollar Stores, home decor, pet services, sporting goods, those are all things that are right in our wheelhouse right now. I mean, look, entertainment. The performance within some of our operators within entertainment, they're pretty interesting and pretty positive. And so that might be an area that we'll evaluate in the more near term potentially, may not be that obvious to people, but there is -- people are in those venues now. Obviously, I think if we thought about those, they would have to have some form of a rent reserve in place for us.

Movie theaters, I don't think we're going to be doing movie theaters for a while. We'll see how this plays out with our existing investment. And then I mentioned casual dining. Look, on gyms, that's another area. The gyms for us, our experience has been better than expected and there are some high-volume, low price operators that look pretty interesting right now, we're looking at some opportunities right now, but people are definitely going back into the gym. You have to be very selective with the operator in terms of their value thesis and credit and things like that, but that's another industry group that you can see us doing more potentially in the near term.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. And then maybe questioning on the thesis a little bit, if you go to Page 6 of the presentation, of that kind of 13.6% of kind of deferred accounts receivable that is kind of net of reserves, how is the split of that maybe between the big three operators and some of the more regional operators? And then specifically, essentially just want to say, the Studio Movie Grill, any rent there -- or any receivables there are fairly net of -- or reserved again essentially. Is that a fair statement or fair to assume?

Michael Hughes -- Executive Vice President and Chief Financial Officer

Yeah. We're not going to get too far in the weeds on individual tenants. I mean, obviously Studio Movie Grill, you could assume it's reserved. And what you're looking at in the bottom chart net of reserves, that's what's actually on our balance sheet, right, net of reserves. So we had $2.8 million of theater revenues, of deferred rent receivables on our balance sheet at the end of Q3 that are in receivables, right, that are net of those reserves. So that is still we feel -- those are for the tenants that we are now recognizing on a cash basis. So it's the other piece that we reserve for.

So if you think about our ABR, $26.2 million of theater revenues, 70% have been reserved for. So it's a lot of tenants and I'll let you guys make assumptions on what they are, but we did obviously a tenant by tenant analysis and the tenants that we did not reserve for, we feel, have strong balance sheets, nimble operations, they can weather the elongated recovery you expect theaters to have to deal with it. And again, 40% of the theater revenue that we are recognizing has actually been paid in cash, right, so the $2.1 million per quarter and there's really only $1.4 million-ish that's non-cash in there. So we feel good about that, but we don't want to get into naming specific tenants on this reserve, but you could obviously assume Studio Movie Grill is one of the ones we reserved for.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. And then one last detail question, property operating costs came down pretty decently quarter-over-quarter and I was just wondering why that was, and sorry if I missed that in the prepared remarks if that was already explained.

Michael Hughes -- Executive Vice President and Chief Financial Officer

Yeah. It came down from 4.1%, we call it a leakage, to 2%, it would be about 2.7% normalized. We did have a little over $800,000 of property tax recoveries coming in from the prior quarter and that we recognized in this quarter. So if you net that out, it'd be 2.7%. So obviously a big improvement compared to last quarter. And that's just a function of tenants doing better, less tenants kind of in the workout bucket. And so we don't have -- and they're paying taxes. So it's tenants getting current on their taxes, tenants paying rent, tenants who we are arguing with, fighting with whatever, reaching deferral agreements and getting a good stand. It's just simply the result of that.

Operator

Our next question is from Brent Dilts with UBS. Please proceed.

Brent Dilts -- UBS -- Analyst

Hey, guys. I have a couple of questions around the elections since we've already done some pretty deep digging elsewhere. The first is what key changes to your business do you expect under each administration? And the second, if we get a blue sweep, how do you think that might impact the 1031 market, given it's an area that was included in the Biden camp's high level tax plan?

Jackson Hsieh -- President and Chief Executive Officer

Well, look, I don't think I'd forecast the elections, but 1031 is an easy one. It doesn't really impact our strategy. We are selectively selling assets. Many times we will sell assets into that particular market, but the thing about 1031 is it's made a lot of things that we want to buy non-competitive. I mean, if you think about our business model, we're really a long-term investor. We're not a churner of assets in this business model. So if there were changes to 1031 market, I could see that giving us more opportunity to increase our QSR portfolio, be more competitive on C stores, where today it's not -- doesn't really work for -- so for our kind of cost of capital and business strategy, at least on the QSR side, the stuff that the 1031 buyers are chasing after.

And in terms of where our portfolio is positioned, like if you look at the distribution map of our assets, they tend to be in the lower Sunbelt areas of the country. Most of our assets are in very suburban kind of marketplaces. So whether there is blue or red, I mean, the big takeaway is these operators have been able to kind of deal with the first onslaught of sort of these challenges. If they have to go back again, they've made adjustments. The world didn't fall -- sky didn't fall for us on our head. So I believe that they'll manage through it.

And like I said, we actually have talked about that internally about how that might impact us, but generally I think what we can say is, it's really more the local municipalities that have more stroke over where the things are open or closed versus at the state level. And so far we've been positively surprised with the recovery pace of our portfolio and just -- it's really the entrepreneurialism of our operators, I mean, just very impressive. And so I think if there is another setback, we'll get through it with those operators just like we did the first time.

Brent Dilts -- UBS -- Analyst

Okay. Great. That's it from me. Thanks guys.

Operator

And we have one follow-up question from Ki Bin Kim. Please proceed.

Ki Bin Kim -- SunTrust -- Analyst

Thanks. So we -- the result of COVID and how it's created some winners and losers in retail, have you thought about maybe taking advantage of the winners of COVID, which may not be winners forever? I'm thinking about tenants like retailers or home decor weren't particularly doing well pre-COVID, did well during COVID and just curious if you think this is more of an opportunity to sell some of these assets.

Jackson Hsieh -- President and Chief Executive Officer

I don't know, Ki Bin. I don't think we would necessarily -- so I mean we -- like, here is a good example, like on home decor, At Home. We liked it before COVID, we liked it at our Investor Day. What COVID has done is just being able to accelerate their success and market share and they've been able to make more investment in their omnichannel and membership -- members part of their business to help them on the sales side.

So I mean, look, we're not real flippers. I mean, I think we have a very deliberate strategy. If you go to our heat map, we're going to stay on that middle to upper right quadrant of that field of industries, focus on good real estate, focus on good operators, focus on good rent to -- rent per square foot kind of relationships, and build duration steadiness, like in our portfolio. That's really kind of like the game plan.

And look, there are opportunities to buy things in distress right now, but that's not really our business model. We're really trying to kind of create more steady cash flow growth, and look, the movie theater part is something that is going to take a little bit more time, just given their release schedules.

Ki Bin Kim -- SunTrust -- Analyst

Got it. Thank you.

Operator

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Jackson for closing remarks.

Jackson Hsieh -- President and Chief Executive Officer

Well, look, first of all, I'd like to thank our associates here at Spirit, who've had to deal with all the number of different challenges that COVID has brought, not just to our operations, but to our tenants' operations. So a big shout out to them. I'd like to thank everyone for participating on our call this late afternoon and just let you all know that we are in great position right now to execute our business strategy, the one that we laid out in our Investor Day presentation back in December of 2019. And I can tell you, myself and the Board, we're extremely excited here at the company and we look forward to moving forward. Thanks.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Pierre Revol -- Senior Vice President, Head of Strategic Planning and Investor Relations

Jackson Hsieh -- President and Chief Executive Officer

Michael Hughes -- Executive Vice President and Chief Financial Officer

Kenneth Heimlich -- Executive Vice President and Head of Asset Management

Anthony Paolone -- J.P. Morgan -- Analyst

Haendel St. Juste -- Mizuho Securities -- Analyst

Ki Bin Kim -- SunTrust -- Analyst

Nate Crossett -- Berenberg -- Analyst

Linda Tsai -- Jefferies -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

Brent Dilts -- UBS -- Analyst

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