Spirit Realty Capital Inc (SRC) 2014 Q1 法說會逐字稿

Good afternoon, ladies and gentleman, and welcome to Spirit Realty Capital's first-quarter 2014 results conference call. (Operator Instructions)

This conference call is being recorded and a replay of the call will be available for one week beginning at 6 p.m. Eastern Time today. The dial-in details for the replay can be found in today's press release. Additionally, there will be an audio webcast available for the next 30 days on Spirit Realty Capital's website.

It is now my pleasure to turn the call over to Mr. Michael Bender, Executive Vice President and Chief Financial Officer of Spirit Realty Capital. Mr. Bender, please proceed.

Thank you, Tony, and good afternoon, everyone. Thank you for joining us today. Here with me today to discuss our 2014b first quarter performance are Tom Nolan, our Chairman and Chief Executive officer, and Pete Mavoides, our President and Chief Operating Officer.

Tom will start with some introductory comments and I'll then provide some color on our first quarter 2014 financial results. Pete will then discuss our portfolio and investment program, and Tom will conclude with summary remarks prior to the Q&A portion of the call.

I would like to 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 expectations 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 current as of today, May 8, 2014, 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, AFFO, and FAD, can be found in the Company's earnings release from earlier today, which is available in the investor relations section of our website.

With that, here is Tom.

Thank you, Mike, and thank you everyone for joining us today. We are very pleased with our results for the first quarter of 2014. Our $7-billion-plus portfolio remains in excellent shape with strong underlying tenant credit performance, and we continue to see a very attractive acquisition environment. We remain focused on our organic and disciplined growth strategy of investing in operationally essential single-tenant triple-net-lease properties, primarily through sale-leaseback transactions with quality middle market operators.

Our results demonstrate the progress we have made since we went public just over 18 months ago. After what could perhaps best be described as a transformation period, this first quarter of 2014 can finally begin to demonstrate a more typical quarter with normal run rates, a quarter that demonstrates the predictable and consistent financial performance we have established as one of our goals.

We've strengthened our balance sheet by utilizing both debt and equity vehicles that allow us to capitalize on the attractive acquisition opportunities we see. From this position of strength, we have been able to make smart, well-timed investments thus far into 2014 and our pipeline remains robust. We remain optimistic about the future because of the quality and stability of our portfolio and because we continue to see attractive opportunities to add to it. We have the scale and capacity to execute our strategy, adapt to changing market dynamics, and importantly, deliver attractive and sustainable cash flows to our stockholders.

With that, I'll turn things back over to Mike who will walk you through the financial highlights for our first quarter of 2014. Mike?

Thank you, Tom.

As Tom mentioned, we are very pleased with our first quarter 2014 results, which reflect our commitment to delivering consistent and attractive cash flows to our shareholders. In the first quarter ended March 31, 2014, we generated revenue of $144.0 million, more than doubling the revenues reported in the first quarter of 2013. The increase reflects the benefits derived from the real estate acquisitions that we made organically as well as through the merger.

Net income for the first quarter of 2014 was $14.2 million, or $0.04 per share, based on 369 million weighted average shares of common stock outstanding. That's compared to a net loss for the first quarter of 2013 of $8.3 million, or $0.05 per share, based on 159 million weighted average shares of common stock outstanding.

First-quarter 2013 results included $10.2 million in merger-related costs, $3.6 million of which were amortization charges associated with financing commitments obtained for the merger, which we reported in interest expense. Absent these charges, results from operations would have provided $1.8 million in net income for the first quarter of 2013, or $0.01 per share.

Please remember that the historical shares outstanding has been adjusted by the merger exchange ratio as detailed in Spirit Realty Capital's proxy statement filed with the Securities and Exchange Commission regarding the merger.

General and administrative expense in the first quarter of 2014 increased $4 million to $11 million as compared to $7 million for the same period in 2013. Higher compensation and related benefits of $1.8 million due primarily to the hiring of additional personnel in connection with the merger, along with $0.7 million of higher noncash stock-based compensation, account for approximately half of that increase. Professional fees, technology costs, and outside consulting services increased $2.3 million during 2014, primarily as a result of costs incurred for compliance and in connection with the integration of the net asset required in the merger.

Property costs increased to $5 million compared to just under $1 million in the first quarter of 2013. The merger resulted in the acquisition of a limited number of single- and double-net leases that required the Company to initially incur certain expenses, which are billable and subsequently received from the tenant, subject to certain caps and other limitations as provided in the leases. Hence, the increase is predominantly attributable to the reimbursable costs associated with acquired non-triple-net leases.

Real estate acquisition costs also increased slightly from the prior year to approximately $1.3 million.

Interest expense increased to $54.4 million in the first quarter of 2014 compared to $36.4 million in the first quarter of 2013. The increase in interest expense is primarily due to the rise in total indebtedness of approximately $2 million, the vast majority of the increase being the assumption of debt in connection with the merger.

Depreciation and amortization expenses more than doubled from the prior year, reflecting the expansion of the portfolio.

Finally, we recognized impairment charges of approximately $1.7 million during the first quarter of 2014 associated with two vacant properties and one active property, all of which are being marketed for sale.

Funds from the operations, or FFO, for the first quarter of 2014 were $74.7 million, or $0.20 per share, compared to $21.9 million, or $0.14 per share, for the prior year period. Adjusted funds from operations, or AFFO, for the first quarter of 2014 totaled $74.6 million, or $0.20 a share, compared to $36.6 million, or $0.23 per share, for the first quarter of 2013.

In the first quarter of 2014, we declared a cash dividend of $0.16625 per share. The first quarter of 2014 dividend equates to an annualized dividend of $0.665 per share. For the three months ended March 31, 2014, dividends declared to common shareholders of $61.6 million represented an 83% payout ratio against funds available for distribution.

We define leverage as debt reduced by cash and cash collateral balances divided by annualized quarterly EBITDA adjusted for one-time items. As of March 31, 2014, leverage was 7.3 times, which was unchanged from our leverage as of December 31, 2013.

Moving to guidance, we are pleased to reaffirm our previously announced 2014 AFFO guidance of $0.77 to $0.82 per share. Now, subsequent to the end of the quarter, we commenced an exchange offer for our master trust notes, issued in separate series between 2005 and 2007, with an aggregate principal outstanding of approximately $912 million. As of April 28, 2014, the required minimum amount under the terms of the exchange agreement had been tendered. Consequently, we expect the exchange to occur in the second quarter.

This transaction allows us to remove Ambac as a control party and a no payment guarantor, eliminate the insurance premium associated with that guarantee, and extend the average term of the existing notes, which will be upgraded from a BB+ to A+ by Standard and Poor's.

Additionally, in mid-April, we filed a prospectus supplement with the SEC for a continuous equity offering under which an aggregate $350 million of common stock can be sold from time to time in an at-the-market, or ATM, offering. During the six trading days through and including April 23, 2014, approximately 1.6 million shares were sold for net proceeds of $16.6 million.

I would now like to turn the call over to Pete to review our operations. Pete?

Thanks, Mike. As illustrated by Mike and Tom's comments, we are very happy with our performance and we believe our portfolio is in great shape. We continue to optimize the portfolio by growing organically, recycling capital as appropriate, and making accretive acquisitions, all with the goal of delivering stable and predictable cash flows that supports our dividend.

Our gross investment in real estate and mortgage receivables totaled $7.4 million in the first quarter of 2014, substantially all of which was invested in 2,287 properties that were 99% occupied. Our properties are generally leased under long-term, triple-net leases, with a weighted average remaining maturity of approximately 10.2 years. As of March 31, 2014, approximately 43% of our annual rent based on annualized first-quarter rental revenue was contributed from properties under master leases, and approximately 87% of our single-tenant properties provide for annual rental increases.

As part of our active management and monitoring of risk, we received monetary unit level financial statements for approximately 52% of our products. For Spirit's reporting tenants, the average unit level rent coverage for the trailing 12 months was 2.9 times. This compares favorably to 2.6 times for the same period a year ago. As you know, we view unit level rent coverage as a valuable indicator of how essential our properties are to our tenants' operations and their ability to pay rent.

We continue to make good progress in reducing our tenant and geographic concentration. Our real estate portfolio as of March 31, 2014 was diversified geographically across 48 states and among various industry types. Texas, Illinois, Wisconsin, and Georgia accounted for 12.5%, 6.5%, 5.9%, and 5% of our annual rent contribution of the real estate portfolio, respectively.

During the first quarter of 2014, revenue from Shopko, our largest tenant, represented 14% of total revenues, down from 14.8% in the fourth quarter of 2013. During the three months ended March 31, 2014, no other tenant represented more than 5% of total revenues. As of March 31, 2014, our three largest industry types were specialty retail at 18.5%, general and discount retail at 18.2%, and quick- serv restaurant at 9.7%.

Moving to the investments, we acquired 104 properties for gross investments of $157 million in 12 separate real estate transactions in the first quarter. These investments had an initial cash yield of 7.81% and were with two existing and 10 new tenants.

The associated leases have a weighted average remaining lease term of 12.2 years. Approximately 66% of these investment volume represented direct sale-leasebacks transactions where we acquired properties and negotiated a lease directly with parties affiliated with the tenant.

Acquisitions in the first quarter of 2014 were nearly triple the volume in the first quarter a year ago. These acquisitions were generally consistent with our strategy of investing in small portfolios of granular properties where there is decreased competition from large investors seeking to deploy significant amounts of capital and from retail investors focused on acquiring properties on a one-off basis.

Our current investment pipeline is robust and we are encouraged by our ability to close a high volume of transactions at attractive terms.

Consistent with our strategy, we continue to selectively sell assets and recycle proceeds. During the first quarter of 2014, we sold three properties generating gross sales proceeds of $6.3 million. One of the properties sold was vacant, while the remaining two properties were sold, closed at an average cash yield of 8% and had an average remaining lease term of 6.2 years. The market for our properties is very strong and we are encouraged by our ability to dispose of property that we believe no longer meet our long-term investment criteria.

We continue to enjoy a competitively strong position in the triple-net market. We believe we have the scale and capital structure we need to continue to deliver sustainable and attractive performance for our shareholders. We remain focused on growing our portfolio rationally with superior risk-adjusted terms, small and middle market tenants, and the disciplined recycling of capital,.

With that, I'll turn it back to Tom.

Thank you, Pete. We are pleased to have started 2014 with financial strength and flexibility, and a clear strategy to continue to deliver consistent results for our stockholders. We remain focused on growing our $7-billion-plus portfolio through normal course acquisitions that meet our investment parameters.

We have taken significant positive steps with regards to our balance sheet this year. This gives us the flexibility to optimize our portfolio and capitalize on strategic opportunities to increase shareholder value if they should arise.

It is worth nothing that since the current leadership team began managing this company, we have more than doubled the size of our portfolio. But importantly, while we certainly believe that the added scale of the Company is beneficial, we have also accomplished this while also addressing our stated goals of reducing tenant concentration, improving overall credit quality, and enhancing balance sheet flexibility. I am proud to be a part of this team and thank my colleagues here in Scottsdale for their effort.

As always, we appreciate the support we receive from shareholders and look forward to remaining in touch with all of you as we move forward. For those that will be at ICSC or NAREIT, we look forward to having an opportunity to see you there.

We are now happy to answer your questions.

(Operator Instructions) The first question comes from the line of Mr. Vikram Malhotra of Morgan Stanley. Please proceed.

Good evening, guys. Could you maybe just give us a rough split in terms of the cap rate between some of the transactions you did with relationship tenants versus non?

As we said, two of the transactions were with relationship tenants and follow-on tenants, and the balance, the 10 were with new tenants. The range of caps rate in the quarter ranged from a low seven to mid-eights, and the tenant quality and real estate quality vary within that range. And there is really no -- the two is not an accurate sample set to measure against the overall average. But in general, in the market, a follow-on transaction with the tenant has certain synergies and that can be 25 to 50 basis points above where a normal transaction may be with that tenant.

Okay, great. And then just on some of your comments that you may look to selectively dispose of assets that don't maybe fit the criteria, are there sub-segments where you feel pricing has reached a level where -- not where you may feel kind of priced out, but just at levels where you feel it just makes more sense to maybe monetize? So help me -- just how will you think of the disposition bucket?

We look at the disposition bucket, Vikram, as really actively managing the risk within the portfolio and selling assets where we think that the tenant may not be a good long-term fit for our portfolio, where the renewal probably may fall below our long-term average. And it just makes sense to sell where retail investors will pay for more it than we feel that assets are worth today.

And so we look at every asset and obviously, the financing vehicle behind that asset weighs into that calculus as to what we sell. But it's just -- it's a risk analysis of the individual assets, more so from a credit perspective than from an industry perspective.

Okay, great. And then just one quick last one. Just in terms of the bump you saw this quarter, can you give some sort of sense what that was maybe on a same-store basis?

Vikram, this is Mike. We don't -- as you see, we don't really give that for a couple of reasons, one of which is a lot of our leases have bumps in multiple years. So you have one bump every three years. So it's a little bit of a -- it's lumpy as far as how it plays out.

I think we said before that we tend to get between 1% and 2% and that's certainly been consistent with our performance. You can tell that we don't have any, much impact from vacancy and that sort of thing since we have 99% occupancy. So that seems to hold consistently. And then I think -- Pete, correct me if I'm wrong -- I would say that on go-forward transactions it's at least 1.5 points, maybe north of that.

Yes.

Great. Thanks, guys.

Your next question comes from the line of Mr. Andrew Saper from Sandler O'Neill. Please proceed.

Thank you. Can you talk about the balance from the ATM issuance [and] asset sales as a potential source of equity to fund your acquisition activity and just your general targeted LTV ratios?

Sorry, can you repeat the first part of that again?

Just the balance between ATM issuance and asset sales as a source of liquidly to fund your acquisition activity and the general LTV ratios you're targeting.

I think, I mean we obviously look at, and this is a constant analysis, where is the cheapest cost of capital. And we're looking to optimize that. We do expect that we will be recycling capital during any given quarter. But clearly, the ATM is intended to be a vehicle that we will utilize, and I think we will be looking at where the best optimization occurs between the two. And I would expect we'd continue to use the two.

In terms of our balance sheet leveraging strategy, again, we're looking to optimize the best position that we can have for a particular investment. If it tends to be a larger investment, it often qualifies for a CMBS type of position. If it's a smaller, more granular one, we tend to basket them and utilize the ABS structure that we have more recently instituted.

And the overall leverage strategy that the company has, I think, we have been making an effort to slowly bring the leverage ratios down coherently. And it's been our stated goal that we're buying assets, in general, over time, meaning when they get packaged and ultimately permanently financed at slightly lower leverage ratios than we currently have at the moment.

And so that's been kind of the approach that we've taken as we construct this portfolio.

Okay, thanks. That's it for me.

Your next question comes from the line of Mr. Vincent Chao of Deutsche Bank. Please proceed.

Yes, hi everyone. Just want to go back to your comments about the pipeline being pretty robust here. You have done over $150 million here this quarter, over $200 million last quarter in terms of acquisitions. And do you see that level -- I know you don't provide guidance per se, but given the pipeline, does that feel like a reasonable amount in the near term?

Yes, I would say that the current run rate is supported by the current market conditions, looking out at least through the second quarter. We obviously don't have a lot of visibility beyond that in our pipeline and deals tend to be chunky, and deals also tend to be occasionally back ended in the year, in the fourth quarter. But we feel good about what we see and what the year looks like for us.

Okay. (Multiple speakers) --

And let me offer that the contrast of talking about the pipeline and not giving guidance, which I realize at times can seem kind of mutually exclusive, we are obviously trying to give current commentary on where we see the market. And the reason we don't provide guidance is we simply want to be flexible in the event that we see a sudden shift or even a gradual shift, but a continuous shift over time. And if the acquisition climate becomes less attractive, we don't want to be in a position where we provided a goal we would feel uncomfortable making.

So I do think sometimes it feels a little bit odd to not give guidance and yet comment on the pipeline. But that's really the way we look at it. And we do want to give everyone a sense of how we see the market. And right now, I think we see the acquisition market as being attractive.

Right. Thanks for that clarification, appreciate that. I am just also curious, I mean given the strategy of sort of looking at the best risk reward to net just under investment grade tenant quality, just curious if you could provide some color on what you see the spread of in terms of cap rates between sort of the actual investment grade types of tenants versus the ones that are maybe just a hair below, but the cash flow profile looks similar, but for whatever reason they don't have the rating. Just curious what that spread looks like.

Well, clearly, we would say the market for the guys just under investment grade is represented in our investment activity. And the 7, 8 as a point estimate, and probably a range of 7.25 to 8.25.

I think it's important to note, as we disclosed, that 66% of what we did were direct sale leasebacks where we were structuring new net-lease investments as opposed to acquiring existing leases. And then much of the transaction volume you see in the investment grade space is acquiring the existing lease, be it a Walgreens or a CVS, that was developed by a developer and then resold.

In terms of investment grade cap rates, we have seen them really go low, as low as 5 to 6 caps and the center mass I would probably say is around a 6.5. But we don't spend a lot of time in that space. It's not where we focus our new investment dollars. And so I probably wouldn't have that good a pulse on it.

Got it. Thanks. And then just maybe on the distribution side, can you just remind me in terms of multi-tenant assets, how many are left in the portfolio? And what's the demand for those assets? I know you were planning to sell those over time.

Yes, and we sold the bulk of the big ones last year, as you know, and that portfolio was sized when we closed (inaudible) two, anywhere between $500 million and $600 million. And looking back, we sold, I want to say, close to 350, 325 to 350 so that would give you a sense of what's in the stub. And those properties are generally smaller by nature. A lot of those properties have -- some of those properties have financing that we're working through, or tenant issues. And so there's about $250 million portfolio that we'll be working through over the next six to 18 months.

Okay. So right now, none of those remaining properties are being marketed as you work through some of these other issues that you mentioned. Is that right?

No, we are actively marketing some of them. I just want to set the expectation that they're all not going to go out the door here in the near term. But we are clearly working on the ones that are ripe for sale and looking to recycle that capital.

Okay. Thanks, guys.

Your next question comes from the line of Mr.Chris Lucas of Capital One Securities. Please proceed.

Good afternoon, guys. Just a couple of quick questions. Mike, can you remind us what the size of the credit facility is?

Sure. Yes, it's $400 million.

Okay. So you are at $135 million at the end of the quarter, I guess, given the different tools that you have, how should we be thinking about sort of the size that you would be looking to term that out? In other words, what balances make you want to move it into a more permanent financing, whether it's equity or debt?

Yes, we are always in the process of doing that. Certainly, you have the scale up. And you saw that the size of our ABS offering last time. We wouldn't necessarily always have to do it that way, but that may be one good way to think about it. And let me, before I forget, the $400 million line, we actually have two lines, the large one and a smaller one it'is only $35 million. The big line had $120 million outstanding at the end of the quarter. So just so that you got that data.

But back to your question, I think that you don't want to get too far north of the halfway point in theory, but you're always managing that aggregation on your credit line in light of what you are going to do in terms of the permanent financing. And again, as Tom pointed out, that can manifest itself with an ABS offering or CMBS. Typically, that's done at the time of the close, but ABS and then the equity financing. So we are always cognizant of that line balance, and it is always just a bridge to the permanent financing.

Okay, and then just a quick question. On the lease expiration schedule between last quarter and this quarter for 2014 the same number of leases are in place but the ABR went up by 14%. Is that the same pool of leases or is there some in and outs that are going on? What drove that sort of difference?

I'd have to look at that one for you. I just don't have that in front of me. Sorry about that.

Okay, maybe I'll follow-up with you.

Will do. Thanks.

That's it for me. Thank you.

I would say just globally, looking forward in the next 12 months, as I kind of look at it, we have less than 2% of our rental revenue expiring and our anticipation would be that renewal rate is consistent with our history of right around 80%.

Your next question comes from the line of Mr. Rich Moore of RBC Capital Markets. Please proceed.

Hi, good afternoon, guys. Going back to Chris's question about the line and how you might handle that, how you might clear some of that balance, you did obviously a little bit of ATM once you guys got going on that. Was there anything special about that particular issuance right there? Or should we -- I did a little mental math and (inaudible) you did $16 million in [60] days. You're going to be using this thing up pretty fast if you keep going at that rate. Should we assume you're going to keep issuing equity under that or was there some reason, I guess, that you did the first a little [slow]?

Well, a couple things. First of all, we really did do it to open up the spigot, if you will, went out and were able to place those offerings really in a beneficial way versus what the market was. The volume was there to be able to do it, so we took advantage of that. But I think honestly, Rich, in part that was just to demonstrate that we know how to use the line and we're going to get it exercised and working. We'll do that based on opportunity and need just going forward. But it works out really well for us because it is granular and it is a very efficient way to issue that equity, which matches our acquisition strategy very well.

Okay, you are not active right now I guess, Mike?

Well, of course not right during the earnings process here. You would not be able to issue until after your 10-Q is filed.

Yes, I got you, okay. So no reason to think you are going to have a steady stream of that coming out necessarily?

Well, probably -- it works very well for us but, yes, I would not necessarily extrapolate those [60] days and presume that we are going to go right back in and issue at the same level sort of until we use up the $350 million. We will use it as we think it's appropriate based on when we think it is opportunistic and how it matches up with the acquisitions.

Okay, I got you. Good, thank you. Then in your acquisitions this quarter, it looked like medical and other office was a big contributor. What exactly, Pete, is in medical and other office, and what did you add I guess this time?

We added a couple of small surgery centers with strong sort of local doctor groups. We also added a large dental practice, dental offices subject to long-term master lease with strong credit behind it. Those are primarily what's in that bucket.

Okay, was there more of that with the groups that you did this with, so there might be some more opportunity in there?

Yes, I mean some of the groups were small and we bought their existing portfolio and liked the credit, and like the unit level coverage. And some of the groups were much larger and have substantial portfolios behind that and we'd be hopeful to win their business going forward as well.

Okay, good. Got you. Thank you. And then did you say you sold three assets and you have three more held for sale at the moment that you were about to sell? Or did I just miss the way you phrased that when you were giving your opening remarks?

Yes, you just missed it. Sorry to interrupt. You must have missed the way I read it. We sold three, one vacant, two leased. Given our occupancy, we have about 22 properties that are vacant, that are currently held for lease or sale and there's various other assets that we're exploring the sale on.

Okay. All right. Good. Thank you. And then on the exchangeable notes, I assume when all this is done, there's a different interest rate on those, is that right?

No. No. The point of this was to really change the rating on the notes predominantly. We did have the benefit of extending the life a little bit. But otherwise, the terms are identical to the notes in place.

And we got off paying the insurer, who was actually -- was the principal reason that the notes carried a noninvestment grade rating, the irony of having the so-called insurer. Because they were a control party and they were not as credit worthy as the actual portfolio was, the irony was is that we were basically paying a premium in order to not to have our bonds receive a less rating than they otherwise would have, not a common occurrence. And so we were able to, by getting them out as a control party, we saved the premium going forward and the bonds were upgraded, which is a benefit to the bondholders. But the interest rate, the benefit to us was the savings on the insurance.

Okay, good. Yes, got you. And I think that is it for me. Thank you, guys.

Your next question comes from the line of Mr. Cedric Lachance of Green Street Advisors. Please proceed.

Thank you. Just looking at the ATM, I am curious as to how you think at what share price you have the right share price to issue. Obviously, I can look in the last days of trading where you issued some equity, but thinking about it conceptually, how do you approach this? Do you think of the multiple on your earnings? Do you think about the accretion you get out of some transactions? Do you think about some form of premium [10AB]? How do you think about determining whether share price at which you are issuing is the right share price?

Again, I think it is a good question, Cedric. I don't think there is a magic formula. I think all of those factors weigh into it. And we are obviously very focused on managing both sides of our balance sheet in terms of what we buy and how we capitalize it. And we are looking at everything that we do. If we're buying something or we're engaging in a financing transaction, we're obviously looking to optimize the best return that we can get on the overall transaction. And so, yes, we are looking at accretion. Yes, we are looking at cost of capital. Yes, we are looking at alternatives. And we're looking at it relative to where our capital structure is. But all of those clearly are fluid items.

And so I don't really think -- it would not be appropriate and I don't want to establish a kind of benchmark that says -- that we are on record as saying if this criteria is met than you can expect the Company to be drawing on the ATM. I think that I guess would rather simply say that we take all the factors in that you just suggested and then we weigh the relative merits of alternatives.

And just turning to your attention to leasing and releasing, could you give us some details as to what you have done over the last quarter in terms of leasing space? And to the extent that you renewed any tenants, what were the spreads for the new rents versus the rents that those tenants were paying previously?

Yes, I'll take that, Cedric. We haven't had a lot. And, as I said, looking forward we have less than 2% rolling in the next 12 months. And our historical renewal rate tends to be about right around 80%. To the extent that a tenant renews, they have options in the lease that specifies what the rent is. And generally that follows the normal escalation pattern in the lease of about 1.5% at a compounded annual year, every three years, or whatever the specifics of that lease is. And so in general for the 80% that renew, we are going to get a bump that's consistent with what we have during the life of the lease.

And then on the 20% that don't renew, the 20% that come back to us, that can be across the board where in some instances we sell the property above our basis or we lease it below our basis to a new tenant. And those results vary widely. But in general that's kind of how we look going forward and what we have experienced over the last 10 years and it hasn't really changed in the last six months of that.

In terms of vacant properties, what's been your recent success rate in releasing, I guess finding new tenants for a vacant property versus selling them?

Generally, it's about half of that we release and half that we sell. And we are talking about 22 properties now and really have kind of been around that level for a while, but it's generally 50-50.

Okay and perhaps final question, just on Shopko, if you think about the next several years, at what percentage of your portfolio would you like to see Shopko be reduced to and what do you think will be the main method to get there?

Well, at the time of the IPO 18 months ago, what we stated was it was a stated intention to reduce the exposure to Shopko. At that time, it was 30%. And 18 months later, it is down to 14%. So I think we -- and it remains our ambition that -- I mean Pete talked about it earlier, we have no other tenant larger than 5% of the portfolio. That would be an ideal scenario for a portfolio composition.

We have -- the opportunities to reduce the exposure to Shopko are pretty well known. Either you grow the portfolio or you reduce the Shopko exposure. And I think that in the short term, and since the IPO, we've clearly been increasing the size of the Company. Over the longer term, we expect to have opportunities that present itself that will allow us to reduce the actual aggregate size of Shopko in itself.

There are Shopkos that trade in the market today where we don't own them all. We own a significant portion of the portfolio but there have been other ones that have traded and there is demand for those properties at reasonable prices. So I think we're confident over time when the situation presents itself that we will have the opportunity to work both sides of the equation, the numerator and the denominator. But we do feel as though we've gotten off to a good start clearly, getting it from 30% to 14% and we remain focused on reducing it further.

We have also stated, and I want to state it again, as you have addressed it, we find Shopko a very good tenant. And really, when we are talking about it, we are talking about it purely because of the size. But for the size of the exposure, it is a tenant that we remain very happy with, that has good credit metrics, that is a good operator. They've recently -- they've brought in a new CEO in the last three months. They continue to invest in their portfolio. They continue to work on optimizing their internal performance.

So when we talk about it, we again -- sometimes when we talk about it, sometimes you may get the distinction we are talking about it out of a kind of weakness in terms of the tenant. But it really is in an issue that relates solely to the size. And that's why we address it and that's the way that we're looking at it.

Okay. Thank you.

Your next question comes from the line of Mr. Dan Donlan of Ladenburg Thalmann. Please proceed.

Thank you and good afternoon. Tom, since you mentioned it, I was just kind of curious, I have not seen any Shopkos trade. Where have the transactions sold for? I am sure market -- it is different from market to market, but could you maybe give a cap rate range?

I'll tackle that Dan. We have seen them -- and this is important -- we have seen them listed and we certainly haven't followed them to the ultimate buyer. But they have been -- I have seen the list cap rates for Shopko, the big boxes, ranging from 7, 7.5 to 8.25 on various lease terms from six years on up to 15 years, broadly speaking. I have also seen some of the smaller Shopko Hometown concepts which are more bite-size assets and they are developing some [new one] of those. I have seen them trade -- or list in the 7 to 7.5 range.

Okay, thank you. That's very, very helpful. And just as a reminder, what are your -- what percentage of-- and I am sorry to keep talking about it. I probably won't do it again. But how much are the big box versus the smaller ones? I think I feel like it was like a 15/85 split. Just wanted to double-check that.

Yes, I think it is even more skewed than that. We have -- the vast majority of our investment is big box (inaudible), [I think] north of 85.

Okay, perfect, thank you. And then I guess a question for Mike on this exchange offer. As part of this, are you getting rid of any type of prepayment penalties or anything on this? Or is that still going to be in place? Or what can you offer us there?

The terms are unchanged. Now, it's important to note that this exchange offer didn't result in any real prepayment penalties. It's just an exchange.

Okay. No, I was just making -- I was just curious if you had prepayment penalties on this and by doing this you were able to get rid of them, I am not saying you had to pay anything but I just -- so there is still probably some prepayment penalties associated with this debt?

Yes, going forward there would be. If we were to choose to prepay the $900 million, we would incur prepayment penalties.

Okay. And how much of you are pushing out the maturities on some of these and how did you think about that relative to where you might be able to be refinance some of these notes?

Yes, Dan, we extended the average lease, I think it was about a half a year. This exchange, as Tom pointed, was largely a -- it was an economically positive transaction for us and picking up that half a year average life, but more so in removing the Ambac premium. And so thoseweare the economic considerations to us in the transaction.

But, more importantly, we went through the exchange as an accommodation to our bondholders who came into what was an investment-grade bond, were downgraded to sub-investment grade purely by the structure of the bonds. And so more than anything, this exchange was to allow them to get back to the benefit of their bargain and do the right thing by the bondholders in a market that we tend to be a habitual issuer in. And so to make that market continually available to us, this was important for us to do. We did have very positive economics on what we went through, but (inaudible) picture was really just to fix the bonds for the bondholders and keep that market open for us as an issuer.

Okay. And then, lastly, some of your peers have used unsecured term notes, as little as three years and as much as 12 years. What is your -- it seems like you might be reticent to do tha. But can you maybe talk about why you want to continue to use secured debt and not try to use unsecured type of features?

I don't think we want to suggest any kind of bias one way or the other. I think when we -- when the three of us came here, we had a very, very secured structure. That was the balance sheet that we had. I think it has served us fine. We feel very confident about our balance sheet structure. And we will look at every tool in the toolbox, as they say, I guess, trite phrase. But we had a very heavily weighted secured structure. And so we are working within that structure.

But I think going forward, we will be utilizing whatever the best, cheapest, most attractive long term. We very much like matching. We are interested in extending maturities, matching our revenues and expenses, and we will do it in the most cost effective fashion that we can. And if that has as unsecured element to it then we will utilize that. If secured continues to be the most attractive vehicle, we will utilize that. But it isn't a bias one way or the other so much as it is just what is the best -- what fits the best at the time that we have with the portfolio of assets that we are looking to finance.

Okay, completely understood. Thank you.

That concludes the Q&A portion of today's call. I will now turn the call over to Mr. Tom Nolan.

Well, thank you everyone for your interest in Spirit Realty Capital and for listening to our call today. And we look forward to talking to you again soon. Thank you very much.

That concludes today's call. You may now disconnect. And have a great day.