Spirit Realty Capital Inc (SRC) 2015 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to Spirit Realty Capital's 2015 First Quarter Earnings Conference Call. At this time, all lines have been placed in a listen-only mode. Please note that today's conference is being recorded. An audio replay will be available for one week beginning at 6 o'clock 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, and can be obtained from the Investor Relations section of Spirit Realty's website at www.spiritrealty.com. After our speakers' remarks, there will be a question-and-answer period. (Operator Instructions).

I will now turn the conference over to Mary Jensen, Vice President of Investor Relations for Spirit Realty Capital. Please go ahead.

Thank you, operator. Joining us today on the call are Tom Nolan, our Chairman and Chief Executive Officer; Phil Joseph, our Chief Financial Officer; Mike Bender, our Chief Accounting Officer; Gregg Seibert, our Chief Investment Officer and Mark Manheimer, our Executive Vice President of Asset Management.

During the course of this call, we will make forward-looking statements. These statements are based on beliefs or assumptions made by and information currently available to us. Our actual results will be affected known and unknown risks, trends, uncertainties and factors that are beyond of our control or ability to predict. Although we believe that our assumptions are reasonable, they're not guarantees of future performance and some will prove to be incorrect.

Therefore, our actual future results can be expected to differ from our expectations and those differences may immaterial. For a more detailed subscription of potential risks, please refer to our SEC filings which can be found in the Investor Relations section of our website. All information presented on this call is current as of today May 07, 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 and AFFO can be found in the Company's earnings release which can be obtained on the Investor Relations section of our website.

During our prepared remarks today, Tom Nolan, our Chairman and CEO will discuss our first quarter operating results, provide an update on how we're progressing on our operating plan and provide an overview on the net lease market trends. Phil Joseph, our CFO, will then discuss our quarterly financial results that were released earlier today. After our prepared remarks, Tom and Phil along with Mike Bender, Gregg Seibert and Mark Manheimer will be available to take your questions.

With that, I would like to turn the call over to Tom.

Thank you, Mary, and thank you everyone for joining us today. To begin, I would like to welcome Phil Joseph to Spirit as our new Chief Financial Officer. Phil is a great addition to the team and brings extensive capital markets expertise and a proven financial acumen that will allow us to continue building on our recent successes. As I've noted in prior calls, I'm confident we have a deep and talented management group and we're happy to add Phil to the team. Among Phil's many responsibilities, one item that Pill and I have agreed for him to turn his attention to is our quarterly reporting package. As such, we've targeted next quarter to implement certain changes, including the addition of a supplemental reporting package. As for our Chief Operating Officer position, I continue to execute those responsibilities and will happily continue to do so until a suitable individual is in place.

Now turning to our quarterly results. Spirit had an excellent and very productive quarter across the board. Our financial results were right on target with our plan. We delivered AFFO of $0.21 per diluted share in the first quarter of 2015. We have made substantial progress in our stated tenant diversification objectives. Our acquisition activity was robust in terms of volume, pricing and asset quality. Finally, we continue to strengthen our balance sheet to optimize flexibility, pricing and terms, which we believe will position us for long-term success.

Let me touch briefly on each of these points. From operations, as I've noted, we delivered AFFO of $0.21 per diluted share in the first quarter of 2015, which represents a 5% increase from the same period a year ago. Occupancy remained above 98% and our property revenues increased 12.4% year-over-year. In addition, we paid a quarterly dividend of $0.17 per common share. Phil will get into greater detail on these numbers in a moment.

As to our ongoing diversification program, I'm pleased to report that we have reduced the normalized revenue contribution from our largest tenant Shopko from 14.0% at the beginning of the year to 12.1% after giving effect to sales during and subsequent to the end of the quarter. Since we began this program through today, we have sold 13 Shopko Stores for total gross proceeds of approximately $103 million. We have been pleased with the broad investor interest in these Shopko assets and believe it is reflective of the positive real estate and credit characteristics of the individual stores and the tenant.

As you are aware, we do not disclose cap rates on individual purchases or sales. However, I can report that in the aggregate, these 13 sites have sold at a weighted average cap rate less than the rate we have achieved on our acquisitions during the comparable period or in other words, we've been able to achieve our diversification objectives while doing so on a mildly accretive basis. For those who maybe concerned that we are selling only the better performing or premium Shopko assets, I'm pleased to report that the aggregate rent coverage ratio of the assets that remain in our portfolio is higher today than the entire portfolio achieved when we began this sales exercise at the beginning of the year. As you know, the industry regards this ratio as one of the most important measures of how operationally essential each given location is to the tenants profitability and therefore how attractive a given site is to a prospective purchaser.

Moving on to our investment activity, during the quarter, we acquired 53 properties for $265.5 million. The initial cash yield on these investments was approximately 7.7% and the average remaining lease term was 17.2 years. 77% of our acquisition activity was achieved through direct sale leaseback transactions and we obtained master leases on 64% of them. Finally, 94% of these leases provide for rent escalations over the term.

We continue to execute on what we believe is a proven investment strategy, acquiring a diverse group of net lease properties that are operationally essential to our tenants, principally middle market in terms of credit underwriting and well located geographic areas and across various industries. This quarter's acquisitions represented a variety of different industries including grocery stores, restaurants, convenience stores, automotive service, as well as general and specialty retail.

Going into the second quarter, we have a similarly robust acquisition pipeline with several transactions already closed or under contract. The market for net leased properties while still competitive is essentially unchanged from last quarter and we continue to underwrite attractive acquisition opportunities. You will note our reported cap rate on acquisitions is a little higher this quarter over the last. I would add that I do not believe this is reflective of any general market trend, but rather is purely a result of the investment mix this quarter.

Turning to our existing portfolio, we continue to derive predictable cash flows from our stabilized portfolio due to the credit quality of our tenants and our active asset management. As noted earlier, we again maintain high occupancy, is about 98% during the quarter and our average remaining lease term increased to 10.9 years from 10.2 years in the first quarter of 2014. At March 31, 2015, approximately 46% of our annual revenues were derived from master leases and approximately 89% of our single-tenant leases provide for periodic rent increases.

We believe that disciplined underwriting is the first step to acquire high quality diversified tenant roster. But it doesn't end there. As part of our active asset management plan, we continually review our tenants corporate and unit level financial performance, which help us monitor our tenants' credit risk as well as any underlying business and market trends. For the trailing 12 months, our unit level coverage was a healthy 2.8 times for our reporting tenants and consistent with what we've reported a year ago.

A quick comment on our lease renewal activity for the quarter. Well it was not a large sample, our tenant retention remain near a historical average at approximately 80%. We generally engage in renewal discussions with our tenants well in advance of an expiring lease term to allow ourselves every opportunity to actively manage the lease renewal or property repositioning efforts.

During the first quarter, we had only 11 out of 2,547 properties come up for renewal. Eight of these properties were renewed or released to new tenants and one property was sold. The eight properties that were renewed or released, we captured approximately 100% of the expiring rents in these properties. The remaining two properties are currently being marketed for lease or sale.

Now I would like to turn to our balance sheet. Over the last year, we have materially increased the size of our unencumbered asset base and have taken steps to further unencumber our real estate portfolio. At March 31, we had 628 unencumbered properties valued at $2.5 billion. This is a substantial increase over our unencumbered asset base a year ago. During the quarter and just subsequent to it, we extinguished approximately $163 million of 5.76% coupon secured debt and raised approximately $348 million in net equity sales proceeds.

In addition, we obtained a new four year term $600 million unsecured revolving credits facility that replaced our previous $400 million secured credit facility. The new facility is more flexible with better terms pricing and also allows us to potentially increase the borrowing capacity up to $1 billion through an accordion feature. As a result of our recent capital markets and portfolio management activities, our net debt to adjusted EBITDA was 7.5 times at March 31 2015, compared to 7.6 times at December 31, 2014. However, as a further point of reference, had our recent follow-on equity offering occurred a couple of weeks earlier, as of March 31, our adjusted net debt to adjusted EBITDA would have been 7.0 times. We believe this ratio or perhaps even slightly lower is where we expect to position the balance sheet through the remainder of the year.

With that, I'll turn things over to Phil who will walk you through our first quarter financial results. Phil.

Thanks, Tom. We are pleased with our strong first quarter financial results. As Tom said, this afternoon we reported AFFO of $0.21 per diluted share for the first quarter ended March 31, an increase of 5% compared to the first quarter of 2014 and a 5% increase from the 2014 fourth quarter. This year-over-year increase is mostly attributable to higher rental income as a result of our acquisition activity over the last 12 months coupled with consistent operating expenses. Total revenues for the quarter ended March 31 increased 12.7% to $162.3 million compared to $144 million in the first quarter of 2014. Sequentially, revenues grew almost 5% in the first quarter when compared to the fourth quarter.

Total operating expenses in the first quarter of 2015 increased 9.4% to $146.9 million from $134.3 million in the same period of 2014. Of this $12.6 million increase, approximately $9.6 million was due to an increase of non-cash items, notably non-cash interest, depreciation and amortization and G&A expense. The remaining $3 million of incremental operating expenses is primarily attributable to higher property and cash interest expense. Property costs increased $2.1 million over the prior period with approximately $1.3 million of this increase recaptured through tenant reimbursements. While cash interest modestly increased over the first quarter of 2014 by approximately $1 million, it is important to note that our weighted average cash interest rate decreased by approximately 64 basis points to 4.89% from the prior first quarter.

On the G&A front, I also want to highlight that the $1.5 million increase from the same period last year is mostly due to severance-related expense of $1.4 million. Excluding the $1.4 million of severance-related expenses, our operating expenses were approximately 7% of our total revenues for the first quarter of 2015 compared to approximately 8% of our total revenues in the same period last year. This clearly illustrates our highly scalable platform, which [sustains] considerable growth with very modest increases in G&A related expenses.

Moving onto our capital structure and liquidity, as Tom mentioned earlier, we were very active in the capital market in the first quarter and our second quarter remains on pace as evidenced by our follow-on offering in April. Further, Spirit's corporate credit rating was raised to BB by S&P in March. While a small victory, we are keenly focused on our long-term goal of creating a more balanced debt capital structure with a more through focus on unsecured debt combined with opportunistic use of our existing Spirit Master Funding ABS structure.

We believe having a well-balanced capital structure will enable us to strategically access capital across all market cycles in addition to providing us with the best pricing and asset management flexibility to accretively acquire and recycle assets and attractive spread to our cost to capital. During the quarter, we made significant progress in support of this objective. As Tom stated earlier, we extinguished $162.8 million of high coupon secured debt with a weighted average coupon rate of 5.76%, which unencumbered approximately $335.4 million of assets.

On the equity capital front, we raised $78.6 million through our ATM program during the quarter. And since the program's inception, we have generated net proceeds of $242.4 million. The ATM is a very efficient way to match-fund our acquisition activity in an attractive cost to capital. Post quarter end, on April 14, we raised net proceeds of approximately $268.9 million in a follow-on equity offering, which was used to repay the outstanding balance under our revolving credit facility to fund acquisitions and for general corporate purposes. As a result of these capital market transactions and as Tom mentioned earlier, we reduced our net debt to adjusted EBITDA from the previous quarter to 7.5 times. However, had our April 14 follow-on equity offering occurred on March 31, our adjusted net debt to adjusted EBITDA would have been 7.0 times. Adjusting further for severance-related expenses during the quarter, our reported net debt to adjusted EBITDA would have been under 7 times.

Now turning to corporate liquidity, as of March 31, we had approximately $170 million drawn on our new $600 million unsecured credit facility. As Tom mentioned, this new facility replaced our previous $400 million secured facility. The new line of credit has an initial borrowing rate of LIBOR plus 170 basis points compared to the previous secured facility, which was incurring interest at LIBOR plus 250 basis points. The new credit facility matures on March 31, 2019 with an option to extend it to March, 31, 2020 and includes an accordion feature which can increase the size of the facility up to $1 billion subject to obtaining additional lender commitments.

Currently we have approximately $86 million in unrestricted cash and cash equivalents on our balance sheet and nothing drawn under our line of credit. In conjunction with our prior $747.5 million issuance of unsecured convertible notes last year, we believe this new unsecured facility provides us with greater operational flexibility and better positions the Company towards establishing a more balanced capital structure with a more thorough focus on unsecured debt.

During the quarter, we declared dividends to common stockholders of $71.1 million, which represented an AFFO payout ratio of 81% compared to $61.6 million representing an AFFO payout ratio of 83% in the comparable period a year ago. In conclusion, we are affirming our 2015 AFFO guidance range of $0.84 to $0.86 per common share.

With that, we will be happy to take your questions.

Thank you. (Operator Instructions). Juan Sanabria, Bank of America Merrill Lynch.

I was just hoping you could give us a little bit more color on the G&A line what run rate we should expect and if you could remind us -- I know you gave us some detail on the severance charges that ramp through and if those were backed out to get to AFFO?

Yes. On the severance charges relating to AFFO we include that in our non-cash stock comp, add back. So that was included in there, I think, I can't remember the amount it was about -- maybe $1.2 million or so, $1.4 million. So, the -- and then as it related to G&A, as Mike said last quarter, we feel pretty comfortable for the year with a 7% of total revenues as a good run rate for us and again, as I said in my prepared comments, we really view our business model as highly scalable, based upon our current G&A and headcount. So, I think we feel very comfortable with that level.

And then, with regards to the search for a replacement for Peter, where are we in the process? When do you think we could expect an announcement? What are the key attributes you're looking should we expect somebody would triple net experience or somebody outside that realm?

Yes. The process is ongoing and I don't want to give a specific date, but the process is ongoing and we have got at a number of interested parties. As to the capabilities, I want somebody who's a skilled real estate professional who is going to complement the executives that we have here in the room and elsewhere in the Company. Obviously, Phil is just getting his feet under him. He's been here for a few weeks now and so we're looking for somebody to further complement the team. I do not believe it necessarily needs to be a triple net lease executive that may be, but I don't certainly believe that it needs to be. I'm very confident and comfortable with the triple net lease capability that this company has really throughout the organization. So I think it could come from that space or it could come from the, from the broader real estate space.

Okay. And just one last one for me. On the balance sheet, how should we be thinking of funding of transactions going forward given your sort of target I guess assume to be sort of between 6.5 times to 7 times. Should we be thinking 60-40 equity debt split or if you could provide any color on the way you're think about the things?

Yes, I would just say in terms of on a go-forward run rate, it's going to be managing to our leverage target of I would say around 7 turns on debt-to-EBITDA and then from an equity prospective it's really depends on how we view the market and we have the flexibility with the ATM program as well. So we're going to have to over time keep that equity component checked to get to our target level. But again, when we look at where our debt-to-EBITDA target is now we feel pretty comfortable with it.

And further, I guess remind everybody that, we have an aggressive target on our diversification program when we announced $100 million of sales today, but given the target that we have indicated, clearly that process is going to be ongoing. So, we will be not only looking at debt and equity but we will be recycling proceeds coming from the sale of Shopko as well as with any other assets that we have identify for portfolio recycling.

Collin Mings, Raymond James & Associates.

I guess, first question, Tom, I think in the prepared remarks you highlighted again that what drove the uptick and yields a little bit on what you bought was really just a mix. Can you maybe put a little more color around that on specifically was it a particular sector or something like that, that you have a little bit more exposure to that drove that?

No, I really don't think it was. Because we're so granular and we do so many transactions, I think our reported cap rate is going to move 20, 30 basis points, mid-sevens, lower sevens, higher sevens, it's really just going to come down to what happens to get close that particular quarter. I don't think as I looked at the portfolio and I study this every time in terms of where cap rates are going and the types of investments that we're looking at, there were really no trends there. It just happened to be what closed in March from perhaps what might have closed in April. It was a pretty consistent group of assets and the type of assets that we have been buying really over the last six months.

Okay and then just as far as the deal pipeline, you started pretty upbeat in the prepared remarks and recognizing that I know you can't give explicit guidance but just as we go into where we sit right now as far as in 2Q, do you think you are going to see more transactions closed in than the $265 million in 1Q or less or just how do think about that in your near term?

Well, And I appreciate you reminding me we don't give guidance and again, I will repeat my philosophy on that. But what we do try to do is on every call is to give really the market quotes, where we see it because we can see out obviously a quarter just because of the nature of the way these transactions work. And I think you correctly identified my comments as being upbeat. We do think we had a strong first quarter and we believe that the transactions in front of us are also equally compelling. And while I don't want to give an exact number, I think we are feeling that the run rate that we had in the first quarter is probably plus or minus what you're likely to see in the second quarter given where we fit in the quarter and how we're looking at our pipeline.

Okay. And then, well, I guess for Phil again, congrats on the new role. Maybe just talk a little bit more, I know, again looking at introducing a supplemental next quarter, any other particular disclosure you think that will help as far as communication with the street going forward, any thoughts again as far as maybe (inaudible) little bit more with some additional guidance. If you can talk a little more about that, that would be helpful.

Yes, I think it's refinement around the edges initially, and again we went through this at Prologis where I was out before and it took us a good year to get to a place where we really thought that about the supplemental. So, I mean, there is a number of different refinements -- for example, it's like a debt capitalization table, debt maturity profile schedule and things like that and then over time I think what that's going to help us with is kind of refining our disclosure and guidance as well. It kind of goes hand in hand, but stay tuned definitely next quarter we got our hands full. I'm looking at Mike and Mary right now because they're going to be big help in terms of putting that product together. Over the course of the year it will improve and we will have an active dialog with all of you in that regard as well.

Okay. And then one last one for me and I'll turn it over. But just on the deal flow front, any particular sectors or you're just seeing more flow -- or on the flips and maybe getting a little bit more cautious about completing deals in?

Maybe Gregg Seibert, our Chief Investment Officer, is sitting in the room. Maybe I'll turn this one over to Gregg.

Thanks, in the first quarter, I think Tom referenced the bulk of the sectors where we completed transactions. It was a heavy kind of retail quarter in a mix that's consistent with our current pipeline at Spirit, industries we've had success with in the past, grocery stores, retail, convenience stores, restaurants. So, it's very consistent with our existing portfolio. There's obviously certain sectors that we have done in the past that we're not doing as much of today, but I think for the past five or six quarters, you will find the bulk of our acquisitions are mostly in the sectors I just mentioned.

Okay. I guess, I will sneak one more (inaudible) your appetite as far as looking at industrial or office here?

I guess that's another number that had some flows in the quarter. We did do some industrial not as much on the office side, we did a little industrial metro markets, market rent, newer properties, staying away from tertiary markets older properties, older products, to companies that make money and that's kind of our industrial, it's not a large percentage of our new acquisitions, but the percentage is probably also consistent with the current mix in our portfolio.

Vik Malhotra, Morgan Stanley.

Just on the transactions closed in the first quarter, it seem just from the disclosure that there seem to be a large grocery store transaction, given the increase in the exposure there. Was there one large transaction there?

There was one -- we had a larger grocery store portfolio that we've done. That's actually in the first quarter and has continued into the second quarter. So, yes, there was a good size groceries store component for this particular quarter.

Okay and then just on the shop. Sorry, go ahead.

I was just going to mention, we did have, I think we did business with approximately 25 tenants in the first quarter. So, that kind of gives you more of a guide that's also consistent with what we've done in the past. So there is about 25 tenants in the $265 million.

Okay, just seeing from some of the market data, it seem that there was about $100 million or so grocery store transaction but I guess, if you look at the exposure, that kind of foots there but on the Shopko sale trends, I know the target is around that 10% mark, but how should we think about it just from a modeling standpoint for the next -- for the balance second, third and fourth quarters. Do you anticipate it being kind of this call it five to ten assets or do you anticipate any quarter being lumpy?

We can always speak lumpy I guess. That's one of the reasons we set the target as of the end of the year so that we didn't find ourselves necessarily being in a position where we felt we had to close something on any given quarter. But clearly, with a sub 10% objective at the end of the year and getting to be able to report that we were halfway there in the first quarter's call, I think that we looked at that as being a positive development and clearly I think indicative of the fact that there was a significant asset value for these assets, which does not surprise us and that we're likely to get to that goal before the end of the year. Now, whether we'll have as many of report next quarter as we had this quarter, it's too early to say. And again, we never want to be in a position where we have a (inaudible) we're negotiating with the prospective purchaser who knows we've got ahead of bogey. But I think that, again, the demand is strong, it's a diverse demand and there no reason that we shouldn't continue to see this reduction in the revenue concentration to be able to report quarter after quarter.

And just remind us, if you do have the opportunity to take it down kind of under 10%, is the goal to kind of stop around that 10% or if there is an opportunity, you're willing to take it down even further?

Well, I think that the -- we set a goal that we felt was an important kind of milestone. I mean, as everybody -- well, probably -- perhaps not everybody remembers, but at the IPO, we were over 30% and 10% seemed like the goal to get to, to certainly ameliorate a lot of the concern around it. At 10% or less than 10%, it's still twice as large as our next largest investment and so, I think our ambition, our stated ambition that we have here at the Company is to have the most diversified Top 10 tenant roaster in the industry and to have the most diversified tenant roaster through our entire portfolio of assets. And so, my expectation is that once we get beyond 10%, provided there still is considerable interest, that number will likely continue to decline. But, from our standpoint, the goal we have, that we set out and the bogey we set out with was less than 10%. So, that's kind of will declare I guess many victories when we get there, and then we'll assess how to move on from there.

And just last one, again, I know you don't give the acquisition guidance, but given that historically at least 4Q seems to be seasonally better than most of the other quarters and 2Q seems to be strong as well. Given that you're on pace at least to meet the 1Q acquisition volume, would you be surprised if you kind of reach close to, lets called it, $1 billion in acquisition this year?

No, I wouldn't be surprised. We were at $960 million last year. So I think we've kind of proven that we're kind of capable at that range and as you said the fourth quarter historically tends to be the quarter that you get lots of reasons, there seem to be those year-end transactions. So, but again, one of the reasons we don't give guidance is fourth quarter is a long way away, and we'll continue to assess the market and if we can make accretive smart investments and it works with our capital structure, then we're going to make it. But would I'd be surprised if we were at $1 billion, no, not after hitting $265 million in the first quarter.

Vincent Chao, Deutsche Bank.

Just wanted to go back to the question about the sort of funding sources, return on debt and equity and you mentioned the Shopko dispositions being recycled. Just curious given where cap rates have trended particularly for some specific tenants, if you be willing or interested in selling some of your Walgreens stake to fund acquisitions and also how you're thinking about the most attractive funding sources today between debt equity and dispose?

I think that we're always looking at our portfolio and asking ourselves whether there is an appropriate recycling opportunity. We sold a couple of Walgreens last year that we thought were very good recycling opportunities and we did it. And so again, that's kind of an ongoing process and it's something that we're always looking at. As to our objective on our balance sheet management is to be in a position to have the optimum optionality, that's kind of been my mantra from day one, which is have as many opportunities to assess capital and pick the best one at the appropriate time, given where the market conditions are. It could be debt, it could be equity, it could be debt-to-equity, it could be asset recycling and I think we study that pretty closely and I would hope with the three year history of the Company that the market would consider that I think we've been pretty prudent, in terms of accessing what we saw as the best opportunities for the best cost of capital at any given time.

Okay. And I guess, just a clarifying question from a comment from earlier, I think it's when you were talking about the rent coverage in the portfolio today being higher than at the start of the year. Was that the entire portfolio your were referring to or is that specifically the Shopko coverages?

That was purely a Shopko factor. So in other words, after we sold the 13, the coverage ratio of the ones that are remaining is higher than the coverage was when you included the 13 at the beginning of the year.

Ryan Peterson, Sandler O'Neill.

You talked about going to a -- using more unsecured debt. I was just wondering if you could give us an idea of what the magnitude of those and possible sources would be for your next unsecured deal?

Yes, It's clearly going to be a process. So, obviously, there is a lot of bank term debt capital that's out there on an unsecured basis. That's the most obvious and then ultimately we like to get to a place where we're able to issue public unsecured debt. But as you can imagine, it's going to be a process in terms of engaging with the agencies as well as to look at our debt capital structure, we don't have any really significant secured debt coming due until 2017, which is going significantly increase the size of our unencumbered asset base. So, I would say initially bank term debt capital will be the first source and then with the goal to eventually longer term issue public unsecured debt.

Because I like to talk about history a little bit and the Company is coming up in its three-year anniversary in September, but at the time of the IPO, we had effectively a few hundred million dollars of unencumbered assets in the Company. Today, we have over $2.5 billion of unencumbered assets in the Company. So, again, to work on that absolute optionality of where you can source potential capital, I think the Company is in a far stronger position today than it was a year ago and certainly a far stronger position than it was at the time of the IPO almost three years ago.

(Operator Instructions). Dan Donlan, Ladenburg Thalman.

Just really one question from me. Tom, if you guys were in a public company, would you want to bring Shopko down from kind of where you are to where you're looking to go or do you think it's kind of just -- you get penalized for it on a multiple basis in which case you kind of want to bring it down to just make the market feel a bit more comfortable?

That's a great question. Yes, I think that -- I like the credit and I think the people who are buying it like the credit. And I think that's one of the reasons that it's where we're moving them as efficiently as we are. And Dan, the reality is that we spend a lot of time talking about one tenant in our portfolio and if this was a private company, we wouldn't be spending that amount of time and we are at a multiple discount to our peers. One of the reasons most often given is this concentration, particularly when we compare our Top 10 tenants to all of our competitive sets Top 10 tenants in terms of credit quality and credit history. We think we have a strong portfolio in the triple net space as anybody in the industry, and yet we do trade at this multiple discount that we've closed material since the IPO, but there is still much work to be done there. And again, the number one reason expressed when we meet with the institutions, investors and analysts is we have a oversized concentration in a tenant that the market has concluded is not as good as perhaps we've concluded. So, yes, I think the answer is, if we were a private company, I wouldn't worry about it as much, but we aren't. And I'm happy we can recycle it actually accretively. I think that's a big plus. I think that's perhaps a bit of a surprise for the market, but it's not a surprise to us, because, again, it's been a very strong tenant. So, I think the short answer, I gave a long answer, I could have given a short answer that is, yes, if we were a private company we probably wouldn't worry about it as much.

No, I appreciate the thoughts and maybe once it goes below 10%, you can institute a rule that only two analysts can ask a question about it or something.

Stay tuned on that. We'll see.

Chris Lucas, Capital One Securities.

Just a couple of follow-up questions. Phil, you talked a little bit about maybe some of the process issues you're going to have as it relates to maybe moving to investment-grade. I was wondering if you could give us some of the goals or hurdles that you see in order to get to investment-grade and then the second part of the question would be, have you looked at the insurance market as a potential source for the unsecured capital as opposed to banks, given their ability to write longer term?

Right, that's a great question. So, you're obviously talking about the private placement market [for] the insurance companies, right?

Correct.

Okay. So, yes, the private placement market again I'm not a big fan of it. How much they are going to give corporate bond covenants. They're very structured in their covenants. So, it's not ideal for us because eventually we want to get to a place where we're issuing public debt. So, I don't want to have a structured covenant package from them and again it's not a competitive source of capital because it is an oligopoly, as I'm sure you know. But in terms of the process of getting to investment-grade, it's obviously going to takes some time. The rating agencies as you know do not move on a dime and I mentioned the fact that we don't have any sizable secured debt coming due until 2017. That's kind of win -- obviously, we're going to have a significant increase in the amount of our unencumbered real estate assets and that's going to be the primary driver that gets us to investment-grade. So, hopefully, that helps you in terms of kind of the items that we're focusing on to get there.

Tom, I going to ask you a Shopko question. Just wondering if you would provide a little more color on the transactions you've completed so far in terms of the actual number of separate transactions and the different number of buyers for the 13 assets?

I don't have the exact numbers in front of me. I know that we've sold a couple of pools, different pools and I know we've done a number of individual asset sales, but I don't have the exact ones in front of me. I probably do, but I can't add them up correctly. But I shall believe we've done at this point two pools and the rest were individual separate transactions.

And were the buyers separate on each transaction or were there some repeat buyers just in separate individual transactions?

At this point, all the separate individual transactions.

That concludes the question-and-answer portion of today's call. I would like to turn the call back over to Mr. Nolan for his closing remarks.

Thank you, operator. As you heard, we're pleased with our first quarter financial and operating performance, which illustrates the quality of our well diversified portfolio and our seasoned management team that has a proven track record of operating through various market cycles. We expect our disciplined underwriting and proactive asset management capabilities will continue to allow us to source accretive acquisitions and maintain a high quality diversified portfolio. We believe these core competencies will create sustainable risk adjustment growth that supports an attractive dividend and creates value for all our stakeholders. Thank you for joining us today, and thank you for your continued support.

This concludes today's call. Thank you for attending today's presentation. You may now disconnect.