Spirit Realty Capital Inc (SRC) 2016 Q2 法說會逐字稿

Good morning and welcome to the Spirit Realty Capital 2016 Second Quarter Earnings Call. All participants will be in a listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Investor Relations for Spirit Realty Capital.

Thank you, operator. Hosting the call today are Mr. Tom Nolan, Chairman and Chief Executive Officer; and Mr. Phil Joseph, Chief Financial Officer.

During the course of this call, the Company will make forward-looking statements. These forward-looking statements are based on the beliefs or assumptions made by information currently available to us. The Company's 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, actual future results can be expected to differ from expectations and those differences may be material. For a more detailed description of some of the potential risks, please refer to our SEC filings which can be found in the Investor Relations section of the website.

All the information presented on this call is current as of today, August 4, 2016. 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 funds from operations and adjusted funds from operations may be found on the Company's quarterly report, which can be obtained on the Investor Relations website.

During the prepared remarks today, Management will provide an overview of operating results, an update on current business activities and a review of our quarterly financial results. Following the prepared remarks, the team will be available to take your questions. With that, I would like to turn the call over to Mr. Tom Nolan. Tom?

Good morning. Thanks everyone for joining our Second Quarter 2016 Earnings Call. Today, I will start with an overview of Spirit and where we see the Company positioned today. Then, I will briefly review our financial performance and summarize our recent acquisition and disposition activity. I'll then turn the call over to Phil, who will discuss our financial results in more detail. After that, we will open the call for your questions. Also joining us today is Mark Manheimer, our Executive Vice President of Asset Management and Boyd Messmann, our Chief Acquisitions Officer.

2016 has been an exciting and transformative year for Spirit in virtually every way. In the past few quarters, we have truly taken this Company to a different level as we have successfully executed on the key strategic goals that we have shared with you in the past. These initiatives include materially improving our revenue diversification profile, improving our balance sheet metrics and flexibility, and attracting and retaining best-in-class executive talent.

It has been over three years since we set out on this course and we couldn't have gotten to this point without a lot of focus and commitment on the part of the entire Spirit team. Our headquarters' move is substantially complete. I appreciate the confidence of our team members who have relocated to Dallas. I welcome our new staff and I want to add a special thank you to those Spirit employees, who for whatever reason, were unable to make the move with us, yet worked tirelessly and selflessly to assure a seamless and efficient transition. I thank you all.

The net lease sector is poised for tremendous growth and opportunity over the next three to five years. And as I sit here today, I believe that Spirit is positioned with the right team, the right portfolio and the right balance sheet to drive strong income growth and value creation for our shareholders in the quarters and years to come.

Let me review some of our accomplishments thus far in 2016. Our move to Dallas was an investment that we believed would open up doors to a wider variety of talent. And while we are just getting ourselves established, we are very pleased with where we stand today. In June, we hired Boyd Messmann as Executive Vice President and Chief Acquisitions Officer. Boyd is a talented executive with over 20 years of experience in the triple net industry and he is hard at work in his new role.

And as we announced last week, we have hired Jackson Hsieh as President and Chief Operating Officer, where he will have oversight responsibility for new investments, credit underwriting and portfolio and asset management. Jackson was most recently a Vice Chairman of investment banking at Morgan Stanley, where he served as Senior Lead Banker.

I've known Jackson personally and worked with him professionally for many years over my career in various capacities. Jackson shares my vision for this Company. He shares my enthusiasm to establish Spirit as an industry leader. Jackson's skill set is a perfect complement to the talent we already have and I look forward to working closely with him, as we continue to grow Spirit for many years to come.

We have also invested in building a balance sheet that can support our growth initiatives through any economic environment and provide access to the widest availability of capital options at the most advantageous pricing. In the second quarter, we successfully completed a well-received follow-on equity offering and received investment-grade credit ratings from S&P and Fitch. These initiatives do come with a minor short-term earnings dilution, but at the end of the second quarter, our adjusted debt to adjusted EBITDA ratio stood at 6.0 times and our unencumbered asset base was $4.2 billion.

These are truly transformative metrics, a material improvement from a year ago and a substantial upgrade from where this Company was at the time of its initial public offering. With this balance sheet work behind us and our executive team in place, we are positioned to grow through disciplined accretive acquisitions and continued diligent portfolio management.

Now turning to our second quarter results, last night we reported AFFO per diluted share of $0.22. Our revenue grew by 2.3% year-over-year. At June 30, our portfolio was 98.3% occupied and had an average remaining lease term of 10.7 years, 45% of our normalized rental revenues were derived from master leases and 89% of our single-tenant leases have built-in rent increases.

Our portfolio, as measured by almost any metric, is in better shape than it has ever been, and positioned to continue to provide reliable, predictable income. For the trailing 12 months, our unit level rent coverage was 3.0 times for those tenants that report.

The long-term nature of our leases means that we do not have significant leasing activity each quarter, however, in the second quarter, we did have nine leases come up for renewal. We renewed 100% of these leases. We have 33 lease expirations in the remainder of 2016, which represents 1.9% of our normalized rental revenue.

With regard to our investment activity this quarter, we continue to look for opportunities to grow our portfolio and create value through prudent acquisitions, while pruning our portfolio through targeted dispositions. In the second quarter, we purchased $165 million of high-quality targeted assets and completed $138.2 million of dispositions. The $165 million of acquisitions had a weighted average initial cash yield of 7.6% and a weighted average lease term of approximately 15.9 years, with average annual escalators of 1.7%. In keeping with our stated strategy, approximately 66% were through sale-leaseback transactions, roughly 61% had master lease structures and most of the new transactions provide unit level reporting.

The $138 million of assets we disposed of during the quarter included $35.3 million of properties conveyed to lenders. Of the remaining approximately $103 million of sold assets, the weighted average cap rate for occupied properties was 6.93%.

One of these sales was a Haggen store that was returned to us at the time of the rejection of their master lease last year. We have now sold three Haggen stores for total gross proceeds of $20.8 million. The demand for the remaining stores in the Haggen portfolio remains robust and we are confident we will achieve or exceed the aggregate proceeds target that we have previously disclosed.

We also sold five Shopko locations and our revenue concentration from this tenant is now down to 8.2%. We remain on track for achieving our long-term objective of having no tenant represent more than 5% of our revenue.

As I have noted in the past, we view aggressive portfolio management as a key contributor to long-term financial performance. And we continue to recycle capital efficiently and accretively, given that over the last year, we have consistently sold in the mid to high 6% cap rate range and bought in the mid to high 7% cap rate range.

We're also very optimistic about the current opportunities we see in the acquisition market and have a large number of transactions under various stages of review. While, as you would expect, our acquisition pace will vary from period-to-period, we are off to a strong start this quarter. As I report today, we have already closed on $145.3 million of new acquisitions in the first five weeks of the third quarter.

With that, I'll turn the call over to Phil who will review our second 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 the progress made during the second quarter.

We continue to position our balance sheet to improve our capital structure efficiency, which we believe will drive shareholder value and improve our cost of and access to capital. In the second quarter, we continued to be a disciplined allocator of capital, while maintaining a vigilant focus on balance sheet management.

During the second quarter, we raised $388 million in net equity proceeds, which were primarily used to repay approximately $391 million of high coupon secured debt. As Tom mentioned, we were a net acquirer of assets in the second quarter and we continued to be proactive on the capital recycling front. During the quarter, we acquired $165 million of assets at a 7.6% cap rate and we disposed of $138 million of assets, including assets conveyed to lenders under defaulted loans at a 6.38% cap rate.

Heading into the second half of the year, we will continue to focus on accretive liability management and acquisition activities, while improving our access to the institutional capital markets.

Last evening, we reported AFFO of $0.22 per diluted share for the second quarter including adjustments for restructuring charges and other expenses associated with our corporate relocation. This performance represents an increase of 1.7% compared to the second quarter of 2015. The moderate increase is primarily attributable to our disciplined capital allocation focus during the year-over-year period and the timing of the full deployment of equity raised during this period.

Our prudent balance sheet management over the last year well positions us to continue to make progress on lowering our cost of capital as well as enabling us to accretively grow and strengthen the portfolio.

Total revenues for the second quarter of 2016 increased approximately 2.3% to $171.7 million compared to $167.9 million in the second quarter of 2015. Primary drivers were moderate net acquisition activity during the year-over-year period and fee-related other income, which was offset by lost rent related to lease restructurings and to tenant credit loss. Same-store rent growth for the quarter when compared to the prior year second quarter increased 0.5%. Rent growth continued to be negatively impacted by a legacy theater 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 and swap termination payments included in G&A, total expenses in the second quarter of 2016 decreased to $144.7 million from $173.4 million in the same period of 2015. Prior to the aforementioned adjustments, total expenses decreased 14% or $24 million from the prior year's second quarter. Driving this improvement was lower non-cash impairments and lower cash interest expense, which were offset by corporate relocation and restructuring charges, as well as swap unwind costs.

With respect to G&A, including corporate relocation charges, but excluding interest rate swap termination payments, it represented 7.1% of total revenues for the quarter in line with our target of 7%.

We continue to make great progress on lowering our debt cost-to-capital. Cash interest expense decreased by approximately 14% or $7.4 million compared to the second quarter of 2015, primarily as a result of the repayment and refinance of high coupon CMBS debt. Our weighted average cash interest rate improved by approximately 47 basis points to 4.45% from the prior second quarter, principally due to our proactive liability management activities.

In terms of our financial standing, our leverage and cash flow metrics notably improved. Our second quarter reported leverage at 6 times improved by 0.7 times from the prior second quarter period. As I mentioned on our prior earnings call, we would expect leverage to moderate over the course of the year and are maintaining our year-end leverage target at or below 6.5 times. Furthermore, our fixed charge coverage ratio was strong at 3.3 times coverage.

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 significantly enhances our financial flexibility. At the end of the second quarter, our unencumbered asset base stood at $4.2 billion or over 50% of our real estate investments, an increase of $1.3 billion from the prior second quarter.

Our investment-grade standing and near-term secured debt maturities provide us the opportunity to further solidify our financial standing.

On the liability management front, during the second quarter, we extinguished approximately $391 million of high coupon secured debt with a weighted average coupon rate of 6.16%. Included in this debt retirement is approximately $34.5 million of defaulted loans that transition to deed in lieu. Total costs related to this early retirement of debt approximated $10 million or 2.6% of the principal balance of the debt that was retired.

Currently, our remaining 2016 debt maturities excluding approximately $36 million of defaulted loans transitioning to debt forbearance totals only $6.4 million. Furthermore, our remaining 2017 debt maturities currently approximate $502 million and have a weighted average interest rate of 5.8%. Our near-term debt maturities through 2017 represent a very tangible opportunity to significantly improve our cost of and access to capital. We expect to proactively address these maturities in an accretive manner during the remainder of the year with our strong corporate liquidity and access to the capital markets.

Our strong corporate liquidity positions us well for prudent and accretive growth. As of June 30, we had nothing drawn on our $800 million unsecured line of credit. Currently, we have approximately $18 million in unrestricted cash and cash equivalents on our balance sheet and approximately $643 million available under our line of credit. In addition, we have approximately $20 million of liquidity available in our 1031 Exchange and Master Trust Notes [for lease] accounts that are available to fund real estate investments.

During the quarter, we declared dividends to common stockholders of $83.9 million, which represented an AFFO payout ratio of 81%, compared to $75 million representing an AFFO payout of 79% in the comparable period a year ago.

In conclusion, during the quarter, we made significant progress improving our capital structure and our access to institutional capital. As I stated last quarter, we are committed to maintaining our investment discipline to drive prudent growth over the long term. While we are encouraged with the quality and size of our near-term investment pipeline, we did experience some earnings drag during the quarter related to the timing of targeted follow-on equity proceeds into new investments and high coupon debt repayment.

With that in mind, based on our near-term investment pipeline, our proactive capital recycling efforts year-to-date, potential additional liability management activities and lastly excluding any future Haggen settlement proceeds that may be received during the current fiscal year, we are adjusting our 2016 AFFO guidance range from $0.88 to $0.91, to $0.87 to $0.89 per common share. With that, we'll be happy to take your questions.

(Operator Instructions)

Alexander Goldfarb, Sandler O'Neill.

Just first, Phil, on the guidance, just to clarify, so Haggen is out, but what is in guidance as far as the proactive balance sheet management that you outlined?

Look, Alex, the guidance that we originally gave everybody was purely organic in nature and that was getting to the midpoint of $0.895. So, when you look at the drivers in terms of a range and the upside to the range, liability management was one of those things. So, that's a driver to the upside. I mean, I can walk you through how we got to the $0.88 set number, if you want me to, but liability management is just an incremental driver.

And then as far as G&A goes, does guidance include Jackson and whatever other changes hiring you may have or are those incremental?

No. Our current guidance does include some incremental G&A as it relates to Jackson, but again on the margin, that's -- in terms of run rate G&A, that's not going to be a significant impact. We still are targeting at or below 7% of total revenue.

And then just a second question. On the properties, you said that you've got another $36 million of properties that you will likely go back on the debt forgiveness. Can you just walk us through sort of one, how many properties you foresee this happening with, and then two, assume all of these are legacy properties, so none that you've recently acquired, and then three, as an ongoing percentage, is there like some sort of percentages just like bad debt where you always assume maybe less than a percent of properties go bad or something of that sort?

So, in terms of run rate, the thing to appreciate is that our near-term debt maturities through 2017 is very granular CMBS transactions and these resolutions as it relates to these defaulted loans, they just take time. You have conflicting interest here in terms of you've servicers that are managing the process for the securitizations and it's in their best interest to let things drag out, because they're incurring fees and what have you.

Our asset management team works very closely with the special servicers in terms of presenting them offers and seeing if they'll agree in terms of the debt forgiveness related to those assets. When you look at the total amount of defaulted loans, I mean it's on the order of less than 1.5% of our total debt balance. So, it's not a big number, but obviously when you look at the impact to the balance sheet, it does help leverage on the margin, because we are getting some debt forgiveness on assets that are -- the investment is well below the principal balance of the debt. (multiple speakers)

Just to clarify, you asked whether they were legacy assets. These assets are in fact the legacy Spirit assets or they were a couple of them that were actually legacy core assets that we had identified actually at the time of the merger were likely to be candidates for the deeds in lieu. So it is not anything that was bought recently to specifically answer your question.

Okay. So that -- so just going forward, it's about one -- less than 1.5%. So, we may see these from time to time, but we shouldn't expect this to be a trend or anything like that is the bottom line?

Right. And again, the one thing we do is we work very closely with Mark and his team in terms of evaluating our principal paydowns of debt. We are not going to -- we want to -- if we have option value on an asset, we want to get advantage of it. But again, this is not something that will be recurring longer term, but there will be some additional ones that may pop up in 2017, but that's only going to inure to our benefit.

And this is Mark, Alex. To echo on Phil's point, I mean just looking at our debt repayment schedule, you can see that the CMBS more or less goes away in 2017. So after 2017, I would not expect to see any more.

Vikram Malhotra, Morgan Stanley.

Congrats, Tom, on getting the move done -- completed. And I want to just check and get a sense of the 70 employees that you did have, or 71 or so, can you just give us a sense of like how many actually moved and then are there additional hires you have to make to back fill?

I think we gave those numbers before, I think we said approximately 20 employees would move, that's in fact what has happened. Everybody who had indicated that they intended to move has done so or they were in the final process of it, I think we still have one or two that are commuting but it really hasn't changed that significantly since we discussed it before.

As to complementing our organization chart, I think we're in terrific shape, we've got -- I would say, we've got kind of what you ordinarily have in the ordinary course of business, there is always one or two spots that are open or you're looking to complement or add to. We are a growing Company, so we'll continue to be looking for individuals that can complement our organization, but at the moment, I think we've got a fully-functioning Company, fully-functioning organization chart and hopefully the additions that we make will only be complementing the folks we already have.

Yes. And the only thing I'll add, Vikram, is that we hope this question kind of dies, because, as Tom mentioned, we're fully staffed right now. I mean you can look around the room, the Office of the General Counsel, Investments, Asset Management, Office of the CFO, we are fully staffed. So, it's -- we're ready for just basic run rate operations.

Boyd, question for you, just given your background on the industrial office side, what -- do you sort of -- do you think there could be opportunities for Spirit, just incremental opportunities and maybe the business mix changes a bit, and just from a relationship standpoint, it seemed you would have really strong relationships there. So, just wondering sort of what you might do differently in terms of acquisitions and what you bring towards Spirit?

Yes. So my background, I've been in the net lease business for over 20 years, started out in the retail sector with PepsiCo, Yum Brands, onto FFCA. So, I have really been involved in cross-sections of the net lease market for 20 years. I don't see any reason to change the Spirit model. We're going to continue to do what we do on a day to day basis. We're also going to look for other opportunities as they arise and leverage the relationships I have to add value.

And then just last one, Phil, just on guidance, just so that we're clear and just on -- I know in October, there was sort of an organic number and I'm assuming you've clarified that sort of at the midpoint, and then the last quarter, there were some acquisitions and other balance sheet management. So, as we look out sort of in the third quarter, generally companies provide guidance, are you considering just sort of providing a clean organic guidance number and any thought on maybe giving a little more color on acquisitions and dispositions?

Well, I mean good question. So Tom did provide color on acquisitions and dispositions in terms of what we acquired so far during this quarter, about $145 million of assets. And I can't remember what was under PSA, what was the number, around $31 million we disclosed in the Q, something like that. So, that is kind of some insight in terms of how the quarter is shaping up.

As it relates to organic guidance, I mean the $0.88 is our organic guidance, and walking through that, we are at $0.895 in terms of the midpoint of guidance organically. That was just basic blocking and tackling in the portfolio, no acquisitions or dispositions, no equity raise. When we did the equity raise, we estimate the net dilutive impact to be around $0.015.

As I alluded to you in my prepared remarks, the capital deployment friction in terms of being behind the plan in terms of the deployment of that capital being fully deployed in terms of -- for example, repaying high coupon debt, that added a friction of about $0.01. However, we offset that with some other income during the quarter and then there was some one-time G&A expense related to new employees in terms of upfront signing bonuses for example that was $0.001.

So, that kind of got you to the $0.88 midpoint and then the additional upside to that midpoint is additional liability management, accretive acquisitions and we did remove Haggens from our guidance, but as Tom has mentioned in the past in terms of our recovery on that and the AFFO eligibility of that recovery, whenever that may be because we're recognizing it on a cash basis, that could be upwards of $0.035 impact to AFFO, be it a portion of this year and a portion of next year, and we're going to continue to provide the disclosure in our financials in terms of the characterization of that recovery, how much of that is true loss rent and how much of that is rent for future period. So you can kind of segment and figure out what is run rate operations eligible, what is not.

And just, it would just be my two cents, it would be really useful if you can just reconsider providing some sort of acquisitions, dispositions guidance number. Just to keep it apples-to-apples, otherwise every quarter we're sort of seeing what is organic, what is not organic and it just gets a bit confusing, so it would really be helpful if you could reconsider that?

I certainly appreciate that. I appreciate the jobs that you folks have and trying to put your models together and I realize we appear to be kind of dogmatic about this point, but again, my view is -- our job is to try to provide as much clarity on where we see the market at any given time, and what -- and to provide clarity on a time frame that we feel comfortable about.

For companies that issue guidance in the fall for the following year, which is what we do and others do, I find that I just - I find the thought of providing a guidance target acquisition number in the fall of the given year, for the following calendar year, I continue to believe that establishes a target for investing as opposed to the more -- the way that we look at the world, which is that you buy properties when you make money and you sell them when you make money, and you don't have an artificial target particularly established 15 months before the end of the following calendar quarter. I understand your point, we're going to continue to look at this and try to find ways to give as much clarity to you as we can, but the actual acquisition guidance number itself remains kind of a dogmatic point.

Tyler Grant, Green Street Advisors.

Can you provide an update on monetizing the former Haggen space at this point?

So, as Tom mentioned earlier, we sold another one of the vacant locations of the three, so taking our total portfolio of initially 20 down to 17. We still have four vacant assets that we are currently marketing. We're talking to tenants on all four of those, still trying to negotiate something that works for us. But we do have four locations out at the market where we're getting close to -- some are already under contract and the other two we are still negotiating contracts, but we should be able to have some of those sales actually closed before the end of next quarter.

So, we're optimistic that those numbers are going to be pretty strong. And Tom mentioned in his opening remarks that we still expect to be within the range or above the range in terms of the total value, but I think by the time we actually re-let and sell all of the vacant locations as well as sell the remaining operating locations, whether they would be Smart & Final, Gelson's or Albertsons, that's going to take a little bit of time just because we do not want to put too many in the market at once because we think that would negatively impact our sales process, but I would anticipate being this fully resolved within the next three quarters.

And then are there any properties, former Haggen properties where you're having -- already seeing an issue potentially being able to sell them at attractive valuations?

No. We've had a very positive reaction from the market. We're marketing them through three different brokers and all three brokers have come back with extremely positive reactions from the market.

And then just moving on to internal growth, over the past year, Spirit has averaged about 50 basis points of occupancy loss per quarter in the same-property pool. Just curious as to which -- if I compare that to some of your peers, it's a worst performance, how does this compare to your long-term expectations for occupancy loss in the same-property pool?

And part of that is, we've been extremely active in terms of trying to get out ahead of issues. For example, we have got two tenants where we may have a large master lease and say we are willing to take back a couple of your problem assets, because we think we can either sell them or re-let them to a tenant that may be able to do better and then exchange -- extend a lease or get something in return from the tenant.

So we're really focused on trying to improve the long-term cash flows of the business rather than try to kick the can down the road, which I think -- I don't think that's the right approach. We did a little bit of that this quarter. We're -- part of it was the [the phase] bankruptcy, which if you compare it to the other two of our competitors that have the phase, we fared significantly better in the bankruptcy negotiations than they did, but we're - and we're already have found tenants for a large number of those locations, but we also approached the tenants that had master lease with some underperformers where we knew there were other tenants that had interest in that space, thought they could do better. So, we took them back and that shows up in the occupancy cost -- in the occupancy of the portfolio, which may look negative, but in our view, we're either getting properties out of the portfolio that are going to be bigger problems down the road, or we're putting in better tenants that have a chance to be able to perform within those locations.

And just a follow-up to that question. Do you have an estimate of what -- when Spirit is in more of a steady state of what that occupancy loss could be on any given quarter (multiple speakers)

Well, I mean, a little bit tough to give you a specific answer on that, but I guess you know when you consider the fact that we had a legacy portfolio that we started with this management team to not put together and then we pretty quickly after going public did a merger of another portfolio that was not put together by this management team and they have subsequently bought a couple of billion more assets. We've really focused on trying to get out of properties that don't fit our current investment criteria.

So, we've -- I mean, I think you've seen that we've been extremely active on that front over the past couple of years and I would imagine that will start to dissipate as we get closer, but it's going to vary quarter-to-quarter and I think we're going to -- we're always going to be active in asset recycling and approaching tenants where we think we're going to get a better long-term economic outcome.

That being said, we did have a lot of wood to chop coming out of 2012, 2013, and I would expect that to be more steady state within the next couple of years.

Ian Gaule, SunTrust.

Just a quick question on dispositions. So, the last two quarters, your dispositions, the cap rate has been around 6.4%. I'm just wondering if that's purely a function of selling better assets or cap rate compression?

This is Mark. A big chunk of that is the health of the 1031 market. We sell properties if we think that we're going to have a -- if there is risk to the cash flows, meaning if there is a credit risk that we think we're getting ahead of, and so those will typically be at higher cap rates, but we really like to focus on what is really attractive with the 1031 guys, that they made value properties more than we would

So if the market is going to value property more than Spirit is really getting rewarded. I mean Walgreens is the obvious example where there are flat leases, you don't get unit level information other than the way that they report sales, which isn't overly helpful. It's just kind of directionally whether it's a good or bad store. But we've dug in and a lot of people think you know that it's the investment-grade ratings, but that's not even necessarily what drives it, it's what do the 1031 buyers like.

And when you look at the Walgreens, the cap rates were healthy in what we sold, but they were in line with the overall cap rate, the top 5 best cap rates of assets that we sold, were not investment grade. In fact, they were kind of the weaker performers in some of our quick service restaurant operators, where we actually do think there could be some risk at some point in time.

So, we do understand that there are people that may think that we're selling off that as a better asset, but it's really more diversification selling assets that aren't rearding us, whether it be Walgreens or the flat lease, without unit level information or we're getting out ahead of risk.

One thing and just in full disclosure and Tom alluded to this in his comments and we also disclosed this in the supplemental, that 6.38% cap rate, that includes properties that transitioned to the lender. And when you look at the non-defaulted loan cap rate for the dispositions, it was still healthy from a 6.9% cap rate, but I just wanted to clarify that, but just to reiterate what Mark was saying, and as we said before, 2017 it's a lot of granular CMBS transactions and there are some pretty high profile credits there where Mark can accretively recycle out of assets.

Joshua Dennerlein, Bank of America Merrill Lynch.

Most of mine have already been answered, but just one quick clarification. Did you disclose on how much dispositions you have done since the end of the quarter. I got your acquisition number?

Yeah. So, including deeds in lieu, we've sold about $138 million of assets, $35 million of that are deed in lieu properties, that's second quarter.

But what about since the end of the quarter, did you disclose (multiple speakers)

We did not disclose any supplemental dispositions.

But I think it's safe to say that, in the near term we expect to be a net acquirer.

We're definitely going to be a net acquirer and we're definitely going to be active in portfolio management. Mark has already referred to the Haggen assets, which are in the market and close to being signed. So, we are going to continue to be a healthy aggressive portfolio manager, but we did not disclose the specific status as of the quarter today.

And just a little bit more color, Haggen is going to be the lion's share of what we sell in the foreseeable future. We've had a few sales, but it has been a little bit slower than what you have seen in the first and second quarter.

(Operator Instructions). Dan Donlan, Ladenburg Thalmann.

We haven't beat this horse dead yet, so I just wanted to go back to the guidance, just so I understand it. You said liability management is not a part of the $0.88. What about further lease termination income or other income at that bucket?

No, lease termination fee income in terms of the organic number at the midpoint $0.88, no. I mean that could be incremental upside. But I think last year, we probably had around $7 million or $8 million of other fee income and I can see this year kind of mirroring that going forward.

So, that's kind of what was in the $0.88, is about $7 million or so?

No, just what we have year-to-date is what's in the $0.88, and we're always going to have a run rate of number for other income, but I think by the end of this year, we could approximate something similar to what we had last year and I think it was like $7 million.

I'm sorry if I missed this, but how much CMBS debt would you guys consider or is feasible without too much of a prepayment penalty or defeasance cost and potentially paying down in the back half of this year, what's the potential unsecured offering. Is that something you guys are considering or just kind of curious of your thoughts there?

Look, we're definitely monitoring the capital markets. We made a lot of progress in terms of getting investment grade standing with two of the agencies. That's something that we monitor constantly and as it relates to additional liability management, as I alluded to in my comments, we are already at about 50% of our assets unencumbered, actually a little bit higher than 50%. And we're in a sweet spot right now.

So, we likely will do some additional liability management given our strong liquidity and access to the capital markets, but we're going to be very disciplined in terms of what loans we go after -- we're -- the good thing is that it's granular CMBS, it could be very surgical, working with Mark's team in terms of making sure that we're maintaining option value where we want to with respect to the debt, but we're also going to be cognizant of the fact that we don't want debt extinguishment costs while they get back out of AFFO. I mean it's a cash expense, so we want to be very disciplined in terms of the amount of prepayment penalties that we incur, but I would estimate that, if we go after some debt, it's probably going to average between 3% to 4% of prepayment penalties or defeasance, debt extinguishment cost related to that debt. But, liability management is definitely something that we've been focused on this year and will be continued to focus on to the remainder.

And as far as G&A goes, if you strip out the relocation expenses and that the interest thing, the swap that you had in there, you're about $11 million for the quarter. Is that a kind of a new run rate and then maybe we ticked that up a bit in the fourth quarter when Jackson starts, is that a fair way to look at or is there -- will that potentially gravitate back up to $12 million or so as more people are hired or just kind of curious on a run rate there?

From just a cash comp perspective, even before Jackson is hired, as I mentioned before, we did an analysis with Mercer and were any up today in terms of -- if we just replicate people's original salaries for a particular position to where we are today, we don't -- we're not really seeing a meaningful cash comp increase in that regard. Now as it relates to Jackson, yes, this is going to be a minor tick up in G&A as it relates to that. But we really don't see a material increase in our compensation expense going forward. I can't remember if the $11 million you referred to backed out some of the restructuring and reload charges that are included in G&A, but --

It did.

But I think we feel comfortable having G&A be at or below 7% and that's been a good mile post for us.

And then switching gears to Shopko, you sold five in the quarter, but your number of stores went down by 15, did you re-tenant some of those stores, I think Mark alluded to a master lease, you guys doing something with master lease tenants, and whether there's some vacancy there, just what was the delta, why did you have a delta of 15?

Yeah, that's a good question. So we did, we sold five and the master lease that I was alluding to earlier was one of a smaller (inaudible) master lease, which is now owned by Shopko so that rolls up into our Shopko exposure and they had a number of locations, where we had a different tenant that we wanted to put in there, that would pay a similar rent and a couple locations that we thought we did take back and either sell or re-let to names like Tractor Supply and Hy-Vee and good credits that are willing to pay us similar rent, so we took some of those properties back in exchange for a lease extension on that master lease.

So, how many were re-leased in short order? And how many are left to be leased?

There are six left to be re-leased, although we're making pretty good progress on those.

And in the rented, at or around the same level?

Similar, I mean some of them we did, some of them we've sold, so there won't be rent, but the replacement rents are similar.

Okay. And then, it looks like your --

Just to elaborate, I mean Mark made reference to it, I mean we take the portfolio management very seriously and this is one of these examples where -- now this is a master lease portfolio with -- these are very small assets. The Shopko standalone assets are much larger. So, we really are dealing with very small assets and very small dollars, first of all.

But this is a case where we could have just sat here and collected the rent and allowed the lease to run out and then add an issue because some of these assets we've already identified will likely to be underperforming, but rather than do that, we pursued an aggressive kind of portfolio management plan, got out in front of it, identified the properties and then moving them off our balance sheet and I think that's the approach we take not just with Shopko but we take with any of the assets in our portfolio.

And are there any other Shopkos where this is possible. I mean, is there more evaluation that can be done here?

This was -- I wouldn't expect anything like what we just did to happen again mainly because it went from -- we've drastically increased the unit level coverage and within the master lease, so they're happy with the assets they have. We think it could happen with one or two, for a quarter or two, possibly, but certainly not in the magnitude of 10 properties.

I appreciate that. And then as far as the NAV page, page 19 itself, it looks like the number of total loans receivable went down from 143 to 109. Just curious what happened there and if you wind up owning the properties, was that new rent that you received, is that factored into the annualized cash rent number?

So, I'll start, Dan and I'll turn it over to Mark. We had an opportunity with an existing loan portfolio to exchange assets in conjunction with debt repayment. So, part of the -- some of the other income that we recognized was related to an early pre-payment penalty related to that debt. And now, we own these properties as opposed to being the lender. Maybe Mark can give you some color in terms of the nature of the assets and --

Yes. In this particular instance, they were quick service restaurant assets that we really liked a lot, but we did not own. We were essentially in the position of being the CMBS debt owner. And so we have a good relationship with the equity holder of those properties and the debt was fairly onerous.

So, we're able to cut a deal with them where we were able to buy the properties, let them out of the debt with a prepayment penalty of course and they were assets that we really wanted to own and we're able to take those over and rather than having that debt go away in the next few years, now we've got a master lease portfolio of quick service restaurants at pretty low rents and extremely high rent coverage.

Collin Mings, Raymond James.

Recognizing it's always going to be noisy, but Tom, I mean you've noted a pretty meaningful acceleration acquisition decisions here over the last five weeks. I'm just curious from your perspective, what do you think is the biggest driver of that? And do you think just the relocation and management changes now being in the rearview mirror has helped on that front?

I mean, Boyd is sitting next to me, I'm sure he'd like to take all the credit, but I'll -- I think that the easy answer is that June 30 was kind of a high date and we don't like to be in a position where we are kind of rushing to get transactions done just to meet a quarter end deadline and there were a couple of transactions that at least initially when we kind of put our program together, I think we thought were going to close in the second quarter, but either for administrative reasons, due diligence reasons or whatever it happened to be, it slipped into the third quarter and I just thought that extra color would be useful.

We do think, I do believe that the market is an attractive acquisition market today. The cap rates are excellent, you look at the cost of capital that the companies such as ourselves have and yet the cap rates remain I think attractive and so when opportunities of high-quality assets is there and we believe is there today, we do want to be aggressive in pursuing that. So I think you can read into it that we think the acquisition climate is attractive. And as long as it remains attractive, we're going to be a buyer. But it really is, just, I wouldn't read anything into the actual specific numbers itself, because again that was just items that seemed to fall from one quarter to the next.

And then maybe just looking back into 2Q as far as some of the activity there, it does look like that there was a pretty meaningful uptick as far as C store exposure. Maybe just update us as far as the opportunities you're seeing there?

Yes, I mean I think again, we continue to -- we have been underweighted C Stores really forever relative to our peers and it is a sector and so that was a nice combination to have, I think again some of our peers are probably at the C store level that they'd like to be. That provides us buying opportunity for us as there isn't quite as much competition among our peers for this particular sector. We like it, we are underweighted and so for us that just meant an opportunity, but it is a sector that we continue to like, it's a sector we continue to pursue and it is a sector we continue to see some attractive opportunity there.

And then just one last small kind of housekeeping question. Just on the same-store performance, just on the automotive dealers, there was a big jump there as far as contributing to that 50 basis point increase, just touch on what maybe drove that, was there just a step change in a couple of leases or something?

Yes. It was, Camping World was the tenant. And we had a period of time when we initially bought the property where there was a three-month period and so that rolled off and now we've got reflecting [rent], so that's pushed up.

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you and thank you all for your time this morning and your interest in Spirit Realty. We are pleased with our progress as we've successfully executed on our goals to improve our portfolio diversification, enhance our balance sheet and attract the best-in-class management team. We believe we're positioned -- better positioned than ever to drive strong long-term growth. We thank you again. We look forward to speaking with you again soon.

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