Spirit Realty Capital Inc (SRC) 2015 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to Spirit Realty Capital's 2015 Third Quarter Earnings Conference Call. At this time, all lines have been placed in listen-only mode. Please note that today's conference call 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 would now turn the conference over to Ms. Mary Jensen, Vice President of Investor Relations for Spirit Realty Capital.

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

During the course of this call, we'll make forward-looking statements. These forward-looking statements are based on the beliefs of, assumptions made by, and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are 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 be material. For a more detailed description of some potential risks, please refer to our SEC filings which can be found on the Investor Relations section of our website. All information presented on this call is current as of today November 5, 2015. Spirit does not intend and undertakes no duty to update forward-looking statements unless required by law.

In addition, reconciliation to non-GAAP financial measures presented on this call, such as FFO and AFFO can be found in the company's quarterly reports, which can be obtained on the Investor Relations section of our website.

During our prepared remarks today, Tom Nolan, our Chairman and CEO will provide a review of our third quarter growth metrics, as well as an update on how we are progressing on our key focus areas. 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 Gregg Seibert and Mark Manheimer, will be available to take your questions.

With that I would like to turn the call over to Mr. Tom Nolan. Tom?

Thank you, Mary. And thank you, everyone, for joining us today, to discuss our third quarter results. I would like to begin by saying that Spirit is stronger, more diversified and better capitalized than ever before. On our last call, I spent some time on our post-IPO history and what I believe we have accomplished over those three years. The core of that discussion was how I believe we are positioning ourselves as a dynamic industry leader in the net lease sector.

So I thought I would share what being an industry leader in the net lease sector means to us. We are a company that has a coherent and articulated business strategy. We consistently execute on that strategy while reporting our progress through useful and transparent reporting disclosures.

I'm encouraged with the quality of our real estate portfolio and our future earnings potential. I believe our leadership team is poised to achieve our industry leadership ambitions and I am convinced these attributes will create shareholder value over the long term.

Phil will go into the numbers in more detail, but our results for the third quarter as in previous quarters, do an excellent job of demonstrating our track record. Spirit and an excellent quarter in which we reported AFFO per diluted share of $0.22, representing a 5.3% increase over the comparable period from last year. Through our focused investment underwriting and capital recycling execution, revenues increased approximately 10.6% in the quarter. In addition, we paid a quarterly dividend of $0.17 per common share, representing an AFFO payout ratio of 78%.

Turning to our portfolio, we continue to derive predictable cash flows in large measure due to the credit quality of our tenants and our asset management expertise. Our portfolio remains essentially fully occupied at 98.5% with an average remaining lease term of approximately 11 years, compared to approximately 10 years at this time last year.

At September 30, 2015, approximately 45% of our annual revenues were derived from master leases and approximately 89% of our single-tenant leases provides for periodic rent increases. Of the trailing 12 months, our unit level rent coverage was a healthy 2.9 times for our reporting tenants, slightly higher than that which we reported a year ago.

Moving on to our investment activity during the quarter, we invested $159.8 million in 50 properties, located in 15 states at an initial cash yield of approximately 7.4% with a weighted average lease term of 15 years. If in place percentage rents were included, the initial cash yield would have been approximately 7.5%.

Of the $159.8 million invested, approximately 77% were sale-leaseback transactions and approximately 56% have master-lease structures. The average annual lease escalations for the new investments are approximately 1.7% and over 96% of the new transactions at unit level financial reporting. These transactions have a weighted average unit level rent coverage of 2.39 times.

On a revenue basis, 93% of the revenues are generated from the retail sector and 7% from single tenant, medical, office. These assets are leased to 17 different tenants in 12 different industries. The primary industry focus for the quarter continued to be quick service restaurants, entertainment centers, health and fitness and general and discount retail. Additionally, these new assets are located in 15 different states.

Our acquisition volume this quarter was more modest than in most recent periods, which is principally a seasonal effect, but also reflective of the changing dynamics of the cost of capital in the triple net sector in general and ours in particular. We have demonstrated, we have been a prudent steward of our capital. For example, over the last six months, we have invested over $448 million in new investments, but we've also sold approximately $367 million. We are a proponent of active portfolio management and accretively recycling assets that others value more than we do, or they do not meet our current investment criteria. This is something you can expect to continue in the foreseeable future.

As we've stated consistently since our IPO, our investment philosophy is to buy high quality assets at attractive prices that will enhance and continue to further diversify our portfolio, increase AFFO per share and thereby creating shareholder value over the long term. As a result, we refrain from buying assets solely to achieve an artificial acquisition goal. We are confident the assets we acquired this quarter meet that criteria and equally confident in our ability to identify assets that will meet that criteria in the future.

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, in well located geographic areas and an industries that have attractive characteristics in which we know well.

Now we had a lot to say about our portfolio and our consistent performance, shows why asset quality is so important. Nowhere is that better demonstrated than when those assets are tested, as in the case with our portfolio leased by Haggen. We understand the concern in this case and acknowledge that we overestimated Haggen's ability to successfully expand in certain markets. But I want to reiterate what I focused on during our last call, and what was so compelling about those assets in the first place, and why I remain confident that we will favorably resolve this situation. Indeed, our expectation is that this situation is a credit interruption that will not become a material negative credit event.

To review, we committed to acquiring 20 assets for approximately $225 million in Q4 of last year, representing an initial yield of approximately 7.5%. These assets were underwritten on an in-place in pro forma basis with the unit level coverage of over two times. The assets are in well located, attractive neighborhoods spanning the West Coast from Southern California to Washington State. At the time of acquisition, they were highly productive stores.

As I said in our last call, we took comfort in the quality of the real estate, particularly as it related to our acquisition cost basis. In our underwriting, we estimated the acquisition price was less than 60% of replacement cost, and that is a perfectly reliable metric for triple net assets in densely populated, high barrier to entry West Coast locations. We expect these assets will be in demand, either by our newly restructured Haggen, new tenants, or most likely a combination of both.

As to the status of the rent payments, I'm pleased to report that Haggen is current on October and November rent and as such, the only month currently outstanding is September, the month in which they sought protection.

We continue to believe there is limited long-term revenue exposure and we expect at worst, a neutral, and most likely a positive value outcome when all is said and done. In other words, comparing the value of our portfolio at the completion of this process versus the original $225 million investment. This event is unfortunate, but it highlights the reason you have always heard us stress that we invest in operationally essential real estate, with proven asset classes, in proven industries.

Haggen's bankruptcy process continues to progress and the team and I remain focused on protecting our interests and achieving the most favorable outcome for our assets and for our shareholders. And finally, while I appreciate the attention on Haggen and I welcome the scrutiny, I would remind everyone that since this team took over leadership of the Company and excluding the assets from the Cole merger , we have invested over $2 billion in 204 separate investment transactions, representing 786 properties. Further, and with the exception of Haggen, we have not had a single negative credit event over that period of time. That is an impressive track record and I would put that underwriting performance up against anyone. As I stated at the outset, Spirit is stronger, more diversified and better capitalized than at any point in our history.

Now I'd like to talk about the future and our earnings potential, as well as the team that's going to get us there.

We started this company on the belief that there was significant risk-adjusted value potential in the net lease sector. Our goal was, and continues, to capitalize on that potential. Today the results are now evident. Our ultimate objective is to be the leading company for investors in our sector, because of our asset quality, our performance for our shareholders and our presence in the market. We have grown a lot in the past three years, but we have grown smartly. There is more value to be created and we are well positioned to capitalize on it. We've recently taken steps toward this goal.

One such step is our success in improving the flexibility of our balance sheet by un-encumbering 36% of our gross assets; maintaining our net debt to EBITDA ratio below 7 times, currently at 6.8 times and improving our fixed coverage ratio to 2.9 times as of September 30, 2015. We also continue to replace high interest secured debt with unsecured debt at more attractive rates. One example of this is the $325 million senior unsecured term loan that we obtained on November 3, 2015. Phil will go into more detail about that in his remarks later.

I would now like to touch on our organization for a moment. As you know, we've added to our team and pleased to have appointed Michelle Greenstreet to the position of SVP, Chief Human Resources Officer. This hire reflects the final reallocation of duties from the former COO position, among myself, Mark Manheimer, Gregg Seibert and Michelle. Michelle brings a wealth of practical Human Resource experience and will work closely with our current executives as we expand and improve our organizational effectiveness, talent management and development programs.

As you've most likely read in our press release issued earlier this week, Michelle has more than 20 years of Human Resource expertise, primarily in the financial services industry. Most recently she was Senior Director of Human Resources at Sabre Inc., but has spent the majority of her career at Citigroup as a Senior Human Resources Adviser. With the addition of Michelle, we have the corporate platform we need for our next stage of growth. You've seen the strong results that the team can deliver and it's our pledge to do more of the same.

So let's talk about the remainder of 2015 and our outlook for next year. Phil will have more details, but you all know we tightened our 2015 AFFO guidance towards the high end of the existing range and released our first look at 2016 AFFO. The future of this Company is growth and the value we will create for shareholders will be built on the three leadership characteristics I mentioned earlier, the quality of our portfolio, our earnings potential, and our leadership team's track record. We're taking the steps necessary toward the future. We appreciate your support and look forward to reporting our progress to you in the coming quarters. Before I turn it over to Phil, I do want to address one other topic. You may have seen reports that the Company is considering moving its headquarters to Dallas, Texas. I can confirm that is a subject that is under serious consideration by the Company and the Board of Directors. We are in the final stages of due diligence and assessment of options, and I would expect we'll have something definitive to report within the next 30 days.

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

Thanks, Tom. We are very pleased with our third quarter financial results. Our strong growth in AFFO per share over the same period in 2014 is particularly notable given the prudent reduction in leverage during this period. We have been a very disciplined allocator of capital and will continue to seek out accretive portfolio capital recycling and liability management opportunities to drive shareholder value.

Before I provide commentary on our earnings results for the quarter, I want to highlight the discipline and measurable improvement in our portfolio and financial position. Page 4 of our financial supplement provides a good backdrop on our progress. From a portfolio perspective, while a lot of focus is given to our shop co-tenancy, we have enhanced our top 5 and top 10 tenant disclosure, so that you can compare our much improved tenant diversity against certain of our net lease peers.

In terms of our financial standing, three key focus areas related to leverage, capital access and cash flow continue to show notable improvement. In this regard, leverage remains below our year-end target of sub 7, at 6.8 times, [and our] $3 billion unencumbered asset base represents 36% of our total gross real estate investments and our fixed charge coverage ratio stands firmly at 2.9 times.

We continue to maintain a high degree of focus on these particular credit metrics, as we look to transition to a more balanced debt capital structure. Our recently closed $325 million senior unsecured bank term loan is evident in this regard. I'll provide more commentary on the term loan later in my prepared remarks.

As Tom said, this afternoon we reported AFFO of $0.22 per diluted share for the third quarter, an increase of 5.3% compared to the third quarter of 2014 and an approximately 1.2% increase from the 2015 second quarter. As with the prior quarter, the year-over-year increase is largely due to higher rental income as a result of our strong acquisition activity over the last 12 months, coupled with moderate same-store rental growth and consistent operating expenses.

Total revenues for the quarter ended September 30, increased approximately 10.6% to $168.4 million compared to $152.3 million in the third quarter of 2014. During the current year third quarter, we recognized a $2.2 million of lease termination fee, which recovered substantially all other remaining contractual rent under a lease that has approximately three years remaining term.

Same-store rent growth for the quarter when compared to the prior year third quarter increased 0.7%. As I mentioned on last quarter's call, our same-store rent figure will fluctuate from time-to-time, given the nature of annual versus periodic escalation terms contained in our leases, as well as the intra-quarter timing of certain schedule- based rent increases.

Total expenses in the third quarter of 2015 increased 8.7% to $159.3 million from $146.5 million in the same period of 2014. Approximately $11.4 million of this variance is attributable to certain non-cash items, namely asset impairments, depreciation and amortization, non-cash interest and non-cash G&A.

With respect to G&A, our normal G&A run rate remains at approximately 7% of total revenues. Cash interest slightly increased over the third quarter of 2014. Adjusting for interest capitalized to principal under certain defaulted loans, cash interest expense would have been essentially unchanged. Furthermore, it is important to note that our weighted average cash interest rate decreased by approximately 13 basis points to 4.87% from the prior third quarter, principally due to repayment and refinancing of high coupon debt.

Moving on to our capital structure and liquidity, the Company is well positioned for prudent growth. As I mentioned previously, we have been a disciplined allocator of capital and have not raised equity since our April follow-on equity offering earlier this year, which raised net proceeds of $268.8 million and an offering price of $11.85 per share.

Furthermore, over the last six months, we have accretively acquired over $448 million of assets at a weighted average initial cash yield of 7.6%, while selling over $367 million of assets at a weighted average cap rate of 7.25%. During the quarter, our acquisitions totaled approximately $160 million and a weighted average initial cash yield of approximately 7.4%.

In addition, during the quarter, we disposed of $82 million of properties at a weighted average cap rate of 7.25%, resulting in an overall gain on sale of $8 million. As a point of clarification, for the third quarter acquisition activity I wanted to point out that the reported initial weighted average cash yield does not include contractual percentage rents, which if included would have resulted in a cash yield of 7.5%. Our supplemental financial appendix provides clear and concise reporting definitions and explanations specifically as to how we calculate economic yields on acquisitions and dispositions.

During the quarter, we extinguished approximately $42 million of high coupon secured debt with a weighted average coupon rate of 5.56%, increasing our unencumbered asset base to $3 billion or 36% of our real estate investments. As I mentioned previously, we recently closed on a $325 million senior unsecured bank term loan. The loan has an initial term of three years and has two one-year extension options, which are exercisable at our option.

This facility is an important step in our goal of diversifying our access to the institutional unsecured debt markets. The accordion feature enables us to increase the size of the facility up to $600 million. We have already refinanced $89 million of 2016 and 2017 debt maturities with this facility and will continue to utilize the facility in tandem with our strong corporate liquidity to address these maturities in a proactive manner.

From a credit metric perspective, we are well positioned for putting growth. As a leverage, we continue to expect the year sub 7 on a debt to EBITDA basis. At the end of the third quarter, our net debt to adjusted EBITDA was 6.8 times. From a cash flow and capital access perspective, our fixed charge coverage ratio of 2.9 times and our ratio of unencumbered assets to unsecured debt in [a sense] of 3.6 times remains strong.

Our 2016 and (inaudible) debt maturities represent a tremendous opportunity. We have approximately $1.1 billion of granular CMBS debt maturing during this period. As you may recall, we inherited these debt towers in connection with the Cole merger. Besides the opportunity of refinancing high coupon debt that has a weighted average interest rates north of 5.8%, it is important note that there was approximately $1.7 billion of assets encumbered by this debt. Some of the tenants includes Walgreens, FedEx, CBS among other highly valued credits. Simply stated, 2016 and 2017 represents a tremendous opportunity to lower our cost of capital to accretively recycle assets and to significantly increase the size of our unencumbered asset base. These organic activities when paired with our credit metrics, as is, will enable us to achieve our goal of diversifying our access to institutional capital in an accretive fashion.

Now turning to corporate liquidity. As of September 30, we had $75 million drawn on our $600 million unsecured credit facility. Currently, we have approximately $50 million in unrestricted cash and cash equivalents on our balance sheet and nothing drawn under our $600 million line of credit, post the closing of our senior unsecured term loan. In addition, we have approximately $20 million of liquidity available in our 1031 Exchange and Master Trust Notes release accounts that are available to fund real estate investments. In summary, our strong corporate liquidity position well positions us for prudent and accretive growth.

During the quarter, we declared dividends to common stockholders of $75 million, which represented an AFFO payout ratio of 78% compared to $66.3 million, representing an AFFO payout ratio of 80% in the comparable period a year ago.

In conclusion, as a result of our strong year-to-date performance, we are narrowing our 2015 AFFO guidance range to $0.86 to $0.87 per share from $0.85 to $0.87 per share. In addition, we are introducing our 2016 AFFO guidance range of $0.88 to $0.91 per share. Our run rate operations, assuming contractual lease escalation of 1% on non-expiring leases, 85% rent recovery on expiring leases and refinancing 2016 debt maturities at a conservative interest rate of 4.5% and no equity issuance, results in us achieving the midpoint of guidance. Upside to the midpoint of guidance are accretive acquisitions, ongoing portfolio management and furthermore, liability management activities primarily related to their early refinance for 2016 and 2017 debt maturities. At this time, we do not plan on providing acquisition or disposition guidance relative to 2016.

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

(Operator Instructions) Vikram Malhotra, Morgan Stanley.

Just on the third quarter dispositions, I guess, they were a little higher, at least than I anticipated. So, I'm just kind of wondering, have you maybe relooked at the portfolio and sort of identified a bunch of assets that you might want to dispose of and I know you're not giving us disposition guidance, but I just want to make sure in your 2016 guidance, I'm assuming you've baked in at least some amount of dispositions?

This is Tom Nolan. I'll let Mark refer to the types of assets that we're looking for, but I do want to be clear, I guess on the guidance that we've issued. The point that we've made on the guidance, which is a distinction from how we did it last year. So I want to be clear about that. But the point that we were making on our guidance, our 2016 guidance, is it does not have any acquisitions or dispositions in them.

Last year, we issued guidance and the question was did we have that information in there, and the answer was, yes, we have it, but we weren't at that time disclosing it because we don't disclose guidance. This year, we changed that approach in response to feedback that we got from investors and analysts. And so, the guidance that is out there for 2016 purely has the items that Phil articulated in the guidance. There are no dispositions assumed. There are no acquisitions assumed and there is no equity issuance assumed in that guidance.

So on the theory that if we do do acquisitions and we do them as well as we think we can do them, obviously that should be accretive to the information that we've produced in terms of guidance. With that I'll let Mark refer to the types of assets that we're identifying.

Yes. Thanks Tom. The types of assets that we look to dispose of are kind of -- I'd put them into maybe four categories. First of which would be non-core. As you're likely aware, we sold a lot of multi-tenant assets that we acquired through the Cole merger, as we -- over time will become surely single tenant.

The second group of assets that I'd put into that -- that we would look to sell would be strategic, for strategic reasons, Shopko kind of is the obvious one there, as we look to diversify the portfolio. The next group, I would say, is where you've got assets that the market values more than Spirit. So for instance, you've got Walgreens, CBS, flat leases, the types of assets that the market is going to pay more than how we value the locations. And then the fourth bucket is trying to get out in front of risks and if we see whether it be an industry issue, a company issue or a store issue, we look to dispose of those assets if we can get more value for them than waiting for a default type situation.

On the rent bumps, I guess I was --

Vikram, I was just going to comment, because I wanted to be very specific, it's in my opening comments. My comments relating to guidance were directed at the midpoint of the guidance. So I just wanted to be clear about that in terms of what was in there and what wasn't in there. Sorry, to interrupt you.

So, just to clarify, when you're saying midpoint of the guidance that -- so you're saying the midpoint includes no acquisitions or dispositions?

Vikram, it's Phil. So, just to be clear, to get to the midpoint of guidance, and again, it was in my prepared remarks, but I'll just reiterate. To get to the midpoint of guidance, it assumes contractual lease escalation of 1% on non-expiring leases, 85% rent recovery on expiring leases. And then as relates to our 2016 debt maturities, we assume that we refinance that debt at a very conservative interest rate of 4.5%. And then any upside to that guidance range from the mid-point is going to be accretive acquisitions, ongoing portfolio management activities and obviously liability management activities related to the 2016 and 2017 debt maturities.

Okay, I can just follow on that offline. Just on your rent bumps, I was a bit surprised, I guess, if I'm reading this correctly, was the rent bump 0.7% this quarter?

Yes. Our same-store rent bump was 0.7%. The thing to keep in mind is that everybody's same-store rent definition is different, but what we also have going on in our portfolio is that we have a portion of our leases that have annual rent escalations, but we also have a portion of our portfolio that's periodic non-annual lease escalations. So, it can be bumpy from quarter-to-quarter. I did highlight that last quarter in my prepared remarks, as well as this quarter, but I would say on a run rate basis, 1% annual rent bumps is a pretty conservative estimate for us going forward.

And Vikram, I guess, the other thing that influences the number this quarter, as Phil mentioned, unlike our competitors, we do not include percentage rent, as we think the goal of the disclosure is really to show contractual organic growth. And we did have one tenant that's kind of been a problem tenant, that's been on our credit watch since I've been here since 2012, from a sale leaseback done back in 2005.

It's a company where -- was recently bought by another movie operator, but was held in a separate entity and in exchange we're getting the corporate credit on a lease and the new operator putting about $10 million of TIs into the theaters, we agreed to change the lease to percentage rent rather than contractual rent as the operator will have some downtime if they make renovations and upgrade the ceiling. We did discuss taking this tenant out of the math, which would result in a closer to 1% of same-store rent, but we want to avoid making exceptions quarter to quarter.

Then just sticking on my last question, just on the movie theater, I just want to make sure I understand the distribution -- industry diversification just on three specific items. So on movie theaters, I think you are -- the property count went up to 48, but your percent of rents went down by almost 2%. Can you just clarify kind of how that worked?

Are you in front of a specific page?

Yes, if I look at page 14, the number of movie theaters went from 45 last quarter to 48. Your percentage of rent -- I am sorry it was not 2%, but it went from 5.9% to 5.1%.

From that -- we did not add I don't think any movie acquisitions during the quarter. So some other category, our revenue increased a little bit.

And I guess that also goes to the same-store rent, where we are converting to one of the tenants to percentage rent and we have not received the sales receipt and just started receiving the percentage rent in October. So that's probably just a timing issue, is my assumption.

And then the sporting goods category went up, I think you took three -- there were three stores that increased and the square footage went up by a million plus square feet. Can you just -- that seems a pretty large amount. Could you just sort of highlight what you bought?

I'm trying to place -- I am looking at my list.

For the sporting good, last quarter you add 1.3 million square feet and now you have 2.9 million?

We have a couple of tenants in that sector that we continue to add new units for. I don't think that are our top 20, but there are some two or three chains that we continue -- that have been customers of ours a long time, and we continue to add locations. Going backwards a minute on you movie theater, one reason is, I was incorrect saying we didn't add any. We added three or four locations on the last day of the quarter. So, they did not get any revenue for that quarter, but they closed on the last day, so they are counted in the asset. So sorry.

But just to clarify this sporting good, it went up by three units, so each is like 500,000 square feet. I'm just trying to figure out what did you --

Hey Vikram, let us get back to you on that.

I know we added three units, but they were not 500,000 square feet.

No. No.

Okay, that's fine. And then maybe I've another clarification on the grocery thing, because one went up and one went down, but I can take this offline.

Juan Sanabria, Bank of America.

Just looking forward, you noted your cost of capital being somewhat impaired relative to where you like. What's the game plan to address that? How should we think of you in the acquisition market or are you kind of shutting that down, at least temporarily or are you focused on dispositions? What's the focus that we should be thinking of at this point in time given where the stock price is?

T I recognize that the day-to-day spot multiple is certainly viewed as an important metric. We certainly view it as an important metric, we recognize that the moment that there is a differential between the most well known peers and ourselves. But I guess from my perspective, I don't look at that as a long-term impediment. I actually look at that is a short and intermediate opportunity. You've heard us focus about portfolio quality. You've heard us focus about consistent performance. You go back and look, the last two years we've had a multiple differential between us and our peers and yet those -- as a AFFO growth component, we have had higher growth from an AFFO growth perspective against those very peers.

So, it's not something that we're not looking at. You've certainly heard us focusing on asset recycling and you've heard us focusing on balance sheet management. We will be prudent. We're cognizant of where our stock price is, but we've proven that we are a good steward of it. We've proven that we can use our equity capital and still grow AFFO. So I don't think by any means do we intend to shut anything down, I don't think that we have to and we're just going to continue to march forward. Again, those multiples that exist out there, they don't -- as I like to say to the folks that look at that, those are -- it's not is if a company has a patent on it or a trade mark on it. Those are simply reflection of the stock price today and we're confident that through performance, consistent performance that multiple differential will be eliminated.

And Juan, it's Phil here. I echo Tom's comments there, but I really don't see anybody else in our space that has transformative events that we have in terms of the organic drivers of growth. As I mentioned before, we have about $1.1 billion of debt coming due in 2016 and 2017, very granular CMBS, moderately leveraged, weighted average coupon north of 5.8%. The underlying tenancy in those debt towers that's encumbered includes Walgreens, CVS, FedEx and some other very highly rated credits that we can accretively recycle out of.

The other thing to bear in mind as well is that we're buying assets -- when we underwrite our assets, let's say, we're acquiring assets at an initial cash yield of 7.6% on average, we're underwriting the 40% leverage and the cost of debt we are looking at is conservative at 4.5%. That translates to a leverage yield north of 9.7%. That provides a very attractive margin for us. So, it's a provocative question to ask from quarter-to-quarter, but again, I think it's pretty clear that we have a lot of strong organic drivers to growth. And I do think that as time goes on, I'll put our financial supplement disclosure up against any of our peers, we're going to continue to refine that and make improvements from quarter-to-quarter and maintain an active and continual stakeholder engagement and that's going to narrow the gap.

And can I take that last comment to me that you wouldn't necessarily be interested in a buyback?

Well, I mean, look, as it relates to the stock buyback programs that other REITs have put out there, we've obviously seen a lot of them put those programs out there. And candidly, we've also seen a lot of them not been utilized. I would be remiss to say that we don't consider this from time-to-time, but we just don't think it's the most efficient use of capital.

And then just on the potential headquarter relocation. Is the new hire, Michelle, an Human Resources -- is she based out of Dallas or Scottsdale only? And then what do you see as the benefits from moving the Company? Have you looked at the potential Keyman risk of losing people if you do move headquarters?

Well, a couple of questions there. So, let me answer the first one. Michelle is a resident in Dallas. She is aware that we haven't made the decision to move and she is committed to spend as much time here in Phoenix for as long as -- there is much time and as long as necessary. As to the Keyman, I can tell you that the assessment that I referred to earlier is not being done just by me, that it's being done by the entire senior management team, and this is an effort that has been undertaken by the senior management team and that the four individuals who you've heard speak here today; Phil, Mark, Gregg and myself, are all committed to this, to the extent that we pursue it. And so that there will not be, from that perspective Keyman loss -- the key elements of the company that was I think important to all of us. And as I said, this has been a group assessment and that group and the four of us are committed to reaching the appropriate outcome.

But what's the main potential driver for switching to Dallas, what benefit does that bring to Spirit and to shareholders?

I think it brings -- I mean obviously the decision that we're making is where can we be most effective, where can we be most efficient, where can we attract and retain the best talent for this organization. The Scottsdale location was a legacy location, that doesn't really have anything to do with the executives that are in this room. I don't think it's an accident that Texas is the most popular location for corporate relocations, number one for corporate relocations, I think, there's a reason for that. It's a business friendly environment, very centrally located, much better efficiency from a travel standpoint. There are lots of elements that go into it. But it's the ambition of the working group that is looking at this. We are looking for effectiveness and efficiency going forward. That will be the standard (inaudible).

Vincent Chao, Deutsche Bank.

Just wondering if you could just go back to Haggen for a second. Understand there is some interest in some of the boxes already, request from Haggen on certain other boxes, but can you just give us a timeframe when you think all this will be resolved in terms of how you decide to modify it or not modify the master lease?

In terms of timing, the bids have come in. The due date for those was Monday, then they're going to kind of try to work with a better than -- and come up with a list of who they think the winning bidders are tomorrow and then there will be the auction and sales hearing starting next Monday.

That being said, it's a dynamic process. We still need to agree to some kind of -- breaking up of a master lease, in order to kind of go along with the way that Haggen has approached this process. That being said, they have had a substantial amount of interest as you alluded to with the [stocking order] bids we're aware of the fact that there have been other bids, and also where we're still receiving a rather large amount of reverse increase for the real estate.

So, in terms of when it gets wrapped up, it's a dynamic process. We don't have full visibility, but we do feel like it is moving quickly and that it's in Haggen's best interest to make it move quickly as well as ours.

And at this point, I mean, just given the demand that you're seeing from the reverse increase, plus the bids that are out there, I mean, how many boxes do you think would actually come back to you as opposed to getting re-tenanted or being backfilled fairly quickly?

Yes, I hate to speculate, we're going to get a lot more information here in the next couple of weeks and we'll continue to update the fact sheet on our website as more information comes in.

And just one last question from me on the Shopko side of things, another three units sold this quarter. Looks like the average cost per unit was about [$8,000] or so, I think the year-to-date is more like [$10,000]. Just curious if there was anything different about the ones that were sold this quarter, maybe they were smaller square footage wise or something? And then also, are there any Shopkos currently in the market today?

Yes. And in terms of the price it is always going to be heavily dependent on what the rent is. The ones that are sold, we're not going to comment too much, but they were the normal size boxes. And then we do have a handful of Shopkos in the market. We will continue to look to lower our concentration in Shopko, but as we mentioned on last quarter's call, we were going to stop giving quite as much detail as we were noted in the market as kind of a not distressed seller, but a seller that was very motivated, and so taking that motivation out of the equation has helped our pricing on the asset.

Dan Donlan, Ladenburg Thalman.

Just wanted to focus in on one of the line items in the income statement, the other income and interest from real estate. That number tends to -- it's bounced around a little bit quarter-to-quarter. So I'm just kind of curious what is actually in that and kind of how much of that is recurring versus maybe non-recurring? At $3 million for the third quarter is a fairly large number.

Most of that is going to be attributable to lease settlement, lease termination fees. and as I mentioned in my script, we did have a lease termination here with a tenant that essentially accounted for almost three years of rent. That's going to happen from quarter-to-quarter, you'll see that the same thing happen with certain of our peers. I saw that number quoting the same thing this quarter. So, Dan, I would say, on a run rate basis, as it relates to run rate, lease termination fee income, I would think $2 million to $3 million per year is a pretty good average to assume.

I typically refer to them, Dan, as recurring, non-recurring items, because when you have a portfolio of this size, there just seems to be one that pops up once to twice a quarter.

Right. And Mark is very proactive with the portfolio. And so if he sees things that he can do in terms of better managing the portfolio, we're going to take those opportunities.

And then just kind of curious on the net book value of vacant assets that you guys provided, I really appreciate that detail. You list about $68.7 million of those, so just kind of curious as we think about obviously there's no income there. So as we think about kind of the value for any repurposes, was just kind of curious what type of discount we should ascribe to those properties. Is it 25%, is it 10%, is it 50%, just kind of a general rule of thumb, when you saw vacant assets, how much have they gone for relative to book value?

Let me start with that. I mean again, all we can do, Dan, is give you guys a building block for NAV and you guys can ascribe whatever discount you want to. I mean that's really de minimis amount, but I'll let Mark kind of --

Yes, Dan, I feel like, whether we determine we're going to sell the assets or lease them, will be kind of what will drive that, but in most cases if we have gotten a property back, it's already been impaired. So I feel like the $68 million is probably a fair number for you.

I'm going to take one more question as well. Was just kind of curious if you could give us maybe the acquisitions by month in the quarter, because in looking at the definition that you guys provide for when you do your tenant concentration and I think that's maybe why Vik was having issues with the number of properties versus the percentage, that it still seems to me like why you exclude the sales from any intra-quarter sales, you don't normalize it for acquisitions made in that last month of the quarter, is that correct? Am I right to assume that? I was just beating the definition in the back of the supplement and just wanted to make sure I was getting that down correctly?

Dan, are you talking about the definition of annualized rents, what are you talking about?

Yes, exactly.

Okay. Again, so we've talked about this before. So the definition of annualized rents, whatever tenants are in place as of the last day of the quarter, we give them a full month's rent and then it's annualized. That's how that's calculated.

Okay. That's it for me.

Thanks, Dan.

Tyler Grant, Green Street Advisors.

Just a quick question from me, during the quarter you released five of your six planned lease expiries and sold three assets that were vacant, but occupancy dropped by about 20 basis points. Back of the envelope, that suggests that eight unexpected vacancies occurred during the quarter. Can you walk us through that a bit or talk about the assets?

Could you just run that math finally one more time and then I'll let Mark comment on it. I just had a little trouble tracking that.

Do you want me to repeat it, you said?

Yes. If you wouldn't mind.

So during the quarter you guys released five of your six planned lease expiries and then you also sold three assets that were vacant, but whereas your occupancy actually dropped during the quarter by about 20 basis points. So, if I do a little bit of back of the envelope math, it suggests that you had eight assets that became vacant unexpectedly. Can you describe those assets or why the vacancies occurred?

I mean, the vacancies occurred because we had tenants, not renewal leases. And then in terms of why our vacancy dropped, which -- going from a 20 basis point change, it's simply because the number of assets increased in the portfolio. And keep in mind, we also have other vacant assets that were relet or sold. So, there is 21 new vacant properties and 21 real estate dispositions with our vacant properties. So, the number stayed at 37, but the number of our total properties changed.

Then impairments for the quarter were $21 million, can you explain why those impairments were taken?

So, the impairments relate primarily to one asset in Salt Lake City, a distribution center, lease is coming due to mature, I think in June of next year. We've impairments from time to time in our portfolio. But I guess when I look at it, for the year, our impairments are probably 50 basis points of our gross real estate investments for the year.

And as Phil mentioned that there is one asset that was a larger asset leased to Hewlett-Packard, it's a distribution center in Salt Lake City that we identified as a risk before the merger with [Cole II], that's part of that portfolio. And as we get inside of one year of expiration on leases that we know we're fairly certain that are not going to renew we do that as -- we run that through our impairment analysis and that asset became impaired.

Rich Moore, RBC Capital.

I wanted to ask you, Tom, wanted go back to the equity question. If you guys found a big portfolio or a $300 million or $400 million of acquisitions that you wanted to close on near-term, would you think about going to the common equity market to help finance that with your stock price where it is, or would you be inclined to pass on something like that?

You probably won't be shocked with this reply Rich, but it's always difficult to speculate and I don't think it's useful speculating on potential capital market transactions. All I can do is point to our history. All I can do is go back and say -- these folks have been the stewards of this equity capital now for three years, when did they tap the equity market, why have they tapped the equity market, was it rational when they did tap the equity market and I think our score card on that by most accounts is very good. So you can't -- it's really difficult, because I don't know what the price of that portfolio would be. I don't know where my stock would be. All I can again do is point to, I guess, in the rearview mirror, and say how we look at equity. We view equity as precious as any company does, and we would certainly expect the appropriate return on it to the extent that we utilize it.

And then I wanted too, thinking about Haggen a bit, I mean you guys, as you pointed out, have done a great job of underwriting real estate in general for the acquisitions that you do, and I'm curious, maybe how you underwrite the operator, because I didn't know Haggen either particularly. They weren't entirely big until they started this whole activity, but the more I've read about them and talk to people about them, it didn't sound like anybody really liked them as an operator, whether it was customers or others who dealt with them, et cetera. So it sounded like there was information out there that they maybe weren't that great an operator. So, I'm curious what you guys do to study the operator, not just the real estate?

Yes. I'm happy to answer that because we do obviously underwrite the operator. I think, in last quarter's call, we shared the fact that this was the distinction for us. This was an unusual underwriting in that we were underwriting an asset and then we were putting another operator to replace the operator that had produced a historical performance. That's very unusual for us, say, 99% of every other transaction we've done, we're underwriting the operator and we're underwriting the assets. So, we are doing the asset in the very box that we're buying. This was unique in that context.

As to your second question that Haggen was an inferior operator, I think our perspective on that would differ. We did do due diligence on them as an operator in their home market, in the Pacific Northwest, we compared their operating results versus competitive groups. We compared their operating results against various people who were in the stores that we were buying. And what we found was that they were a solid operator and in many cases, they were outperforming the peers in the market that they were in. Now again, they were not able to translate that beyond their core markets, but I don't think that, at least we did not reach the conclusion. And I'm not sure of the fact supports that they were a sub-optimal operator in the Pacific Northwest.

Okay. So, maybe this was just biting off more than they could chew is kind of what you're thinking?

Well, they certainly did. I mean, I think the outcome supports that thesis. They were over ambitious, they didn't execute and it failed.

Paul Puryear, Raymond James.

Tom, we did want to hear a little bit more about this move -- prospective move to Dallas. What's the total cost for doing something like that?

We haven't finished the due diligence, as I said in my opening comments, but I guess just to give you some comfort here, I mean, we do not expect the cost to be material. We are large company in assets, but we're not a large company in people. It is one of the virtues of this space. So we neither have a lot of real estate, nor do we have a lot of people relative to again the asset base that we have. So there will be one-time costs associated with it, which is the utilization of our resources and I think any expenditure of our resources, whether I'm buying property or I'm investing in our people, I take any one of those seriously and I'm looking for a return on our assets. I'm looking for a return on our people. I'm looking for a return on any place that we put money. That's why I referred earlier to, we're looking to improve efficiency going forward, not increase our cost going forward, but to improve efficiency going forward. And there will be a one-time cost for that, but it really isn't going to be material.

So does the G&A run rate change?

No, we do not expect the regular -- we had the one-time cost here. We do not expect that there will be a change in our G&A perspective going forward.

Chris Lucas, Capital One Securities.

Tom, just sort of a big picture question. Maybe if you give us some context as it relates to the spread between sort of portfolio pricing and one-off pricing. What have you seen over the last three to six months on that?

I'm going to let our resident expert Mr. Seibert to comment on that. I'll throw my perspective as we all sit around the table. There has been a price correction in the triple net sector in general over the last six months and you saw a lot of, I think, excitement about some portfolio transactions earlier in the year. I think we talked about them in the last conference call, so we don't need to necessarily go over now. But (technical difficulty) overall kind of again triple net price correction give us, at least I've witnessed and we have seen in the market, I think less kind of enthusiasm for stepping up and paying the big portfolio premiums to get big chunks of assets. You really haven't seen much of that lately, but I'll turn it over to Gregg.

There were a couple large transactions in the market, maybe in the late spring that we're being priced, but they were delayed a little bit and they ended up closing in October. And on those transactions, I think there was probably a 25 to 40 basis point pickup and where the rate ended up from where the expectation was perhaps in May of 2015. On the smaller transaction side, it's probably had a comparable type pickup a little bit. It has not really seen a diminishment in the number of bidders, but just an uptick in cap rates reflecting a little tighter credit market, particularly on the CMBS side.

And then this is Mark, I would just also say, depending on how far you want to go down the scale, they're really small assets where you're competing with 1031 type investors that they are not impacted by the pullback in REITs and aren't looking to finance with CMBS. Those prices continue to be aggressive. So, there has not been that type of pullback and the really small 1031 type properties, which has created opportunity for us on the disposition side as we can acquire at higher cap rates in the larger deals and then dispose individual assets on a smaller scale at lower cap rates.

And then just a technical clarification for me, I need to go back to this -- on the tenant diversification. Last quarter the Shopko store count was 159 and then this quarter it's153, what am I missing?

Yes. So we had a couple of Shopko home towns, which are the smaller boxes. We've re-let those to other tenants.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Tom Nolan, Chairman and CEO for any closing remarks.

Thank you, operator, and thank you everyone for joining us today. As you are aware, we changed our reporting format to allow more time between the release of our earnings and our call. We made that change based on feedbacks from our investors and analysts and hope it was well received. We're happy to take any additional suggestions that can improve this process. Our ultimate goal is to produce industry-leading results and a best-in-class net leased real estate portfolio. I'm pleased to be working with this team, committed to reaching these objectives. We look forward to seeing many of you in Las Vegas in a couple of weeks at the NAREIT REITWorld Conference. Thank you, and good night.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.