Spirit Realty Capital Inc (SRC) 2014 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to Spirit Realty Capital's 2014 Fourth Quarter and year-end Earnings Conference Call. (Operator Instructions) Please note that today's conference call is being recorded.

An audio replay will be available for one-week beginning at 6 PM Eastern Time today and the webcast will be available for the next 90 days. The dial-in details for the replay can be found in today's press release, can be obtained from the Investor Relations section of Spirit Realty's website at www.spiritrealty.com.

After the speakers' remarks, there will be question-and-answer period. (Operator Instructions) At this time, I will turn the conference call over to Ms. Mary Jensen, Vice President of Investor Relations for Spirit Realty Capital. Ma'am, please proceed.

Thank you. Joining us on the call today are Tom Nolan, our Chairman and CEO; Mike Bender, our Chief financial Officer; Gregg Seibert, our Chief Investment Officer; and Mark Manheimer, our EVC as asset management.

During the conference call, we will make forward-looking statements. These forward-looking statements are based on the beliefs and assumptions made by and information currently available (inaudible). Our actual results will be affected by unknown and known risks. Trends, uncertainty, and factors that are beyond are ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some (inaudible). Therefore, our actual future results can be expected to differ from our expectations and those differences maybe material. For a more detailed discussion and some potential risks, please refer to our SEC filings, which can be found on the Investor Relation section of our website.

All the information presented on this call is current as of today, February 26, 2015. 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, which can obtained on the Investor Relations section of our website.

I'll now turn the call over to Mr. Tom Nolan, our Chairman and CEO, who will thoroughly review the 2014 and other views of triple net lease market environment and insurance transaction and portfolio activity.

Michael will then discuses our 2014 financial results that was released earlier today. After our prepared remarks, we'll be happy to take your questions. Tom?

Thank you, Mary, and thank you everyone for joining us today. Before we review our quarterly and year-end results, I'd like to take a moment to discuss the addition on those that we released this afternoon.

As you may have read, our President and COO, Pete Mavoides (inaudible) Spirit Realty. This was a mutually agreed upon decision. I personally enjoyed working with Pete. And during his tenure, he has made numerous contributions, which have supported Spirit's success and we wish him well in his future endeavors.

I've assumed Pete's responsibilities on an interim basis as we conduct a search for a successor. Spirit remains focused on maintaining the quality of our portfolio and executing on our stated business plan. We have a deep and seasoned management team in place that will work closely with me to ensure business as usual, while we conduct our search.

Now, I would like to turn to our 2014 fourth quarter and year-end operating results. With an improving in economy and a robust acquisition market, we had another strong year in positioning Spirit as one of the premier companies in the triple net industry.

During the year, we continue to strengthen and diversify our real estate portfolio. We accretively invested almost $1 billion in single-tenant net leased property and recycle the capital from the sale of 38 non-core properties totaling $121 million.

We also continue to proactively evaluate our geographic and tenant concentration. As such we announced in December, that we had amended and extended the Shopko master lease, which lengthened the weighted average lease term by five years and importantly allows us to unilaterally sell properties and newly executed leases which pays the way for us to reduce this tenant concentration. It remains our intention to have no single tenant, represent more than 10% of Spirit's total revenues by the end of 2015, and I'm pleased to report that we've begun to make progress on this stated goal.

Earlier this month, we sold four ShopKo assets for approximately $33 million. There is a healthy appetite for these assets from a variety of buyers and we're currently in active negotiations with multiple parties on a number of additional transactions.

Turning to our balance sheet. Through a combination of debt and equity transactions, we were able to fund our acquisition activity throughout the year and continue to focus on the strength and flexibility of our balance sheet.

During the year, we extinguished approximately $600 million of high coupon CMBS debt as well as approximately $100 million subsequent to the end of the year. As such, we've become a more active unsecured borrower, generating net proceeds of approximately $726 million from the sale of convertible senior notes on the two separate issuances.

Further, we issued $510 million of investment grade, A plus investment rated net lease mortgage notes all through our master funding program. These transactions contributed to lowering our debt costs and extending our maturity profile.

The slight temporary uptick in our leverage ratio at the end of the year was a result of a combination of factors. The impact of the $510 million of net lease mortgage notes we issued late last year, and the fact that the EBITDA contribution from the income producing properties we acquired with the proceeds from these notes was not in place for the entire reporting period.

Had that EBITDA have been normalized, the debt to EBITDA ratio would have been substantially unchanged for the quarter.

On the equity side, during the year, we issued approximately 41 million common shares through a follow on offering in our ATM program, which generated approximately $435 million in net proceeds. Today, we're one of the leading net leased REITs with an enterprise value of over $9 million with a proven operating platform and a strong balance sheet. We had taken Spirit a long way from the $3.1 billion enterprise value at the end of our IPO in September of 2012.

Looking to our financial results. We reported fourth quarter 2014 AFFO of $0.21 per diluted share, representing a healthy 10% increase from the same period a year ago.

Further, we continue to pay an attractive quarterly dividend, and in December, increased the dividend 2.3% to $0.17 or $0.68 per share on an annualized basis. As I said some earlier, we are an active acquirer throughout 2014. In the fourth quarter, we've invested $399.5 million in real estate through 27 separate transactions acquiring 120 properties. These investments at a weighted average initial cash yield of 7.4% and a weighted average initial lease term of 16.7 years, 78% of those transactions consisted of direct sale leasebacks.

For the entire year, we acquired 361 properties investing almost $1 billion in 82 separate transactions, again primarily through sale leaseback transactions. These investments at a weighted average initial cash yield of 7.5% and a weighted average lease term of 15.7 years.

The market for net lease transactions remains active and the credit worthiness of our tenants continue to improve. We did see some cap rate compression throughout the year, but with the low interest rate environment and our improving cost of capital. Our investment spread remains robust by historical standards.

We are disciplined in our underwriting and are confident and our ability to source new transactions that continue to produce healthy spreads to across the capital. As we begin 2015, we have a robust acquisition pipeline, which would allow us to remain an accretive acquirer.

This pipeline reflects the strength of our acquisition platform in a disciplined underwriting delivered negotiations if there are due diligence. Our investments in asset management teams personally sell us each deal and undergo extensive research on each property we acquired to sale. This involves the narrative things including property sales of every asset and ongoing discussions with our existing and prospective tenants.

As a result of this focused approach, we've established a solid track record of maintaining a high quality portfolio that supports sustainable earnings growth.

Since our IPO exclusive of the Cole II merger we have organically grow on the portfolio and have invested over $1.5 billion in new acquisitions representing more than 127 transactions. This prove an operating sign of (inaudible). Delivered and granular has developed and refined over the last decade and tested through various market conditions.

Now turning to our portfolio. We are proactively managing the portfolio by selectively selling non-core assets and reinvesting the proceeds into assets more consistent with our investment philosophy. During the fourth quarter, we sold 19 properties generating gross sales proceeds of $76.4 million for the period ended December 31, 2014, we sold 38 properties generating growth sales proceeds of $121.2 million with a weighted average cap rate of 7.6%. Subsequent to year-end, we sold eight properties for $62.3 million and a 7.5% cap rate on the income producing properties, which includes the four Shopko assets we sold for $32.6 million that I referred to earlier. As of December 31, 2014, we have 2,509 properties, which were 98.4% occupied, representing a 20 basis point increase from last quarter and a 40 basis point increase from last year.

At year-end, we only have 37 properties available for lease. Portfolio consists of 454 tenants representing more than 27 diverse industries across 49 States as well as the US Virgin Islands with a weighted average lease term of 10.8 years. Since our IPO, we've maintained consistently high occupancies north a bit 98% and maintained a relatively consistent average remaining lease term of approximately 11 years.

Only three States contributed more than 5% of our total rent. Our largest state Texas, Illinois and Wisconsin accounted for 12%, 6.7% and 5.5% of the annual rent contribution of our real estate portfolio respectively, and no one can other than Shopko contributes more than 3.7% of our total revenues.

The top three industry types represented by 454 tenants as of December 31, 2014 where general merchandize accounting for 15.9%, followed by casual dining at 9.8%, and quick serve restaurants at 7.5%.

As of December 31, 2014, approximately 45% of our rent was contributed for mass releases and approximately 89% on a single-tenant properties provide for periodic rent increases. As part of our asset management strategy, we continually review our tenants corporate and unit level financial statements, which was again healthy in the fourth quarter.

For the trailing 12 months, a unit level rent coverage was 2.8 times for our reporting tenants in consistent with what we reported a year ago. As you know, we view this as a valuable indicator of how essential our properties are towards the end of the operation and their ability to pay rent. Finally, I would like to comment on a lease renewal activity for the year, which consisted of 64 properties, 51 of those properties were renewed or relieved to new tenants and one of the properties was sold. The 51 property that were renewed or released recaptured approximately 105% of the expiring rents on those properties. The remaining 12 properties are currently being marketed for lease or sale.

With that, I'll turn things over to Mike, who will walk you through our fourth quarter and year-end financial highlights. Mike?

Thank you, Tom. We are pleased with our fourth quarter and year-end financial results. As Tom said, this afternoon, we reported AFFO of $0.21 per diluted share for the fourth quarter ended December 31, 2014, an increase of over 10% compared to the fourth quarter of 2013. This increase is primarily attributable to higher rental income with consistent operating expenses.

We also reported AFFO of $0.82 per diluted share for the full year ended December the 31, 2014 compared to 81% in 2013. Total revenues for the fourth quarter and year ended December 31, 2014, totaled $154.8 million and $602.9 million resulting in an 11.2% and 43.7% increase compared to the quarter and year ended December 31, 2013, respectively.

New investment combined with contractual rent growth drove the increase in the fourth quarter. The increase for the year was primarily driven by properties acquired in Cole II merger as well as the $971.7 million of non-merger real estate investments and contractual rent increases in 2014, partially offset by property sales during the year.

Total operating expenses were in line with expectations for the fourth quarter and year ended December 31, 2014. Property expenses were slightly higher in 2014, primarily because of reimbursable costs incurred in connection with non-triple net leases acquired Cole II merger completed in the second half of 2013.

General and administrative expenses in the fourth quarter totaled $10.8 million or 6.9% of revenues. For the year, G&A totaled $44.3 million, which includes a $1.7 million of one-time expense. It was noted last quarter. Absent bad expense, G&A for the year would have been 7.1% of revenue.

Although we do not provide specific G&A guidance, we continue to focus on our human capital needs in 2015. As such, we expect our G&A as a percentage of total revenue should be in the low 7s throughout 2015. The increase in interest expense for the fourth quarter was driven primarily by debt used to fund the acquisitions during the last 12 months.

Debt acquired in the merger also contributed to the increase in interest expense for the full year 2014 compared to 2013. Similarly, the fourth quarter and full-year increase in depreciation and amortization was driven by acquisitions and the merger

Moving onto our capital structure and liquidity. As Tom mentioned, we're very active in the capital markets during the year. The proceeds from these transactions were used to fund acquisition and provide greater flexibility in our balance sheet.

In November, we issued $510 million of 8 plus rated net lease mortgage notes under our secured master funding program also known as our ABS structure. The notes have a blended coupon rate of 4.42% and weighted life of 9.4 years. Recall that earlier in the year we also completed an exchange offer for $912.4 million of outstanding notes, which are now 8 plus rated also. As we continue to be an active acquirer, our ABS structure will provide the flexibility and pricings to effectively acquire triple net properties and attractive spread to our cost of capital.

In addition, during the year, we generated net proceeds of approximately $726 million through the issuance of convertible senior notes. The shorter tranche totaled $402.5 million at 2.875% and is due in 2019. The other tranche totaled $345 million at 3.75% and is due in 2021.

At the time we issued the convertible notes, we also issued 26.5 million common shares in our first follow-on equity offerings since the IPO, resulting in net proceeds of $163.8 million. During the fourth quarter, we sold 12.8 million common shares through our ATM program resulting in net proceeds of approximately $148 million.

For the year in total, we sold 14.4 million shares, resulting in net proceeds of $164 million. These equity and debt transactions in combination with our asset sales during the year allowed us to fund our acquisition activity in 2014 and have also created a strong financial position to fund our acquisition pipeline going into 2013.

For example, our cash and cash equivalent balance totaled $176.2 million at December 31, 2014 and our $400 million revolver was undrawn. Our dividend continued to grow in 2014. We increased our quarterly cash dividend on December 15 to $0.17 per common share, a 2.3% increase from the previous quarterly rate of 16.625 per common share. The new dividend represents an annualized amount of $0.68 per common share. And based on our closing price today of $12.33, the dividend represents a current yield of approximately 5.5% and an AFFO payout ratio of approximately 83%.

Including this guidance, we're affirming our 2015 AFFO guidance range of $0.84 to $0.86 per common share. And with that, we'll be happy to take your questions.

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. (Operator Instructions). And our first question comes from Juan Sanabria from Bank of America. Please go ahead with your question.

Just with regards to our Peter's departure, I was wondering if you could give us a little more color, was there and not compete that will keep them out of the competitive situation. Can you say where he's going, if possible. And if you can comment on any sort of vesting of stock rewards that may have taken place?

Sure. I'm happy to comment on all of those. I know those had -- first of all from Pete's perspective, this is a personal decision. but those that have had the pleasure of working with Pete. I know he is a dedicated family man. When he joined Spirit some years ago, he moved to his family here to Scottsville. At the end of the last year, Pete made the decision that he wanted to return his family back to his native Northeast roots, a family decision, I certainly respect it. And it's really is quite simply these geography challenges that we're instrumental in the mutual decision that we reached.

As to his departure, the economics of his arrangement were setup in his employment contract, and the economics will mirror what is outlined there relative to the severance and acceleration. And as to his ultimate where he ultimately goes, I am not aware of anything at the moment, he hasn't shared anything, but I'm sure whereever he goes, he will be successful. And there is employment contract also that of course not only the severance and acceleration, but there is also language concerning the Pete.

Could you just comment on how long that is?

It is 12 months.

Okay fine, that's very helpful. And then on Shopko, I know you gave a little color there. What are the types of buyers that you're seeing is it mainly people interested in one-off assets, private buyers or is it also mixed with larger vehicles, it may be looking into two multiple assets that position this from you guys.

I think we're seeing the whole mix, the first transaction we just happened to do and that is really the timing, we have easily have done another transaction but happened to be the portfolio for assets. So, in that case you had somebody buying for. So, we have people who looking at small pools and we have many people looking at individual assets.

Okay. And if I could just go back to Peter's departure, is it your intention to at least temporarily relocate the Scottsdale I don't think you're currently based there from a living perspective?

No, well I have lived there in the past, so Scottsdale is the second home to me. My commitment is to be here as much as required. I would tell you I've spend with the people in this room know, I already spent a substantial amount of time in Scottsdale, and I will continue to do so to meet the obligations that I had as well as the existing interim obligations that I have, so I will certainly spent all the time here I need to spent. It is not that difficult commute and obviously I had other responsibilities around the country for representing Spirit, but there is not difficult to spend here.

Okay, great, I'll move further. Thank you very much.

Thank you.

Our next question comes from Vikram Malhotra from Morgan Stanley. Please, go ahead with your question.

I just wanted to clarify that cap rate I may have missed this, but did you see the cap rate on all the assets sold in this year was 75 or was it -- whas that Shopko?

It was all.

Do you know what the cap rate? Could you let us know with the cap rate on Shopko was?

Well, no and I again don't need to be left in the sense of saying no what we have -- I think what we've said in the past and is that the pricing around Shopko given its with th fact of the qaulity credits and that we expect the pricing to be consistent with the assets that we're buying and selling in other areas of the business.

We do not in general comment on any particular transaction, we never comment on specific transactions, we always keep aggregate numbers for purposes of one confidentiality and two we have as you can imagine, we have many, many Shopko assets that are currently in various forms of negotiation they're in different locations, their cap rates on them will be different, then it really isn't helpful of productive to the process of selling them by to be releasing an individual cap rate, which then folks can get kind of tied into. So I think it will be and again our approach. We want to give you the best transparency that we can give you, which obviously we try to do here by aggregating with the other sales that we had. But I think again the main message is that the cap rate here is very consistent with, other sales and purchases to our life-time property.

Okay and then just, I mean I'm sure all of you been involved, but I believe Pete was fairly involved in this processes as well in terms of, just obviously the renegotiation but more also on the process of divesting some of this, would there be, just interim as you resume more of this responsibilities, maybe just a little bit more of an elongated process in terms of selling Shopko as his departure has no bearing on it.

Yeah, obviously, with all due respect I think the Pete's contribution and there were many, we don't expect this to have any impact on our marketing efforts relative to Shopko, Mark Manheimer is sitting here in the room with me, he has been the principal architect of our sales strategy and where we expect it to remain as we anticipated.

Okay and then just last one. Assuming that you're whatever you have baked into guidance initially when you first gave 2015 guidance in terms of Shopko and other assets, assuming that is similar now, I'm just wondering kind of, are you, is it just because of obviously limited visibility into the acquisition side of things for 2015, but I would assume that given the acquisition number that you printed in 4Q, pretty easy for you to kind of get the guidance number. I'm just wondering, are you, what kind of stopped you from maybe just taking the guidance up a bit?

Yeah, Vikram its Mike and just a couple of things as you pointed out, first of all, we have the Shopko sales that are a piece of the 2015 plan and as Tom said, we're endeavoring to get that exposure down below 10% by the end of the year. So that has an impact.

And then secondly it's our plan at this point to reduce our leverage somewhat during 2015 as well. And when you add those two things together and then coupled it also with the fact there are fourth quarter acquisitions, fourth quarter is always a little bit high relative to the other three quarters during the year. So when you add all that up, this is the guidance that we feel comfortable with.

Okay but just to clarify whatever you have baked in, in terms of Shopko a sale that has not changed this past quarter.

Right.

Okay. Okay, thank you guys.

You're Welcome.

Our next question comes from Alexander Goldfarb from Sandler O'Neill. Please go ahead with your question.

Good evening. Yeah, we'll miss Pete he is a good guy. So first question is, I just covering off on that, can you see what this out is there a severance that will be like, is there something we should put in our first quarter FFO or expect when you guys print first quarter earnings.

Well there is a serverance as I said set out in his contract includes, the severance and the non-compete most kind of industry standards tend to go hand in hand. So Pete has a year severance but the reality is given our G&A number and our enterprise value those type of charges dont have a meaningful or material impact on any guidance numbers or really any quarterly AFFO or FFO numbers.

Okay. But that's not the guidance range that you guys provide excludes that's correct?

Well, you point out the right thing Alex, the AFFO is after adjustment for equity compensation, but to the extent there is any severance and equity related, it doesn't impact the FFO.

Okay. And then you guys did a little of the ATM issuance and ATM has been a active topic this quarter. So can you just one tell us what you're assuming in your guidance for ATM issuance and two how you guys think about ATM versus an overnight offering.

Well, we don't we issue capital markets guidance and unfortunately I can't can offer anything there, I mean, as two the use of the selection of the method of raising equity I think that's clearly facts and circumstances driven Alex, I must say I find the ATM exceptionally efficient and if you have good volume and particularly because we're a granular buyer of real estate, given the way that we operate our business and we have so many transactions the matching principle here can be really, really effective. So I'm not to say we wouldn't do bought the overnight deal or marketed deal, I mean we look at all those but at least most recently the ATM have just proven to be an exceptional inefficient and well matched source of funds.

Okay. And then just finally, given that you end up time has settled the ARCP issue. Just sort of curious now that the markets have settled out what impact if any, it's had with them not being there anymore. Have you noticed any change in, in the cap rates or people coming back to you or anything or is it as though just this began to be disappeared, and it hasn't made a difference at all as far as you guys are concerned and the acquisition or disposition space?

I'll let Gregg elaborate, but I guess my comment would be, I don't think it didn't have a huge impact on our cap rate per se. I would tell you that we picked up transactions both that have close, and I think respectively will close that we might not have had the opportunity to do, because I think there would have been a more aggressive capital source available, but is not available now. I'll let Gregg elaborate.

Correct. There is not really have much of an impact on cap rates and maybe a little impact on volume, but we still see robust pipeline. It's not like it's kind of get back down to where the transactions are still as high as we've seen in the past few years, although the fourth quarter is translated it unlike the heaviest quarter. Most of the lot of activity not cap rates are this year anyway not seem to be heading lower, at least for right now subject to change. But we still see the big pipeline would look with decent spreads over cost to capital.

Okay. Thank you.

Thanks, Alex.

Vincent Chao, Deutsche Bank.

Hey, good afternoon, everyone. Most of my questions have been answered, but I was just curious if I missed it may be, but did you share with us the unit level coverage for the quarter?

Yes, the rolling 12 is 2.8.

Okay. And I guess going back to Shopko little bit, I mean, I guess so the target by year-end is (inaudible) 10%, obviously Shopko would be down to 10%. Once you get there, I guess if there was enough demand, because you've talked about them as being comfortable with the credit risk, but obviously you have a lumpy mix there. Just curious, would you be willing to go to zero if there was enough demand or would you want to keep some level of Shopko exposure just because you think it's a good credit?

I would miss talking about it. So I couldn't bring myself to go to there. So I think that clearly there is a spread between if we get less than 10 and our next largest tenant at 3.7%. So, I would expect over time that the given provided as the volume continues to be there, that we would bring that exposure more in line over time, but we wanted to create kind of a bright line objective that people you can get their arms around. And this approach seems to be the way to go, which was set the date, set the target and let people know that we were going to get there. But, I certainly don't see any reason to go to zero. I mean they're good tenant. And they continue to function consistently quarter-after-quarter as they have really isn't that become familiar with them. When, I came here in 2011. So it doesn't, and I don't expect it to go to zero. I don't think it needs to go to zero. I would not be surprised again overtime, if it's works its way down from 10 closer or other exposure.

Our next question comes from Rich Moore from RBC Capital Markets.

The announcement about Pete it seems you're hurry to me Tom. And I'm curious why wouldn't you guys you and Pete both wait until the spot has been filled, wait until you've already identified the successor, and then make the announcement or then having go at that time?

I don't believe and Pete share this Rich, you make a decision, make a decision, and can be a so called lined up you're out marketing for a successor. I think what in terms of it seems rushed, let me just comment on that. Obviously Pete and I have done discussing this. I think both of us felt strongly that we wanted to be in a position where, to the extent that this was going to be the outcome that we wanted it to be done in times of this call. That was, because it's good to have a deadline that the discussion had gone back and forth. And it just seemed appropriate. And he and I both share that, that this was transparency getting this out there, and this was the best time to do it, because we were having an earnings call. And so, let's get the -- let's get the news out there, and Pete can move on with the personal decisions that he made in his life.

I mean, I certainly applaud the transparency, I think that's great. Why are search (inaudible) revenue had said that you have a deep bench and that's probably true, I mean, I guess a search is external for the most part?

Well, first of all, we haven't. I mean we'll do a search, but internal candidates will be considered. First of all, I think that's always a good kind of executive leadership to make sure. And second, the search that again the position, as the company has grown substantially, we do have a deep bench and some of the attributes of the President and Chief Operating Officer role when Pete put this when he and I joined here four years ago theparticular search that we look for could have -- and probably will have quite different attributes, because we're going to be utilizing internal resources for many of the skills that he developed. I would tell you when talking to Pete, I think he is very proud of the legacies that he left here. I think he is proud of the management team that I'm working with here and he feels as comfortable as I do. This organization is prepared to move on in his absence.

And then did you give a timeframe you think for the search or do you have an idea of how long it might take?

I always think it will take longer than anything, but now it will be -- we're going to conductive, and I think that the constructive Company to work for (inaudible) so much dependent obviously. So I think we'll get on it and I expect we'll have a candidate in due course. I don't think there is any extenuating circumstances that would got extended.

Okay, all right. Good, thanks. Thanks, Tom. And then, let me expect could on the 20 office supply stores have, is there any issue in there. I mean, obviously you are aware of everything is going on, is there any issue within your 20-year -- all of your 20?

No. It is Mark. Most of the ones that we work through the issues whether they would take office max (inaudible), we think we've got the lion share of those issues.

Okay. Good, thanks. And then just having curiosity with everything that's going on in Texas that you guys previously marketed, have you seen anything oil related or any issues with your tenant base in Texas.

No. I mean, we do have a decent size representation in Texas. I guess there are couple of thoughts. I think the Texas economy is a lot more diversified and it's historically been in some of the other economic environment. It is really early to tell -- going remember when oil started to move, I mean some of the stuff takes a while to work its way through the system. I'm sure if you're driller obviously feel it overnight, but I think in terms of our portfolio -- in terms of the dialog that we're having with the tenants were not seeing really any repercussions at all, obviously, oil is lower so as gas prices and disposal income is higher and it seems to be helping (inaudible). So I think that on balance Rich, whatever impact it's having and I know people talk about office space and use them in the like and we only have about a third of our whole entire Texas exposures in the Houston area, and even there, we really hasn't seen, we haven't seen any impact at all.

Our next question comes from Cedrik-Lachance of-Green Street Advisors. Please go with your question.

Tom, you become a lot more active on the acquisition front, I think the pace continue to pick up, and what I'm curious is whether or not the investment strategy has firmed up or has changed, when you came in into the public market, and came back in the public market, I think the intention was to be fairly quiet on the acquisition front. You enjoyed a portfolio that was primarily leased and non-investment grade rated tenants, then subsequent to the Cole acquisition as you add a lot of assets that were lease investment grade rated tenants. And I think, it wasn't clear whether or not you'd favor assets that have a higher or lower credit profile. And as you pick-up the pace on the acquisition where do you stand on that, what will you be primarily targeting. And how does that also influence disposition strategy?

I like Gregg to elaborate here in a moment, but I think in terms of the, our investment strategy, yes, we picked up a lot of investment grade with Cole. However, as to our fundamental investment strategy, we continue to believe, I think as we have since the time that the IPO, that the best risk adjusted returns, where we can accomplish the best long-term returns remains in the non-investment grade rated tenants.

We have an excellent either local or regional tenants well operated that do not have an investment grade rating and therefore do not have investment grade capacity to get investment grade capital. Not only we get in our opinion that are lease terms, that you, but in terms of cap rate, that you all get better lease terms in terms of potential master leases. You also get rents on that you not see an investment grade rated tenants. So it is -- our investment thoughts I think has been quite consistent again passes the Cole transaction. And as to the-- I feel like maybe I like to Gregg comment on that.

Yeah I'll just add a couple of points obviously, the middle market and credit has been our niche of 12 years. We are very heavy in the retail, master leases, still as both our comprised majority of our transactions. Our coverage structuring the master lease for extra credit enhancement. But, and we -- the industry we are targeting the consistent with the industries. We already have in our portfolio, which obviously gravitating towards the stronger performing industry and potentially dropped out from our history shows did not perform as well. So in summary, kind of a short statement that's what we're targeting in this facility and active market with a lot of potential.

okay and then. So from a disposition perspective given the amount of properties that you now have on your books that are not consistent with the type of assets you're trying to acquire within this pool of investment grade rated properties that I believe are very well-priced in (inaudible) markets wouldn't that consists of a great disposition pool for you guys?

Yes. And we have capped in Cedric. And I assume we will continue to do that from a portfolio management basis, but we also have an aggressive disposition program already on relative to the Shopko exposure. And I think that just from a portfolio management standpoint, we want to be prudent about how much we are selling at any given quarter. But certainly, your point is taken, I think some of the dispositions that we have done has been from credit or the our investment grade tenants where we think we'll get a outside pricing on sale.

Okay, thank you.

Our next question comes from Colin (Mace) from Raymond James, please go ahead with your question.

A couple of question, just going back to the comment about seeing that you've seen cap rates compress a little bit over at 2014. Can you venture to estimate maybe roughly how much higher than that investment focus that you are focusing on. How they have compressed. And then, are you seeing more opportunities on a relative basis of maybe a office or industrial properties relative to retail relative to call it 6 or 12 months ago?

No, we've been pretty consistent in terms of we do medical offers. We do a small American opportunistic industrial there's a lot of large perhaps industrial portfolio that we've reviewed, spent lot of time in the process probably over the past 18 months. And we've just put our reason that leases aren't non-triple net leases. The real estate -- lot of times tertiary it's not exactly that the quality real estate basically we're looking for they are able achieve in some of the retail kind of made and main we're used to and had more success with.

Okay. And as far as cap rate compression any sort of rough estimate on how much that may be compressed for 2014?

(inaudible) Trade results obviously decreased. And I think the spreads remained relatively consistent over treasury, but they did decrease, I would say right now we seem to have stabilized in my opinion, but kind of changes over time. So, it might be stable in the near-term.

I mean if you look at our averages I think we're in the mid the to high seven is about this point last year were in the mid to low sevens at this point. Some of that make sure related you can't attribute it all compression but you that feels like 25 and 30 basis points.

Okay, great that's helpful and then just going back filling Pete's position it sound like you guys are focused both externally or internally, but at this point any feeling like if you're going to actually hire like a third party search firm to help with the process or something you plan on doing it internally or just can you talk just a little bit more about that search process?

I have made my experience is search firms are useful particularly for type of you have individuals and my expectation is that we would, we'll get the assitance I just you are going to get a better view of the of the playing field. So it's from stand point that's money will spend.

Okay. And then as far as the disposition activity it sounds like you guys have a lot of potential sales speed up for preferred are pretty far down the path as far as discussions and I recognize the final give a aggregate number for the year. What you're targeting. But can you talk a little bit more about maybe what the mix at least the mix of that pipeline looks like versus Shopko versus everything else?

Well on Shopko it dominates the deliver I mean we will other transactions that we don't, I don't have an exact percentage, but quite clearly the majority of our dispositions will be Shopko.

Okay, alright that's helpful, any other as you think about what, what you're selling any other geographic or sector bias. I know we talked a little about the investment strategy kind of a last question would just geographic or sector focus at all on beyond Shopko?

Yes, I wouldn't say geographic but we are still working last set of multi tenant retail on portfolio lot of that had some previous debt on it that made it get closer to maturity we get pay of and mark those back lease so we're getting below you on loan demand.

Okay and then just one last question prepared remarks renewal in 2014. I think you've said you got a 5% bump related to expiring rents, how do you think that will look like for 2013. Any sense on how the renewals are going to shape up for 2015 and then of course I think there was a dozen properties that didn't renew any consistent theme of properties that our tenants are opting not to renew?

No I mean generally there is a that don't renew the ones (inaudible) they don't like money in the migration so pretty consistent and then I dont know if you want to keep on predicting 2015 is expected to be generally in line with our renewal rate.

I mean at this point, we're going to -- we've added a 10-year renewal history and I think the 105 is above kind of our historical norm. It's been north of 80 most of the time on a consistent basis in terms of total recovery. And so it feels like again this year, happen to be a little bit better than that. But, I think again with the 10-year history, I think we've been pretty consistent that the minimum of 80 and then seven years is better than that.

Our next question comes from Chris Lucas from Capital One. Please go ahead with your question.

Just a couple of quick follow-ups on the ShopKo portfolio sale, recognizing it's a small sample set. But, wondering if you could maybe provide some additional color on the quality of the stores that you sold and their productivity, compared to the remainder of the portfolio of ShopKo Stores?

No, I am happy to do that. I think one of the things about the ShopKo portfolio is it has been fairly marginal. It -- they're really from a spectrum of performance, there is just, not a lot of difference between their best quartile, in the top quartile and the bottom quartile, and which moved --- for some time. So in terms of what we sold, I would say, I think we sold an average kind of a margin group of assets consistent with what the portfolio looks like as a whole.

And then, just on the ATM. Can you remind us of when you're open and when you're restricted?

Well yes, you typically would be restricted from at least right about the time if you closed your quarter through earnings. So we've been restricted in the first couple of months of this year, for example, through today. And then, I think 48 hours after that.

So Mike, when you say it's close to the quarter, I mean is you're still available. So in this particular quarter, you would still be opened the first, I don't know 10 days of the new quarter over some period in, right? Or is it literally the cut-off of the quarter?

Well, I think in the underwriting agreement, I think it is more like you were saying that you would have the opportunity to sell into the just after the -- through the quarter and just after the quarter, we have not done that yet.

Our next question comes from Dan Donlan from Ladenburg Thalmann. Please go ahead with your question.

Just two quick ones from me to make me stop questions going respond to the call. But, just curious what the -- what's the -- and I'm sorry if you says what's the accrued interest on the defaulted loans, what's triggering that?

Yeah, sure. We've got -- as you can see we have a small handful and truly mostly one loan, one CMBS loan on a property where the properties are underwater. We're in discussion with the lender to relieve that debt by virtue of getting the properties back, we're selling them for them. And so that that will come down over time. But in the intervening period, the provisions to that CMBS loan are such that the accrued interest has been accelerated or elevated rate. And so for GAAP perspective, which continued to accrue that expense. Now, the result of course will be because this is non-recourse CMBS, the results of all this will be that the relieve of above -- the principal on the debt and the accrued interest will be by virtue of disposing of the properties.

Not to put as it's a non-account, of course they used to be account, we're basically accruing a default interest, we will never pay.

Okay, understood. And then just looking at, I mean this is so small too, but the portfolio maintenance capital expenditures -- if you look at your total CapEx in a given year, where does that shake out, is it fairly insignificant maybe $4 million or $5 million. Just kind of--

Yeah. At most. It is very insignificant and very what you're seeing in that acquisition. It's is actually instances where we made an additional investment with our tenants that's producing revenue where the cap rate on that investment is an (inaudible) and the same as what we might have given on the original lease. So that's a real revenue producing investment. The incremental CapEx that maybe not revenue-producing is miniscule.

Okay. Thank you so much.

Thanks Ted.

And our final question comes from Juan Sanabria from Bank of America.

I just had a quick follow-up question. Mike, I think you mentioned that the guidance may include some sort of deleveraging, could you just share kind of what your goals, maybe with that respect what kind of metrics you are looking at.

Yeah. We're not prepared to give a hard number on that. At this point, it will depend as you point out on the acquisition levels and our opportunities as the year and full. But it is our intention at least in the plan to deliver a little bit over time and so that pro forma, if you will, 74 that Tom alluded to, we're hoping to be lower than that by the end of the year.

Yeah, it could be --- and again from my perspective. And again, we don't provide capital market with the currents. But we realized because of the kind of fact that certain instances and timing, it will pick up a little bit and so our intent to have it pick back down some, so fairly I think it is little more granular than that, but that's our objective.

Okay. Major period of sale in a medium-term basis not holding into 2015 that you want to get to seven times or do you want to get below that or?

I think we're not -- we don't have a target, but we are definitely getting in the direction that you articulate it.

Okay. Thank you.

You're welcome.

And ladies and gentlemen, at this time, we'll conclude today's question-and-answer portion of the call. I'd like to turn the conference call back to Mr. Nolan for any closing remarks.

Thank you. And as I began this call, let me reiterate. We're pleased with our fourth quarter and full-year operating results, as we continue to focus on growing our earnings and our dividends, which creates value for our shareholders. As we embark that third year as a public Company, we plan to continue with a disciplined operating strategy and a prudent fiscal plan. As we've said in the past, we strive for the highest level of excellence and discipline at all levels of our organization, and I had the pleasure of working with the professional seasoned management team with decades of experience in the triple net industry.

This group is dedicated to meet our ultimate goal to be the premier Company in the triple net industry. Thank you for joining us today and I thank you for your support of Spirit Realty Capital.

Ladies and gentlemen, that does conclude today's conference call. Thank you for attending. You may now disconnect your telephone lines.