Spirit Realty Capital Inc (SRC) 2012 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Spirit Realty Capital's fourth-quarter and full-year 2012 results conference call. At this time, all lines have been placed on listen-only mode. After the speakers remarks there will be a question-and-answer period. (Operator instructions).

This conference call is being recorded and a replay of the call will be available beginning at 6 PM Eastern time today for one week. The dial-in details for the replay can be found in today's press release. Additionally, there will be an audio webcast available on Spirit Realty's website at www.spiritrealty.com, an archive of which will be available for 30 days.

It is now my pleasure to turn the call over to Michael Bender, Senior Vice President and Chief Financial Officer of Spirit Realty.

Thank you, Regina, and good afternoon, everyone. Thank you for joining us today. Here with me to discuss our fourth-quarter and full-year 2012 performance are Tom Nolan, Chairman and Chief Executive Officer; and Pete Mavoides, President and Chief Operating Officer. Tom will review our fourth-quarter and full-year performance and provide you with our views going into the new year. I will provide you with more specifics of our financials and Pete will then walk you through our portfolio and recent activity. Tom will wrap up our prepared remarks, after which I will be happy to take your questions.

Before we begin, please note that during this conference call, we will make certain statements that may be considered to be forward-looking statements under federal securities laws. The Company's actual future results may differ significantly from the matters discussed in these forward-looking statements and we may not release revisions to those forward-looking statements to reflect changes after the statements were made.

I would now like to turn the call over to Tom Nolan, Spirit Realty's Chairman and Chief Executive Officer.

Thank you very much, Mike, and thank you everyone who has joined us today.

We are very pleased with our results for our fourth quarter, which was our first full quarter as a public company, and for the full year. This is an exciting time in the triple net industry and we are pleased to have gone public when we did. We believe a number of positive trends and fundamental changes are benefiting the triple net industry overall.

Consolidation is well underway, as you know, not just for Spirit Realty, but for others as well. In addition, we are seeing a significant increase in institutional interest from the triple companies as a class. I believe institutional investors increasingly recognize the attractive risk-reward profile of the industry and the opportunities before us.

Following the close of the Cole II transaction, Spirit Realty will be the second-largest publicly traded triple net lease company, and we intend not only to participate in the positive trends affecting our industry, but also to be a leader in the development of the industry as an attractive investment class for both institutional and retail investors.

The recent focus on Spirit has been about the Cole II merger, and our call today will certainly touch on that. That said, we want to focus most of today's call on our fourth-quarter and full-year performance. I hope you will find that, as we have discussed in the past, our coal portfolio has very predictable cash flows that result in financial performance that is equally predictable and reliable.

Before we begin discussing these results, I would like to briefly update you on our proposed merger with Cole Credit Property Trust II, or simply Cole II. To the extent that we are able, since it is still pending shareholder and regulatory approval, I do hope you will bear with us and recognize that we are limited in responding to certain inquiries concerning the merger until such time as the appropriate regulatory filings have been made.

On January 22, 2013, we announced a definitive agreement to merge with Cole II to create the second-largest publicly-traded triple-net-lease REIT in the United States with a pro forma enterprise value of approximately $7.1 billion. The proposed transaction with Cole II supports and significantly accelerates our long-term business objectives and better positions Spirit Realty to deliver long-term value to shareholders by enhancing our ability to generate stable and predictable cash flows.

We and the Cole organization are in the process of preparing a registration statement and joint proxy statement to be filed with the Securities and Exchange Commission within the next few weeks. We anticipate scheduling the date for a shareholder meeting and vote shortly thereafter. We remain confident we will close the transaction by the end of the third quarter of this year.

In the meantime, we remain focused on our existing portfolio and on executing the operating and investment strategies which were the foundation of the investment thesis we articulated at the time of the IPO.

The fourth quarter was a productive quarter for acquisitions. We invested more than $77 million in 33 real estate properties. This activity was comprised of four new investments with both new and existing tenants. Pete will provide some additional color on these acquisitions in a moment.

We also continued to generate steady and predictable revenue growth through these acquisitions and contractual rent increases, resulting in solid funds from operations. We are well-positioned to advance our strategic objectives and capitalize on opportunities the net lease real estate market offers, which will in turn create value for our shareholders.

Now I would like to turn the call back over to Mike Bender, our Chief Financial Officer, who will take you through our financial statements. Mike?

Thank you, Tom. In the fourth quarter ended December 31, 2012, we generated total revenues of $73 million, an increase of 5.4% compared to $69 million in the fourth quarter of 2011. Total revenues for the full year ended December 31, 2012 improved 3.7% to $283 million compared to $273 million in 2011.

The revenue increase is attributable to a higher than unanticipated acquisition level, better than budgeted credit performance in the contractual rent escalations that are embedded in the vast majority of our leases.

G&A expenses in the fourth quarter of 2012 were $5.9 million, slightly higher than the $5.6 million spent in the fourth quarter of 2011. Compensation increases related to higher headcounts and other administrative increases associated with the growing portfolio and being a public company were partially offset by term loan and IPO-related costs which were present in the fourth quarter of 2011.

G&A expenses incurred for the full year 2012 were $37 million compared to $28 million spent in 2011. This increase was primarily attributable to $13 million in charges associated with completing our IPO and extinguishing the term note indebtedness and $6 million in stock-based compensation (technical difficulty) granted in 2012. During the same period in 2011, the Company recognized $7 million in consulting fees in connection with the term note and its conversion agreement.

Property costs were approximately $2 million in the fourth quarter of 2012 and more than double the fourth quarter of a year ago. This was primarily due to an increase in accrued property tax associated with one delinquent tenant for which we are pursuing a recovery. For the same reasons, full-year 2012 property costs were slightly higher than a year ago.

Note that our leases are generally triple net and require tenants to pay all property operating expenses, such as real estate taxes, insurance premiums and repair and maintenance costs related to property unless a property becomes vacant. Interest expense reductions in the fourth quarter and the full year 2012 when compared to similar periods in 2011 are primarily due to the extinguishment of the term loan with partial offsets associated with net new borrowings on our new investments during the year.

Modest increases in depreciation and amortization reflect the expansion of the portfolio. As noted previously, impairment charges are triggered primarily when we make a decision to sell a vacant property and will, therefore, be sporadic; but these non-cash impairment charges do not impact the cash flow generated by the portfolio.

So, net loss attributable to common stockholders for the fourth quarter of 2012 was $5 million, or $0.06 a share. That compares to net loss attributable to common shareholders for the fourth quarter of 2011 of $18 million or $0.71 a share. For the full year ended December 31, 2012 net loss attributable to common shareholders was $78 million or $1.85 a share compared to $64 million or $2.47 a share in the previous year.

As we noted in the last quarter, the full-year results included the following items associated with the IPO and the extinguished term note -- first, a $33 million loss that we recognized on the extinguishment of the term loan; secondly, a $9 million non-cash charge related to derivative instruments on the Company's term note; thirdly, a $5 million charge related to G&A expense for IPO incentive awards; and, finally, (technical difficulty) $5 million in third-party expenses incurred to secured lenders' consent to the IPO.

Absent the charges associated with the IPO and the term note extinguishment, the net loss attributable to common shareholders for the year ended December 31, 2012 was $25 million or $0.62 a share.

Please note that per-share amounts in historic periods are based predominantly on the lower number of shares outstanding prior to the IPO since the IPO-related shares have only been outstanding since the day their offering was completed in late September 2012.

So, funds from operations, or FFO, for the fourth quarter were $31 million or $0.37 per share compared to $18 million for the fourth quarter of 2011. For the year ended December 31, 2012, FFO was $53 million or $1.09 a share compared to $70 million for the same period in 2011.

Adjusted funds from operations, or AFFO, for the quarter -- for the fourth quarter of 2012 totaled $35 million or $0.42 a share compared to $25 million for the fourth quarter of 2011. For the full year ended 2012, AFFO was $118 million or $2.15 per share compared to $99 million for 2011.

Ongoing adjustments to convert FFO to AFFO primarily consist of non-cash revenue, non-cash interest expense and non-cash equity compensation. So we modestly outpaced our guidance for the fourth quarter of 2012. Related to guidance, had we not entered into a definitive agreement for a proposed merger with Cole II, we would be on track to achieve our 2013 estimate.

However, because of the significant impact of the proposed merger on our Company, the uncertainty as to the exact timing of the closing date, as well as the related costs associated with the merger, we are withdrawing our 2013 guidance estimates at this time.

With that, I would now like to turn the call over to Peter Mavoides, our President and Chief Operating Officer. Pete?

Thanks, Mike. As mentioned earlier, during the fourth quarter Spirit Realty invested $77 million in 33 new properties. This compared to $30 million in the fourth quarter of 2011. These properties were acquired subject to long-term triple-net leases with creditworthy tenants. These leases had a weighted-average initial lease term of nearly 17 years and they were acquired with a weighted-average initial cap rate of 8.12%.

New investments for the full year total $163.6 million, again, significantly up from new investments written the prior year of $38.1 million. This represents eight transactions and 91 individual properties. The weighted average initial lease term and initial cap rate were 17 years and 8.36%, respectively.

(technical difficulty) continued down pressure on cap rates throughout the year but has also seen a corresponding group in financing costs and have been able to lock in very attractive spreads to our cost of capital on these transactions. Subsequent to year end, we closed on a five-year nonrecourse debt financing for an acquisition closed early in the fourth quarter at a coupon rate of 3.9%, effectively locking in a very attractive spread to our initial cap rate.

The portfolio now consists of 1207 owned or financed properties that are net leased with a weighted average lease term of 11 years to 164 tenants operating in 47 states and across -- diversified across 18 different industries. Only one state, Wisconsin, accounted for more than 10% of the total value of the real estate portfolio based on annual rent.

Spirit's three largest property types at year end were general and discount retail, 29%; restaurants, 18%; and specialty retail, 9%. At the end of the fourth quarter 2012, the portfolio was 98.8% occupied, based upon the number of properties owned. We currently have 14 properties that are available either for lease or sale. This represents an 11-basis-point increase in occupancy rate as compared to the same period a year ago. We view 98% occupancy as essentially full, but we continue to focus on re-leasing or selling (technical difficulty).

We have 11 properties representing annual rent of approximately $2.1 million with leases set to expire during 2013. We anticipate that the majority of these tenants will exercise their renewal option in the leases and that our occupancy will remain stable throughout the year.

During the quarter, we sold 16 properties for net sales proceeds of $26 million. For the year, we sold 41 properties for $46 million in total net sale proceeds. These sales were equally split between the sale of vacant properties and the sale of leased properties that were sold because the property or tenant no longer met our long-term investment objectives.

As we have discussed in the past, an important indicator of risk in the portfolio is the unit-level rent coverage, which is a measure of how essential our properties are to our tenants' ability to conduct their operations and generate profits. As of December 31, 2012, the average unit-level rent coverage on TTN basis for our top 10 tenants and the portfolio as a whole was 2.67 and 2.69 times, respectively. This compares favorably to 2.44 and 2.49 times for the same period as last year. This represents an overall improvement in the credit profile of the portfolio and is an encouraging trend.

With that, I'll turn it back to Tom for some concluding remarks and the Q&A.

Thank you, Peter. As I mentioned at the start of this call, these are active and exciting times in the triple-net industry and we're pleased to be playing a leadership role in this environment. We are focused on completing a proposed merger with Cole II and continuing to advance our strategic objectives of improving diversity, reducing leverage, increasing financial flexibility and growing our predictable revenue base. In fact, all of our efforts here at Spirit, from the routine day-to-day portfolio management activities to the Cole II merger are pursued with advancing these objectives in mind.

In terms of Cole II, unfortunately we were not able to talk in much detail about the transaction, and as a result I will ask you to focus your questions on our results. Once our definitive proxy is filed, we'll be able to talk with you in greater detail about the merger.

Before I open the call up to questions, I would like to thank the team here at Spirit Realty for their hard work and dedication during this very busy and exciting time in our Company's growth. I look forward (technical difficulty) with this talented team to grow our business further and create value for our shareholders.

At this point, we would be happy to take your questions regarding our earnings results. Operator, if you please, with the first question.

(Operator instructions) Rich Moore, RBC Capital Markets.

Good afternoon, guys. When you think about acquisitions, they were strong in the fourth quarter, probably stronger than I thought they would be. What do you think, Cole aside, of course, you are looking at as you look out at 2013 in terms of what is going on, on the acquisition front?

I, as you, I guess, may recall from the prior call, we've elected not to provide acquisition guidance going forward. I'm just a believer in transacting when the risk-adjusted opportunities present themselves, and I don't like having objectives that may cause unintended results.

So we are not offering, in the past, and haven't -- we won't be providing forecasts for our acquisitions.

Having said that, and as I think Pete already addressed this, we have seen certainly cap rate compression. It appears to continue to be somewhat asymmetric, where it's a little bit more in the investment-grade and a little bit less than some of the sub-investment grade. And clearly, the capital markets have provided a boost by declining interest rates, again, our five-year mortgage at a 3.9% is a substantial improvement over what would have would have got in a comparable period a year ago.

So I think our impression is that the acquisition pipeline and our pipeline remains attractive and the risk-adjusted opportunities remain available to us and we have got a backlog of investments that we are looking at. And I think we can expect that we're going to continue to move forward as we have over the last quarter unless we see changes in that risk profile.

Okay, fair enough, Tom, thank you. And then the first quarter of the year is kind of a bankruptcy season, if you will, for certainly retailers. Are you seeing anything that troubles you from the existing portfolio front in terms of tenants that might not make it or looking to close stores?

No. I think that -- which is the easy answer, no. And I agree with you, historically, that first quarter has been the season for retailers. But no, obviously we have a lot of tenants and we have had bankruptcies in the past, and I'm certain that there will be issues in the portfolio, which is really the ordinary course of business for us.

But as Pete disclosed, our coverage ratios continued to strengthen and we have really had no feedback, I would say, across the board from tenancy suggesting that the fourth quarter was anything other than either what they expected or modestly better.

So I think we are pleased. And as you can appreciate from a budgeting standpoint, we put a certain credit and a loss component into our budgeting, and one of the reasons we beat in the fourth quarter slightly -- again, it was slightly -- modestly, was the fact that that budgeted amount of exposure did not materialize.

Okay, good, thank you. And if I could, a couple questions for Michael. The line of credit -- anything on that at the end of the quarter?

No balance outstanding of that at the end of 2012.

Okay. And then cash actually went higher, which sort of surprised me. Should I (technical difficulty) from the asset sales?

You got it. It's a combination of asset sales and just the timing of the acquisition.

Okay, and then G&A, interestingly, was where you guys beat us. It was pretty substantially, and that's probably just because we blew it. But I'm curious if there's anything you can talk about. You are not giving guidance per se, but how you are thinking about G&A for comparing first quarter, say, compared to fourth quarter, that kind of thing.

Yes. G&A for fourth-quarter, and I understand it's difficult to look at G&A because we do -- have had as a result of the transactions, you have noise going through that line item a lot. But G&A was a little bit off of run rate for Q4 but that's probably a pretty clean number there. Caveat it with the fact that we are still spooling up a little bit on the public company cost side, and we are getting ready to do more acquisition and we are getting prepared for the merger.

Okay, good. And last thing, accounts payable -- that was kind of huge. Is there anything special in there?

No. That's, again, timing. And to your point, Rich, that's also -- because of that timing is also why that cash was a little high.

Okay, got you, thank you, guys.

Rob Stevenson, Macquarie.

Sorry if you covered this; I had to jump off for a second. But did you talk about the ShopKo store renovation plan and where they are and how that is going?

No. Happy to touch on it and just to, I guess, remind everybody that when we actually file our K, what we will have in the K will be the third quarter ShopKo financial statements because, again, they are a quarter in arrears because they have a quarter end and month end a month later than we do. So their year end is the traditional kind of retailer end of January year end. So we are going to be disclosing in the K the third quarter, and of course the fourth quarter is the one that people will be most interested in and we will have that in a subsequent filing.

As to what people will see when they see the K, I think that they will see is there's not much that's unexpected. In the third quarter, the renovations and retrofitting and merger-related activities were ongoing. You'll see a lot of noise, I think, in there, financials relating to one-time costs associated with that. But the actual performance as will be disclosed, I think, is going to be reasonably consistent with what they expected. And, again, the fourth quarter will be a more significant in a quarter, but I think as we have said in the past, their performance is pretty consistent and I think that's what people will see.

And specifically touching on the hometown conversions, Rob, and looking at the unit-level performance of our stores, we are happy to say that their investment thesis in acquiring the Pamida chain and converting to hometown, ShopKo hometown, that investment thesis is bearing out, and we're seeing that come through the numbers.

Okay. And what about 84 Lumber? You have had a continued uptick in the housing market there. Are you seeing any material improvement in their operating health?

You know, they have done a tremendous job, Rob, and that has flown through both the coverage on the master lease as well as their corporate performance, and they are doing very well.

Okay, and lastly, as you guys look forward and the potential of shares trading upon close of the Cole deal or some of the lockups expiring, etc., have you guys thought more seriously about accelerating disposition to raise proceeds?

Well, I think as we mentioned in the original conference call that disclosed the merger, the Company does intend to and has as part of the credit facility that they established at the time of the merger, we have financial flexibility already and funds set aside. In the event that there was more activity occurring at the time of the merger close than perhaps we anticipated, I think that will be something that will be facts and circumstances driven.

But this merger does provide this Company significantly improved financial health, and I think that that flexibility will allow us, and we are confident that when, again, this merger comes together and those shares will begin to trade that we will be in a position to manage that as effectively as we can. Our objective, and we went out and met with investors and made presentations after the announcement of the merger. We are confident and we are determined to create a long-term, stable investor base, both institutional and retail in this Company. And we are confident that the feedback that we are getting is good and that all of this will ultimately work its way through the system over the next few months.

Okay. And then just lastly, have you guys put an ATM program in place?

We have not yet, no.

Okay, thanks, guys.

Alexander Goldfarb, Sandler O'Neill.

I guess the first question is a two-part question on acquisitions, but I will take the smaller one first. I understand that the cash balance was inflated a little by just timing of dispositions. But how much more do you think that you guys can buy within your current balance sheet?

I would say we did $77 million in the fourth quarter, and I would say there's $100 million to $200 million in capacity on our balance sheet now looking into next year.

Obviously, we have the cash, as you saw, that's on our balance sheet, and we have a line of credit which is totally undrawn. So I think we are confident that we have the capacity to execute the pipeline and the type of transactions that we're looking at.

Okay. And then the second question is, and we have seen it in other sectors, like in student housing. We have seen the same thing that you guys have in Cole, where there's an opportunity for publics to buy private portfolios. Presumably, Cole is not the only one out there. There are probably others. To the extent other large portfolios come along, are you in some way in a position where you cannot be bidding on them until you close Cole, or you can be in active pursuit of other portfolios even before you close on the Cole deal?

Well, I think, realistically, once you file (technical difficulty) financials and sets forth the merger -- because, again, this is a merger, not an acquisition; it's a merger. I think from a practical standpoint, we can go forward on the general blocking and tackling and intend to, in terms of acquisitions. But I think it probably isn't realistic to assume that there would be a major material transaction in dependency of getting the shareholder votes and getting the closing.

Okay, but would you -- if we just stepped back, would you say, though, it's a fair assessment that we are likely to see over the next few years more of these large-scale private portfolios trade? Or, would you think it's more a fund or an institution that owns a set investment of properties it's looking to liquidate?

It's hard to speculate. I do feel -- and I felt for a while, and I said this at the time that we went on the IPO roadshow that there was a lot of these asset pools out there, whether they were in the private REIT structure or they're in the institutional hands, and then, eventually, I believed, again, particularly because I just think the risk/return characteristics are so positive relative to other investment alternatives that ultimately they would be unlocked in some fashion.

I didn't know when, didn't know which one and certainly, at the time that we did the IPO, we didn't expect that we would have been announcing the Cole merger so quickly. We absolutely didn't expect that. But, having said that, the opportunity presented itself and the Company was in position to be able to capitalize on it, and I think that's really -- I would like to think that's our job going forward, which is wherever these opportunities are, if they are attractive and if they meet our ultimate long-term shareholder value creation objectives, it's going to be something we'll take a look at. But it's hard to speculate exactly where they will come from.

Okay. Listen, it's a great transaction, and I appreciate it. Thanks.

(Operator instructions) Joshua Barber, Stifel Nicolaus.

Most of my questions have been asked and answered, just one quick one. Can you talk about the dispositions -- I saw that you guys are sold some restaurants during the quarter as well while buying a number of other restaurants. Can you just talk about what you are seeing there and what you would like to do with your portfolio on the disposition side for the next nine months -- where you seeing some opportunities, what the level is, what cap rates you are selling at today and what the trade-off is in what you are buying and how that is upgrading the portfolio?

Certainly, Josh, I'll take that one. We sold properties. As I said, about half of what we sold were vacant assets that we disposed of, and some of those were restaurant properties. The other half was leased properties where we were selling because they no longer fit our investment objectives, either from a credit risk perspective or a real estate fundamental perspective.

I would anticipate that portfolio pruning to continue throughout the year. We see very aggressive appetites on one-off property sales, and those transactions, depending on the risk characteristics of the investment, are trading in the 7s on up.

In terms of sizing that, I don't want know that I would want to put a number on there. We actively manage the portfolio and look to recycle capital accretively to the extent that we can.

Okay, and just a clarification on the G&A. I know somebody asked about that before. But if I back out the charges from the third quarter, it looks like G&A was running just a shade under $8 million, and it dropped $2 million quarter over quarter. What is the good non-Cole run rate to be using for the first two to three quarters of this year?

I think, Josh, that if you look at fourth quarter, that's probably a good place to start. And if we weren't increasing a little bit to fill some holes here, and then in anticipation of Cole, I think that would be a good baseline.

Okay, but given that there is Cole, there's going to be some more that's going to be there, just sprinkled into the first half of the year?

Right, yes, exactly.

Okay, thanks very much, guys.

As there are no further questions in the queue, I will go ahead and turn the call back over to management for any closing remarks they would like to make.

I think our only closing remark is to thank everyone for their interest in Spirit Realty and for listening to our call today, and we look forward to talking with you again in the future. Thank you very much.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.