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1 Move That Signals This REIT Is Focused On Creating Long-Term Value

December 18, 2014 4:26 pm
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1 Move That Signals This REIT Is Focused On Creating Long-Term Value

REIT investors are always seeking higher risk adjusted returns. Risk can come in many different forms, including concentration risk, which is essentially having too many eggs in the same basket.

On December 16, Spirit Realty Capital, Inc (New) (NYSE: SRC) announced that it had reached a sweeping new agreement for its master lease with Shopko, its largest tenant.

The Spirit Realty portfolio contains 84 percent retail, 10 percent industrial and 6 percent office.

A Successful Business Model

The Spirit Realty single-tenant, triple-net business model is most similar to peers Realty Income Corp (NYSE: O) and National Retail Properties, Inc. (NYSE: NNN). In the triple-net model, the tenant operates the real estate and in addition to monthly rent pays for taxes, insurance and almost all of the property maintenance.

The top holding in the National Retail portfolio is Sunoco LP at 6.6 percent. Realty Income’s top tenant is Walgreen Company at 5.4 percent, followed closely by FedEx Corporation at 5.1 percent.

Too Much Of A Good Thing

Spirit Realty CEO Thomas Nolan, Jr. pointed out, “Since our IPO in September 2012, we have reduced Shopko’s contribution to our annual revenue to just over 14 percent from approximately 34 percent.”
Source: Company presentation Sept. 2014

“The investment appetite for properties leased to quality middle market tenants, like Shopko, remains robust, and as such, we anticipate a further material reduction by the end of 2015, as we execute on our stated objective of having no single tenant that represents more than 10 percent of our annual revenue,” Nolan said.

Ability To Diversify Moving Forward

The amended Master Lease gives Spirit Realty more flexibility:

  • Creates a release provision in the Master Lease that allows Spirit to unilaterally sell properties or sub-portfolios under newly executed leases or master leases between Shopko and the buyers.
  • Extends the weighted average lease term by approximately 5 years, which is expected to broaden the pool of prospective purchasers and enhance pricing for the assets.
  • Allows Shopko to vacate 3 properties (out of 112) currently subject to the Master Lease, reflecting rent of approximately $1.75 million.
  • As part of this transaction, Shopko received $18.8 million, of which at least $13.5 million will be used over time to fund capital improvements to properties currently owned by Spirit Realty.
    The company stated that this will not materially affect cash available for distribution in 2015.
  • Diversified In Other Respects

    Spirit Realty has done an excellent job of diversification in other areas of its business model, including owning approximately 2,300 properties spread over 49 states.
    Spirit Realty has over 400 different tenants, representing 27 different industries.

    Heavily Weighted Towards U.S. Retail – Does It Work?

    Spirit Realty portfolio is 84 percent retail. This compares favorably National Retail, having essentially 100 percent exposure to U.S. retail, and Realty Income’s mix, which includes 78 percent retail tenants.
    National Retail has a track record of 25 consecutive years of increased dividends. Realty Income announced on December 17, its 78th dividend increase since 1994. It has paid shareholders 534 consecutive monthly dividends.

    Bottom Line

    Although Spirit Realty is a relative newcomer to the publicly traded triple-net REIT universe, it appears that its management team is focused on doing what it takes to reduce the risks from having too many eggs in the Shopko basket.

    SRC shares were up just over 2 percent at the close of trading on December 17.


REIT Real Estate

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