Spirit Realty Capital Inc (SRC) 2018 Q1 法說會逐字稿

Good day, and welcome to the Spirit Realty Capital 2018 First Quarter Earnings Conference Call and Webcast. (Operator Instructions) Please note, that this event is being recorded.

I would now like to turn the conference turn the call over to [Cara Smith]. Please go ahead.

Thank you, operator, and thank you, everyone, for joining us today. Presenting on today's call will be President and Chief Executive Officer, Mr. Jackson Hsieh; Chief Financial Officer, Mr. Michael Hughes; and Head of Asset Management, Mr. Ken Heimlich.

Before we get started, I would like to remind everyone that this presentation contains forward-looking statements. Although the company believes these forward-looking statements are based upon reasonable assumptions, they are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from those currently anticipated due to a number of factors.

I would refer you to the safe harbor statement in today's earnings release and supplemental information as well as most of our recent filings with the SEC for a detailed discussion of the risk factors relating to these forward-looking statements.

This presentation also contains certain non-GAAP measures, reconciliations of non-GAAP financial measures to most directly comparable GAAP measures and they are included in today's release and supplemental information furnished to the SEC under Form 8-K. Both today's earnings release and supplemental information are available on the Investor Relations page of the company's website.

For our prepared remarks, I'm now pleased to introduce Mr. Jackson Hsieh. Jackson?

Good morning, and thanks, everyone, for joining our First Quarter 2018 Earnings Call. This morning, I will discuss the results of the quarter as compared to last year, touch on our spin transaction, review our capital allocation activities and provide an update on Shopko.

Additionally, we are pleased to welcome Mike Hughes, our new Chief Financial Officer to the Spirit team. Mike will discuss our financial results in more detail and provide our guidance expectations for the balance of the year.

We will then take your questions.

Beginning with our first quarter results. Our diversified portfolio of triple-net real estate posted superior operating performance in the first quarter 2018 as compared to the same quarter of the prior year, which, again, was a reflection of our high-quality portfolio as well as the process improvements and management changes that have taken place over the last 12 months. As I've discussed on prior calls, our operations and capital allocation capability year-over-year has improved significantly. Consider our first quarter 2018 results compared to last year, across a wide range of metrics and the improvement is clear.

Our total revenues were essentially flat despite a net decrease of 142 properties. Our FFO was 10% higher. Our outstanding share count was approximately 9.8% lower, our adjusted debt to adjusted EBITDA decreased from 6.5 to 6.3x. Our property cost leakage reduced by over 41%, improving bottom line profitability by $2 million.

Our lost-rent reserve, excluding the recoveries in Q1 2018, is approximately 0.4% of rental revenues this year versus 2.6% of rental revenues in Q1 2017. Overall, we had a positive rent in Q1 as a result of rent recoveries.

And our occupancy rate improved 120 basis points from 97.7% to 98.9%. Our company is in a stronger position than it has ever been, and we are very proud of these results.

Yesterday, the Spirit board formally approved the spin-off plan and set the record of distribution dates. This action represents a culmination of a year's worth of hard work and dedication from the entire Spirit team.

Once completed, we will finally be able to remove certain structural impediments that will result in a more superior and more diversified investment-grade real estate portfolio, better operating statistics and significant balance sheet capacity for growth.

Post-spin, Spirit's adjusted debt-to-adjusted EBITDA ratio will be in the 4.6 to 4.7x range, the lowest level in the company's history.

For SMTA, the amendment we secured on our Shopko master leases will give SMTA the disposition flexibility to more aggressively and creatively dispose of the Shopko assets.

In addition, pairing those sales proceeds with the financing efficiency of the 2014 Master funding facility and improved collateral pool will, in turn, generate greater free cash flow and residual value from the 2014 master funding facility.

Turning to top line performance. For the first quarter of 2018, contractual rent was $149 million, and our cash rent received for the quarter was $148.3 million. The $700,000 of lost rent was primarily caused by a majority of tenants that will be in SMTA post-spin.

From a same-store perspective, our contractual rent was 1.5% year-over-year. This reflects strength in our cinema, medical office, restaurants and specialty retail categories.

Starting this quarter, we have updated our same-store disclosure to better reflect same-store contractual rent escalations. The definition of same-store contractual rent escalations is fully laid out on Page 17 of the supplemental. But in short, this metric includes all properties owned throughout the measurement period in both the current and the prior periods, but excludes multi-tenant and vacant properties and properties with lost rent reserves during the period.

We believe this methodology provides a better picture of our portfolio's organic growth. By contrast, using our previous definition, same-store rent grew 1.4%.

Now turning to capital allocation. Given our stock price's significant discount to NAV, we have continued to allocate capital to common share repurchases. During the first quarter, we repurchased over 13.2 million shares of common stock at an average price of $7.88 for a total of $104 million. We've continued to repurchase common stock through April bringing the total year-to-date stock repurchased to 21.2 million shares at an average price of $7.90.

In the past 12 months, we have acquired approximately 12% of the outstanding stock of Spirit Realty Corp. 57 million shares at an average price of $7.89, resulting in $450 million of capital deployed.

As of this call, there are 426.4 million shares of common stock outstanding. Our Board of Directors authorized a new $250 million stock repurchase plan, which provides us with ongoing flexibility to take advantage of value dislocations in our trading price should they persist.

Consistent with our stated deleveraging and portfolio optimization strategy, we, again, were a net seller of properties in the first quarter, having sold 29 properties totaling $38 million, including 4 vacant assets. These sales correspond with the identified categories in our heat map for which we intended to reduce our exposure. We invested $9.9 million into the acquisition of a new asset and provided additional funds to a number of revenue-generating CapEx projects and development projects.

We did not close any Shopko sales in the first quarter. However, we do have interested buyers and this remains one of the highest priorities for Spirit. The financing for Shopko properties has continued to be a headwind. We have a number of new Shopko sales initiatives underway and expect to have more activity to report in the second half of the year.

Additionally, we have committed to approximately $86 million in development projects and takeout funding for existing and new tenants, where the yield premiums were positive for us, including Andy's Frozen Custard, Camping World, Shooters World and Circus Tricks at a weighted average cap rate of 8%. We expect the majority of the funding to be complete by the end of 2018.

Now a brief update on Shopko. Shopko improved their bottom line EBITDA performance for their fiscal year 2017, ending the year with a positive $26.7 million improvement to fiscal year 2016. In the stores that we own, total EBITDAR for fiscal year '17 increased by 6.2% to $119.8 million. Pre-overhead FCCR for our portfolio increased to 2.55x from 2.41x comparing fiscal year '17 to fiscal year '16.

Shopko management has shared with us that their EBITDA performance continued to improve through the first 2 months of fiscal year 2018, delivering March 2018 year-to-date EBITDA positive -- with a positive $8.7 million over fiscal year 2017.

Although sales were challenging for the month of March and continue into April, as a result of continued late winter weather, liquidity is stable and in line with expectations as vendor terms continue to improve after compressing last year.

Please note, the foregoing information was supplied by Shopko and Spirit management takes no responsibility for its accuracy.

Finally, I want to touch on the company's valuation relative to the quality of our portfolio. As you recall, in connection with the 2014 Master Trust Notes issuance, a major portion of our assets were appraised at a 6.75% cap rate, and we were able to refinance these assets at 75% loan to value. These are real-world facts.

Prior to our difficult Q1 2017 earnings call, market pundits were applying an average cap rate to our portfolio over that was 100 basis points lower than their current estimates today, and it is currently 100 basis points above our peers. We believe that as we move forward and continue to produce strong results, the market will recognize the quality of our portfolio, our accomplishments over the past year and the benefit of creating 2 new companies with independent growth strategies.

As this occurs, we have no doubt that the current gap in valuation that exists between SRC and its peers will largely disappear.

Our focus remains on delivering on our goals, and we will let our results speak for themselves.

Before I hand the call over to Mike, I just want to reiterate to our shareholders how personally excited I'm to be leading this transformed Spirit Realty platform into the future. So many positive achievements across so many fronts have been accomplished here at Spirit Realty. I can assure you that our 87 person team at Spirit will not only be owners of both companies but will also be excellent stewards as we drive both businesses forward. I will now turn it over to Mike.

Thanks, Jackson. Good morning, everyone. I'd like to start by saying that I'm thrilled to be joining Spirit at such an exciting time. I've actually been a Spirit stockholder for the past year, investing after Jackson stepped into the CEO role. I've been closely monitoring Spirit's transformation. I've known Jackson for many years as a banker and believe his experience and reputation speak for themselves, which is the reason that I both invested in Spirit, and ultimately, agreed to join the company.

In my short time at Spirit, I've witnessed firsthand the controls, procedures and discipline that Jackson has implemented and the quality of the team we have in place. And I believe that Spirit is now well positioned to enter its next chapter and create value for all stakeholders.

As CFO, I intend to partner with Jackson to build upon the foundation he created by maintaining a conservative, but flexible balance sheet with access to a diverse set of attractively priced capital sources, continuing to provide strong disclosure to help investors understand our portfolio and operations and fostering a culture of discipline, transparency and accountability.

I look forward to meeting with many of you in person in the coming weeks, and again, I am happy to be on board.

Now turning to the first quarter results. We reported AFFO per share of $0.21 or $0.22 excluding severance charges versus $0.20 for the same period last year and grew adjusted EBITDA by $3 million despite being a net seller of real estate over the last 12 months. These increases were largely driven by lower unreimbursed property costs or leakage, lower reserves for lost rent and higher interest income.

AFFO per share also benefited from our continued share repurchase activity. In particular, leakage, which is the lion's share of property cost, was only 2% of total cash rent this quarter compared to 3.3% for the same period last year. One of the teams responsible for this improvement is lease administration, who retooled our billing and tracking process, resulting in tenant reimbursements as a percent of property cost increasing from 44% to 60% quarter-over-quarter.

Another important driver to the reduction in leakage and lost rents were our efforts to cull the portfolio of vacant properties and troubled tenants. As Jackson mentioned, we disposed of 29 assets during the quarter and our weighted average disposition cap rate of 12.3% was skewed by 1 tenant, Unique Ventures, who declared bankruptcy in the first quarter of 2017 and leased 22 of the 25 revenue-producing assets sold during the quarter.

The proceeds from these sales were deposited into the Spirit Master Trust 2014 release account. The remaining 3 revenue-generating properties were sold for weighted average cap rate of 7.6%. The majority of the proceeds from 1 revenue-producing asset sales along with 4 vacant properties were transferred to a CMBS special servicer in satisfaction of $33.9 million in secured debt scheduled to mature in 2018.

Overall, the dispositions this quarter were an anomaly that we do not expect to repeat for the remainder of the year.

Also, during the first quarter, we funded a $35 million B1 term loan to Shopko, secured by the collateral that backs Shopko's $784 million asset-backed lending facility.

Our term loan bears interest at a rate of 12% per annum and matures in 2020. This loan will be contributed to SMTA. Concurrently with this loan, we amended our Shopko master lease to provide us with greater flexibility to dispose of Shopko assets and gain more visibility into the Shopko's operations.

Post-spin, these lease enhancements will allow SMTA to efficiently execute its asset recycling strategy, creating value for its shareholders.

Now turning to our balance sheet. As Jackson mentioned, we repurchased 13.2 million shares of common stock during the first quarter. And it's important to note that despite these large stock repurchases, our adjusted debt to annualized adjusted EBITDA actually declined to 6.3x at quarter-end compared to 6.5x for the same period last year. During the second quarter, we will be repaying $123 million in master trust 2013 secured notes, generating annualized interest savings of approximately $1.1 million. In going forward, our liquidity remains exceptionally strong, giving us the flexibility to pursue accretive acquisitions or take advantage of dislocation in our common stock price. As of April 30th, we maintained $1.1 billion in available liquidity, consisting of approximately $8 million in available cash and $959 million of availability under our revolving credit and term loan facilities.

In addition, we have approximately $98 million in 1031 exchange and Spirit Master Trust release accounts, the majority of which is earmarked for acquisitions.

Pro forma for the spin-off transaction, we expect that our adjusted debt-to-adjusted EBITDA will be approximately 4.6x to 4.7x and 80% of our assets would be unencumbered. In addition, approximately 24% of our rents will be derived from investment-grade tenants with an additional 19% being generated from tenants that we categorize as investment-grade equivalents. We expect the strong balance sheet metrics, combined with the enhanced quality and diversity of our new portfolio, will improve our access to capital.

Now turning to guidance. We are now providing guidance for Spirit as a stand-alone entity pro forma for the expected distribution of Spirit MTA REIT as if SMTA had been distributed as of January 1, 2018. For the full year 2018, we project AFFO per share of $0.66 to $0.68, excluding severance charges incurred during the first quarter. Capital deployment comprising acquisitions, revenue-producing capital expenditures and stock repurchases of $400 million to $500 million. Asset dispositions of $50 million to $100 million and adjusted debt-to-adjusted EBITDA of 5.1 to 5.4x. With respect to Spirit's common dividend going forward, beginning in the third quarter, we expect to target a dividend payout ratio as a percent of AFFO of approximately 75%. We believe that this dividend policy will bring us in line with our investment-grade peers, enable us to maintain our conservative low-leverage balance sheet and allow for the accretive reinvestment of retained earnings, which will provide steady and achievable dividend growth in the future.

As always, the actual amount of quarterly dividend distributions is subject to the approval of our Board of Directors.

Given that SMTA shares have not yet been distributed, we will not be providing guidance for SMTA's earnings or dividends at this time. The appropriate timing of those communications will be decided by the management team and board of SMTA. With that, we will now open up the line for questions.

(Operator Instructions) And the first question comes from Vincent Chao from Deutsche Bank.

Just wanted to make sure I understood the ins and outs of the new Spirit guidance versus the Path Forward III. At the time, I think it was $0.65 at spin, this is a forward-looking number, so just is the difference in the $0.65 versus the range just the net investments that you've got in there, the $400 million and $500 million? And then on the post-spin debt-to-EBITDA of, I think, 4.6 or 4.7 is what I heard, I thought. That's a little bit higher than the 4.5 back in the Path Forward III. Is that just simply due to the share repurchases completed since that time?

Vincent, this is Jackson. Yes, you're pretty much right on top of that. The share buybacks that we've put in place marginally increase debt to EBITDA to that low 4.6x range. And the full deployment of the capital plan that Mike articulated, basically drives the $0.66 to $0.68 range on the stand-alone Spirit.

Okay. So as a starting run rate, though, we should still be thinking about in terms of the sort of $0.66-ish range, $0.65 range.

$0.65 is good. I mean -- yes, remember on the Path Forward III, EBITDA is slightly higher, right, because that was using a closing year-end 2017. So EBITDA is actually higher, first quarter annualized. And there was a differential between the Path Forward III in the Form 10. But $0.65 is a good starting point and the ending point will be in that $0.66 to $0.68 range.

Got it. And could you just give us an update on sort of the CEO and board search for SMTA?

Sure. Well, first of all, Ricardo is -- he's on his [garden] leave right now, but he's going to serve as CFO of the REIT and be the interim CEO. We have 4 independent board members that have been identified have agreed to come on board, and we plan to put them in our next filing, which will be the later this week in the Form 10. But I can give you this little description. Our lead trustee is currently a standing REIT CEO. Our head of our audit chair is currently the audit chair for public real estate C-corp, someone that I've known for many years. We were involved in a GGP bankruptcy together. Our comp chair is a principal at a private equity firm, not real estate but general PE firm. And our head of non-gov was actually the senior restructuring banker that we hired as part of our process earlier this year when we were looking at different alternatives. So I feel really good about the independent board. And as it relates to the CEO, we're continuing that process. And we decided that we wanted to make sure that the new board had some ability to have some input in that individual. So I think that we'll have more to say about that in the coming time, but right now, we feel like we're adequately staffed with a really good board and Ricardo, who is obviously very versed in the master funding vehicle and the ABS market, so he will able to really articulate the benefits of that of that opportunity.

Okay. And just one last one if I might. Just on the Shopko sales, it sounds like a vendor -- financing is still an issue and you guys had been talking about providing vendor -- financing yourselves. And I was just curious how that process is going? And if the lack of sales is a reflection of sort of the deals that maybe didn't look that attractive to you versus buyers here looking to use your own capital as a source?

Yes, look, I'd characterize it as there's no shortage of buyers. Actually, we still have -- we've signed up a number of more -- we have more buyers coming that were entering either LOIs or purchase contracts on Shopko sales. Unfortunately, in the first quarter, we just had a few guys whiff. There was a variety of different reasons, but I'd say, it was principally related to their ability to arrange financing. So I would tell you that we do have, in the current deals that we're looking at, some do have financing that we're associated with, providing some form of seller financing. Others are free and clear. So we expect that the pace is going to pick up this year, and I feel pretty good about it. And you should also know that -- or people should know that the sale of Shopko assets is a major KPI for all the named executive officers of Spirit. So when you look at those scorecards, one of the things that's critical for us this year, the former senior execs at Spirit, are we actually have certain threshold targets in terms of dollar volume for Shopko sales this year. So it's a major KPI here. The other thing, I'd just say to you is, on Shopko itself, look, we feel really good about what the new management team at Shopko has been doing the last 12 months. As I've said in the past, they have a reconfigured Board of Directors there. Their vendor terms are improving. Shopko is a lot better today than where we were sitting a year ago at this time. And most importantly, 2 things, their operating plan that they put in place, the new management team last year is starting to really be on plan and on target in terms of what they said they were going to do. And their liquidity -- access to liquidity is still positive relative to their ABL. So we'd plan to kind of moving forward here.

And the next question comes from John Massocca from Ladenburg Thalmann. And the next question comes from Ki Bin Kim with SunTrust.

Can we go back to the dividend policy. I think it's a good thing that you guys cut the dividend to 75% payout ratio, obviously, you want to set up a new story for success. But just curious on the spinoff dividend policy. You have that amortizing debt of about $35 million. Is the idea here to take that into consideration so to make the payout effectively after that amortization? So on a net basis, the total dividends to combined Spirit shareholders should be around $0.59, $0.60. Does that sound about right?

Okay. Well, in Q -- so -- I mean, if you -- on the Form 10-Q, we have that -- on the dividend policy, there's that magic page. And if you sort of look at that page, I think that's Page 109, it's 76. Sorry about that. So basically, cash flow available for distribution is going to be approximately $46-plus or minus million, so that's after amortization, after fees, after preferred and the things that we've been talking to the new board about and that we've had several face-to-face meetings with them, they're obviously not on the board yet. But we've talked about the concept of 100% [CAD] payout for dividends. We've talked about the concept of up to 50% of Shopko sales proceeds being returned to shareholders via special dividends. Now this has not been approved by the new board, obviously, because the new board is not in place. But we've talked to them about this plan. We've actually recommended the plan and, just so you know, this was the same plan that we used with our board as we described the opportunity in relation to the solvency opinions and all the other things that you do for spinoffs like this. So the long and the short of it, the dividend, including specials and ongoing run rate dividends on SMTA could actually be quite high. The other thing I'd sort of draw your attention to is you sort to have to really think about SMTA in a different way than I think people do think about it. SMTA is really a private equity fund that's public. We have a promote structure here at Spirit that we will be directly tied to on the performance of the stock price, so that opportunity for SMTA. So what is that -- why do I call it a private equity fund? We're going to liquidate noncore assets, the noncore unencumbered assets will be liquidated. We're going to enhance the master trust through either buying new properties and/or recycling on the margin some of the assets within that master trust. We're going to return capital to shareholders. If we do it faster, better for IRR purposes, right? And then we're going to monetize the master trust. As you know, in the Form 10 that you just saw, we made some changes for the contract -- to the asset management contract that we think give the Board more flexibility to sort of drive value in the form of like a private equity fund. The termination fee, it was reduced from a 3x multiple in the first 18 months to a flat 1.75x. We've also given the ability of the Board where the preferred was sort of linked to a change in the asset manager. So that's gone. Note that the asset management fee can be picked under certain scenarios. If it doesn't comply for retests, that's one scenario. If there's a cash trap in the NCA, is another, which is a very low likelihood. So we think what we've done is we've created an opportunity where the new board is going to think about this as a private equity investment, return capital to shareholders, and really look for strategic alternatives to monetize the master trust when we're all said and done.

Okay. And when you say monetize the master trust is the end game liquidating? Or is it...

Yes, liquidated. No, I mean, it's not liquidated. The master trust is very valuable. One of the reasons we hired Ricardo, who spent his -- pretty much the majority of his career in the ABS market, is to really try to explain to investors the value of this. It's an extremely difficult trust to create. It's got -- it's one of the largest, it's one the most diversified. Obviously, we were able to lever it as part of this spin plan. And it's got a lot of value that, candidly, our shareholders are not giving us a lot of credit for. Hopefully, the SMTA shareholders will, but we certainly know that we will get paid for it if we execute on what we say we're doing.

Okay. Just to go back on the original question. And I ask this because, I think, spin co will more likely trade on dividend yield compared to the market versus some type of multiple or economic NAV or anything like that. So I mean, is the $0.59, $0.60 combined run rate as we said today, short of capital returns, does that sound about reasonable?

Yes, this is Mike. I think for -- as we kind of stated on our prepared remarks, we really can't give dividend guidance at this point for SMTA. But I think that the page you've gone through, clearly on Page 76 of the Form 10, I really think is the best guidance for the cash flow available to distribute. And as Jackson said, this is going to be a private equity-type higher-yielding vehicle. So I think you can kind of read into what you think the common would ultimately result in there.

Okay. And on the same page, actually, there's a line item that says about -- for about $6.862 million and the description is net decreases in the contractual rent due to lease expirations, assuming renewals consistent with historical data. I just -- I was just kind of confused by that line item. What does that mean?

Yes. So what that line item is, is there -- it's kind of interesting how you have to disclose things in a Form 10. But you have the 2017 pro forma information and then when you go to Page 76, that's really walking you through the cash flows available for 2018. And so those are some adjustments that kind of take you from a pro forma '17 number into a 2018 number to account for things that would happen or have happened post 2017 in the pro forma year. So those are adjustments for exactly like they say, for things that have happened that would adjust cash flows.

I see. So it's not separate from your guidance. It's not any different.

No.

No.

And the next question comes from John Massocca with Ladenburg Thalmann.

Apologies for being dropped from the call earlier there, guys. So what was same-store rent growth for just the assets that will remain in SRC?

It was 1.4%.

Okay. So basically in line with the rest of the portfolio. And then you didn't sell any Shopko assets in the quarter, but you did have one last time. I mean, was that just a vacancy?

Yes.

Okay. And then, has SMTA's kind of AFFO per share run rate, I mean, I know, to the extent you can give any color on this, but has its run rate changed at all given what happened with Unique ventures? Or do you kind of expect it to be close to that $0.16 that was in the last half or...

It's actually going to be higher. If you just do the math on it, it's going to be higher. And you've got to factor in the lower share count. So I mean, if you just look at that Page 76 and you sort of look at Page 109 on the $89.9 million 2017 AFFO and make adjustments for G&A, lost rent, you basically come up with a number that's $81.7 million of AFFO. And that's not a bad number to use. Then there's 426 million shares outstanding. So if you sort of do the math, that's $0.19. So that's not guidance but that's math.

Does that account for Unique ventures or...

Yes.

And the next question comes from Vikram Malhotra from Morgan Stanley.

Just wanted to go back to the leverage. Can you maybe just give us some thoughts around where you see leverage for both -- sort of both companies trending? And more so for remain-co, what you're targeting for the next 12 months?

Hey, Vikram, it's Mike. The guidance that we put out there for leverage, I mean, that's really kind of our year-end target. So we're going to come out of the gate, pro forma to the spin, around 4.6, 4.7. Pretty consistent with what we put in the Path III. And then when you look at our spin this year, we have $86 million of capital deployment related to revenue-producing CapEx and development take-out commitment. So that's going to be spent throughout the year. That's really not going to generate a ton of revenue for us this year. So that kind of drives our leverage up a little bit in the short term. And then of course, we have the stock buybacks, and we expect some acquisitions to come online later in the year. So we do expect to leverage up a little bit from that 4.6, 4.7 this year. But going into next year, obviously, we'll still have to evaluate that. But I would guess, for our company, we're targeting staying at or below around 5.5x and really don't want to go above that. So that's kind of where we're looking to. And then over the long term, we may even want to come back down from that. But for the rest of the year, the leverage increase is really being driven primarily by the stock buybacks and those revenue-producing capital expenditures that don't have revenue yet. On the SMTA side, I would just say it's probably consistent with the Path Forward III that we put out. It's going to be a much higher leveraged company.

So like 10x?

Correct.

Okay. And the 5.1 to 5.4, that was just adjusted for the amortization?

Yes, I mean, that's -- that is post-spin adjusted for all the splitting of the debt and that includes any amortization for the year and any loans that we're writing off through derisk.

And including reinvestment. So that includes the $400 million to $500 million of investments, right. So that's fully deployed balance sheet, we end up in that range.

So will you end up, just to clarify, you will -- right now, you said -- so you will end up in the mid-5s?

In the low-5s.

By the end of the year.

By the end of the year, after, we sort of hit that $400 million to $500 million of capital deployment, sell $50 million to $100 million of assets.

Okay. So was this -- I'm just trying to bridge this with the original 4.5. So the big difference obviously is the $400 million to $500 million deployment, which is not contemplated earlier?

Yes, right. We never gave deployment guidance. So that's...

The Path III was a 2017 number. Relative to the 4.5, we're at 4.6, 4.7, right? So that's the relative metric and then we have some additional leveraging throughout the entire year with the capital deployment.

Okay. And can you clarify just sort of the run rate contractual rent, there have been a couple of numbers and we went through the Form 10, but I just want to clarify, what are the run rate contractual rent numbers for both companies?

We really can only give SRC. And that was going to be on a -- that's the run rate in the supplement.

So on the same-store page, it's 1.5% pickup, so -- and we mentioned 1.4%. So they're generally going to be in line.

No, sorry, I meant the actual -- the dollar contractual rent -- the actual dollar value of the rent.

Yes, that's the $596 million annualized on Page 19 of the supplement.

Got it. And just to -- but post-spin, can you just clarify what that number will be?

No, we don't believe we have that right now, breakout. Let's see.

We'll have to come back. I mean, if you looked at -- if you think about it from an EBITDA standpoint, in the Path Forward III deck, we had about $376 million of EBITDA in Spirit and $194 million in SMTA. If you were to kind of look at, based on the end of the first quarter, roughly where that would be, it would be $381 million for post Spirit and $199 million for post SMTA net of $400 million in leakage. So it's not really a rent number, but it's more of an EBITDA number.

Got it. And then just one quick clarification. The coverage metric, I remember last time, there was a change in the top 10 so the number fell.

(technical difficulty)

But now you -- last quarter or maybe last quarter just so -- for comparison.

So Vikram, if you remember, the reason why we flipped the top 10 was to give us a small subset. So I think that what we'll do for both companies is give portfolio coverage, which I think is more relevant. And so...

The portfolio coverage you provided this quarter, what was the same number last quarter or a year ago?

Last quarter, we didn't disclose it. And I think, I'll have to have a look back on a year ago or so.

And the next question comes from Collin Mings from Raymond James.

To start, Jackson, I just wanted to follow up on the development pipeline comments and the new disclosures in the supplemental. Just maybe talk a little bit more about how you think about growing that part of the platform on a go-forward basis. And what's the right amount of capital to deploy on opportunities along those lines annually?

Okay. I mean, one of the -- well, let's see, the development pipeline that we put together, as you can see, look, that started to materialize last year. And one of the reasons why we made a change in terms of the head of asset management -- acquisitions, sorry, was that, as I talked to you, that Dan Rosenberg has been leading our direct sale leaseback activity. I can tell you that we're going to do -- the large majority of acquisitions will be not development deals but existing property deals with existing clients, a good portion of them. But as part of his effort, he was able to develop quite a nice pipeline of these higher-yielding opportunities. And when you think about where we were over the last 12 months, we didn't really have -- it didn't really make sense to be buying property at low cap rates, obviously. So that's something that didn't make sense. But -- so we've been sort of balancing buyback shares, building a higher-yielding, quality pipeline that will start to take an effect later this year. But as we start -- and we currently are building our current pipeline -- acquisition pipeline. Going into second, third, and fourth quarter this year, you'll see a larger majority be existing assets with hopefully current tenants.

Okay. And that kind of leads into my second...

Without giving you a special -- without giving you a specific number. But we do like selectively looking at these opportunities where we can get new projects, higher yields with tenants that we like -- existing tenants and markets that we like as well.

Okay. So you like kind of having that platform, but again, you would look at kind of, call it, more traditional acquisitions on a go-forward basis?

Yes. Exactly.

And then maybe just -- my second question just kind of ties to that in a way in the sense that -- just maybe talk a little bit more about the opportunities on the more traditional acquisition front the team is seeing. Just obviously, you guys have been sidelined for a while from kind of being in the acquisition market. What do you see out there? And you touched on this a little bit in the prepared remarks, but just balancing those acquisition opportunities versus repurchases as we think about that $400 million to $500 million of deployment -- capital deployment you've laid out in the guidance.

Yes, I mean, one of the things that we didn't talk about is, we've talked in the past, there's release account cash in the master trust now in the area of, I'll call it, $66 million. That's going to increase as we sell the non-encumbered -- the unencumbered noncore assets there. So when you actually think about the amount of assets that we've got to acquire for both companies, the numbers get -- starts to build up quite significantly. So we are kind of adjusting our acquisition effort accordingly. So as you know, we've got a heat map. We've got a process. The whole team's been -- the acquisition team has been organized. And I think you'll start to see a good balance of existing property with existing tenants that we're acquiring, a select percentage, smaller, being these development-type opportunities. And we'll see where our stock trades post-spin, but that's obviously a tool in the box as well.

And the next question comes from Haendel St. Juste with Mizuho.

Just a follow-up on the last question. Curious, the type of asset categories you're looking at potentially acquiring in the new SRC and how would that cap rate range or return expectations compare to what you're expecting on the development side?

Well, first of all, as you know, we have 1 heat map -- industry heat map and as you've seen in our previous slides, each company, SMTA and SRC, have different value allocations relative to the heat map in terms of their total portfolios. I think for us, the development opportunity can, in some cases, be up to 100 basis points in premium for -- that's just a generalization, but for these forward takeouts or development deals, so you wouldn't want to do them all that way, but I think that, that's certainly an area where we can pick up higher yield. We don't think there's a shortage of sectors that were under-weighted, if you kind of look at those 2 heat maps. And that'll be a good -- without going into specifics, that's an area that we're really focused on right now, those areas that were on the bottom right of the quadrant of the heat map for both companies.

Got it. okay. Okay. A question for you, Michael. Welcome, first of all.

Thank you.

I'm curious on the convertibles that come due next year, I think there's $400 million or so, just curious what the current plans are thinking for that debt is at this point?

Yes, I mean, it's a little too early to start planning specifically. I mean, it's certainly something that I have my eye on. A good thing about Spirit is that we have lots of different capital buckets that we utilize, which is helpful. So when we get there, we're going to have optionality, whether that's do bonds, do more converts, do more bank debt, do more secured lending, utilize the MTB, issue equity, issue preferred. So it's nice to have all those levers to pull. So I think, too early to tell, but as we get closer, we'll be able to see where the markets are with the different pockets of money and how much they cost and pick accordingly. So we'll be able to give more guidance on that as we get closer to it.

Got it. Got it. Jackson, I guess, one more. Going back to central seller financing on the Shopko side. Would you be comfortable giving us a sense of what type of [LCDs] you'd be comfortable lending at, interest rates, any sense of how you would potentially structure the debt from -- you would be willing to lend to potential buyers? And then what type of premium would you expect to receive on the cap rate side for potentially providing seller financing?

It's hard to give you a kind of generic answer to that, I'll give you a good sense, like the seller financing that we're providing, it's not, I would call, programmatic. It's very much case-by-case. Look, I'd rather have someone buy a Shopko and just show up with the money, that's a lot easier to deal with. Last quarter, what we saw was some people had trouble with the senior financing. So if you think about it, if someone's willing -- if someone can get a 40% to 60% LTD loan from the local bank, maybe they provide some form of recourse, we might look at providing the next 15% in a mezz loan. Now the pricing of the mezz loan is really dependent on the cap rate of the acquisition. So they're sort of circular with each other. I guess, the way we look at it is, if we can net 40% to 50% of the investment basis upfront to Spirit, whether it's we're providing a second or we're providing a first and they get another person to put a second on, that starts to begin to make some sense. And that's a function of the cap rate that they're paying and that has sort of implications on the pricing of the mezz. So like if we've got an aggressive cap rate, we could give a more below -- or a more attractive mezz-type of loan. If it was a lower -- it was a higher cap rate, we'd have to probably look for a more market-type piece of paper on the mezz. So it's -- we're really looking at proceeds, that's really the key thing. Getting enough --if we're going to do a seller financing opportunity, are we getting enough upfront proceeds? And I'd say that, that's got to be at least 50% at a minimum on the sale, if that helps you.

And the next question comes from Wes Golladay with RBC Capital Markets.

Can we stick with that seller financing question. Would it be Spirit providing seller financing or SMTA?

Wes, it would be SMTA.

Okay. And then for acquisitions going forward, I guess, can you provide some context, in the history of Spirit, how many deals were relationship driven? How many do you expect going forward? And how are you going about developing new relationships?

Well, we -- I'll answer on the relationship. We have actually a lot of relationships currently. We're just really trying to harvest the current relationships that we have. Again, to give you a good sense, later this year, we're having a tenant appreciation event here in Dallas, our top tenants, golf, entertainment, we just -- we hadn't done that in the past here at Spirit. So we're really trying to -- on the subset of tenants, for both companies that we really like, we're really focused on them. So that's one thing. The second, it's -- if you kind of look at our team, it's kind of hard to see because the new team has been in place here, effectively, for 12 months. I'd say a good number of the properties that were acquired early of 12 months ago, we're probably more broker oriented. And as we've gotten into the second, third, and fourth quarters, a much higher percentage of existing tenants, and that's -- that trend is going to continue to increase.

Okay. And then a last question from me. When we look at SMTA, how do you balance buying more assets, growing that platform, gaining scale from a G&A perspective versus returning capital to shareholders? Is there one more of a priority right now?

Well, since it's a thing with SMTA if you -- and that's why I tried to start with that comment, Wes. It's really a private equity fund that is public. So If you kind of believe that, that means you want to use leverage. If you're looking to generate TSR or IRR, it's -- you actually get a better return if you return capital sooner and faster in terms of in the form of either dividends or special dividends. So the one thing that's really clear to us is the master trust funding entity, I'll call it an entity, because it's almost a stand-alone entity in itself from a reporting standpoint and from just the bankruptcy remoteness of it. That asset could be sold right after we spin it. I don't think the Board is going to do that. So the question just is, how do you continue to improve it, shine it up, make it better, and there are opportunities within that portfolio. Forgetting about doing anything else, of just recycling 10%, 15% of the assets just within that master trust. So that's always going to be monetizable and sale-able. We're not worried about that. The sale of those noncore properties, the unencumbered ones, that's going to be a decision on the new board, but if you return capital faster, sooner and balance that versus waiting till the end, your IRR, your TSR is going to be better. And one other thing that you'll see in the papers that come out in the filing, in terms of board comp, look, this board compensation for the new independent directors is, candidly, going to be higher than the Spirit Board of Directors comp. A very particular reason why, this is going to be a very event-driven exercise. These directors are going to have power and control over this company. They have to approve all transactions. Eventually, I'm sure we'll have thresholds. They have unilateral ability to terminate us if they want to. So they are going to -- they are -- they know what the business plan is, which is return -- high shareholder return. And that kind of means basically returning capital faster, making sure we're doing a good job on the master trust and then, ultimately, monetizing all the assets.

And the next question is a follow-up question from Ki Bin Kim from SunTrust.

Can you talk a little bit more about the $400 million to $500 million capital deployment plan. Currently, are you thinking how much of that is share buyback versus deploying capital on acquisitions?

Yes. Well, I mean, just -- so not to be surprising anybody, so if you kind of look at year-to-date, so this -- obviously, we're giving guidance a little late, but we wanted to do it when we sort of had a better sense as to the timing of the actual spin. So let's assume we were at January 1, that assumes the $400 million to $500 million. So we've repurchased about $160 million of stock, right? We've committed to about $86 million of forward takeout sort of development construction spend commitments. We've acquired, in Q1, about $10 million of deployment into existing development and CapEx opportunities. So that's roughly about $263 million. So the delta between here and end of the year, is basically $137 million to $237 million of net new investment for new SRC between now and year-end to kind of get to that guidance range that Michael was talking about.

Okay. So for that remainder, is it -- I mean, I know it's a small number, relatively speaking, but is that like mostly on acquisitions or do you think …

Yes, that's mostly -- I think that's mostly acquisitions. Like I said, it's not a hard number to place against properties. But as you know, we're pretty -- we're more specific about what we're trying to buy. So there's no shortage of opportunities to deploy that incremental amount in acquisitions. But as you know, we plan very specific about what we're trying to buy right now in terms of industries and things like that.

Ki Bin, from a guidance standpoint, we assume that's going to be acquisition, from a guidance standpoint.

From a guidance, yes.

Not share repurchase, that could change, obviously, what we actually do, depending on market conditions, et cetera, but from a guidance standpoint, that's what's baked in.

It's Ki Bin, but don't worry. Companies I have covered for 10 years have gotten it wrong, so no big deal. And what are your plans -- if SMTA goes according to your plan and you're selling assets, returning capital, there's a chance that the intercompany G&A or management fee starts to come down. So what are your plans today, If that happens, not to let it dilute your own earnings, is there a plan to perhaps rightsize G&A over time?

No, look, I think, Ki, we have to look at it. That's -- Obviously, that's one of the things, obviously, we think about, the way the structure is set up. It's -- SMTA is not currently set up to be permanent forever. Now that could change, who knows. If the stock is trading, I've [polled] the directors, we may wanted change the nature of the management fee, make it longer, change the nature of it. And I think we'll have to sort of see as we go through the sale of those noncore unencumbered assets. But remember, we have a $150 million preferred, that's that comes back if the thing goes away. We get termination fee. We get a promote. So there's a lot of capital that could come back if we're able to monetize or if SMTA gets sold or it goes away. It may not go away because then maybe -- I can tell you that we've had conversations with shareholders that are very intrigued with this master trust because it's a very unusual facility. It's an A+ rated facility that continue -- that can issue, basically, debt perpetually as long as you take care of the assets. And it runs at a much higher leverage. So it's a very unique and hard to [replace] type of financing facility that's backed by hundreds of real estate assets.

Okay. and just last question. On Page 17, the contractual rent of 1.5%, did I hear you correctly that excludes assets that are vacant? And is that the way it's going to be reported, which might be maybe a little bit less useful to investors?

Yes, that excludes vacant properties. And that's something, I think, in the past, we have continued to exclude. What we were trying to get to with this is trying to give everyone a good look at what our organic growth actually is going forward. So you've kind of got a clean here's what our contractual rent growth is. And from there, you can then layer in your own assumptions on dispositions, acquisitions, lost rent, et cetera. When you kind of look back quarter-to-quarter, and it's something I saw when I came into the company, there was a lot of volatility in that number and it was usually driven by just a few little things. So you begin put it in perspective, this quarter, had we done in the old way, it would have been 1.4% versus 1.5% growth. We're still capturing a similar universe of tenants. But we do think this will be a lot more meaningful for you going forward from a modeling standpoint because now it gives you that baseline that you can actually then make assumptions off of, versus having little assumptions or little changes really skew the number every quarter and, frankly, make, in our mind, the data less helpful and less meaningful.

And this concludes our question-and-answer session. I would like to turn the call back to Jackson Hsieh for any closing remarks.

Thank you, operator. In closing, I'd just like to say, it's been a long and winding road this past 12 months, but we're almost live on our moving-forward plan. So what I'd like to do is really thank all of our shareholders who have been supportive of us this period. And we look forward to driving shareholder value for both companies going forward. And we look forward to seeing you all very soon in the future. Thank you.

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