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Spirit Realty Capital (NYSE:SRC) made its public debut on Thursday. Shares of the REIT ended their first day unchanged at $15.00 per share.

The public offering

Spirit Realty Capital, owns a portfolio of 1,096 properties leased to 165 tenants as of June 30 of the year. The company sold 29.0 million shares for $15.00 a piece. The firm sold all shares in the offering, with no shares being offered by selling shareholders. Spirit Realty Capital raised $435 million in gross proceeds in the offering process. Based on the offer price of $15, the firm is valued at $1.14 billion.

The offering is quite a disappointment. Initially the firm and its bankers set an offer price range of $16-$18 per share. Given the low demand for shares the company was forced to lower the offer price to $15. At the same time, Spirit boosted the offer volume from 27.1 million to 29.0 million, to increase the proceeds. In total, the firm sold about 36% of its shares outstanding.

Major banks which brought the company public were Morgan Stanley, UBS, Deutsche Bank, RBC Capital Markets and Macquarie Capital among others.

Valuation

Spirit Realty Capital invests in single-tenant real estate throughout the United States. It focuses on retail and distribution industries.

The company reported annual revenues of $268.0 million for its annual year of 2011, unchanged from the year before. The company reported a net loss of $63.9 million, driven by $170.0 million in interest payments.

For the first six months of 2012, the company generated revenues of $137.5 million, up 3.5% compared to 2011. Net losses came in at $21.1 million, after interest charges of $81.2 million.

The company operates with $72 million in cash and equivalents and roughly $2.63 billion in total debt obligations, as of June 30. Pro forma, including the gross proceeds of $435 million, the net debt position would come in around $2.1 billion.

Based on a rough annual revenue estimate of $275 million for 2012, the market values Spirit Realty Capital at 4.1 times annual revenues. The company is expected to report net losses for the full year.

Investment Thesis

Spirit Realty Capital's public offering was quite a disappointment. The public offering took place at a price of $15, revised downwards from an initial price range of $16-$18 per share. Despite the offer price at a discount, demand did not increase as shares ended the day flat. The firm was forced to increase the size of the offer to 29 million shares, in order to raise enough capital.

The company net lost $21.1 million for the first six months of the year. If Spirit Realty Capital converts its $435 million in gross proceeds in debt reduction, net losses would narrow close to 0. Currently, Spirit Realty Capital pays 6.1% on interest on its $2.6 billion in total debt. 98% of revenues are generated by long term contracts with an average duration of 11.4 years, of which most contracts allow for future rent increases. One drawback is the fact that the biggest tenant, Shopko Stores, generates 30% of its total revenues.

While Spirit Realty looks very risky given the significant debt position, and concentration of tenants, the offering might look more appealing. Most of the debt position, over $2.1 billion has a maturity of three years or longer, and the company might offer more shares to convert debt into equity. At the same time, annual depreciation amounts to $110 million, resulting in significant positive cash flows.

REITs are not primarily set up for capital gains. However Spirit already announced to pay quarterly dividends of $0.3125 per share, for an annual dividend of $1.25 per share. This provides investors with a dividend yield of 8.0%.

It is up to investors' risk tolerance if they like to invest in Spirit's debt at 6% secured by mortgages, or equity which carries an 8% dividend yield and offers upside potential.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Spirit Realty Capital - 8% Dividend Yield After A Disappointing Public Offering