Nov 11, 2013
Executives
Michael Bender - SVP and CFO Tom Nolan - Chairman and CEO Pete Mavoides - President and COO
Analysts
Operator
Good afternoon, ladies and gentlemen and welcome to Spirit Realty Capital’s Third Quarter 2013 Results Conference Call. At this time all lines have been placed on a listen-only mode.
After speaker 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. At this time I have the pleasure to turn the conference over to Mr.
Michael Bender, Senior Vice President and Chief Financial Officer of Spirit Realty Capital. Mr.
Bender, please proceed.
Michael Bender
Thank you, Jessie and good afternoon everyone. Thank you for joining us today.
The third quarter was a transformative period for Spirit, we are very pleased with the progress we've made and with the strong competitive position we have built in the triple-net lease space. Tom Nolan, our Chairman and Chief Executive Officer; and Pete Mavoides, our President and Chief Operating Officer are with me today to discuss the operating results for the third quarter ended September 30, 2013.
These financials reflect the results of our newly combined companies, Spirit Realty Capital and Cole II for the entire quarter except for the first 16 days of July before we completed the merger, that period only includes the predecessor Spirit’s performance. Tom will start with some introductory comment, I will then provide some color on the financial results of our first consolidated quarter, Pete will then discuss our portfolio and investment programs and Tom will conclude with summary remarks prior to the Q&A portion of the call.
I would like to note that during this conference call we may make certain statements that may be considered to be forward-looking statements under federal securities law. These statements are based on management’s current expectations and the company’s actual future results may differ significantly.
In our periodic reports 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 November 11, 2013 and Spirit does not intend and undertakes no duty to provide, 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 relations section of our website. And with that, here is Tom.
Tom Nolan
Thank you Mike, and thank you, everyone who’s joined us today. The new combined Spirit Realty Capital today is in a very strong competitive position given what we’ve accomplished as a team since our IPO, a little over one year ago.
Through a mix of organic growth and the transformative merger with Cole II, we have gained scale by nearly doubling the number of properties in our portfolio and increased our enterprise value to approximately $7 billion of this September from approximately $3.2 billion as of last September. We have improved the credit quality of our tenants, increasing the percentage of our revenue derived from investment grade quality tenants to approximately 50% as of this September from 28% as of September 2012.
We have also reduced our tenant concentration, with revenues derived from our top ten tenants dropping to 35.6% as of the end of this year’s third quarter from 52% as of the end of the third quarter last year. And we are also more efficient as a result of this increased scale.
For example, we have reduced our G&A as the percentage of revenue to 7.3% as of this September from 8.8% as of last September. We are equally proud to say that these accomplishments have benefited our shareholders.
Through last Friday’s closing price which is November 8th, our stock has delivered a total annualized return since the IPO in excess of 30% including the dividends. We are even more pleased with that performance [amidst] the increase in the amount of shares that have been released into the market place.
The expiration of all contractual lockups and the merger with Cole II increased the free flow in our stock from about $500 million a year ago to $3.7 billion today. Finally and importantly, this progress has positioned us very well to continue to invest in accretive transactions that are consistent with our strategy and operational expertise which we expect will result in sustainable and attractive cash flows that we can then distributes to our shareholders.
One area of particular strength for us is our active portfolio management expertise. We are not just aggregated of assets, we are disciplined operators.
We know and understand the individual properties on our portfolio; their lease terms, beyond just contractual rents, as well as the dynamics of the specific real-estate markets. We know when and at what price to buy them and when it is advantageous to sale them.
Our recent sale of Camelback Mountain Resort is one example of this discipline. Camelback was a good profitable investment, but it did not align completely with our core strategy.
Yes, it is an operational essential property, it is however a larger and more limited in its potential or reuse than we like with our properties. As a result we have sold it for an attractive return and are now cycling the proceeds into accretive acquisitions that do fit our core strategy.
Our operational expertise also came through with our successful merger and integration of Cole II. For Stardust, we acquired the portfolio at an attractive valuation particularly relative to other comparable transactions.
Second, we identified and disposed in excess of $250 in core assets and remain on schedule with a disposition program we set for ourselves at the conclusion of the merger. Third, at closing of the merger we turned out over $200 million of revolving debt and remain on track to continue to match fund our portfolio.
And lastly, I am happy to report that the integration of Cole II's portfolio into our own has been seamless. Our credit portfolio and financial management processes are fully integrated and are up and running.
We think the strong consolidated results, we recorded for the third quarter demonstrate the power of the combined platform. This power also manifests itself in the high quality investment opportunities that we've seen.
Our acquisition pipeline today is robust and we like the risk adjusted opportunities in front of us. I’d like to close my introductory remarks by thanking the team here at the new Spirit.
Everyone has done a fantastic job and I know that even better things are yet to come in the months and years ahead. With that I'll turn things over to Mike who will walk you through the financial highlights for our third quarter ended September 30, 2013.
Mike?
Michael Bender
Thank you, Tom. As Tom mentioned we're pleased to report consolidated financials for the quarter.
While the merger may still impact the numbers slightly in future quarters, the integration process is largely behind us and I would like to personally thank everyone for the hard work and dedication they delivered to allow us to report these solid results. I’d like to start by walking through the highlights of our first quarter consolidated financial results for the third quarter ended September 30, 2013.
As a reminder, predecessor Spirit has treated as the accounting acquirer as such the results of operations of Cole II are included in the combined company’s results beginning on July 17, 2013 the date the merger became effective. In the third quarter ended September 30, 2013, total revenues more than doubled to $137.1 million compared to the prior year.
Although the contribution of the Cole II portfolio in the current year’s quarter was limited to the period from the completion of the merger or approximately 2.5 months, it accounts for 80% of the growth in revenue, the remaining 20% of the growth or approximately $15.4 million was generated from the predecessor Spirit portfolio. In addition to do investment in contractual rent growth, certain predecessor Spirit tenant’s operating performance improved significantly.
As a result, previously unrecognized straight line rent was recorded in the quarter. This increase, more than offsets the loss of revenue from only having the Cole II portfolio for a portion of the quarter.
Consequently net loss attributable to common shareholders for the third quarter of 2013 was $21.9 million or $0.07 per share based on 330 million weighted average shares of common stock outstanding, compared to the net loss attributable to common stockholders for the third quarter 2012 of $49.9 million, or $0.89 per share based on 56 million weighted average shares of the common stock outstanding. The results for the third quarter of 2013 included $45.1 million of merger related costs including transaction charges and third party expenses incurred to solicit and obtain lenders’ consent to the merger.
General and administrative expenses decreased $7.4 million in the third quarter of 2013 to $9.9 million from $17.4 million the prior year. And the decrease was primarily attributable to $8.3 million of charges in 2012 associated with the IPO in our term loan extinguishment.
Offsetting this decrease were higher professional license and franchise [factors], as well as an increase in compensation cost due to hiring additional personnel due to the merger. Meanwhile property cost increased to $5.1 million for the third quarter of 2013, depreciation and amortization cost increased to $48.3 million in the third quarter of 2013 from $26.2 million in the third quarter of 2012.
The increases in property cost and depreciation and amortization reflect the impact of the merger. Funds from operations for the third quarter of 2013 were $27.9 million or $0.08 per share compared to a loss of $21.8 million or $0.17 per share for the prior year.
Funds from operations in this quarter were significantly impacted by the merger cost expense in the period. Adjusted funds from operations for the third quarter of 2013 totaled $64.1 million or $0.19 per share compared to $28.5 million or $0.32 per share for the third quarter of 2012.
The historical shares outstanding have been adjusted by the merger exchange ratio and restated. Also keep in mind that the number of shares outstanding for the 2012 period was impacted by the IPO occurring at the end of the quarter.
Leverage at September 30, 2013 was 7.1 times compared to 7.3 times at September 30, 2012. The improvement reflects scheduled debt repayment and the impact of the Cole II portfolio.
I would like to also briefly review the results for the nine months ended September 30, 2013. Total revenues for the first nine months in 2013 were $280.9 million or up 37.8% from the first nine months of 2012.
Please keep in mind current results, current period results include the pro rata contribution of the Cole II portfolio. The growth in total revenues therefore is principally the result of an increase in rental income from the addition of the Cole II portfolio.
The favorable impact of lease termination fees earned in the first nine months of 2013 was offset by reduction in interest income on loans receivable due to scheduled and early pay-offs. Net loss attributable to common stockholders for the first nine months in 2013 was $41.9 million or $0.19 per share based on 217 million weighted average shares of common stock outstanding compared to the net loss attributable to common stockholders for the first nine months of 2012 of $71.1 million or $1.38 per share that was based on 52 million weighted average shares of common stock outstanding.
As noted, the historical shares outstanding have been adjusted by the Merger Exchange Ratio and restated. For the first nine months of 2013, FFO were $71.1 million or $0.33 per share compared to $21.6 million or $0.34 per share for the first nine months of 2012.
AFFO were $138.8 million or $0.64 per share for the first nine months of 2013 compared to $84.3 million or $0.97 per share for the first nine months of 2012. Finally, Spirit declared two cash dividends for the third quarter equating to over $0.1640625 per share on a post-merger basis.
The post-merger dividend declared on September 05, 2013 equates to an annualized dividend of $0.65625 per share. For clarity, I'd like to walk you through second post-merger dividend replay.
Again on September 5th, we declared a $0.1783 per share daily cash dividend for the period from July 17, 2013 the effective date of the merger through September 30, 2013. As noted this dividend equates to an annualized dividend of $0.65625 per share.
This dividend represents a 4% increase to the rates paid to shareholders of Cole II and the final dividend paid prior to the effective date of the merger and is consistent with the dividend rate paid to the shareholders of Predecessor Spirit after the exchange ratio adjustment, prior to the Cole II merger. The dividend was paid on October 15, 2013 to shareholders of record as we [closed] the business on September 30, 2013.
You'll also note that we filed a Shop Registration Statement with the Securities and Exchange Commission on Form F-3 last week. As a well known seasoned issuer under SEC rules, our registration payment became immediately effective when filed and provides another meaning for us to effectively excess capital and structure transaction to execute our strategy going forward.
Finally, today we are reaffirming our previously announced 2014 AFFO guidance in the range of $0.77 to $0.82 per share. I would now like to turn the call over to Pete to review operations.
Pete?
Peter Mavoides
Thanks Mike. As illustrated by Mike and Tom's comments, our portfolio is in great shape and performing well.
We continue to see, to optimize the portfolio by maximizing occupancy, recycling capital efficiency, efficiently and making accretive acquisitions, all could [go well] delivering stable and predictable cash flows that support our dividend. I will start with an overview of the portfolio.
As of September 30, 2013, our gross investment in real estate and mortgages totaled $7.1 billion, substantially all of which was invested in 2,083 single tenant net leased properties. The portfolio is 99% occupied with an average remaining lease term of approximately 10.3 years.
These properties were leased to 354 tenants operating in 19 different industries across 48 states. Approximately 43% of our annual rent defined as annualized September 30, 2013 contractual rent is contributed from properties under master leases and 89% of these leases provide for contractual rental increases.
Based on annual rent, as of September 30, 2013, approximately 50% of the portfolio consists of this investment grade quality tenants. As an additional element of managing the risk profile, we see unit level financial statements from approximately 53% based upon annual rent of overall tenants.
On the portfolio as a whole, the average unit level rent coverage for the trailing 12 months was 2.74 times. This compares favorably to 2.52 times for the same period a year ago.
On the top 10 basis, with 70% of tenants reporting, the coverage was 2.57 on trailing 12-month basis. As we mentioned on our last earnings call in August, we ramped up investment activity after the closing of the merger.
To that end during the third quarter, we invested $81.7 million in 11 separate transactions adding 40 new single tenant net lease properties to our portfolio. These investments had a weighted average initial cash yield of 7.9% and have a weighted average remaining lease term of 15 years.
Approximately 33% of these transactions were direct sales leaseback in which we priced and structured new leases with our tenants and approximately 35% were with tenants with existing relationships. A range financing for these investments include combination of our revolver, recycled, existing, master funding proceeds and long-term CMBS loans.
The CMBS debt has an average weighted term of 8.2 years, up 54% loan to value and a weighted average interest rate of 5%, which locked in very attractive initial equity return that will grow as the rent escalate. We continue to source efficient long-term debt capital to term out a revolver, match formed our investments and lock in equity returns.
We've been successful in selected lease selling non-core assets and recycling proceeds into assets consistent with our focused strategy. During the third quarter of 2013, we sold seven properties generating growth sales proceeds of $274 million.
In addition to the sale, the two non-core multi-tenant properties previously announced on our last earnings call, we completed the sale of Camelback Resort for $69 million earlier this month. While we wouldn’t expect this level of sales activity going forward, we continue to explore the sale of other non-core properties in our portfolio in a disciplined and patient manner.
Subsequent to September 30, 2013 we have invested an additional $65 million on terms similar to those discussed above. We have a very robust pipeline and have sourced ample opportunities that will allow us to recycle the capital generated from non-core dispositions and deploy fresh capital prudently.
As Tom and Mike mentioned, we are pleased with our position in this evolving market. We remain disciplined in our investment strategy of investing in operationally essential single tenant net lease real estate to generate durable and sustainable cash flows.
With that, I will turn it back to Tom for some concluding remarks before the Q&A.
Tom Nolan
Thank you, Pete. Once again, we are pleased with [all-in] as an accomplished since the IPO in September 2012 and we’re looking forward to continuing our positive momentum the remainder of the year and into 2014.
The Cole II transaction was transformative for us and it’s given us greater scope and scale to deliver attractive, sustainable returns to our shareholders. A size and scale of our business has increased, but our focus has not changed.
We have a clear strategy and see a number of attractive opportunities for continued growth in the future. We believe our third quarter consolidated results demonstrate that.
We appreciate the support we received from our shareholders and look forward to remaining in touch with all of you as we move forward. We are now happy to answer your questions.
Operator
(Operator Instructions) Your first question comes from the line of Vikram Malhotra with Morgan Stanley. Please proceed.
Unidentified Analyst
This is [Lenin Park] on for Vikram. We just had a question about your current acquisition and pipeline and where that stands and where you see asset pricing going forward given the pick down in your cap rate this corner?
Pete Mavoides
Yeah, we are actually pleased with the 7.9% cap rate that we reported for the quarter. We saw a cap rates declining through the summer months but have seen kind of a stabilizing on that.
We are modeling a further take down going forward, but we are pretty optimistic about what we have in front of us. We have the robust pipeline.
As I mentioned we closed the $65 million subsequent to the quarter alone and we certainly see ample opportunity out there for us.
Unidentified Analyst
All right, great. Thank you.
Operator
At this time, we have no further questions. (Operator Instructions).
Tom Nolan
All right. Well, I guess that concludes the Q&A portion of today’s call and thank you again for your interest in Spirit and for listening to our call today.
We look forward to talking with you again soon.
Operator
Ladies and gentlemen, that concludes today's conference. Thank you for your participation.
You may now disconnect and have a great day.