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A 10% Yield On A Battered REIT With Significant Upside

Summary

  • The retail sector malaise has spilled into the triple net lease REITs.
  • An unusually bad quarter has sent Spirit Realty Corp. down almost 50% from its recent high.
  • We note several positives about the REIT that allowed us to initiate a small position.

Spirit Realty Capital's (NYSE:SRC) Q1-2017 was really spooky and there might be more pain ahead. But current extreme valuations and the fortress balance sheet compel us to take a position ahead of Q2-2017 results.

The last year has been a painful one for those who chose to invest in the retail space. Whether it was the retailers themselves, the retail mall REIT group, the triple net REITs, you were in for a rough ride.

Within the latter two groups, Spirit Realty Capital (SRC) was one of the worst performers, outdone only by Pennsylvania REIT (PEI). We hold a constructive outlook on PEI and so we decided to see if SRC was worth an investment as well.

The Business:

SRC is a triple net lease REIT focusing on the retail sector. While majority of the its revenue is derived from retail, the small components of office and industrial help provide some level of diversification. Additionally, a large subset of retail is service-oriented versus "traditional retail" and hence less vulnerable to e-commerce.

The Recent Issues:

The stock had been trending down in sympathy with the retailer woes but the Q1-2017 results is what created the big selloff. SRC decreased its guidance by about 10% for 2017, decided to stop acquiring new properties and brought to light several troubled retailers on their watch list that had defaulted. The analyst call was not a pleasant one for management with 3 different analysts (Daniel Donlan, Anthony Paolone & Rob Stevenson) either directly asking or suggesting that the company should basically sell and go private.

The additional issue that came to light was that management had factored in a rapid turnaround on some troubled properties to get to the new guidance of $0.80-$0.84 in AFFO. Failing that, the AFFO could come in significantly lower.

The Portfolio:

This article was written by

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Analyst’s Disclosure: I am/we are long OHI, WPG, CBL, SRC, PEI, GNL. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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