Spirit Realty Capital Inc (SRC) 2006 Q3 法說會逐字稿

Good day and welcome to the Spirit Finance Corporation Third Quarter Earnings Release for 2006 Conference Call.

[Operator Instructions]

It is now my pleasure to turn the floor over to your host, Miss Catherine Long, Chief Financial Officer. Please go ahead ma'am.

Thank you. Good afternoon and thank you for joining us on our third quarter 2006 earnings conference call. I'm Cathy Long, Chief Financial Officer of Spirit Finance Corporation. With me on today's call is Mort Fleischer, our Chairman and Chris Volk our President and Chief Executive Officer.

Before we begin I need to remind everyone that part of our discussion this afternoon will include forward looking statements. They are 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, performance and financial conditions.

And with that, let me tell you about the structure of today's call. I'll start by providing a review of the results of our third quarter activity. I will then provide an update on our real estate portfolio and our guidance for 2006. Chris will discuss operations and summarize our strategy going forward. Mort will wrap up our comments and we will then open the line for questions.

Now, lets review our third quarter results. For the third quarter of 2006, FFO was $0.27 per diluted share and AFFO was $0.26 per diluted, each of which represent a 50% or more increase over the third quarter a year ago. Growth rates like this are a direct result of the strong acquisition volumes that we've been able to achieve, having increased the size of our investment portfolio by over 100% during the past year.

By the way, it's important for you to know that these FFO and AFFO per share amounts for the third quarter do not include an additional $0.03 per share of cash gains from the same of real estates.

As we have anticipated, this strong FFO growth has driven our dividend payout ratio for the third quarter to just below 80%.

Net income was 17 million or $0.17 per diluted share, a 70% increase on a per shear basis from the comparable quarter in 2005, primarily fueled by the growth in our revenues. Revenues grew by 139% to 56.2 million, which includes revenues from properties classified as discontinued operations.

Focusing on revenues for a moment, there are a few things I want to point out. First, our revenues drive high quality earnings because they're predictable and repeatable. They're generated by long-term leases, with a weighted average remaining maturity of 16 years. Less than 2% of our lease portfolio will expire in the next 5 years. So our FFO is supportable by our monthly lease revenues and does not rely on gains from the sales of assets or other one-time revenues.

Second, because our earnings are driven by revenues that are essentially all cash, received on a monthly basis, our earnings are bankable. Which is another factor to consider in reviewing our earnings quality. Our revenue includes only a relatively small adjustment for straightlining the rents on those leases that have fixed rent escalation.

Finally, remember that we have a growing revenue stream. A substantial portion of our portfolio's rental increases are contingent on changes in the consumer price index. These future rent increases are reported as revenue only when the actual CPI increase is known. So the weighted average, cash on cash yield, on our portfolio of approximately 8.7% does not include the benefit of any future rental increases we will realize from CPI increases or other contingent rentals.

We expect our CPI rent escalators on our existing portfolio to translate into same store rent increases in the future, averaging around 1.5 to 2% annually. Since our portfolio is financed at around a 60% leverage rate, that translates into about 3.75 to 5% growth to our stockholders.

Just as important as creating a steady stream of rental revenue is financing our properties appropriately. We've been able to match funds over 90% of our investment assets with long term fixed rate debt. This means that we've financed substantially all of our properties, locking in a long term fixed rate debt payments.

The weighted average cost of our fixed rate debt is approximately 250 basis points, or 2.5 percentage points below our current cash yield on our investment portfolio. Because our debt payment is fixed over the entire term of the debt and our rent revenue is expected to increase over time through rent escalations, that excess of our cash revenues over our debt payments is expected to grow over time.

Now that we've covered revenues and debt costs, lets turn to general and administrative expenses. In terms of improving our operating efficiencies, our general and administrative expenses during the third quarter of 2006 represented only 70 basis points, or 0.7% of our average assets as compared to 110 basis pints or 1.1% in the same period last year.

Turning to the balance sheet. At September 30th, we had nearly 2.6 billion in total assets, including approximately 2.5 billion in gross real estate owned, 65 million in mortgages and other loans receivable and 62 million in cash and cash equivalents.

We had 1.6 billion in debt. Nearly all of it long term, fixed rate, mortgages and notes payable. On a short-term basis, we often use a variable rate secured credit facility before placing permanent financing on our properties. We renewed one of our bank's credit facilities in October and expanded it to $400 million. We intend to use this facility to fund our real estate acquisitions pending the issuance of long term fixed rate debt.

As a result of the expansion of this credit facility, we are allowing our other bank facility to expire this month at the end of its term.

From a capital standpoint, our leverage ratio of total debt to total assets was 63% at September 30, 2006.

Now, let me give you an update on our real estate portfolio. We continue to have a diverse real estate portfolio, which includes 914 properties, diversified geographically throughout 43 states and among the many industries in which our customers operate.

Only 2 states, Wisconsin at 13% and Texas at 11% accounted for 10% or more of the total dollar value of the real estate investment portfolio at September 30th. The 3 largest industries in which our customers operate, as a percentage of our total investment portfolio were general and discount retailers at 33%, restaurants at 21%, and specialty retailers at 10%.

The company's real estate investments also include properties operated as movie theaters, educational facilities, automotive dealers, parts and service facilities, recreational facilities, industrial properties and super markets. Our largest individual tenant at September 30th was Shopko Store's operating company at 29% of our portfolio assets. With no other individual tenants representing greater than 4% of the total investment portfolio.

We continue to adhere to our diligent underwriting standards and portfolio monitoring process. This strategy has continued to result in a strong real estate portfolio of operationally essential real estate properties occupied by stable, long term, tenants.

For those tenants reporting unit level financial information, the weighted average fixed charge coverage ratio, at September 30 ,2006 was 2 to 1. As with prior quarters, substantially all of our properties are occupied and are current in their monthly lease and loan payments.

In the third quarter, we completed over 74.3 million in real estate acquisitions and financings, bringing our year-to-date acquisitions to over 1.1 billion. This added 7 new customers and 34 new properties to our portfolio this quarter. Chris will discuss acquisitions in a more detail a bit later.

Now, I'll turn to our earnings guidance. As we've discussed previously, our policy is not to provide quarterly earnings guidance. Based on our best estimate of the timing and amount of real estate acquisitions expected to be closed during the remainder of this year, we expect FFO per diluted share, for 2006 to be in the range of $0.99 to $1.02 per share, which is based upon completing 1.2 billion to 1.3 billion in gross acquisition volume for 2006.

While the timing of the closing of acquisitions has changed, our market opportunity has not diminished. We remain true to our underwriting and investment returns discipline and complete only those transactions that will contribute to the increased cash flow of this company over time. We have, and will continue to, turn away deals that do not meet our strict underwriting and returns standards. We believe this is the best way to run our business and create long-term shareholder value.

Consistent with our past practice, we will give formal FFO, per share guidance, for 2007 during our fourth quarter conference call.

I'll now turn over the call to Chris who will share with you some of his insights on our real estate portfolio operations and our strategy in the months to come. Chris?

Thanks Cathy. 2006 continues to be a momentous one for Spirit as we're on track to achieve another year of strong FFO per share growth. For the third quarter we realized a 50% increase in FFO per share as compared to the same quarter of 2006. As Cathy noted, our quarterly FFO per share excluded cash gains from asset sales, which totaled another $0.03 or about 8% more growth. As we have often said, our business can be lumpy on the investment side with transactions falling out or moving into later quarters.

This quarter we invested $74.3 million, which represents a very light quarter for us. Today's narrowed FFO per share guidance takes this and our expected fourth quarter investments into account. As we have noted in the past, our investments tend to be weighted towards the end of each quarter so there will be minimal FFO per share impact of 2006 from our fourth quarter investments.

This particular quarter had internally been targeted for a higher number, but 2 deals aggregating about $130 million were terminated by the sellers during the diligence process for reasons beyond our control. We currently anticipate we will invest approximately $200 million in the fourth quarter, which would bring our total investments for 2006 to about $1.3 billion.

Our pipeline of investments under evaluation continues to be robust, over $2 billion, which excludes a number of larger potential transactions. From an economic vantage point, Spirit has maintained some of the best investment spreads in the REIT industry, averaging 2.5%.

At a leverage of about 2 to 1, which is about 66% leverage -- and of course today we're about 63% leverage, at a leverage of about 2 to 1, and averaging -- average going in lease rate of about 8.5%, this equates to a gross cash yield before the cost of running Spirit Finance of about 13%. Add in the escalators, which average about 1.5 to 2% annually, and our total levered return would be in the mid to high teens.

As to the cost of running Spirit, the increased size to scale lowered our general and administrative costs to just 80 basis points for the recent quarter from 110 basis points the year earlier.

Again, at 2 to 1 leverage this 40 basis points efficiency raised the Spirit investor returns by more than 1%. So we have not just sought to maintain the discipline in our credit criteria, but in our potential for total rates of return. The simple idea is that the return on new investments we make should be high enough to make any subsequent equity raise used to fund new investments accretive to our existing shareholders. So far we've been able to achieve this so that each equity rates contributed to better FFO per share, for existing shareholders, while also achieving attractive investment returns to benefit the newer stockholders.

While there was no noticeable capital market activity from Spirit during the third quarter I would draw your attention to our renewed lines of credit. First, we raised our general corporate client from $100 to 150 million. This line gives us flexibility above existing flexibility to fund another 375 million investments should we decide to use it for the short term.

We have worked to be sure that the equity capital that we have raised in the past is immediately deployed and this type of credit facility helps to make this happen.

When we lowered our warehouse line from 400 million to 250 million, which we think will suit our short-term needs. At the same time, we restructured this facility so that it is now housed within Spirit master funding itself. This will eliminate the need to set up new entities and will save us legal and property transfer costs in the future. Spirit master funding broke new real estate financing ground when we formed it and it just got better.

On October 5 we had an Investor Day in Minneapolis, where our senior management team outlined for analysts and stockholders the 4 core competencies it takes to successfully run a company like Spirit. The presentation was webcast with copies of the slide show made available on our website. I thought it would be appropriate to give a much abridged edition of some of the comments related to our central corporate competencies.

The first core competency was investment origination wherein our ability to selectively generate investment opportunities can be realized at rates of return typically unavailable to retail investors. In REIT parlance, this means asset value creation with each investment made. The second core competency we illustrated was credit and investment evaluation capabilities. Here we underscored our bottom up and real estate due diligence approaches. Given our liability structure, which relies on the deep structured finance marketplace, this credit and investment approach is also closely reviewed by our lenders, as well as the rating agencies, monoline insurers and managers of the varying conduits we employ.

As Cathy stated, our average store level coverage stands at about 2 to 1 and we received unit level financials on almost 90% of the investments we make.

At the tenant corporate level, we noted that we employed independent algorithmic based credit model, in addition to our own credit models that estimates annual expected default frequencies. This is meaningful because so many customers have no formal credit rating as a result of limited public or institutional debt.

Using this model, we've also noted that just over 28% of our clients scored credit ratings of investment grade or above, with nearly 52% in the double B range. Just 2% of our investments rated at less than B minus. Keep in mind that these ratings are at the corporate level are expected default frequency experience has shown that net leases we own actually have a lower probability of default due precisely to the operationally essential nature of the assets we own.

The third competency we noted was in the area of lease enforcement and servicing. We have been in this business of enforcing leases for a long time and we view documentation as integral to credit.

I can also state that the importance of strong documentation is not lost in the structured finance marketplace. More than half our leases are structured at unitary leases, which bind multiple assets with a single lease payment. Structures like this create essential alignments of interest with our customers that will stand to Spirit and will benefit Spirit's stockholders over the long term.

With regard to servicing, we have a scalable model that enables portfolio oversight and enhances our ability to access the structured finance marketplace.

The final core competency we illustrated relates to capital market's execution. Spirit finance is in the spread business and our ability to match fund, be inventive and access the most efficient liability sources is integral to our mission of achieving strong investor returns.

With so much attention paid by analyst investors to the asset side of the balance sheet in an effort to estimate net asset values, the liability side is just as critical to return generation. To that end, not only should we be able to originate at lease rates typically unattainable for individual investors, but we should be able to finance those assets using means that are also more efficient.

Finally, our presentation illustrated Spirit's corporate financial ratios relative to a broad select peer group including leverage, fixed charge coverage, dividend payout, FFO growth, debt maturity schedules, industry, tenant and geographic diversity amongst others, making a strong case for Spirit as an investment proposition. We continue to believe this is the case.

With that synopsis of our recent analyst communications I will now turn the call over to Mort.

Thanks Chris. We started this company with a long-term vision to build value by lowering our customer's cost of capital, by improving how they finance their operationally essential real estate assets. While we are mindful that our performance is measured quarterly, we make decision is that will create the most value for our shareholders over the long term.

Just to refresh your memory, we have defined the markets in which we seek new business as follows, there is an existing sale lease back market. This market is large and is fed by the most part by intermediaries. We participate in this market. There are emerging markets. As we've continually pointed out, globalization and increased productivity are compressing margins for our customers. Operating efficiencies are difficult for them to obtain. There's just too much of everything in America.

We believe creating balance sheet efficiency is the next frontier as Spirit is able to step in and help companies unlock real estate value through a sale lease back transaction. We've developed the technology to do this which provides favorable tax treatment and lease flexibility for our clients. The Shopko and Camelback transactions are an example of this emerging market. This market is very large and consists of both investment and non-investment grade companies whose balance sheets we can help make more efficient by executing a sale lease back to their real estate assets, with Spirit, which will create a higher return on their invested capital.

In summary, our platform is in place and we're addressing both existing and emerging markets. The quality of our funds from operations is strong and reoccurring. Our growth in FFO per share is significant and should continue to be strong. The market for our service is extremely large and we have positioned Spirit as a uniquely qualified player to assume a leadership position having size and scale.

Finally, management is strongly aligned with our stockholders, we have never sold any stock, we will continue to pursue meaningful opportunities to create long-term value for our stockholders. We have the platform, the sophisticated financial tools and a motivated team to attack these markets and create long term value.

Even though we cannot always control the pace of investment activity, we have confidence, based on our proven ability to add more than 2.5 billion in assets in 3 short years, that we will get more than our share of existing and emerging marketing opportunities.

Thank you and I will now turn the call back to the operator.

Thank you. [OPERATOR INSTRUCTIONS]

And our first question comes from Chris Lucas with Robert Baird.

Good afternoon everyone.

Good afternoon Chris.

Just a couple of quick questions. On the -- you mentioned the $0.03 in gains. What was the actual gross volume of dispositions for the quarter?

This is Cathy. We sold about 29 million, that was the proceed, 15 properties.

And the type of properties? The business line, whatever, can you give us some color on that?

Yes, those were convenience stores and -- convenience store assets and they were sold in the cap rate of roughly high 7s and we had originated those properties in the low 9s.

So 10-31 type buyers on that?

Exactly.

Chris, this is Chris Volk, and by the way Jeff Fleischer who runs acquisitions, just answered that questions since he's here helping on the question side.

The properties that were sold, we thought about keeping the convenience stores. We didn't -- we weren't sure we could finance them as efficiently as we wanted to, and it just made more sense for us, we thought to redeploy the capital. So that's exactly what we did. And we didn't include it in FFO because it was not sold out of our taxable REIT subsidiary.

There were some gains out of the TRF though, were there not?

Very tiny. Yes.

Okay. And then on -- Chris you've mentioned, maybe it was Cathy, talked about the 2 deals that were seller terminated. Do you have costs in those that hit third quarter G&A or are they going, do they float in the fourth quarter, or?

Chris Volk. No, I mean typically the clients pick up the costs on this stuff, so the answer is no.

Okay. And then my last question, and then I'll hop back out, is -- actually I think that covers it.

Thank you.

Thanks.

[OPERATOR INSTRUCTIONS]

And we'll move now to Ross Nussbaum with Banc of America.

Hi everyone, good afternoon.

Hey Ross.

Couple different questions, first, I missed the first part of your call, but can you just talk a little bit about -- in terms of the, sort of the acquisition pipeline over the next couple quarters here, are there anymore sort of Shopko sized deals that you'd put a reasonable probability on, or is it your usual 10, 20, 30 million kind of deals?

It's hard to comment on the timing of those Ross. We expect to have a normal quarter and end the year at a billion 2, to a billion 3 of total gross acquisitions. We would say that the pipeline of larger transactions is certainly robust and out there, but its very, very difficult to predict when those opportunities actually fund.

And how much? It seems like that -- sort of the big transaction to become much more competitive over the last year or 2. I mean it seems like all the shopping center REITS take a look at it and you've got a couple more optimistic real estate folks to take a look at it. How has that sort of played into your benefit positioning there?

It's -- it hasn't really effected how we look at the credits and it hasn't impacted how we go to the market. Closing Shopko had the impact of certainly ensuring that Spirit is on the list, raised the radar screen in terms of larger transactions so we tend to get more inbound inquiries than we had when we first started the company.

Okay. Next question is the yield curve has obviously remained inverted here, have you expected that to continue and does it cause you to revisit any of your financing strategies going forward?

Ross, this is Chris. The 10 year today is around 460 and the 2-year is about 470. So it's basically flat. First of all, our view on this stuff is that it tends to working our favor from a potential deal origination perspective as much as companies don't really benefit by financing short versus long. So, the ultimate long term financing is sale lease back and we think that those companies are looking to make their balance sheets more efficient. We think that the flat yield works in our favor.

In terms of financing strategies, we tend to hedge virtually everything we have so we're locked in on the assets - on the handful of assets that are on our balance sheet today that have not been term financed but are waiting for a subsequent master funding type financing in the future. The spreads have basically been locked in on those transactions so we try not to make any bets on the moves of interest rates one way or the other but to lock in spreads.

I would say that a 460 rate today, given cap rates that are in the mid 8s tends to be -- tends to have the promise for nice spreads, although you can never tell exactly where spreads are going to be going forward. One of the reasons that we'll -- we think the market is very robust for the type of business that we have and we see, as you do, a number of large transactions, which should tell you that the markets very robust. And frankly my view is that we've just scratched the surface in terms of the deals that can be done. So there's just a lot of transactions out there that can be done, which we're excited about. And as we get into 2007 and are looking to give guidance, we'll take a close look at where we think the spreads are going to be at that point in time and the timing. So a lot of that is just effects exactly where the FFO guidance will be during the first of the year.

Okay, and then finally, with respect to the balance sheet. In terms of equity funding going forward, have you spent any more time looking at joint venture capital as opposed to common equity and how would you comment on that at this point?

Yes, the only think I could say Ross, at this point, is that our goal is to maximize the value of Spirit shares for our shareholders long term and we are constantly evaluating, as any company should do, ways of raising capital that are efficient and there are ways that are more efficient than the REIT marketplace and we will absolutely evaluate that.

Thank you. Thanks.

[OPERATOR INSTRUCTIONS]

And we'll go with David Fick with Stifel Nicolaus.

Hi. Sorry I had to stop, I had to hop off a little bit and I may have missed this. Have you guys considered doing anything more creative with the rights out of your balance sheet, I know you already referenced the value add there, but a [CDO] if you were to expand your loan business for example.

David, this is Chris Volk, the loan business for us -- have you finished the question by the way or?

Yes, that's --

Okay. The loan business for us is exceptionally small and its possible that we can get a little bit more bang for the buck on the handful of loans we do do. It's about $65 million out of our entire balance sheet, so out of 2.6 billion or so, its pretty small. It's possible that we could get more bang for the handful of loans that we do do. But our view historically has been that there are other people that are more competitive in the loan marketplace that have much higher leverage so we limit the amount of lending we do.

The -- as far as the right side of the balance sheet. A lot of your brethren on the analyst front think we're already pretty creative on that side because they look at what we've done and wonder if we're levered too high. Our view is that we're not levered too high. I mean if you compare us on a cost basis, for sure, relative to a broad peer group of companies, 63% is not that high. But we're able to achieve spreads on that 63% which is really critical so that you have good coverages.

We have looked at things like trust preferreds and converts, our view is that we can leverage very efficiently without doing trust preferreds today, although we may consider it at some point in the future and both trust perferreds and converts don't exactly match up the liability structure the away we'd like to match it up on the right side.

So -- and beyond that, I would say that its important to note that Spirit Finance is structured, all of the liability side, pretty carefully so that we have equity strips in every investment that we have. Whether its CMBS funded transaction or whether its master funded transaction so that in the future, should we have enough size sale and diversity to be able to use those equity strips potentially to be able to more efficiently to gather leverage and I should also point out that, in master funding, we have the ability, which is very unique amongst REITS to be able to reliever master funding as its paid down, so - so that's unique in and of itself.

Well, for what's it's worth, we don't think you're over levered.

The implicit cap rate on trust REIT. Can you comment on what you guys thought about that transaction and what it means relative to your valuation?

Well David, the first thing is we can't give a comment on it. I mean obviously it shows that there is a value to a pool of net lease properties. So that's the good side. And I think the same thing could be said for the cap lease, or the capital automotive transaction early this year.

And I --

What do you think the cap rate was?

What do I think the cap rate was? David, I don't know that I know. I've seen estimates ranging from 6.5 to 7. Let's say it's 7, I just don't know. I think it depends on the value -- everybody seems to think it depends on the value that you accord the business -- the flip business, the trust rate is very active then.

But -- one of the things that we did on our Analyst Day was we pointed out that the typical transactions when we sold assets in the 10/31 market ourselves. The average cap rate has been kind of in the 780 range. At 11/50, 11/60, where our stock's been trading, our implied cap rate is 830. So if people are looking at net asset value, the can consider the sales price of assets and I would say that from a logic perspective, since analysts are often willing to accord REIT's value for the assets that they are able to sell in the 10/31 marketplace and give them credit for that, they should likewise give us credits for the assets we hold on our sheet and assume a similar cap - capital value.

Now, beyond that -- I think that -- I think that the equally important thing which is it relates to your first question, which is the levered side, and the liability side. And so a lot of attention gets paid to the right -- the left side of the balance sheet, which is the NAB side, which is where your trust REIT comment goes to. But then an equal amount of attention has to be paid to the right side of the balance sheet which is the liability side and there I would guess that one of the motivations for GE Capital is that they have an ability to leverage the right side of the balance sheet very efficiently and that is a key consideration for us as investors and when we're looking at creating value for shareholders we look at both the left and right side of the sheet.

Well, that gets back to Ross's question. And clearly we are of the view that it would make sense for you all to go to external equalization, going forward, and generate some fee business. Thank you very much.

Thanks. I would say if you came out with a strong buy rather than a hold on our stock, it might be able to have a -- have better results on the REIT marketplace.

I wish I had so much influence. Thank you.

And [Alan Calderon] with [European Investors] is next.

How you doing guys? Last year you announced your dividend increase on December 27th? Is that the kind of timing you could potentially announce something this year?

Typically, our tradition has been to evaluate the dividend increases in the fourth quarter so that would be our expectation.

Okay. And last year you set it -- you set the dividend so you had 100% [fad] payout on the fourth quarter '05, first quarter '06. What kind of fad payout might you guys feel comfortable with -- given you have an 80% payout right now.

I would say, first of all, that I think we were actually, from an FFO payout perspective, I think that we might have been. Yes, we might have been about even with fad at the time. We did that and we're now on an FFO payout ratio, we're at about -- closing in on about 80% so -- for the year. I think that we -- our board will just evaluate it. We have to do is weigh dividend increases with the fact that we have a huge amount of growth potential here and we want to be able to deploy capita.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS]

We'll move to Jonathan Litt with CitiGroup.

Hi this is [Andi Gigowell] with Jon. On the joint venture front, would you consider JVs just generally like an open-ended fund or would you be interested in doing a JV on a specific deal? I'm just trying to get a feel of -- you said that you're considering doing joint ventures, how you're thinking about that type of funding.

First thing being, I said no comment. So what I said was we always evaluate lasting alternatives and that could include joint ventures, but I want to make sure that you don't put down in your research that Spirit is moving into a joint venture format because I don't want to make that declaration today.

That being said, joint ventures come in all shapes and sizes from open ended strategic alliances to one off transactions and I think that there are opportunities -- there are potential opportunities in all these areas.

Okay. And then on the Buffets deal, did Spirit look at that.

The Buffets deal relates to Ryan's Steakhouse.

Yes.

Spirit was aware of that transaction and I can't comment any further on that.

Okay. And then, can you give any color - ju8st kind of splitting out the $2 billion pipeline and what you think could potentially - like high probability versus medium probability? Any more color on the pipeline?

No, but we think we'll close the year with 1.2 to 1.3 billion of total gross acquisitions for 2006.

Okay. And then -- my last question, are you going to be releasing Shopko's financials?

The answer is that the Shopko financials, for so long as they are more than 20% of our balance sheet, will be included in our -- as a disclosure item in our 10Q and our 10K. So you'll see that. So the next - our third quarter Q, which is going to be filed shortly, will have a second quarter Shopko numbers. And the second quarter Shopko numbers ended off the trade July. So - because they have a January fiscal year end.

And when you see those second quarter numbers, you'll see -- there are a couple things I'll tell you about that. First is you'll see a huge amount of interest expense as it relates to basically the expensing of deferred interest financing costs, or deferred financing costs related to the acquisition. So you're still going to see a lot of noise in the numbers from - from a capital standpoint you'll notice that the company has the same or more cash available to it on its asset backed line than what it did before, inclusive of the net proceeds that we advanced Shopko on sale lease back, which were used to pay down the line.

So basically from a liquidity standpoint the company is in the same or better position and when we did the Analysts Day presentation, which you attended, the Shopko folks made a presentation and basically pointed out that they had been up on a same store basis for the year, which is encouraging that they'd been flat the year before, down slightly and so they company is proceeding along its plans and I think that the people that were there that day were extremely impressed with the management team, who is an impressive management team.

Okay. And do you have any update on the rent coverage ratio? Or is that basically the same from when you announced the deal?

It will be roughly the same.

Okay. Thank you.

And we'll move now to Ben Williams with KG Redding.

Hi. Just a real quick question. I'm just sort of curious. It seems as though the net leases spaces obviously have -- has a much higher yield and I was just curious if you guys thought whether or not we might see some yield compression given the trust REIT transaction, maybe what you're seeing in the capital marketplace, just if you could add any color there.

Well. It's always potential. I mean one of the things that Mort and I think about is -- going to the analysis I gave earlier about where the returns are on the business we're making. I - at an average lease rate of 8.5% and then just the cost of debt, which averages about 6% on our balance sheet. You're talking about 13% gross cash yields before the cost of running Spirit. Cost of running Spirit being 70 basis points today, subtract 210 basis points and you're in the high 11s. And that's before the rent escalations kick in and the rent escalations are substantial.

So, our view is -- when we started this company our view was that we wanted to target total equity returns in the neighborhood of 12. We're certainly getting - we're certainly there and our view is that we're getting better rates of return that would be available for mezzanine investments with basically collateral. So if you look at this on the champion of what people can invest in, whether it's real estate or whether its high yield [vet] instruments. We're getting better rates of return than high yield vet instruments and on par with mezzanine and perhaps with collateral. And so the question is whether or not -- there's spread compression is going to be due to people thinking that those returns are excessive and that the returns should be less. And that's something that we're always mindful of.

Okay. Thanks a lot.

And there are no further questions. So that concludes today's conference call. On behalf of Spirit Finance Corporation I'd like to thank you for your participation, have a great day.