Spirit Realty Capital Inc (SRC) 2018 Q2 法說會逐字稿

Good day, and welcome to the Spirit Realty Second Quarter 2018 Earnings Conference Call and Webcast. (Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Cara Smith, Investor Relations. Please go ahead, ma'am.

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 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 and 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 Second Quarter 2018 Earnings Call. This morning, I will review our post-spin metrics and activity as well as our capital allocation plans. I will then turn the call to Mike Hughes, who will discuss our financial results in more detail and provide our updated guidance for the year, reflecting the impact of the spin-off transaction. We will then take your questions.

The second quarter was another extremely busy period here at Spirit. We completed the spin-off of SMTA in June, which was the combination of a significant amount of effort. We believe the spin-off was a watershed moment for Spirit and combined with other financial, operational and managerial changes we have made over the last 14 months has completely transformed our portfolio, operations and balance sheet into what we believe is now one of the premier investment opportunities in the triple-net REIT sector.

We believe our portfolio metrics speak for themselves. We own an extremely diversified triple-net portfolio with 1,512 properties, leased to 250 tenants, across 49 states and 32 industries. Our portfolio is 99.6% occupied with portfolio weighted average unit level rent coverage of 2.7x. Our #1 and top 10 tenants comprise just 3.8% and 25.5%, respectively, of our contractual rents, which is indicative of the diversity of our portfolio. And additionally, 43.1% of our tenants are investment grade and investment-grade equivalent, and we have master leases that cover 38% of our contractual rents, which provides additional predictability and stability of cash flows for our investors.

From an operational perspective, we've implemented a series of best practices and process improvements. We developed a proprietary property ranking system that allows us to apply strategic factors to our investment and property management decision making. We internalized our property management, which has virtually eliminated our vacancy through focused asset management oversight, and we have substantially improved visibility into our tenants' current health and future growth plans.

Finally, our executive team is now fully in place to move us forward, and our organizational improvements have enhanced a can-do attitude and culture at Spirit.

I'm extraordinarily proud of our accomplishments over the last year, and I would like to acknowledge and thank the entire Spirit team for their dedication and effort. With this strong foundation, we now move forward with a clearly defined strategy. We're approaching our growth decisions deliberately and strategically. We will seek to prudently enhance our portfolio, guided by our view on each industry's growth prospects and our existing portfolio weightings. And given our size after spinning off 1/3 of our assets and half of our total debt, we have an advantage in that we do not need to acquire as much volume to move the needle in terms of earnings growth, positive impact on our portfolio metrics and tenant and industry-type weightings. Further, our low-leverage investment-grade balance sheet has never been stronger or more flexible. Approximately 80% of our real estate investments are unencumbered from debt, and we now have a portfolio that fully aligns with our capital strategy. With over $800 million of capital available to deploy toward growth opportunities as well as multiple sources of asset recycling opportunities, we are well positioned to fund our future growth strategies.

Now turning toward our second quarter results. For the second quarter, our contractual rent was $90.7 million, and our cash rent received was $90.5 million. Our same-store contractual rent rose 1.5% year-over-year. We saw especially strong performance from medical office, movie theaters and C-store tenant categories.

With regard to capital recycling, we've worked hard to improve our portfolio through better portfolio management and oversight. And we will continue to be deliberate as we move forward.

In the second quarter, we disposed of 11 properties, 8 from SRC, with the remainder from SMTA for $24.4 million in gross proceeds. 5 of these properties were income producing with a weighted average cap rate of 7.88%. We sold 3 Shopkos in the second quarter, and the disposition of Shopko assets remains a key area of focus for the Spirit team in the coming quarters. We continue to utilize multiple avenues to source transactions and expect to have more sales to announce in the second half of the year.

Our capital deployment activity during the second quarter was modest. As we continue to repurchase approximately $64 million of our common stock, bringing our year-to-date total to 21.2 million shares at a weighted average price of $7.90.

Based upon yesterday's close of SRC and SMTA, that represents an over 20% return to our shareholders. We acquired 4 properties for a total of $15.2 million, all of which are now part of SMTA post-spin. We also invested $10.8 million in revenue-producing capital expenditures related to an additional 25 properties, with approximately 86% of that spending being related to properties that are still part of the Spirit portfolio.

With the spin-off transaction now completed and our improvement in our cost of capital, we are focusing more intently on real estate investments. During the past year, we put significant effort into refining our capital allocation strategy, including an initiative to cultivate our existing tenant relationships, which we believe will allow us to gain better access to deals outside of the traditional broker channel.

We'd been very active building our acquisition pipeline, and I'm pleased to share that we have executed purchase contracts totaling $185 million and have an additional $100 million of acquisitions and developments under our letter of intent, representing a healthy mix of developments, direct sale leasebacks and broker transactions.

We're pleased with the diversity and quality of our investment pipeline, which includes new and existing tenants with locations in 9 states, including Life Time Fitness, CircusTrix, Shooters World, Camping World, Andy's Frozen Custard, Kohl's and Topgolf.

In aggregate, this investment pipeline has a weighted average lease term of 17 years, which given our post-spin size meaningfully moves the needle for us by raising our portfolio average lease term from 9.6 years to 10 years. Approximately half of these deals were originated directly with the sellers, which is the key initiative for Spirit, and include rent bumps that are 30 basis points above our portfolio average.

All of these investments fit positively within our heat map and add more experiential and service type of tenancy to our existing portfolio. Further, the real estate rankings for these assets are all accretive to our existing rankings within each particular property type.

Finally, the initial cash yield on these $285 million in investments is 7.1%, and the economic yield is 8.3%, which is an accretive use for our capital.

The transaction market remains robust and we are already building our investment pipeline of opportunities for 2019. Additionally, as the Asset Manager for SMTA, we built a separate investment pipeline that matches up with their specific cost of capital, portfolio allocation and industry heat map, utilizing the asset allocation policy that was put in place at the time of the spin-off.

In closing, we're very pleased we were able to complete our spin-off transaction on time and as promised to our shareholders. But rest assured, we are not sitting still post-spin. Our vacancy is low, loss rent is de minimis, leverage is the lowest ever for SRC. We have momentum on Shopko store sales, and our management team and organization are forward-looking. We're excited about the opportunities we have, and we look forward to growing our company and creating even more long-term value for shareholders.

Before I turn the call over to Mike, I want to remind everyone that SMTA reports tomorrow. And we will be putting out recorded comments in order to help investors understand the strategy and provide good disclosure. This call will be available via a webcast link on SMTA's IR site and through a dial-in provided in the press release.

Go ahead, Mike.

Thanks, Jackson, and good morning, everyone. As Jackson mentioned, it was a very busy quarter at Spirit, and we're happy to have the spin-off of SMTA completed. While the spin-off has caused some noise in our financial statements this quarter, which I know can be challenging for investors, starting in the third quarter and moving forward, we expect that our financials will be simplified and easier to understand.

Before I get into second quarter numbers, I want to give some color around the presentation of our financial statements to help walk everyone through the incremental information we're providing. Under the accounting literature for discontinued operations, the spin-off of SMTA qualified as a strategic shift for Spirit. Meaning the spin-off had a material impact on Spirit's operations and financial results. Accordingly, Spirit had to apply discontinued operations accounting starting on the May 31, 2018, spin-off date, which, of course, impacts all of our financial statements and disclosures. So let me give you a quick rundown of the impact.

Starting with the income statement. The results of both SRC and SMTA are included in net income for 2 of the 3 months ended June 30 and 5 of the 6 months ended June 30, 2018. However, all revenues, less expenses related to SMTA, have been classed into a single line item called income or loss from discontinued operations. The same net activity for SMTA related to the prior year comparison periods has also been collapsed into the same line item. The income statement for the 3- and 6-month periods ended June 30, 2018 and 2017 for SMTA discontinued operations is disclosed in Note 8 of our 10-Q, which we expect to file later today.

Since the spin-off occurred in May 31, there is no impact of discontinued operations on the June 30, 2018, balance sheet, which represents SRC as a standalone entity at that point in time. However, there are a few line items appearing as of June 30 that I'd like to point out.

First is the inclusion as an asset of the $150 million in SMTA preferred equity owned by Spirit post-spin. Second, we're now including a $33.6 million investment in the MTA notes issued last year, which we're required to hold as the issuer of those notes. Prior to the split, that investment was eliminated in consolidation. And we're now recognizing a $29.4 million mortgage note liability for loans made in 2014 from MTA to Spirit for certain assets owned by Spirit. The loans have a remaining term of 9 years and bear interest at 1% per annum. This liability was also previously eliminated in consolidation.

The December 31, 2017 balance sheet, total assets and total liabilities of SMTA have been condensed and bifurcated separately. The December 31, 2017 balance sheet detailing the assets and liabilities of SMTA is disclosed in Note 8 of the 10-Q.

As it relates to the consolidated statement of changes in stockholders equity for the 6 months ended June 30, 2018, the distribution of the net assets to SMTA in conjunction with the spin-off is shown as a single line item, SMTA dividend distribution, which represents the net assets of SMTA on historical cost basis.

There are no significant changes to the consolidated statement of cash flows, which does not bifurcate the cash flows from SMTA. Rather, the net of cash flows from operating and investment activities related to the discontinued operations are disclosed separately in Note 8 to the financial statements in the 10-Q for all periods presented.

Certain non-GAAP measures, comprising Spirit's consolidated AFFO and adjusted EBITDAR, are included in the earnings supplement on Pages 6 and 28, respectively.

The AFFO for the 3- and 6-month periods ending June 30, 2017 and 2018 and adjusted EBITDAR for the second quarter of 2018 do not bifurcate the discontinued operations of SMTA. Accordingly, we have also provided AFFO for the month ended June 30, 2018, separately in order to give investors insight into Spirit's run rate AFFO as a standalone entity.

Now turning to second quarter results. Rental revenues declined $7.3 million compared to the same period last year, driven by a $7.2 million decline in contractual rents as we were a net seller of $171 million in real estate over the last 12 months.

Interest income declined by $460,000, primarily due to the early prepayment of a $7.1 million loan receivable on April, which resulted in the reduction of interest income of $600,000 related to the acceleration of noncash amortization. Also, other income increased by $1 million due to the prepayment penalty related to the same mortgage net receivable.

Unreimbursed property cost, or leakage, declined by $1.4 million, primarily due to fewer vacant properties and distressed tenants and represented only 2.3% of second quarter rental revenues compared to 3.5% for the same period last year. Reserves for loss rent declined by $1.4 million, representing only 0.3% of contractual rents.

General and administrative expense was $13.5 million and included $1.4 million in accelerated stock grant amortization expense related to the SMTA stock dividend distributed to restricted shareholders. We regard this onetime distribution and the resulting charge as a transaction-related expense and an add back for the calculation of adjusted EBITDAR and AFFO.

Related party fee income, which is a new line item this quarter, was $2.2 million and included 1 month of SMTA asset management fees and MTA property management fees. Separately, we recognized preferred dividend income of $1.25 million for our investment in SMTA's preferred equity. The detailed breakdown of this income can be found in Note 11 of the 10-Q.

Despite the spin-off of SMTA on May 31 and the net sale of real estate over the last 12 months, AFFO per share was $0.20 compared to $0.21 for the same period last year.

Now turning to the balance sheet. Our adjusted debt to annualized adjusted EBITDAR, which included 2 months of operations from SMTA, was 3.6x. Pro forma for the spin-off of SMTA, that metric equates to approximately 4.8x.

During the second quarter, we retired the full $123 million of Series 2013-1 Master Trust 2013 secured notes. There is no prepayment penalty associated with that repayment.

Also during the quarter, we repurchased 8.1 million shares of common stock, reducing our outstanding share count to 426.6 million shares. As Jackson mentioned, we disposed of 8 Spirit assets during the quarter. Of those dispositions, 2 properties were transferred to CMBS special servicers in satisfaction of $22.4 million in secured debt scheduled to mature in 2018. The net book value associated with those properties was $14.4 million and resulted in a gain on extinguishment of debt of $6.7 million.

We have 1 remaining CMBS loan in default that we anticipate resolving by year-end and mortgages collateralized by 1 vacant asset with a loan balance of $9.6 million, including $2.9 million of capitalized default interest accruals.

Subsequent to the -- to quarter end, we borrowed $420 million on our delayed draw term loan facility. The proceeds were used to repay our line of credit, which currently has a 0 balance.

Our liquidity remains exceptionally strong, giving us the runway to close our acquisition pipeline without needing to tap the capital markets. As of August 6, we maintained $833 million in available liquidity consisting of approximately $25.6 million in available cash and $800 million of availability under our revolving credit facility.

In addition, we have approximately $7.4 million in the Master Trust 2013 release account. As of June 30, 74.6% of our debt is unsecured and 80% of our assets are unencumbered. We're also pleased to report that in recognition of our work to strengthen our balance sheet, Fitch upgraded their credit outlook from neutral to positive and Moody's upgraded their outlook from negative to neutral.

Now turning to our guidance. We are introducing full year 2018 AFFO per share guidance for Spirit of $0.75 to $0.76 excluding severance, which includes 5 months of operations for SMTA. We are raising the low end of our previous AFFO per share guidance for Spirit as a standalone entity, pro forma for the expected distribution of Spirit MTA REIT as if SMTA had been distributed as of January 1, 2018, by $0.01 per share, moving our guidance range to $0.67 to $0.68 excluding severance.

Due to our robust acquisition pipeline, we're increasing the range of capital deployment guidance and raising the low end of our range for leverage guidance. Capital deployment, comprising stock repurchases, revenue-producing capital expenditures and acquisitions, increases from $400 million to $500 million to $450 million to $550 million.

Through the second quarter, we have repurchased $168 million of common stock and spent or committed $90 million in acquisitions, developments and forward take-out commitments. Our range for leverage, defined as adjusted debt to adjusted EBITDAR, is now to 5.2 to 5.4x.

Finally, we're reaffirming our disposition guidance of $50 million to $100 million. With respect to Spirit's common dividend, the Board of Directors declared a quarterly cash dividend of $0.18 per share for the second quarter. As we noted on our last call, beginning in the third quarter, we're targeting a dividend payout ratio, as a percent of AFFO, of approximately 75%. We believe that this dividend policy will enable us to maintain our conservative, low leverage balance sheet and offer 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.

With that, I will now turn the call back over to Jackson.

Thanks, Mike. Just as a friendly reminder before we get into Q&A, we want to focus everyone on Spirit. If you have questions related to SMTA, as I mentioned, they will report tomorrow, and you can reach out to Ricardo with questions. Operator, we're ready to open up the line.

(Operator Instructions) Today's first question comes from Vikram Malhotra of Morgan Stanley.

Could you maybe just walk us through on appropriates of run rates for some of the key items, interest expense, G&A, just given all volatility in the quarter. Just trying to get a sense of what the back half could look like for some of the big picture items.

Yes. Sure, Vikram. I mean, on G&A, in particular, it has been a noisy number, I think, for a while. If you look at last quarter and this quarter, last quarter, we had some severance. You take that out, we're about $12 million of G&A kind of run rate. This quarter, you take out the accelerated stock grant amortization and you're at 12, which should imply about $48 million run rate. So I'd say $48 million to $50 million is probably a good run rate for the G&A.

Okay. And interest expense?

Yes, interest expense has been pretty consistent when you look at, like, the pro forma Q we put out last quarter and you look at where we are today. I mean, assuming -- and certainly there could be some changes with our capital structure as we refinance debt and, of course, if we do acquisitions down the road and whatnot. But where we stand today, I think it's a good run rate until things start moving around from a capital structure standpoint.

Got it. Jackson, I guess, one of the goals eventually is to sort of get REIT ratings for Spirit as it is today given that -- given sort of the leverage, the profile of the -- the property provide, et cetera. Can you maybe just walk us through kind of how you're thinking about the next maybe 6 to 9 months, some of the actions you can take to kind of close the gap from a multiple perspective?

Sure, Vikram. Thanks for that. So I think for the next 6 months, we're already -- we're actually ahead of -- in sort of my own internal schedule as to what to do over the next 6 months. And I think the first priority is to demonstrate our acquisition wins and statistics. So on that front, I think we've made a reference of this $285 million. It's unusual for us to talk about forward acquisitions, but this company spun off, as you know, SMTA in June. So we only had sort of a month to talk about our standalone Spirit profile. So we didn't expect to close any acquisitions in the second quarter. But as it relates to the third quarter, about half of that pipeline -- a little bit over the half of that $285 million pipeline will close in the third quarter. Some additional information about that pipeline, 94% of the tenants in that pool of opportunities will provide unit level reporting. So that will increase our current 42% unit level corporate reporting statistics up to 50%, just from that one acquisition of $285 million. So when I made that point about moving the needle, I mean, as we continue to demonstrate new acquisitions, I'll call it, selective asset recycling, which we'll continue to do. We're going to have a material change in the sort of portfolio of metrics of this portfolio. And I just think it's a good portfolio already, just going to get better. And I'm thinking time when people see it and they look at some of these other portfolio statistics, which is the -- we have 6 vacant properties right now, loss rent is $200,000, leverage is really low and we've got a lot momentum on Shopko sales. I think that's going to be the green light when it clicks on.

Okay, that makes sense. And then last one just -- you mentioned specific SMTA questions for tomorrow or we can follow on. But could you just talk about the market in general for Shopko assets?

We -- I'd rather reserve it for tomorrow because it's a material part of SMTA's strategy. And I don't want to gun jump what they're going to talk about. What I can tell you is it's a very important priority for this senior management team. The 4 executive leaders of this company have bonus metrics tied to specific dollar volume Shopko sales targets. So I'm looking around the room with these guys and we're planning on trying to get it. So we're really pretty focused on it and so is the Board. And it's an important part of the SMTA story. So we'll give more color on that tomorrow.

Is it for a specific time that target you mentioned?

This is a year -- it's a calendar year. These are calendar year, yes.

And our next question today comes from Ki Bin Kim of SunTrust.

Can you talk about what you are looking to buy? What are the quality metrics? And some other kind of lead parameters? And how that compares to how previously you guys used to buy assets?

Well, we haven't bought assets for a while, so. As you know, look, it all start with these process changes and strategy that we put in place when I joined the company. So we have a heat map. We have a ranking system. And so it's really quite clear if you look at some of that data we put out in the June presentations, where we're under or overweight. But I'll give you a couple of things to think about. The portfolio that we have -- that we mentioned some of the names, we want long-term leases, we want meaningful annual rent escalators or bumps or in the case if we can get CPI escalators as well. We're looking for primarily, what I'll call Internet-resistant industries because our tenants are challenged with that real reality. So service is important, entertainment is important, quality of operator is important. And really what's also important is just doing direct business with our tenants that we think can perform. So we're probably not going to do the 1- or 2-unit operator. I mean, we want to deal with operators that have more scale or to that operators that we believe can get scale with our partnership. But if you specifically look on Page 16 of our supplemental, the weightings of our contractual rent percentage change as a relation to the spin-off of SMTA. So convenience stores moved up from 6.5% of contractual rent to 10.8%. Drug stores and pharmacies increased from 4.8% pre-spend to now 7.4%. And grocery also nudged up a bit. So I wouldn't be surprised if you see us selectively look to recycle some of that percentage down and then increase in the areas of health and fitness, entertainment, professional services, warehouse clubs, building materials and distribution in terms of those areas. So those are kind of the -- basically that's what you'll see us, I think, start to increase percentage.

Okay. And can you help us maybe get a better sense of your new asset management philosophy and kind of day in, day out, how you are basically monitoring your tenants in a better way?

I'll let Ken answer that. He's in the room, and he's done a great job of really helping us get a stronger handle on the business as we move forward.

Well, yes, easy enough. There's several metrics that we use in the asset management function. Jackson's mentioned some of them. We do -- the property ranking is an integral part of that. We are monitoring property rankings, we are monitoring coverages, we're monitoring lease expirations, getting on out in front of those. We're constantly looking to extend the duration of the portfolio. So we got multiple avenues that we monitor.

Well, how about for the tenants that don't report all financials? How do you monitor them from the perspective of how their businesses are actually doing?

Well, the good thing is a lot of those -- I don't have a percentage in my head, but a lot of those are going to be investment grade. But we have other ways that we monitor. It can range from direct conversations with the tenant where they may not share financials, but we do have conversations with them on an -- a regular rhythm to monitor performance. We're monitoring rent obviously, real estate taxes, insurance. Those are all indications of tenant health that we would monitor on a daily basis.

Okay. And in terms of your leverage profile. I know this quarter's debt to EBITDA metrics had couple of months of SMTA in it, so it's not very useful. By end of the year, after you've deployed the capital in terms of acquisitions and share buybacks, where should we be at the year-end on a pro forma basis?

Yes. Ki Bin, it's Mike. So one thing in my prepared remarks, I did mention that in Q2, we were kind of pro forma 4A, because I know that the 2 months of SMTA is not a meaningful number. So if you take out SMTA in Q2, we should be around 4A. At the end of the year, I mean, it's going to be in our guidance range. I think that if we were to hit the top end of our capital deployment range, we will be at the top end of our leverage range. If some deals fall out and we fall somewhere below that, then you'll be between that 5.2x and 5.4x.

Okay. And just last question. There are some reports that Shopko hired a ground restructuring adviser. Could you just provide any kind of initial thoughts you have on that? And how that matters to your own compensation plans and the plans for SMTA and, I guess, link to you guys in the selling of Shopko assets?

Look, I'm not going to comment on -- look, first of all, there's always all kinds of people saying the wrong things about Shopko, so just leave it at that. And I'm not going to address that question. But we're very comfortable with the pace and progress of Shopko sales. It's a key part of SMTA strategy. So we're going to be able to talk more robustly about that in the second half of the year.

(Operator Instructions) Today's next question comes from Haendel St. Juste of Mizuho.

I just want to follow up on the leverage question for a sec. It looks like after buying the assets under contract, under LOI, your leverage will be somewhere in the mid- to upper 5 on debt to EBITDA. So maybe you could talk about the leverage you're looking at pulling here to get you back down to your telegraphed threshold. Would equity, for instance, be part of that conversation?

Yes. One, it's not going to be the high but it would be the kind of the mid- to midsize, as I say, it would be 5.2 to 5.4. But we're certainly comfortable floating a little bit above that range and I think we have some incremental leverage capacity before we hit kind of our ceiling. Especially from a timing standpoint, if we go above -- I know 5.5 is where I want to kind of peak out. If from a timing standpoint, we go over and above that because we have a big acquisition pipeline, that's fine and we can float back down at the appropriate time. The other thing just to note is we are going to do some more capital recycling next year. We still have some assets left to sell this year that we'll recycle and we'll do more of that next year. So from a pipeline standpoint, we'll be doing a lot more capital recycling. And then we also have a lot more free cash flow with the lower interest expense we have, the more conservative dividend policy, we're going to be derivating quite a bit more free cash flow that we can use as equity, leverage appropriately and do more acquisitions. So we don't have an immediate need and we will have to see how the pipeline shapes up to identify what kind of capital raise we would need to do.

Okay. And then on the $285 million under LOI. Curious how much of that was sourced internally, not via brokers or intermediaries? And then how should we think about the potential impact to your platform in costs, maybe G&A personnel as you moved towards -- as you move more towards direct nonbrokered, nonmarketed deals?

Just from a G&A standpoint, it's not going to make any difference because it's really the same team. A lot of this is being executed in partnership with the asset management teams. Ken mentioned, the way you get ahead of your tenants is talk about current health and future health and future development opportunities. So that's like easy pipeline, right. But it's connecting the dots between the acquisition teams, our strategy, effort, research and credit. Where I kind of see where the portfolio needs to go and just kind of bringing all those groups together on the pipeline that we have to date. So $185 million is actually -- we have hard money, expect to close soon on those opportunities of that, what, $285 million. I'd say half of that -- over half was sourced just directly with the seller without any real -- with just nonbrokered kind of situation. And I'm not sure that, that's going to be the percentage all the time. Sometimes it will go up, sometimes it will go down. But we are -- we really changed the nature of how we're interacting with our current tenants. I can say my -- personally, my time, I spent more time post-spend on the road, meeting our largest tenants, sources of capital, working probably most directly at this point with our acquisition team. I feel like I can have the most impact there. So it's part of the puzzle for us.

Okay. And one last one. Wouldn't be complete without -- the call wouldn't be complete without some mention of Amazon. So curious looking at your exposure to the drugstore pharma industry, you're looking at about 7.5% of revenue. Curious what you're thinking about that long term, what the right exposure to drug stores, pharmacies given Amazon's acquisition of PillPack and any thoughts you have on that?

Yes, just let me -- look, I'm not going to try to pile on because some of my other peers have already talked about sort of in general, sort of the impact there. But the high level, you guys know these numbers, PillPack is estimated to have $100 million annual revenue across this $400 billion addressable market. What's interesting to me of all these different things is, if you sort of just focus on the mail order part portion of the pharmacy business over the long period, the market share for prescriptions over the mail decreased from 14.7% in 2010 to 7.8% in 2017. So i.e. that -- it's not that easy to get people to convert, to flip over to mail prescriptions. And during that same period, the pharmacy chain stores increased their market share step -- from that same period from 50.2% to 57.9%. So I think it's, first of all, it's going to be a lot longer than people think in terms of the impact. I think the barriers to entry as it relates to regulatory, the relationship between a consumer and a pharmacist, it's not that easy to break and it's also a very complex and interwoven supply chain. So I don't think that we're thinking that this is going to disappear overnight. The other thing is if you look at our drugstore portfolio, in particular, the average 5-mile population is about 125,000 within our drugstore portfolio. But what's interesting is the median age of our population within 5 miles of our stores are 40.5 years. So it's 3 years older than the average U.S. population as a whole. So I mean, I think that's sort of bodes well for what CVS, Rite Aid and Walgreens deal. I think the bigger issue for us is, the drugstore portfolio that we have are generally flat leases. And as I've told you in the past, we're looking for more escalations, we're looking for more service. So on the one hand, drug stores are great. They're really liquid if we want to sell them, we can sell them very easily. They are very comfortable on their ability to pay rent. But as a result of the spin-off, our pharmacy exposure went from 4.8% of contractual rents up to 7.4%. So I would not have sort of drove that percentage up like that. So I think in time, you'll see us selectively continue to reduce exposure, not because we're afraid of Amazon, but just it's a relationship of flat leases, it's a larger percentage than we're focused on. We're trying to build more organic growth in this portfolio, so.

And our next question today comes from Brian Hawthorne of RBC.

Are there any new relationships that you guys kind of talk about for that could be a source of new transactions or new acquisitions?

I mean -- yes, I mean, look, we have a lot. If you look at just the pipeline, for instance, we had referenced Topgolf and without getting too specifically with them, that's a new relationship. Life Time Fitness would be a new one and there's other -- there's a handful of others. So we've got a very robust pipeline, not just the ones that we mention here, but we launched the -- we're already building our 2019 pipeline already. And let's not forget the tenants that we currently have in our portfolio. We have 400-plus tenants and we like the majority of them. So it's just trying to find opportunities that kind of match up from a strategy standpoint for us and we're trying to drive the portfolio and some of the numerical statistics that we're looking at relative to lease type and duration. Just -- kind of just matching it up and obviously, we're in the business of trying to price credits appropriately; it's a big part of what we do with the real estate backstop. So as all those things kind of go into the mix, it's not like we're trying to increase all new tenants; that's not really the focus. It's -- we have a very specific strategy as industries that we like and we're very intellectual as to how we look at our current portfolio and where we want that portfolio to be in 5 years.

And today's next question comes from John Massocca of Ladenburg Thalmann.

I know you guys are kind of reticent to answer questions about SMTA, but I just want to ask this one because it's about management. Has there been any progress with regards to hiring a permanent SMTA CEO?

Like I said, we said we don't want to talk about SMTA because in fairness, they haven't really announced yet. But that's going to be, obviously, a Board decision over there. And I can tell you -- what I will tell you is that the Board has -- the Board of SMTA, the new board of independent trustees have spent quite a bit of time actually just time, time getting to understand our process, the portfolio, the decisions they have to make as it relates to capital allocation and the things that were set up as part of the spin-off structure. So I will just leave it at that, that Ricardo is the Interim CEO and CFO and Treasurer. And we'll continue to spend time working with the new Board, but that will ultimately be their decision.

Understood. And then maybe just kind of as a reminder, how far along in that $450 million to $550 million of capital deployment between what closed and went to SRC in 2Q and stock buyback and then also maybe including the $285 million you have under contract? And then, how much additional kind of acquisition capacity does that give you beyond that $285 million?

Yes. So if you look at what we've done so far of that $450 million to $550 million. We've kind of got spoken for $168 million of stock we repurchased. We did a little bit of acquisition in the first quarter, about $3 million. We had $75 million of redevelopment and $12 million of forward commitment. So $168 million stock buyback is done, $90 million of the $450 million to $550 million is spoken for. And so that really leaves what's under contract in LOI. Anyway, and after that, look, we have some capacity, we have 800 -- over $800 million of liquidity. So we have a lot of, even net of all this, we're going to have quite a bit of liquidity on hand. And we still have a little room on the leverage side and we will have, again, the additional free cash flow that we can put to use as well as a lot of capital recycling going into the year. So definitely have some ability to continue to work at acquisition pipeline before we need to raise any capital.

Yes, and the disposition cap rate that we announced in the second quarter, that's not going to be really indicative of what's coming in the third and fourth quarters. Yes, there are some things that will be sold that are very low, relative from a spread-wise, relative to where we're buying things. And we're doing that not because just they're low, but because from a weighting standpoint, just the overall strategy of where this portfolio is, we're going to do that. So this accretive recycling is a key portion of what we're going to do. Because I said to you earlier, like, our cost of capital is improving, it's not there yet. I got to get a buyback program in place. We're always going to look at that, always looking at kind of at our cost of capital, but it's improving, our pipe is improving. So we think we've got a number of different levers to pull in order to drive earnings and drive accretive acquisitions relative to not only at a cost of capital, but just accretive to the portfolio itself.

You anticipated my second question there. How long do you think that kind of a runway is in terms of capital recycling if you kind of get to the end of this $450 million to $550 million and you're not trading at a range that you want to be. I mean, could you potentially just capital recycle for a year or would you kind of run out of assets at a certain point within 2019?

No, I mean -- I wouldn't want to put a time on it but we have -- you guys, keep me up -- this portfolio is really good. It's very liquid. The properties are -- I can tell you it's really good because the things that we look at, that we have to -- it's very competitive in the acquisition market today. And if you talk to some of our other CEO peers, they'll tell you that the spreads on quality properties have really not changed or much at all and so it's a lot of demand for them so. So there are tremendous amount of opportunities where we can redeploy what I'll call either flat to low growth leases or maybe nonreporting kinds of leases and opportunities and kind of parlay them into 8-plus-percent economic yield oriented.

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will increase AFFO and do all the right things, so. I'd rather not put a volume number on it. But I don't think that we run out of bandwidth for a while, so if we had to.

Understood. Then there is one quick kind of detailed question. The 2.7 fixed charge coverage ratio coverage that you had for the portfolio, was that a weighted average or a median number? And then if we kind of had to guess just broad-strokes, what would be the 4-wall coverage there?

Well, yes, the fixed charge coverage, that has a couple of months of SMTA in there. So it's not a really clean number, I'd have to get back, John, with the clean number. The actual number is higher. As far as the 4-wall coverage, that's in our supplement. I think, that's 2.7x.

Our next question today comes from Chris Lucas from Capital One Securities.

Jackson, just to kind of a bigger picture question, you mentioned, I think, distribution as one of the target areas for you. As you think about the portfolio down the road in terms of exposures to retail, industrial and office assets, is there a sort of ranges that you think about in terms of what that portfolio looks like down the road few years?

It's not going to change. It's -- within it's going to have a more service orientation, obviously, as it relates to what traditionally called retail. We have -- we define it as service retail, traditional retail, but it's going to just have more of a service orientation. I would say like the -- look, distribution is -- it's very competitive. And so it's really hard for us to find sort of the right opportunity where it makes sense for our cost of capital. So I think that I would say if you look at our current weightings. I think our service industries, I think, I'd like to see them up. They're currently 58% of contractual rent; they'll probably move up to hopefully 65%. And I could see industrial increasing slightly, I don't think data centers are going to increase dramatically in our portfolio. And then I think just in terms of -- I think that's basically, that's what I see of what we're going to try do. Once again, just increase our service industry portfolio but we don't have a target number that we're shooting for at this point. It's really more a quality of tenancy, very specific to particular industries. We have a much higher fulcrum as it relates to actual specific industries versus the high-level retail industrial mix.

Okay. And then as it relates to the sort of what you think about in terms of how you come up with your disposition pipeline, if you will. Is that coming sort of the bottom of the heat map? Is that coming off of sort of dislocation of value? Is it lease characteristics? How do you think about that pool that goes into this disposition pool?

I think it's a combination of all those factors. There are no shortage of properties in this 1,500-plus portfolio that if I ask Ken, I want to solve this or that, that he can sort of get that done. So what we're really doing is we have a ranking system that's really critical to what we do. There are certain times when certain assets are ripe for sale. Yes, I'll give you a good example. We're exploring right now a distribution center that we have in the pet industry, not that we don't like pet industry. But we think the pricing on that particular asset relative to the credit profile of that particular pet tenant is going to price extremely through that -- where that credit would trade on a standalone basis. So that's just one example of something we will look at and explore. The other is, we're just about to go through our property-by-property ranking system in another couple weeks here, last couple of weeks of August. And so that's going to involve a pretty significant effort, time effort on the part of Ken's team, credit team, our asset management team. And I think that will drive -- that gives us a chance to really look at this portfolio in great detail as we think about what makes sense to sort of sell, when it's the right thing to sell, and so that's the point I'd leave you with.

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

Do you guys officially set a new dividend for SRC?

I'm sorry, we're setting a new dividend for SRC, was the question?

Do you guys set a official dividend rate?

No, the last dividend we declared was Q2. So we'll declare the Q3 dividend in normal course. And as we've said a couple of times, it's going to be based on targeting around a 75% of AFFO per share.

Okay. And any new tenants creeping up on your watchlist?

This is Ken. The answer is no. The credit watch list is very, very stable. I mean, we're always monitoring certain folks. But as far as trend-wise, it's very stable. I'd suggest the positive trends in both our occupancy and our loss rent performance that we've exhibited over the past year is indicative of the credit watch list. Very stable.

And our next question is a follow-up from John Massocca of Ladenburg Thalmann.

Just a quick one. Is the SMTA comp set up in a manner that -- sorry, what happens to management's SMTA-related incentive compensation if SRC is acquired? This is kind of set up in a manner that doesn't work against incentivizing you guys to entertain appropriate offers for SRC.

Look, I think that question, to be honest with you, doesn't make any sense. I mean, we're -- we work for our shareholders, both companies. And if there are things that are more compelling, we'll look at them. And has nothing to do with comp or any of that stuff.

Sorry, so it wouldn't change divesting any type or -- your competition is kind of ...

No.

And ladies and gentlemen, this concludes your question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Okay. Look, I thank you all for joining this morning and we look forward to tomorrow's call with SMTA and we've got -- it's nice to be back in what I'll call a more regular state of the triple-net business right now. Thank you.

And thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.