Spirit Realty Capital, inc (SRC) Q3 2021 Earnings Call Transcript

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Spirit Realty Capital, inc (SRC)
Q3 2021 Earnings Call
Nov 3, 2021, 9:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the Spirit Realty Capital Third Quarter 2021 Earnings Conference Call. [Operator Instructions]

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.

Pierre Revol -- Senior Vice President, Corporate Finance and Investor Relations

Thank you, operator, and thank you everyone for joining us for Spirit's Third Quarter 2021 Earnings Call. Presenting in 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 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 in 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 -- Board of Directors, President and Chief Executive Officer

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 one 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 number-one 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 acquisition 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 nine transactions were heavily weighted toward retail transactions. Looking into the fourth quarter, we feel very good about our pipeline and expect more transaction activity ending the third quarter.

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

Michael Hughes -- Executive Vice President, Chief Financial Officer

Thanks, Jackson. Good morning. We're pleased with our third quarter performance in all respects. We report 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. As we noted in our last guidance update, we do not expect nor we're 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 theatre operators. We currently have only one tenant remaining under a deferral arrangement, which is on a percentage of rent basis, 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 seven theaters under new leases, six are now open. We expect the last one to be fully up and running by second quarter of 2022.

We recognized 260,000 rents for these theatres during the quarter, which represents 19% of their fully stabilized AVR. 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 five times or 4.9 times 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 three 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 $0.5, making our revised net capital deployment forecast from $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're 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.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is from Ronald Kamdem of Morgan Stanley. Please proceed with your question.

Ronald Kamdem -- Morgan Stanley -- Analyst

Hey, 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. Thanks.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Good morning. Thanks. This is Jackson. So, we made a couple 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 a 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 is no, what I call, anchor deals, by definition, deals over $100 million. We're already building, part of that pipeline is going to affect deal 122, which we're very excited about. The thing that I'm 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, we're excited about it. That's obviously why we bumped up our yearend acquisition guidance. The other thing I can tell you is, there are no lifestyle transactions in the fourth quarter, not 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.

Ronald Kamdem -- Morgan Stanley -- Analyst

Right. That's it for me. Thanks.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Thank you.

Operator

Our next question is from Lizzie Doykin [Phonetic] of Bank of America. Please proceed with your question.

Lizzie Doykin -- Bank of America -- Analyst

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

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Yeah, thank you. Good morning. Yeah, 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's -- that were not taken, 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, though that was very intentional, I mean, we saw very attractive opportunities to sell low-cap assets that generate really high IRRs for us. That was one issue. The second was sort of a proof-of-concept issue. And I think that what we're trying to sell for, obviously, is trying to improve our cost of capital, that's really the bottom line. So dispositions are part of that, what we call, strategic dispositions. And I would tell you today, our cost of capital is OK 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 vac 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 or multiple, looking at it in 2019, 2020, and 2021 year-to-date, we've sort of consistently traded at 19% and 20% discount to our peer companies, in spite of like massive reconstruction of this portfolio and 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 in 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...

Lizzie Doykin -- Bank of America -- Analyst

No, that's helpful. That's it for me. Thank you.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Thanks.

Operator

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

Haendel St. Juste -- Mizuho -- Analyst

Hey, good morning, guys.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Hi, Haendel.

Michael Hughes -- Executive Vice President, Chief Financial Officer

Good morning.

Haendel St. Juste -- Mizuho -- Analyst

So a question, I guess, a follow-up on the pipeline. I guess, by new 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 lots of chatter about the increased competition for assets in this space. Thanks.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Yeah, 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 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've 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 buying in that that way, is that it helps to 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 timing wise, it's very hard to control timing of closing real estate transactions. It's not like buying securities. So there are titles, surveys, environmental, due diligence, all kinds of things that are negotiating contracts and leases. So it's not -- 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 guiderails we put out for this year in terms of that cap-rate range.

Haendel St. Juste -- Mizuho -- Analyst

That's fair and exposure to Country Club is at 3%. Is that about as much as you want for now? Or is that something you'll continue to wait, maybe has more room for...

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Yeah, 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 considerable amount of time with them. I can tell you that, we can't disclose the performance of a master lease. But what I can tell you, if you looked at September this year versus September 2019, so pre-pandemic, master lease total revenue is up, master lease EBITDA is up, the master lease FMV is up month over month pre-pandemic. So we're excited about that. Coverage is improved. The one opportunity is there party group revenue is down substantially relative to historical experience 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've stopped 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 a real existing relationship, especially existing relationship where it lines up with the industry and credit and real estate, we're going to be all in. And so, yeah, I would expect, hopefully, we'll do more with them. I wouldn't suspect that we would miss. We're not chasing golf transactions. I would say that. So we've been very opportunistic. We like the industry, but it's very operator dependent, very real estate dependent, very dependent upon trade area, what's supporting the membership. So, I guess the answer is, yes, we would. But it's very -- it kind of depends. So it's very hard for us to tell you with this quarter or next quarter so, but we are looking at it.

Haendel St. Juste -- Mizuho -- Analyst

Well, I'd be happy to help you with any due diligence. But it'd be all serious, but...

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Yeah, maybe. Yeah, when people can get together, maybe we'll have -- we talked about having a big group outing at one of courses here in Dallas.

Haendel St. Juste -- Mizuho -- Analyst

One more if I could on the, Michael, maybe for you on the reserves, 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. Thanks.

Michael Hughes -- Executive Vice President, Chief Financial Officer

Yeah, we really cleaned out our reserves last quarter that was the $0.06 that we've talked about 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 would expect that to come back anytime soon, it's really just with one operator with one unit, that's really had. So, we don't have any reserves for movie theaters. As we mentioned today, all of our movie theaters are paying rent, we are going one movie theatre tenants achieving under deferral agreement, they're paying percentage rent, there'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 two-thirds of their base rent just based on the revenue performance. So, they're all performing really well, I mean, we also mentioned, we had one original operators, 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, as I said, we don't have anything our forecasts with reserves coming back, because there's RNA. So Q3 was a very clean quarter. And, I think, our guidance is very clean, and guidance 2022 is very clean, and you don't expect any noise in the numbers going forward.

Haendel St. Juste -- Mizuho -- Analyst

Great. Thank you.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Thanks, Haendel.

Operator

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

Greg McGinniss -- Scotiabank -- Analyst

Hey, good morning. 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 manufacturer, speaking with owner operators and structuring sale leasebacks? Also, are there any metrics can you share on the depot industry?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

I mean, I think, I would say we have a preference toward, first of all, in this particular segment, structuring new sale leasebacks. The ClubCorp transaction, as I said, last quarter, we have been opportunistic, this transaction close 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 toward private golf courses right now. I'm not to say, we wouldn't ever 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 at over 100 years. So these things stick around for long time, if they're in the right areas, really successful. So, yeah, look its good real estate, you have 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, it's going to be a probably a small portion of what we do, it gets a lot of attention. But, I'd rather not talk about it too much, because I want to buy more, so eventually maybe more people. So...

Greg McGinniss -- Scotiabank -- Analyst

All right. I appreciate that. Thank you. Some of your peers have provided 2022 earnings guidance, and I realized I would like to wait until next quarter for specifics. But could you provide us some context and how to think about feature acquisition volumes and cap rates, especially considering on the record feature pipeline you talked about?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Yeah. So, I mean, like we -- our board meetings coming up. And, we'll put our guidance early next year for the 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 $1.2 billion and a 7.07% cap rate. If you look at the fourth quarter on 2020, the volume was north of $400 million, the reason why we increased that ranges, 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 to $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 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 one-third 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 to 60% acquisitions with our existing tenant base, if you go back to quarter before, same thing. And then, finally, we wanted to achieve a BBB plus credit rating.

I don't know -- I think, we're probably a year behind, just given Moody's upgraded as BBB. But, our pipeline, what we do is all kind of based around those goals. And one of the -- I've gotten some -- let some commentary, well, hey, why don't you guys buy more? If you think about our operating strategies, 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 conservative balance sheet maintenance. So long way of saying that, we're not just trying to pie it at any given time. We really can't time the market really, it says, can only buy it 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 that as well.

Greg McGinniss -- Scotiabank -- Analyst

Thank you, Jackson.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Thank you.

Operator

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

Linda Tsai -- Jefferies -- Analyst

Hi, good morning. Jackson, you mentioned that you think your cost of capital is OK, 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?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Well, first and foremost, I think, it's kind of doing what you say, if you go back to an Investor Day, where 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 team 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, they 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 in 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 has 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 five -- if you look at our top 10 compared in the first quarter of 2018, five of the top 10 are different. So we removed Shopko, AMC, Regal, CVS and CarMax, and replace them with Life Time Fitness, ClubCorp, BJs, GPM and Dollar Tree. If you look at our number 11 through 20, and compare it today versus what it look like the beginning of 2018. We've turned over a number of different tenants, United Supermarkets, Mister Car Wash, Goodrich Theatres, Sportsman's Warehouse, Ferguson, PetSmarts, 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 yeah, there were some issues and portfolio situate -- problems that we had to deal with, but we removed them. So, I believe that if people understand what they're seeing, dig into a little further, they'll see that 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, or WACC is in the mid-4s, right now that's 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, or what I would call larger portfolio opportunities. We've kind of scroll down more than I can explain to you. But in the end, the math doesn't work for us, so you can't do it. So, yeah, 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 the other kind of stuff. So, I'm very proud of what the team has accomplished so far. But, I think, there's more to come.

Linda Tsai -- Jefferies -- Analyst

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?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Generally, like, flat leases aren't great. So we'll continue to -- we've been chipping away at reducing things like drugstore exposure to generate what I'll call longer term stickier opportunities that have better rent escalations. So, yeah, I would say, I think there's wholesale big change at this point just on the margin. And then we're also consistently trying to improve our portfolio. Some of the companies that have had more historic track record operating versus us, have had that time, the decades that it helps you to kind of cycle through real estate. And we had to do to stuff like really fast, I mean, just another time. So, I would say there's still opportunity to cycle through assets get blended extends, sell them off at a good IRR is 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, yeah, we're going to continue to build and tweak, and improve this portfolio.

Linda Tsai -- Jefferies -- Analyst

Thank you.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Thank you.

Operator

Our next question is from Wes Golladay of Baird. Please proceed with your question.

Wes Golladay -- Baird -- Analyst

Yeah, good morning, everyone. 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?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Yeah, absolutely. It's not just their cost of funding, as they look at sale leaseback opportunities. I mean, when a company doesn't sale leaseback, they look at their unsecured debt spreads as a cost capital, because 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 just talking about these 1031 buyers, well, there's now institutional funds that have been set up for net lease, which is by the way, 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 including 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 don't have to buy a huge amount of drive earnings here. So we can be very selective to pick our spots.

Wes Golladay -- Baird -- Analyst

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

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

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 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 called 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 at credit watch list discussions. I'm kind of smirking, because every quarter I convinced the best it's ever been. And so, I think our thesis, what we're doing makes sense. We just have to make sure the market really understands it.

Wes Golladay -- Baird -- Analyst

Got it. Thanks for taking the time. Thanks, Jackson. I appreciate it.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Yeah.

Operator

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

John Massocca -- Ladenburg Thalmann -- Analyst

Good morning. So maybe building on that theme -- or kind of -- improving kind of portfolio performance in quarter-over-quarter? Can you hear me? Maybe kind of building...

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

John, can you hear me?

John Massocca -- Ladenburg Thalmann -- Analyst

Can you hear me?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Okay, we're going to jump to the next question, if he wants to recycle through it...

Operator

Our next question is from Harsh Hemnani of Green Street. Please proceed with your question.

Harsh Hemnani -- Green Street -- Analyst

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

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

I wouldn't say that we're seeking to make big changes, Harsh, in this area. 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 of our top 20 tenants, our goals to do more with them. And you can sort of see how they fit, some of them are into 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 that we've done a lot with the last 36 months. And we want to do more with and we are treating them like real partners, clients, some degree is competitive. They can do business with other people can 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.

Harsh Hemnani -- Green Street -- Analyst

Got it. And 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?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Sure. Well, 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 a 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 that got to come back to the landlord. So on the one hand, it provides us great credit protection increases the theoretical credit worthiness of that underlying tenant's unsecured rating. But the other thing that it does, and we're seeing the benefits of this, you really have the ability to work with the 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 and 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. So that was the lightweighting company that we bought earlier this year.

And they were coming out of bankruptcy, the credit was obviously speculative. But they were acquired by an investment grade counterparty Worthington Industries and Worthington had to step into the massive restructure. So, in the future of Worthington wants to do more business, in a particular way, we'll approach them. And 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 when you do sell leasebacks or buy existing leases. That's almost more of a commodity type of operation. But since 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 massive restructure. So, I think, it'll always be a big part of what we do.

Harsh Hemnani -- Green Street -- Analyst

Got it. Thank you so much.

Operator

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

John Massocca -- Ladenburg Thalmann -- Analyst

Can you hear me?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Yes.

Michael Hughes -- Executive Vice President, Chief Financial Officer

Yeah, we can hear you.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

I don't know -- yeah, we...

John Massocca -- Ladenburg Thalmann -- Analyst

Great. I think, with the headset issue on my end, so anyway. In terms of acquisitions, just given 3Q was kind of frontend 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 backend loaded? Or are there things that you kind of sell-through to maybe the start of the quarter?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

I see things sell through, I mean, deals have a different sort of lifecycle to them. If you look at what we completed in the quarter, just take out ClubCorp. The businesses that we acquired, we're basically a weighted average cap rate of six and three quarters, which was 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 much higher number of transactions that are going to close or as close already. And so, I think, you'll see a more smoother deployment of capital -- 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 have 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 dropped 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 restructure our teams.

John Massocca -- Ladenburg Thalmann -- Analyst

I guess, I said sell through I really kind of made a thing that was going to close by 3Q and that just ended up falling into October?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

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

John Massocca -- Ladenburg Thalmann -- Analyst

And they 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 here. 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 a fully up and running? Or is that really probably the floor as to how low that unreimbursed opex can go?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

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

Ken Heimlich -- Executive Vice President, Chief Investment Officer

What I would say is that number, I don't see risk from COVID and Delta or 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, while it's a very meaningful improvement from what it's been historically. I'm not -- I don't think Mike, either will be prepared to say that's a normalized room, right?

Michael Hughes -- Executive Vice President, Chief Financial Officer

Yeah, there could also be some seasonality to it on the timing of when some unreimbursed property costs with you. But it's certainly a big improvement. I think, historically, if you go back to Investor Day, we reached model 2%. I do feel like going forward, that numbers coming down. But yeah, 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, that are kind of 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 turn this portfolio, so we're kind of still getting use of the new Spirit, new portfolio and produces. And we'll get more clarity going through 2022, and at some point, we'll kind of get a better feeling on what that is. So probably be conservative with our forecasts for the next year, but maybe not conservative over the last year.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. That makes sense. And that's it for me. Thank you very much for taking the question.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Thanks, John.

Michael Hughes -- Executive Vice President, Chief Financial Officer

Thanks.

Operator

Our next question is from Steve Dumanski of Janney. Please proceed with your question.

Steve Dumanski -- Janney -- Analyst

Yes, good morning. 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?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

I would say just generally, it's narrowed. It really has narrowed. We saw more compression in the 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, the BB term loan index, those things are just like crushingly low right now. So, yeah, 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?

Ken Heimlich -- Executive Vice President, Chief Investment Officer

Yeah, 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.

Steve Dumanski -- Janney -- Analyst

Got it. Thank you. That's very helpful. And also just regarding ClubCorp, if ClubCorp were to have issues, what are your thoughts of the potential repositioning of those properties?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Well, ClubCorp is doing great, from this time, 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, 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 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, a lot of different options.

Steve Dumanski -- Janney -- Analyst

Thank you, Jackson. That was very beneficial.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Sure.

Operator

Our next question is from Chris Lucas of Capital One. Please proceed with your question.

Chris Lucas -- Capital One -- Analyst

Hey, good morning, guys. Hey, Jackson, I'm going to go back to the Investor Day presentation as well. Back then, one of the comments you made was that -- 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?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

I'd say, we were there. I mean, I can't tell you what the number is going to be. And I'll tell you the next time we report earnings. It's going to have a much higher pace of transactions per quarter. And it's going to be repeatable is what I say. I mean, Ken, you can -- bringing Ken into the role of CIO and we brought Danny who is doing acquisitions back into running asset management. And everything kind of rose up under Ken, maybe you can describe what's just happening in your role.

Ken Heimlich -- Executive Vice President, Chief Investment Officer

Jackson's alluded to, the work we did starting back in 2019, was about building the 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 it's a one-team effort in our acquisitions. And since 2019, we continue to refine it, and whatnot. But no, more transactions is not a game.

Chris Lucas -- Capital One -- Analyst

Okay, great. And then just...

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Yeah, I mean, I would say one thing, Chris, so just a follow-up on that comment. I would say, since Investor Day, there was a lot of work, like I'll 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, exactly what we said. And I just think we're going do it better and faster in the coming quarters. Just it's pretty much ready to go. It really is, well.

Chris Lucas -- Capital One -- Analyst

Okay, thank you for that. And then, I guess just a quick one, you'd mentioned about the spreads narrowing between investment grade and non-investment grade. As you think about where we are with said activities and unlikely 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?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

I think for the time being it's going to stay like this. I don't see any, absent some global economic issue that creates changes in the fixed income market, yeah, that'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 is private. There's almost a private one every other week. Private groups setting up these platforms. On the one hand, you would 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. If your blended extends and things like that. It can generate a lot of IRR and a lot of steady earnings and growth that way. And I still think there is -- not everybody really understands this business. And as more time and performance happens, I think it'll -- 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 with the tenants.

Chris Lucas -- Capital One -- Analyst

Great, thank you. That's all I had this morning.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Thanks, Chris.

Operator

Our next question is from Ki Bin Kim of Truist. Please proceed with your question.

Ki Bin Kim -- Truist -- Analyst

Thanks. Good morning. Just a couple of catch-up questions here. I'm not sure if I missed it. But the unit level coverage of 2.7 times, I know this is looking arrears, and there is a lag in the forwarding. But it didn't seem to change from the previous quarter. I'm not sure if you really talked about this.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

It's flat, yeah. That was flat, there was no...

Ki Bin Kim -- Truist -- Analyst

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

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

I think it's -- yeah, I mean, I think it's a -- we gave you a trailing 12 months coverage number given. 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.

Ken Heimlich -- Executive Vice President, Chief Investment Officer

There was a slight increase in the combined unit and corporate from two-nine to three-zero. So it just takes time for some of those metrics to work through.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

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 2021 compared to September 2019 pre-pandemic, across a number of different metrics, unit coverage improved, revenue, EBITA, 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.

Ki Bin Kim -- Truist -- Analyst

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

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Mike, you want to take that? Yeah.

Michael Hughes -- Executive Vice President, Chief Financial Officer

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've 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 one 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 court. As an example, Bayin's Auto, we've already renewed that one. We not only got rent increases, we got 10 years of term. So we're pretty happy with how that's looking. Last thing I'll throw out is, if you go back three, four quarters, look at the percent of the portfolio that is in that last bucket beyond 10 years. It's growing every single quarter. So, now, we think we have a very good system to deal with expirations.

Ki Bin Kim -- Truist -- Analyst

Okay, thank you, guys.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Thanks. 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 yearend, but we're equally more excited about our prospects for 2022. And being able to demonstrate the leverage of this platform that we 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. Look forward to talking to you at Nareit next week, hopefully. Take care.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Pierre Revol -- Senior Vice President, Corporate Finance and Investor Relations

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Michael Hughes -- Executive Vice President, Chief Financial Officer

Ken Heimlich -- Executive Vice President, Chief Investment Officer

Ronald Kamdem -- Morgan Stanley -- Analyst

Lizzie Doykin -- Bank of America -- Analyst

Haendel St. Juste -- Mizuho -- Analyst

Greg McGinniss -- Scotiabank -- Analyst

Linda Tsai -- Jefferies -- Analyst

Wes Golladay -- Baird -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

Harsh Hemnani -- Green Street -- Analyst

Steve Dumanski -- Janney -- Analyst

Chris Lucas -- Capital One -- Analyst

Ki Bin Kim -- Truist -- Analyst

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