Spirit Realty Capital's (SRC) CEO Jackson Hsieh on Q4 2017 Results - Earnings Call Transcript

Spirit Realty Capital (NYSE:SRC) Q4 2017 Earnings Conference Call February 22, 2018 8:30 AM ET

Executives

Jackson Hsieh - President and CEO

Phil Joseph - Chief Financial Officer

Ken Heimlich - Head of Asset Management

Analysts

David Corak - B. Riley, FBR

Vincent Chaor - Deutsche Bank

Daniel Santos - Sandler O'Neill

Ki Bin Kim - SunTrust

Haendel St Juste - Mizuho

John Misaka - Ladenburg Thalmann

Operator

Good morning, and welcome to the Spirit Realty Capital 2017 Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there'll be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Cara Smith [ph]. Please go ahead.

Unidentified Company Representative

Thank you, operator, and thank you, everyone, for joining us today. Presenting on today's call will be President and Chief Executive Officer, Mr. Jackson Hsieh; Chief Financial Officer, Mr. Phil Joseph, and Head of Asset Management, Mr. Ken Heimlich.

Before we get started, I would like to remind everyone that this presentation contains forward-looking statements. Although the company believes these forward-looking statements are based upon reasonable assumptions, they are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from those currently anticipated due to a number of factors.

I would refer you to the Safe Harbor statement in today's earnings release and supplemental information as well as most of our recent filings with the SEC for a detailed discussion of the risk factors relating to these forward-looking statements. This presentation also contains certain non-GAAP measures, reconciliations of non-GAAP financial measures to most directly comparable GAAP measures and they are included in today's release and supplemental information furnished to the SEC under Form 8-K. Both today's earnings release and supplemental information are available on the Investor Relations page of the company's website. For our prepared remarks I'm now pleased to introduce Mr. Jackson Hsieh. Jackson?

Jackson Hsieh

Good morning and thank you for joining our fourth quarter and full year 2017 earnings call. Let me begin by saying that 2017 was a transformational year for Spirit. After a challenging start to the year, we took significant and deliberate steps to reposition the company into a fortress REIT. As we sit here today Spirit is a much improved company than it was just one year ago. When I joined Spirit in late 2016, one of my first goals was to improve the company's procedures, processes and systems and enhance oversight and portfolio management decision making.

In 2017, the benefits of these efforts became evident. First from a strategic perspective we created an in-house research team and developed and implemented two important tools. We created a dynamic property ranking system with which we are able to evaluate our entire portfolio on a regular basis as well as compare potential acquisitions and dispositions against our existing asset base.

And we created an industry heat map that defines a clear framework for Spirit as we allocate our capital. Second, from an operational perspective we work to enhance certain key processes and increase our oversight of our portfolio. Most notably we improved tenant surveillance by bringing all asset servicing functions in-house.

Third, we work to optimize our capital allocation. During 2017, we sold 192 properties for $552 million. Importantly having identified property costs leakage as a key performance indicator for our team 105 of those properties were vacant, non-income producing assets. We also worked to reduce our exposure to Shopko through asset sales and sold 12 revenue producing Shopko properties for $71 million. As a result of these efforts, we showed marked improvement throughout the year in earnings, occupancy rate, property costs, releasing spreads and loss represents.

From a financial and balance sheet perspective, we also took key steps in 2017 that we believe will be beneficial to shareholders over the long term. First, we significantly expanded and improved our disclosures in order to help the market understand the true underlying value of our portfolio. Second, we were active purchasers of our shares on the open market with 282 million shares repurchased for the full year. Finally we raised over 885 million in net cash proceeds from our preferred stock, Master Funding nets and CMBS transactions.

Separately, and in concert with these efforts to enhance Spirit as an organization, we worked with our Board and in consultation with outside advisors to evaluate all strategic options to create shareholder value. A key goal was to eliminate certain strategic structural impediments that conduct the result within a single entity. The structural impediments include the need to isolate our Shopko investment and to better align our asset base with the appropriate capital structures, which will allow for the full maximization of the leverage capabilities of the secured Master Trust structure

In August, we announced our path forward, which was our plan to leverage a spin-off Master Trust A and our Shopko assets into a separate entity called Spirit Master Trust or SMTA. Since then we have made substantial strides towards completing this transaction.

In late 2017 we confidentially filed our Form 10 with the SEC. Since then we completed ABS financing and re-marketing of our notes for Master Trust A and completed our CMBS transaction.

In addition, we funded 35 million into an existing Shopko secured credit facility and concurrently amended our lease with Shopko by removing terms that could impact our ability to monetize value for these assets, including eliminating a minimum rent threshold and added approvals to meet potential SEC reporting requirements. Importantly, we have outperformed under every metric we laid out at the time we announced the path forward, including pro forma leverage, timing and amount of capital raise.

We expect to publicly file our Form 10 shortly after we file our 10-K for 2017. We remain on track to complete the spinoff for the second quarter of 2018 as I stated on our Path Forward III call, the completion of this transaction will have a profound positive impact on both companies.

With the separation new Spirit will have significantly improved credit metrics and optimized portfolio and most importantly plenty of dry powder to grow, hopefully resulting in a competitive cost of capital. I'm proud of the entire team at Spirit and thank them for their hard work and dedication in this process.

Now, turning to our quarterly results, for the fourth quarter we reported $0.21 of AFFO per share and $0.85 of AFFO per share for the full year 2017, including severance charges. As we disclosed on a Path Forward III call in January, we were again a net seller of assets in the fourth quarter. These sold assets track our industry lead map in the general merchandise, drugstore casual dining and grocery industries.

We sold approximately $145 million of assets in the fourth quarter which brought our full-year total to $552 million. Nine of our fourth quarter dispositions were vacant properties, bringing our full-year total to 105 vacant properties sold for $154 million. We expect to benefit from both reduced property cost leakage and redeployment of this capital into higher yielding investments.

Turning briefly to our balance sheet, during 2017 we repurchased 35.8 million shares at a weighted average share price of $7.88 for a total of $282 million. We ended the year at 6.3 turns adjusted debt-to-annualized adjusted EBITDA as compared to 6.5 times in Q3. And pro forma poster leverage is expected to be 4.5 times adjusted debt to annualize adjusted EBITDA.

As of December 31 our portfolio, which is comprised of single-tenant, operationally critical real estate properties in 49 states was 99% occupied and had an average remaining lease term of 10 years. 45% of our contractual rental revenues were derived from national leases and 89.2% of our leases have built-in rental increases.

Approximately 95% of our tenants provide us financial information on our weighted average level 4-wall rent coverage for our top 10 tenants, was 2.1 times. The reduction from Q3's 2.5 coverage was related to Regal theaters replacing Albertsons in the top 10. The 4 wall coverage for Q4 using last quarter's top 10 tenants will be 2.4 times. During the quarter Spirit relayed 15 of 16 of our expiring leases and our revenue recapture rate was 98.5%. For the full year, we renewed 41 of 47 leases and recaptured 101.1% of expiring rent with $1.2 million in additional capital expenditures.

Finally, we have provided incremental information on Shopko as recently as today on our Investor Relations website and are providing the following update on their third fiscal quarter results. Spirit on Shopko Stores comparable sales for Q3 2017 versus the same period in 2016 decreased 2.6% and trailing 12 months comparable sales decreased 2.9% with unit level 4-wall coverage of 2.5 times

During the fourth quarter, we sold one revenue-producing Shopko store for $6.9 million and a 7.85% cap rate and one vehicle former Shopko store. Through year-end, we have sold 12 operating Shopko stores for $71.4 million at an average cap rate of 7.7%; and 14 vacant Shopko stores for $9.6 million. We have reduced our Shopko rent concentration to 7.7% of Spirit's total contractual rent.

Overall the fourth quarter was another consistent quarter from operational perspective and our results were demonetarized [ph] of the strength and stability of our diversified portfolio of freestanding triple net real estate.

Before I turn the call over to Phil, I'd like to say a few words related to the press release and 8-K that were filed today outlining the upcoming departure of two of our senior executives.

Phil Joseph and Spirit have mutually agreed not to renew Phil's employment contract which expires on April 20, 2018. Phil's found a CFO through the end of his employment contract and the company is engaged with search firm to find his replacement. Boyd Messmann will be leaving Spirit to pursue other opportunities.

We will be merging the efforts of our direct sale leaseback effort led by Daniel Rosenberg and our acquisitions team in an effort to grow and improve business with our existing tenant base. I thank Phil and Boyd for their contributions to improving Spirit Realty Capital and wish them the very best in their future endeavors.

I'll now turn the call over to Phil. Phil.

Phil Joseph

Thanks Jackson. As previously mentioned, we reported AFFO of $0.21 per diluted share for the fourth quarter of 2017, which was in line with our prior year fourth quarter. Disciplined capital allocation, most notably meaningful share repurchases in addition to lower fee income, largely drove our performance quarter-over-quarter. For fiscal year 2017, we reported AFFO per share of $0.85, which includes cash severance charges of $0.01 per share. From a capital allocation perspective, we have reduced our weighted average share count by approximately 6% as a result of our open market share repurchases

During 2017, we repurchased approximately $280 million [ph] of stock at a weighted average price of $7.88, including 7 million shares during the fourth quarter. Our accretive share repurchases were completed in a leveraged neutral manner. And notable dividend savings will increase our cash available for investment.

On a portfolio management front, during the year, we have been a net disposer of assets to the order of $220 million including $154 million of vacant assets. Our portfolio capital recycling activities have been accretive to earnings, having acquired $323 million of assets at a weighted average cap rate of 7.7% and selling $398 million of income producing assets at a weighted average cap rate of 7.1%

Furthermore, our vacant property dispositions have reduced property costs leakage. Our post-spend balance sheet will benefit from the recent ABS and CMBS financing that raised net cash proceeds of approximately $710 million. Post-spend our financial standing will notably improve with pro forma debt to EBITDA at approximately 4.5 times, unencumbered assets representing approximately 75% of gross real estate assets and secured leverage at approximately 10% of gross assets.

These metrics should notably enhance our access to and cost of capital as well as our investment grade profile. Total revenues for the fourth quarter of 2017 were $165.3 million compared to $173.4 million in the fourth quarter of 2016. Net disposition activity and lower fee related income contributed to the decline in revenues.

Same-store rent growth for the quarter when compared to the prior year fourth quarter was up 0.5%. This increase was largely driven by organic rank growth in the portfolio, which was slightly offset by underperforming assets that are planned to transition to SMTA. Excluding assets transitioning SMTA, our reported same-store rent growth would have been 2%.

Total expenses excluding costs associated with the spin-off transaction in the current year and headquarter relocation costs in the prior year period decreased to $147.9 million in the current year fourth quarter from a $184.8 million in the same period of 2016. Lower non-cash impairments largely drove the reduction in operating expenses.

With respect to run rate G&A it represented approximately 7% of total revenues for the quarter. Our property cost leakage was flat compared to the prior year period, while elevated compared to third quarter 2017. We continue to target property cost leakage of 2% of total revenues on a go-forward basis. Cash interest expense was relatively unchanged compared to the prior fourth quarter despite the repayment of $137 million of secured debt during the current quarter, largely due to higher average borrowings under our corporate bank facilities during Q4 2017 as well as our $674 million ABS issuance in December.

During fiscal year 2017, we extinguished approximately $238 million of secured debt with a weighted average coupon of 5.5% and as of today we only have $125 million of non-defaulted bullet debt maturities through the end of 2018.

In addition, subsequent to year-end we have resolved $34 million of defaulted loans via deed in lieu transactions with lenders. As to our corporate liquidity, we currently have $1.2 billion available under our corporate bank facilities and $112 million of cash balances including $102 million in our Master Trust notes release accounts. In terms of our financial standing, we achieved our year-end leverage target of 6.3 turns. Our reported fixed charge coverage stood at 3.3 times and our 4.7 billion unencumbered asset base continues to represent approximately 60% of our gross real estate investments.

As mentioned previously post-spin our pro forma debt to EBITDA will be approximately 4.5 turns. Looking forward to our 2018 year unleveraged target, we would expect debt to EBITDA to be at or below 5.5 turns.

During the quarter, we declared dividends to common stockholders of approximately $81 million, which represented an AFFO payout ratio of 84% compared to $87 million representing an AFFO payout ratio of 85% in the comparable period a year ago.

In conclusion Spirit is well positioned for accretive growth post-spin now that we have closed meaningful financings in connection with the spin transaction. Our balance sheet strength and modest debt maturity profile will enable us to be strategic on the capital allocation front.

As I previously noted, our year-end leverage target is to be at or below 5.5 turns. While we are mindful of our current cost of capital, we will continue to allocate capital in a prudent fashion for SMTA in the near term that will mean that we will use Master Trust notes release account cash proceeds to acquire replacement assets to enhance our operating cash flow for stakeholders. Currently there is $80 million in our Master Trust 2014 release accounts that will be invested in new acquisitions at a targeted weighted average cap rate of 7%.

For Spirit, the illustrative benefits related to repurchasing shares or acquiring assets is largely dependent on the timing of capital allocation activities. At this time, we anticipate providing earnings guidance for Spirit and SMTA in connection with our first quarter earnings announcement if not sooner.

I am proud of the accomplishments the team has made during the three years that I've been here. Before I accepted this position as a condition I want to make sure the company was a line with my primary goals of improving Spirit's capital structure, access to and cost of capital as well as its financial disclosure.

Spirit is now investment grade, has much improved access to capital and its financial disclosure is extensive and transparent. Along the way I was able to build a best-in-class finance, FP&A tax and accounting team that will ensure ongoing business continuity.

I would now turn the call back over to Jackson.

Jackson Hsieh

Thanks Phil. And I would like to open up for any questions. So, operator?

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from David Corak with B Riley, FBR. Please go ahead

David Corak

Hey, good morning guys. In terms of your refined strategy to sell Shopko that you mentioned a month ago as it pertains to kind of the seller financing in the spring a wealth a bit with the number of brokers and commission structure, I realize it's been a month or so, but what's the feedback been from the market, has this facilitated the process at all?

Jackson Hsieh

Good morning, David, it's Jackson. I would let Ken answer that question.

Ken Heimlich

Yeah. So we are in the early stages of that strategy, but early indications are good. It does take new brokers a little bit of time to get up and running. But thus far we're pretty happy with the interest that we're receiving based on the new relationships with those brokers.

David Corak

Okay. Fair enough. And then just one for you Jackson, do you expect the spin would occur before the executive departures or will you have backfill the CFO role by then or could you conceivably be transacting the spin without CFO?

Jackson Hsieh

Well just to go forward. I think to answer your question. First of all, we are well down the road with the Spirit CFO replacement and are equally well down the road with the CEO of SMTA and the CFO of SMTA as well and SMTA Board. So we have got a number of different processes moving forward. And I would expect them all to be in their seats at the time of the spin.

David Corak

Okay, fair enough. Thanks guys.

Jackson Hsieh

Thank you

Operator

The next question comes from Vincent Chao with Deutsche Bank. Please go ahead.

Vincent Chao

Good morning, guys. I know it's probably little bit of a sensitive topic. Just curious if there is any other color that can provided in terms of the departures. Phil, you mentioned some of the accomplishments that you have achieved as the CFO. So I don't know if that's implying that you feel like you've kind of done the comps that you want, but just given the timing of spin, it does seem a little bit odd. So just curious is there else that you can actually provide here?

Jackson Hsieh

Good morning, Vin. I'll try to take it. If you can recall I took over the [indiscernible] as CEO in May. And I think it was a pretty clear just try to improve processes the organization. And I think in terms of Phil and myself, we did have a conversation back in November, because we knew this contract was coming up. We had made a determination at that point, but I felt like given where we are, where we want to go. It makes sense for both of us to kind of pursue other directions.

I can tell you that we obviously didn't want to try to do this while we are doing all the financings and the work on the Form 10. But if you were going to make this change, if you think about it given the timing of his contract where we are in the process, if you are going to make a change it is about the right time we do it, before we actually execute on the actual spin itself.

But what I will say on that is we have a very deep bench, our Chief Accounting Officer, our accounting team, tax. I mean we've run through as fast as I've seen a Form 10, spinoff get put together in terms of tax analysis for that accounting work on the Form 10. It's not just one individual, it's really a team and we've got a very strong team there.

Phil Joseph

Yeah. I mean, Vin it's Phil. I would add to that. I mean, as you know, when I first got here the capital structure was much different than what it was today. There's about a billion and a half of debt maturing between when I got there to the end of 2017. We've completely re-capitalized our balance sheet, we refinanced a ton of secured debt maturities, increased our unencumbered assets by over 2 billion, got to an investment-grade standing, improved our access and cost of capital and de-risked the balance sheet. Our financial disclosure was kind of non-existent when I joined. We have continually just enhanced that overtime. I think it's think best in class financial disclosure.

And then actually I totally agree with Jackson. I mean in terms of the team that we have here at Spirit. I mean, I do think we have a best-in-class finance accounting, tax and FP&A team and I do think the go forward team is very well positioned.

Jackson Hsieh

And then I know, you could look at this is sort of glass half full or half empty, but I would tell you that if you look at the people, Ken was hired last year, as Head of our Asset Management Team; Dave had a Research; Bill, we moved him to Head Credit, Danny has been with the company for 11 years now is moving from his direct sale leaseback efforts to really have an acquisition team. And as I said, CFO - CEO and CFO of SMTA and our new Board for SMTA those are all the - we were well down the road with all those individuals and expect to have them in the seats very, very shortly.

Vincent Chao

Okay. Maybe just a different topic, just looking at the total rent recapture rate. Over the last couple quarters, it's been coming down obviously it's difficult to retail market. I am just curious if you feel like that has stabilized at this point and could potentially go higher going forward or do you think sort of that 80ish% level is about where we're going to be for some time?

Jackson Hsieh

Are you referring to the, on the renewals?

Vincent Chao

No, the total rent recapture that you disclosed in the Supplemental, not the payback [ph] from it, but it is about 79% in the quarter.

Jackson Hsieh

Okay. When you look at that obviously, it depends on if you have tenants going weaker. I mean I would say that through the headline from me, if I look at it, I think about what was happening in the first quarter last year, where we are today. I think it's really largely behind us. The last small portfolio of assets that we're moving into SMTA we have referred to sort of the workout portfolio, chapters learning for instance is in that portfolio that's three of them the rank number 82 in our top 100 property list, 0.3% of rent, we filed bankruptcy last month. So it's literally like poor tenants that are moving in and I think it will be largely behind us and I think you'll see much more steady rates operations out of Spirit going forward, more some over our peers.

Vincent Chao

Okay, thank you.

Operator

The next question comes from Daniel Santos with Sandler O'Neill. Please go ahead.

Daniel Santos

Good morning, thanks for taking my question. Just going back to the C3 transition. Just wondering, once you have those 3 executives that you mentioned in place should we expect that the transition period should be over?

Jackson Hsieh

Yes.

Daniel Santos

Or more team members that you are looking to bring them onboard?

Jackson Hsieh

Yeah, that's ….

David Corak

Okay.

Jackson Hsieh

I mean there are some minor - I could tell you just from processing standpoint, I mean it's all about dual company running right now. Every process that we are running internal, whether it's credit committee, disposition committee, talking about any - our senior management team meetings, everything is sort of done in the way of thinking like you are two companies at this point. So we have, it will be completed with this last series of changes.

Daniel Santos

Got it. And then will it impact, affect any deals that are in process and how should we be thinking about acquisitions and dispositions in the year? Thanks.

Jackson Hsieh

First of all Dan Rosenberg has been running our direct sale leaseback team since later last year. And as a goal I can tell you that we want to do more business with our existing tenant base. We have over 400 tenants a number of them are largely in the right area of heat map that we need to expand them. That's not something that we won't buy assets from brokers, that's always part of the flow as well.

But if you look at what we acquired in 2017; 2017, we had a $144 million group of acquisitions in the first quarter, 82 in the second, 62 in the third and zero in the fourth. So it did roll off, but it's rolling right back up again.

And if you look at the 2017 acquisition class, I will show you this will be get the city around the heat map and shows where these things actually, how they fit in our heat map but the 3 Home Depots the new FedEx building we bought in Michigan, the distribution center, all the entertainment assets I would say about half of those assets were bought through our existing tenant base. So I don't think we're going to see really any disruption at all to answer your questions.

Daniel Santos

Got it. Thanks. That's helpful

Jackson Hsieh

Thanks.

Operator

The next question comes from Vikram Malhotra with Morgan Stanley. Please go ahead

Unidentified Analyst

Hi, this is Kevin on for Vikram. I had a quick question in terms of the rent coverage, it looks like it dropped a little bit this quarter. Just wondering if you can give any additional color around that?

Jackson Hsieh

Yeah, so the rent coverage. Once again it goes - we referred to the top 10. I mean we - first of all to answer your question Shopko rent coverage was basically on the margin actually improved from third quarter to fourth quarter, third quarter and fourth quarter. We had some softness in our Church's Cajun portfolio, there was some weakness in sales there that's what sort of had some of them to push down AMC Carmike's. AMC is in the process of integrating the Carmike portfolio when the process of doing again extends and putting capital into those assets right now. So we saw some weakness on the coverage there.

But the big impact was we sold the Albertsons property up in [indiscernible] and that sort of made them drop of the top 10. Well, Albertsons 4-wall coverage is over 6 times. So moving, Regal back up on the margin had a little bit of numerical impact to it.

I would say overall for the portfolio, we have seen some reduction in coverage. I would tell you I think part of that is general sort of what's happening in the business, but I mean it is not a trend that I'm really concerned about at this point. I think we have a very durable service oriented retail portfolio.

Unidentified Analyst

Okay, thank you for that. And just one quick question, in terms of the tenant watch list, are there any issues or any new tenants that are on your list or you keep your eye on?

Jackson Hsieh

In the first quarter last year we obviously had a lot of things that were creating lot of headaches. I could tell you where we are today we just really don't have any, I mean we're moving the things that - the handful of small things that are moving over into SMTA are other sort of last things basically in the first quarter that was identified last year that was sort of pushing us.

Unidentified Analyst

Okay and then just one last one, any update on the spends anything you think we should now since the path forward III.

Jackson Hsieh

No, I mean I think we - obviously I know people want us to put our guidance probably, but I mean, we're on track, you see the public live filing really shortly. I would hope at the end of next week. But it's going to be the following later. So we will get the live filing out. You're not going to see the new Board members or executives of SMTA in place but in subsequent filings shortly, you will see them. And I think that it will make more sense for us to give guidance for new Spirit once those numbers are out.

But you can do the math, you have got 4.5 times to 5.5 times, it's depending for buying assets or buying back stock in new Spirit. It's actually quite accretive. So we're not really concerned, but just from a timing standpoint, we really want to get ahead of ourselves but on trying to get guidance.

Unidentified Analyst

Okay. Thanks a lot. That's all from me.

Jackson Hsieh

Thank you.

Operator

The next question comes from Ki Bin Kim with SunTrust. Please go ahead

Ki Bin Kim

Thanks, good morning everyone. Can we talk about the dividend pro forma for the company, any chance of you guys cutting the dividend after the spin is done to preserve capital which might be the right move?

Jackson Hsieh

Yeah. After the spin is done, we haven't come back the dividend policies for both companies yet, but we will, we are still evaluating it. So I really want to get ahead of it yet, but I can tell you that for sure the SMTA is going to have a very high payout ratio, I can't tell you that.

Ki Bin Kim

Yeah, I can see that. But I'm talking about the new Spirit because if you want to operate and retain cash flow, I can imagine dividend cut, that's why I ask. Okay. So the other interesting thing is that it seems like a lot of releases have a CPI component to it. Can you talk a little bit more about that, what the mechanics are, is it on the annual basis or quarterly or it's a longer-term? And given the kind of early signs of some inflation in the US any kind of meaningful impact to you guys?

Phil Joseph

Yeah. out of all the leases that have escalators, which is about 89% of the portfolio, you can see, about 37% of those are CPI-related. And they typically have some type of floor in them. But yes, it will get a boost as those come. Some are annual, some are every three years but the majority of our escalators are on the fixed category. Some annual, some 10% every 5 years.

Ki Bin Kim

Okay. I guess maybe a little too early to tell what the financial impact could be?

Phil Joseph

Well, I think what you're sort of looking for is, they are going to be in different buckets. So in new Spirit, about 20% in the portfolio would be CPI related, 15% flat, 65% contractual bumps; and then SMTA you will 35% contractual, 61% CPI related and 4% flat. So [indiscernible] SMTA is going to have much more upside fluctuation, in a rising CPI environment was new Spirit obviously, we'll have more just semi contractual bumps.

And that is probably the function of, you think about the assets in new Spirit, we talked about it a little bit. Our top five tenants will be Walgreens, Churches, Couche-Tard and Home Depot and CVS.

So that's coming out of more investment grade orientation. Just in the top 5. And so, yeah, as you, as you think about how CPI impacts the portfolios that would just we do not have a model yet for to give you, but directionally I think you know most of the CPI portfolio will be in terms of SMTA.

Ki Bin Kim

Okay. And lastly, I know there is always differences in methodology for same-store, but if I actually, if I look at the diversion, it seems like the ones that would be left may not be in the same-store calculation for contractual rent increases as a percent you guys posted. But FX on [indiscernible] it looks like it might have made a decent impact. What does that seems when I look like with the relating?

Phil Joseph

From a same-store perspective as it relates to the same-store pool. We have laid out in our disclosure is and includes those leases, excluding multi-tenant, excluding vacant properties and relate impact of those tenancies should be impacted in the overall same store, same-store pool, the 0.5% that we disclosed. One of the things that I want to call out as well was that there were certain tenancies that were driving same-store rent lower year-over-year and tenancies that are moving to SMTA. And if you exclude the impact of those our same store would have actually been 2% in new Spirit.

Jackson Hsieh

In new Spirit.

Ki Bin Kim

Okay. Alright, thank you guys.

Jackson Hsieh

Thanks, Ki.

Operator

The next question comes from Haendel St Juste with Mizuho. Please go ahead.

Haendel St Juste

Hey, good morning.

Jackson Hsieh

Good morning.

Haendel St Juste

Yeah. I was hoping you could expand a little bit on your comment about the leakage in the assets you are selling. Is it something that you're referring to the assets being empty in terms of leakage or is it something perhaps in the outdoor ways? Just trying to understand how much of an opportunity could be there and over what timeframe perhaps you can achieve some of those implied efficiencies?

Phil Joseph

So I mean I guess we are talking about the property cost leakage. This last quarter when we look at the property costs leakage, third quarter was really where we want to be operating from a property cost leakage perspective and I'm saying specifically go forward Spirit.

We're targeting about 2% of revenues from our property cost leakage perspective. When you look at the fourth quarter, they were just certain issues that came up with respect to obviously credit issues and specifically tenancies that are transitioning to SMTA. We had some incremental vacant asset leakage and Gander I will point out in particular was a part of that. And then we had a one-time [indiscernible] expense with respect to certain tendencies, that's not a go-forward basis. So I think go forward for Spirit 2% of revenues is a really good run rate number.

Haendel St Juste

Got it. Thanks Phil. Another question, perhaps on deal flow. Looking a bit here at Danny's background seems to be more of a sale-leaseback. Curious if we should expect to see those types of deals accelerate as we move forward under his leadership there? And what potentially that implies for I guess the types of deals you will be looking at near-term?

Jackson Hsieh

I mean, he's personally been doing it very successfully for the past, been doing this since early part of last year. But what I cast him to do back in early 2016 was look we have a portfolio of over 400 tenants. We're not going to want to do business with all of them, necessary repeat, but there are very good number of tenants that we want to actually do more. And so he basically started to coordinate that effort, working with our existing tenants, trying to do things more directly, i.e. not a broker. And we will start to get good traction there. And I don't think there was as much focus on organizationally.

And like to tell you from what early returns we're seeing, the benefits are when you buy properties with existing tenants you first of all get them what you want to lease more, number one. Number two, you can actually put them into existing releases where we have ownership. So that's a benefit, Three is like what you said, we're talking to our tenants on a much more frequent basis today than we were a year ago. And you just learn things where there's opportunities, where there's things that we can help one another just like in Shopko.

So you'll see that more out of our after going forward. And I think you get better pricing, you get better terms and conditions. You have much more control over your deal flow. That doesn't say that we won't buy Home Depots on the open market. We bought three last year. We bought a brand new FedEx distribution center in Michigan, which is great property. So we will continue to do that and there is a team that focuses on that, that Danny is going to take on. But we look at this as a real opportunity to give him some runway to grow. It also gives people in our asset management team an opportunity there should be some promotions in that group, when people will take on more responsibility under Ken. So it's just part of the natural evolution of as organizations develop.

Haendel St Juste

Appreciate that. One more, then I'll jump back in the queue. You mentioned the coverage through top 10 tenants of 2.1 times. What's the coverage for the remaining portfolio, what percentage of rent is that as well?

Jackson Hsieh

So I mean in terms of percentage, about 50% of our tenants overall today give us reporting units, about 51%. We're running at about 2.7 times as a portfolio, if you exclude manufacturing assets that number that drops down 2.6 times that for the 51%. When we actually split the company in terms of that 51%, the large majority will actually of those reporting units moving to SMTA. So just directionally and once again, the drop in coverage is not related to Shopko it's sort of isolated, some go up some go down, but we had obviously Cajun AMC had a negative impact this past quarter.

Haendel St Juste

Okay. Any early conversations Albertsons, any early color or thoughts you can provide on that front?

Jackson Hsieh

I think we have 23 Rite Aids and 22 Albertsons right now. I think makes lot of sense right now if you think about what Walgreens and CVS are doing in terms of providing more service and health in the box and trying to get away from retail. If you think about Rite Aid had great balance sheet but less coverage. So for them to kind of go to a service model to compete against CVS and Walgreens, I think that's like a tough last a long time, right.

So potentially for Albertsons to move is kind of a very interesting idea because we see that for instance in Shopko. Shopko is pharmacy and optical within what they do and their general merchandising box delivers significant flow through EBITDA. And so I'm sure Albertsons - I think for Rite Aid to compete it's kind of very interesting idea. Obviously they're both - Albertsons has nationwide portfolio and I think that will be very interesting opportunities as they think about it. So I hear you very positive relative to Rite Aid standing alone and trying to complete head to head with CVS and Walgreens.

Haendel St Juste

Appreciate that. Actually I apologize, I just got email from an investor and so, it's okay if you just want to read the question for you. We are trying to understand how stable SpinCo and SpinCo's payment to remain are struggling a bit. Can you help with the few structural questions, one is the run rate annualized amortization for the SpinCo Master Trust around 44 million and annual amortization on the Academy CMBS around 3 million.

And then secondly, if the Shopko rent goes away is it correct that you would have to cut the dividend on SpinCo zero and only be able to pay out one-third of the preferred dividend back to Spirit for make up?

Jackson Hsieh

First of all that's a lot of stuff. So I would just have the amortization of 40 million is higher. The run rate is more like 33 million on the MTA assets. And as it relates to like scenarios on - what just speculate because we're designing a structure as it relates to the preferred investment that we have in the management contract to kind of work in sync with the assets that are sitting in SMTA.

Haendel St Juste

Got it, thanks. I'll follow up offline.

Jackson Hsieh

Okay.

Operator

The next question comes from [indiscernible] with RBC Capital Markets. Please go ahead.

Unidentified Analyst

Good morning, guys. You guys are doing a pretty good job looking to track down the cost of capital by the lowering the debt levels, clean up the portfolio. To me the next leg down for drive down the cost of capital appeared to be demonstrating value creation through external growth. I wonder if you agree with that. And then if so, how do you view way improving your acquisition platform, but new acquisitions this year versus investing in existing tenants or in the portfolio via buyback?

Jackson Hsieh

Well, look I think you hit around the head. You make money in my opinion on things you buy. I think if you think about where we were deploying capital in the third quarter, and fourth quarter 2016, our stock was very, very undervalued in our opinion. As we move forward like I said, I think that buying with tenants that we know we like, we understand, what we can do it directly. I think you create more value doing that I think the cap rates will be better. We've got ability to kind of control our pipeline.

And so we want to we really want to grow our asset base, in the Spirit. And over and SMTA they will grow. I mean, but it's more cycling of Shopko assets into similar type of assets and we're talking about that would go into Spirit. So as you said, you actually make money on the things you buy, very clearly as opposed to things you sale. So we are very sensitive to that.

Unidentified Analyst

Okay, thank you.

Jackson Hsieh

Thank you.

Operator

The next question comes from John Misaka with Ladenburg Thalmann. Please go ahead

John Misaka

Good morning.

Jackson Hsieh

Hey, John.

Phil Joseph

Hey, John.

John Misaka

So you guys mentioned that you felt your stock was undervalued. How do you view the buyback program today and maybe more particularly, is there any reason that you could not utilize the program between now and the completion of the spin?

Jackson Hsieh

To answer your question. Remember, like what I laid out a path forward back in August 6.3 times debt to EBITDA at year-end. That was like a real target. I mean I did not just say. So if you sort of look at quarter-to-quarter what we bought what we sold, how much stock we bought back. It's all added up to 6.3 times, not by accident.

As we think about buying back stock today. As Phil said the priority is to actually get the Master Funding cash in those release accounts deployed, it still had its foot there. We can't take it out, there's penalties if we wait too long. They're designed to be used.

So, that takes kind of first priority. And if you think about buyback like now versus later I think you actually get more impact potentially in buying back postponement Spirit versus if we bought back today 80% of the company, benefits from the buyback, 20% goes to SMTA. So our sense is that we're focused on right now adding assets into the combined companies. And we will still look at buyback, obviously it's - I can't tell you what our cost of capital is. Obviously for new Spirit, but obviously that's going to be an important benchmark for us.

But I don't suspect that we will be buying back shares in the first quarter, it's really going to be more top line assets right now as I said, focusing on the recent count cash particularly in Master Trust 2014.

John Misaka

But if you fill your cost - it's obviously theoretical we don't what the cost of capital is going to be, but you fill your cost of capital. Do you feel that was a better investment opportunity to buy back your shares and post spin Spirit, you would still be willing to do that as opposed to ramp back with the new condition there?

Jackson Hsieh

Yeah, no question there. I mean, look, buy back shares obviously it's not only accretive for earnings based on dividends. And we're not just buying, as I said earlier the things you buy is where you generate returns, it's a great sense of that. So to buy things if our stock is at a better value than where we can deploy assets well that's really - the math is the math on that. So now I'm hopeful that we will have a competitive cost of capital, and we're doing all the things that we talked about to get ready to do that.

But as I said we can't control that necessarily, but what we can do is we can make real conscious decisions on getting good returns for our capital.

John Misaka

Understood. That makes sense. And then kind of switching gears a little bit you mentioned that kind of excluding assets that are transitioning to SMTA, SS NOI growth would have been around 2%? If we look at it on kind of an industry basis, is there any industry on page 17 of the stock where that would lead to a big jump in SS NOI growth or would it kind of be and across the board increase in performance?

Jackson Hsieh

Let me make sure I understand question, John. So you talked about like same-store or….?

John Misaka

Yeah. Same store NOI growth.

Jackson Hsieh

So same-store is tricky to get general trends to be honest with you. Like Church's learning has a big impact in that segment filed just they were sort of declining in the fourth quarter performance wise. We obviously filed bankruptcy last month. In the entertainment area we have one go card operator. Small asset that's making trouble it was same asset back in the first quarter of 2016 it is not new to us. On the health side there is a small portfolio of neighbor health assets moving over and there is a car dealer?

So these are very small isolated things, but they were things that sort of paint a much dire picture than really is the case, very small portfolio.

Phil Joseph

Right. The other thing I'll add and Ken kind of touched on this as well is that obviously there is periodic versus annual escalators that are going to come through at any one point in time. And then as it relates to percentage of rent, we don't recognized percentage of rent on an accrual basis, we do recognize it on a cash basis in same store then also had a minor impact to the downside during the quarter-over-quarter period. So is there is a whole bunch of different factors that come into play in the same-store, just on a run rate basis.

John Misaka

Understood. And then kind of with the theater operators performed very best amongst your segments on a same-store NOI growth basis. Is some of that tied to, I know you've had theatre operators you're having trouble with around this time last year. Is that just weaker comps or was there something specific that drove outperformance in that segment?

Jackson Hsieh

No, that was really just a theater development coming online compared to the prior period. So that was the main driver there.

John Misaka

Okay. That's it from me. Thank you guys very much.

Operator

This concludes the question-and-answer session. I would like to turn the conference back over to Jackson Hsieh for any closing remarks.

Jackson Hsieh

Okay, thank you very much. In closing, and this really goes out to our public equity investors who are new and existing MTA bondholders that are unsecured investors and all of our other relationships with vendors, but we really appreciate your continued support, interest and patience, our efforts to improve our people processes, portfolio and balance sheet.

As your new CEO since the second quarter of 2016, I have really tried to deliver what we've communicated to you. If you think about if there were lot of unanswered questions back in 2016. Today we have the answers. So we are really positioned to focus on driving growth in new Spirit and SMTA In 2018 and beyond. So once again I want to thank you again. Bye-bye.

Operator

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