Spirit Realty Capital (NYSE: SRC) is a net lease real estate investment trust, or REIT, focusing on single-tenant retail properties and smaller concentrations of industrial and office properties. In this article, we'll take a closer look at Spirit Realty Capital's portfolio, investment strategy, recent developments -- including how the COVID-19 pandemic impacted the business -- and its performance history since its 2012 initial public offering (IPO).
Spirit Realty Capital company profile
Spirit's portfolio consists of 1,880 properties leased to just over 300 tenants, 77% of which is leased to retail tenants, with industrial and office properties making up the bulk of the rest. The company's properties are located throughout the U.S., with particularly high concentrations in the Southeast and Midwest.
Two key characteristics separate Spirit's business (and those of other net lease retail REITs) from other retail-based real estate investments.
First, Spirit's properties are mostly leased to tenants with businesses that are either essential, recession-resistant, e-commerce-resistant, or some combination of the three. For example, top tenant Life Time Fitness is a business that must be experienced in person. Other top tenants, such as BJ's Wholesale Club and Family Dollar, sell items at discounted prices and tend to hold up very well in recessions.
To name a few more, Home Depot, At Home, Circle K, and Walgreens are also on the top 10 tenants list. All these businesses fit into one or more of the categories mentioned at the start of this paragraph. And no tenant accounts for more than 3.4% of Spirit's rental income.
Second, the net lease model is designed for stability. Tenants sign long-term leases -- often with initial terms of 15 years or more -- and agree to annual rent increases, or escalators, throughout the lease term. In fact, Spirit's average tenant has more than 10 years left on their lease.
The tenants are responsible for paying property taxes, insurance, and maintenance expenses, which is why these leases are also called "triple net leases." In a nutshell, all Spirit has to do is put a tenant in place and enjoy decades of predictable, growing income.
We'll get into the resilience of Spirit's business in the next section, but the focus on essential and e-commerce-resistant industries has allowed the company to maintain an extremely high occupancy rate. At the end of the first quarter of 2021, 99.5% of Spirit's properties were occupied. Occupancy hasn't fallen below 99% -- not even through the worst parts of the COVID-19 pandemic.
Spirit's primary growth mechanism is through property acquisitions (as opposed to developing new properties from the ground up). In 2019 and 2020, Spirit spent more than $1 billion on the acquisitions of 238 properties. In Q1 2021, Spirit acquired 25 properties for a total purchase price of $191.5 million. With about $1.3 billion in available liquidity, Spirit has the financial flexibility to pursue attractive growth opportunities as they arise.
Spirit Realty Capital news
The biggest news item affecting REITs in recent history is the COVID-19 pandemic, so let's take a closer look at how Spirit Realty Capital was affected. To be sure, although Spirit is designed to produce stable cash flow relative to other retail REITs, the company wasn't exactly unscathed by the pandemic.
For starters, while most of the portfolio consists of essential retail, that isn't the case with 100% of the properties. Of Spirit's properties, 8% are occupied by health and fitness businesses, and restaurants make up about 12%. So, that's 20% of the portfolio that was largely shut down in the early days of the pandemic. Further, a little over 4% of Spirit's rental revenue comes from movie theater properties, and the movie business is just now starting to ramp back up.
As you might expect based on this exposure, rent collections in the early days of the pandemic weren't great. In May 2020, for example, Spirit received just 70% of its contractual rent, and collections remained depressed for months.
However, the numbers have since rebounded nicely. In Q1 2021, Spirit reported lost rent of just 2.2%, with the bulk of that amount coming from its movie theater properties.
Spirit Realty Capital stock price
Spirit Realty Capital went public in September 2012, so it has been around for nearly nine years as of this writing. In its history, the company has evolved quite a bit. For instance, in its earlier days, it owned a portfolio of commercial mortgage assets in addition to its physical properties. And prior to a spinoff of its Shopko-occupied assets and other non-core properties in 2018, the company's portfolio was quite a bit larger.
With that in mind, here's how Spirit Realty Capital has performed over certain periods compared with the S&P 500 index and a couple of its net lease REIT peers: