Spirit Realty Capital's (SRC) CEO Tom Nolan on Q2 2016 Results - Earnings Call Transcript

| About: Spirit Realty (SRC)

Spirit Realty Capital, Inc. (NYSE:SRC)

Q2 2016 Earnings Conference Call

August 4, 2016 11:00 am ET

Executives

Tom Nolan - Chairman & CEO

Phil Joseph - EVP & CFO

Mark Manheimer - EVP, Asset Management

Boyd Messmann - EVP, Chief Acquisitions Officer

Analysts

Alexander Goldfarb - Sandler O' Neill

Vikram Malhotra - Morgan Stanley

Tyler Grant - Green Street Advisors

Joshua Dennerlein - Bank of America/Merrill Lynch

Dan Donla - Ladenburg Thalmann

Collin Mings - Raymond James

Unidentified Company Representative

Thank you, operator. Hosting the call today are Mr. Tom Nolan, Chairman and Chief Executive Officer and Mr. Phil Joseph, Chief Financial Officer.

During the course of this call, the Company will make forward-looking statements. These forward-looking statements are based on the beliefs or assumptions made by and information currently available to us. The Company's actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or our ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will prove to be incorrect.

Therefore our actual future results can be expected to differ from expectations and those differences may be immaterial. For a more detailed description of some of the potential risks, please refer to our SEC filings which can be found in the Investor Relations section of the website.

All the information presented on this call is current as of today August 4, 2016. Spirit does not intend and undertakes no duty to update forward-looking statements unless required by law. In addition, reconciliation to non-GAAP financial measures presented on this call, such as funds from operations and invested funds from operations may be found on the Company's quarterly report which can be obtained on the Investor Relations section of our website.

During our prepared remarks today management will provide a review of our operating results, an update on our current business activities and a review of our quarterly financial results. Following the prepared remarks, the team will be available to take your questions.

With that, I would like to turn the call over to Mr. Tom Nolan. Tom?

Tom Nolan

Good morning, thanks everyone for joining our second quarter 2016 earnings call. Today, I'll start with an overview of Spirit and where we see the company positioned today. Then I will briefly review our financial performance and summarize our recent acquisition and disposition activity. I'll then turn the call over to Phil, who will discuss our financial results in more detail. After that we will open the call for your questions. Also joining us today is Mark Manheimer, our Executive Vice President of Asset Management and Boyd Messmann, our Chief Acquisitions Officer.

2016 has been an exciting and transformative year for Spirit in virtually every way. In the past few quarters, we have truly taken this company to a different level as we have successfully executed on the key strategic goals that we have shared with you in the past. These initiatives includes materially improving our revenue diversification profile, improving our balance sheet metrics and flexibility and attracting and retaining best-in-class executive talents.

It is been over three years since we set out on this course and we couldn't have gotten to this point without a lot of focus and commitment on the part of the entire Spirit team. Our headquarters move is substantially complete. I appreciate the confidence of our team members who have relocated to Dallas. I welcome our new staff and I want to add a special thank you to those Spirit employees, who for whatever reason were unable to make the move with us, yet work tirelessly and selflessly to assure a seamless and efficient transition. I thank you all.

The net lease sector is poised for tremendous growth and opportunity over the next three to five years and as I sit here today. I believe that Spirit is positioned with the right team, the right portfolio and the right balance sheet to drive strong income growth and value creation for our shareholders in the quarters and years to come.

Let me review some of our accomplishments thus far in 2016. Our move to Dallas was an investment that we believe would open up doors to a wide variety of talent. And while we're just getting ourselves established, we are very pleased with where we stand today. In June, we hired Boyd Messmann, as Executive Vice President and Chief Acquisitions Officer. Boyd is a talented executive with over 20 years of experience in the triple net industry and he's hard at work in his new role.

And as we announced last week, we have hired Jackson Hsieh as President and Chief Operating Officer. He will have over responsibility for new investments, credit underwriting and portfolio and asset management. Jackson was most recently a Vice Chairman of Investment Banking at Morgan Stanley, where he served as Senior Lead Banker. I've known Jackson personally and worked with him professionally for many years over my career in various capacities. Jackson shares my vision for this company. He shares my enthusiasm to establish Spirit as an industry leader. Jackson's skill set is a perfect complement to the talent we already have and I look forward to working closely with him, as we continue to grow Spirit for many years to come.

We have also invested in building a balance sheet that can support our growth initiatives through an economic environment and provide access to the widest availability of capital options at the most advantageous pricing. In the second quarter, we successfully completed a well-received follow-on equity offering and received investment grade credit rating from S&P and Fitch.

These initiatives do come with a minor short-term earnings dilution, but at the end of the second quarter. Our adjusted debt to adjusted EBITDA ratio stood at 6.0 times and our unencumbered asset base was $4.2 billion. These are truly transformative metrics, a material improvement from a year ago and a substantial upgrade from where this company was at the time of its initial public offering.

With this balance sheet work behind us and our executive team in place, we are positioned to grow through disciplined accretive acquisitions and continue to build a portfolio management.

Now turning to our second quarter results, last night we reported AFFO per diluted share of $0.22. Our revenue grew by 2.3% year-over-year. At June 30, our portfolio was 98.3% occupied and had an average remaining lease term of 10.7 years. 45% of our normalized rental revenues were derived from Master Leases and 89% of our single tenant leases have built in rent increases.

Our portfolio as measured by most any metric is in better shape than it has ever been and position to continue to provide reliable, predictable income. For the trailing 12 months, our unit level rent coverage was 3.0 times for those tenants that report.

The long-term nature of our leases means that we do not have significant leasing activity each quarter. However in the second quarter, we did have nine leases come up for renewal. We renew 100% of these leases. We have 33 lease expirations in the remainder of 2016, which represents 1.9% of our normalized rental revenue.

With regard to our investment activity this quarter, we continue to look for opportunities to grow our portfolio and create value through prudent acquisitions while pruning our portfolio through targeted dispositions. In the second quarter, we purchased $165 million of high quality targeted assets and completed $138.2 million of dispositions. The $165 million of acquisitions had a weighted average initial cash yield of 7.6% and a weighted average lease term approximately 15.9 years with average annual escalators of 1.7%.

And keeping with our stated strategy, approximately 66% were through sale-leaseback transaction. Roughly 61% had Master Lease structures and most of the new transaction provide unit level reporting.

A $138 million of assets we disposed off during the quarter included $35.3 million of properties conveyed to lenders. Off the remaining approximately $103 million of sold assets, the weighted average cap rate for occupied properties was 6.93%. One of these sales was a Haggen store that was returned to us at the time of rejection of their Master Lease last year. We have now sold three Haggen stores, total gross proceeds of $20.8 million. The demand for the remaining stores in the Haggen portfolio remains robust and we are confident we will achieve or exceed the aggregate proceeds target that we have previously disclosed.

We also sold five Shopko locations and our revenue concentration from this tenant is now down 8.2%. We remained on track for achieving our long-term objective of having no tenants represent more than 5% of our revenue. As I've noted in the past, we view aggressive portfolio management as a key contributor to long-term financial performance. And we continue to recycle capital efficiently and accretively, given that over the last year we have consistently sold in the mid-to-high 6% cap rate range and bought in the mid-to-high 7% cap rate range.

We are also very optimistic about the current opportunities we see in the acquisition market and have a large number of transactions under various stages of review. While as you would expect our acquisition pace will vary it from period-to-period. We are off to a strong start this quarter. As I report today, we have already closed on $14.53 million of new acquisitions in the first five weeks of the third quarter.

With that, I'll turn the call over to Phil. Who will review our second quarter financial highlights summarize our balance sheet and liquidity metrics and discuss our guidance for the year. Phil?

Phil Joseph

Thanks, Tom. We are very pleased with the progress made during the second quarter. We continue to position our balance sheet to improve our capital structure efficiency, which we believe will drive shareholder value and improve our cost of and access to capital.

In the second quarter, we continued to be a disciplined allocator of capital while maintaining a vigilant focus on balance sheet management. During the second quarter, we raised $388 million in net equity proceeds which were primarily used to repay approximately $391 million of high coupon secured debt. As Tom mentioned, we were net acquirer of assets in the second quarter and we continue to be proactive on the capital recycling front.

During the quarter, we acquired $165 million of assets at a 7.6% cap rate and we disposed $138 million of assets including assets conveyed to lender under defaulted loans at a 6.38% cap rate. Heading into the second half of the year, we will continue to focus on accretive liability management and acquisition activities, while improving our access to the institutional capital markets.

Last evening we reported AFFO of $0.22 per diluted share for the second quarter including adjustments for restructuring charges and other expenses associated with our corporate relocation. This performance represents an increase of 1.7% compared to the second quarter of 2015. The moderate increase is primarily attributable to our disciplined capital allocation focus during the year-over-year period and the timing of the full deployment of equity raise during this period.

Our prudent balance sheet management over the last year well positions us to continue to make progress on lowering our cost of capital as well as enabling us to accretively grow and strengthen the portfolio. Total revenues for the second quarter of 2016 increased approximately 2.3% to $171.7 million compared to $167.9 million in the second quarter of 2015.

Primary drivers were moderate net acquisition activity during the year-over-year period and fee related other income, which was offset by lost rent related to lease restructurings and tenant credit loss. Same store rent growth for the quarter when compared to the prior year second quarter increased 0.5%. Rent growth continued to be negatively impacted by a legacy theatre chain investment as well as bankruptcy filing of Ryan Buffets.

On the expense front, excluding restructuring charges and other expenses associated with our corporate relocation and swap termination payments included in G&A. Total expenses in the second quarter of 2016 decreased to $144.7 million from $173.4 million in the same period of 2015. Prior to the aforementioned adjustments total expenses decreased 14% or $24 million from the prior year second quarter.

Driving this improvement was lower non-cash impairments and lower cash interest expense, which were offset by corporate relocation and restructuring charges as well as swap on wind cost. With respect to G&A including corporate relocation charges, but excluding interest rate swap termination payments. It represented 7.1% of total revenues for the quarter in line with our target of 7%.

We continue to make great progress on lowering our debt cost to capital. Cash interest expense decreased by approximately 14% or $7.4 million compared to the second quarter of 2015, primarily as a result of the repayment and refinance of high coupon CMBS debt. Our weighted average cash interest rate improved by approximately 47 basis points to 4.45% from the prior second quarter principally due to our proactive liability management activities.

In terms of our financial standing, our leverage and cash flow metrics notably improved. Our second quarter reported leverage at 6 times improved by 0.7 turns from the prior second quarter period. As I mentioned on our prior earnings call, we would expect leverage to moderate over the course of the year and are maintaining our year-end leverage target at or below 6.5 times.

Furthermore, our fixed charge coverage ratio is strong at 3.3 times coverage. With respect to access to capital, we continue on our path of positioning the balance sheet to strategically access capital more efficiently. Our unencumbered asset base continues to grow which significantly enhances our financial flexibility. At the end of the second quarter, our unencumbered asset base stood at $4.2 billion or over 50% of our real estate investments, an increase of $1.3 billion from the prior second quarter.

Our investment grade standing and near-term secured debt maturities provide us the opportunity to further solidify, our financial standing. On a liability management front, during the second quarter we extinguished approximately $391 million of high coupon secured debt with a weighted average coupon rate of 6.16%. Included in this debt retirement is approximately $34.5 million of defaulted loans that transition to deed in lieu.

Total cost related to this early retirement of debt approximated $10 million or 2.6% of the principal balance of the debt that was retired. Currently, our remaining 2016 debt maturities excluding approximately $3 million to $6 million of defaulted loans transitioning debt forbearance totals only $6.4 million.

Furthermore, our remaining 2017 debt maturities currently approximate $502 million and have a weighted average interest rate of 5.8%. Our near-term debt maturities through 2017 represent a very tangible opportunity to significantly improve our cost of and access to capital. We expect to proactively address these maturities in an accretive manner during the remainder of the year with our strong corporate liquidity and access of the capital markets.

Our strong corporate liquidity positions us well for prudent and accretive growth. As of June 30, we had nothing drawn on our $8 million unsecured line of credit. Currently we have approximately $18 million in unrestricted cash and cash equivalents on our balance sheet and approximately $643 million available onto our line of credit.

In addition, we have approximately $20 million of liquidity available in our 1031 Exchange and Master Trust Notes release accounts that are available to fund real estate investments. During the quarter, we declared dividends to common stock holders of $83.9 million which represented an AFFO payout ratio of 81% compared to $75 million representing an AFFO payout of 79% in the comparable period a year ago.

In conclusion, during the quarter we made significant progress improving our capital structure and our access to institutional capital. As I stated last quarter, we are committed to maintain our investment discipline to drive prudent growth over the long-term, while we are encouraged with the quality and size of our near term investment pipeline. We did experience some earnings drag during the quarter related to the timing of targeted follow-on equity proceeds into new investments and high coupon debt repayment.

With that in mind, based on our near term investment pipeline our proactive capital recycling efforts year-to-date, prudential [ph] additional liability management activities and lastly excluding any future paying and settlement proceeds that maybe received during the current fiscal year. We are adjusting our 2016 AFFO guidance range from $0.88 to $0.91 to $0.87 to $0.89 per common share.

With that, we'll be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] we have question from Alexander Goldfarb from Sandler O' Neill. Please go ahead.

Alexander Goldfarb

Just first Phil on the guidance, just to clarify. So Haggen is out but what is in guidance as far as the proactive balance sheet management that you outlined.

Phil Joseph

Alex, the guidance that we originally gave everybody was purely organic in nature and that was getting to the midpoint of eight nine and half cents. So when you look at the drivers in terms of you know a range and the upside to the range, liability management was one of those things. So that's a driver to the upside. I mean, I can walk you through how we got to the $0.88 number, if you want me to but liability management it's just an incremental driver.

Alexander Goldfarb

Okay and then as far as G&A goes does guidance including Jackson and whatever other changes hiring you may have or are those incremental?

Phil Joseph

No, that is - our current guidance does include some incremental G&A's related to Jackson but again on the margin that's in terms of run rate G&A that's not going to be a significant impact. We still are targeting at or below 7% of total revenue.

Alexander Goldfarb

Okay and then just a second question. On the properties you said that you've got another $36 million in properties that you know likely go back on the debt forgiveness. Can you just walk us through sort of one, how many properties you foresee this happening with, and then two, assume all of these are legacy properties, so none that you've recently acquired, and then three, as an ongoing percentage, is there like some sort of percentages as like bad debt where you always assume maybe less than a percent of properties go bad or something of that sort?

Phil Joseph

So in terms of run rate, the thing to appreciate is that, our near term debt maturities through 2017 is very granular CMBS transactions and these resolutions as it relates to these defaulted loans, they just take time. You have conflicting interest here in terms of you have servicer service that are managing the process for the securitizations and it's in the best interest to let things drag out because they were incurring fees and what have you.

Our asset management team works very closely with the special servicer in terms of presenting them offer and see if they will be in terms of the debt forgiveness related to those assets. When you look at the total amount of defaulted loans I mean it's on the order of less than 1.5% of our total debt balance. So it's not big number but obviously when you look at the impact to the balance sheet, it does help leverage on the margin because we are getting some debt forgiveness on assets that are you know the investment is well below the principal balance to the debt.

Tom Nolan

So just to clarify, you asked whether they were legacy.

Phil Joseph

Oh, yes I'm sorry.

Tom Nolan

These assets are in fact in the legacy Spirit assets or they were [indiscernible] they were actually legacy call assets that we had a identified actually at the time of the merger more likely to be candidates for the deeds in lieu. So it is not anything that was bought recently to specifically answer your question.

Alexander Goldfarb

Okay so that, so just going forward it's about less than 1.5% so we may achieve these from time-to-time but you know we shouldn't expect this to be a trend or anything like that is the bottom line.

Phil Joseph

Right and again, what the one thing we do is we work very closely with Mark and his team, in terms of evaluating our principal pay downs of debt. If we have an option value on an asset, we want to take advantage of it but again, this is not something that's going to be recurring longer term, but there will be some additional ones that may pop-up in 2017, but that's only going to near to our benefit.

Mark Manheimer

This is Mark. Alex to echo on Phil's point I mean just looking at our debt repayment schedule you can see that, you know the CMBS more or less goes away in 2017. So after 2017 I would not expect to see anymore.

Alexander Goldfarb

Mark that's helpful, thank you.

Operator

And our next question is from Vikram Malhotra from Morgan Stanley. Please go ahead.

Vikram Malhotra

Congrats, Tom on getting the move down, completed. I wanted to just check and get a sense of, off the 70 employees that you did have or 71 or so, can you just give us a sense of like how many actually moved and then are there additional hirers, you have to make the backfill?

Tom Nolan

You know I think we gave those numbers before, I think we said approximately 20 employees would move, that's in fact what's happened. Everybody who's has had indicated that they intended to move has done so or they were in the final process of it. I think we still have one or two that are commuting, but it really haven't changed that significantly since we discussed it before. As to complementing our organization chart I think we are in terrific shape. I mean we've got, I would say we've got kind of what you ordinarily have in the ordinarily course of business, there's always one or two spots that are open or you're looking to complements or have to, we're growing company. So we'll continue to be looking for individuals that can complement our organization, but at the moment. I think we've got a fully functioning company ad fully functioning organization chart and hopefully, the additions that we make will only be completing the folks we already have.

Phil Joseph

Yes. I'll add Vikram, is that we hope this question kind of dies because as Tom mentioned, we're fully staffed right now. I mean if you look around the room, Office of General Counsel, Investments, Asset Management, Office of the CFO, we're fully staffed. So it's - we're ready for just basic run rate operations.

Vikram Malhotra

Okay, it sounds good. Boyd, question for you just given your background on the industrial office site. Do you think there could be opportunities for Spirit, just incremental opportunities and maybe the business of exchange is a bit and just from a relationship standpoint, it seem you had really strong relationships there. So just wondering sort of what you might do differently in terms of acquisitions and what you bring towards Spirit?

Boyd Messmann

Yes, thank you. My background - the net leases for over 20 years, started out in the retail sector with PepsiCo, YUM Brands, onto FFCA. So I've really been involved cross sections of the net lease market for 20 years. I don't see any reason to change the Spirit model. We're going to continue to do what we do on a day-to-day basis. We're also going to look for other opportunities as they arise and leverage the relationships I have to get value.

Vikram Malhotra

And then just last one, Phil, just on guidance, just to be very clear and just on - I know in October, there was sort of an organic number and I'm assuming you've clarified that sort of at the midpoint, and then the last quarter, there was some acquisitions and other balance sheet management. So, as we look out sort of in the prior quarter, generally companies provide guidance, are you considering just sort of providing a clear organic guidance number and any thought on maybe giving a little more color on acquisition and disposition?

Phil Joseph

Yes, I mean good question. So Tom did provide color on acquisitions and dispositions in terms of what we acquired so far during this quarter about $145 million of assets and I can't remember what was under PSA, what was the number?

Tom Nolan

31.

Phil Joseph

Around $31 million, we disclosed in the Q something like that. So that's kind of from insight in terms of how the quarter is shaping up. As it relates to organic guidance, that mean the $0.88 is our organic guidance and walking through that, we were at eight nine and half in terms of the midpoint of guidance organically, that was just basic blocking and tackling in the portfolio, no acquisitions or dispositions, no equity raise.

When we did the equity raise, we estimate the net diluted impact to be around $1.50. as I alluded to you in my prepared remarks, the capital deployment friction in terms of being [indiscernible] in terms of the deployment of that capital, we employee, deployed in terms of for example repaying high coupon debt, that added a friction of about a $0.01. however we offset that with some other income during the quarter and then there were some one-time G&A expense related to new employees in terms of upfront signing bonuses for example that was a tenth of signing.

So that kind of got you to, the $0.88 midpoint and then, the additional upside to that midpoint is additional liability management, accretive acquisitions and you know we did remove Haggen's from our guidance but as Tom has mentioned in the past in terms of our recovery on that and the AFFO eligibility of that recovery whenever that maybe because we are recognizing it on a cash basis, that could be upwards of $3.50 impact to AFFO. Will be at a portion in this year and a portion in next year and we're going to continue to provide the disclosure in our financials in terms of characterization of that recovery, how much of that is true loss rent and how much of that is rent for future period. So you can kind of segment and figure out what is run rate operations eligible, what is not.

Vikram Malhotra

Okay and just, just my true sense [ph]. It'll be really useful you can just reconsider providing some sort of acquisitions, disposition guidance number just to keep it apples-to-apples. Otherwise every quarter with sort of saying what is organic, what is not organic and it just gets a bit confusing. So it'd really be helpful if you could reconsider that.

Tom Nolan

Yes and I certainly appreciate that. I appreciate the jobs that you folks have so trying to put your models together. And I realize, we appear to be got it dogmatic about this point, again my view is, you know our job is to try to provide as much clarity on where we see the market at any given time and what and to provide clarity in on timeframe that we feel comfortable about. For companies that issue guidance in the fall for the following year, which is what we do and others do. I find it, I just I find the thought of providing a guidance target acquisition number in the fall of a given year for the following calendar year. I continue to believe that establishes a target for investing as opposed to the more the way that we look at the world, which is as you buy properties when you make money and you sell them, when you make money and you don't have an artificial target particularly established 15 months before the end of the following calendar quarter.

I understand your point, we were going to continue to look at this and try to find ways to give you as much clarity for you as we can, but the actual acquisition guidance number itself remains kind of dogmatic point.

Vikram Malhotra

Okay, thank you very much.

Operator

Your next question is from Tyler Grant from Green Street Advisors. Please go ahead.

Tyler Grant

Can you provide an update on monetizing the former Haggen space at this point?

Boyd Messmann

Yes, so as Tom mentioned earlier we sold another, one of the vacant locations of the three, so taking our total portfolio of initially 20 down to 17, we still have four vacant assets that we are currently marketing, we are talking to tenants on all four of those still trying to negotiate something that works for us, but we do have four locations to help in market where we are getting close to some are already under contract and the other two, we're still negotiating contracts but we should be able to at some of those sales actually closed before the end of next quarter.

So we're optimistic that those numbers are going to be pretty strong and Tom mentioned in this opening remarks that we still expect to be within the range in terms of the total value. But I think by the time we actually re-let and sell all of the vacant locations as well as sell the remaining operating locations whether they be smart and final Smart & Final, Gelson's or Albertson's that's going to take a little bit of time just because we do not want to put too many in the market at once because we think that negatively impacts our sales process, but I would anticipate being this fully resolved within the next three quarters.

Tyler Grant

Okay and then are there properties former Haggen properties where you're having already seeing an issue potentially being able to sell them at attractive valuations?

Boyd Messmann

No, we've had a very positive reaction from the market. We're marketing them through three different brokers and all three brokers have come back with extremely positive reactions from the market.

Tyler Grant

All right, sure. And then just moving onto internal growth. Over the past year, Spirit has averaged about 50 basis points of occupancy loss per quarter in the same property pool. To just curious as, which if I compare that to some of your peers it's a worse performance. How does this compare to your long-term expectations for occupancy loss in the same property pool?

Mark Manheimer

Yes and part of that is, we've been extremely active in terms of trying to get ahead of issues. For example we have gone through tenants where we may have a large Master Lease release and say, we're willing to take back a couple of your problem assets because we think we can either sell them or re-let them to attempt that may be able to do better and then exchange it's not a lease or get something in return from the tenants.

So we're really focused on trying to improve the long-term cash flows of the business rather than try to pick again down the road, which you know I don't think that's the right approach. We did a little bit of that in this quarter, where part of it was the Buffet's bankruptcy which you know if you compare to the other two of our competitors that have basically faired significantly better in the bankruptcy negotiations than they did, but we're and we're already have bounced kind of a large of those locations, but we also approach it kind of that have naturally some underperformance where we knew there were others kind of had interest in that space, thought they could do better so we took them back and that shows up in the occupancy cost, in the occupancy of the portfolio which may look negative but in our review we're either getting property out of the portfolio that are going to be bigger problem down the road or we're putting in better tenants they get better chance to be able to perform within those location.

Tyler Grant

Okay and just a follow-up to that question. Do you have an estimate of when Spirit's in a more of a steady state of what that occupancy loss could be on any given quarter?

Mark Manheimer

I mean a little bit tough to give you a specific answer on that, but I guess when you consider the fact that we had a legacy portfolio that we started with this management team to not put together and we pretty quickly after going public today, a merger of another portfolio that was not put together by this management team and subsequently bought a $2 billion more assets. We really focused on trying to get out of properties that don't fit our current investment criteria's. So I mean, I think you've seen that we've been extremely active on that front over the past couple of years and I would imagine that will start to dissipate as get closer, but it's going to vary quarter-to-quarter and I think we're always going to be active in asset recycling and approaching tenants where we think we're going to get a better long-term economic outcome.

That being said, we did have a lot of wood to chop coming out of 2012, 2013 and I would expect that to be at more steady state for next couple of years.

Tyler Grant

Okay, that's all from me. Thank you guys.

Operator

Your next question is from [indiscernible] from SunTrust, please go ahead.

Unidentified Analyst

Just a quick question on dispositions. So the last two quarters your dispositions your cap rates is been around 6.4. I'm just wondering if that's really a function of selling better assets or cap rates compression.

Mark Manheimer

This is Mark. A big of chunk of that is, is the health of the 1031 market. We sell properties that we think that we're going to have, if there's risk to cash flows meaning if there's a credit risk that we think we're getting ahead of, so those will typically be higher cap rates. But really like to focus on what is really attractive, with the 1031 guys they might value properties more than we would. So if the market is going to value a property more than Spirit's really getting rewarded. I mean, Walgreen is the obvious example where their flat leases, you don't get unit level information other than the way that the report sales which isn't overly helpful. it just kind of directionally whether it's a good or bad score, but we've dug in and a lot of people think you know it's the investment grade ratings, but that's not even necessarily what drive to this, what do the 1031 buyers like? And when you look at the Walgreen took efforts were healthy and what results that they were in line with the overall cap rate that top five best cap rates of assets that we sold, were not investment grade but they were kind of weaker performers in some of our quick service restaurants operators, where we actually do there could be some rescue at some point in time.

So we do understand that there are people that may think that we're selling off the better assets, but it's really more diversification filling assets that aren't rewarding as whether it be Walgreen for the flat lease, without unit level information or we're getting ahead [indiscernible].

Phil Joseph

One thing and just in full disclosure and Tom alluded to this in his comments and we also disclosed this in the supplemental. 6.38% cap rate that includes profits that transition to the lender and when you look at the non-defaulted loan cap rate for the disposition, they were still healthy from a 6.9% cap rate. But I just wanted to clarify that but just to reiterate what Mark was saying and as we said before, 2017 lot of granular CMBS transactions and there are some pretty high profile credits there were [technical difficulty].

Tyler Grant

Okay, I appreciate the color. Thank you.

Operator

And our next question is from Joshua Dennerlein from Bank of America/Merrill Lynch. Please go ahead.

Joshua Dennerlein

Most of mine of have been answered, but just one quick clarification. Did you disclose on how much dispositions you've done since the end of the quarter? I got your acquisition number.

Mark Manheimer

Yes, so including deed in lieu we sold about $138 million of assets, $35 million of that are deed in lieu properties.

Joshua Dennerlein

Okay. Thanks.

Mark Manheimer

At second quarter.

Joshua Dennerlein

But what about since the end of the quarter? Did you?

Tom Nolan

We do not disclose any supplemental dispositions.

Phil Joseph

All right. But I think it's safe to say that, in the near term we expect to be net acquirer.

Tom Nolan

We're definitely going to be a net acquirer and we're definitely going to be active in portfolio management. Mark's already referred to the Haggen assets which are in the market and close to being signed. So we're going to continue to be healthy towards aggressive portfolio manager, but we did not disclose the specific status as of the quarter to-date.

Phil Joseph

And just a little bit more color. Haggen is going to be lion share of what we sold in the foreseeable future. We had a few sales but its middle of [indiscernible].

Joshua Dennerlein

Okay, thanks appreciate the color.

Operator

[Operator Instructions] we have a question from Dan Donla from Ladenburg Thalmann. Please go ahead.

Dan Donla

We haven't beat this horse dead yet, so just wanted to go back to the guidance, just so I understand it. You said liability management is not a part of the $0.88. What about a further lease termination income or other income at that bucket?

Phil Joseph

Lease termination and fee income in terms of the organic numbers midpoint $0.88 no, I mean that could be incremental upside but I think last year we probably had around $7 million or $8 million of other fee income and I can see this year kind of mirroring that going forward.

Dan Donla

Okay so that's kind of what was in the $0.88 was about $7 million or so.

Phil Joseph

No, just what we have year-to-date is what's in the $0.88. We're always going to have a run rate number for other income, but you know I think by the end of this year we could approximate something similar to what we had last year. I think it was like $7 million.

Dan Donla

And sorry if I missed this, but how much CMBS debt would you guys consider or it's feasible without too much of a prepayment penalty or defeasance cost and potentially paying down in the back half of this year, what's the potential unsecured offering. Is that something you guys are considering or just kind of curious your thoughts there?

Phil Joseph

I mean look we're definitely monitoring the capital markets. we made a lot of progress in terms of getting investment standing with two of the agencies, that's something that we monitor constantly and as it relates to additional liability management as I alluded to you in my comments, we are already at about 50% of our assets unencumbered actually a little bit higher than 50% and we're in a sweet spot right now. So we likely will do some additional liability management given our strong liquidity and access to the capital markets, but we're going to be very disciplined in terms of what loans we go after, the good thing is that granular CMBS and can be very surgical. We're working with Mark's team in terms of making sure that we're maintaining option value where we want to with respect to the debt, but we're also going to be cognizant of the fact that we don't want to debt extinguishment cost, while they get back that AFFO I mean, it's a cash expense.

So we want to be very disciplined in terms of, the amount of prepayment penalties that we incur, but I would estimate that if we go after some debt. It's probably going to average between 3% to 4% of prepayment penalties or defeasance, debt extinguishment cost related to that debt but liability management is definitely something that we've been focused on this year and we'll be continue to focus later on to the remainder.

Dan Donla

Okay and as far as G&A goes, if you strip out the relocation expenses and that the interest thing, the other swap that you had in there you're about $11 million for the quarter. It is, is that a kind of new run rate and then maybe we pick that up a bit in the fourth quarter, when Jackson starts, is that a fair way to look at it? Or is there you know will that potentially gravitate back up to $12 million or so as you know more people are hired or this just kind of curious on the run rate there?

Phil Joseph

Yes, I mean from just a cash comp perspective even before Jackson's hire. As I mentioned before, we did an analysis with Mercer and we're ending up today in terms of, if we just replicate people's original salaries for particular position to where we are today. We're not really seeing a meaningful cash comp increase in that regard now. As it relates to Jackson, yes there's going to be minor tick up in G&A as it relates to that, but we really don't see a material increase in our compensation expense going forward. I can't remember if the $11 million you referred to backed out some of the restructuring and relo charges that are included in G&A, but.

Dan Donla

It did.

Phil Joseph

I think we feel comfortable having G&A be at or below 7%. I mean that in a good mile post for us.

Dan Donla

Okay and then switching gears to Shopko. You sold a five in the quarter but your number of stores went down by 15, did you re-tenant some of the stores. I think Mark alluded to a Master Lease, you guys doing something with Master Lease tenants and whether there's some vacancy there just, what was the delta, why did you have a delta of 15?

Mark Manheimer

That's a good question. So we did, we sold five and the Master Lease that I alluding to earlier was one of the smaller [indiscernible] Master Lease which is now owned by Shopko that rolls up into our Shopko exposure and they had a number of locations, where we had a different tenant that we wanted to put in there that would be, that would pay a similar rent in a couple of locations that we thought we could take back and either sell or re-let to [indiscernible] and good credits are we would like to pay it, similar rents that we took some of those properties back in exchange for a lease extension on that Master Lease.

Dan Donla

Okay, so the, so how many were re-leased in short order and how many are left to leased?

Mark Manheimer

There are six left to be re-leased although we're making pretty good progress on those.

Dan Donla

Okay and in the rent at or around the same level.

Mark Manheimer

Similar, I mean some of them we sold so they won't be rent but the replacement rents are similar.

Dan Donla

Okay and like your...

Tom Nolan

Just to elaborate, I mean Mark made reference to it. I mean, we take portfolio management very seriously and this is one of these examples where this is a Master Lease portfolio, these are very small assets, the Shopko standalone assets are much larger. So we really are dealing with very small assets and very small dollars first of all, but this is a case where we could have just sat there and collected the rent and allowed the lease to run out and then to have an issue because some of these assets we've already identified will likely to be underperformed but rather than do that, we pursued an aggressive kind of portfolio management plan got out front of it, identified the properties and moving them off our balance sheet and I think that's the approach we take not just from Shopko but we take with any of the assets in our portfolio.

Dan Donla

Okay and is there any other Shopko's where this is possible, I mean is there more evaluation that can be done there?

Mark Manheimer

This, I wouldn't' expect anything like what we just did to happen again. Mainly because it went from we drastically improved the unit level coverage and within the Master Lease, so they're happy with the assets they have, we're - one or two third quarter to possibly but certainly not the magnitude of some properties.

Dan Donla

Okay, appreciate that. And then as far as the NAV Page, Page 19 itself, it looks the number of total loans receivable went down from 143 to 109. We're just curious what happened there and if you want, owning the properties was that new rent that you received, is that factored into the annualized cash rate number?

Phil Joseph

So I'll start, Dan then I'll turn it over to Mark. We had an opportunity with an existing loan portfolio to exchange assets in conjunction with debt repayment. So part of the some of the other income that we recognized was related to an early prepayment penalty related to that debt and now we own these properties as oppose to being the lender maybe Mark can give you some color in terms of the nature of the assets and.

Mark Manheimer

Yes, so in this particular instance they were quick service restaurants assets that we really liked a lot but we did not own. We were potentially in the position of being the CMBS debt owner and so we have a good relationships with the equity holder of those properties and the debt was fairly onerous. So we are able to cut a deal with them where we were able to buy the properties, let them out of the debt with a prepayment only of course and other assets that we really wanted to own and when the [indiscernible] over and rather than having that debt go in a few years, now we've got a next release portfolio of quick service restaurants pretty low rent and extremely high rent coverage.

Dan Donla

Okay, thanks. That's it from me.

Operator

Your next question is from Collin Mings from Raymond James. Please go ahead.

Collin Mings

Recognizing it's always going to be noisy, but Tom, I mean you've noted a pretty meaningful acceleration acquisitions over here over the last five weeks. I'm just curious from your perspective, what do you think is the biggest driver of that? And do you think just the relocation and management changes now being in the rear view mirror has helped on that front?

Tom Nolan

Boyd is sitting next to me. I'm sure he'd like to take all the credit. But I think the answer is that June 30 was kind of hard date, we don't like to be in a position where we're kind of rushing to get transactions down just in the quarter end deadline and there were a couple of transactions that these initially when we kind of put our program together, I think we thought we're going to close in the second quarter, but either for administrative reasons, due diligence reasons of whatever it happened to be it slipped into the third quarter and I just thought that extra color would be useful.

We do think, I do believe that market is an attractive acquisition market today, the cap rates are excellent, you look at the cost of capital that the company such as ourselves have and yet they've been over cap rates remain, I think attractive and so when opportunities by quality assets as their and we believe is there to-date, we do want to be aggressive in pursuing that. so I think you can read into it, that we think the acquisition climate is attractive and as long as it remains attractive, we're going to be a buyer, but it's really it's just I would read anything into the actual specific number and so because again that was just items that seem controlled from one quarter to the next.

Collin Mings

Okay, that's helpful, Tom. And then maybe just looking back into 2Q as far as some of the activity there, it does like that there was a pretty meaningful uptick as far as C store exposure, maybe just update as far as the opportunities you're seeing there?

Tom Nolan

We continue, we've been underweighted C stores really forever on to our peers and it is a sector, we - and so that was a nice combination to have, I think again some of our peers are probably at the C store level that didn't like to be, that provides us buying opportunity for us because there isn't quite as much competition among our peers for this particular sector. We like it, we were underweighted and so it for us, that just meant an opportunity, but it is a sector that we continue to like, it's a sector we continue to pursue and it's a sector we continue to season the track the opportunity there.

Collin Mings

And then just one last small kind of housekeeping question. Just on the same-store performance, just on the automotive dealers, there was a big jump there as far as contributing to that 50 basis point increase, just touch on what may be drove that, was there just a step change in a couple of leases or something?

Phil Joseph

It was Camping World was the tenant and we had a period of time when we initially bought the property where there was a prematurity and so that you know rolled off and now we've got, reflecting around so that pushed up.

Collin Mings

Thanks guys, appreciate the color.

Operator

Now ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Tom Nolan

Thank you and thank you all for your time this morning and your interest in Spirit Realty. We are pleased with our progress as we've successfully executed on our goals to improve our portfolio and diversification, enhance our balance sheet and attract the best management team. We believe we're positioned better positioned than ever to drive strong long-term growth. We thank you again, we look forward to speaking with you again soon.

Operator

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

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