Spirit Realty Capital Inc (SRC) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Spirit Realty Capital 2016 third-quarter earnings call.

(Operator Instructions)

Please note that today's conference call is being recorded. An audio replay will be available for one week beginning at about one o'clock PM Eastern Time today, or one hour after the conclusion of the call, 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.

(Operator Instructions)

I would now turn the conference over to Investor Relations at Spirit Realty.

Thank you, operator. Hosting the call today are Tom Nolan, Chairman and Chief Executive Officer; Jackson Hsieh, President and Chief Operating Officer; and 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 potential risks, please refer to our SEC filings which can be found in the Investor Relations section of our website. All of the information presented on this call is current as of today, November 3, 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 in the Company's quarterly report which can also 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 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 third-quarter 2016 earnings call. Today I will start with an update on Spirit and our accomplishments during the quarter. I will briefly summarize our financial performance and take a few moments to introduce Jackson Hsieh, our President and Chief Operating Officer. Jackson will then discuss his role and provide an update on the Company's operations, including acquisition and disposition activity. Finally, Phil will provide more detail on our balance sheet, financial results and guidance. We will then open the call to your questions.

For those of you that have followed Spirit since our IPO, you have consistently heard me present a three-point strategic plan to position the Company as a best-in-class triple-net REIT. Number one, through a combination of targeted acquisitions and aggressive portfolio management, improve our tenant quality and revenue diversification. Number two, enhance our balance sheet, both in terms of credit metrics and flexibility. And finally, build a best-in-class Management team.

I'm pleased to report that the Company has made substantial progress across all of these objectives during the quarter and subsequent to quarter end. First, we significantly enhanced our portfolio quality and revenue diversification, most notably with the recent sale of the 84 Lumber portfolio, our second largest tenant, which virtually eliminates our exposure to the cyclical homebuilding industry. And as to our diversification metrics, at the time of our IPO our top two tenants represented over 35% of our revenue. Today our top 10 tenants represent less than 25% of our revenue.

Second, we further diversified and strengthened our balance sheet and meaningfully lowered our cost of capital with a completion of our inaugural offering of senior unsecured notes in August, through which we raised $300 million which we then used to retire a comparable amount of higher cost inflexible secured CMBS debt. Finally, we strengthened our Management team with the addition of Jackson Hsieh as our President and Chief Operating Officer.

With these efforts now behind us, we are ready to capitalize on what we see as a large opportunity set within the net lease sector. We believe that more and more companies will choose to unlock capital by selling their real estate assets and that Spirit can be a natural partner for these companies. With our disciplined investment strategy that focuses on single-tenant, operationally essential real estate, we believe we can continue to significantly grow and diversify our portfolio and generate long-term cash flow growth and appreciation for our shareholders.

Turning to third-quarter results, we reported net income of $0.06 per share and AFFO per diluted share of $0.22 which represents growth of approximately 2.6% over the prior-year quarter. Phil will provide additional details on our financial results. Let me take a quick moment to make one non-Spirit related comment.

I would like to congratulate Craig Macnab, the current CEO of National Retail Properties, and someone who I've had the pleasure of knowing for many years on his upcoming retirement. Craig has been a terrific steward for the Company and its shareholders over the last 12 years. I'd also like to congratulate Jay Whitehurst on his upcoming appointment as the new CEO of their Company.

Now I'm delighted to introduce our new President and Chief Operating Officer, Jackson Hsieh. Jackson joins us from Morgan Stanley where he was Managing Director and Vice Chairman of the Investment Banking Division. When I thought about the criteria for this important position, I looked for an individual who would deepen our bench of talent and add a complementary skill set to our team. Jackson has had immense success throughout his career, not just on the transaction side, but in building and managing high-performing professional teams.

Jackson will oversee credit underwriting, new investments and portfolio and asset management. Having worked with Jackson in various capacity over the years before he joined us here, I look forward to working alongside him as we refine our investment and portfolio management strategy and work to position this Company as a leader in the net lease sector.

With that, I'll turn the call over to Jackson.

Thanks, Tom, for that introduction and good morning, everyone. I am extremely excited to be here at Spirit at this moment in time to help be a part of growing this vibrant Company. As one of the former senior investment bankers who worked on Spirit's IPO in 2012, I joined the Company because I believe Spirit is well-positioned to take advantage of a significant growth opportunity in the net lease sector. The quality and diversification of the Company's tenancy and cash flows has been much improved making Spirit a stronger Company.

The Company's balance sheet has come a long way in terms of debt reduction and flexibility since the 2012 IPO and its cost of capital is significantly lower. And finally, the Company has completely revamped its operations and has a culture that is laser-focused on growth, asset management and shareholder value creation. I'll be working alongside Tom to find and execute the strategy and support the efforts that are already in place at Spirit.

Since I started in September, I have completed a detailed asset review of our entire real estate portfolio with our asset management team. We are focused on enhancing the portfolio to further increase the quality of our cash flows, further diversify our tenant and industry base and begin to accelerate growth in the years to come.

As of September 30, our portfolio was 98.4% occupied and had an average remaining lease term of 10.5 years. 46% of our normalized rental revenues were derived from master leases and 89% of our single-tenant leases have built-in rent increases. Our cash flows remain durable and predictable and for the trailing 12 months our unit level rent coverage was approximately 3.0 times on most tenants that report unit financials. During the quarter we had nine of nine tenants renew leases whose base lease term expired. The renewal rental rate for those leases was 100.7%.

Turning to acquisitions, we continue to source and close opportunities to grow our portfolio while recycling capital and refining portfolio quality and focus through dispositions. During the quarter we acquired $215.9 million of acquisitions which had a weighted average cap rate of 7.5% and a weighted average lease term of approximately 15 years with annual escalators. Additionally, approximately 65% were through sale-leaseback transactions; 85% have master lease structures; and most of the new transactions provide unit level reporting. Our year-to-date Q3 acquisition volume is $456.5 million at a weighted average cap rate of 7.64%.

On the disposition front in the quarter, we sold 14 properties for $58 million at a going-in cap rate of 6.18%. Two properties were sold vacant for $2.1 million and one property was a deed-in-lieu transaction. Our year-to-date through Q3 disposition volume was $313.3 million at a weighted average cap rate of 6.33%.

Finally, subsequent to quarter end, we proactively negotiated an agreement with 84 Lumber, our second largest tenant, which represented 2.8% of our normalized income at the end of the third quarter and who had a purchase option in their lease contract with us. We recently closed on the sale of all 108 properties that 84 Lumber occupies for total proceeds of $205.7 million, inclusive of a $5 million amendment fee to accelerate the timing of their purchase option from April 30, 2017, to the end of October 2016, which will be reflected in our fourth-quarter results. This transaction was executed at a cap rate of approximately 8.7%.

84 Lumber had a contractual right to purchase these assets at a set price. However, it was our belief that we could reinvest this capital into more attractive assets while reducing our exposure to the cyclical homebuilding business. While there will be some short-term dilution eliminating the uncertainty regarding our multiple purchase options over the duration of the lease will be beneficial over the long term. Overall, we continue to make strong progress on all aspects of our strategy and we believe Spirit is very well-positioned to accelerate its growth in the coming years.

I'll now turn over the call to Phil.

Thanks, Jackson. During the third quarter we made substantial progress on positioning our capital structure to ensure prudent and accretive growth. We now have three investment grade ratings which enabled us to complete a de novo 144-A bond offering with public registration rights. This same-day bond execution was two times oversubscribed and is an important step towards driving shareholder value and improving our cost of and access to capital.

In the third quarter we maintained our disciplined capital allocation focus while improving our capital structure efficiency. Our $300 million senior unsecured 10-year bond offering, priced at a coupon of 4.45% and was primarily used to retire $322 million of secured debt with a weighted average coupon of 5.63%. As previously mentioned, we continue to be a net acquirer of assets in the third quarter as well as opportunistic on the accretive capital recycling front. During the quarter we acquired $216 million of assets at a 7.5% cap rate and we disposed of $69 million of assets, including assets transferred to 84 Lumber at a 6.2% cap rate.

Lastly on the capital allocation front, we raised approximately $45 million via our ATM program at a weighted average share price of $13.66. Heading into the end of the year, we are encouraged by our opportunity set of acquisitions and our positioning to be a net acquirer in the fourth quarter, despite the strategic 84 Lumber transaction.

As Tom mentioned, last evening we reported AFFO of $0.20 per diluted share for the third quarter including adjustments for restructuring charges and other expenses associated with our corporate relocation. This performance represents an increase of 2.6% compared to the third quarter of 2015. The increase is primarily attributable to our disciplined capital allocation focus during the year-over-year period and moderate net acquisition activity. Specifically we have significantly improved our cost of capital, having repaid and/or refinanced over $1 billion of debt during the last four quarters that had a weighted average coupon of approximately 6%.

We continue to maintain a vigilant focus on improving our cost of capital as we accretively grow and strengthen our portfolio. The means by which we seek to accomplish this is via continual stakeholder engagement, prudent balance sheet management, and disciplined capital allocation.

Total revenues for the third quarter of 2016 increased approximately 2.4% to $172.5 million compared to $168.4 million in the third quarter of 2015. Primary drivers were moderate net acquisition activity during the year-over-year period and higher fee-related other income which was offset by lost rent related to lease restructurings and tenant credit loss.

Same-store rent growth in the quarter, when compared to the prior-year third quarter, increased 0.2%. Rent growth continued to be negatively impacted by legacy theater chain and casual dining investments. In addition, an investment in the C-Store category has continued to underperform and a remediation plan is underway. While none of these tenants represent more than 1% of our annual in-place rents, we continue to be proactive on the portfolio management front to maximize a return on investment.

On the expense front, excluding restructuring charges and other expenses associated with our corporate relocation included in G&A, total expenses in the third quarter decreased by $149.9 million from $159.5 million in the same period of 2015. Prior to the aforementioned adjustments, total expenses decreased 3% or $4.8 million from the prior-year third quarter. Driving this improvement was lower non-cash impairments and lower cash interest expense which were offset by corporate relocation and restructuring charges.

With respect to run rate G&A, excluding corporate relocation charges, severance expense, and bad debt expense recorded to G&A, it represented 6.4% of total revenues for the quarter in line with our target of at or below 7%. We continue to make great progress on lowering our debt cost to capital.

Cash interest expense decreased by approximately 17% or $8.7 million compared to the third quarter of 2015, solely as a result of our proactive secured debt liability management. In addition, our weighted average cash interest rate improved by approximately 56 basis points from the prior third quarter to 4.31%.

In terms of our financial standing, our leverage and cash flow metrics remain strong. Our third-quarter reported leverage at 6.2 times improved by 0.6 turns from the prior third-quarter period. We would expect leverage to moderate for the remainder of the year and expect to end the year at or below 6.3 turns. Our fixed-charge coverage also notably improved at 3.5 times, compared to 2.9 times in the prior third quarter.

With respect to access to capital, our de novo bond offering puts us on a solid path to strategically access capital more efficiently. Our unencumbered asset base continues to grow and sit at $4.9 billion or approximately 58% of our real estate investments, an increase of $1.9 billion from the prior third quarter.

On the liability management front, since the end of the prior third quarter we have extinguished approximately $1 billion of high coupon secured debt. Included in this debt retirement is approximately $56.3 million of resolved defaulted loans that transition to deed in lieu. Total cash costs related to this early debt retirement of debt approximated $31 million or 3.1% of the principal amount of the debt that was retired. We have addressed all of our scheduled 2016 debt maturities, excluding approximately $28.6 million of defaulted loans transitioning to debt forbearance.

Furthermore, as of today our remaining 2017 debt maturities are manageable, currently approximating only $203 million at a weighted average interest rate of 5.84%. Our strong corporate liquidity positions us well for prudent and accretive growth. As of September 30, we had $105 million drawn on our $800 million unsecured line of credit. Currently we have approximately $13 million in unrestricted cash and cash equivalents on our balance sheet and approximately $772 million available under our line of credit.

In addition we have approximately $30 million of liquidity available in our 1031 Exchange and Master Trust Notes release accounts that are available to fund real estate investments. During the quarter we declared dividends to common stockholders of $84.6 million, which represented an AFFO payout ratio of 78%, compared to $75 million representing a AFFO payout ratio of 78% 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. We are maintaining our 2016 AFFO per share guidance range of $0.87 to $0.89 per common share. In addition, we are introducing our 2017 AFFO guidance range of $0.89 to $0.91 per share.

Embedded in our 2017 AFFO guidance range are the following key assumptions. No equity issuance, no incremental proceeds from the Haggen settlement, $250 million of net acquisitions, contractual lease escalation of 1.3% on non-expiring leases, 85% rent recovery on expiring leases, refinancing 2000 debt maturities at a conservative interest rate of 4.7%, all result in us achieving the mid-point in guidance. Upside to the mid-point in guidance are additional acquisitions, ongoing portfolio management activities and outperformance on capital markets execution.

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

(Operator Instructions)

Rob Stevenson, Janney.

Good morning, guys. Jackson, as you've looked through the portfolio since you've been there, the supplemental shows 41 vacant assets with 10 held for sale. The other 31, are those likely to be sold or are there some re-tenanting options there? How should we be thinking about that?

How are you? Nice to meet you, by the way. Of that 31, I would say there is a number that will be relet; probably the majority. Some will be sold and there will be a few that are -- a very small percentage that will be longer to take -- just be longer to release and be sold.

Okay. And then, Tom, question for you. The 2017 guidance at this point is up just a tad. I know that Management teams are usually relatively conservative at this point in the year, but how does that feed into the expectations for the dividend when the Board meets again?

You guys have been raising it pretty regularly for the first quarter. Is this level of AFFO growth likely to allow you to be able to continue to grow the dividend? Do you pause on the dividend growth for now? How should we be thinking about that?

Sure; good morning. As to the dividend, as you have said, the Company in the fourth quarter has consistently, since we've been public, looked at the dividend and in every case has raised the dividend modestly. I think companies get credit for being consistent in their performance, both in terms of growth and dividend expectations.

You can't presuppose a dividend declaration, as you know, but I would think that given the history that we have developed to date and the growth that we have, that when the time comes in the fourth quarter for us to review the dividend policy, we will likely or potentially reach the same conclusion that we have in the past. Again, because I think steady dividend performance, reliability on that topic, is important for long-term shareholder appreciation.

Okay. And then one last one for Phil. What are you assuming in terms of the dilution on the redeployment of the 84 Lumber proceeds?

It's probably approximating something on the order a $0.01.

Okay. All right, guys; thanks.

You are welcome.

Vikram Malhotra, Morgan Stanley.

Thank you. And congrats, Jackson, on the new role. We'll certainly miss you at our next lease conference as a Morgan Stanley participant, but look forward to you being there the Spirit part (inaudible). But congrats on the new role.

Thank you.

I wanted to just start off with a clarification on some of the assumptions around guidance. Phil, I may have missed it, but could you give us a net acquisition number and is this sort of an incremental sort of the components?

From a net acquisition perspective, what we are assuming in our guidance, as I disclosed in our prepared remarks, is $250 million of net acquisitions.

Okay, that's great. Does that bake in anything large that you are contemplating in terms of dispositions? Any specific asset classes you can call out, because obviously just relative to trend on a net basis that's at least a difference than what we've seen this past year.

I'll take the first part of that, then I'll turn it over to Jackson. One of the things we have been communicating to the market consistently regarding our 2017 debt towers is those are assets that were encumbered and those came over to us in connection with the co-merger.

A lot of the tenancy in those assets is very strong credit-related tenancy and there continues to be a very vibrant 1031 market, as I'm sure you are aware of. And from a disposition perspective, if there's going to be opportunities for us to accretively recycle capital for assets that we feel are mispriced or assets that are not part of our core operating strategy, we are going to hit that bid in that market. The fact that we now have approximately $4.9 billion of unencumbered real estate assets, now Jackson has the ability to be able to accretively recycle out of certain assets that have those characteristics that I mentioned.

Okay. And just related to that, Jackson, your comments around moving this to higher -- to more quality, more credit would be helpful, if you could just elaborate on that.

Sure. So I'm 60 days on the job, but as you know, if you looked at the year-to-date dispositions, the team basically came out with a plan that looked at sort of flat leases as an opportunity of assets to sell selectively. Assets that might be short-term or at risk potentially or assets where we saw declining unit coverage as a potential target.

And so, as we disclosed, we sold something in the order of $313 million year-to-date and you have the statistics on the cap rate. But to give you an idea of what sort of -- of a feel for what happened in the third quarter, we sold a Kentucky Fried Chicken franchise store in an area that was about 70 miles southwest of Atlanta, Georgia, and it was a 1031 buyer. It was about a $1.6 million size asset and sold at a 5.25% cap rate. We sold a national drugstore that had a lease term of less than two years at a 9% cap. We sold another pharmacy similar at a 6% cap with a longer lease term.

So I think one of the things we tried to do is selectively look at that portfolio. In the third quarter, we sold one of the Haggens assets. It was a Gelson's in Laguna Beach, and that property sold for approximately $19.7 million in the third quarter at a 3.92% cap rate. And that worked out to be $571 a square foot on an 18.67 square foot lease.

Just on a note on Haggens, just to spend a minute there, we've signed three PSAs on three of the four vacant properties at this point that are what we believe are pretty good prices relative to where we initially thought allocated values were. And we signed another Albertsons store at a 5.25% cap rate with a buyer. And so we are selectively going through the Haggens portfolio. These are very low cap rate assets that are not the typical 1031 buyer because of the magnitude of the dollar size. As you know, the 1031 market is really liquid from the $1 million to $4 million size transactions.

So the long and the short of it is we're trying to accretively work through the portfolio. And just a headline, because you might have asked the question, I did have a chance to look at every property with the team over the last four weeks sort of property by property. We've come up with a ranking system for those properties, based on corporate coverage, unit coverage, lease term, demographic income, population, market rent versus current rent, the real estate grade, in effect. Is it on a hard corner with national tenants or is it back behind a shopping mall with bad access and visibility?

We sort of looked at the geographies size of the market and then put a weight on industry. And we have a point of view on that. And the long and the short of that was basically, not surprising, we end up with a portfolio worth 20% of our 2,600-plus properties defined as fortressed properties. The next 70%, I'd define as really steady Eddie, really durable, really good quality. And I'd say the 10%, the remaining, I wouldn't call them watch-list type properties, but properties that we're looking at very carefully, just given some of the criteria that we put the screen over.

So to give you some color, on that fortressed asset quality, we have a Home Depot in Colma, California -- actually I grew up near that area as a kid. This property has 480,000 residents within a five-mile radius of the property. Household income of $89,000, but has a lease term of 4.2 years left. But it's what we believe is one of the strongest performing Home Depots in the country. We rank the property at number one, by the way, in terms of real estate score.

To give you another example of what's in the middle, we have a Regal movie theater in Woodstock, Georgia, and that property has five-mile population of 152,000, household income $73,000, had a three real estate grade. Really good property, solid weighted- average lease term of 13 years. And then you might wonder, what's in the bottom, in terms of the bottom 10%.

Just to pick a name, we have a Dollar Store that has 13 years left on the lease. It's in a rural Oklahoma location. Five-mile radius, there is 5,000 people, basically, that live in the area and income down in the $35,000 range. The real estate grade on that was like a three, but that type of property ended up in our bottom section.

So we're going through the property and we're coming up with plans, but I think we're going to continue on to look at the portfolio disposition opportunities as they relate to that strategy if we think that there is opportunity to monetize some of these things at a premium price.

Great, that's really helpful, and thanks for the added disclosure. I really appreciate that.

Thank you.

Vinit Tyagi, Capital One Securities.

Hi, good morning. Thanks for taking my questions. Can you provide some additional color on how the error in the allocation of goodwill was discovered and sort of how broad of a review of the accounting policies and procedures was undertaken as a result?

Sure, I will take that question. The way the disclosure in the goodwill issue came up is that we had a new concurring audit partner come onto our account from EY, and during his customary review of the financials, the partner concluded that we were not properly allocating goodwill in connection with certain property dispositions. We've obviously refiled all the required financial statements related to the issue.

We've actually also tested our internal controls in this regard with our outside consulting firm that does our internal audit for us and we fully remediated the goodwill issue that you are asking about. Now from a go-forward standpoint, as a Company I'm very confident in our accounting team and the team that we have built here in Dallas.

As it relates to a broader review of the accounting policies and procedures, I don't see that being necessary. We have a strong accounting team in place. We have a longstanding relationship with EY.

And, again, these things come up. It's unfortunate that it did, but we quickly found the issue at hand and remediated it very quickly, as evidenced by the time it took for us to refile these financial statements. And I think I covered all your questions.

Yes, sure. And as it pertains to the headquarters move, is anything still being run out of Scottsdale? Can you provide an update on how hiring is progressing in Dallas?

Sure, I'll take that. I think we're fully staffed here in Dallas. The Scottsdale office is closed. And we actually had a terrific open house here about a month ago to introduce the Company to both the Dallas community in general.

We scheduled it commensurate simultaneously with the ULI session that was here in Dallas, so we had a large contingency of the real estate professionals that were able to join us. So I think the punchline is that the move is now complete. The organization chart is complete. And the Scottsdale operation has been shut down and the lease has been terminated and we're off and running.

Okay, great. And just lastly, it looks like you sold a couple of Walgreens during the quarter. Did you guys see any sort of impact to cap rates from the noise around the Walgreens Rite-Aid deal?

No, not really, to be honest with you. This year, as you know -- well, actually don't know, so I'll tell you, we've sold 63 Walgreens stores this year, year-to-date and we haven't really seen pricing impacted. I think Rite-Aid right now, for the right type of size and lease duration, people are still pretty aggressively buying these kinds of properties.

Okay, great. Thanks for the time.

(Operator Instructions)

[Daniel Sanchez] of Sandler O'Neill.

Good morning, everyone, thanks for taking my question. My first question is about acquisitions and dispositions. Is there any way you can give us some more color on timing and cap rates on acquisitions and dispositions?

The easy answer I guess is no. In terms of -- first of all I think you can look at the number. We look at it as a ratable number, so we are providing a net acquisition number for the quarter. I think you can look at that as ratable during the course of the year.

I think as in terms of acquisitions and disposition cap rates, we have had a pretty consistent track record, I think at this point over the last 12 to 18 months. We have seen some tightening of cap rates and we are looking at the whole spectrum of asset acquisitions.

I think I commented on this last call. We are focused on quality assets that have a lower cap rate through -- our range is in the 6%s, up until the high 7%s, and it tends to net out, as it has over the last couple of quarters, at around 7.5%. As I made this comment before, that tends to be very mix related. It could move 200 basis points where our acquisition criteria really hasn't changed, but rather the mix has. And so I think in any given quarter you could see that move a couple hundred basis points.

Again, it really doesn't reflect a change in investment strategy. It just happens to be a mix issue. We have proven to be an accretive recycler. The cap rates for the assets, notwithstanding the 84 Lumber sale, I mean, Jackson referred to the 63 Walgreens --

Let me correct that. $63 million, it was 13 Walgreens.

$63 million of Walgreens sales. Obviously those have been at attractive cap rates and we have recycled that capital. One final comment on the net acquisition, our effort in this quarter, and Phil and I have spent time on this. We've heard from investors and analysts alike that they would like more clarity on our philosophy as to how those acquisition numbers and disposition numbers work into our guidance.

What we tried to do this quarter was come up with a method of being transparent about that while at the same time being consistent with our first perspective that we've discussed many times, which is that the reason we don't provide explicit acquisition guidance is we don't want to be in a position where we are held to a criteria for which we do not manage ourselves to.

We manage ourselves to -- we sell property when somebody's willing to pay more than it's worth; we buy property when we think we can add to our portfolio in an accretive and quality basis. We don't buy or sell to meet short-term numbers. This $250 million net seemed like a very rational, I think, perspective to give to allow people to look at our guidance number and say, okay, I understand how they built up the guidance. This was again our effort to try to be responsive to the feedback we have received from analysts and investors. At the same time, focusing on how we run the business.

Yes, and what I will add to that as well is that, as Tom was saying, there's two things obviously that is key in the net lease sector. Everybody focuses on external growth and I think what people don't focus on as much is something that we've really excelled at, and that's capital allocation. The capital markets have been very volatile, as we all know, and it's been a volatile across the whole net lease space.

We have the ability -- and I'm not saying we have the secret sauce, but other net lease REITs do as well, but we have the ability to, when capital markets are in a state of flux, take advantage of a vibrant 1031 market, as Jackson was alluding to, take advantage of opportunities in the capital markets as well.

And the other thing is really the 84 Lumber; yes, that was a lot of money coming back to us quickly. We had the ability to time the closing of that transaction in connection with our capital needs and deployment. It's not as if -- we didn't sit on that cash and earning nothing. We quickly repaid down borrowings that were on our corporate bank facilities and, candidly, borrowings on our corporate bank facilities that prefunded acquisitions.

And I'll turn this to Jackson, but the fourth quarter is typically a very active quarter for the net lease space. And you guys know a lot of the transactions that are in the marketplace today and our pipeline is no different than any others. We have a lot of opportunities in our pipeline to quickly act upon, but the key thing is that capital allocation is something I really think is just not enough credit for in the net lease sector. It's solely people focused on external growth. But, Jackson, maybe from a pipeline perspective you can talk about those things?

Yes. Just a minute on the third-quarter acquisition. As we stated, it was $215 million. You saw the cap rate. To give you some granularity around the shape of it, it was 13 transactions in areas that were very consistent with what we invest in, C-stores, auto service, movie theaters, some car washes, QSRs, health and fitness. So everything was within what we believe are things that we think are interesting opportunities.

The portfolio coverage on the acquisitions in the third quarter were over three times in terms of unit level coverage. As we look in the fourth quarter in terms of pipeline, we've actually closed already a number of transactions and we have PSAs signed and letters -- LOIs that, candidly, are probably in excess of -- well excess of what we did in the third quarter. And so that doesn't include any mega-portfolios or anything like that. There's a good pipeline, pretty disciplined about what we are buying and very mindful of how the assets fit within our sort of strategy on where we should be on the industry side. And, of course, we're selling as well, so areas I described to you earlier, where there are some areas that we can kind of improve the quality of the portfolio across those rating criteria that I mentioned earlier.

Great. Thanks, I appreciate the full answer. Tom, one more question. As you think about your senior team, now that Jackson is up and running, are there any other areas where you can see yourself adding to the bench?

I think we have built a terrific bench here. We just, within the last two weeks, have hired a new Head of Investor Relations. That was a spot that had been open; that spot has now been filled.

Jackson -- one of the ancillary components or outcomes of the thorough portfolio review that Jackson talked about was -- and one of the benefits of the deep dive, so to speak, was to identify the right skill set for what will be our new Head of Asset Management. So that is a position that we will be filling. We've got a tremendous list of candidates.

Yes, we've reached out and I think timing-wise, you should assume early part of next year is when I think we will have that seat filled. We want to get the -- before we jumped in to replace Mark, I wanted to have a feel for what the assets are in the Company.

We have a very good team in Asset Management and Portfolio Management, and we try to put the right kind of person in there that shares the belief the way I think we should be analyzing this type of business. So we have a good list of people we've already been in contact with and my guess is that process will accelerate after the holidays here.

So I think the punchline is, with the exception of that seat, we've got a fully functional Senior Management Team here in Dallas, looking forward to next year and beyond.

Awesome. Thanks. That's it for me.

Daniel Donlan at Ladenburg Thalmann.

Hi, this is actually John Massocca on for Dan.

Hi

So just a question touching again on the Haggen assets, how many of those are still -- of the former Haggen assets, I should say. How many of those are still left in the portfolio at this time?

It's got 13, and one is under contract, operating assets. And then under Smart and Final, Gelson's and Albertsons brands. And, obviously, Albertsons owns Smart and Final, so --

And you have the three under PSA that are vacant, correct, still? Does that include the 13?

Correct.

What's the ultimate goal for the rest of that portfolio? Is it still to sell pretty much all of the remaining assets, both vacant and occupied, and if so, what is the time line for exiting that portfolio?

We laid out a plan there where we intended to monetize that. That continues to be our expectation where these properties are leased, most of them. And obviously we are focused on the vacant ones by getting those under PSA and getting them out of our portfolio because they are not revenue producing.

The rest of them are revenue producing, and so we didn't want to necessarily flood the market with these properties. They are excellent properties. There's a lot of investment interest in them and we are going to systematically sell them. Why are we going to do that? Because the cap rates associated with them are so attractive that we believe we can reposition that capital.

It's really no different analysis than what we do on the rest of the portfolio. There's somebody willing to pay a cap rate for this property that allows us to reinvest in what we believe to be better risk-adjusted returns.

Jackson made reference to the one sale we had this quarter, obviously at a sub 4% cap rate, is a terrific execution. So, yes, we bought 20 assets. We've been through the whole restructuring process now; we're still waiting for the final payment of the damage claim. That's still awaiting final court determination. But as to the 20 assets, we are right where we want to be running, I think a very rational process and we will be selling those over the next few months.

Okay, understandable.

Again, we specifically did not set a target date for when these would be liquidated because, from our experience, that doesn't help on the pricing.

Okay, understood. And just more generally, when you look at the current portfolio, particularly with the casual dining exposure, is there anything on a tenant watch list from a credit perspective, especially given some of the bankruptcies in that space?

No, I will tell you, I went through it and in the brands that we have and the locations that we have, we're actually pretty comfortable with them. There are Pizza Huts and Red Lobsters and Cracker Barrels and Golden Corrals. I'm not sure we're going to be doubling the size of that group, but between that and our QSR portfolio, they are pretty solid portfolios.

But nothing imminent?

No.

And then lastly, just kind of a detailed question, with that kind of other costs and G&A associated with headquarters relocation on the line item and the AFFO add-back, is that all kind of relocation reimbursements and, as such, is that going to be de minimus on a going-forward basis or is there something else in there that we are going to keep seeing that?

Well, there are actually two components. There is the restructuring line item and then there is the component that's also going through G&A. In terms of what's going through those two line items, it's employees severance that we have largely paid out related to those employees that did not join us from Scottsdale.

It's also related to temporary redundant personnel in terms of when you're -- to Tom's point, we are fully staffed here in Dallas right now and there's really one or two people that are legacy transitionary people, but to the extent that we have redundancy in personnel in terms of onboarding people, that expense isn't in there.

To the extent we had duplicate costs related to our office space, the portion related to Scottsdale is in there. And then obviously there are costs related to relocating people and that's in there as well. So when you look at the quarter in terms of the amounts that were going through the P&L, about $4.8 million went through the P&L, $3.3 million was in the restructuring line and about $1.5 million was included in G&A.

Okay. Understood. And going forward, should that be de minimus or is there still some extra cost?

The amount going through G&A, I mean through the P&L, is going to be, I would say rather de minimus. I can't see that amount exceeding $1 million. It's probably going to be a little bit less than that.

Understood; that's it for me. Thanks.

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

Thank you, operator. And thank you all for your time this morning and your interest in Spirit. We are very pleased with our progress this quarter and we continue to position the Company for growth in the coming years. The Management team will be on the road next week in Boston and New York on a [non-deal] road show. We look forward to seeing some of you there.

Also the Management team does intend to host an Investor Day in the first half of next year. We will be getting the save-the-date notices out soon. So with that, that concludes our comments for today. Thank you very much.

Go, Cubs.

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