Spirit Realty Capital (SRC) Tom Nolan on Q1 2014 Results - Earnings Call Transcript

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 |  About: Spirit Realty Capital (SRC)
by: SA Transcripts

Spirit Realty Capital (NYSE:SRC)

Q1 2014 Earnings Conference Call

May 8 2014 5:00 PM ET

Executives

Michael Bender - Senior Vice President and Chief Financial Officer

Thomas Nolan Jr. - Chairman and Chief Executive Officer

Peter Mavoides - President and Chief Operating Officer

Analysts

Vikram Malhotra - Morgan Stanley

Andrew Saper - Sandler O’Neill

Vincent Chao - Deutsche Bank

Chris Lucas - Capital One Security

Rich Moore - RBC Capital Markets

Cedric Lachance - Green Street Advisors Inc

Dan Donlan - Ladenburg Thalmann

Operator

Good afternoon, ladies and gentlemen and welcome to Spirit Realty Capital's First Quarter 2014 Results Conference Call. At this time, all lines have been placed in listen-only mode. After the speakers' remarks there will be a question-and-answer period. (Operator Instructions)

This conference call is being recorded and a replay of the call will be available for one week beginning at 6 PM Eastern Time today. The dial-in details for the replay can be found in today's press release. Additionally, there will be an audio webcast available for the next 30 days on Spirit Realty Capital's website.

It is now my pleasure to turn the call over to Mr. Michael Bender, Executive Vice President and Chief Financial Officer of Spirit Realty Capital. Mr. Bender, please proceed.

Michael Bender

Thank you, Tony, and good afternoon everyone. Thank you for joining us today. Here with me today to discuss our 2014 first quarter performance are Tom Nolan, our Chairman and Chief Executive Officer, and Pete Mavoides, our President and Chief Operating Officer.

Tom will start with some introductory comments and I'll then provide some color on our first quarter 2014 financial results. Pete will then discuss our portfolio and investment program, and Tom will conclude with summary remarks prior to the Q&A portion of the call.

I would like to note that during this conference call, we will make certain statements that may be considered to be forward-looking statements under federal securities law. These statements are based on management's current expectations and the company's actual future results may differ significantly.

In our periodic reports on file with the SEC, we set forth certain factors that could cause our future results to vary from management's forward-looking statements. All information presented on this call is current as of today, May 8, 2014, and Spirit does not intend and undertakes no duty to update forward-looking statements unless required by law.

In addition, reconciliations of non-GAAP financial measures presented on this call such as FFO, AFFO, and FAD can be found in the company's earnings release from earlier today, which is available in the Investor Relations section of our website. And with that, here is Tom.

Tom Nolan

Thank you, Mike. And thank you everyone for joining us today. We are very pleased with our results for the first quarter of 2014, a $7 billion plus portfolio remained in an excellent shape with strong underlined tenant credit performance and we continue to see a very attractive acquisition environment. We remained focus our organic and discipline growth strategy of investing in operationally essential single tenant triple net lease properties primarily through sale leaseback transactions with quality middle market operators.

Our results demonstrate the progress we've made since we went public just over 18 months ago. After what could perhaps best be described as a transformation period its first quarter 2014 can finally begin to demonstrate a more typical quarter with normal run rates. A quarter that demonstrate the predictable and consistent financial performance we have established as one of our goals. We've strengthened our balance sheet by utilizing both debt and equity vehicles that allow us to capitalize on the attractive acquisition opportunities we see. From this position of strength, we have been able to make smart, well timed investments thus far in 2014 and our pipeline remains robust. We remain optimistic about the future because of the quality and stability of our portfolio. And because we continue to see attractive opportunities attached to it. We have the scale and capacity to execute our strategy, adopt changing market dynamics and importantly deliver attractive and sustainable cash flows to our stockholders.

With that, I'll turn things back over to Mike who will walk you through the financial highlights for our first quarter of 2014. Mike?

Michael Bender

Thank you, Tom. As Tom mentioned we are very pleased with our first quarter 2014 results which reflect our commitment to delivering consistent and attractive cash flows to our shareholders. In the first quarter ended March 31, 2014, we generated revenue of $144.0 million, more than doubling the revenues reported in the first quarter of 2013. The increase reflects the benefits derived from the real estate acquisitions that we made organically as well as through the merger. Net income for the first quarter of 2014 was $14.2 million or $0.04 per share based on 369 million weighted average shares of common stock outstanding, that compared to a net loss for the first quarter of 2013 of $8.3 million or $0.05 per share based on 159 million weighted average shares of common stock outstanding. First quarter 2013 results included $10.2 million in merger related cost, $3.6 million of which were amortization charges associated with financing commitment again for the merger which we reported interest expense. Absent these charges, results from operations would have provided $1.8 million in net income for the first quarter of 2013 or $0.01 per share. Please remember that the historical shares outstanding has been adjusted by the merger exchange ratio as detailed in Spirit Realty Capital's proxy statements filed with the Securities and Exchange Commission regarding the merger.

General and administrative expense in the first quarter of 2014 increased $4 million to $11 million as compared to $7 million for the same period in 2013. Higher compensation and related benefits of $1.8 million due to primarily to the hiring of additional personnel in connection with the merger, along with $0.7 million of higher non-cash stock based compensation account for approximately half of that increase. Professional fees, technology cost and outside consulting services increased $2.3 million during 2014 primarily as result of cost incurred for compliance and in connection with the integration of the net asset required in the merger.

Property cost increased to $5 million compared to just under $1 million in the first quarter of 2013, the merger result in the acquisition of a limited numbers of single and double net leases that required the company to initially incur certain expenses which are billable and subsequently received from the tenant subject to certain caps and other limitation that provided in leases. Hence the increase is predominantly attributable to the reimbursable cost associated with acquired non-triple net leases.

Needless to say acquisition cost also increased slightly from the prior year to approximately $1.3 million.

Interest expense increased to $54.4 million in the first quarter 2014 compared to $36.4 million in the first quarter of 2013. The increase in interest expense is primarily due to the rise in total indebtedness of approximately $2 billion. The vast majority of the increase being the assumption of debt in connection with the merger.

Depreciation and amortization expenses more than doubled from the prior year reflecting the expansion of the portfolio. Finally, we recognized impairment charges of approximately $1.7 million during the first quarter 2014 associated with two vacant properties and one active property all of which are being marketed for sale.

Funds from operation or FFO for the first quarter of 2014 was $74.7, or $0.20 per share compared to $21.9 million or $0.14 per share for the prior year period.

Adjusted funds from operations or AFFO for the first quarter of 2014, totaled $74.6 million or $0.20 a share compared to $36.6 million or $0.23 per share for the first quarter of 2013.

In the first quarter of 2014, we declared cash dividend of $0.16625 per share. The first quarter 2014 dividend equates to annualized dividend of $0.6650 per share.

For the three months ended March 31, 2014, dividends declared to common shareholders of $61.6 million, represented an 83% payout ratio against funds available for distribution.

We defined leverage as debt reduce by cash and cash collateral balances divided by annualized quarterly EBITDA adjusted for one time items. As of March 31, 2014, leverage was 7.3 times which was unchanged from our leverage as of December 31, 2013.

Moving to guidance, we are pleased to reaffirm our previously announced 2014 AFFO guidance of $0.77 to $0.82 per share. Now subsequent to the end of the quarter we commenced an exchange offer for our master trust notes, issued in separate series between 2005 and 2007 with an aggregate principal outstanding of approximately $912 million. As of April 28, 2014, the required minimum amount of under the terms of the exchange agreement had been tendered. Consequently, we expect this change to occur in the second quarter.

This transaction allows us to remove end back as a controlled party and no payment guarantor, eliminates the insurance premium associated with that guaranty and extend the average term of the existing notes which will be upgraded from double D+ to A+ by Standard & Poor's.

Additionally, in mid April we filed the prospectus supplement with SEC for continuation equity offering under which an aggregate $350 million of common stock can be sold from time to time in at the market or ATM offer. During the fix trading days through and including April 23, 2014, approximately 1.6 million shared were sold were net proceeds of $16.6 million.

I would now like to turn the call over to Pete to review our operation. Pete?

Pete Mavoides

Thanks Mike. As illustrated by Mike and Tom's comments, we are very happy with our performance, and we believe our portfolio is in great shape. We continue to optimize the portfolio by growing organically; we certainly capitalize appropriate and making accretive acquisition all of that involved by delivering stable and predictable cash flows that support our dividend. Our gross investment in real estate and mortgage receivables totaled $7.4 billion in the first quarter of 2014, substantially all of which was invested in 2,287 properties that were 99% occupied. Our properties are generally leased under long-term, triple net leases, with a weighted average remaining maturity of approximately 10.2 years. As of March 31, 2014, approximately 43% of our annual rent based on annualized first quarter rental is contributed from properties under master leases and approximately 87% of our single-tenant property provide for annual rent increases.

As part of our active management and monitoring a risk, we receive monitory unit level financial statements for approximately 52% of our products. For Spirit's reporting tenants, the average unit level rent coverage for the trailing 12 month was 2.9 times. This compares favorably to 2.6 times for the same period a year ago.

As you know, we do unit level rent coverage as a valuable indicator of how essential our properties are to our tenants' operations and their ability to pay rent. We continue to make good progress and reducing our tenant and geographic concentration. Our real estate portfolio as of March 31, 2014 was diversified geographically across 48 states and among various industry types.

Texas, Illinois, Wisconsin and Georgia accounted for 12.5%, 6.5%, 5.9% and 5% of our annual rent contribution of the real estate portfolio respectively.

During the first quarter 2014, revenue from ShopKo, our largest tenant represented 14% of total revenues, down from 14.8% in the fourth quarter of 2013. During the three months ended March 31, 2014, no other tenant represented more than 5% of total revenues. As of March 31, 2014, our three largest industry types were specialty retail at 18.5%, general and discount retail at 18.2%, and quick service restaurants at 9.7%.

Moving to investments. We acquired 104 properties for a gross investment of $157 million in 12 real estate transactions in the first quarter. These investments have initial cash yield of 7.81% and with two existing and 10 tenants.

The associated leases have weighted average remaining lease term of 12.2 years. Approximately 66% of these investments volume represented direct sales transaction where we acquired properties and negotiated lease directly with parties affiliated with the tenant.

Acquisitions in the first quarter of 2014 were nearly tripled the volume in the first quarter a year ago of, these acquisition were generally consistent with our strategy of investing a small portfolio of granular 0:14:35.1, properties where there is decrease competition from large investors taking to play a significant amount of capital and for new time investors, focused on acquiring properties on a one off basis.

Our current investment pipeline is robust and we are encouraged by our ability to close the high volume in transaction at attractive terms.

Consistent with our strategy, we continue to selectively sell assets in recycle proceeds. During the first quarter of 2014, we sold three properties generating gross sales proceeds of $6.3 million. One of the properties sold was vacant; while they were empty properties were sold closed at an average cash yield of 8% and had an average remaining lease term of 6.2 years. The market for our property is very strong and we are encouraged by our ability to sell the properties that we believe no longer need a long term investment criteria.

We continue to enjoy competitively strong position in the triple net market. We believe we have the scale and capital structure we need to continue to deliver sustainable and attractive performance for our shareholders. We remained focused on growing our portfolio rationally with superior risk adjusted returns. Small and middle market tenants and the disciplined recycling of capital.

With that I'll turn it back to Tom.

Tom Nolan

Thank you, Pete. We are pleased to have started 2014 with financial strengths and flexibility and a clear strategy to continue to deliver consistent results for our stockholders. We remain focused on growing our seven plus billion dollar portfolio to normal cost acquisition to meet our investment parameters. We have taken significant positive steps with regards to our balance sheet this year. This gives us the flexibility to optimize our portfolio and capitalize on strategic opportunities to increase shareholder value if they should arise. It is worth noting since the current leadership team began managing this company, we have more than doubled the size of our portfolio. But importantly while we certainly believe that the added scale of the company is beneficial, we've also accomplished its -- well also addressing our stated goals of reducing tenant concentration, improving overall credit quality and enhancing balance sheet flexibility. I am proud to be part of this team and thank my colleagues here in Scottsdale for their effort.

As always we appreciate the support we received from our shareholders and look forward to remaining in touch with all of you as we move forward. For those that will be at ICSC or Navy, we look forward to having an opportunity to see you there.

We are now happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions).

The first question comes from the line of Mr. Vikram Malhotra of Morgan Stanley. Please proceed.

Vikram Malhotra - Morgan Stanley

Good evening, guys. Could you may be just give us rough split in terms of the cap rate between some of the transaction you did with relationship tenants versus non?

Pete Mavoides

As we said two of the transaction were with relationship tenants follow on tenants and the balance the ten were with new tenant, the range of cap rate in a quarter range from low seven to mid eight and the tenant quality and real estate quality vary within that range and there is really no -- the two is not an accurate sample set to measure against the overall average. But in general in the market a follow on transaction with the tenant had certain synergies and that can be 25 to 50 basis points and above were a normal transaction may be with that tenant.

Vikram Malhotra - Morgan Stanley

Okay, great. And then just on some of your comments that made to selective dispose asset that they don't meet, fit the criteria, are there sub segment where you feel pricing is reached a level where not that way you may feel kind of priced out but just at levels where you feel it just make more sense to may be monetize somehow it just turn -- how will you think of the disposition bucket?

Pete Mavoides

If you look at this disposition bucket, Vikram, that is really actively managing and risk within the portfolio and selling asset where we think that tenant may not a be good long term fit for our portfolio where the renewal probably may fall below our long-term average and it just make sense to sell where retail investors will pay for more than the -- we feel that assets worth today. And so we look at every asset and obviously the financing vehicle behind that asset raise into that calculus as what we sell but it's just -- it is a risk analysis of the individual assets more so from a credit perspective than from an industry perspective.

Vikram Malhotra - Morgan Stanley

Okay, great and then just one quick last one. Just in terms of the bump you saw this quarter. Can you give us some sort of sense what that was may be on the same store basis?

Michael Bender

Vikram, this is Mike. We don't --as you see we don't really give that for a couple of reasons. One of which is a lot of our leases have bumps in multiple years so you have one bump every three years so it is a little bit -- it will lumpy as far as how it is plays out. I think we said before that we tend to get between 1% and 2% and that certainly being consistent with our performance. You can tell that we don't have any much impact from the vacancy and out sourcing because we have 99% occupancy. So that's brings a whole consistently and then I think be practical and say that's the -- on go forward transaction it is at least supplying half may be triple may be north of that.

Operator

Your next question comes from the line of Mr. Andrew Saper from Sandler O’Neill. Please proceed.

Andrew Saper - Sandler O’Neill

Thank you. Can you talk about the balance from ATM issuance are still a potential source of equity to fund your acquisition activity and it should general targeted LPD ratios.

Michael Bender

Sorry, can you repeat the first part of that again?

Andrew Saper - Sandler O’Neill

It is about ATM issuance and asset sales source of liquidity to fund your acquisition activity and then general LPD ratios you are targeting.

Tom Nolan

I think I mean we look at and this is constant analysis where is the cheapest cost of capital and we are looking to optimize that. We do expect that we will be recycling capital during any given quarter. But clearly the ATM is intended to be a vehicle that we will utilize and I think we will be looking at where is the best optimization occurs between the two and I would expect we continue to use it. In terms of our balance sheet leveraging strategy, again we are looking to optimize the best position that we can have for a particular investment, if it is essentially a larger investment, it often call applied for CMBS type position, if it is a smaller more granular, we tend to basket them and utilize the AVS structure that we have more recently instituted. And the overall leverage strategy that the company has I think we have been making an effort to and slowly bring the leverage ratios down coherently and it has been our stated goal, we are buying assets in general over time meaning when they get packaged and often then we permanently finance at slightly lower leverage ratios than we currently have at the moment and so that's been kind of the approach that we have taken as we construct this portfolio.

Operator

Your next question comes from the line of Mr.

Vincent Chao of Deutsche Bank. Please proceed.

Vincent Chao - Deutsche Bank

Yes, hi, everyone. Just want to go back to your comments about the pipeline being pretty robust here. You have done over a 150 million shares this quarter, over 200 last quarters in terms of acquisition. And do you see that level -- I know you don't provide guidance per se but given the pipeline, does that feel like a reasonable amounts in the near term?

Michael Bender

Yes, I would say that the current run rate is supported by the current market conditions looking out at least through the second quarter. We obviously don't have a lot of visibility beyond that in our pipeline and deals tend to be chunky and deals also tend to be occasionally back ended in the year and fourth quarter but we should go about what we see and what the year looks like for us.

Tom Nolan

And there will be offer that-- the contrast of talking about the pipeline and not giving guidance which I realize at times it seems kind of mutually exclusive, we are obviously trying to give current commentary on where we see the market. And the reason we don't provide guidance is we simply want to be flexible in the event that we see sudden shift or even a gradual shift for the continuous shift over time and if the acquisition climate becomes less attractive, we don't want to be in a position where we provided a goal and we would feel uncomfortable making it. So I do think sometimes that it feels a little bit odd to not give guidance and yet comments on the pipeline but that's really the way we look at it and we do want to give everyone a sense of how we see the market. And right now I think we see the acquisition market as being attractive.

Vincent Chao - Deutsche Bank

Right, thanks for the clarification, appreciate that. I just also curious I mean given the strategy of sort looking at the best restored tenant just under investment grade tenant quality, just curious if you provide some color on what you see the spread of -- cap rate between sort of the actual investment grade type of tenants versus the one that are may be just a hair below, but the cash was statistic, profile look similar but for whatever reasons they don't have the rating, (inaudible) look like.

Michael Bender

Well, clearly, we would say the market for the guys just under investment grade is represented in our investment activity and they -- seven to eight as a current estimate, probably range of seven or quarter to eight, eight in quarter, I think it is important note as we disclose that 66% of what we did were direct sale leaseback, where we restructuring new middle investment as a first to acquiring existing lease and then we must transaction volume, we are seeing an investment grade state is acquiring existing lease -- who already in to CVS that was developed by developer and then resold. In terms of investment grade cap rate, we have seen under it go low -- as low as five to six caps and the center math I would probably say is around 6.5, but we don't spend a lot of time in that space, it is not where we focus our new investment dollars and so I probably not have that good falls on it.

Vincent Chao - Deutsche Bank

Got it, thanks. And then just may be on the distribution side. Can you just remind me, in terms of multi tenant assets, how many are left in the portfolio? And what's demand for those assets? I know you are again playing these several over time.

Michael Bender

Yes, and we sold the bulk of the big ones last year as you know and that portfolio was sized when we closed, call to anywhere between $500 million and $600 million and looking back we sold, I want to say close to 350, three and quarter to 350 so that we will give you a sense of what's in stuff and those properties are generally smaller by nature, a lot of those properties has -- some of those properties has financing that we are working through or tenant issues so it is about $250 million portfolio, it will be working through over the next 6 to 18 months.

Vincent Chao - Deutsche Bank

Okay so right now none of those winning properties are being marketed as you work through some of other issuance you mentioned, is that right?

Michael Bender

Yes, we are actively marketing some of them, I just wanted to say the expectation that is all not going to go- go after door here in the near term but we are clearly working on the one that are right for sale and I am looking at recycle of our capital

Operator

Your next question comes from the line of Chris Lucas of Capital One Security. Please proceed

Chris Lucas - Capital One Security

Good afternoon, guys. Just a couple of quick questions. Mike, can you remind us what's the size of the credit facility is?

Michael Bender

Sure, it is $400 million

Chris Lucas - Capital One Security

Okay, so you are at $135 million at the end of the quarter, I guess given the different tools that you have, how should we be thinking about sort of the size that you would be looking to term that out? In another words sort of what balances make you want move it into a more permanent financing? Whether it's equity or debt?

Michael Bender

Yes, we are always in the process of doing that. Certainly we have the scale up and you saw that size of our ABS offering the last time. We wouldn't necessarily always have to do it that way. But that may be one good way to think about it. And let me before I forget, the $400 million line, we actually have two lines. The large one and the smaller one, it is only $35 million. The big line had a $120 million outstanding at the end of the quarter. So just so that you got that data. But back to your question I think that you don't want to get too far north of the halfway point in theory, but you are always managing that aggregation on your credit line in light of what you are going to do in terms of the permanent financing. And gain that can as Tom pointed out that can manifest its up with an ABS offering or CMBS, typically that's done at the time of the close but ABS and then the equity financing. So we are always augment in the back that line balance and it is always just to bridge to the permanent financing

Chris Lucas - Capital One Security

Okay and then just a quick question on the lease expression schedule between last quarter and this quarter for 2014, the same number of leases are in place but the ABR went up by 14%. Is that the same pool of leases or is there some in and out that are going out, what prove sort of difference?

Michael Bender

You have to look that for you. I just don't have that in front of me, sorry about that.

Chris Lucas - Capital One Security

Okay, I got follow up with you.

Michael Bender

Will do, thanks.

Chris Lucas - Capital One Security

That's it for me, thank you.

Michael Bender

I would just say looking forward in the next 12 months as I kind of look at it, we have less than 2% of rental revenue expiring and our anticipation would be that renewal rate is consistent with our history right around 80%.

Operator

Your next question comes from the line of Mr. Rich Moore of RBC Capital Markets. Please proceed.

Rich Moore - RBC Capital Markets

Hi, good afternoon, guys. Going back to Chris' question about the line and how you might handle that, how you might person the balance, you did obviously a little bit ATM which you guys got going on that. Was there anything special about that particular issuance right there or should we little bit mental math and consider you get $60 million in six days you are going to use this thing up pretty fast, and you keep going at that rate I am assuming you are going to keep issuing equity under that or was just some reason I guess that you did the first little slow?

Michael Bender

Well, the couple things. First of all, we only did to open up this figure if you will, went out and we are able to place those offerings really in a beneficial way versus what the market was, the volume was there to be able to do it, so we took advantage of that. But I think honestly in part that was just to demonstrate that we know how to use line and get it exercised and working, I will do that based on opportunity and need, just one quarter but it worked out really well for us because it is granular, it is very efficient way to issue that equity which matches our acquisition strategy very well.

Rich Moore - RBC Capital Markets

Okay, you are not active right now I guess Mike.

Michael Bender

Well, of course not right during the earnings conference here. You would not be able to issue until after your 10-Q is filed

Rich Moore - RBC Capital Markets

I got you, okay. So no reasons to think you are going to have steady stream of that coming out necessarily.

Michael Bender

Well, probably, it works very well for us and I would not necessarily extrapolate those six days and presume that we are going to go right back in and issue at the same level sort of until we use up $350 million. So we will use it, everything is appropriate based on when we think it is opportunistic and now it matches up with the acquisition

Rich Moore - RBC Capital Markets

Okay, I got you, thank you. Then your acquisitions this quarter look like medical and other office was a big contributor, what exactly Pete is in medical and other office and what did you add I guess this time?

Pete Mavoides

We've added a couple of small surgery centers with a strong sort of local doctor groups. And we also added a large dental practice, dental offices subject to long -term mass release strong credit behind it. Those were primarily what are in our bucket.

Rich Moore - RBC Capital Markets

Okay, was there more of that with the groups that you did this with sort of there might be some small opportunity in there?

Pete Mavoides

Yes, I mean some of the groups were small and but their existing portfolio and like the credit and like the inner level coverage and some of the groups were much larger and had substantial portfolios behind that. I would be hopeful to win their business going forward as well.

Rich Moore - RBC Capital Markets

Okay, good, got you, thank you. And then you did you say you sold three assets and you have three more held for sale at the moment that you are about to sell or did I just miss the way you phrase that on your --

Pete Mavoides

Yes, you just missed it. You just missed Rich, we sold three, one vacant, two leased, given our occupancy is about 22 properties that are vacant, that are currently held for leases, so I mean there is other offices that we are exploring to sell on.

Rich Moore - RBC Capital Markets

Okay, good, thank you. And then on the exchangeable notes, I assume whenever all these done there is different interest rate on those, is that right?

Michael Bender

No, there is a point of this was to really change the rating on the note predominantly; we do have the benefit of extending the life a little bit. But otherwise the terms are identical with those in place.

Tom Nolan

The insurer who is actually was the principal reason that the notes carried a non investment grade rating the irony of having the so called insurer because they were a control party and they were not as credit worthy as the actual portfolio was. The irony was that we will basically paying a premium in order to not have our bonds received a less rating than they otherwise would have not a common occurrence and so we were able to by getting them out of the control party we save the premium going forward and the bonds were upgraded which is the benefit to the bond holders but the interest rate, the benefit was the savings on the insurance.

Rich Moore - RBC Capital Markets

Okay, good, got you and I think that's it for me, thank you, guys.

Operator

Your next question comes from the line of Mr. Cedric Lachance from Green Street Advisors. Please proceed.

Cedric Lachance - Green Street Advisors Inc

Thank you, once again the ATM, I am curious as to how you think what share price, you have the right share price to issue, obviously I can look at the last days of trading where you issued some equity but thinking about it conceptually how do you approach this? Did you think of the multiple on running, do you think about the accretion you get, obviously transaction, do you think about some form of premium tenant, how do you think about determining whether share price at which you are issuing is the right share price?

Tom Nolan

Again, I think it is a good question, Cedric, I don't think there is a magic formula. I think all of those factors weigh into it and we are obviously very focused on managing both side of our balance sheet in terms of what we buy and how we capitalize it. And we are looking at everything that we do, we provide something or gauging the financing transaction, we are obviously looking to optimize the best return that we can get on the overall transaction. And so, yes, we are looking at accretion, yes, we are looking at cost to capital, yes, we are looking at alternative. And where we are looking at a relative to where our capital structure is, but all of those clearly are fluid items and so I don't really think, it would not be appropriate and I don't want to establish a kind of benchmark that says that we are on record of saying this criteria is best and you can expect the company to be drawing on the ATM. I think I guess would rather simply say that we take all the factors in that you just suggested and then we weigh relatively merits of alternatives.

Cedric Lachance - Green Street Advisors Inc

And just throwing attention to leasing and re-leasing, could you give us some data as to what you have done over the last quarter in terms of leasing space and to the extent that you're renewing any tenants, what spreads versus or the new rents versus the rents of those tenants were paying previously?

Michael Bender

Yes, Cedric , we had in a lot and as I said looking forward we have less than 2% rolling in next 12 months and our historical renewal rate tend to be about right around 80% for instance the tenant renewals there, they have options in lease that specify what the rent and generally that far normal escalation pattern in lease we have about 1.5% at a compound annual year every three years or whatever this specifics at leases and so in general for the 80% that renew we are going to get bump that consistent with what we have during the life of the lease and then on the 20% that don't renew, the 20% that come back to us that can be across the board where in some instances we sell the property above our basis or we lease it below our basis to a new tenant, those results vary widely but in general that's kind of how we look going forward and how what we have experienced over the last 10 years and that didn't really changed in the last six months of that.

Cedric Lachance - Green Street Advisors Inc

In terms of vacant properties and what's the new leasing success rate and you really think that you are finding new tenants for vacant properties versus selling them?

Michael Bender

Again generally it is about half of that we release and half of that we sell. And we are talking about 22 properties now and really have kind of been around that level for a while but it is generally fifty, fifty.

Cedric Lachance - Green Street Advisors Inc

Okay and perhaps final question, just on ShopKo, you think about the next several years. At what percentage of your portfolio would you like to see ShopKo and you reduced to and what do you think will be the main method to get there?

Tom Nolan

Well, It has been at the time of the IPO 18 months ago where we stated -- it was stated in intention to reduce the exposure to ShopKo, at that time it was 30% and 18 months later it is down to 14% so I think we ended -- it remained our ambition that I mean Pete talked about it earlier we have no other tenant larger than 5% of the portfolio, that would be an ideal scenario for a portfolio composition. We have the opportunity to reduce the exposure to ShopKo are pretty well known, to be grow the portfolio or you reduce to ShopKo exposure. And I think that in the short term and since the IPO we have been increasing the size of the company, over that longer term we expect to have opportunities they present itself that will allow us to reduce the actual aggregate size of ShopKo and itself. There are ShopKo the trade in the market today where we don't own them all, we give the owned - a significant portion of the portfolio but they happened out of the one for the traded and there is demand for those properties with middle prices so I think we are confident over time when the situation present itself that we will have the opportunity to work both side of the equation, and numerate around and nominate but we do feel though we've got an off to a good start clearly, getting it from 30 to 14 and we remained focused on reducing it further. We have also stated and I wanted to say again as you have addressed it, we find ShopKo a very good tenant and really when we are talking about it, we are talking about it purely because of the size. But for the size of the exposure it is the tenant that were -- that we remain very happy with, that have a good credit metrics, that it is a good operator. And recently they brought it in new CEO in the last three months, they continue to invest in their portfolio, they continue to work and optimizing their internal performance. So when we talk about it, we again sometimes when we talk about and sometimes you get the distinction we are talking about it kind of weakness in terms of the tenant but it really is in an issue that relates solely through the size. And that's why we address it and that's the way they were looking at it.

Operator

Your next question comes from the line of Mr. Dan Donlan of Ladenburg Thalmann. Please proceed.

Dan Donlan - Ladenburg Thalmann

Thank you and good afternoon. Tom, since you mentioned that I was just kind of curious, I had not seen any ShopKo's trade, what are the transactions sold for? I am sure market -- it is different market to market but could you may be give a cap rate range?

Pete Mavoides

I will tackle that Dan. We have seen and it is important, we have seen them within and we certainly haven't follow them to the ultimate buyer but they have been -- I have seen with cap rate for ShopKo that the big box is ranging from 7 - 7.5 and 8.25 on various lease terms from six years on up to 15 years broadly speaking, I have also seen some of the smaller ShopKo home town concepts which are more buy size assets and they are developing some new one of those, I have seen them trade -- are less in the 7 to 7.5 range.

Dan Donlan - Ladenburg Thalmann

Okay, that's very, very helpful and just as a reminder, what are your -- what percentage -- and I am sorry to keep talking about it, I would probably won't do it again but how much of the big box versus the smaller one, I think you said it was like 15 and 85 split, just want to double check that.

Pete Mavoides

Yes, I think it will give mostly within that, we have -- the vast majority of our investment north to 85.

Dan Donlan - Ladenburg Thalmann

Okay, perfect, thank you. And then I guess question for Mike on this exchange offer, as part of this -- are you getting rid of any type of prepayment penalties or anything on this still going to be in place or what can you offer us there?

Michael Bender

The terms around change, that's important to note this exchange offer didn't result in any real prepayment penalty, it is an exchange but --

Dan Donlan - Ladenburg Thalmann

Now it is making, I was just curious if you have prepayment penalties on this and by doing this you are able to get rid of them, I am not saying you had to pay anything but I just -- so there is still probably some prepayment penalty associated with this debt.

Michael Bender

Yes, going forward there would be. If we were to choose to prepay the $900 million we would incur prepayment penalties.

Dan Donlan - Ladenburg Thalmann

Okay, how much of you are pushing up the maturities on some of these -- what is - how did you think about that relative to where you might be able to be find in somebody these -- some of these notes?

Pete Mavoides

Yes, we extended the average lease; I think it is about half the year. This exchange as Tom pointed was largely -- it was an economically positive transaction for us and picking up that happy year that was lay up but more so in removing the end back premium and so those will be the economic consideration to us in transaction. But more importantly we went through the exchange as an accommodation to our bond holders who were came into what was an investment grade bond were downgraded to sub investment grade purely by structure of the bond and so we made significant change was to allow them to get back to the benefit of that bargain and do the right thing by we invested the bondholders in a market that we tend to be which you are issuer in and so it is make that market continually available to us -- this was important for us to do. And we did have very positive economic on what we went through but -- we want to make sure was really just to fix the bonds so the bond holders and keep that market open for us as issuer.

Dan Donlan - Ladenburg Thalmann

Okay and then lastly some of your peers have used unsecured term notes is label as three years and as much as 12 years. What is your -- it seems like it might be the ready send to do that or can you may be talk about why you want to continue secure debt and not try to use unsecured type of features?

Tom Nolan

I don't think we want to suggest any kind of bias one way or the other. I think when we -- when three of us came here we had a very, very secured structure. That was the balance sheet that we had. I think it is served at time, we feel very confident about our balance sheet structure. And we will look at every tool in the toolbox say I guess try-- we had a very heavily weighted secured structure and so we are working within that structure, but I think going forward we will be utilizing whatever the best cheapest, most attractive long term, we very much like matching, we are interested in expanding maturities, matching our revenues and expenses and we will do it in the most cost effective fashion that we can and if that has as unsecured element to it then we will utilize that, if secured continuous to be the most attractive vehicle, we will utilize that. But it is in the bias one way or the other so much it is just what is the best -- what fits the best at the time that we have with portfolio of assets that we are looking to finance.

Operator

That concludes the Q&A portion of today's call. I will now turn the call over to Mr. Tom Nolan.

Tom Nolan

Well, thank you everyone for your interest in Spirit Realty Capital and for listening to our call today. And we look forward to talking to you again soon. Thank you very much.

Operator

That concludes today's call. You may now disconnect. And have a great day.

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