Spirit Realty Capital's (SRC) CEO Jackson Hsieh on Q1 2018 Results - Earnings Call Transcript

Spirit Realty Capital, Inc. (NYSE:SRC) Q1 2018 Earnings Conference Call May 2, 2018 8:30 AM ET

Executives

Jackson Hsieh - President, CEO & Director

Michael Hughes - EVP & CFO

Analysts

Vincent Chao - Deutsche Bank

Ki Bin Kim - SunTrust Robinson Humphrey

John Massocca - Ladenburg Thalmann & Co.

Vikram Malhotra - Morgan Stanley

Collin Mings - Raymond James & Associates

Haendel St. Juste - Mizuho Securities

Wesley Golladay - RBC Capital Markets

Operator

Good day, and welcome to the Spirit Realty Capital 2018 First Quarter Earnings Conference Call and Webcast. [Operator Instructions]. Please note, that this event is being recorded.

I would now like to turn the conference turn the call over to Cara Smith. Please go ahead sir.

Unidentified Company Representative

Thank you, operator, and thanks, everyone, for joining us today. Presenting on today's call will be President and Chief Executive Officer, Mr. Jackson Hsieh; Chief Financial Officer, Mr. Michael Hughes; 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 thanks, everyone, for joining our First Quarter 2018 Earnings Call. This morning, I'll discuss the results of the quarter as compared to last year, touch on the Sprint transaction, review our capital allocation activities and provide an update on Shopko. Additionally, we are pleased to welcome Mike Hughes, our new Chief Financial Officer to the Spirit team. Mike will discuss our financial results in more detail and provide our guidance expectations for the balance of the year.

We will then take your questions. Beginning with our first quarter results. Our diversified portfolio of triple-net real estate posted superior operating performance in the first quarter 2018 as compared to the same quarter of the prior year, which, again, was a reflection of our high-quality portfolio as well as the process improvements and management changes that have taken place over the last 12 months. As I've discussed on prior calls, our operations and capital allocation capability year-over-year has improved significantly. Consider our first quarter 2018 results compared to last year, across a wide range of metrics and the improvement is clear.

Our total revenues were essentially flat despite a net decrease of 142 properties. Our FFO was 10% higher. Our outstanding share count was approximately 9.8% lower, our adjusted debt to adjusted EBITDA decreased from 6.5 to 6.3x. Our property cost leakage reduced by over 41%, improving bottom line profitability by $2 million. Our loss rate reserve, excluding the recoveries in Q1 2018, is approximately 0.4% of rental revenues this year versus 2.6% of rental revenues in Q1 2017. Overall, we had a positive rent in Q1 as a result of rent recoveries.

And our occupancy rate improved 120 basis points from 97.7% to 98.9%. Our company is in a stronger position than it has ever been, and we are very proud of these results. Yesterday, the Spirit board formally approved the spin-off plan and set the record of distribution dates. This action represents a culmination of the huge work of hard work and dedication of the entire Spirit team.

Once completed, we will finally be able to remove severance structural impediments that will result in a more superior and more diversified investment grade real estate portfolio, better operating statistics and significant balance sheet capacity for growth. Post-spin, Spirit's adjusted debt-to-adjusted EBITDA ratio will be in the 4.6 to 4.7x range, the lowest level in the company's history.

For SMTA, the amendment we secured on our Shopko master leases will give SMTA the disposition flexibility to more aggressively and creatively dispose of the Shopko assets. In addition, during those sales proceeds to the financing efficiency with the 2014 Master funding facility and improved collateral pool will in turn generate greater free cash flow and residual value from the 2014 master funding facility.

Turning to top line performance. For the first quarter of 2018, contractual rent was $149 million, and our cash rent received for the quarter was $148.3 million. The $700,000 of lost rent was primarily caused by a majority of tenants that will be in SMTA post-spin. From the same-store perspective, our contractual rent was 1.5% year-over-year. This reflects strength in our cinema, medical office, restaurants and specialty retail categories.

Starting this quarter, we have updated our same-store disclosure to better reflect same-store contractual rent escalations. The definition of same-store contractual rent escalations is fully laid out on Page 17 of the supplemental. But in short, this metric includes all properties owned throughout the measurement period in both the current and the prior periods, but excludes multi-tenant and vacant properties and properties with loss rent reserves during the period. We believe this methodology provides a better picture of our portfolio's organic growth. By contrast, using our previous definition, same-store rent grew 1.4%.

Now turning to capital allocation. Given our stock price and significant discount to NAV, we have continued to allocate capital to common share repurchases. During the first quarter, we've repurchased over 13.2 million shares of common stock at an average price of $7.88 for a total of $104 million. We've continued to repurchase, common stock through April bringing the total year-to-date stock repurchased to 21.2 million shares at an average price of $7.90. In the past 12 months, we have acquired approximately 12% of the outstanding stock of Spirit Realty Corp. 57 million shares at an average price of $7.89, resulting in $450 million of capital deployed.

As of this call, there are 426.4 million shares of common stock outstanding. Our Board of Directors authorized a new $250 million stock repurchase plan, which provides us with ongoing flexibility to take advantage of value dislocations in our trading price of 8%. Consistent with our stated deleveraging and portfolio optimization strategy, we, again, were a net seller of properties in the first quarter, having sold 29 properties to only $38 million, including four vacant assets. These sales correspond with the identified categories in our hit map for which we intended to reduce our exposure. We've invested $9.9 million into the acquisition of a new asset and provided additional funds to a number of revenue-generating CapEx projects and development projects.

We did not close any Shopko sale in the first quarter. However, we do have interested buyers and this remains one of the highest priorities for Spirit. The financing for Shopko properties is continued to be a headwind. We have a number of new Shopko sales initiatives underway and expect to have more activity to report in the second half of the year. Additionally, we have committed to approximately $86 million in development projects and takeout funding for existing and new tenants, where the yield premiums were positive for us, including Andy's Frozen Custard, Camping World, Shooters World and Circus Tricks at a weighted average cap rate of 8%. We spent the majority of the funding to be complete by the end of 2018.

Now a brief update on Shopko. Shopko improved their bottom line EBITDA performance for their fiscal year 2017 and in the year, ending the year with a positive $26.7 million improvement to fiscal year 2016. In the stores that we own, total EBITDAR for fiscal year '17 increased by 6.2% to $119.8 million. Pre-overhead SCCR for our portfolio increased to 2.55x from 2.41x comparing fiscal year '17 to fiscal year '16. Shopko management has shared with us that their EBITDA performance continued to improve through the first two months of fiscal year 2018, delivering March 2018 year-to-date EBITDA positive with a positive $8.7 million over fiscal year 2017.

Although sales were challenging for the month of March and continue into April, as a result of continued late winter weather, liquidity is stable and in line with expectations as vendor terms continue to improve after compressing last year. Please note, the foregoing information was supplied by the Shopko and Spirit management takes no responsibility for its accuracy. Finally, I want to touch on the company's valuation relative to the quality of our portfolio. As you recall, in connection with the 2014 Master Trust Notes issuance, a major portion of our assets were praised at 6.75% cap rate, and we were able to refinance these assets at 75% loan to value. These are real-world facts.

Prior to our difficult Q1 2017 earnings call, market pendants were applying an average capital to our portfolio over 100 basis points lower than their current estimates today and there's currently 100 basis points above our peers. We believe that as we move forward and continue to produce strong results, the market will recognize the quality of our portfolio, our accomplishments over the past year and the benefit of creating two new companies with independent growth strategies. As this occurs, we have no doubt that the current GAAP evaluation that exists between SRC and its peers will largely disappear.

Our focus remains on delivering on our goals, and we will let our results speak for themselves. Before I hand the call over to Mike, I just want to reiterate to our shareholders how personally excited I'm to be leading this transformed Spirit Realty platform into the future. So many positive achievements across so many fronts have been accomplished here at Spirit Realty. I can assure you that our 87% team at Spirit will not only be owners of both companies will also be excellent stewards as we drive both businesses forward. I will now turn it over to Mike.

Michael Hughes

Thanks, Jackson. Good morning, everyone. I'd like to start by saying that I'm thrilled to be joined the Spirit at such an exciting time. I've actually been a Spirit's stockholder for the past year, investing after Jackson stepped into the CEO role, having closely monitoring Spirit's transformation. I've known Jackson for many years as a banker and believe his experience and reputation speak for themselves, which is the reason I both invested in Spirit, and ultimately, agreed to join the company.

In my short time at Spirit, I've witnessed first-hand the controls, procedures and discipline that Jackson has implemented and the quality of the team we have in place. And I believe that Spirit is now well positioned to enter its next chapter and create value for all stakeholders.

As CFO, I tend to partner with Jackson to build upon the foundation he created by maintaining a conservative, but flexible balance sheet with access to a diverse set of attractively priced capital sources, continuing to provide strong disclosure to help investors understand our portfolio and operations and fostering a culture of discipline, transparency and accountability.

I look forward to meeting with many of you in person in the coming weeks, and again, I'm happy to be on board. Now turning to the first quarter results. We reported AFFO per share of $0.21 or $0.22, excluding severance charges versus $0.20 for the same period last year and grew adjusted EBITDA by $3 million.

Despite being a net seller of real estate over the last 12 months. These increases were largely driven by lower reimbursement property cost or leakage, lower reserves for lost rent and higher interest income. AFFO per share also benefited from our continued share repurchase activity. In particular, leakage, which is the lion share of property cost, was only 2% of total cash rent this quarter compared to 3.3% for the same period last year. One of the team's responsible for this improvement is administration, we retool our billing and tracking process, resulting in tenant reimbursements as a percent of property cost, increasing from 44% to 60% quarter-over-quarter.

Another important driver to the reduction of leakage and lost rents where efforts to call the portfolio vacant properties and trouble tenants. As Jackson mentioned, we disposed a 29 assets during the quarter and weighted average disposition cap rate of 12.3% was skewed by one tenant, Unique Ventures that declared bankruptcy in the first quarter of 2017 and leased 22 of the 23 revenue-producing assets sold during the quarter. The proceeds from these sales were deposited into the Spirit Master Trust in 2014 release account. The remaining three revenue-generating properties were sold for weighted average cap rate of 7.6%. The majority of the proceeds from the one revenue-producing asset sales along with 4 vacant properties were transferred to CMBS special servicer and satisfaction of $33.9 million in secured debt schedule to mature in 2018.

Overall, the disposition this quarter were an anomaly, and we do not expect to repeat for the remainder of the year. Also, during the first quarter, we funded a $35 million B1 term loan to Shopko, secured by the collateral of the Shopko $784 million asset-backed lending facility. Our term loan bears interest at a rate of 12% per annum and matures in 2020. This loan will be contributed to SMTA. Concurrently with this loan, we admitted our Shopko master lease to provide us with greater flexibility to dispose the Shopko assets and gain more visibility into the Shopko's operations.

Post-spin, these recent enhancements will allow SMTA to efficiently execute its asset recycling strategy, creating value for its shareholders. And turning to our balance sheet. As Jackson mentioned, we repurchased 13.2 million shares of common stock during the first quarter. It's important to note that despite these large stock repurchases, our adjusted debt to analyzed adjusted EBITDA actually declined to 6.3x at quarter-end compared to 6.5x for the same period last year. During the second quarter, we will be repaying $123 million in master trust 2013 secured notes, generating annualized interest savings of approximately $1.1 million. And going forward, our liquidity remains exceptionally strong, giving us the flexibility to pursue accretive acquisitions or take advantage of dislocation of our common stock price. As of April 30, we maintained $1.1 billion in available liquidity, consisting of approximately $8 million in available cash and $959 million of availability under our revolving credit and term loan facilities.

In addition, we have approximately $98 million in 1031 exchange and Spirit Master Trust release accounts, the majority of which is earmarked for acquisitions. Pro forma for the spin-off transaction, we expect that our adjusted debt-to-adjusted EBITDA will be approximately 4.6x to 4.7x and 80% of our assets would be unencumbered. In addition, approximately 24% of our rents would be derived from investment-grade tenants with additional 19% being generated from tenants that we categorized as investment-grade equivalents. We expect the strong balance sheet metrics, combined with enhanced quality and diversity of our new portfolio will improve our access to capital.

And turning to guidance. We are now providing guidance for Spirit as a stand-alone entity. Pro forma for the expected distribution of Spirit MTA REIT as distributed as of January 1, 2018. For the full year 2018, we project FFO per share of $0.66 to $0.68, excluding severance charges incurred during the first quarter. Capital deployment comprising acquisitions, revenue-producing capital expenditures and stock repurchases of $400 million to $500 million. Asset dispositions of $50 million to $100 million and adjusted debt-to-adjusted EBITDA of 5.1 to 5.4x. With respect to spirit's common dividend going forward, beginning in the third quarter, we expect to target a dividend payout ratio as a percent of AFFO of approximately 75%. We believe that this dividend policy will bring us in line with our investment-grade peers, enable us to maintaining our conservative low leverage balance sheet and allow for the accretive reinvestment of retained earnings, which will provide steady and achievable dividend growth in the future.

As always, the actual amount of quarterly dividend distributions is subject to be approval of our Board of Directors given that SMTA shares have not yet been distributed, we will not be providing guidance for SMTA's earnings or dividends at this time. The appropriate timing of those communications will be decided by the management team and board of SMTA.

With that, we will now open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. And the first question comes from Vincent Chao from Deutsche Bank.

Vincent Chao

Just wanted to make sure I understood the ins and outs of the Spirit guidance versus the Path Forward III. At the time, I think it was $0.65 at spin, this is a forward-looking numbers, so just is the difference in the $0.65 versus the range just you made investment that you've got in there the $400 million and $500 million and then on the post-spin debt-to-EBITDA, I think 4.6, 4.7 that's what I heard or thought, that's a little bit higher than the 4.5 back in the Path Forward III. Is that just due to your share repurchases completed since that time?

Jackson Hsieh

Vincent, this is Jackson. Yes, you're pretty much right on top of that. The share buybacks that we put in place marginally debt to EBITDA that 4.6x range. And the full deployment of the capital plan that Mike articulated, basically drives the $0.66 to $0.68 range on stand-alone Spirit.

Vincent Chao

Okay. So the starting run rate, though, we should still be thinking about in terms of sort of $0.66 ish range, 65% range.

Jackson Hsieh

65 is good. Yes, remember on the Path Forward III, EBITDA slightly higher, right you've got closing year in 2017. So EBITDA is actually higher first quarter annualized. And there's a differential between the Path Forward III in the Form 10. But 65 is a good starting point and ending point will be in that $0.66 to $0.68 range.

Vincent Chao

Got it. And could you just give us an update on sort of the CEO on board search for SMTA?

Jackson Hsieh

Sure. Well, first of all, Ricardo is always leave right now, but he's going to serve as CFO of the REIT and be the interim CEO. We have four independent board members that have been identified have agreed to come on board and we plan to put them in our next filing, which will be the later this week in the Form 10. But to give a little description, our lead trust is currently standing REIT CEO, our Head of Audit share is currently the audit share for public real estate some of them have known for many years. We were involved in the GDP bankruptcy together. Our comp share is a principal on a private equity firm, not really sure, but general PE firm. And our Head of Non-Gov was actually the senior restructuring banker that we hired as part of the our process this year when we were looking at different alternatives. So I feel really good about the independent board. And as it relates to CEO, we're continuing that process, and we've decided that we wanted to make sure that the new board had some ability to have some input in that individual. So I think that we'll have more to say about that in the coming time, but right now, we feel like we're adequately staffed with a really good board and Ricardo, who is obviously very versed in the master funding vehicle and the ABS market, so he will able to really articulate the benefits of that of that opportunity.

Vincent Chao

Okay. And just one last one if I might. Just on the Shopko sales, it sounds like when the financing is still an issue and you guys had been talking about providing vendor - financing your sales. And I was just curious how that process is going? And if the lack of sales reflection a sort of the deals that maybe didn't look that attractive to you versus buyers here looking to use your own capital as a source?

Jackson Hsieh

Yes, I characterize that there's no shortage of buyers. Actually, we still have - we've signed up a number of more - we have more buyers coming that we're entering either analyze or purchase contracts on Shopko sales. Unfortunately, in the first quarter, we just had a few guys left. There was a variety of different reasons, but I'd say, it was principally related to their ability to arrange financing. So I would tell you that we do have in the current field that we're looking at some do have financing that we're associated with, providing some forms financing. Others are clear. So we expect that the pace is going to pick up this year, and I feel pretty good about it. And you should also know that, our people should know that the sale of Shopko assets is a major KPI for all the named executive officers of Spirit.

So when you look at those scorecards, one of the things that's critical for us this year for senior Spirit are we actually have certain threshold targets in terms of dollar volume for Shopko sales this year. So it's a major KPI here. The other thing, I just say to you is on Shopko itself, but we feel really good about what the new management team at Shopko has been doing the last 12 months. As I said in the past, we have configured Board of Directors there. Their vendor terms are improving. Shopko is a lot better today than where we were sitting a year ago, this time. And most importantly, two things, their operating plan that they put in place, the new management team last year is starting to really be on plan and on target in terms of what they said they were going to do. And the liquidity access to liquidity is still positive relative to their ABL. So we would plan to kind of moving forward here.

Operator

And the next question comes from John Massocca from Ladenburg Thalmann. And the next question comes from Ki Bin Kim with SunTrust.

Ki Bin Kim

Can you go back to the dividend policy. I think it's the good thing that you guys cut the dividend to 75% payout ratio, obviously, you want to set up new story for success. But just curious on the spinoff dividend policy. Have you have that amortizing debt of $35 million. Is the idea here to take that into consideration so to make the payout effectively after that amortization? So on a net basis, the total dividend to combine shareholders should be around $0.59, $0.60 is right?

Jackson Hsieh

Okay. Well, I mean, if you saw on the Form 10-Q, we have that on the dividend policy, there's that magic page. And if you sort of look at that page, I think that's Page 109, it's 76. sorry about that. So basically, cash flow available for distribution is going to be approximately 46-plus or minus million, so that's after amortization, after fees, after preferred and the things that we've been talking to the new board about that we've had several face-to-face meetings with them, they're obviously not on the board yet. But we've talked about the concept of 100% for dividend. We've talked about the concept of up to 50% of Shopko sales proceeds being returned to shareholders via special dividend. Now this has not been approved by the board obviously, because the new board is not in place. But we've talked a little bit about this plan.

We've actually recommended the plan and just so you know, this was the same plan that we used with our board as we described the opportunity in relation to the solvency opinion and all the other things that you do for spinoff like this. So longer or shorter, the dividend, including specials and ongoing run rate dividend on SMTA could actually be quite high. The other thing, I sort of draw your attention to is you sort to have to really think about SMTA in a different way than I think people do think about it. SMTA is really private equity fund that's public. We have promote structure here at Spirit that we'll be directly tied to on the performance of the stock price so that opportunity for SMTA. So what does that - why do I call the private equity fund? We're going to liquidate noncore assets, the noncore unencumbered assets will be liquidated. We're going to enhance the master trust through either buying new properties and/or recycling on the margin some of the assets within that master trust. We're going to return capital to shareholders. If you do it faster, better for our IRR purposes, right? And then we're going to monetize the master trust.

As you know, in the Form 10, that you just saw, we've made some changes for the contract, the asset management contract that we think give the Board more flexibility to sort of drive value in the form of like a private equity fund, the termination fee, it was reduced from 3x multiple from the first 18 months to a flat 1.75x. We've also given the ability of the Board where the preferred was sort of linked to a change in the asset manager. So that's one. And note that the asset management fee can be picked under certain scenarios, but if it doesn't comply for retest, that's one scenario. If it's a cash drop in the NCA, it's another, which is a very low likelihood. So we think what we've done is we've created an opportunity where the new board is going to think about this as a private equity investment, return capital to shareholders, and really look for strategic alternatives to monetize the master trust when you're all said and done.

Ki Bin Kim

Okay. And monetize the master trust is and gain gained to the liquidating?

Jackson Hsieh

Liquidated that the master trust is very valuable. One of the reasons we hired Ricardo, who spent his pretty much majority of his career in the ABS market is to really try to explain investors the value of this. It's an extremely difficult trust to create. It's got - it's one of the largest, it's one the most diversified. Obviously, we were able to leverage as part of spin plan. And it's got a lot of value that our shareholders and not giving us a lot of credit for, hopefully, the SMTA shareholders will, but we certainly know that we will get paid for it if we execute on what we say we're doing.

Ki Bin Kim

Okay. Just to go back on the original question. In our assets, I think, spin co with more likely dividend yield compared to the markets versus some type of multiple or economic NAV or anything like that. So I mean, is the $0.59, $0.60 combined run rate as you said today, sort of capital return, does that sound about reasonable?

Michael Hughes

Yes, this is Mike. I think for - we kind of stated on our prepared remarks, we really can't give dividend guidance at this point for SMTA. But I think that the page you've gone through clearly on Page 76, that was Form 10, I really think is the best guidance for the cash flow available to distribute. And as Jackson said, this is going to be a private equity-type higher-yielding vehicle. So I think you can read into what you think the common would ultimately result in there.

Ki Bin Kim

Okay. And on the same page, actually, there's a line item that says about for about $6.8 $6.2 million and the description is a net decrease in the contractual rent due to lease expiration, assuming renewals consistent with historical data. I just I was just kind of confused by that line item. What does that mean?

Michael Hughes

Yes. So what that line is, it's kind of interesting we disclose things in Form 10. But you have the 2017 pro forma information and then when you go to Page 76, that's really walking through the cash flows available for 2018. And so there's some adjustments that kind of take you from a pro forma '17 number into 2018 number to account for things that would happen or have happened post 2017 in the pro forma year. So those are adjustments for exactly like this year, things that happened that just cash flows.

Ki Bin Kim

I see. So it's not separate from your guidance is not different.

Jackson Hsieh

Yes.

Operator

And the next question comes from John Massocca with Ladenburg Thalmann.

John Massocca

Apologies for being dropped from the call earlier there, guys. So what was the same-store rent growth for just the assets that will remain in SRC?

Michael Hughes

It was 1.4%.

John Massocca

Okay. So basically in line with rest of the portfolio. And then you didn't sell any Shopko assets in the quarter, but you did have one left, was that just the vacancy?

Jackson Hsieh

Yes.

John Massocca

Okay. And then, as SMTA is kind of AFFO per share run rate I know to the extent you can give any color of this, but has the run rate changed at all given what happened with Unique ventures? Or do you kind of expected to be close to that $0.16 that was in the last...

Jackson Hsieh

It's actually going to be higher. If you just do the math, it's going to be higher, and you've got a factor in the lower share count. I mean, if you just look at that Page 76 and you sort of look at Page 109 on the $89.9 million, 2017 AFFO adjustments, made adjustments for G&A loss rent, you basically come up with a number that's $81.7 million of AFFO. And that's not a bad number to use in their 426 million shares outstanding. But you just do the math, that $0.19. So that's our guidance, but that's the math.

John Massocca

That accounts Unique ventures or?

Jackson Hsieh

Yes.

Operator

And the next question comes from Vikram Malhotra from Morgan Stanley.

Vikram Malhotra

Just wanted to go back to the leverage. Can you give maybe just give us some thoughts around where you see leverage or both sort of both companies trending and more so for what you're targeting over the next 12 months?

Michael Hughes

Hey, Vikram, it's Mike. The guidance, we put out there for leverage, I mean, that's really kind of our year-end target. So we're going to come out and give performance spend on 4.6, 4.7. Pretty consistent with what we put in Path III. And then when we look at our spin this year, $86 million of capital deployment related to revenue versus CapEx and development take our commitment. So that's going to be spent throughout the year. That's not going to generate a ton of revenue for us this year. So that kind of drives our leverage up a little bit in the short term. And then of course, we have the stock buybacks, and we expect some acquisitions to come online later in the year. So we do expect to leverage up a little bit from the 4.6, 4.7 this year, but going into next year, I was evaluate that. But I would guess, for our company, we are targeting staying at or below around 5.5x and really don't want to go above that. So that's kind of where we're looking too. And over the long term, we may want to come back down from that. But for the rest of the year, the leverage increase is really being driven, primarily by the stock buybacks in those revenue-producing capital expenditures that don't have revenue yet. On the SMTA side, I would just say it's probably consistent with the Path Forward III that we put out. It's going to be much higher leverage company.

Vikram Malhotra

So like 10x?

Michael Hughes

Correct.

Vikram Malhotra

Okay. And the 5 1 to 5 4, that was just adjusted for amortization?

Michael Hughes

Yes, I mean, that is the post-spin adjusted for all the splitting of the debt and that includes any amortization for the year, any loans that we're writing off through.

Jackson Hsieh

And including reimbursement. So that includes $400 million to $500 million of investment, right. That's so that's fully deployed in the balance we end up in that range.

Vikram Malhotra

So will you end up, just to clarify, we will, right now you said you will end up in the mid-five?

Jackson Hsieh

In the low-5s.

Michael Hughes

By the end of the year.

Jackson Hsieh

By the end of the year, after, we sort of hit that $400 million to $500 million of capital deployment, sell $50 million to $100 million of assets.

Vikram Malhotra

Okay. So I'm just trying to bridge this with the original four, five. So the big difference obviously is the $400 million to $500 million that was not contemplated earlier?

Jackson Hsieh

Yes, right. We never gave deployment guidance. So that's.

Michael Hughes

And the Path III was 2017 number, relative to the 4, 5 or 4 6, 4 7, right? So that's the relative metric and then you have some additional leverage throughout the entire year for the capital deployment.

Vikram Malhotra

Okay. And can you clarify just sort of the run rate contractual rent, there have been a couple of numbers and we went through the Form 10, but I just want to clarify, what are the run rate for actual rent numbers for both companies?

Michael Hughes

We really don't give our SRC and that was going to be on our the run rate in the supplement.

Jackson Hsieh

So on the same-store page, it's 1.5%, and so we mentioned 1.4%, so they're generally going to be in line.

Vikram Malhotra

Sorry, I mean, I maybe the actual dollar contractual rent and the actual dollar value of the rent.

Michael Hughes

Yes, that's the $596 million annualized on Page 19 of the supplement.

Vikram Malhotra

Got it. And just to - but post-spin, can you just clarify what that number would be?

Michael Hughes

No, we don't have that breakout.

Jackson Hsieh

I love to come back. I mean, if you look at you have to think an EBITDA standpoint, in the past, Path Forward III deck, we have about $376 million of EBITDA in Spirit and $194 million in SMTA. If you kind of look at based on the end of the first quarter, roughly where that would be, it would be $381 million for post Spirit and $199 million for post SMTA net of $400 million leakage. So that really rent number, but is more a EBITDA number.

Vikram Malhotra

Got it. And then one quick clarification. The coverage metric, I remember last time, there was a change in the top so the numbers have [Technical Difficulty] and our last quarter, maybe last quarter for the comparison.

Jackson Hsieh

So Vikram, if you remember the reason we flipped the top 10 was to give us a small subset. So I think that what we'll do for both companies is give portfolio coverage, which I think is more relevant. And so...

Vikram Malhotra

The portfolio coverage that you provided more the same number last quarter or a year ago?

Jackson Hsieh

Last quarter, we didn't disclose it. And I think it was back a year ago or so.

Operator

And the next question comes from Collin Mings from Raymond James.

Collin Mings

To start, Jackson, I just wanted to follow up on the development pipeline comment and the new disclosure in the supplement business, just maybe talk a little bit more about how you think about growing that part of the platform on a go-forward basis? And what's the right amount of the capital deployed and opportunities along those lines annually?

Jackson Hsieh

Okay. I mean, one of the - I see the development pipeline that we put together, as you can see, that started to materialize last year. And one of the reasons why we made a change in terms of the Head of Asset Management acquisition, sorry, was that I talked to you Dan Rosenberg, he has been reading our direct sale leaseback activity. I can tell you that we're going to do a large majority of acquisitions will not development deals, but existing property deals with existing clients, a good portion of them. But as part of his efforts, he was able to develop quite a nice pipeline of these higher-yielding opportunities. And we think about where we were over the last 12 months, we didn't really have - it didn't really make sense to buying property at low cap rates, obviously. So that's something that to make sense. So we've been sort of balancing buyback shares, building a higher-yielding, quality pipeline that were starting to taking effect later this year. But as we start and we currently are building our current pipeline, acquisition pipeline going into second, third, and fourth quarter this year, you'll see a larger majority be existing assets with hopefully current tenant.

Collin Mings

Okay. And that kind of flip.

Jackson Hsieh

We're not giving we're not giving a specific number, but we do like selectively looking at these opportunities where we can get projects, higher yields with tenants that we like existing tenants and markets that we like as well.

Collin Mings

Okay. So you like kind of having that platform, but again, when you would look call at more traditional acquisition on go-forward basis?

Jackson Hsieh

Yes. Exactly.

Collin Mings

And then maybe just - my second question is kind of tied to that in a way and sense that just maybe talk a little bit more about the opportunities on the more traditional acquisition front the team is seeing obviously, you guys have been sidelined for a while from kind of being in the acquisition market. What do you see out there? And you touched on this a little bit in the prepared remarks, just balancing those acquisition opportunities versus repurchases has been about that $400 million to $500 million deployment - capital deployment as you laid out.

Jackson Hsieh

Yes, I mean, one of the things we didn't talk about this as we talked in the past, their released account cash in the master trust now in the area of what we call $66 million. That's going to increase as we sell the non-encumbered - the unencumbered noncore assets there. So when you actually think about the amount of assets, that we've got to acquire for both companies, the numbers get start to build up quite significantly. So we were kind of adjusting our acquisition efforts accordingly. So as you know, we've got a hit map, we've got the process, the whole team's been the acquisition teams that we've organized. And I think you'll start to see a good balance of existing property with existing tenants that we're acquiring, select percentage, smaller these new development-type opportunities, and we'll see where our stock trades post-spin, but that's obviously tool in the box as well.

Operator

And the next question comes from Haendel St. Juste with Mizuho.

Haendel St. Juste

Just a follow-up from the last question. I was curious the type of asset categories you're looking at potentially acquiring in the new SRC and how would that cap rate range or return expectations compared to what you're expecting the development type?

Jackson Hsieh

Well, first of all, we have one heat map, industry heat map and as you've seen in our previous slides, each company, SMTA and SRC have different value allocations relative to the heat map in terms of their product portfolios. I think for us, as a development opportunity can in some cases be up to 100 basis points in premium for select, that's just a generalization. But for these forward takeouts or development deals, so you wouldn't want to do them all that way, but I think that, that's certainly an area where you can pick up higher yield. We don't think there's a shortage of sectors that were underrated. If you can't look at those two heat maps, and there'll be a good I won't go those specifics, that's an area that we're really focused on right now. Those areas that we're on the bottom right of the quadrant of our map for both companies.

Haendel St. Juste

Got it. okay. Okay. And a question for you, Michael, welcome, first of all.

Michael Hughes

Thank you.

Haendel St. Juste

I'm curious on the convertible that come due next year, I think there's $400 million or so. So I just curious what the current plan is thinking for that debt is at this point?

Michael Hughes

I mean, Haendel, it's a little too early to sort of planning specifically, I mean, certainly some of them are A good thing about Spirit is that we've got a lot of different capital buckets that we utilize, which is helpful. So when we get there, we're going to have optionality of whether that's do bonds, do more converts, do more bank debt, and do more secured lending, utilize the MTB, issue equity and issue preferred. So it's nice to have all this leverage to pull. So I think it's too early to tell, but as we get closer, we'll be able to see where the markets are in the different buckets of money and what the cost and think accordingly. So we'll give more guidance on that as we get closer to it.

Haendel St. Juste

Got it. Got it. Jackson, I guess, one more. Going back to on the potential sale of Shopko side. Would you be comfortable giving us a sense of what type of LTD you'd be comfortable lending at interest rate, any sense of how you would potentially structure of that you'd be willing to lend the potential buyer? And then what type of premium would you expect to receive on the cap rate side would potentially providing self-financing?

Jackson Hsieh

It's hard to give you a kind of generic answer to that, I'll give you a good sense, like the seller financing that we're providing, it's not, I would call problematic. It's very much case-by-case, live I've got to have some have shopped with the money, that's a lot easier to deal with. Last quarter, what we saw was some people had trouble with the senior financing. So if you think about it, if someone's - if someone can get 40% to 60% LTD loan from the local bank, maybe they provide some form of recourse, we might look at providing the next 15% in a mezz loan. Now to the pricing of the mezz loan is really dependent on the cap rate of the acquisition. So there's sort of circular with each other. I guess, the way we look at it is, if we can net 40% to 50% of the investment basis, upfront to Spirit, whether it's we're providing a second, we're providing a first and they've got another person to put a second on. That starts to begin to make some sense and that's a function of the cap rate that they're paying and that has sort of implications on the pricing of that mezz. So like we've got aggressive capital, we have a more attractive mezz-type loan There was a lower - it was a higher cap rate, we'd have to probably look for more market-type piece of paper on the mezz. So it's we're really looking at proceeds, that's really the key thing. If you're going to do a seller financing opportunity, are we getting enough upfront proceeds, I'd say that, that's got at least 50% at the minimum on the sale. Does that help you?

Operator

And the next question comes from Wesley Golladay with RBC Capital Markets.

Wesley Golladay

Can we stick with that seller financing question. To be Spirit providing seller financing or SMTA?

Jackson Hsieh

Wes, yes, it would be SMTA.

Wesley Golladay

Okay. And then for acquisitions going forward, I guess, can you provide some context, in the history of the Spirit, how many deal per Relationship driven. How many do you expect going forward? And how are you going about developing new relationships?

Jackson Hsieh

Well, I'll answer on relationship. We have actually a lot of relationships currently. We're just really trying to harvest the current relationships that we have and again, give you a good sense later this year, we're having a tenant appreciation event in Dallas, our top tenants, golf, entertainment, we just - we haven't done that in the past here at in Spirit. So we're really trying to the substrate tenant, for both companies that we really like, we're really focused on that. So that's one thing. The second, it's - if you kind of look at our team, it's come hard to seek the new team has been in place here effectively for 12 months. I'd say the good number of the properties that we acquired earlier 12 months ago, we're probably more broker oriented and as we've gotten into the second, third, and fourth quarters, much higher percentage of existing tenants and that's - that trend is going to continue to increase.

Wesley Golladay

Okay. And then one last question for me. When you look at SMTA, how do you balance buying more assets growing that platform, gaining new scale from a G&A perspective versus returning capital to shareholders. Is there one more of a priority right now?

Jackson Hsieh

Well, since it's a thing with SMTA if you - and that's why I tried to start with that comment, Wes. it's really a private equity fund that's public. So If you kind of believe that, that means you want to use leverage. If you're looking to generate PSR or IRR, it's - you actually get a better return, if you return capital to sooner than faster in terms of the form of dividend or special dividends. So the one thing that's really clear to us is the master trust funding entity, I'll call it an entity because it's almost a stand-alone entity in itself from a reporting standpoint and from just the bankruptcy of it. That asset could be sold right after we spin it. I don't think the Board is going to do that. So the question is just how do you continue to improve it, sign it up, make it better and there are opportunities within that portfolio. If we're getting about doing anything else of just recycling 10%, 15% of the assets just within that master trust. So that's always going to be monitizable and sellable.

We're not worried about that. The sale of those noncore properties, the unencumbered ones, that's going to be a decision on the new board, but if you return capital faster, sooner, and balance that versus waiting to the end, your IRR, your TSR is going to be better. And one other thing that you'll see in the papers that come out in the filing, in terms of Broadcom, look, this board compensation for the new independent directors is candidly going to be higher than the Spirit Board of Directors. Very particular reason why. This is going to be a very adventure-driven exercise. These directors are going to have power and control over this company. They have to approve all transactions. Eventually, I'm sure they'll have thresholds. They have unilateral ability to terminate us if they want to. So they are going to - they know what the business plan is, which is return high shareholder return. And that kind of means basically returning capital faster, making sure that we're doing a good job on the master trust and then, ultimately monetizing all the assets.

Operator

And the next question is a follow-up question from Ki Bin Kim from SunTrust.

Ki Bin Kim

Can you talk a bit more about the $400 million to $500 million capital deployment plan, currently are you thinking how much of that is share buyback versus deploying capital on acquisition?

Jackson Hsieh

Yes. Well, I mean, just to not to be surprising, so but if you kind of look at year-to-date, so this obviously we're giving guidance a little late, but we wanted to do it when we sort of have a better sense to the timing of the actual spin. So let's assume that we're January 1, that assumes the $400 million to $500 million. So we've repurchased about $160 million of stock, right? We've commented to about $86 million of forward takeout sort of development construction spend commitments. We've acquired in Q1 about $10 million of deployment into existing development and CapEx opportunities. So that's roughly about $263 million. So the delta between here and at the end of the year, is basically $137 million to $237 million of net new investment for new SRC between now and year-end to kind of get to that guidance range that Michael was talking about.

Ki Bin Kim

Okay. So for that remainder, is it, I mean, relatively speaking, but is that like mostly on the acquisitions or do you think….

Jackson Hsieh

I think that's most acquisitions. Like we said, it's not a hard number to place against properties. But as you know, we're pretty - we're more specific about what we're trying to buy. So there's no shortage of opportunities to deploy that incremental amount and acquisitions. But as you know, we plan very specific about what we're trying to buy right now in terms of industry and things like that.

Michael Hughes

From a guidance standpoint, we assume that's going to be acquisition.

Jackson Hsieh

From guidance, yes.

Michael Hughes

Not share repurchase, that could change obviously what we actually do, depending on market conditions, et cetera, but from a guidance perspective, that's just baked in.

Ki Bin Kim

It's skating, but don't worry. And what are your plans if SMTA goes according to your plan, you're selling assets trading capital is there a chance that intercompany G&A or management fee for us to come down. So what are your plans today if that happens, not related to our dilute your own earnings, is there a plan to perhaps rightsize G&A over time?

Jackson Hsieh

No, I think we have to look at it. That's - Obviously, that's one of the things, obviously, we think about the way the structure is set up. It's - SMTA is not currently set up to be permanent forever, that could change, who knows? If the stock is trading, directors, we may wanted change the nature of management fee, make it longer, change the nature of it. And I think we'll have to sort of see as we go through the sale of those noncore unencumbered assets. But remember, we have $150 million preferred, that's that comes back if the thing goes away. We get termination fee. We get to promote. So there's a lot of capital that could come back if we're able to monetize or if SMTA get sold or goes away. And it may not go away because there may be - I can tell you that we've had conversations with shareholders that are very intrigued with this master trust because it's a very unusual facility. It's A+ rated facility that continue that - is that an issue basically debt perpetually as long as you take care of the assets. And if the ones that are much higher leverage. So it's a very unique and harder place type of financing facility that's backed by hundreds of real estate assets.

Ki Bin Kim

Okay. and just one last question. On Page 17, the contractual rent of 1.5%, did I hear you correctly that excludes assets that are vacant? And is that the way it's going to reported, which might be maybe a little bit less useful to investors?

Michael Hughes

Yes, that excludes vacant properties. And that something in the past, we have continued to exclude. What we're trying to get to it is we're trying to get everyone a good look at what our organic growth actually is going forward. So you kind of get a clean here's is what our contractual rent growth is. And from there, you can then layer in your assumptions on dispositions, acquisitions, loss trend, et cetera. When you kind of look back quarter-to-quarter, and something I saw when I came into the company, there's a lot of volatility in that number and it's usually driven by just a few little things. So you have to put that in perspective, this quarter, have we done in the old way, it's 1.4% versus 1.5% growth. We're still capturing the similar universe of tenants. But we do think that will be a lot more meaningful for you going forward from a modeling standpoint because that gives you that baseline and you can actually then make exemptions off of versus having a little assumptions, a little changes you skew the number of recorder and frankly, make in our mind the data was helpful, meaningful.

Operator

And this concludes our question-and-answer session. I'd like to turn the call back to Jackson Hsieh for any closing remarks.

Jackson Hsieh

Thank you, operator. In closing, I just like to say it's been a long and winding road this past 12 months, but we're almost live on our moving-forward plan. So what I like to do is really thank all of our shareholders, who have been supportive of this period and we look forward to driving shareholder value for both companies going forward. And we look forward to seeing you all very soon in the future. Thank you.

Operator

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