Spirit Realty Capital Inc (SRC) 2013 Q2 法說會逐字稿

Good afternoon ladies gentlemen and welcome to the Spirit Realty Capital's second-quarter 2013 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 6.00 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 Capital'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 Capital. Mr. Bender, please proceed.

Thank you, Catherine, and good afternoon, everyone. Thank you for joining us today.

The first half of this year was a very productive and exciting time for Spirit Realty Capital and we are pleased with the progress we've made. Tom Nolan, our Chairman and Chief Executive Officer, and Pete Mavoides, our President and Chief Operating Officer, are with me today to talk about our premerger results from June 30, 2013 and discuss the post merger Spirit Realty Capital results now that we have completed our transaction with Cole Credit Property Trust II, or Cole II.

Tom will start with some introductory comments, I will then provide color on our results for the first half of the year as a pre-merge Company, and some pro forma highlights of the newly combined Company. Pete will then discuss our portfolio and investment program, followed by Tom providing some summary remarks prior to the Q&A portion of the call.

Before I turn things over to Tom, I'll note that during this conference call, we will make certain statements that may be considered to be forward-looking statements under Federal Securities law. These statements are based on Management's current expectation, and the Company's actual future results may differ significantly. In our periodic reports on file with the SEC, we set forth certain factors that could cause our future results to vary from Management's forward-looking statements. All information presented on this call is as of today, August 8, 2013, and Spirit does not intend and undertakes no duty to update forward-looking statements unless required by law.

In addition, reconciliations of non-GAAP financial measures presented on this call such as FFO and AFFO can be found in the Company's earnings release from earlier today, which is available in the investor relations section of the website. With that, here's Tom.

Thank you Mike, and thank you everyone that has joined us today. We would like to extend a special welcome to those of you who may be listening to our results call for the first time, including shareholders of the former Cole II.

We thank you for your interest in Spirit Realty Capital and look forward to a successful and long-term relationship with you. I'm very pleased with our results and with the performance of the Spirit team. We have a sizable to do list this year coming out of the IPO, and I'm happy to report that we've already accomplished a number of the important items on that list.

We continue to deliver a attractive and predictable portfolio performance to shareholders by pursuing a disciplined ownership strategy focused on single-tenant, operationally essential real estate within the triple net leased sector. We also successfully completed the merger with Cole II. Taken together, we've made significant progress in the objectives we articulated at the time of our IPO less than one year ago.

As I said at the time of the merger closing three weeks ago, we remain intensely focused on continuing to improve our portfolio diversity and scale our business to deliver a steady and attractive total return to shareholders. We think our increased size and scale will enable us to continue to carve out a leadership position, which will allow us to pursue a wide range of future opportunities, including both direct portfolio acquisitions and strategic transactions. This is an exciting time to be in such a dynamic and growing sector of the real estate industry.

We recognize that this is somewhat of an unusual reporting quarter and that our financial results show only the predecessor Spirit, and yet clearly the Company materially changed only a couple weeks after the quarter end. In recognition of that, what we have attempted to do in our release and what Michael further elaborated on, is to build a bridge to the new Spirit through the inclusion of certain pro forma information on the combined entity. As to the combination itself, I'm happy to report that the integration of the two Companies and portfolios has progressed as planned and is continuing smoothly.

As I noted we have provided you pro forma results for the combined Company for 2012 and for the first six months ended June 30, 2013. That should give you a good sense of the combined Company's financial position and operating results. One word of caution is that these are pro formas and not a forecast, and as such will not be a precise indicator of the actual financial performance or operating results of the combined Company going forward. As noted in our release, we do intend to provide guidance for the new Company by the time we issue our third-quarter report.

Turning to the acquisition market for a moment. There has been a lot of attention on the recent rise in interest rates, but I would note that they remain low by historical standards. And low interest rates and a steady, although somewhat slow economic recovery, have led to an active investment market. While competition in the market remains strong, we continue to deploy our capital in a thoughtful and disciplined fashion, acquiring properties at attractive risk-adjusted returns, and selectively divesting other properties where it makes sense. We've done this with an eye towards ensuring that we continue to optimize our portfolio so that it generates attractive and stable returns.

The recent sale of two large non-core multitenant properties acquired in the Cole II merger also demonstrates our commitment to a focused investment strategy. These are excellent properties and they were performing well. But they do not fit with our core expertise of investing in operationally essential single-tenant net lease properties. As such we are pleased to have sold them at an attractive cap rate and we are looking forward to reinvesting the proceeds in properties that are consistent with our strategy.

I'll close by expressing once again my appreciation for the exemplary performance of the entire Spirit team. We are all excited about our position in this dynamic sector, and look forward to continuing to execute the strategic plan that we have laid out.

With that, I'll ask Mike to walk you through our premerger financial results for the second quarter and six months ended June 30, 2013, and provide highlights of the pro forma combined Company. Mike?

Thank you, Tom.

I'd like to start by walking through the stock conversion mechanics of our merger as there have been some discrepancies on some of the websites that publish public company data. Under the terms of the merger agreement, premerger Spirit stockholders received 1.9048 newly issued shares of the combined Company in exchange for each share of Spirit stock they owned before the merger. Additionally, each share of Cole II common stock issued and outstanding remains outstanding as common stock of the combined Company.

Applying the exchange ratio to the number of the premerger Spirit shares outstanding, approximately 85 million shares, and adding that figure to the total shares of Cole II common stock outstanding, approximately 208.5 million, yields a total shares outstanding number for post merger Spirit Realty Capital of approximately 370.4 million shares. The exchange ratio also should be applied to premerger Spirit share data in order to enable an apples to apples trend comparison. We are working with financial data sources to get the information correct.

Secondly, let me explain the dividend briefly. Both the predecessor Cole II and Spirit shareholders have received dividends through July 16, the day before the merger closed. Now it is the responsibility of Spirit's Board of Directors to review the performance of the Company during the year and decide when and how much to pay dividends. But having said that, let's assume for illustration purposes that post merger Spirit will pay dividends comparable to what it distributed before the merger. Based on this, the annual dividend would equate to $0.65625 per share or $0.164 per share per quarter. For reference that is a little over $0.03 higher per year than the rate previously paid by the former Cole II to its shareholders.

Spirit has paid dividends quarterly, approximately 15 days after the close of the quarter. So for example, the third-quarter dividend will likely be paid on or about October 15. Keep in mind that because both predecessor shareholder groups have already been paid a pro rata dividend for the first 15 days of the quarter, the third quarter, the dividend for Q3 will be roughly 2.5 months rather than a full quarter.

Lastly, let me explain the SEC filings and related financial statements you will see the next few days. To start with, the earnings release sent out before this call has two major components. The first section is our discussion disclosure of the results of operations of premerger Spirit for the first three months -- or for the three months and for the first six months ended June 30, 2013. As you will see when we discuss these in a minute, the performance of premerger Spirit for the second quarter was solid and better than expected.

As Tom mentioned, the second section of the release provides you with the SEC defined pro forma information that shows what the post merger Spirit might have looked like during 2012 and the first half of 2013. Note the presentation also includes adjustments for the sale of the two large multitenant properties we acquired in the Cole merger and sold right after the merger closed.

Full financials for premerger Spirit and the prepared pro forma information will be filed with the SEC in the next few days in a Form 8-K/A. In addition, we will be filing a second-quarter 10-Q for the former Cole II, which presents just their premerger operation. Beginning in the third quarter, the Form 10-Q will include the historical results of Spirit as the predecessor Company through July 16, 2013, and the consolidated results of the combined Company going forward.

Having covered that, let's move onto our results for premerger Spirit second quarter. In the second quarter ended June 30, 2013, premerger Spirit Realty Capital generated total revenues of $72.8 million, an increase of 7.2%, as compared to $68 million in the second quarter of 2012. The growth in total revenues is primarily driven by rental income, which was higher by $4.2 million, or 6.3%. Interest income and other was $1.1 million higher than in the second quarter of last year, due to lease termination fees recognized during the second quarter of 2013. Lease termination fees periodically result from negotiations with tenants, which provide higher revenue in the period in which the fee is received, but may result in lower revenues in future periods.

General and administrative expenses in the second quarter of 2013 increased to approximately $9.1 million, compared to $7 million in the second quarter of 2012. The increase was primarily attributable to $1.9 million non-cash charge associated with stock compensation awards in the second quarter of 2013. Meanwhile, property cost decreased significantly to approximately $0.5 million in the second quarter of 2013, from approximately $1 million in the second quarter of 2012, as a result of our improved occupancy rate. In addition, acquisition cost decreased significantly and interest expenses were reduced compared to a year ago.

Depreciation and amortization increased in the second quarter of 2013 as a result of the expansion of the portfolio, and impairment charges totaled approximately $1.6 million in the second quarter of 2013. So net loss attributable to common stockholders for the second quarter of 2013 was $11.7 million, or $0.14 per share. That is based on 83.7 million weighted average shares of common stock outstanding. Compared to net loss attributable to common shareholders of $8.8 million, or $0.34 a share for the second quarter last year. And that would've been based on 25.9 million weighted average shares of common stock outstanding.

Funds from operations, or FFO, for the second quarter of 2013 were $21.4 million, or $0.25 a share. FFO for the second quarter of 2012 was $19.4 million, or $0.49 per share. Adjusted funds from operations, or AFFO, for the second quarter of 2013 totaled $37.9 million, or $0.45 per share, compared to $27 million or $0.60 per share for the second quarter of 2012.

Now let's briefly review the six-month results for the premerger Spirit. For the six months, total revenues ended -- for the period ended June 30, 2013 were $144.2 million, or 6%, or $8.2 million higher than total revenues for the first six months a year ago. The growth in total revenues was principally the result of an increase in rental income. The favorable impact of these termination fees earned in the first six months of 2013 was offset by reductions in interest income on loans receivable due to schedule and early payoffs.

For the first six months of 2013 FFO was $43.3 million, or $0.51 a share. For the first six months of 2013 AFFO was $74.5 million, or $0.89 per share. These results compare to an FFO of $43.4 million or $1.01 per share, and AFFO of $54.6 million, or $1.21 per share for the first six months of 2012. Ongoing adjustments to convert FFO to AFFO primarily consist of non-cash interest expense, non-cash revenues, and non-cash compensation.

The results for the second quarter and first six months in 2013 included $11.5 million, and $21.6 million respectively of merger-related costs. The second-quarter and first six months results in 2012 were impacted by charges of $2.8 million and $4.5 million respectively, associated with last year's IPO and the associated term-loan extinguishment.

As you can see, after adjusting for merger-related costs incurred during the period, premerger Spirit's second-quarter results would have out performed the guidance we provided last fall. As Tom mentioned, we are currently finalizing the merger related purchase accounting. We intend to provide guidance for post merger Spirit by the time we report results for the period ending September 30, which would be the first quarter of the combined Company. And we are not re-adopting our prior guidance at this time.

For now we are providing pro forma results for 2012 in the six months ended June 30, 2013, representing the financial position and operating results for the combined Company. So here are some pro forma metrics regarding the combined Company as of July 17, 2013, the date we completed the merger. As of that date, the combined Company's real estate investments totaled approximately $6.5 billion. Our debt was approximately $3.6 billion. Market capitalization was approximately $3.4 billion based on pro forma shares outstanding outlined earlier. And our occupancy rate was 99%.

As of July 17, 2013 the combined Company's lease portfolio generated approximately $546 million in annualized rent from 383 tenants across 48 states. As Tom noted, our market sector remains attractive and we look forward to continuing our strategy of investing in operationally essential single-tenant net leased real estate to deliver attractive shareholder returns.

I'll now ask Pete to review our operations. Pete?

Thanks, Mike.

As illustrated by Tom and Mike's comments, our portfolio is in great shape and performing well. That said, we constantly seek to optimize the portfolio by maximizing occupancy, recycling capital efficiently, and making accretive acquisitions. All with the goal of delivering stable and predictable cash flows that support our dividend.

Our gross investment as of June 30, 2013 totaled $3.7 billion, substantially all of which was invested in 1,234 properties that were approximately 98% occupied. As of June 30, we had only 19 properties available for sale or lease. We view 98% occupancy as essentially full, but we continue to focus on leasing or selling properties not currently occupied.

Our properties are generally leased under long-term triple net leases, with a weighted average remaining lease term of approximately 11 years. As of June 30, 66% of our rent was contributed from properties under master leases, and 96% of all leases provided for contractual rent increases. As of that date we had nine properties with expiring annual rents of approximately $1.1 million for the remainder of 2013. We anticipate that the majority of these tenants will exercise their renewal options and that our occupancy will remain stable throughout the balance of the year.

With respect to dispositions, property sales during the quarter were de minimus. However on July 19, we completed the sale of two non-core multitenant properties that we acquired in the Cole II merger in a transaction valued at approximately $259 million. As Tom mentioned, this transaction is consistent with our operationally essential single-tenant property focus. We expect to continue to selectively divest in non-core assets.

During the second quarter 2013 we invested $38.2 million, and added nine real estate properties with tenants in place. These properties were leased with a weighted average initial lease rate of 8.14%, and a weighted average initial lease term of over 17 years. These investments were made to three tenants, one existing and two new, that operate in the casual dining, specialty retail, and automotive service industries.

Investments in real estate during the first six months of 2013 were approximately $95 million and comprised 40 new properties. Year-to-date acquisitions had an average annual rental rate of 8.25%, average initial lease term of 17.5 years, and contractual average annual rent escalations of 1.5%. The first half of this year we intentionally maintained a low profile in terms of acquisitions as we worked through the Cole II merger. We expect to ramp this activity up in the second half of the year and we have the staff resources to be able to do so.

We have significant capacity to fund new investments and redeploy capital generated through the sale of non-core properties. To that end we currently have $115 million in transaction that fit our investment criteria under contract or LOI that we are excited about. These transactions are all subject to due diligence and there is no assurances that any of them will close. But we do intend to be more active throughout the back half of this year.

In support of these activities, concurrent with the closing of the merger, we secured new financing. Specifically we obtained a new three-year $400 million revolving credit facility, and $203 million in 10-year fixed-rate CMBS financing. In addition we are continuing to explore alternative sources to source financing and match fund our assets.

As we have discussed in the past, an important indicator of health of the portfolio is the unit level rent coverage, which we believe to be a measure of how essential our property is to our tenant's ability, and their ability to pay rent. As of June 30, the average unit level rent coverage on a TTM basis for our top 10 tenants in the portfolio as a whole was 2.67 and 2.7 times respectively. This compares favorably to 2.58 and 2.49 times for the same period last year. This represents an overall improvement in the credit profile of the portfolio and is an encouraging trend.

As of June 30, our top 10 tenants accounted for 50% of our revenue. As previously disclosed, this decreased to 37% as of closing of the merger. We will provide you with more details on our combined portfolio during our next call in the fall.

As Tom mentioned, it is an active triple net lease market and we expect that to continue. We are maintaining our disciplined investment strategy and we continue to see ample opportunities to make new investments and recycle the capital generated from the sale of non-core properties.

With that I'll turn it back to Tom for some concluding remarks.

Thank you, Pete.

We have accomplished a lot so far this year, and we're looking forward to continuing our positive momentum over the balance of the year. The size and scale of our Business has increased but our focus has not changed. We continue to take a conservative approach to identifying and securing selective investment opportunities. We also remain focused in an area we know very well, the triple net lease single-tenant properties that are essential to their tenants' operation.

This focus is being rewarded as more and more retail and institutional investors come to recognize the long-term sustainable appeal of the sector. And with our larger and more diversified portfolio, we think we are in an even better position to grow and deliver attractive risk-adjusted returns to our shareholders. We appreciate the support we receive from our shareholders, and we look forward to remaining in touch with all of you as we move forward as a combined Company.

With that we will be happy to answer your questions.

(Operator Instructions)

Alexander Goldfarb, Sandler O'Neill.

Just a few questions here. One, just on some accounting stuff. Three items on the accounting side. One, what is the $279 million of goodwill, what is that?

That's our estimate at this point, again all of this from first accounting perspective is preliminary, but that is the estimate -- estimated resulting goodwill from the acquisition.

Right, I understand that, but what is the goodwill? Cole II is not like a consumer goods product that has got -- there's a brand-name or something, so I'm just -- and it's not listed as above or below market rents, so I'm curious what the goodwill relates to.

It is simply -- you simply go through every single asset and take an individual market value, both for the asset and the debt, and at the end of the day you look at that relative to the portfolio purchase price including all of the costs associated with it and you end up with a goodwill. It's not uncommon even in REIT transactions -- we happen to be looking at this because we anticipated the question. But in a number of the REIT transaction mergers that you've seen of comparable size, there's been comparable goodwill allocations.

Okay, and Tom, this is -- FAS 141 would be part of this or that would be separate?

Sorry, I think that's part of it, if I'm understanding the question right.

Okay, that's helpful. Next, the $86 million of merger cost, is that something that is going to be expensed in the third quarter or that gets capitalized and doesn't appear and will not appear in the third-quarter P&L?

Good, yes, both. We try to give you a full picture. A substantial portion, say things that relate to debt costs for example, and as you might guess, amortized over as effective interest rate in your interest expense, but a good chunk of those things do get period cost.

Okay. Do you have a split out how much we should anticipate in our third-quarter FFO estimate?

That's what we're finalizing right now.

Okay. So it sounds like my G&A -- and what about a good run rate for G&A or is that -- we'll have to wait for third quarter, as well?

For third-quarter that would be difficult because as you pointed out a lot of that amount would go through G&A in Q3.

Okay. So let me ask just a final question. We've -- this quarter or this year we've seen other companies do large transactions and it's ended up derailing other parts of their business. How confident are you guys that as far as integrating the portfolio, and then as far as engaging in new large-scale acquisitions?

Well, I think it's an excellent question, and I think that that's -- therein lies I guess the Executive oversight that Mike, Pete, and I hopefully are bringing to this organization. I think at the very beginning when we announced this transaction, one of the things we found very compelling about it was that it was very, very consistent, with the exception probably being on average a better credit quality than what we had, but very, very consistent with that type of assets, and obviously we were in a comfortable amount of space.

So there was a high degree of confidence on the integration of the assets, and I think that has completely played out. I think we have plenty of time to prepare for the closing. We worked very closely with the Cole organization and if anyone from Cole is listening I want to thank them, they were very good on the integration and made the integration for us as seamless as I think it could be given the scale that we had here.

Also because this was a nonemployee-related acquisition, where it was only assets and liabilities that we were integrating, there wasn't the usual, what I will call organizational kind of noise that is often associated with a merger. We didn't have to deal with that. We simply had to add resources to manage a bigger company. And again, we had a fair amount of time to do that. We announced it in January, we closed it in July. So, we had a long time to look at that organization chart, go out and find the people we wanted to find and have to be in a position to work on the portfolio the day it closed.

I do think that, had we not engaged in the Cole merger, we probably would have bought a few more properties outside of that. Our acquisition number would have been maybe a little bit larger, but that was a decision that we made, where we said, let's not lose sight of the big objective here and going out and acquiring another $30 million of $40 million when we're trying to integrate over $3 billion, let's focus on what is important. Let's make sure that goes well, and I think -- we're three weeks into it, but I think our confidence is high. We're feeling good about the integration and I think we're also feeling, as Pete mentioned, that we'll be more active in the third and fourth quarters, because we are confident that this assimilation of the two portfolios has gone well.

Okay, thank you.

Rob Stevenson, Macquarie.

Just a follow-up on that. If I'm looking at the numbers correctly, is the way to be thinking about this, the $86 million of merger and expenses that you guys incurred through July 17 minus the $21.6 million in the six months ended June 30, means that there is $64.5 million or whatever the adjustment winds up being in the third quarter or so?

Again, net of whatever portion of that ends up being capitalized, yes.

Okay. All right. Just wanted to get that straight. And then, Pete, can you talk about a bit, even if it is just qualitative, where the rent coverage on the combined portfolio winds up being? If you're 2.67 and 2.7, does that marginally increase, marginally decrease when you put the portfolios together? How should we be thinking about that?

It's important to note that the Cole II portfolio was 40% investment grade, and often times with investment-grade tenants you don't get unit level financial statements. And so, that number becomes difficult to track. For the tenant that report in the Cole II portfolio, that number is consistent with our existing portfolio.

Okay. And how should we be thinking about dispositions? You talked about $115 million of acquisitions under contract that you're looking at. From a disposition standpoint, what are you guys looking to market and what is the magnitude there in terms of what you'll need to finance?

The two transactions that we -- the two properties that we announced the sale of, represented about 50% of what we identified at the time of the merger were nonstrategic assets. There was a lot of interest in those assets and it was advantageous to us to do it as simultaneously as possible. But I would expect that -- as I said, we are about halfway done that disposition process, and we will be looking to match the proceeds and to be reinvesting them as we sell them.

We are not under -- again one of the beauties is that it's great when you're selling a nonstrategic asset that's a good asset. It's nonstrategic not because it's not performing well, it's nonstrategic because it doesn't fit our investment strategy. So, we are not under any pressure to do it in any timeframe, other than we are looking to be efficient and to rematch the proceeds. So we are about halfway done, and I would expect we will be done -- we'll continue to roll those out through the end of the year.

Okay, and then Mike, from a debt standpoint with the debt that you've got and the debt that you've refinanced, are there any near-term maturities that you guys have an opportunity to reduce the leverage of the entity, or is basically everything is still now going forward is termed out and you guys are several years away from any significant maturity?

The only thing that we had to do was to refi Cole's heritage revolver, which we did. And what we have outstanding on that, as subsequent to the merger and the disposition that Tom just referenced, is a little over $100 million outstanding there. So, that obviously we can pull the trigger on at any point if we choose to do that. Everything else --

And that's $100 million, a little over $100 million against the $400 million availability, and we will be as we would always do be looking to when we should be terming out those liabilities. But at this point, we have a de minimus amount of short-term debt.

Okay, and then given the reduced role of Shopko in terms of the tenant, are the financials still going to be part of your filings going forward?

Not certain of that, but there is a chance they would not be going forward.

Okay and then just lastly, Tom, what has been the discussions with the Board on the maximum payout ratio that you guys feel comfortable from a dividend perspective? I mean obviously the FFO will get that -- will get to that as to what fourth quarter and '14 winds up looking like when you guys talk about that next quarter or so, but I mean what is the comfort level? Is it paying out 90% of AFFO, 80%, 100%, where should we be thinking about that?

Well, I mean I'm not sure I came prepared to put a specific target out there at the moment, but I would suggest and I think I have suggested in prior calls that we do expect that payout ratio to come down, and that we expect our earnings growth to probably -- we'll be taking a piece of that looking at it in terms of dividend increases until we get that payout ratio at a point that we are comfortable with.

But one of the important things about the payout ratio for Spirit, and this is not the case in all of the other companies that you would expect us to be compared against, is that we have a substantial amount of debt amortization that gets built into our payout ratio. Where other companies that have -- that don't have fixed rate secured debt often don't have amortization. So, we look at the payout ratio both on a pure basis as you would calculate it, and we also look at it after taking into account how much debt amortization, and therefore equity accretion, we have done on any given year.

And it's not an insignificant sum. The post merger I believe, the debt amortization is over $50 million a year. And so, when you factor that into the payout ratio, our payout ratio is very consistent with payout ratios of other companies that do not have that debt amortization and therefore do not accrete the value to the equity shareholders.

Okay, thanks, guys.

Ross Nussbaum, UBS.

Tom, if I'm understanding the numbers correctly here, it sounds like you are going to be able to match fund your new acquisitions with the remainder of the non-core dispositions you have from Cole through at least the remainder of the year? Is that not a reasonable statement?

We are not looking to totally match fund them. I think it's true that the nonstrategic asset sales is going to produce incremental dollars, and we do expect to invest those dollars. But it's not a target per se. I think our actual acquisition amounts could be higher than the amounts, and we expect that they are likely to be higher than the amount that we are going to achieve through asset dispositions. We would expect at the end of the year, we will, after taking into account asset dispositions we will still be a net acquirer of real estate.

Okay. So let me make sure I understand so you're suggesting in Q3 and Q4 combined that you intend to acquire over $250 million-ish of assets?

Yes. That's an expectation. Again, as you've heard from me before, we don't issue guidance on acquisitions because again this is just a philosophical point, but I view acquisitions as making a decision at any given time to invest the capital, and we don't necessarily want to feel compelled to have a target out there, which would cause us to invest at rates of return that we didn't feel appropriate relative to the risk. But, given our backlog and given the market and given the activity that we see, we -- I think we're comfortable with what we just articulated.

Okay. Next question would be then from a funding perspective as you think past the next couple of months into 2014, and you think about your acquisition objectives, and you look at your line of credit capacity, how do you think about the need for common equity and the timing for common equity issuance?

Well, again that's so tax and circumstances driven that it's -- we are not going to be, and we don't, sit there and put a stake in the ground that says March 1, we are going to go out and do an equity offering. I think what we do do is and we work with our financial backers, the banks, investment banks, and we have a lot broader group of those now, given the larger scale here. And we are always looking to optimize I think the financial structure that can be achieved, whether that is -- whether you, and where and when you do an equity raise, I think is totally dependent on the other options that you have relative to in your quiver with it.

Again this Company currently does not have preferred stock. I'm not suggesting we're going to do it. But at our capitalization structure, that could be a component of our capitalization structure forward, you could see convertible, you could see equity. There is lots of elements of the capital structure that I think are available to us today that probably weren't available to us six months ago given our -- the scale that we now have.

But I think that any company, any REIT, and this isn't news to anyone on this call, but any REIT that becomes an active acquirer ultimately will actively source the equity market, that's the nature of how REITs grow, and that is how we would expect to grow as well. But we don't have a finite target date.

Okay. Let me nitpick a little bit on the quarter. And granted we didn't have a lot of time to go through the numbers, did the rental revenue line go down about $1 million from Q1?

In sequentially, I think it's very close. I thought it was flat quarter over quarter, and then just a combination of a couple of things, but yes, it's about flat.

Okay. Can you give us some color on where the lease termination fee came from, what kind of tenant? Were they on a watchlist of yours, just some color around that?

Yes. Yes, it was actually a for-profit education tenant that had a long-term commitment to a property that no longer suited its purpose and we allowed them to buy out the lease and we took the property back vacant. And took a very healthy MPD of the rent that they owed us as the lease termination fee.

Where was the asset?

It was in Arizona.

And then lastly, on Shopko, I know the numbers are going to be in the Q, is there any color you can give us just on how their performance has been of late? And maybe how we should be thinking about that in the context of the improving overall credit profile you cited of the tenant base?

Yes, I think what you'll find in the Shopko financials is much what we've been articulating since the IPO is that they are pretty steady as she goes and a pretty stable company with solid performance. You will see some diminishing noise related to the integration of the Pamidas, but there will be no surprises there. And as 50% of our top 10 premerger -- 50% of our revenue premerger was in our top 10, and Shopko represented 30%, with those numbers you can get a pretty good sense where Shopko sits.

Thank you.

Rich Moore, RBC Capital Markets.

I'm here with West as well. Was that just out of curiosity, that for-profit school was that the facility we toured in Phoenix with you guys?

It was not Rich, it was a different tenant.

Okay. So is there more to that I guess, is what I was going to get to of it was, but it's not, but is there more to come from that situation?

No.

In terms of lease term fees, et cetera?

No, it was an isolated situation.

Okay, good. Thank you.

No, Rich, it was an isolated situation.

Okay. And then on the properties you are selling, the two properties are selling, the cap rate on those if you could or something that we can take, so we can take NOI out going forward, and then the rate on the debt for the debt on those two assets?

Yes, I'll take that. I take the cap rate and let Mike do the debt. As is often the case when we sell individual properties, we have an agreement with whoever whether with the buyer or the seller that we don't disclose individual cap rates. That's why we always find ourselves in a position in the reports at the end of the quarter to -- we provide a weighted average cap rate so that we don't, we're not in a position to violate that. And on these sales, we sold these properties to DDR, and we did commit in our agreement that we would not disclose the cap rate.

I can say that the cap rate was accretive to the overall cap rate of the portfolio. In other words we sold it at a lower cap rate than we acquired the portfolio, but that's as specific as we can be under our agreement.

Yes, and one thing might be convenient if you look at the last couple of columns of the pro forma, we actually have pro forma'd out those dispositions so that you can see what everything looks like with that already pulled out. The answer to your question specifically on debt that side, I think it was high 5%s, maybe 5.8%.

Okay, all right, good. Thank you guys. And then on the debt in general, you talked a little bit about that, that you are getting from Cole. Is any of that pre-repayable in any way that you could at your option as opposed to stuff you have to do clearly because it is maturing, but stuff that comes pre-payable that you could address earlier than the maturity?

I think predominately their structure is very comparable to ours. Those are typically CMBS loans at the property level. As we mentioned, they had over $300 million of revolver in short-term debt, and that was all paid in connection with the transaction.

Okay. And then as far as the portfolio, if Cole was 40% investment grade, so you guys are about 20% post merger, somewhere in there?

Yes, I think 19%.

Okay, got you. And then, I'm curious, this is a bit of a strange question I guess, but it's kind of troubling me. I look at your stock price and you guys went out and bought assets in a very interesting transaction, which I understand, but then at the end of the day, you've essentially split your stock into a sub $10 stock price when you just came out in your IPO last year. And I'm wondering what you think about that and whether that's a good move to be a sub $10 stock after such a short period of time as an IPO, splitting the stock like we have here?

Well, first of all I hope it doesn't stay in the single digits. But it's unfortunately a math mechanic that was not -- that did not have an alternative outcome. A reverse merger, which was the way that this transaction was accomplished, and that was the only way to accomplish this transaction was a reverse merger, whereby the -- even though we are Spirit Realty we are using the predecessor Cole II umbrella as our Company of which was the surviving company.

So I didn't love the outcome, Rich, in the sense that -- I mean it is just math, right, it's not like the Company is any less valuable, it's absolutely not less valuable, and the math was what the math was. But there was no other way to accomplish that other than to do the reverse merger the way that we did it. We have been frustrated that some of the financial data sources, we were in touch with all of them premerger, we provided them with all of the information.

Some of them don't actually won't even talk to you, they simply take the information that comes off corporate filings. And so some of the information in the data services that are out there, for example show the stock at the high, whatever it was, $20, and the low of $9, but of course that's not the case. You have to do the math in order to get those numbers correct. But fortunately, we're making all of our filings over the next few days and we expect those data sources to correct themselves. But it was purely a legal outcome of the way that the transaction was accomplished.

It's just the optics Tom, of that sub $10 stock price, and obviously you could afford to reverse split two for one, one for two, and then you'd be back to $18. But yes, I see what you're saying. And I have one more question guys. What are your thoughts from your point of view on Shopko and 84 Lumber today? Just what you're seeing from those two companies?

I'll give my comments and Pete can -- I think on Shopko, I'm not sure our view has changed from the time I first met with them. And then working through the IPO process, they're a solid midwestern operated company that seems to perform consistently quarter over quarter over quarter, and there's not a lot of volatility in their business. And they just seem to be going steadily about their business.

I think in 84 Lumber in that case, we've seeing a substantial difference, in that 84 Lumber is a company that was a -- certainly suffered from the housing challenges in '08 and '09. But they're also the beneficiary of the housing recovery that you're seeing. And their performance across the board has been improving very, very significantly. So they are a much healthier credit than they were even at the time that we were preparing the materials for the IPO.

Okay, great.

Jim Casagrande, Brant Point Capital.

Congratulations on the quarter. Really just had a -- it's more of a clarification question. There was a question earlier on the payout ratio, and I guess the response was you expect that to decline. And that was, I guess I wasn't clear on the answer, was that because cash flow is going to be growing, and that the dividend will wait to catch up? Or maybe I have that mixed up? Thanks.

No, I think that's an accurate summary.

Got it. Okay. And then as for where that ratio may be, the comment was we're going to have to wait for Q3, or there's no -- are you looking at other peers, where their yield is? Should we think of something similar to where SRC was premerger?

Our payout ratio, we are not -- we have no intention to change the dividend in order to affect the payout ratio. I think that we are very comfortable where the dividend is. And again it is on -- after taking into account the debt amortization, we are very, very consistent with others in our sector. So we have no concerns about the dividend, and there isn't an intention at this point to diminish that in any way. We simply are going to strive, as companies do, to grow the bottom line and to make the payout ratios look smaller, because the earnings look larger.

And just maybe give you a point of reference, obviously, SRC continues, is generating the same amount of AFFO that it was before the merger, and the payout -- so the payout ratio essentially would be unchanged there. And as we mentioned earlier, we are just ticking up a little bit from where Cole's payout ratio was. So, if you look at in combination, it would be approximately where it was before, give or take that little bit of increase for the previous Cole shareholders.

Got it. Great, thank you guys.

RJ Milligan, Raymond James and Associates.

Just wanted to follow up on just that last statement, that AFFO is not going to move for SRC shareholders. So you still anticipate the deal to be slightly accretive, but maybe not accretive, but certainly not dilutive, is that correct?

Well, what I was trying to say there RJ was that, the portfolio that Spirit is contributing is the same as it was. That portfolio that Cole is contributing is the same as it was. And just from an economic perspective in terms of the dividend coverage, it's going to be about the combination of the two, because we're upticking the Cole shareholders a little bit, and the Spirit shareholders presumably stay the same if we keep our dividend payout where it has been.

But just to be clear, and I think we've been clear, I hope we've been clear about this from the beginning. We certainly do this -- the spot accretions at the time that this portfolio, at the time that this merger was announced was -- it's factor in any transaction. It was a factor in this one, but it was not certainly the sole primary factor. We weren't necessarily looking for spot accretion as we were looking for what I would call accretive -- an accretive acquisition to our overall business plan and the other objectives that we had.

And I don't believe that when the final numbers that come out this will show that it was accretive from an AFFO standpoint, it will be slightly dilutive from a AFFO standpoint. But, I think, again that was the understanding for this transaction all along, that on a spot basis, but again from an aggregate portfolio strategy, investment strategy basis, we thought at the time we announced it, and we believe it today that it was a very, very significant, important, and again accretive, not so much on a spot AFFO basis, but certainly accretive to the Business.

Okay, great. Thanks guys.

That concludes the Q&A portion of today's call. I'll turn the call back to Tom Nolan.

All right, thank you, and thank you once again for your interest in Spirit Realty Capital and for calling in today. And we look forward to speaking to you again soon. Thank you very much.

That concludes today's call. You may now disconnect.