Aug 8, 2013
Executives
Michael Bender – SVP and CFO Tom Nolan – Chairman and CEO Peter Mavoides – President and COO
Analysts
Alexander Goldfarb – Sandler O’Neill Rob Stevenson – Macquarie Rich Moore – RBC Capital Markets RJ Milligan – Raymond James & Associates
Operator
Good afternoon, ladies and gentlemen, and welcome to the Spirit Realty Capital’s Second Quarter 2013 Results Conference Call. At this time all lines have been placed on listen-only mode.
After the speakers remarks there will be a question-and-answer period (Operator Instructions). This conference call is being recorded and a replay of the call will be available beginning at 6:00 pm Eastern Time today for one week.
The dial in details for the replay can be found in today’s press release. Additionally there will be an audio webcast available on Spirit Realty Capital’s website at www.spiritrealty.com an archive of which will be available for 30 days.
It is now my pleasure to turn the call over to Michael Bender, Senior Vice President and Chief Financial Officer of Spirit Realty Capital. Mr.
Bender, please proceed.
Michael Bender
Thank you, Katharine, and good afternoon everyone. Thank you for joining us today.
The first half of this year was a very productive and exciting time for Spirit Realty Capital and we are pleased with the progress we have made. Tom Nolan, our Chairman and Chief Executive Officer; and Pete Mavoides, our President and Chief Operating Officer with me today to talk about our pre-merger results through June 30, 2013 and discuss the post-merger Spirit Realty Capital and now that we have completed our transactions with Cole Credit Property Trust II or Cole II.
Tom will start with some introductory comments I’ll then provide color on our results for the first half of the year as pre-merged company and some pro forma highlights of the nearly combined company. Pete will then discuss our portfolio and investment program followed by Tom providing some summary remarks prior to the Q&A portion of the call.
Before I turn things over to Tom I’ll note that during this conference call we will make certain statements that may be considered to be forward-looking statements under federal security law. These statements are based on management’s current expectations and the company’s actual future results may differ significantly.
In our periodic reports that are filed with the SEC we set forth certain factors that could cause our future results to vary from management’s forward-looking statements. All information presented on this call as of today August 8, 2013 and Spirit is not intend and undertakes no duty to update forward-looking statements unless required by law.
In addition reconciliations of non-GAAP financial measures presented on this call such as FFO and AFFO can be found on the company’s earnings release from earlier today which is available in the investor relation section of the website. With that here is Tom.
Tom Nolan
Thank you Mike, and thank you, everyone who’s joined us today. We’d like to extend a special welcome to those of you who may be listening to our results call for the first time including shareholders of the former Cole II.
We thank you for your interest in Spirit Realty Capital and look forward to a successful and long-term relationship with you. I’m very pleased with our results and with the performance of the Spirit team.
We are sizeable to do with this year coming out of the IPO. And I’m happy to report that we’ve already accomplished a number of the important items on that list.
We continue to deliver attractive and predictable portfolio performance to shareholders by pursuing a disciplined ownership strategy focused on single-tenant operationally essential real estate within the triple-net lease sector. We also successfully completed the merger with Cole II.
Taken together, we’ve made significant progress on the objectives we articulated at the time of our IPO less than one year ago. As I said at the time of the merger is closing three weeks ago, we remain essentially focused on continuing to approve a portfolio diversity and scale our business to deliver a steady and attractive total return to shareholders.
We think our increased size of scale will enable us to continue to recover our leadership position which will allow us to pursue a wide range of future opportunities including both direct portfolio acquisitions and strategic transactions. This is an exciting time to be at such a dynamic and growing sectors in the real estate industry.
We recognized that this is somewhat of an unusual reporting quarter. And then our financial results show only the predecessor Spirit and you have clearly the company materially changed only a couple of weeks after the quarter end.
In recognition of that, well we’ve intended to do in our release and what Michael further elaborate on is to build the bridge to the new Spirit to the inclusion of certain pro forma information on the combined entities. As for the combination itself I’m happy to report that the integration of the two companies and portfolios as the great test plans and is continuing smoothly.
As I noted we have provided you pro forma results for the combined company for 2012 and for the first six months ended June 30, 2013 as it gives you a good sense of the combined company’s financial position and operating results. One would have caution us that these are performance and not a forecast.
And as such will not be a precise indicator of the actual financial performance or operating results of the combined companies going forward. As noted in our release, we do intend to provide guidance for the new company by the time we issue our third quarter report.
Turning to the acquisition market for moment. We spend a lot of attentions on the recent risen interest rates.
But I would note that they remain low by historical standards. And lower interest rates and a steady although somewhat slow economic recovery has led to an active investment market.
Our competition in that market remains strong. We continue to deploy our capital in a thoughtful and disciplined fashion acquiring properties at attractive risk adjusted returns and selectively divesting other properties where it makes sense.
We’ve done this with a nice flow and ensuring that we continue to optimize our portfolio so that it generates attractive and stable returns. The recent sale of two large non-core multi-tenant properties acquired in the Cole II merger, also demonstrates our commitment to a focused investment strategy.
These are excellent properties and they were performing well. But they do not fit with our core expertise of investing in operationally essential single-tenant at lease properties.
As such, we’re pleased we’ve sold them in an attractive cap rate and we’re looking forward to reinvesting the proceeds and properties that are consistent with our strategy. I’ll close by expressing once again my appreciations for the exemplary performance of the entire Spirit team.
We’re all excited about our position in the dynamic spectrum. And look forward to continue to execute the strategic plan that we have laid out.
With that I’ll ask Mike to walk you through our pre-merger financial results for the second quarter and six months ended June 30, 2013. And provide highlights of the pro forma combined company.
Mike?
Michael Bender
Thank you, Tom. I like to start by walking through the stock conversion mechanics of our merger as there have been some discrepancies on some of the websites with published public company data.
Under the terms of the merger agreement pre-merger of Spirit stockholders received 1.9048 newly issued shares of the combined company in exchange for each share of Spirit stock they owned before the Merger. Additionally, each share of Cole II common stock issued and outstanding remains outstanding as common stock of the combined company.
Applying the exchange ratio to the number of the pre-merger Spirit shares outstanding approximately 85 million shares. And adding that figure to the total shares of Cole II common stock outstanding, approximately 208.5 million yields a total shares outstanding number for post-merger Spirit Realty Capital of approximately 370.4 million shares.
The exchange ratio also should be applied to pre-merger spirit share data in order to enable in apples-to-apples trend comparison. We are working with financial data sources to get the information correct.
Secondly, let me explain the dividend briefly. Both, the predecessor Cole II and Spirit shareholders have received dividends through July 16, the day before the merger closed.
Now it is responsibility of Spirit’s Board of Directors to review the performance of the company during the year and decide when and how much to pay dividends. But having said that, let’s listen to our illustration purposes that post-merger Spirit will pay dividends comparable to had it distributed before the merger.
Based on this, the annual dividend would equate to $65.625 per share or $16.04 per share per quarter. For reference there is a little over $0.03 higher per year than the rate previously paid by the former Cole II to its shareholders.
Spirit will take dividends quarterly approximately 15 days after the close of the quarter. So, for example the third quarter dividend will likely be paid on or about October 15.
Keep in mind that because both predecessor shareholder this has already been paid a pro rata dividends for the first 15 days of the quarter the third quarter. The dividends for Q3 will be roughly 2.5 months rather than a full quarter.
Lastly, let me explain the SEC filings and related financial statements you will see in the next few days. To start with, the earnings release sent out before this call has two major components.
The first section is our discussion disclosure for the results of operation of pre-merger Spirit for the first three months – I refer the three months until this first six months ended June 30, 2013. As you will see when we discuss these in a minute the performance of per-merger Spirit for the second quarter was solid and better than expected.
As Tom mentioned, the second section of the release provides you with the SEC defined pro forma information that shows what the post-merger Spirit might have looked like during 2012 and the first half of 2013. Note that presentation also includes adjustments for the sale of the two large multi-tenant properties we acquired in the Cole merger and sold right after the merger closed.
Cole financials for pre-merger Spirit and the prepared pro forma information will be filed with the SEC in the next few days in our Form-8K. In addition, we will be filing our second quarter 10-Q with the former Cole II which was just there pre-merger operation.
Beginning in the third quarter the Form 10-Q will include the historical results of Spirit as the predecessor company through July 16, 2013 and the consolidated results of the combined company going forward. Having covered that, let’s move on to our results for pre-merger Spirit’s second quarter.
In the second quarter ended June 30, 2013 pre-merger Spirit Realty Capital generated total revenues of $72.8 million, an increase of 7.2% as compared to $68 million in the second quarter of 2012. The growth in total revenues is primarily driven by rentals income which was higher by $4.2 million or 6.3%.
Interest income and other was $1.1 million higher than in second quarter of last year due to lease termination fees recognized during the second quarter of 2013. Lease termination fees periodically result from negotiations with tenants which provide higher revenue in the period which the PLs received but may result in lower revenues in future periods.
General and administrative expenses in the second quarter of 2013 increased to approximately $9.1 million compared to $7 million in the second quarter of 2012. The increase was primarily attributable to $1.9 million non-cash charges associated with stock compensation awards in the second quarter of 2013.
Meanwhile, property cost decreased significantly to approximately $0.5 million in the second quarter of 2013 from approximately $1 million in the second quarter of 2012 as a result of our improved occupancy rate. In addition, acquisition cost decreased significantly and interest expense were reduced compared to a year ago.
Depreciation and amortization increased in the second quarter of 2013 as a result of the expansion of portfolio. And impairment charges totaled approximately $1.6 million in the second quarter of 2013.
So net loss attributable to common stockholders for the second quarter of 2013 was $11.7 million or $0.14 per share and that’s based on 83.7 million weighted average shares of common stock outstanding. Net loss attributable to common shareholders is $8.8 million or $0.34 of share for the second quarter last year and that would have been based on $25.9 million weighted average shares to common stock outstanding.
Funds from operations or FFO for the second quarter of 2013 were $21.4 million or $0.025 a share. FFO for the second quarter of 2012 was $19.4 million or $0.49 per share.
Adjusted funds from operations or AFFO for the second quarter of 2013 totals $37.9 million or $0.45 per share compared to $27 million or $0.50 per share for the second quarter of 2012. Now let’s briefly review the six months results for the three merger of Spirit.
For the six months, total revenues ended – for the period ended June 30, 2013 were $144.2 million or 6% or $8.2 million higher than total revenues for the first six months a year ago. The growth in total revenues was principally the results of an increase in rental income.
The favorable impact of lease termination fees earned in the first six months of 2013 was offset by reduction in interest income on loan receivable due to scheduled and early payoff. For the first six months of 2013, FFO was $43.3 million or $0.51 a share.
For the first six months of 2013 AFFO was $74.5 million or $0.89 per share. These results compared to FFO of $43.4 million or a $1 per share and AFFO of $54.6 million or a $1.21 per share for the first six months of 2012.
Ongoing adjustments to convert FFO to AFFO primarily consist of non-cash interest expense, non-cash revenues and non-cash compensation. The results for the second quarter and first six months in 2013 included a $11.5 million and $21.6 million respectively of merger related cost.
The second quarter and first six months results in 2012 were impacted by charges of $2.8 million and $4.5 million respectively associated with last year’s IPO and the associated term loan extinguishment. As you can see after adjusting for merger related cost incurred during the period, pre-merger Spirit’s second quarter results would have outperformed the guidance we provided last call.
As Tom mentioned we are currently finalizing merger related purchase accounting. We intend to provide guidance for a post-merger Spirit by the time we report results for the period ending September 30th which will be first quarter of the combined company.
And we’re not readopting our prior guidance at this time. For now we are providing pro forma results for 2012 and the six months ended June 30, 2013 representing the financial position and operating results for the combined company.
So here are some pro forma metrics regarding the combined company as of July 17, 2013 to-date we completed the merger. As of that date the combined company’s real estate investments totaled approximately $6.5 billion.
Our debt was approximately $3.6 billion. Market capitalization was approximately $3.4 billion based on pro forma shares outstanding outlined earlier.
And in occupancy rate was 99%. As of July 17, 2013 the combined company’s lease portfolio generated approximately $546 million in annualized rent from 383 tenants across 48 states.
As Tom noted our market sector remains attractive and we look forward to continuing our strategy of investing in operation into a single-tenant net leased real estates to deliver attractive shareholder returns. I’ll now have Pete to review our operation.
Pete?
Peter Mavoides
Thanks Mike. As illustrated by Tom and Mike’s comments our portfolio is in great shape and performing well.
That said, we constantly seek to optimize portfolios by maximizing occupancies, recycling capital efficiently and making accretive acquisitions. All of the goals delivering stable and predictable cash flows that support our dividends.
Our gross investment as of June 30, 2013 totaled $3.7 million essentially all of which was invested in 1234 properties that were approximately 98% occupied. As of June 30, we had only 19 properties available for sale or lease.
We do 98% occupancy as essentially full. Well we continue to focus on any single selling properties not currently occupied.
Our properties are generally leased under long term triple-net leases with a weighted average remain leased term of approximately a 11 years. As of June 30, 66% of our rent was contributed from properties under master leases 96% of all leases provide for contractual rent increases.
As of that date we had 9 properties with expiring annual rents of approximately $1.1 million through the remainder of 2013. We anticipate that the majority of these tenants will exercise below the renewal options and our occupancy remains stable throughout the balance of the year.
With respect to dispositions, property sales during the quarter was minimum. However, on July 19, we completed the sale of two non-core multi-tenant property that we acquired in the Cole II merger and transaction valued at approximately $259 million.
As Tom mentioned this transaction is consistent with our operationally essential single-tenant property focus. We expect to continue to selectively to invest at non-core assets.
During the second quarter 2013, we invested $38.2 million and added nine real estate properties with tenants in place. These properties were leased within weighted average initial lease rate of 8.14% and weighted average initial lease term with almost 17 years.
These investments were made to three tenants, one existing and two new, that operates in the casual dining, specialty retail and automotive service industries. Investments in real estate during the first six months for 2013 were approximately $95 million and comprise 14 new properties.
Year-to-date acquisitions at an average annual rental rate of 8.25%, average initial lease term of 17.5 years. And contractual average annual rent escalations of 1.5%.
The first half of this year we intentionally maintained a low profile in terms of acquisitions as we work through the Cole II merger. We expect to ramp this activity up in the second half of the year and we have the staff resources to be able to do so.
We have significant capacity to fund more investments and redeploy capital generated to the sale of non-core properties. To that end we currently have a $115 million in transactions that did our investment criteria under contracts or LOI that we are excited about.
These transactions were all subject to due diligence and there are no assurances that any of them will close. Well, we do intend to be more active throughout the back half of this year.
In support of these activities, concurrent with the closing of the merger we secured new financings. Specifically, we obtained a new three-year $400 million of revolving credit facility and $203 million in ten-year fixed CMBS financing.
In addition, we are continuing to explore alternative sources to source financing and match fund our assets. As we have discussed in the past the important indicator of path of the portfolio as the unit level rent coverage which we believe to be a measure of how essential our properties to our tenants ability and they are delighted to pay rents.
As of June 30, the average unit level rent coverage on a TTM basis for our top 10 tenants and the portfolio a whole was 2.67 and 2.7 times respectively. This compares favorably to 2.58 and 2.49 times for the same period last year.
This represents an overall improving and the credit profile of portfolio and is an encouraging smart trends. As of June 30, our top 10 tenants accounted for 15% of our revenue.
As previously disclosed this decrease to 37% as of closing of the merger. We’ll provide you with more details on our combined portfolio during our next call in the fall.
As Tom mentioned it is the active triple-net lease market and we expect that to continue to. We are maintaining our disciplined investment strategy and we continue to see ample opportunities to make new investments and recycle the capital generated from the sale of non-core profits.
With that, I’ll turn it back to Tom for some concluding remarks.
Tom Nolan
Thank you, Pete. We have accomplished a lot so far this year and we’re looking towards continuing a positive momentum over the balance of the year.
The size and scale of our business have increased and our focus has not changed. We continue to take a conservative approach to identifying and securing selective investment opportunities.
We also remained focused in an area we know very well. The triple-net-lease single-tenant properties that are essential to the tenants operation.
This focus has been rewarded as more and more retail and institutional investors come to recognize the long-term sustainable field of the sector. With our larger and more diversified portfolio we think we are in an even better position to grow and deliver attractive risk adjusted assurance to our shareholders.
We appreciate the support we received from our shareholders. We look forward to remain intact with all of you as we move forward as the combined company.
With that we’ll be happy to answer your questions.
Operator
Thank you. (Operator Instructions).
And please standby for your first question which is from the line of Alexander Goldfarb from Sandler O’Neill. Please go ahead.
Alexander Goldfarb – Sandler O’Neill
Good afternoon out there.
Tom Nolan
Good afternoon.
Michael Bender
Good afternoon.
Alexander Goldfarb – Sandler O’Neill
Just a few questions here. One just on some accounting stuff three items on the accounting side.
One what’s the 279 million of goodwill what’s that?
Michael Bender
That’s our estimate at this point and getting all this from purchased accounting perspective is preliminary but that’s the estimate, estimated resulting goodwill from the acquisition.
Alexander Goldfarb – Sandler O’Neill
Right I understand that but what’s the goodwill I mean Cole is not – it’s not like a consumer goods product that’s got there is a brand name or something so I’m just sort of and it’s not lifted as above or below market rents. So I’m sort of curious what the goodwill relates to?
Tom Nolan
I mean it’s simply if you simply go through every single asset and take an individual market value both for the asset and the debt. And at the end of the day you look at that relative to the portfolio purchase price including all the cost associated with it and you end up with a goodwill it’s not uncommon even in re-transactions that we will happened to be looking at this because we anticipated the question but a number of the transaction mergers we have seen a comparable size has been there has been comparable goodwill allocations.
Alexander Goldfarb – Sandler O’Neill
Okay. And this is Tom this is it’s if FAS 141 would be part of it so that would be separate?
Tom Nolan
Sorry I think that’s part of it, I don’t understand the question right.
Alexander Goldfarb – Sandler O’Neill
Okay. That’s helpful.
Next the $86 million of merger costs is that something that’s going to be expensed in the third quarter or that gets capitalized and doesn’t appear and will not appear in the third quarter P&L?
Tom Nolan
Good yeah the in both we would try to give you a full picture on the substantial portion facing that relate to debt cost for example and as you might get amortized over as affective interest in your interest expense but a good chunk of those things do get really positive.
Alexander Goldfarb – Sandler O’Neill
Okay. Do you have a sort of split out how much we shared anticipate in our third quarter FFO estimate?
Tom Nolan
That’s what we are finalizing right now.
Alexander Goldfarb – Sandler O’Neill
Okay. So it sounds like my G&A and what about a good run rate for G&A or is that walked away for third quarter as well?
Tom Nolan
For third quarter that would be difficult because as you pointed out a lot of those a lot of that amount would go through G&A in Q3.
Alexander Goldfarb – Sandler O’Neill
Okay. So let me ask just a final question.
This quarter or this year we’ve seen other companies do large transactions and it’s ended up derailing other parts of their business. How confident are you guys that as far as integrating the portfolio and then as far as engaging in new large scale acquisitions?
Tom Nolan
Well I think it’s an excellent question and I think that’s behind the library gets the executive oversight that probably might be nice hopefully you are bringing to this organization but I think at the very beginning when we announced this transaction one of the things we found very compelling about it was very, very consistent with the exception probably being on average a better credit quality and what we had that’s very, very consistent type of asset and obviously there is it’s comparable amount of space. So there was a high degree of confidence on the integration of the assets and I think that has completely slate out and I think we had plenty of time to prepare for the closing we worked very closely with the Cole organization and that’s if anyone from Cole is listening I want to thank them they were very good on the integration and made the integration for us as seamless because I think it could be given the scale that we had here.
Also because this was a non-employee related acquisition where it was only assets and liabilities that we were integrating. There wasn’t the usual what I call organizational kind of noise that is often associated with the merger.
We didn’t have to deal with that. We simply had to add resources to management a greater company and again we had a fair amount of time to do that.
We announced in January we closed this in July. So we had a long time to look at that organization share go out find the people we wanted to find and happened to be in a position to work on the portfolio the date is closed.
I do think that had we not engaged in the Cole merger we probably would have bought a few more properties outside of our acquisition number would have been maybe a little larger but that was a decision that we made where we said let’s not lose stay from the big objective here and going out and acquiring and another $30 million or $40 million well we are trying to integrate over $3 billion let’s focus on what’s important let’s make sure that goes well and I think we are three weeks into it but I think confidence is we are feeling good about the integration and I think we are also feeling as Pete mentioned that we’ll be more active in the third and fourth quarters because we are confident that this is simulation of the two portfolio versus comp as well.
Alexander Goldfarb – Sandler O’Neill
Okay. Thank you.
Operator
Thanks, Alexander. The next question is from the line of Rob Stevenson from Macquarie.
Please go head.
Rob Stevenson – Macquarie
Good afternoon guys. Just a follow-up on that if I’m looking at the numbers correctly.
Is the way to be thinking about the $86 million of merger and expenses that you guys go through July 17 minus the $21.6 million in the six month ended June 30 means that there is 64.5 or whatever the adjustment lines are being in the third quarter or so.
Tom Nolan
And again net of whatever portion of that end up being capitalized yeah.
Rob Stevenson – Macquarie
Okay. All right just wanted to get that straight and I think Pete can you talk about of debt I mean even if of its qualitative where the rent coverage combined portfolio line are being if your 267 and 270 does that marginally increase marginally when you put the portfolios together how show we would be thinking about that.
Tom Nolan
Reached up it’s recording now that the Cole team portfolio was 40% investment grade often times with investment grade tenants you don’t get unit levels financial statements and so that number will become physical to track for the tenants that report and the Cole I portfolio that number is consistent with the our existing portfolio.
Rob Stevenson – Macquarie
Okay. And how should we be thinking about dispositions are you talked about $115 million of acquisition under contract that you are looking at I mean from a disposition stand point what do you guys sort of looking to market and what’s those sort of magnitude there in terms of what’s you’ll need to finance?
Tom Nolan
Both the two if you do the transactions that we that the two properties that we announced the sale of representative about half of what we identified that the time of the merger where we’re strategic assets there was a lot of interest in those assets and there was haven’t paid just. We’re also continuing to do with simultaneously as possible.
But I would expect that they were about half way road that new position process and we will be looking for much the proceeds and to be reinvesting them as we sell them we are not under again one of the beauty is the it’s great when you are selling our non-strategic assets that’s a good asset it’s non-strategic not because that’s not performing well but it’s non-strategic because it doesn’t fit our investment strategy. So we are not under any pressure to do it at any timeframe other than we are looking do to be efficient and re-match the proceeds.
So we’re about halfway done and I would expect will be done we’ll continue to roll those out through the end of the year.
Rob Stevenson – Macquarie
Okay. And Mike from a debt stand point with the debt that you got and the debt that you refinanced.
Are there any near term maturities that you guys have an opportunity to reduce the leverage of the entity or it’s basically everything is still going forward is termed out and you guys are several years away from any significant maturities?
Michael Bender
Well the only thing that we had to do was to refi poles heritage revolver which we did and when we have outstanding on that subsequent to the merger and the disposition that Tom just referenced is a little over a $100 million outstanding there. So that obviously we can pull the trigger on it at any point if we choose to do that.
Everything else.
Tom Nolan
And that the $100 million a little over a $100 million against the $400 million
Michael Bender
Available.
Tom Nolan
Availability and we will be as we would always do we would be looking to when we should be firming out those liabilities but at this point we have a de minimis amount of short-term debt.
Rob Stevenson – Macquarie
Okay. And then given the reduced role of shot go in terms of the tenants that still got out of the financials still going to be part of your filings going forward?
Tom Nolan
Not, not really that but there is a chance that they would not be going forward.
Rob Stevenson – Macquarie
Okay. And then just lastly Tom what’s the been the discussions with the board on sort of the maximum sort of payout ratio that you guys feel comfortable from a dividend perspective?.
I mean obviously the FFO will get that will get to that as to what fourth quarter and 2014 winds up looking like when you guys talk about that. Next quarter or so but I mean what’s the sort of comfort level.
Is it paying out 90% of AFFO 80%, 100% where should we be thinking about that?
Tom Nolan
Well I mean I’m not I think prepared to put a specific target out there at the moment but I would suggest and I think I have mentioned in prior calls that we do expect that payout ratio to come down and that we expect our earnings growth t probably will be taking a piece of that looking at it in terms of dividend increase until we get that payout ratio at a point that we are comfortable with but one of the important things about the payout ratio for Spirit and this is not the case in all of the other companies that we would expect us to be prepared against is that we have a substantial amount of debt amortization that gets still into our payout ratio where other companies that have that don’t have fixed rate of secured debt often don’t have amortization. So we look at the payout ratio both on a sure basis as you would calculate when you also look at it after taking into account how much debt amortization and therefore equity accretion we have done on any given years and it’s not insignificant sum the close merger I believe the debt amortization is over $50 million a year and so when you factor that into the payout ratio our payout ratio is very consistent with payout ratios of other companies that do not have that debt amortization and therefore do not accrete the values to the equity shareholders.
Rob Stevenson – Macquarie
Okay. Thanks guys.
Tom Nolan
Thank you.
Operator
Thank you, Rob. The next question comes from the line of Ross Nussbaum from (inaudible).
Please go ahead.
Unidentified Analyst
Hi, guys good afternoon. If I’m understanding the numbers correctly here it sounds like you are going to be able to match fund your new acquisitions with the remainder of the non-core dispositions you have from Cole through at least the remainder of the year.
Is that an unreasonable statement?
Tom Nolan
I mean we are not looking to totally match fund I think it’s true that the non-strategic asset sales is going to produce incremental dollars and we do expect to invest those dollars but it’s not as target per se I think our actual acquisition amounts could be higher than the amount and we expect their life will be higher than the amount that we are going to achieve through asset dispositions. We would expect at the end of the year we will after taking into account that has a dispositions we will still be a net acquire of real estate.
Unidentified Analyst
Okay. So let me make sure I understand you are suggesting in Q3 and Q4 combined did you intend to acquire over 250ish million of assets?
Tom Nolan
Yes.
Unidentified Analyst
Okay.
Tom Nolan
And as I say and again you’ve heard from me no before we don’t issued guidance on acquisitions because again this is just a philosophical point but I do acquisitions as making a decision at any given time to invest the capital and we don’t necessarily want to feel compelled to have a target out there which would cause us to invest at rates of return but we didn’t feel appropriate relative to the risk but this is our backlog and given the market and give the activity that we see. We I think we are comfortable with what we just articulated.
Unidentified Analyst
Okay. Next question would be then from a funding perspective as you think perhaps the next couple of months into 2014 and you think about your acquisition objectives and you look at your line of credit capacity and that the how are you think about the need for common equity and the timing for common equity issuance?
Tom Nolan
Well it’s me again that so facts and circumstances driven that is we are not going to be and we don’t sit there and put a stake on the ground that says my first we are going to go out and then do an equity offering. I think what we do, do is and we work with our financial factors that banks, investment banks and we have a lot broader I Google those now given that the largest scale there and we are always looking to optimize I think the financial structure that can be achieved whether that’s whether you and where and when you do an equity raise I think is totally dependent on the other options that you have relative to and you quiver with that and we this company currently does not have preferred stock.
And I’m suggesting we are going to do it but with our capitalization structure that could be a component of our capital structure going forward you can see a convertible you can see equity. There is a lot of elements of the capital structure that I think are available to us today that probably weren’t available to a six months ago given our the scale that we now have but I think that any company, any reason this is an newest to anyone on this call but any REIT that it becomes an active acquirer ultimately as an active we’ll actively source the equity market that’s the nature of how we grow and that’s how we would expect to grow as well but we don’t have a finite target there.
Unidentified Analyst
Okay. Let me take a little bit on the quarter and granted we didn’t have a lot of time to go through the numbers.
Did the rental revenue line go down about a million from Q1?
Michael Bender
It’s sequentially I think it’s very close I thought it was flat quarter-over-quarter and then it’s just a combination of a couple of things but yeah it’s about flattened.
Unidentified Analyst
Okay. Cam you give us some color on where the lease termination fees came from what kind of tenant were they on a watch list of yours different color around that?
Tom Nolan
Yeah it was just it was a actually have full profit education tenant that I had a long-term commitment to a property that no longer suited it’s purpose and we allowed them to buy out the lease we took the property back. They again and took very healthy NPV or the rent that they owned us as a lease termination fees.
Unidentified Analyst
Where was the asset?
Tom Nolan
It was in out of zone.
Unidentified Analyst
Okay. And then lastly on Shopko I know the numbers are going to be in the queue is there any color you can give us just on how they are performance has been overlaid and maybe how we should be thinking about that in the context of the improving overall credit profile you sighted of the tenant pace/
Tom Nolan
Yeah I think what you are finding in the Shopko financials is much what we have been articulating since IPO that they are pretty steady as they go as she goes and pretty stable company with solid performance. You’ll see some diminishing noise related to the integration of the providers but they are helping us with price there.
And as 50% of our top 10 pre-merger 50% of our revenue pre-merger was in our top 10 and top two represented 30, with those numbers you get a pretty good sense of order shop that sits.
Unidentified Analyst
Thank you.
Operator
Thank you. The next question comes from the line of Rich Moore from RBC Capital Markets.
Please go ahead.
Rich Moore – RBC Capital Markets
Hi, good afternoon guys. I’m here with Wes as well.
Was that – just had a curiosity that poor profits grew, is that the facility matured in Phoenix, would you guess?
Tom Nolan
It was not matured difference by the time.
Rich Moore – RBC Capital Markets
Okay. So, is there more to then I guess is you guys are going to get to if it was but it’s not but is there more to come from that situation.
Tom Nolan
No.
Rich Moore – RBC Capital Markets
And specifically is term fee et cetera.
Tom Nolan
No it’s not that situation. No Rich it’s not a situation.
Rich Moore – RBC Capital Markets
Okay. Then on the properties you are selling the two properties you’re selling.
The cap rate on those if you could or something that we can take so we can take NOI out going forward and then the rate on the debt for the debt almost two assets?
Tom Nolan
Yeah, I’ll take that, I’ll take the cap rate, I’ll let Mike do the debt. As it soften the case when we sell individual properties we have an agreement with whoever with the buyer or the seller that we don’t – we don’t disclose individual cap rates, that’s why we always find ourselves in a position in the reports that the end of the quarter to be provide a weighted average cap rates so that we don’t – we’re not in a position to violate that and on these sales we sold these properties to TDR and we did commit in our agreement that we would easily would not disclose the cap rate.
I can say that the cap rate was accretive to the overall cap rates of the portfolio, in other words we sold that at a lower cap rate than we acquired. The portfolio of the debts is specific as we can be under our agreement.
Michael Bender
Yeah. One thing and it might be convenient, if you look at the sort of the last couple of cons of the pro forma we actually have pro forma out those disposition.
So that you can see what everything was like with that already pulled out. To answer your question specifically on to debt side I think it was high fives maybe five to eight.
Rich Moore – RBC Capital Markets
Okay. All right, good.
Thank you guys. Then on the debt in general you talked a little bit about that, that you’re getting propose any of that prepayable in any way that you could have your option as supposed to since you have to do clearly if this is maturing but the stuff that becomes prepayable that you could address earlier than the maturity?
Tom Nolan
I think predominantly their structure is very comparable to ours. Those are typically CMBS loans with the property level, as we mentioned they had over $300 million of revolver and short-term of debt and that was all paid in connection with the transaction.
Rich Moore – RBC Capital Markets
Okay. And then, as far as the portfolio you’ve disclosed 40% investment grade just so where you guys about 20% post-merger somewhere in there.
Tom Nolan
Yeah, I think 19.
Rich Moore – RBC Capital Markets
Okay, got you. And then I’m curious this is a bit of a strange question I guess but it’s kind of troubling.
I look at your stock price and you guys went out and bought assets in an interesting transaction which I understand. But then at the end of the day you’ve essentially split your stock into a sub $10 stock price when you just came out in your IPO last year and I’m wondering which you think about that and whether that’s a good move to be a sub $10 stock after such a short period of times in IPO it was putting the stock like we have here.
Tom Nolan
No it’s not. First of all well it doesn’t stay in the single digits.
The – but it’s unfortunately a math mechanic that was not – that did not have an alternative outcome reverse merger which was the way for this transaction was accomplished and that was the only way to accomplish this transaction was a reverse merger whereby the – our even though we’re at Spirit Realty, we are using the predecessor Cole II, Umbrella has our company of which was the surviving company. So, ideally lot of the outcome rich in the sense that I mean it’s just math right it’s not like the company that have less valuables it’s actually not less valuable and the math was what the math was but there was no lot of way to accomplish that other than to do the reverse merger the way that we did it.
We haven’t frustrated in some of the financial data sources, we were in touch with all of them pre-merger, we provided them all of the information. Some of them don’t actually won’t even talk to you they simply take the information that comes out of corporate filings.
And so some of the information in the data services that are out there that for example so the stock at the high whatever it was 20 below of 9 of course that’s not the case that maybe you have to do the math for – to in order to get those numbers correct. But fortunately we’re making all of our filings over the next few days and we expect those data sources to correct themselves but it was clearly a kind of a legal outcome of the way that the transaction was accomplished.
Rich Moore – RBC Capital Markets
Yeah, any of the – it’s just the optics Tom, of that. So, $10 stock pricing obviously you could – the board could reverse split 2 for 1, 1 for 2 and then you’d be back to 18 but yeah I see which you’re saying.
And I have one more question guys, what are your thoughts from your point of view on Shopko and 84 Lumber today, just what you’re seeing from those two companies.
Tom Nolan
Well, I guess I’ll give my comments and Pete can. I mean I think on Shopko, I’m not sure our view has changed from the time I first met with them and then working through the IPO process, they’re solid Midwestern operated company that it seems perform consistently quarter-over-quarter and there is not lot of volatility in their business and they just seem to be going steadily above their business.
I think in 84 Lumber in that case we’re seeing a substantial difference and 84 Lumber is a company that was a – certainly suffered from the housing challenges in 2008 and 2009 but there also the beneficiary of their housing recovery that you’re seeing in there, their performance across the board has been improving very, very significantly. So they have a much healthier credit than they were at the time even at the time when we were preparing the materials for the IPO.
Rich Moore – RBC Capital Markets
Okay, great.
Operator
Thank you, Rich. The next question comes from the line of (inaudible).
Please go head.
Unidentified Analyst
Yeah. Hi, there and good afternoon and congrats on the quarter.
Really just had a more of a I guess a clarification question there was a question earlier on the payout ratio and I guess the response was you expect that to decline and that was I guess that was in clear on the answer was that because I guess cash flow is going to be growing and that the dividends will wait to catch up or maybe have that next step. Thanks.
Tom Nolan
No, like I said Nick that’s an accurate summary.
Unidentified Analyst
Got it. Okay.
And then as for where that ratio maybe I guess the comment was we’re going to have to wait for Q3 or there is no – I mean are you looking at where other peers where their yield is – should we think of something similar to where SRC was pre-merger.
Tom Nolan
Well, we are I mean our payout ratio I mean we’re not – we have no intention to change the dividend and brought it to affect the payout ratio I think that we’re very comfortable with the dividend is and again it’s on our – that’s a take come to that acquisition we’re very, very consistent with in our sector. So, we have no concerns about the dividend and there isn’t an intention at this point to diminish that in any way.
We simply are going to strive as companies do to grow the bottom line and they make the payout ratios look smaller because their earnings look larger.
Michael Bender
And just maybe to give you a point of reference, obviously SRC continues generating the same amount of payout of where it was before the merger and the payout to the payout ratio essentially will be unchanged there. And as we mentioned earlier we’re just sticking up a little bit from what where Cole payout ratio was.
So if you look at in a combination it will be approximately where it was before give or take that a little bit of increase for the previous share Cole shareholders.
Unidentified Analyst
Got it. Great.
Thank you then.
Operator
Thank you, (Jim). And the next question comes from the line of RJ Milligan from Raymond James & Associates.
Please go ahead.
RJ Milligan – Raymond James & Associates
Hey good evening, good afternoon guys. Just want to follow-up on just the last segment that AFFO is not going to move for SRC shareholders.
So do you still anticipate that the deal to be slightly accretive but maybe not accretive but certainly not dilutive. Is that correct?
Tom Nolan
What I just trying to say there RJ was that the portfolio that Spirit is contributing is the same it was. Portfolio of the Cole is contributing is the same it was and just from an economic perspective in terms of the dividend coverage it’s going to be about the combination for two because we are up ticking the Cole shareholders a little bit and the Spirit will presumably say the same if we keep our dividend payout where it has been.
Michael Bender
But to be clear I mean and I think we’ve clear I hope we have been clear about this from the beginning. We certainly view this as spot accretions the time that this portfolio at the time that this merger was announced was it’s a factor and any transaction it’s was a factor and this one that it was not certainly the sole primary factor we weren’t necessarily looking for spot accretion as we were looking for what I’d call accretive an accretive acquisition to our overall business plan and the other objectives that we had and I don’t believe that when the final numbers are come out this will show that it was accretive from an AFFO stand point it will be slightly dilutive from an AFFO stand point but I think again that was the understanding for this transactions all along that on a spot basis but again from an aggregate portfolio strategy investment strategy basis we got at the time we announced it and we believe it today that it was a very, very significant important and again accretive not so much in the spot at AFFO basis but certainly accretive to the business.
RJ Milligan – Raymond James & Associates
Okay, great. Thanks guys.
Operator
Thank you. That concludes the Q&A portion of today’s call.
I’ll turn the call back to Tom Nolan.
Tom Nolan
All right. Thank you and thank you once again for your interest in Spirit Realty Capital and for calling in today and we look forward to speaking to you again soon.
Thank you very much.
Operator
That concludes today’s call. You may now disconnect.