Spirit Realty Capital Inc (SRC) 2005 Q2 法說會逐字稿

Good afternoon everyone and welcome to the Spirit Financial Corporation's Second Quarter Earnings Conference Call. (Operator Instructions) And it is now my pleasure to turn the conference over to your host, Miss Cathy Long.

Good afternoon. Thank you for joining us on our second quarter conference call. I'm Cathy Long, Chief Financial Officer of Spirit Finance. Along with me on today's call from Spirit is Mort Fleischer, our Chairman and Chief Executive Officer and Chris Volk, President and Chief Operating Officer.

Before we begin I need to remind everyone that part of our discussion this afternoon will include forward looking statements. They're not guarantees of future performance and therefore undue reliance should not be placed upon them. We refer all of you to our filings with the Securities and Exchange Commission for a more detailed discussion of the risks that may have a direct bearing on our operating results, our performance and our financial conditions. And with that I'll pass the call to Mort.

Thank you Cathy and thank you for joining us today on our conference call to discuss our second quarter results. The format for today's call will be as follows. I will provide some introductory comments, then Cathy will review our financial performance for the quarter as well as update guidance for 2005. Chris will then discuss operations and make some additional remarks. Following our prepared remarks we'll be happy to discuss any questions you may have.

I will let Cathy and Chris comment on the specifics of the second quarter but I wanted to start off by talking a little bit about how we are making steady progress in building shareholder value through our more efficient real estate capitalization strategies. We founded this company because we saw the opportunity to help numerous companies lower their cost to capital for operationally essential real estate assets. At the same time, Spirit and its shareholders would benefit as this asset classes substantial growth is realized over time.

Based on our record second quarter results, strong sequential revenue growth and more than 320 million in acquisitions resulting from the ongoing interaction with potential customers, we are confident that our business model is working, that companies are increasingly recognizing the advantages of leasing versus owning passing real estate assets. We maintain our outlook for a total of at least 800 million in acquisitions by the end of the year.

Specifically we had a record quarter, closing on 322 million of acquisitions and producing funds from operations of 11.4 million or $0.17 per diluted share.

As you can see by comparing our second quarter acquisitions volume to the first quarter volume, results will vary in this business and often quite dramatically. Investment volume in the second quarter was more than 8 times greater than the first quarter. Such fluctuations are a given in our business since we don't have total control over the timing of when a deal may close. It's more important to us that we make investments judiciously and with a long-term perspective rather than attempting to hit any short-term targets.

Let me also address the macro environment. The world has become a much smaller place with the global economy having an impact on every country's economy including the United States. Excuse me. Every nation is looking to preserve and store its wealth and is investing in what is perceived as the most solid, secure investment, the US long term bond. From China to Eastern Europe, the flow of funds into this country has created an economic phenomena, the flattening of the yield curve. Coupled with fuel prices at historically high levels the impact on the economy has yet to be determined but we believe the effects are starting to be felt.

While we are not in the business of economic forecastin,g we did try to provide and educated opinion on our business 8 months ago when we provided our initial earnings guidance. I can candidly state at the time we did not model, as I'm sure many of you did not model a prolonged flattening of the yield curve. This has impacted finance companies, banks, real estate companies, and many other industries including Spirit. Fortunately based on our 50 plus years of being around the real estate financial markets we had the foresight when we started building Spirit to create a business strategy that was highly flexible and adaptive to almost any economic environment.

Our flexible strategy allows this company to adjust to a changing environment. While spreads have tightened slightly we are still executing transactions both rated and non-rated within the long-term rate of return parameters we expected. However, we have experience some margin compression in the short term and some pressions - some pressures on operating costs.

My years of experience tell me not to argue with the Fed. Short-term rates are rising and anticipation of increasingly long term interest rate. But the wild card is when will long-term interest rates rise?

That being said, Spirit is well positioned. We will benefit from end escalations embedded in our leases, the equity returns on our portfolio are largely locked in. We fully expect to be able to write new leases at high rates as long term yields increase plus a steeper yield curve will help us to regain some lost short term spreads. Our flexible capital structure combined with our disciplined underwriting will help propel this company's growth over time.

Spirit brings to the marketplace and attractive solution to our customer's capital needs. By lowering their cost of capital for companies that use operationally essential real estate assets, we can provide attractive returns to our shareholders and emerge as the leader in this asset class over time. With that I will turn the call back to Cathy.

Thank you Mort. I'll start by providing a review of our second quarter. Then I will provide an update on our real estate portfolio and review our guidance for 2005.

For the second quarter we reported FFO of 11.4 million and AFFO of 11.1 million. Which equated to $0.17 and $0.16 per diluted share respectively. Net income was 7.5 million or $0.11 per diluted share on revenues of 18.1 million, including revenues classified as discontinued operations, which I will discuss in a moment.

The difference between AFFO and GAAP earnings for this quarter consisted of depreciation and amortization of 4.2 million, a $284,000 gain on the sale of properties and a straight-line rent adjustment of $263,000.

Our prior year second quarter is not a meaningful comparison since we raised our first outside capital in December 2003 and were in the early ramp up phase of the company during early 2004. Nevertheless, to briefly review. We reported 2004 second quarter FFO of 1.7 million and AFFO of 1.6 million, which both equated to $0.04 per diluted share. Net income was 1.3 million or $0.03 per diluted share on revenues of 3.3 million.

As a reminder our 2005 earnings are based on the weighted average number of shares outstanding of 67.5 million shares, which is an increase of approximately 30 million shares that were issued in our IPO in December of 2004.

The usage of the term FFO is consistent with the NAREI definition, which is net income computed in accordance with GAAP, excluding any real estate related depreciation and amortization and gains or losses on the sale of portfolio assets. Our AFFO calculation also subtracts straight-line rental revenue. We believe this is a better indicator of our results because its more closely reflects the cash rental payments received by the company.

Turning to our balance sheet, on June 30, 2005 we had $1 billion in total assets including 943.5 million in gross real estate investments, including the related lease intangibles, 43.6 million in mortgage and equipment loans receivable and 38.2 million in cash and cash equivalent.

From a liability perspective, we had 383.3 million in debt including 155 million in long term fixed rate mortgages and notes payable and 228.3 million outstanding on our variable rate secured credit facilities. We recently announced the completion of a $441 million private placement of fixed rate net lease mortgage notes. With the issuance of this debt we have match funded our lease cash flows on 640 million of assets for the next 15 years.

Through this process we locked into expected long term rates on our existing business, which we believe will improve the anticipated - improve with anticipated lease escalations. We believe that our policy of strong asset and liability matching positions Spirit well for future moves in long term interest rates whatever they may be.

In the second quarter we made acquisitions totaling $322 million in 123 properties. We further broadened our real estate investments and we're pleased with how rapidly we are diversifying our asset base. We acquired properties in 4 new asset classes, automotive dealers, recreational facilities, supermarkets and industrial properties. While continuing to add to the educational restaurant and specialty retail areas. Chris will elaborate on some of our second quarter transactions during his prepared remarks.

As we grow we intend to further diversify our purchases into additional property types, geographic areas and tenants in order to decrease our risk in any one area. Our current gross real estate and mortgage loan portfolio of $987 million is geographically diversified across 38 states and among retail distribution and service oriented type properties.

The largest concentration of our real estate investments is in the restaurant segment, consisting of 316 properties owned or financed and totaling 33% of our gross portfolio value. The second largest property type is specialty retailers, consisting of 26 properties and reflecting 13% of our total - total portfolio. And the third largest property type consists of 11 movie theater properties, comprising 12% of the portfolio value.

Since the beginning of the year we sold 23 properties with a gross investment value of $41 million for a net gain of $227,000. Consistent with our definition of FFO this gain is excluded. These properties were sold in order to replace assets that do not meet our long-term investment objectives with assets that provide better long-term stability. These occasional sales are a normal part of our long-term business strategy of acquiring a diversified real estate investment portfolio. Because we intend to replace the properties sold, the cash flows from future operations are only impacted to the extent there would be a significant delay in replacing the investment.

Under the current accounting rules we are required to report the operating results of our sold properties and the gains or losses on those sales as discontinued operations. This classification has no impact on reported cash flow, net income, FFO or with the reinvestment of the proceeds or expectations for future revenues.

Generally our properties are leased under a long-term triple net arrangement. The weighted average maturity of the non-cancelable portion of our leases is 14.25 years providing stable, long term cash flows. Less than 2% of our lease portfolio will expire prior to 2013. Our leases have either scheduled rent escalations or contingent rent escalations based on future changes in the consumer price index or a percentage of the lessees gross sales.

Turning to credit, I'm pleased to report that our disciplined underwriting along with our financing strategy has positioned us well with a strong real estate portfolio. Through June 30th, all of our properties are occupied and are current in their monthly payments. Furthermore our returns on the $987 million in assets are basically locked in over the term of the lease, most for 15 years as we have match funded approximately 85% of these assets.

Our real estate portfolio is leased or financed to 68 companies with no single credit exposure greater than 5.7% of our total investment. Our 10 largest customers comprised 43% of the total dollar amount of our portfolio, down from 53% last quarter. As we continue to grow, we anticipate that the existing tenant concentrations will become even smaller.

Now I'll turn to our earnings guidance. As many of you know it is not our policy to provide quarterly earnings guidance. We continue to be comfortable with our annual investment targets and our recent record investment activity supports this. In addition we have held to our targeted equity total rates of return in the vicinity of 12%. That said, the timing of closings on real estate transactions vary significantly from quarter to quarter with many transactions skewed towards the end of the quarter, which we expect will modestly impact the results this year.

In addition, the flattening of the yield curve impacts the spreads of properties positioned on our short-term credit line. Here spreads have fallen costing us as much as 2 percentage points on these short-term borrowings. We anticipate that such spreads can be recovered to traditional ranges when and if the yield curve reverts to more historic steep patterns.

With that said, the company's updating and tightening its outlook for the balance of 2005. Management now expects the FFO per diluted share for 2005 to range from $0.67 to $0.70. Assuming the company closes at least 800 million of acquisitions by the end of 2005, it would represent an increase of 33% over fiscal 2004 investment activity.

Of course the pace and timing of acquisitions are likely to vary significantly quarter to quarter, with third quarter impacted by the traditional summer vacation mellows at many companies around the country that occurs during July and August. Thus we expect more robust activity in the fourth quarter as we finish out the year.

Our pipeline remains strong and we have a large variety of transactions to consider. Specifically in the third quarter we expect to close from $150 million to 200 million, but again it will have minimum contribution to third quarter results as we expect most transactions to close late in the quarter. We've discussed this before but feel it's important to mention again from a timing perspective, based on our historical results, most transactions contribute to our revenue and FFO the quarter after they close.

This we do not expect to change. Consequently the way to think about the company is by looking at our run rate to better understanding the embedded value we are creating. Taking into account the expected investment activity for the year, the FFO quarterly run rate should more accurately reflect the stabilized earnings and leverage of the company. We expect that run rate to range from $0.23 to $0.24 per diluted share.

With regard to our dividend policy, our most recent dividend declared was $0.19 per share, which was paid on July 25th. Management's goal is to continue to pay dividends at this level with future dividend increases addressed annually.

I'll now turn the call over the Chris to discuss operations and some of our second quarter transactions.

Thanks Cathy. We are pleased to have announced closings of over $1 billion in sale leaseback transactions and mortgage loans since we began purchasing real estate assets in December 2003. I firmly believe that we are helping our clients increase the return on equity by employing sale leaseback capital as a financial tool. We are encouraged that more companies are beginning to appreciate the benefits of leasing rather than owning passive real estate assets and that we can help them improve their capital efficiency.

As Cathy said, we closed on over $320 million of acquisitions in the second quarterly. As importantly we made tremendous progress in our efforts to diversify our assets across industries, property types and tenants. While there isn't enough time to go through each transaction that we completed during the quarter I want to touch on a few transactions that we consider particularly noteworthy. A fine example of this is our recently announces $56 million sale leaseback transaction with CarMax, which marked our entry into automotive retailing industry.

CarMax which operates 62 used car superstores in 28 markets is one of the industry's premier credits and was attracted to the certainty of execution and competitive sale leaseback pricing that we were able to provide. We purchased and leased back 4 dealerships located in Florida, California, and Virginia and importantly the deal was internally sourced by our own sales force and we think that our burgeoning relationship with CarMax sets the stage for additional financing opportunities within the automotive retailing industry.

In concert with our competitive bid, we simultaneously funded the leases in the CMBS marketplace at rates that reward CarMax for its strong financial position while allowing Spirit to maintain our total rate of return targets.

Secondly, we completed a $49 million acquisition of the Camelback Ski and Water Park in the Poconos Resort area in Pennsylvania. Despite the seasonality and volatility inherent in the ski business, Camelback with snowmaking and other strategies has been able to produce steady, stable, recurring EBITDA over the last 30 plus years. Within the past 10 years the company added to its EBITDA and stability by creating a premiere water park facility, Camelbeach which operates between Memorial Day and Labor Day. The facility is the largest ski area in the Poconos with 156 skiable acres.

Third, we also closed on a $47.5 million transaction with 12 United supermarkets in Texas. United is a private company founded in 1916 and operates 47 supermarkets in West and North Central Texas and the investment was made shortly following its funding within the commercial mortgage backed securities marketplace. As we have discussed before the supermarket industry could provide a bastion of opportunity for this company in the years to come. United has been able to compete against Wal-Mart and others for years and has been able to produce steady EBITDA.

And fourth, during the quarter we closed on a $41.5 million investment in three education facilities used by the University of Phoenix, which is right here in our backyard. Two of the buildings here in Phoenix house the online education operations for the company, while one is a campus building in Grand Chute, Wisconsin. This investment complements our other investments in operationally essential education facilities. The University of Phoenix is a subsidiary of Apollo Group, which operates the nation's premiere for profit education company having an equity capitalization of nearly $14 billion.

Our confidence level remains high that we can accomplish our acquisition goals in 2005. Today our pipeline of potential investments continues to exceed $2 billion in opportunity targets. I'll give you some pipeline statistics. We are evaluating 89 investment opportunities with an average investment size of $23 million. Four of the potential opportunities exceed 100 million with all the rest at $50 million or less. The weighted average year one yield approximates 8.45%, which is close to the 8.5% guidance we have offered for the year. The median yield is closer to 8.6 since some of the larger transactions have lower year one yields. The yield ranges from a low of approximately 7% to a high of about 11% and I would say it is definitely bell-shaped, most of the opportunities towards the center of the curve.

The pipeline is across 17 principal sectors, the largest being restaurants at 21%, movie theaters 16%, distribution facilities at 10%, specialty retailers at 7.6% and education facilities at 7.5%. About 20% of the pipeline has ratings of BB or higher, however many of the unrated companies are financial very strong. I should also say that we have made and will make proposals to investment grade companies where we believe we can help management with more efficient capital structures. None of these targeted companies are included within the pipeline. The pipeline is comprised of defined investment opportunities.

During the second quarter we declined transactions totaling $575 million and since May to date, so through right now, that number is over $930 million. Major reasons cited are credit quality or investor return issues. During that same time we lost out on almost $800 million in business due principally to lease rates. So between lost business and declined business you're talking about over 1.7 billion between May and August which gives you some idea of the volatility of the pipeline and how dynamic it is. Even though it's at the same aggregate level that it's been during the course of the year.

Finally I would point out that 3% of the pipeline reflects new construction. We have made significant strides with respect to financing. Recently we announced that we had sold $441.3 million in aggregate principal amount of net leased mortgage notes rated AAA and AAA by Standard and Poor's rating services and Moody's Investor Services Inc. respectively. The notes consist of $183 million of class A1 amortizing notes, bearing interest at a rate of 5.05% per year, due in the year 2020 and $258.3 million of class A2 interest only notes bearing interest rate at 5.37% per year due at the same time. The asset pool is comprised of 408 single tenant commercial real estate properties having a combined value in excess of 630 million. We used the net proceeds from the sale of notes to pay off existing secure credit facilities and plan to utilize the remaining proceeds to fund future real estate acquisitions.

Being the first transactions of this kind, costs were incurred; in addition the transaction was insured by AMBAC Insurance Corporation embedding all of the costs, including the unwinding of our hedge, which was designed to lock into expected spreads. We believe that the blended all-in cost to the borrowings will approximate 6%. I should say this is about where we expected to be when we conceived this transaction over a year ago.

This financing was a significant milestone for us and we believe that it was the first real estate structured finance transaction completed in the United States that employs what I would refer to as master trust technology.

Two anticipated benefits from this offering include the potential to fund larger transactions into a more diversified pool as well as the ability to issue subsequent secured term notes without having to wait to aggregate this large of a pool. Equally important is that we have match funded our cash flows for the next 15 years on a large pool of quality assets which gives us the potential for an improved cost of capital going forward.

Let me turn now to discuss our origination team. We think we've assembled a credible and determined group of individuals who have the contacts, know-how, and motivation to source and close deals. During the second quarter, of the purchases we made, 49% were internally generated from our own sales efforts either from direct phone calls to target accounts or other relationship building initiatives that we utilize. In so doing we're expanding our market rather than simply seeking to take market share and entering into bidding wars and auction environments. Today, senior management - today excluding senior management we have 4 relationship managers with 2 more expected here before the end of the third quarter.

Our current pipeline is 49% sourced from direct originations activity, 29% from investment banks and financial advisors and 22% from retail brokers - real estate brokers. Which we think puts us far above our competitors in terms of generating internal leads. Remember our market is vast with more than 97% of the business being generated from already constructed operating real estate, while only 3% is new development.

The profile of the companies we targeted in our pipeline continues to span the credit spectrum. At the end of the second quarter our customer credit profile was mostly unchanged from the first quarter of 2005. Approximately 50% of our portfolio is rated, approximately, approximately 12% of our existing portfolio has an investment grade rating or equivalent for non-public debt from at least 1 nationally accredited rating agency. Our customers typically have numerous choices of capital and they have selected Spirit.

As Cathy mentioned we expect that Q3 investments will be in the range of $150 to 200 million, which we are really encouraged by. The third quarter with summer vacations tends to be slower. Entering into the fourth quarter, which tends to be the busiest with up to $560 million investments, positions us to be comfortable with our initial investment guidance.

Some words on the expected Q3 activity, we may have as much as 24 transactions with the weighted average year 1 yield of 8.45% with a range of 7.6% individually to 10%. Most or all the transactions will likely be slated for a Spirit term funding as opposed to CMBS funding which provides us with less cost and some more flexibility. The largest transaction would be $50 million with the largest sector again the restaurant sector. Investments slated for the Spirit term funding would entail the interim use of our credit lines. Here, as Cathy stated, the flat yield curve has cost us as much as 2% in spread, virtually eliminating the spreads between short and long term borrowings. With historic usage of credit lines in excess of $200 million, the cost to us in the short term is one major reason for a 2005 FFO range adjustment.

Here, however, I should point out that in the many years to come - or in the many years that the management team has been successfully using interim funding we are in an unusual circumstance, which we believe is likely to be remedied. A bright light here too is the flat yield curve is a signal for corporate America that there has never been a better time for a long-term lease with Spirit. Therefore we believe that this circumstance simultaneously holds opportunity for us and for our shareholders.

Before we open the call up for questions let me reiterate some of Spirit's advantages. We have a strong balance sheet and believe that our investment and liability management strategies are positioning us to be an industry leader. We are able to combine our cost of capital and operational structure with efficient leverage strategies to deliver competitively priced leased products. We continue to pursue investment strategies with investment grade companies because larger investment grade opportunities have the potential for contributing further to our expected growth but this will take time to evolve.

As shareholders ourselves, management firmly believe this is a meaningful way to build long term equity value and to that end we are committing more time than ever before targeting select larger investment grade companies, none of which are included in our current pipeline. While we are confident that we will eventually close many such transactions, these larger transactions will come slowly and intermittently each year. We believe the size for operation essential real estate is in excess of $1 trillion and needless to say we've barely scratched the surface.

In closing, let me reiterate that our strategy has served us well in the past and we are confident will continue in the future as we continue to evaluate our initiatives on an ROE basis to commit capital to areas where the risk to adjusted returns are attractive. Our balance sheet and cash flow generation remains strong and supports our growth internally through 2005. This company employs a risk evaluation strategy that, that includes diversification by geography, property type, tenant, attention to credit fundamentals include the credit paradigm employed by management for more than a decade as well as independent real estate valuations.

And finally Spirit Financial is a leader in forging efficient corporate capital real estate capitalization strategies that will lower our customers' cost of capital. Through leadership and a culture of accountability this company has a solid foundation from which to build sustainable growth, we are enthusiastic about our business prospects and we are committed to our core strategies which will result in a continued market share gains and long term shareholder value. And with that said, operator, let's open the line up for questions please.

Thank you the question and answer session will be conducted electronically (Operator Instructions) And our first question will come from Ross Nussbaum Banc of America Securities.

Hi, good afternoon everyone. Couple questions, first on the auto dealership acquisitions, one of your competitors in that space on their conference call had talked about the transaction that you had completed and had really discussed that the terms in which the transaction was completed didn't make investment sense to them. I'm just curious, can you talk about the cap rates and why you think that this transaction made sense to you but not necessarily in the eyes of your competition?

When I start on this Ross, let me say that if you ever ask us about something that one of our competitors does I won't say a thing about it, so, so I'll start there. I think that the, I think what you have to do - it's a question - what's key in all this is how you finance something on the liability side and the idea is to lock into long term spreads. What we did here was we funded it specifically in the commercial mortgage backed securities marketplace. We did it at a very attractive cost of debt and the leverage was in the neighborhood of 75%, I mean and that is really how we were able to make our total rate of return because you cannot do this given the historic kinds of cap rates that we've seen done in the automotive business.

CarMax by - also you should know is a borderline investment grade rated company, depending on which, which types of transactions you - I've got flash cards showing me our borrowing from that transaction were 5.3%. So that gives you an idea of how that gets done. And it's important that you finance it in a way that gives people - that you finance people - I'm getting another flash card on sour grapes. So it's important that you finance transactions in a way that gives people credit for the credit that they bring to the table and this case CarMax is an investment grade rated company in our view, it's not officially a rated company.

In addition to that, they've created more shareholder value than any other single car dealer in the country, if you look at their share price and equity cap relative to the cost of business. They've had a very, very strong financial model and so as we were looking for who to do business with we were pleased to do that. And I should say that in the marketplace today if you look at the cap rate that we're getting on that transaction relative to the cap rates that we're getting on lower rated companies I would say that the gap is not very significant to us and so as we're looking at it from a risk adjusted return perspective we were very heavily drawn to the investment.

Okay. The other question is you talked a little bit about Camelback in terms of the operating history there. Can you give us a sense of what the rent coverage or the EBITDA coverage looks like against, against the lease because historically Northeast Mid-Atlantic ski resorts have, have not been the most stable and successful businesses.

As we underwrote it, the coverage was in the neighborhood of 1.7 to 2 going into the deal, so very strong which gives you a huge amount of tolerable fall off. Theses people have, just so you know about 0.5 million visitors in each season part, whether it's the ski season or the water park season. One of the reasons we were drawn to this is the variability is not as big as you would suggest because their ability to make snow during the course of the year really does not have a - causes the standard of deviation of days lost during the ski season not to be that big.

Of course there's more to it than just day's lost because there's a question also of which days are lost. But if you go from year to year you'll notice - and we did this, that the volatility was not that substantial. And finally the addition of the water park, which they did, I think they started on that close to 10 years ago is something that has actually smoothed out the volatility and the water park has also likewise relatively little volatility in terms of the numbers of days usage between Memorial Day and Labor Day.

The people that are investing in the property are looking at different options related to the property from a strategic perspective including the possibility of constructing a hotel on the facility and some other improvements, which would further add to the desirability of the facility. Right today, as you probably know, living in New York City, that facility tends to attract mostly day skiers out of the New York area and the Philadelphia area, so the ability to attract people for the weekend or even in between the week which is more important because these guys are often very much fully occupied on the weekends, so it's the ability to add weekday skiing is something that management is clearly focused on.

Is there any type of residential development opportunity there or is this strictly a sale leaseback and did you buy the towers as well or how, how does it work with a ski resort?

There is potentially some ability to do residential development and condominiums on the property. That is not something that Spirit is looking at as a, as a prime income source. We are looking at this solely from the business model of the ski area and the water facility period.

Thank you.

And our next question comes from Paul Puryear with Raymond James.

Good afternoon. We've got a couple of questions but I guess first, could you talk about your credit watch list, who's on that list and the size of the exposure there?

Oh hey this is Chris and the answer is first of all we have nobody that's delinquent. And, and secondly I should point out that we've - you noticed in Cathy's comments that we've sold $40 million worth of assets during the course of the year, these are properties that were not delinquent but properties we were concerned about either return parameters or even the long term value of the properties. And as you know the marketplace for net lease real estate sold on an individual basis is extremely active. And so our view is that's a good way to help preempt any potential credit needs over the long term. Outside of that if I have a watch list with any names on it, which we do monitor names closely around here, I can't say them to you and I would not do that.

What - but you - are you saying you don't have any credits that you're worried about currently?

I have credits that I think about, they're 1 or 2, they're not meaningful in the eyes of the company at this point, but again I'm not going to give you the names of the credits.

Okay, Ken Avalos has a couple of questions.

Yeah, hey guys, could you just talk a little bit more about the pipeline and specifically what I was interested in is kind of the types of credits at the low end of that cap rate range that you gave in the 7 range and the types of credits at the high end there.

The low end of the cap rate by and large tends to be investment grade or borderline investment grade companies and companies where we can fund them in the commercial mortgage back securities business. And last quarter when we did our conference call and were giving guidance relative to the business that we would be doing during the second quarter we basically broke out our expected investment opportunity in terms of what we expected to fund in the CMBS market which has a cap rate on the average in the 7s and then the other business that we expected to fund in Spirit Master Funding which is the net lease transaction that we closed and those transactions averaged around 8.5 and I think that that's really what you, what you see so the bifurcation is a function of funding needs. There are some other outside issues, we may have higher - we're sometimes willing to trade off rate for escalators on leases so there can be some of that that goes on and again we are very focused in generating total investor rates of return in the neighborhood of around 12%.

Thanks, and then I guess a question for Cathy, the $0.23 to $0.24 run rate that you talk about on a stabilized basis. Is it safe to assume that's not sort of a - I know you don't give quarterly guidance but, we don't expect to see that in Q4, is that a safe assumption?

That's correct.

Okay, thanks. That's it for us I think.

Yes, thank you.

(Operator Instructions) We'll go next to Michael Bilerman with Citigroup.

Good afternoon, John List (ph) is on the phone with me as well. What was the timing on the $322 million of acquisitions in the quarter?

It was primarily at the end of May and end of June with some fairly significant size transactions like CarMax actually right at the end of June.

And so basically about a third you would say that hit the quarter of that 322?

Actually when you look at the weighted average of the quarter you can almost assume that, that - yes. Actually less than a third because even though some of it was in May it was the end of May and then whatever happened in June was at the end of June. So you may have only even had a few days of activity for the, the amount of transactions that happened in June.

And then I'm just, I guess I'm trying to wrap this with your new guidance. If you were at $0.17 in the quarter and I guess the bulk load of this 300 really happened at the end, your quarterly guidance should therefore go up into next quarter and then in the fourth quarter, based on the 150 to 200 closing you should be higher. So I guess, what circumstances are you going to be taking to the low end of this range?

Timing-wise we believe more will fall into the fourth quarter than the third quarter.

The 150 to 200 that you're expecting for next quarter you expect to happen late in the third?

Very late in the third quarter, correct.

And the complete fourth quarter that you're basically assuming that it doesn't really even touch fourth quarter at all.

Right because many, many of the transactions happen in mid-December.

Okay and what was the average yield on the 322?

It's -

It was just a tiny bit over 8%. It was along the lines of what we said to you at - in the last call, which is the CMBS stuff. There were basically 3 primary transactions I mentioned to you and they were front of the CMBS trans - CMBS market. United supermarkets is a BB rated company, the other 2 are basically investment grade type companies, those are funded in the commercial mortgage backed securities market at rates that were somewhat similar to around the rates that we financed the CarMax transaction at. So those were in the low 7s and then the rest of it was done around 8.50.

I think you'd commented last quarter about 8.3 on your acquisitions volume so it sounded like you've done more of the investment grade that you'd expected, or the higher grade tenants.

If you add on -

We had a couple of add-ons.

That were more in the low, in the low yield range, so 8, about 8% for the quarter.

Yes.

Between 8 and 8.2.

Okay.

Actually just to, to clarify too Michael, when we were looking at it and maybe we should be better about describing this the, the 820 - some of the transactions we have to incur a legal cost and closing costs in doing it so by the time you wrap it all together and you calculate it you end up a little bit less so that might be the account for that 10 or 20 basis point difference.

Okay, in terms of the ski hill. This was a transaction I think fell out at the end of last year. Can you talk a little bit about what has changed in that transaction relative to when you backed away last year?

Well we always liked the property. And, and, and I think that - we've spoken about it, you and I before and I've spoken about it with other people before and we always liked the property. The issue was the management team that was going to acquire the property and the structure that we were going to use to acquire the property and we couldn't get comfortable last year with the structure and what we did this time was we engaged a different management team.

And what else does this management team operate outside of this ski hill and water park?

The management team that, that does this one of the principals has been involved in recreational properties in the Poconos and he's a local Poconos person which I think is important for a transaction like this. Some of the other partners include the people that have been actually producing the waterslides for the company ever since - and they were the folks that induced the company to get into the water park business about 10 years ago. So they've been working with and know management for a long time, in addition to which the managing partner with the resort whose been there for the last 20 plus years is still there and who is a person that we think extremely highly of and he'll be there for the next 2 or 3 years on a consulting basis. So that's how it was structured.

And then -

Can you comment on the net worth of the operator behind the tenant?

I would rather not comment on the net worth of the operator behind -

I mean is it several hundred million, or is it something in the $10 or 20 million range?

Well if it's several hundred million bucks they might just write a check for it. So, so they, they used the sell leaseback with us, but the net worth and what they're putting up is meaningful.

Well how much did they buy the - I mean they came in and bought the operations and arguably bought the hill and then did a sale leaseback to you so how much did they buy the operations for?

Basically, they are, excluding the working capital, they're putting up lines of credit to fund it because you have to fund this thing - especially its negative cash flow during the interim months and that's pretty meaningful. So they have been writing substantial checks when they bought it and will do it again so after Labor Day as they convert from the water park to the snow season. So they contributed cash and equivalents to be able to get that done.

But there wasn't any value attributed? They're just funding the cash, they didn't actually buy an operating business for a certain price?

Well, you know what we actually did, to be more exact about it was we - in order to get this done, Spirit Finance actually acquired the stock in Camelback, the ski area, so we acquired the stock and actually converted it to a REIT. And by doing that it deferred the taxes, or eliminated a layer of taxes for the shareholders owning it, which is one of the reasons we got an attractive transaction on it. And one of the reasons why the coverage is as high as it is going into the transaction and then what we - what these people did was they created a separate company to operate it and they capitalized that company.

And then what's the yield that you're getting on - in terms of the 49 and what you actually owned, you actually own all the improvements on the site?

We own the mountain, we own all the chair lifts, the buildings, the lodges, the waterslides, the water park facility, which are all qualified REIT assets. They own all the inner tubes the snow groomers, the desks the officer furniture, all the sort of FF&E and especially anything that's got a title to it.

And what was your yield on the acquisition?

I'm sorry to put you on pause for a second, I would - we didn't provide yields on any of the other transactions we talked about and we've never provided yields on specific transactions.

I was wondering if I could ask Mort just a question on the restaurant industry and you looking at a company like McDonalds where you got $25 billion of real estate on their books. Is there a way for you to unlock that?

That's a good question. I have been thinking about a lot on how we'd do that and I was going to comment on this in our closing remarks, in my closing remarks. I think we're looking at ways that we can get involved where we can encourage these people to sell the real estate. We think that the world is awash with capital as we all know and this high gas margins - you may have noticed today that Brinker reported earnings that went down and that's happening all over the restaurant industry so it's going to put a lot of pressure on these over real estate laden companies to give more serious thought on return on equity is what we think. So the answer is we are making calls on restaurant companies, we are - and others that are real estate laden and we are suggesting to them that by partnering up with us we can help return, improve return on equity. More calls and the economic environment to respond directly we think are going to force the issue.

I think David Carlisle had a question as well.

Hi, yes, question on the securitization. I guess you've acquired about $1 billion of assets and about 630 million is in that securitization of the other $370 million of assets that were not in it. Is there a specific reason why they were excluded or may they be eligible for a future series.

The - this is Chris. The answer to that is the vast majority of the assets that are not in the transaction were funded discretely in the commercial mortgage back securities market. So we already had some CMBS transactions going into this - going into this quarter.

Plus there was a cut off at a certain point early in June for the transaction so anything acquired later in the month did not make that transaction.

What - what threshold would you look at to issue another series, in terms of volume?

We haven't determined that yet but one of the potential, I mean what this does for Spirit and again, no one else has done this yet but we're very excited about the option, the options we have. Does for Spirit is it allows us to do a separate secure structure for this facility which has been the norm for a number of companies or we can take the existing facility and actually create a second series of notes and add collateral to it. and because we can do that and have that optionally available to us, it has the potential of lowering our cost to capital because we end up having a more diversified pool of assets and in addition to which we may not have to accumulate $650 million of assets the second time around, so we might be able to do it with $100 or 200 or 300 million worth of assets which basically means that we aren't subject to interest rate exposure on those assets or hedging risk or anything else for a long period of time so those are things that excite us about the able thing that we were able to do.

Yes, it's more efficient execution. If we had a choice we think that this has an option potentially to be better than the CMBS market for some of the stuff that we've been doing and the reason for that is because the commercial mortgage back securities market is extremely attractive or relative to the ability to substitute properties or to take properties in and out of the CMBS transaction, which those kinds of a pieces of flexibility for a tenant, of a single tenant property are so important to be able to have because the flexibility on their business, if they don't have it the lease exacts a huge opportunity cost on them.

So us being able to have this kind of structure available to us I think is really in sync with the kind of market that we're going after and over the long term if we were able to use this more than the CMBS market we would like to see that, so as opposed to just taking our investment grade or high rated type companies and throwing in the CMBS market like we did this quarter, perhaps there'll be the at some point in time the option for us to be able to use this kind of a master trust vehicle for them.

Okay and the final question is what was the cost on the insurance wrap for this deal.

I can't say what the cost of the insurance wrap was.

Okay, great thank you, that's all we've got.

Actually, I want to ask them -

And our next question comes from Chris Lucas, Robert W Baird Investment Bank. Mr. Lucas I'm sorry (Operator Instructions) your line is open.

Hello, okay thanks. Good afternoon everyone. Hello?

Good afternoon.

Okay, a couple of quick questions. Cathy, on the G&A for the quarter, is this a good run rate or should we continue to see some acceleration in the G&A going forward as you continue to add staff?

There will be some increase for '06.

For the rest of this year, what's your thought?

We should be pretty close for this year.

And so the - a 3-2 is a reasonable number per quarter?

Yes.

Okay, and then on the, on this, the lease funding transaction. Can you walk me through sort of the, the, the amount of net proceeds and how they were utilized and what's left in terms of cash available for future investments?

Of the amount that we sold we did have some hedge unwind costs of approximately 13 - 14 million. Which we settled at that time. We also paid off our credit facilities to the tune of about $248 million and then there were some closing costs as well so about $170 to 175 million is left in cash to use for the rest of the year or rest of the quarter as we need.

Okay, and then Chris had mentioned before that the all in cost was around 6% for the transaction?

So, so what you have to do is you take all the costs, that Cathy's talking about, which are legal costs and of course this is the first transaction of its kind, the legal costs tend to be higher, all the costs -

Plus the hedge unwind.

And you know you have the hedge unwind, which the hedge unwind is what it is, we would have a hedge anyway. And then you've got the cost of the AMBAC insurance and when you throw all of that together so you add the AMBAC spread and then you amortize the cost into the deal you end up closer to 6%.

So it added roughly 75 to 80 basis points to the over all transaction cost.

Yes.

Yes, the answer is yes.

Okay, okay. That's all I have, thanks.

(Operator Instructions) At this time we have no questions standing by. I'd like to turn the conference back to Mr. Fleischer for any closing remarks.

Let me say just a further comment on some of the areas that we're exploring without being too explicit. Let me suggest that there, if there's a way for us to look at how we might unlock real estate we're pursuing it. We're attempting to think of any imaginative way that we can do it. we've seen some increasing activities by hedge funds and LBO firms and taking positions in companies, we are exploring ways that we might work with such companies, we've thought about ways we could use up REITS or down REITS or operating units. Our sales people are becoming more and more sophisticated in calling on their target customers, we're adding additional sales people, probably add 2 more this year, in simple terms I think we're getting more traction.

I want to point out that the world is awash with capital, all of you know this. In areas where we might have been one of the lone bidders last year, we recently made a bid on a certain company and there were 14 bidders. We - you'll note that Chris commented on the fact that $800 million in business we bid on we didn't get. I want to assure you that we're not going to chase business and get in a big rush to do things we shouldn't do. This is a period where I really think that discipline overall is very important here and we are maintaining discipline. The master trust that Chris and Cathy and got done I believe that over time is going to make us a much more efficient purveyor of capital by adding more debt in one facility, it's going to create more diversity it's going to give us a lot more AAA paper, or better rated paper and we're going to be able to add more deals to that trust and therefore be a more efficient competitor like we were in the CarMax transaction that Russ asked about. so I want to - we want to thank you for your confidence in us and thank you for joining the call. Good day to all of you.

Thank you for your participation in today's conference call. You may disconnect at this time.