Spirit Realty Capital's (SRC) CEO Thomas Nolan on Q2 2014 Results - Earnings Call Transcript

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

Spirit Realty Capital (NYSE:SRC)

Q2 2014 Earnings Conference Call

August 5, 2014 5:00 p.m. ET

Executives

Michael A. Bender – Senior Vice President and Chief Financial Officer

Thomas H. Nolan Jr. – Chairman and Chief Executive Officer

Peter M. Mavoides – President and Chief Operating Officer

Analysts

Vikram Malhotra – Morgan Stanley

Juan C. Sanabria – Bank of America, Merrill Lynch

Alexander Goldfarb – Sandler O’Neill

Vincent Chao – Deutsche Bank

Rich Moore – RBC Capital Markets

Chris Lucas – Capital One Security

Daniel Donlan – Ladenburg Thalmann

Operator

Good afternoon, ladies and gentlemen and welcome to Spirit Realty Capital's Second Quarter 2014 Financial 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 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 A. Bender

Thank you, Philip, and good afternoon everyone. Thank you for joining us. Here with me today 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 then I’ll provide some color on our 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 expectation 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, August 5, 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.

Thomas H. Nolan

Thank you, Mike. And thank you everyone for joining us today. We are very pleased with our results for the second quarter and for the first half of 2014. This call will be eighth time we have discussed our results since we went public in September of 2012. Those of you who are with us at that time at the IPO may recall we said about tangible and intangible goals for the company. We said, we wanted to be one of most transparent and respected companies in the triple net sector. We also set out very real and tangible portfolio objectives.

We wanted to manage and improve our tenant concentration. We wanted to reduce leverage over time and importantly conservatively manage our debt obligations through long term laddering of maturities. Finally, we wanted to be a smart and strategic acquirer of additional assets. These remain ongoing objectives for the company, but as we sit here today on this eighth quarterly call, we hope and trust that we are gaining the confidence of the investment community that we took these IPO objective seriously and then we’re committed to their ongoing implementation.

From a capital markets perspective, this was a very significant quarter, as we raised over $1 billion through the public issuance of convertible notes and equity. We have used the net proceeds to strengthen our balance sheet, provide additional capacity for our acquisition program, and to give us financing flexibility and expanded options to manage tenant exposures in our portfolio. Also, this transaction further diversified our capital sources and mitigated the cost and risks of delivering sustainable and growing cash flow to our shareholders.

Turning to operations, once again, our results are consistent with our expectations and demonstrate the predictable and consistent financial performance we’ve established as our goal. We remain focus on our organic and disciplined growth strategy of investing in operationally essential single tenant, triple net lease property primarily through sale leaseback transactions with middle market operators. We’ve the scale and capacity to execute our strategy and to adapt to changing market dynamics.

We’re optimistic about the future because among other things, we continue to see a very attractive acquisition environment and our portfolio remains in excellent shape. As a result of our strong year-to-date performance and our expectations for the remainder of the year, we’re raising our AFFO guidance for 2014 from the initial range of $0.77 to $0.82 per share to a new range of $0.80 to $0.83 per share.

With that I’ll turn things over to Mike, who will walk you through the financial highlights for our second quarter and first half of the year. Mike?

Michael A. Bender

Thank you, Tom. As Tom mentioned, we’re very pleased with our second quarter 2014 results which reflect our commitment to delivering consistent and attractive cash flows to our shareholders. As we’ve outlined our second quarter and first half financial results in today’s press release so I won’t repeat them in detail here. Instead I’ll review the highlights of the quarter including the progress we made during the quarter in strengthening our balance sheet, enhancing our acquisition capacity and providing additional flexibility in financing and managing the portfolio. Lastly, I’ll discuss our guidance for the remainder of the year.

In the second quarter of 2014, we generated revenues of $152 million which is more than double the revenues we reported in the second quarter of 2013. The increase reflects the benefits derived from both organic real estate acquisition and the Cole II merger completed in the third quarter of 2013, as well as embedded rent growth in the portfolio. Additionally, we recognized a $2.7 million legal settlement as other income during the second quarter of 2014 following the resolution of the dispute with the tenant. Lease termination fees of $900,000 were reported in the second quarter of 2013.

The significant growth in revenue was reflected in adjusted funds from operations or AFFO. For the second quarter of 2014, AFFO totaled $79 million or $0.20 per share compared to $37 million or $0.24 per share for the second quarter of 2013. In addition to our consistent operating performance during the quarter, we raised over $1 billion in the capital markets and executed other initiatives to further improve our balance sheet including first, a secondary offering of 26.5 million shares of our common stock generating proceeds of approximately $271 million.

Second, establishing an at the market program for our common stock through which we raised almost $17 million on 1.6 million shares sold during the quarter. Thirdly, public offerings of $748 million of convertible senior notes with a weighted average life of approximately six years and a weighted average interest rate of just under 3.3%. Fourthly, we completed an exchange offer for $912 million of Spirit Master Funding net lease mortgage notes with the new notes carrying an investment grade rating of 8 plus by Standard and Poors rating services.

In connection with this exchange, we recognized finance restructuring cost of $30 million. A significant portion of these costs were incurred to terminate the third-party insurance guarantee that had been provided to bond holders. Going forward the associated insurance premium has been eliminated which equates to roughly $3 million in annual cost savings based on the 2013 premiums paid.

Fifth, we extinguished $528 million of debt in the second quarter of 2014, with a weighted average interest of 6.54% and weighted average remaining term of about 25 months. As we noted at the time of our related capital markets transactions, we incurred approximately $65 million in debt extinguishment cost primarily related to diffusing our $489 million ShopKo CMBS loan. The extinguishment of this loan will significantly reduce our interest expense because ShopKo loan had an interest rate of 6.59%. It also eliminated the refinancing risk of this loan which was scheduled to mature in 2016 and it unencumbered the related the ShopKo assets.

Finally, we made milestone progress in addressing a couple of sub-performing tenant situations which have been ongoing for some time. As a result we recognized real estate impairment charges during that totaled $27 million. Most of the projected impact to AFFO for the remainder of the year is now material, the projected impact to AFFO for the remainder of the year is not material and is incorporated in our guidance.

As Tom mentioned, we’re very pleased to raise our previously announced 2014 AFFO guidance to a range of $0.80 to $0.83 per share. We’re raising our AFFO guidance based on our performance so far this year and an expectation of continued strong acquisition activity.

Lastly, I’ll close with the discussion of our dividends. For the second quarter we were pleased to have declared cash dividends of 16.625 cents per share which equates to an annualized dividend 66.5 cents per share. For the three months ended June 30, 2014, dividends declared to common shareholders of $66.3 million represented an 84% payout ratio against funds available for distribution.

I would now like to turn the call over to Pete to review our operations, Pete?

Peter M. Mavoides

Thanks Mike. We continue to focus our efforts on growing the portfolio organically, recycling capital accretively and managing our assets aggressively. All with the goal of delivering stable and predictable cash flows that secured our dividend.

In the second quarter of 2014, our gross investment in real estate and related loans totaled $7.5 billion, substantially all of which was invested in 2,369 properties that were 99% occupied. At quarter’s end we had only 29 properties representing a total gross investment of $65 million and 542,000 square feet that were available for lease.

Our properties are generally leased under long term triple net leases with the weighted average remaining maturity of approximately 10.1 years. As of June 30, 2014, approximately 43% of our annual defined as annualized second quarter rental revenue is contributed from properties under master leases and approximately 87% of our single tenant properties provide for annual rent increases. As part of our active management and monitoring of risk we regularly receive unit level financial statements for approximately 53% of our tenants.

For Spirit’s reporting tenants, the average unit level rent coverage for the trailing 12 months was 2.82 times. This compares favorably to 2.66 times for the same period a year ago. As you know, we view unit level rent coverage as a valuable indicator of how essential our properties are to our tenants’ operations and their ability to pay our rent. We continue to make good progress in increasing our tenant and geographic diversification. As Mike outlined, our capital market activities during the second quarter have provided us with added flexibility on this front.

During the second quarter 2014, ShopKo, our largest tenant represented 13.8% of total revenues. We continue to focus on various strategies including a potential joint venture or other strategic entity level transaction and individual property and sub-portfolio sales to manage this concentration downward. No other tenant represented more than 5% of our total revenue in second quarter of 2014. As of June 30, 2014 our three largest industry types were general merchandise at 16.2%, casual dining restaurants at 9% and quick serve restaurants at 7.7%.

Moving to new investments: We acquired 86 properties in 24 separate real estate transactions for a total gross investment of $207 million in the second quarter of 2014, one transaction introduced Alaska to our geographic diversification. These investments had initial cash yield of 7.72%, 85% of them were direct sale leasebacks and 37% of the amount invested was with existing tenants. On an average the associated leases have a remaining term of 18 years.

For the first six months of the year, we have invested $365 million in 200 new properties at an initial cash yield of 7.76%. Of these investments, 71% were direct sale leasebacks and 27% were with existing tenants. These investments are clearly representative of our strategy of investing in small portfolios of granular properties where there is decreased competition from large investors seeking to deploy significant amount of capital and from retail investors’ focus on acquiring properties on one-off basis.

Our investment pipeline is robust and we are encouraged by our continued ability to source and close a high volume of transactions at attractive terms. Consistent with our strategy, we continue to selectively sell assets and recycle the proceeds. During the second quarter 2014, we sold four vacant properties and one outparcels generating gross sales proceeds of $9 million. The market for single tenant net lease properties remains very strong and we continue to work to proactively manage our portfolio.

We are very pleased with our strong position in the triple net lease market. We have the scale and capital structure we need to continue to deliver sustainable and attractive performance for our shareholders. We remain focused on growing our portfolio rationally with compelling risk adjusted returns, with small and middle market tenants and a disciplined recycling of capital.

With that I will turn it back to Tom.

Thomas H. Nolan

Thank you, Pete. We are proud to have had another strong quarter of acquisitions and we have delivered on our strategy of consistent performance. We remain focused on growing our seven plus billion dollar portfolio through normal cost acquisitions that meet our investment parameters. We are accomplishing our related goals of increasing tenant diversity, improving overall credit quality and enhancing balance sheet flexibility. I am proud to be part of this team and I thank my colleagues here in Scott Field for their efforts. As always, we appreciate the support we receive from our shareholders and look forward to remain in touch with all of you as we move forward.

We are now happy to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Vikram Malhotra from Morgan Stanley.

Vikram Malhotra – Morgan Stanley

I have a quick question on the pipeline you are seeing Pete, just in terms of the mix of assets, kind of range of the cap rates you are seeing and just your expectation in terms of the first half being kind of a good or the quarterly number being a good run rate?

Peter M. Mavoides

The pipeline remains robust and we had a good quarter. I don't know that the third quarter will be as strong and traditionally the fourth quarter in this space is typically pretty strong. So, we don't have great visibility beyond that but we are pretty happy with what we have done and we see a full pipeline, but I think this was a large quarter for us. In terms of range of cap rates, we are seeing deals and closing deals broadly across the sevens, in the general market we are seeing much wider range, but in general we were typically in the seven range and obviously averaging out for the year so far at 775.

Vikram Malhotra – Morgan Stanley

Okay. And then, with regard to ShopKo, are you in a position now to kind of selectively start reducing that or do you still maybe need to work through the Master Lease, can you just kind of layout some of the steps before you can actually start getting or reducing the exposure there?

Peter M. Mavoides

Yes Vikram, I think before we layout any steps, we have to take a plan and we are currently evaluating several alternatives as we outlined in the script and until we really finalize which path we are going to go down, it would be premature to really start laying out steps. Clearly, when we raise the capital to retire that debt we thought there were a number of opportunities for us to work that concentration down and we remain optimistic that we will be able to do so and we are working hard at it.

Vikram Malhotra – Morgan Stanley

Okay. Thanks guys.

Operator

Alright. Our next question comes from the line of Juan C. Sanabria from Bank of America. Please proceed.

Juan C. Sanabria – Bank of America, Merrill Lynch

Hi, good afternoon. Just a quick question, does guidance include any further acquisitions in the second half?

Peter M. Mavoides

Guidance does include what we are looking at for second half of the year. Yes.

Juan C. Sanabria – Bank of America, Merrill Lynch

Is there any, can you quantify that the range of –?

Thomas H. Nolan

No, I mean, the historical perspective which really hasn’t changed is that we’re very happy to provide guidance given the predictability of the company's performance. But, we are reluctant for really what we believe to be rational reasons not to put a target acquisition number on the table simply because that's not the way we look at the business. We look at the business as not having a target for what to acquire every year, but rather do we like the market, do we think there are attractive acquisition opportunities if there are and we like them that we want to aggressively pursue them. And so, for that reason, we have historically not, continued to not provide guidance. Obviously, we have a business plan and a budget, but also given the predictability of the cash flow I think you can recognize that even if we – even if the acquisition performance was not as robust in the second half as it was in the first half, again I am not commenting whether will or wouldn’t be, but if it was, given the predictability of the cash flows and the large enterprise that we already have, we would not have any challenges with the guidance number that we have provided.

Juan C. Sanabria – Bank of America, Merrill Lynch

That's helpful. Thank you. And it looks like you acquired some office assets during the quarter. Can you speak to any sort of cap rate differentials there or what kind of assets you are looking at and where you see that going as a percentage of the portfolio?

Peter M. Mavoides

Yes, in the quarter we were 86% retail and the balance was some office as we discussed on prior calls, we look at office much through the same operationally essential mantra that we look at. Now, the retail real estate and the office that we have acquired most recently has been kind of medical office where there is a customer service aspect to it and tenants drive their profits from those locations, so that's what we see there. Looking forward that number may vary from quarter-to-quarter depending upon the mix of deals that we do, but from a broad perspective, I don't expect our retail exposure to go down materially.

Juan C. Sanabria – Bank of America, Merrill Lynch

And are those assets those medical ops building assets on campus are affiliated with hospitals?

Peter M. Mavoides

Some are, some are more local doctor practice office or dentist office or things like that.

Juan C. Sanabria – Bank of America, Merrill Lynch

Okay, great. And with ShopKo, how should we be thinking about targets in terms of percent of rents and timing of what you think you will be able to do. I know it's still early days, but should we be thinking about like a ten month of 10% of rents over the next year or do you hope to be sort of better than that? Just any sort of parameters would be helpful.

Peter M. Mavoides

Yes, we are really reluctant much to Tom’s point on the acquisition guidance to put out numbers that we need to perform to. I think, we’ve articulated in the past ideally, we wouldn't have a tenant over 10% and that we’re working to get ShopKo down and time will tell how long that takes, but we are working hard at it.

Thomas H. Nolan

We have taken it from 30 of the IPO to less than 1014. So, we are, from our perspective we are then striking to essence of the objective, however long that takes us. All we take to put timeframe zone simply because it put the bulls eye, actually negotiating with other parties. But, I think we feel good about our ability to execute on the strategy that was one of the key rationales for refinancing the debt and I think where our expectation is such that as we move forward we will be announcing activity around the ShopKo credit.

Juan C. Sanabria – Bank of America, Merrill Lynch

Thanks.

Operator

Alright. Our next question comes from the line of Alexander Goldfarb from Sandler O’Neill. Please proceed.

Alexander Goldfarb – Sandler O’Neill

Hey good afternoon out there. Hey how are you? I guess maybe we will just do some quick rapid fire questions, just so I make sure I heard things correctly. I understand that you guys don't provide acquisition guidance, but you do have acquisitions in your FFO guidance, correct?

Peter M. Mavoides

Yes, in AFFO guidance Alex, but as you might guess since we are sitting here in August the number is not terribly sensitive to what gets done in the balance of the year in terms of the contribution of any acquisition.

Alexander Goldfarb – Sandler O’Neill

Okay, and so by the same token you presumably have some APM guidance or APM usage in your numbers but you are not, have you, are you disclosing that or no?

Peter M. Mavoides

No. And maybe one answer again as you’ll see at the balance sheet because of the capital market transaction, we did have the revolver completely on cap and I think $120 million sitting on the balance sheet. So that may give you some indication what we might do in the immediate term here, but we didn’t disclose what we might do later in the year.

Alexander Goldfarb – Sandler O’Neill

Okay. And then, the two way that comparison that was for all of your top ten tenants?

Peter M. Mavoides

Alex, as for the entire reporting portfolio.

Alexander Goldfarb – Sandler O’Neill

Okay, great. And then just, let me just understand, on the first quarter call right before the equity raise, you guys alluded to and then subsequent when you did the equity raise you spoke about it, but you alluded to the whole benefit of the transaction and the ability to prepay the ShopKo debt, breakup the master leases in the smaller portfolios and sell those portfolios off. Now you are talking about a bunch of different options possibly JV, possibly still selling it off or a lot of different options here. Is this the – have you gotten a lot of reversing queries, is that that what you originally thought you wanted to do, the market has changed in the interim or is it that what you thought you wanted to do as you have now gone down the path to pursue it, you suddenly discovered a lot more options?

Peter M. Mavoides

We always – we knew the options were out there. Paying off the debt has triggered significant reversing queries and we continue to explore the options and evaluate the economic impacts of the various alternatives.

Alexander Goldfarb – Sandler O’Neill

Okay and just finally, Tom to your point about transparency, if you did a JV how does adding a JV to the Spirit platform, how does that interact as far as transparency, does that help or does that hurt make it less transparent just because you got the complexity of joint ventures?

Thomas H. Nolan

Well, I guess, I am not of the view that simply because you have JV that it lacks transparency. I think there is – I would agree there is some historical precedent in the industry where joint ventures perhaps aren’t as well set out as solely on properties. But, I’m convinced that or I am quite confident I should say that in the event that the track that we took was some sort of JV on this investment that would not be a diminishment of transparency relating to the ShopKo transaction. I think, we would make sure that that didn’t happen again. I am not suggesting that the JV will be the approach, but it's certainly one of the things on the table and I think we would archive to meet the standard of somebody looking at and saying they knew more about it then they knew before.

Alexander Goldfarb – Sandler O’Neill

Okay. That’s great lesson. Thank you.

Thomas H. Nolan

You are welcome.

Operator

Alright, your next question comes from the line of Vincent Chao from Deutsche Bank, please proceed.

Vincent Chao – Deutsche Bank

Hey everyone. I just had a quick question. I know you are also still working on some multi-tenant asset dispositions post Cole acquisition. Just curious if you can give us an update on how things are progressing there and if there is any, I think, baked into the outlook on the multi-tenant disposition side?

Peter M. Mavoides

Yes Vincent, we continue to work on that and we continue to have traction in selling those assets and any sort of anticipated sale is baked into the guidance.

Thomas H. Nolan

From an economic standpoint, the multi-tenant is pretty much economically neutral. The rationale for disposing of the property isn’t so much economic as it is where we are really trying to run a very simple efficient triple net leased company in the long-term. And so, from that standpoint, these assets are being sold when they are sold at prices that are generally consistent without the capital is being redeployed. So, it really doesn’t have that significant and economic impact, but we do continue to look at it from a portfolio management efficiency, administrative cost point of view.

Vincent Chao – Deutsche Bank

Okay, thanks. And then, just going back to the acquisition side of things, just in general of the overall markets, I think Peter you’re saying deals are sort of in a 7% range, you are averaging about 7.75% I think year-to-date. Should we gauge from those comments that cap rates are still sort of compressing here and I guess within the portfolio pipeline of deals that you are looking at, is there any particular geographies or any particular property types that there are more or less trackers here at this point, I mean outside of retail being your main focus obviously?

Peter M. Mavoides

Yes, I think from a investment mix perspective, we like the industries we are in, we like the markets we are in and I would anticipate future acquisition to look a lot like the portfolio we have constructed. From a cap rate perspective we are seeing slight downward pressure in cap rates. You can see it slightly in our reported numbers, we are buying in a broad range from 7 flat to 8 plus and where we end up in any given quarter really depends upon the mix of deals that we execute in that quarter. But, I think that we have done in the past is a good indicator of what we anticipate going forward.

Vincent Chao – Deutsche Bank

Okay. And just maybe one last question just on the overall demand for single tenant leases. I think it's sort of 1.5%, 2% of the average bump that you guys have in place. I am just curious if you have seen any ability to maybe increase the rent bump on more recent deals?

Peter M. Mavoides

Every deal is unique and every seller has a unique motivation and we look at the entire economic package and so to the extent that we are getting greater growth where we maybe going in at a lower cap rate, I mean giving it up on the front end, and it really again just depends on the mix of deals and sells that quarter obviously reporting direct sale leasebacks in the 75% range plus or minus, those are deals where we are sitting down and negotiating a fresh lease and that lease is being cut at closing and it's negotiation to get growth versus what we get day one and we always try to maximize the total economic package that we are looking at.

Vincent Chao – Deutsche Bank

Okay. I guess I am reading from that just on a total economic pack not a significant change in the environment?

Peter M. Mavoides

No and we could go, we could report a 2% growth rate inherent and all the leases that we structure in the quarter, but going in at a 25 basis point lower cap rate and the economics would be the same.

Vincent Chao – Deutsche Bank

Okay. Thank guys.

Peter M. Mavoides

Yes, thanks.

Operator

Our next question comes from line of Rich Moore from RBC Capital Markets. Please proceed.

Rich Moore – RBC Capital Markets

Hey guys, good afternoon. The first thing is the impairment again, what was that exactly?

Peter M. Mavoides

Predominantly one tenant, Rich and that’s – this is a manufacturing company that we have had for a while and most of the economics have been dealt with previously, but as you know the accounting for the impairment tends to be lumpy, and it tends to come at a point at which you decide to dispose of the assets so that’s where kind of get into that juncture and that’s the reason for the timing.

Thomas H. Nolan

And this was an asset just for us some background here. This was a company, they have been in the envelope maker, which is not the most favorable of industries at the moment for you, avid e-mailers. But, this was the company that had restructured a year's ago prior actually prior to the Spirit IPO, they had months for their first chapter 11 and the company at that time restructured the lease, not to the point where it had an impairment but point where much of the economics that actually been taken out at that time and the company basically at that time negotiated kind of option value pricing going forward in the event that the fortunes of this particular company improved which again given the industry they didn’t, which is why we specifically made the comment in our writing that the economic impact of this change was something we saw coming first of all. And second, the reason it was, we described it as immaterial is that most of the economics again of this particular investment were taken out before this company even went through the IPO process.

Rich Moore – RBC Capital Markets

Okay. I got it. Thank you.

Thomas H. Nolan

So, the option value fundamentally disappeared when the company went chapter 11 for the second timer. For those of us who have chapter 11 experience, it was referred to as 22. So, they were unfortunately in the midst of the 22.

Rich Moore – RBC Capital Markets

Right Tom, thank you I got it. And then, so is that the $41 million or part of the $41 million that’s in the assets held for sale?

Peter M. Mavoides

I don't think that any defeasance is in the assets held for sale. Those are different properties and that subset of that vacant 29 properties that are properties that we anticipate selling at some point.

Rich Moore – RBC Capital Markets

Okay. So, you are looking that group that you have held for sale though I assume you are pretty actively trying to get rid of it, is that right?

Peter M. Mavoides

Sure, yes. Those would typically be things that we expect in some form or another to dispose off in the next 12 months.

Rich Moore – RBC Capital Markets

Okay, great, got you. Then, if I could ask you question on the possibility of a JV, I am curious are you guys just doing that with regard to the ShopKo or is that something that you might pick an institutional partner and do something larger or how are you thinking about that I guess?

Thomas H. Nolan

I think at this point, the reference is purely to ShopKo.

Rich Moore – RBC Capital Markets

Okay, got you. And then, did you just get rid of the one CMBS is that the only tranche, the one do in June that was unwound with the transaction you did this quarter. So, all the other ones that are there are still I assume in place, right?

Peter M. Mavoides

Well, there if I am fine, the ShopKo CMBS, the largest ShopKo CMBS was roughly defeasance and that was most $500 million. The other one is, there is one more which is significantly smaller. And then, just to complete the answer, in the defeasance cost there, we retired also some under non-ShopKo related debt.

Rich Moore – RBC Capital Markets

Okay. And but the ones in 17 with 84 number and all that those are still there, right?

Peter M. Mavoides

Yes.

Rich Moore – RBC Capital Markets

Okay, alright, good and that's great. Thank you guys, I appreciate it.

Thomas H. Nolan

Thanks Rich.

Operator

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

Chris Lucas – Capital One Security

Good afternoon guys. Really just a couple of housekeeping questions if I could. Going back to the rent coverage number, I guess, I was just trying to understand whether or not the median would be much different from the main number that you reported?

Peter M. Mavoides

No I wouldn’t, it's pretty much a normal distribution, Chris.

Chris Lucas – Capital One Security

Okay. And then, what percentage of the portfolio does that, you talked about paying the reporting portion of the portfolio. What does that represent from a NOI or revenue perspective?

Peter M. Mavoides

I would imagine it's pretty pro rata, the number I gave was 53% and that was based upon investment, imagine it will be similar to the revenue number. I just don't have a cut like that at this point.

Chris Lucas – Capital One Security

Okay. Actually that covers it for me. Thank you, guys.

Thomas H. Nolan

Thanks.

Operator

And our next question comes from the line of Daniel Donlan from Ladenburg Thalmann. Please proceed.

Daniel Donlan – Ladenburg Thalmann

Thank you, good afternoon. I just wanted to go back to the guidance real quick given that you have done $0.41 in AFFO to get $0.80 what seem like you really wouldn't acquire anything and/or potentially sell quite a few assets given the interest cost savings. So, I guess what kind of is, I know you are not giving specifics around it, but I mean, is $0.80 or so really, really conservative number or does it assume basically no acquisitions?

Thomas H. Nolan

I know you appreciate it. You can't dissect and discuss guidance as to whether it’s aggressive or what components. It is what it is from the standpoint. I would add back on my comments I guess earlier, which suggested that in the event that the company acquired nothing, going forward, I think was the reference I made that we have the capacity to be comfortable that we would be able to reform within the guidance that we had outstanding, which again I think we find consistent with not having a guidance number for acquisitions. So, I guess that’s one perspective and again the second is we are sitting in August meeting, we only have effectively five months left in the year and acquisitions don't that materially change the guidance for ’14, clearly it would have an impact for ’15.

Daniel Donlan – Ladenburg Thalmann

Okay. And then, as far as how we should think about future funding of acquisitions from a debt perspective, is the – what's the most attractive form of capital you think that's out there, I mean, some of the peers have used unsecured term loans that are pre-payable at no cost. What type of, is this something you guys are exploring or how should we think about future funding as CMBS still an alternative, anything there would be helpful?

Thomas H. Nolan

Sure, I will give you probably a stock answer that perhaps expect, but we spend a lot of time working with our colleagues around the country at the various banks and financing institutions. We would like to think we are staying on top of various alternatives for capital debt equity, whatever it happens to be. And I think the key is to be able to identify the most attractive component when the time comes. If we were sitting here a year ago and (inaudible) you are going to do convertible debt offering and not sure that necessarily would have been on our radar screen. But when the time came and we looked at the markets and we looked at the alternatives and we looked at term loan stand and we looked at every possible alternative and we settled on the one we settled on.

So, I think it's really incumbent upon us to find the cheapest and the most flexible financing we can find that meets our kinds of laddered maturity, well matched balance sheet approach that really is one of the cornerstones of the way that we want to manage the company.

Daniel Donlan – Ladenburg Thalmann

Okay. And then, just lastly, how much CapEx have you guys spent through the second quarter year-to-date?

Peter M. Mavoides

I think that number is about less than a million dollars.

Daniel Donlan – Ladenburg Thalmann

Okay.

Peter M. Mavoides

Well actually maybe $1.1million that’s for six months during the year.

Daniel Donlan – Ladenburg Thalmann

Okay, alright that's it from me, thank you.

Thomas H. Nolan

Thanks.

Operator

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

Thomas H. Nolan

Great, folks. Thank you once again for your interest in Spirit Realty Capital and for listening to our call today. We look forward to speaking with you all again soon. Thank you. Good night.

Operator

That concludes today's call, you may all now disconnect. Have a good day.

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