Spirit Realty Capital Inc (SRC) 2016 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Spirit Realty Capital's 2016 First 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 will now turn the conference over to Spirit Realty Capital Investor Relations.

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 will make forward-looking statements. These forward-looking statements are based on the beliefs or assumptions made by an 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 our 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 in the Investor Relations section of our website. All the information presented on this call is current as of today, May 5, 2016. 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 may be found on the Company's quarterly report, which can be obtained on the Investor Relations website. During our prepared remarks today, Tom Nolan will provide an overview of our operating results and update on our current business activities. So, Joseph will then discuss our quarterly financial results that were released last evening. After our prepared remarks, Tom, Phil, Gregg and Mark will be available to take your questions. With that, I would like to turn the call over to Mr. Tom Nolan. Tom?

Good morning and thanks everyone for joining our first quarter 2016 earnings call. This morning, I will review our portfolio performance, summarize our recent acquisition and disposition activity, and update you on our strategic initiatives. I will then turn the call over to Phil, who will discuss our financial results in more detail. We will then open the call for questions. And Gregg, our Chief Investment Officer and Mark, our EVP of Asset Management will also be available. Before I touch on the quarter, I'd like to give a brief comment on the Company. Three and a half years ago, we went public with the strategic plan to turn Spirit into a premier owner of net-leased real estate with the right combination of size, diversification and flexibility to provide our investors with attractive growth and a premium valuation. We outlined three pillars of this strategy. First, to prudently and profitably grow the Company. Second, to improve our revenue diversification metrics. And finally, to achieve a capital structure that provided us with the flexibility to support incremental growth opportunities throughout the various economic cycles, expand our capital source options and ultimately reduce our cost of capital. While we've been persistently hard at work on these initiatives, during the last three months, we took another large step forward with our opportunistic equity raise followed by upgrade from S&P and new rating from Fitch, which now position us to utilize unsecured debt as part of our capital raising options moving forward. I'd like to thank the entire Spirit team for their efforts in these regards. And as I sit here today, I'm more confident than ever in our corporate strategy and our opportunity to continue to drive strong income growth and thereby create value for our shareholders in the quarters and years to come.

Now, turning to our first quarter results. Last evening, we reported AFFO per diluted share of $0.22, which represents growth of 4.4% over the comparable period from last year. Our revenues grew by 3.7% year over year as a result of our targeted acquisitions as well as our dedicated portfolio management initiatives. And finally, our quarterly dividend of $17.5 per share remains well covered with a payout ratio of only approximately 79% of AFFO.

With regard to our portfolio, we own a diverse pool of assets with long-term net leases comprised of well-located, high-quality properties, which are operationally essential to our tenants. With our disciplined underwriting process, that portfolio provides a stable income base augmented by our ability to continuing to invest accretively to grow and harvest capital through programmatic capital recycling.

At quarter end, our portfolio was 98.7% occupied and it had an average remaining lease term of 10.6 years. In addition, 46% of our normalized rental revenues were derived from Master Leases and 89% of our single-tenant leases have built-in rent increases, which provide steady and predictable growth. The security of our income stream is evident. For the trailing 12 months, our unit level rent coverage was a healthy 2.9 times for those tenants that report.

Given our long lease terms, we do not have a significant amount of leasing activity in any given quarter. In the first quarter, we had 19 leases come up for renewal, which represented less than 1% of our normalized rental revenue. We renewed 16 of these leases. Looking ahead, 14 leases expire in the remainder of 2016, representing just under 3% of our normalized rental revenue.

Moving onto our investment activity during the quarter, we remain focused on being prudent stewards of capital and maintaining our discipline as we seek to purchase high-quality properties at attractive prices that will enhance shareholder value over the long term. Additionally, we continue to actively manage our portfolio and sell assets that did not meet our current investment criteria or where we believe market valuations provide an opportunity to realize value through dispositions.

During the first quarter, we bought $76 million of assets and sold $91 million of properties, which made us a net seller to a modest degree. It is not likely that we will continue to be a net seller in the immediate future, but this quarter's outcome was expected and you may recall I discussed that on our fourth quarter call.

The $76 million of high-quality acquisitions we made during the quarter had a weighted average initial cash yield of 8.1% and a weighted average lease term of approximately 15.6 years with average annual escalators of 1.7%. In keeping with our stated strategy, 67% were through sale-leaseback transactions, 58% have master lease structures and most of the new transactions provide unit level reporting.

The $91 million of assets we sold during the quarter had a weighted average yield of 6.4%. Additionally, these dispositions included two of the six stores that Haggen returned to our possession in connection with their partial rejection of their master lease related to their bankruptcy. We disposed of these two Haggen stores for gross proceeds of approximately $15 million. We also sold an additional store on April 1 for gross proceeds of $5.8 million.

While we are in the early part of the Haggen disposition program, we are increasingly confident that we will meet or exceed the forecasted proceeds and profit targets we disclosed in our most recent update to the Haggen factsheet that is posted in the Investor section on our website. Importantly, we would like to highlight that we are accretively recycling capital and thereby creating value for our shareholders by selling in the mid-six cap rate range and buying in the mid-sevens to low-eights. And as we look ahead, we have a strong pipeline of high-quality opportunities with attractive acquisitions under contract.

Regarding our balance sheet, as I mentioned, subsequent to quarter end, we raised $369 million of capital and a follow-on offering. On a short-term basis, the entire proceeds we used to reduce borrowing outstanding under our $370 million term loan. The ultimate use is to retire approximately $200 million of our near-term high coupon CMBS debt. For the loans we have selected, we have given notice of prepayment to the servicers and expect that paydown will be completed by June 1. The remainder of the capital will be used to fund our acquisition pipeline. As you would likely expect from an equity raise, with a majority of the capital was designated for permanent debt retirement, there is a near-term dilutive impact of this transaction on our earnings per share. Let me note a couple of items. First, given the high coupon rates on the debt we are retiring, the impact is relatively minimum. And second, from our perspective, tangible and intangible benefits proactively addressing our liability management initiatives more than outweigh any concern we would have over the potential for a short-term drag from this equity raise. As I said at the beginning of my remarks, I'm convinced Spirit is better positioned for future success today that at any point since our initial public offering.

With that, I'll turn the call over to Phil, who'll review our first quarter financial highlights, summarize our balance sheet and liquidity metrics and discuss our guidance for the year. Phil?

Thanks, Tom. We are very pleased with our first quarter financial results. We continue to produce AFFO per share growth for our shareholders while at the same time better positioning the Company for long-term prudent growth. In the first quarter, we continue to be a disciplined allocator of capital. As Tom mentioned, we were a marginal net seller of assets acquiring $76 million of assets at a cap rate of 8.1%, while selling approximately $91 million of assets at a 6.4% cap rate.

During the quarter and post quarter-end, we raised total net equity proceeds of $402 million via our ATM program and our following offering at a weighted average price of $11.15 per share. Our proactive raise of equity capital accomplished several key objectives. First, it represents the first phase of proactively addressing our high coupon 2016-2017 debt maturities. Second, it pre-funds a sizable and accretive acquisition pipeline that is identified and scheduled to close in the near term as we seek to maximize the return on capital. And finally, it better positions the Company to access the institutional debt capital markets as evidenced by our post-transaction investment grade standing.

Last evening, we reported AFFO of $0.22 per diluted share for the first quarter including adjustments for restructuring charges and other expenses associated with our corporate relocation. This performance represents an increase of 4.4% compared to the first quarter of 2015. As with recent prior quarters, the year-over-year increase is largely due to higher rental income as a result of our solid acquisition activity over the last 12 months, interest expense savings on debt retirement, moderate same-store rental growth and consistent operating expenses.

Total revenues for the first quarter of 2016 increased approximately 4% to $168.4 million compared to $162.3 million in the first quarter of 2015. The primary driver of this increase is attributable to our 2015 net acquisitions of approximately $342 million. Same-store rent growth for the quarter when compared to the prior year first quarter increased 0.2%. Rent growth was negatively impacted by Q4 2015 lease restructuring related to our legacy [Peter Chain] investment as well as the bankruptcy filing of Ryan Buffets.

On the expense front, excluding restructuring charges and other expenses associated with our corporate relocation included in G&A, total expenses in the first quarter increased to $148 million from $146.9 million in the same period of 2015. Prior to the aforementioned adjustments, total expenses increased 0.75% or $1.1 million from the prior year first quarter.

The primary driver of the increase was higher non-cash impairments, which were largely offset by a lower cash interest expense and real estate acquisition costs. With respect to G&A, it represented 6.9% of total revenues for the quarter, below our internal target of 7%.

Cash interest decreased by 9.5% or $5.3 million compared to the first quarter of 2015, primarily as a result of the repayment and refinance of high coupon CMBS debt. We continue to make great progress on lowering our debt cost of capital. Our weighted average cash interest rate decreased by approximately 20 basis points to 4.61% from the prior first quarter principally due to repayment and refinancing of high coupon debt.

We continue to make progress on improving our financial standing as well as our access to capital. In terms of our financial standing, our leverage in cash flow metrics continue to show a notable improvement. In this regard, our first quarter reported leverage at 6.8 times is at our previously communicated 2016 target.

We would expect leverage to moderate over the course of the year, largely due to early debt retirement of approximately $200 million of high coupon 2016 and 2017 debt maturities, and connects with our recent follow-on offering. As a result, our current year-end leverage target is approximately 6.5 times.

With respect to access to capital, we continue on our path of positioning the balance sheet to strategically access capital more efficiently. Our unencumbered asset base continues to grow which enhances our financial flexibility and currently stands at $3.3 billion or 41% of our real estate investments.

Furthermore, our fixed charge coverage ratio is strong at 3 times coverage. Post quarter-end, we upsized our line of credit by $200 million, which now has a total commitment of $800 million and is currently undrawn. With the proceeds from our recent equity offerings, we have repaid our term loan and planned to re-borrow on the facility as we repay our near-term debt maturities.

On the liability management front, during the first quarter, we extinguished approximately $104 million of high coupon secured debt with a weighted average coupon rate of 6.72%. Post quarter end, we repaid an additional $7.5 million of secured debt with a weighted average interest rate of 5.73%. As of today, our remaining 2016 debt maturities excluding approximately $69 million of defaulted loans transitioning to debt forbearance totals $94 million with a weighted average interest rate of 5.98%.

As we commence our initial phase of our 2016 and 2017 liability management program, we plan on repaying a significant portion of our remaining 2016 non-defaulted debt with proceeds from our recent equity offering, post are approximate $200 million liability management exercise that I previously mentioned, our remaining 2016 non-defaulted debt maturities will approximate $32 million with a weighted average coupon rate of 5.97%. Our 2017 outstanding debt maturities currently approximate $703 million and have a weighted average interest rate of 5.8%.

As it relates to this phase of our liability management program, we will repay approximately $141 million of debt related to our 2017 debt maturities. Once this liability management exercise is complete, our remaining 2017 maturities will approximate $562 million with a weighted average coupon rate of 5.78%. In total, we expect to incur approximately $7 million in cash, debt extinguishment losses with these early repayments.

We remain focused on our high coupon 2017 debt maturities and we'll look to address them proactively well in advance of their scheduled maturities. We will continue to utilize our corporate credit facilities in tandem with our strong corporate liquidity and access to the capital markets to address these maturities in an accretive manner.

Our 2016 and 2017 debt maturities continue to represent a meaningful potential earnings driver as we seek to lower our cost of capital, to accretively grow and recycle assets as well as significantly increase the size of our unencumbered asset base. We continue to maintain an active dialog with all three agencies.

To that end, S&P recently raised our corporate credit rating to triple B minus with a stable outlook and Fitch recently made public its corporate credit rating of triple B minus stable.

Now turning to corporate liquidity, as of March 31, we had $24 million drawn on our prior $600 million unsecured credit facility. Currently, we have approximately $12 million in unrestricted cash and cash equivalents on our balance sheet and nothing drawn under both our upside $800 million line of credit as well as our term loan. In addition, we have approximately $45 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 positions us well for prudent and accretive growth.

During the quarter, we declared dividend to common stockholders of $77.6 million, which represented an AFFO payout ratio of 79% compared to $71 million, representing an AFFO payout ratio of 81% in the comparable period a year ago.

In conclusion, our recent equity offering has accelerated our strategic goal of strengthening our balance sheet and broadening our access to capital. While we have a strong pipeline of opportunities to invest the capital raised from the recent offering, we intend to work to minimize the near-term drag and we intend to maintain our investment discipline to drive prudent growth over the long term.

That said, at this point in time, based on our near-term investment pipeline, our anticipated capital recycling activities, the anticipated timing and recognition of the Haggen settlement claim, and lastly potential additional liability management activities, we are affirming our 2016 AFFO guidance range of $0.88 to $0.91 per common share.

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

(Operator Instructions) Vikram Malhotra, Morgan Stanley.

Phil, I wanted to just check, as you deal with the CMBS, you've kind of said you're looking to get out of maybe a set of deals that are -- don't really have rent bumps and I think we've seen that in the Walgreens reduction, can you maybe elaborate on other types of assets or tenants that you would want to reduce exposure to, as you deal with the CMBS?

Yeah, this is Mark. So, we'll continue to sell flat leases, double net leases and really any properties that we think that the market values more than we do. We value rent bumps and we value financial reporting and master leases and things like that. So, things that are consistent with that, we will continue to call.

Any specific categories you can call out to your tenants?

(inaudible) they will continue to be a focus just from a concentration perspective. And then for industries, maybe we'll continue to take a look at our casual dining exposure.

And then just casual dining or dining -- restaurants in general, did you look at some of the large sale-leasebacks and can you give us update of any other potential deals out there in the market?

No, I think there were some large sale-leaseback transactions completed. I think, in our -- we are focused more on granular smaller transactions, trying to manage our exposure to any existing concepts and keep it low, which is a path we've been on as you can tell for a number of years. And we felt like some of those transactions were a bit mispriced and were below what we felt comfortable paying in terms of cap rate.

And then just lastly a quick numbers question. I remember last time on the guidance, you had clarified on the call that this did not include net acquisitions, and correct me if I'm wrong, but I'm just wondering post the equity deal, are there any changes to the assumptions for the guidance?

Yes, you're right. Our last guidance range was really organic in nature, just basic blocking and tackling. And our prior guidance range did not have any equity issuance or acquisitions or dispositions guidance. Clearly being a net seller in Q1, we've noted our Q2 acquisition pipeline as some of the analysts picked up in the offering perspective. So, our near-term pipeline is approximately $200 million completing our follow-on offering rather earlier in the year. All those things kind of directionally impact the range. We're clearly reiterating our guidance range. However, as I pointed out in my prepared remarks, clearly the timing of certain activities, specifically the deployment of capital into these new acquisition opportunities, the timing of the Haggen settlement proceeds, and perhaps even some incremental liability management that we will pursue later in the year, all those components taken together enable us to reaffirm our guidance range.

So, now that and the net acquisitions are included in the guidance?

Right.

Juan Sanabria, Bank of America Merrill Lynch.

You mentioned, I think, some one-time costs for the headquarter move that may have been in operating expenses or G&A. Could you just spill those out for us and remind us what's left to spend?

Right. So, the costs that were included in G&A and we did -- we break those out separately in our AFFO add-back section was approximately $600,000, I am sorry, -- around $800,000 related to items that are really third-party consulting fees related to bringing new team members on to the team and it does not really characterize as restructuring charges. That being said, all those costs were already included in our original cost estimate of $20 million of cash and I recall about $50 million of that was going to be added back to the AFFO, the remaining $5 million is going to be capitalized costs related to the move.

And so how much is left to spend of that $20 million?

So how much is left to spend of that $20 million, I would probably say something on the order of around $12 million.

And then with regards to the move, could you just update us on the percentage of staff that has left that you need to re-hire?

Sure, this is Tom. I guess I would, without giving a play by play for every individual that's moving and I'm not sure that's necessarily productive. I know we touched on it last time. I guess what I would say is this that, there really haven't been any material changes and what we've discussed on the last call, I think the move, we put a lot of time and effort into this to ensure a seamless transaction or transition, I should say. And I think it's going according the plan. We're actually here in Dallas today. The call is coming from our office space here in Dallas. It's moving along the major positions have bodies in them and so far so good. And that's what our expectation is going forward.

And it was about 50% of the staff, not necessarily the senior positions, is that what you said last quarter?

I think last quarter we were discussing the real estate professionals, and I think the phrase we used was approximately 50% of the real estate professionals.

Okay. And then just on the Haggen capital. So what are the expectations for proceeds to come in as part of that settlement there, if you could just update us on the latest thoughts?

Yes. As you're aware, the bankruptcy process is dynamic and when we actually get the claims, it's some went out of our hands, but we do feel very good about our position and likelihood of recovery. And I guess I would say that, the maybe fourth quarter would be a best guess when we'll get recovery from that.

Any sense of quantum?

Well, we've got a little less than $24 million of claims and we feel like we'll get the majority of that.

Ian Gaule, SunTrust.

Good morning, guys. Thanks for taking my questions. My first question relates to the cash yield, I noticed the last few quarters, the cash yield on your acquisitions has increased from, call it, 7% in Q3, it's about 8% this year. Are you guys targeting different markets or different clientele, could you give some color on that?

Sure. I think I'm not sure if we ever actually got down to 7%, I think we've always kind of been in mid-7s to 8%, has historically been our range. So, yes, there's been a slight uptick. I think when -- the CMBS market, which has kind of recovered a bit now, but it was (technical difficulty) been a bit of uncertainty and it was not as lucrative maybe six months ago as it is today. So, keep in mind some of the transactions that we closed in the first quarter, we may have struck those about five or six months ago, the pricing, etc. And we have -- it's worth noting, we have 435 tenants in our portfolio. In the first quarter, 61% of our business came from those existing tenants. So, we've been able to, in a few cases, specifically in the first quarter, put shorter-term lease properties under contract and then at a higher cap rate, and then at closing, execute a new long-term lease and give the tenant a slight ramp reduction and exchange for term on properties we are acquiring closer to our -- where the target you're seeing. So, that business is generally a little more lucrative and it's becoming specifically in the first quarter higher percentage of what we're doing.

And then just one more question, basically surrounding the ATM program, your stock has done well as of late. I'm just wondering if the ATM program is something you're continuing to use or if you're going to try to fund acquisitions with lower cost as you mentioned.

Well, as of right now, as you can imagine and as I mentioned, we're really in a very good liquidity position, our $800 million line of credit is undrawn. We just raised very successful amount of capital with a follow-on equity offering and our term loan is undrawn and we're going to again re-borrow back up on that as we do our liability management exercise. I don't -- as it relates to the ATM program, given our current liquidity position, I don't anticipate us using it anytime soon, but again the ATM program, especially for a company like us, is a very good program. It's an opportunity to match fund acquisitions at the appropriate time with -- and those are stabilized acquisitions. So I think we'll just use that sparingly over time and again, we're in a very good liquidity position.

Vineet Khanna, Capital One Securities

Thanks for taking my questions. Just two quick ones from me. Could you provide some color on the declines in the same-store performance for the Casual Dining and Movie Theatre segment?

Sure. On the last quarter, we've brought up the -- we did a restructure on a lease with one of our Movie Theater tenants and it was a legacy deal done back in about 2006 where the rent was substantially higher than probably what it should have been. And so we are getting some percentage rent that doesn't roll through the same-store sales calculation. But with all the shows that is the difference, so we restructured that lease and then put some money into the stores out of their pocket and got a corporate guarantee that we didn't have previously. So that was restructured lease and accounts for the impact on the fixed results for the Movie Theatres. And then Casual Dining, we had a bankruptcy with the phase where we have 16 locations and a master lease that we're negotiating with the tenant right now and the bankruptcy to handle that but we did not get rent in February and March from them.

Okay. And just I guess on the topic of bankruptcy, could you guys talk about maybe any Sports Authority exposure we have? And then your views on to the sporting good -- your sporting goods exposure? And then do you guys have any Gander Mountain exposure?

Sure. So, sporting goods is about 3.6% of our revenues, half of which is Academy, which is one of the tenants that's doing exceptionally well. We do not have any Sports Authority exposure, we do not have any [Sport Shell] Eastern Mountain Sports exposure. But we do have six assets that again are Mountains, most of which were acquired back in -- before the downturn. And they suffered a little bit during the downturn and continue to pay rent. So we do have, that's about [0.7%] of revenues against the Mountain.

Tyler Grant, Green Street Advisors.

Hello guys. Good morning. Based upon your recently filed proxy, it appears that Spirit must acquire between $500 million and $1 billion worth of real estate to achieve bonus targets for the management team. Given that you don't explicitly provide acquisition guidance, is it fair to use this in place of it?

We don't provide acquisition guidance because we -- again, as we've said, consistently we take what the market gives us. In terms of the compensation that models we put together, acquisitions is one of the tools as it is with many companies that goes into acquisition guidance. But so is AFFO per share and so is leverage debt to EBITDA, which of course all are inter-related, if you don't do good acquisitions, you don't get good AFFO per share, or if you do acquisitions with capital that isn't well thought out, your debt to EBITDA calculations will come out of balance. So, I think it's -- we believe, and the compensation committee believes, we have an excellent mix of attributes that go across the spectrum and acquisitions is simply one of those.

Sure, I understand that. And just you kind of started to answer there, which was going to be my follow-up question, which is you believe that having such an acquisition target tied to or management's compensation tied to such an acquisition target could potentially create a conflict of interest regarding capital allocation decisions in terms of what's in the best interest for shareholders versus management?

No. Unequivocally no would be the answer to that question, I don't believe it's a conflict of interest. For the reasons that I just stated, all of those factors are interrelated. And the acquisition -- the ability to do acquisitions, they obviously have to be accretive, they have to fit into our capital structure or they would throw the other compensation metrics out of balance to the point that we wouldn't -- they wouldn't be in the ranges that the compensation committee is set. So, no, I don't believe it's a conflict of interest at all.

No -- I agree with Tom. Those are just natural checks and balances there, and one thing to bear in mind as well, we're under the lens of the radiating seasonality being investment grade. So, there is plenty of checks and balances in place, I think, in terms of those compensation guidelines.

And then I'll ask one final question, I will be a little bit quicker this time. You talked about a little bit earlier on the call, how you're accretively recycling capital by disposing of assets at a 6.4% cap rate and buying assets at a 8.1% cap rate. You didn't mention the added risk that you need to take to be able to recycle capital at a higher cap rate. How much incremental risk do you think you are actually taking?

Yes. I'll answer it in the broad context and then I'll answer it specifically in terms of what we're doing. I'm a believer in risk and return, I'm a believer that they're related. I think the higher that you go out on the total return spectrum, generally the more risk you're taking. So I'm certainly been a proponent of that investment philosophy in my entire career. That said, I think in our circumstance, given the type of investing that we're doing and the type of lease of work that we do, in other words, the master lease structures, the financial reporting that we're getting, the fact that it has, in many cases we're selling flat leases, which quite frankly tailor the market values at this point more than we do. There is a [10:31] market out there that's interested in those assets. And in our view they're pricing aggressively, accordingly. So we're going to sell into that market.

And our view is that we're selling into that market, getting the capital and putting it into properties that we actually think fit our investment philosophy going forward. So I guess that's a way of saying it, yes, risk and return are certainly related, but in our case, I think that gap is much narrower than the numbers on the face would suggest.

And Tyler, this is Mark. I would just add that, our overall weighted average implied rating of our portfolio of tenancy has stayed flat and our unit level coverage is at an all-time high. Hence, we have fewer stores that have a coverage of [101 times] than we've had since we've been public. So it's really been a focus of calling real estate that's maybe not fungible, it's calling locations that do not have a very strong unit level coverage as well as some diversification focus. So we feel like we've actually improved the portfolio while also accretively recycling capital.

Greg Schweitzer, Deutsche Bank.

Thanks, good morning everyone. Just had a follow-up on the pipeline, the $195 million that you mentioned in the press release a couple weeks ago, could you compare that to where that level was at the same period a year or two ago, where you ended up acquiring around $902 billion for the year?

Well, I think the first quarter of this year was lighter than the first quarter of last year. So I mean, basically we've at least recorded -- reported 25% of the year is behind us and so I guess we're a little bit under where we were last year. I would say, other than that, it's consistent with where -- if we were having this conversation in 2015 at the same time, that number's about the same.

That $200 million in the pipeline is about the same?

Right.

And then I just wanted to try and better understand your deal team and your acquisitions in underwriting process to be able to compare to peers. When you find -- when a property comes across the desk, goes to committee, what's the typical processing and time from finding it to evaluating it to closing?

I would say that entire process is a 90-day to 120-day process.

And how many acquisition staffs do you have, specifically the people who you spend most of their time on the front prospecting?

Well, I mean the executive team, keep in mind there's a lot of processing, Mark, Tom and myself, which I'm not counting this. We have one person on the East Coast with focus, one on the West Coast, and on top of that, we have five acquisition/credit analysts.

So, those two that are focused on the regions, are they moving?

Well, one of them works on the East Coast already. So, they will be staying.

And the West Coast person?

Well, we're still in process of what office that person is going to work out of. I would say the acquisitions -- the five, and I may have miscounted, there's five or six credit analysts, but they're pretty much all in balance right now.

Collin Mings, Raymond James.

I guess, the first question, I just want to follow up on casual dining. Maybe just touch a little bit more about the potential capital recycling, I think that was something you guys mentioned as far as being where you look to continue to complete dispositions. Is that just going to be some of the buffet properties or is there anything really beyond that?

I mean we'll look at all of our casual dining exposure as we have in the past and you'll notice that that exposure has come down over the past few quarters. Really any of the properties where we feel like there could be a potential risk whether it would be at renewal or before then, we'll look at going ahead of them.

Okay, anything in particular, any other color you can just talk about as far as the plan for the buffet properties?

I mean, we're in the process of negotiating a deal, which will likely result in us getting some of those properties back, but we have not finalized that negotiation.

Okay. And then also you've made the comment earlier, just to focus on getting a little bit more same-store rent growth that you kind of thinking about, what assets you're holding versus selling. Maybe talk about what sectors do you think are best positioned for you to kind of get that as your pursuing acquisitions, what does that kind of tell you towards a little bit more?

Yes. I guess we're heavily focused on it, especially if you know since 2011, it's been a primary focus of ours. As you know on the same-store sales growth, a lot of the flat leases we have are from the Cole II transaction. So since we've been in the acquisition market, we have been as you -- if you look back a few quarters and what we've been acquired has been heavily focused on same-store sales growth. And I will say on -- to your earlier question, the casual dining, I don't think we purchased any in the first quarter and if we did any last year in 2015, it was a very small number, probably under $10 million or $15 million without having in front of me. So that I don't know if that's reflected and we believe that was enough to move our overall core portfolio percentages, but it's a sector that we frankly are not doing much in right now on the acquisition side.

And casual dining, this is a general comment, we don't necessarily dislike casual dining, we just dislike casual dining where it might have rent that's too high, which is pretty common in that sector. So if you've got rents that are similar to what a QSR would be, we'd be fine owning some casual dining, but in a lot of cases the rents are creeping up over call it $40 a foot and that kind of make us a little bit nervous. So we try to call that out of the portfolio.

Okay. And then to kind of along those lines, I think Mark, maybe in response to another question, you touched on the number of properties that were rent covered with, I think you even said below 1 times, can you maybe quantify what that might represent?

It's a de minimis part of the portfolio, but we, over the past 24 months, have cut that in half.

Okay. All right. And then just last question from me and I'll turn it over, just an update on when you feel like the Dallas renewable will be complete and that can sometimes be a little bit of a moving target, when do you feel like that will be completely done as you think it right now?

Well, I think it will be done sometime this summer. It will be substantially complete. As Gregg said, a lot of his team is here now, a lot of the accounting function, treasury function, tax function, they're all here now. So, what we've really been focused on is a seamless transition and built in a lot of time to allow people and their families to make this transition. But it's -- I would say by the summer, early fall, it'll be buttoned up and will be entirely here.

Rich Moore, RBC Capital Markets.

I'm curious in aggregate, as you guys look at the bankruptcies that are out there, I mean there's obviously a whole bunch, you said you had no Sports Authority, of course you have buffets and there's sport (inaudible) and there's store closings for Men's Wearhouse and I'm guessing no (inaudible), but I don't know that, I mean what an aggregate would you say is the [EDR] that's exposed to this group that is either filed or is looking for rent reduction, et cetera?

We do not have any exposure to any of the tenants that you mentioned, anyhow I do think that a lot of the bankruptcies that you're saying are tenants and companies that have been struggling for a long time where, I mean, I think most people in the net-leased base at least have viewed Sports Authority as a tenant that was going to go bankruptcy agent, we still don't know when. And then in terms of where we're seeing the most weakness, I would say, apparel, I mean even in the sporting good there where you have a lot of -- some of those guys are reliable a bit more on apparel, a unusually mild winter and that's always the excuse of most retailers, but that does have an impact on apparel sales. And you're seeing a lot of that, some of the names that you mentioned are apparel, PacSun and Aeropostale, and we're seeing some softness with some of those, but it really -- the portfolio is in better shape and it's been certainly since we went public. So, while we are seeing a lot of bankruptcies, it always kind of keeps our antenna up, but we're no more concerned than we were at this time last year.

So, your exposure overall is just to buffets really, is that it?

Group you mentioned -- out of the group that you mentioned. Yes, and just we pick the buffets up as part of the (inaudible) portfolio, they've been on our watch list since the date that we merged that portfolio. I think as Mark said, we have a lot of visibility into these tenants. I don't think that was a surprise to us. We were prepared for that. And so we were trying to sell a lot of the buffets, but I think we weren't the only one that were aware that that was the potential problem. So, it was difficult to move those.

I guess no Spirit call would be complete without some discussion of Shopko. I mean are you guys -- under 10% you're at 9.1% is that sort of where you want to stay? Is that looking that at this point?

I mean we're pretty pleased with what we're able to accomplish last year getting below 10%, which was our stated goal but we are continually marketing Shopko and we'll continue to decrease our exposure over time. And it's -- there continues to be a good market for them, they continue to perform well. So we're looking at the diversification of the portfolio from all tenants and certainly we think 9% is still too high, so we're going to continue to write that down.

Alexander Goldfarb, Sandler O' Neill.

Hi, good morning. Phil, just going back to the opening where you talked about the debt, I just want to make sure I got it right because obviously when you guys did the equity raise, you talked about paying off the term loan and then starting down on some CMBS. But at the opening of the call, you also mentioned prepaying, I think it was like $117 million, which would incur a $7 million charge. But I just want to -- $114 million pre-pay. But I just want to make sure I'm getting my numbers right, so that I'm not double accounting stuff that you would already talked about when you did the equity raise?

Right. I was being very surgical as it relates to the 2016 and 2017 debt maturities. We're planning on paying off in the aggregate around $200 million of debt maturing in 2016 and 2017. As it relates to 2016, we'll repay a portion of that and we'll probably have around $32 million of remaining debt maturities, non-defaulted at about 5.9% weighted average coupon. And in 2017, after we repay approximately $141 million of debt related to our 2017 debt maturities level, about $560 million outstanding at a weighted average coupon of 5.8%. So that's part where you got a little bit confused, in terms of what we're -- how we're applying that to both those [debt towers].

But then a $7 million prepaid charge, that's something that's going to be this year or is that a second quarter event or that in aggregate so that sort of spread over time?

That's a second quarter event because we're going to be repaying this debt in June, the $200 million, the proactive liability management and that's cash.

Okay. Cool. And then as far as the rating agencies go, did they give you guys sort of a harder time because there's been a lot of M&A and REIT or maybe they're a little more skittish as they look at REITs, giving them investment grade ratings or you did get a sense that you guys -- that the hurdles for you guys were any different than any other non-real estate company?

No, I mean with the rating agencies, look, I'll be totally transparent. It does get frustrating from time to time and we've done so much analysis on this that there are other REITs that have less unencumbered assets than us -- than our investment grade. I have a whole list in front of me here, I'm not going to call out names. But we've made a lot of progress obviously on our balance sheet the last year in terms of deleveraging the balance sheet prudently as well as improving our access to unsecured debt capital. So, clearly this successful equity raise that we did was a transformative opportunity for us to improve our access to capital as well as lower our cost of capital. And the rating agency is like that. And as long as we continue along that path and specifically it's really improving our access to capital and demonstrating our access to the unsecured debt markets. We're going to be in a very good place with the rating agencies.

Yeah and I would just add, Alex, I think the rating agencies were very pleased with what we've done. I don't think they treated us any harder than anybody else. As Phil said, the comparisons are natural, but they remember that as we remember that at the time of the initial public offering, our unencumbered asset pool was 3%. And I think they have watched that grow dramatically, they watch the changes that we've made to their balance sheet. I think they've been very supportive. They like what they see and they like what we are in the future.

Right. They love the net lease sector, they love the recession resiliency and they love the granularity of our investment portfolio.

Now, I was just asking from the M&A approach just given that some of the new B investment grade companies have subsequently been taken out. And then finally, where do we stand on the number of the investment grade tenants, sort of those Walgreen, that basket of assets that you guys are looking to harvest? How much of that is remaining? So, as we think about sources of capital, clearly that's a very attractive one. So, how much of that is left and sort of timing for harvest is that something we should think about you guys selling this year or is that something that would be sold this year into next?

Yeah, I don't think that the percentage investment grade of our portfolio is changing dramatically and it's not really something that we focus much on. And the selling down of Walgreens is (inaudible) getting out of flat leases as well as just bringing down concentrations of all of our tenant fleet and just trying to have as granular a portfolio as possible.

And that said Alex, as you heard from Phil, we've got the CMBS towers that were going to be retiring, there are assets encumbered in there that we will be recycling candidates. There's no question about it. We just didn't want to give the impression that the entire portfolio that's under that CMBS will be recycled, but we will be selecting assets like we do in our ordinary portfolio management work that are now freed up that from the incumbents of the CMBS and we will be recycling those.

Right, but also bear in mind that we have an $800 million line of credit completely undrawn, we have the term loan that's still has the accordion feature even after we've drawn up for another $230 million. We're in a very good liquidity position. So it's not like we need to be a big seller of assets to address the debt maturity towers, especially after this liability management exercise.

Okay. That's fine, I guess I was looking for sort of that percent of the CMBS that have those low cap assets those FedEx and Walgreens, but I don't know if you could provide that info?

No, it's not something that we generally provide.

Juan Sanabria, Bank of America Merrill Lynch.

Hi, just a quick follow-up question. You guys talked about having your exposure to specific bankruptcies mentioned in an earlier question, but just curious on your overall watch list as a percentage of revenues?

Yes, everyone kind of does their credit launch a little differently, (inaudible) as this going to be a little bit more inclusive of lease expirations and things like that, so we don't typically share the percentage of our revenues that comes, that are on the watch list. But that has been obviously we've taken coming off that helped, but even selling, taken aside our watch list is shorter than it's been in the past couple of years.

This concludes our question-and-answer session. I would like to turn the conference back over to Tom Nolan, Chief Executive Officer for closing remarks.

Thank you, and thank you all for your time this morning and your interest in Spirit Realty. For those that will be at ICSC, we hope to see you there. If not, we look forward to Marriott in June. Good day, everyone.

Thank you Mr. Nolan. The conference has now concluded. Thank you for attending. You may now disconnect.