Nov 8, 2015
Executives
Mary Jensen - Vice President, Investor Relations Tom Nolan - Chairman and Chief Executive Officer Phil Joseph - Chief Financial Officer Mark Manheimer - Executive Vice President, Asset Management Gregg Seibert - Chief Investment Officer
Analysts
Vikram Malhotra - Morgan Stanley Juan Sanabria - Bank of America Vincent Chao - Deutsche Bank Dan Donlan - Ladenburg Thalman Tyler Grant - Green Street Advisors Rich Moore - RBC Capital Paul Puryear - Raymond James Chris Lucas - Capital One Securities
Operator
Good afternoon, ladies and gentlemen. And welcome to Spirit Realty Capital’s 2015 Third Quarter Earnings Conference Call.
At this time, all lines have been placed in listen-only mode. Please note that today’s conference call is being recorded.
An audio replay will be available for one week beginning at 6 o’clock PM Eastern Time today and the webcast will be available for the next 90 days. The dial-in details for the replay can be found in today’s press release and can be obtained from the Investor Relations section of Spirit Realty’s website at www.spiritrealty.com.
After our speakers’ remarks there will be a question-and-answer period. [Operator Instructions] I will now turn the conference over to Ms.
Mary Jensen, Vice President of Investor Relations for Spirit Realty Capital.
Mary Jensen
Thank you, operator. Joining us on the call today are Tom Nolan our Chairman and Chief Executive Officer; Phil Joseph, our Chief Financial Officer; Gregg Seibert, our Chief Investment Officer; and Mark Manheimer, our Executive Vice President of Assent Management.
During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs of, assumptions made by, and information currently available to us.
Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will prove to be incorrect.
Therefore, our actual future results can be expected to differ from our expectations and those differences may be material. For a more detailed description of some potential risks, please refer to our SEC filings which can be found in the Investor Relations section of our website.
All information presented on this call is current as of today November 5, 2015. Spirit does 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 in the company’s quarterly report, which can be obtained on the Investor Relations section of our website. During our prepared remarks today, Tom Nolan, our Chairman and CEO will provide a review of our third quarter growth metrics as well as a message on how we are progressing on our key focus areas.
Phil Joseph, our CFO, will then discuss our quarterly financial results that were released earlier today. After our prepared remarks, Tom, Phil, along with Gregg Seibert and Mark Manheimer, will be available to take your questions.
With that I would like to turn the call over to Mr. Tom Nolan.
Tom?
Tom Nolan
Thank you, Mary. And thank you, everyone, for joining us today to discuss our third quarter results.
I would like to begin by saying that Spirit is stronger, more diversified and better capitalized than ever before. On our last call, I spent some time on our post IPO history and what I believe we have accomplished over those three years.
The core of that discussion was how I believe we are positioning ourselves as the dynamic industry-leader in the net-lease sector. So, I thought I would share what being an industry leader in the net-lease sector means to us?
We are a company that has a coherent and articulated business strategy. We consistently execute on that strategy while reporting our progress through useful and transparent reporting disclosures.
I’m encouraged with the quality of our real-estate portfolio and our future earnings potential. I believe our leadership team is poised to achieve our industry leadership ambitions.
And I’m convinced these attributes will create shareholder value over the long term. Phil will go into the numbers in more detail, but our results for the third quarter as in previous quarters do an excellent job of demonstrating our track record.
Spirit had an excellent quarter in which we reported AFFO per share of $0.22, representing a 5.3% increase over the comparable period from last year. Through our focused investment underwriting and capital recycling execution, revenues increased approximately 10.6% in the quarter.
In addition, we paid a quarterly dividend of $0.17 per common share, representing an AFFO payout ratio of 78%. Turning to our portfolio, we continue to derive predictable cash flows in large measure due to the credit quality of our tenants and our asset management expertise.
Our portfolio remains essentially fully occupied at 98.5% with an average remaining lease term of approximately 11 years compared to approximately 10 years at this time last year. At September 30, 2015 approximately 45% of our annual revenues were derived from mass re-leases, and approximately 89% of our single tenant leases provides for periodic rent increases.
Of the trailing 12 months, our unit level rent coverage was a healthy 2.9 times for our reporting tenants, slightly higher than that which we reported a year ago. Moving onto our investment activity during the quarter, we invested $159.8 million in 50 properties located in 15 states and an initial cash yield of approximately 7.4% with a weighted average lease term of 15 years.
If in-place percentage rents were included, the initial cash yield would have been approximately 7.5%. Of the $159.8 million invested, approximately 77% was sale-leaseback transactions and approximately 56% have master lease structures.
The average annual lease escalations for the new investments are approximately 1.7% and over 96% of the new transactions at unit level financial reporting. These transactions have weighted average unit level rent coverage of 2.39 times.
On a revenue basis, 93% of the revenues are generated from the retail sector and 7% from single-tenant medical office. These assets are leased to 17 different tenants in 12 different industries.
A primary industry focus for the quarter continued to be quick-service restaurants, entertainment centers, Health & Fitness and general and discount retail. Additional, these new assets are located in 15 different states.
Our acquisition volume this quarter was more modest than in most recent periods, which is principally a seasonal effect but also reflective of the changing dynamics of the cost of capital in the triple-net sector in general and ours in particular. We have demonstrated, we have been a prudent steward of our capital.
For example, over the last six months, we’ve invested over $448 million in new investments. But we have also sold approximately $367 million.
We are a proponent of active portfolio management and accretively recycling assets that others value more than we do while they do not meet our current investment criteria. This is something you can expect to continue in the foreseeable future.
As we’ve stated consistently since our IPO, our investment philosophy is to buy high-quality assets at attractive prices that will enhance and continue to further diversify our portfolio, increase AFFO per share and thereby creating shareholder value over the long term. As a result, we refrain from buying out solely to achieve an artificial acquisition goal.
We are confident the assets we acquire this quarter meet that criteria and equally confident in our ability to identify assets that will meet that criteria in the future. We continue to execute on what we believe is a prudent investment strategy, acquiring a diverse group of net-lease properties that are operationally essential to our tenants, principally middle-market in terms of credit underwriting in well-located geographic areas and in industries that have attractive characteristics in which we know well.
Now we had a lot to say about our portfolio and our consistent performance shows why asset quality is so important. Nowhere is that better demonstrated than when those assets are tested as in the case with our portfolio leased by Haggen.
We understand the concern in this case, and acknowledge that we over-estimated Haggen’s ability to successfully expand in certain markets. But I want to reiterate what I focused on during our last call and what was so compelling about those assets in the first place, and why I remain confident that we will favorably resolve this situation.
Indeed, our expectation is that this situation is a credit interruption that will not become a material negative credit event. To review, we committed to acquiring 20 assets for approximately $225 million in Q4 of last year representing an initial yield of approximately 7.5%.
These assets were underwritten on an in-place and pro forma basis with the yield level coverage of over two times. The assets are in well-located attractive neighborhoods spanning to West Coast from Southern California to Washington State.
At the time of acquisition, they were highly productive stores. As I said on our last call, we took comfort in the quality of the real-estate, particularly related to our acquisition cost basis.
And our underwriting, we estimated the acquisition price was less than 60% of replacement cost. And that is a perfectly reliable metric for triple-net assets in densely populated high-barrier to entry West Coast locations.
We expect these assets will be in demand either by our newly restructured Haggen, new tenants or most likely a combination of both. As for the status of the rent payments, I’m pleased to report that Haggen is current on October and November rent.
And as such the only month currently outstanding is September, the month in which they start protection. We continue to believe there is limited long-term revenue exposure and we expect that worst, are neutral and most likely a positive value outcome when all is said and done, in other words, comparing the value of our portfolio and the completion of this process, versus the original $225 million investment.
This event is unfortunate. But it highlights the reason you have always heard of stress that we invest in operationally essential real-estate with proven asset classes in proven industries.
Haggen’s bankruptcy process continues to progress. And the team and I remain focused on protecting our interest and achieving the most favorable outcome for our assets and for our shareholders.
And finally, while I appreciate the attention on Haggen, and I welcome the scrutiny, I would remind everyone that since this team took over leadership of the company and excluding the assets from the Cole merger, we have invested over $2 billion in 204 separate investment transactions representing 786 properties. Further and with the exception of Haggen, we have not had a single negative credit event over that period of time.
That is an impressive track record and I would put that underwriting performance up against anyone. As I stated at the outset, Spirit is stronger, more diversified and better capitalized than at any point in our history.
Now I’d like to talk about the future and our earnings potential as well as the team that’s going to get us there. We started this company on the belief that there is significant risk adjusted value potential in the net-lease sector.
Our goal was and continues to capitalize on that potential. Today, the results are now evident.
Our ultimate objective is to be the leading company for investors on our sector because of our asset quality and performance for our shareholders and our presence in the market. We have grown a lot in the past three years but we have grown smartly.
There is more value to be created and we are well positioned to capitalize on. We have recently taken steps towards this goal.
One such step is our success in improving the flexibility of our balance sheet by unencumbering 36% of our gross assets, maintaining our net debt to EBITDA ratio of below 7 times, currently at 6.8 times and improving our fixed coverage ratio to 2.9 times as of September 30, 2015. We also continue to replace high-interest secured debt with unsecured debt at more attractive rates.
One example of this is the $325 million senior unsecured term-loan that we obtained on November 3, 2015. Phil will go into more detail about that in his remarks later.
I would now like to touch on our organization for a moment. As you know, we’ve added to our team and pleased to have appointed Michelle Greenstreet to the position of SVP Chief Human Resources Officer.
This hire reflects the final reallocation of duties from the former COO position among myself, Mark Manheimer, Gregg Seibert and Michelle. Michelle brings a wealth of practical human resource experience and we work closely with our current executives as we expand and improve our organizational effectiveness, talent management and development programs.
As you most likely read in our press release issued earlier this week, Michelle has more than 20 years of human resource expertise, primarily in the financial services industry. Most recently she was Senior Director of Human Resource at Sabre, Inc.
but has spent the majority of her career at Citigroup as a Senior Human Resource Advisor. With the addition of Michelle, we have the corporate platform we need for our next stage of growth.
You’ve seen the strong results that ‘15 can deliver and it’s our pleasure to do more of the same. So, let’s talk about the remainder of 2015 and our outlook for next year.
Phil will have more details, but you will note we tightened our 2015 AFFO guidance towards the high-end of the existing range and released our first look at 2016 AFFO. The future of this company is growth and the value it will create for shareholders will be built on the three leadership characteristics I mentioned earlier, the quality of our portfolio, the earnings potential and our leadership team’s track record.
We are taking the steps necessary towards the future. We appreciate your support and look forward to reporting our progress to you in the coming quarters.
Before I turn it over to Phil, I do want to address one other topic. You may have seen reports that the company is considering moving its headquarters to Dallas, Texas.
I can confirm that is a subject that is under serious consideration by the company and the Board of Directors. We’re in the final stages of due diligence and assessment of options and expect we will have something definitive to report within the next 30 days.
With that, I’ll turn things over to Phil who will walk you through our third quarter financial highlights. Phil?
Phil Joseph
Thanks, Tom. We are very pleased with our third quarter financial results.
Our strong growth in AFFO per share over the same period in 2014 is particularly notable given the prudent reduction of leverage during this period. We have been a very decent allocator of capital and will continue to seek out accretive portfolio capital recycling and viability management opportunities to drive shareholder value.
Before I provide commentary on our earnings results for the quarter, I want to highlight the discipline and measurable improvement in our portfolio and financial position. Page 4, of our financial supplement provides a good backdrop on our progress.
From a portfolio perspective, while lot of focus is given to our Shopko tenancy, we have enhanced our top 5 and top 10 tenant disclosure so that you can compare our much improved tenant diversity against certain of our net lease peers. In terms of our financial standing, three key focus areas related to leverage, capital access and cash flow continues to show a notable improvement.
In this regard, leverage remains below our year-end target of sub-7 at 6.8 times. Our $3 billion unencumbered asset base represents 36% of our total growth real-estate investments and our fixed charge coverage ratios stands firmly at 2.9 times.
We continue to maintain a high degree of focus on these particular credit metrics as we look to transition to a more balanced debt capital structure. Our recently closed $325 senior unsecured bank term loan is evident in this regard.
I’ll provide more commentary on the term loan later in my prepared remarks. As Tom said, this afternoon, we reported AFFO of $0.22 per diluted share for the third quarter, an increase of 5.3% compared to the third quarter of 2014, and an approximately 1.2% increase from the 2015 second quarter.
As with the prior quarter, the year-over-year increase, is largely due to higher rental income as a result of our strong acquisition activity over the last 12 months, coupled with moderate same-store rental growth and consistent operating expenses. Total revenues for the quarter ended September 30 increased approximately 10.6% to $168.4 million compared to $152.3 million in the third quarter of 2014.
During the current year third quarter, we recognized $2.2 million lease termination fee which recovered substantially all of the remaining contractual rent under our lease that had approximately three years of remaining term. Same-store rent growth for the quarter when compared to the prior year third quarter increased 0.7%.
As I mentioned on last quarter’s call, our same-store rent figure will fluctuate from time to time given the nature of annual versus periodic escalation terms contained in our releases as well as the intra-quarter timing of certain schedule based rent increases. Total expenses in the third quarter of 2015 increased 8.7% to $159.3 million from $146.5 million in the same period of 2014.
Approximately $11.4 million of this variance is attributable to certain non-cash items, namely asset impairments, depreciation and amortization, non-cash interest and non-cash G&A. With respect to G&A, our normal G&A run rate remains at approximately 7% of total revenues.
Cash interests slightly increased over the third quarter of 2014. Adjusting for interest capitalized to principle against certain defaulted loans, cash interest expense would have been essentially unchanged.
Furthermore, it is important to note that our weighted average cash interest rate decrease by approximately 13 basis points to 4.87% from the prior third quarter, principally due to repayment and refinancing of high coupon debt. Moving on to our capital structure and liquidity, the company is well positioned for prudent growth.
As I mentioned previous, we have been a disciplined allocator of capital and have not raised equity since our April follow-on equity offering earlier this year, which raised net proceeds of $268.8 million and an offering price of $11.85 per share. Furthermore, over the last six months, we have accretively acquired over $440 million of assets at a weighted average initial cash yield of 7.6% while selling over $367 million of assets at a weighted average cap rate of 7.25%.
During the quarter, our acquisitions totaled approximately $160 million at a weighted average initial cash yield of approximately 7.4%. In addition, during the quarter, we disposed of $82 million of properties at a weighted average cap rate of 7.25% resulting an overall gain on sale of $8 million.
As a point of clarification, for the third quarter acquisition activity, I wanted to point out that the reported initial weighted average cash yield does not include contractual percentage of rents which if included would have resulted in a cash yield of 7.5%. Our supplemental financial appendix provides clear and concise reporting definitions and explanations specifically as to how we calculate economic yield on acquisitions and dispositions.
During the quarter, we extinguished approximated $42 million of high-coupon secured debt with a weighted average coupon rate of 5.56% increasing our unencumbered asset base to $3 million or 36% of our real-estate investments. As I mentioned previously, we recently closed on the $325 million senior unsecured bank term loan, the loan has an initial term of three years and has two one-year extension options which are exercisable at our option.
This facility is an important step in our goal of diversifying our access to the institutional on secured debt markets. The according feature enables us to increase the size of the facility up $600 million.
We have already refinanced $89 million of 2016 and 2017 debt maturities with this facility and we’ll continue to utilize the facility in tandem with our strong corporate liquidity to address these maturities in a proactive manner. From a credit metric perspective, we are well positioned for prudent growth.
As to leverage, we continue to expect the year sub-7 on a debt-to-EBITDA basis. At the end of the third quarter, our net debt to adjusted EBITDA was 6.8 times.
From a cash flow and capital assets perspective, our fixed charge coverage ratio of 2.9 times and our ratio of unencumbered assets to unsecured debt in a sense of 3.6 times remains strong. Our 2016 and 2017 debt maturities represent a tremendous opportunity.
We have approximately $1.1 billion of granular CMBS debt maturing during this period. As you may recall, we inherited this debt towers that connects with the Cole merger.
Besides the opportunity of refinancing high coupon debt that has a weighted average interest rate north of 5.8%, it is important to note that there was approximately $1.7 billion of assets encumbered by this debt. Some of the tenancy includes Walgreens, FedEx, CVS among other highly value credits.
Simply stated, 2016/2017 represents a tremendous opportunity to lower our cost of capital to accretively recycle assets and to significantly increase the size of our unencumbered asset base. These organic activities when paired with our credit metrics as is, will enable us to achieve our goal of diversifying our access to institutional capital in an accretive fashion.
Now, turning to corporate liquidity, as of September 30, we had $75 million drawn on our $600 million unsecured credit facility. Currently, we have approximately $50 million in unrestricted cash and cash equivalents on our balance sheet, and nothing drawn under our $600 million line of credit post the closing of our senior unsecured term loan.
In addition, we have approximately $20 million of liquidity available in our 1031 Exchange and Master Trust Notes release accounts that are available to fund real estate investments. In summary, our strong corporate liquidity position well positions us for prudent and accretive growth.
During the quarter, we declared dividends to common stockholders of $75.1 million, which represented an AFFO payout ratio of 78%, compared to $66.3 million, representing an AFFO payout ratio of 80% in the comparable period a year ago. In conclusion, as a result of our strong first-half performance, we are narrowing our 2015 AFFO guidance range to $0.86 to $0.87 per share from $0.85 to $0.87 per share.
In addition, we are introducing our 2016 AFFO guidance range of $0.88 to $0.91 per share. Our run rate operations assuming contractual lease escalation of 1% on non-expiring leases, 85% rent recovery on expiring leases and refinancing 2016 debt maturities at a conservative interest rate of 4.5% and no equity issuance results in us achieving the midpoint of guidance.
Upside to the midpoint of guidance, our accretive acquisitions ongoing portfolio management and furthermore liability management activities primarily related to their early refinance for 2016/2017 debt maturities. At this time, we do not plan on providing acquisition or disposition guidance relative to 2016.
With that, we will be happy to take your questions.
Operator
[Operator Instructions]. The first question comes from Vikram Malhotra of Morgan Stanley.
Please go ahead. Q - Vikram Malhotra Hello, thank you.
Just on the third quarter dispositions, I guess, they were a little higher, at least than I anticipated. So, I’m just kind of wondering, have you maybe relooked at the portfolio and sort of identified a bunch of assets that you might want to dispose of and I know you’re not giving us disposition guidance, but I just want to make sure in your ‘16 guidance, I’m assuming you’ve baked in at least some amount of dispositions?
Tom Nolan
This is Tom Nolan, and I’ll let Mark refer to the type of assets that we’re looking for. But I do want to be clear I guess on the guidance that we’ve issued, as the points that we have made on the guidance, which is distinction from how we did it last year.
So I want to be clear about that. But the point that we were making on our guidance, our 2016 guidance is it does not have any acquisitions or dispositions in them.
Last year, we issued guidance and the question was did we have that information in there, and the answer was yes, we have it but we weren’t at that time disclosing it because we don’t disclose guidance. This year, we changed that approach in response to feedback that we got from investors and analysts.
And so the guidance that is out there for 2016 is purely has the items that feel articulated in the guidance. There are no dispositions assumed, there are no acquisitions assumed, and there are no, there is no equity issuance assumed in that guidance.
So, on the period, if we do, do acquisition and we do them as well as we think we can do them, obviously that should be accretive to the information that we have produced in terms of guidance. With that, I’ll let Mark refer to the types of assets that were identified.
Mark Manheimer
Yes, so, thanks Tom. The types of assets that we look to dispose of are kind of put in, I’d put them into maybe four categories.
First of which would be non-core. As you’re likely aware we pulled a lot of multi-tenant assets that we acquired through the Cole merger as we over time will become purely single-tenant.
The second group of assets that I would put into that that we would look to sell would be strategic, for strategic reasons, Shopko kind of is the obvious one, as we look to diversify the portfolio. The next group I would say is where you’ve got assets that the market value is more than Spirit.
So for instance you’ve got Walgreens and CVS, flat leases the types of assets that the market is going to pay more than how we value the locations. And then the fourth bucket is trying to get out in front of risk.
And if we see whether it be an industry issue, a company issue or a store issue, we looked - dispose of those assets if we can get more value for them within waiting for a default type situation.
Vikram Malhotra
Okay, that’s really helpful. Thank you for the clarification.
On the rent bumps, I guess I was, hello.
Tom Nolan
Vikram, I was just going to comment because I wanted to be very specific in my opening comments. My comments relating to guidance were directed at the midpoint of the guidance.
So I just wanted to be clear about that in terms of what was in there and what wasn’t in there. Sorry to interrupt you.
Vikram Malhotra
So, just to clarify, when you’re saying midpoint of the guidance that - so you’re saying the midpoint includes no acquisitions or dispositions?
Phil Joseph
Right. Hi, Vikram, it’s Phil.
So just to be clear, to get to the midpoint of guidance and again it was in my prepared remarks but I’ll just reiterate it. To get to the midpoint of guidance, it assumes contractual lease escalation of 1% on non-expiring leases, 85% rent recovery on expiring releases.
And then as it relates to our 2016 debt maturities, we assume that we refinance that debt at a very conservative interest rate of 4.5%. And then, any upside to that guidance range from the midpoint is going to be accretive acquisitions ongoing, portfolio management activities and obviously liability management activities, related to the ‘16 and ‘17 debt maturities.
Vikram Malhotra
Okay, I can just follow on that offline. Just on your rent bumps, I was a bit surprised, I guess, if I’m reading this correctly, was the rent bump 0.7% this quarter?
Phil Joseph
Yes, our same-store rent bump was 0.7%. The thing to keep in mind is that, everybody’s same-store definition is different.
But what we also have going on in our portfolio is that we have a portion of our leases that have annual rent escalations and we also portion of our portfolio is periodic, non-annual lease escalations. So, it can be bumpy from quarter to quarter.
I did highlight that last quarter in my prepared remarks as well, as this quarter. But I would say on a run-rate basis, 1% annual rent bump is a pretty conservative estimate for us going forward.
Mark Manheimer
And Vikram, I guess the other thing that influenced the number this quarter as Phil mentioned, unlike our competitors, we do not include percentage rents as we think the goal of disclosure is really to show contractual organic growth. And we did have one tenant that’s kind of been a problem tenant that’s been on our credit watch since I’ve been here in 2012, from a sale leaseback done back in 2005.
This company where was recently bought by another movie operator, but was held in a separate entity and in exchange we’re getting the corporate credit on lease and the new operator putting about $10 million of TIs into the theaters. We agree to change the lease to percentage rent rather than contractual rent as the operator will have some downtime as they make renovations and upgrade the ceiling.
We did discuss taking this tenant out of the mass which would result in a closer to 1% of same-store rents but we want to avoid making exceptions quarter-to-quarter.
Vikram Malhotra
Okay, that’s helpful. Then just sticking on my last question, just on the movie theater, I just want to make sure I understand the distribution - industry diversification just on three specific items.
So on movie theaters, I think you are, the property count went up to 48, but your percent of rents went down by almost 2%. Can you just clarify kind of how that worked?
Tom Nolan
Are you referring to a specific page?
Vikram Malhotra
Yes, if I look at page 14, so your, the number of movie theaters went from 45 last quarter to 48. Your percentage of rent, I’m sorry it wasn’t 2%, but it went from 5.9% to 5.1%.
Tom Nolan
From that, we did not add, I don’t think any movie acquisitions during the quarter. So, if some other categories, our revenue increased a little bit.
Phil Joseph
Yes, and I guess that also goes to the same-store rent comment where we are converting to one of the tenants to percentage rent and we had not received the sales receipts and just started receiving the percentage rent in October. So that’s probably just a timing issue, my assumption.
Vikram Malhotra
Okay. And then the sporting goods category went up, I think you took three, there were three stores that increased and the square footage went up by a million plus square feet.
Can you just - that seems a pretty large amount. Could you just sort of highlight what you bought?
Tom Nolan
Could you translate, I’m looking at my list.
Vikram Malhotra
For the sporting good, last quarter you had 1.3 million square feet and now you have 2.9 million?
Mark Manheimer
Right. We have a couple of tenants in that sector that we continue to add units for, I do not add, I do not think that are top 20 but there are some two or three chains that we continue who have been customers of ours for a long time, we continue to add locations.
Going backwards a minute on your movie theater, one reason is, I was incorrect saying we did not add any. We added three or four locations on the last day of the quarter.
So, they did not get any revenue for that quarter but they closed on the last day. So they are counting the assets, sorry.
Vikram Malhotra
Okay. But just to clarify this sporting good there so, it went up by three units, so each is like 500,000 square feet.
I’m just trying to figure out what did you?
Tom Nolan
Vikram, let us get back to you on that. So, I know we added three units but they were not 500,000 square feet, no.
Phil Joseph
No.
Vikram Malhotra
Okay, that’s fine. And then maybe I’ve another clarification on the grocery thing, because one went up and one went down, but I can take this offline.
Tom Nolan
Okay.
Vikram Malhotra
Okay, thank you.
Operator
The next question comes from Juan Sanabria of Bank of America. Please go ahead.
Juan Sanabria
Hi, good afternoon. Just looking forward, you noted your cost of capital being somewhat impaired relative to where you like.
What’s the game plan to address that? How should we think of you in the acquisition market or are you kind of shutting that down, at least temporarily or are you focused on dispositions?
Like what’s the focus that we should be thinking of at this point in time given where the stock price is?
Tom Nolan
Thanks Juan, I feel happy to take that one. I recognize that the day-to-day spot multiple is certainly viewed as an important metric.
We certainly view it what are important metric we recognize that at the moment there is a differential between the most well-known peers and ourselves. But I guess from my perspective, I don’t look at that as a long-term impediment.
I actually look at that as short and intermediate opportunity. You’ve heard us focus about portfolio quality.
You’ve heard us focus about our consistent performance. If you go back and look the last two years, we’ve had multiple differentials between us and our peers.
And yet those, as AFFO growth component we had higher growth from an AFFO growth perspective again for those very peers. So, I do, it’s not something that we’re not looking at, you’ve certainly heard us focusing on asset recycling and you’ve heard us on balance sheet management.
We will be prudent. We’re cognizant of where our stock price is.
But we’ve proven that we’re a good steward of it, we’ve proven that we can use our equity capital and still grow AFFO. So, I don’t think by any means do we intend to shut anything down, I don’t think that we have to.
And we’re just going to continue to march forward. Again, those multiples that exist out there, they don’t, as I like to say to post look at that, those are, it’s not as if a company has a patent on there, a trademark on it.
Those are simply reflection of the stock price today. And we’re confident that through performance, consistent performance that multiple, differential will be eliminated.
Phil Joseph
Yes. And Juan, it’s Phil here.
I echo Tom’s comments there. But I really don’t see anybody else in our space that has the transformative events that we have in terms of the organic drivers of growth.
As I mentioned before, we have about $1.1 million of debt coming due in ‘16 and ‘17, very granular CMBS moderately leveraged, weighted average due by north of 5.8. The underlying tenancy in those debt towers that’s encumbered includes Walgreens, CBS, FedEx and some other very highly rated credits that we can accretive recycle out of.
The other thing to bear in mind as well as that, we’re buying assets. When we underwrite our assets, let’s say we’re acquiring assets at our initial cash yield of 7.6% on average, we’re underwriting 40% leverage and we’re in the cost of debt, we’re looking at a conservative at 4.5% that translates to a leverage yield north of 9.7%.
That provides a very attractive margin for us. So, it’s a provocative question to ask from quarter-to-quarter.
But again, I think it’s pretty clear that we have a lot of, strong organic drivers to growth. And I do think that as time goes on, I’ll put our financial supplement disclosure up against any of our peers, we’re going to continue to refine that and make improvements from quarter-to-quarter and maintain active and continual stakeholder engagement and that’s going to narrow the gap.
Juan Sanabria
And can I take that last comment to me that you wouldn’t necessarily be interested in a buyback?
Phil Joseph
Well, I mean, look, as it relates to the stock buyback programs that other REITs have put out there, we’ve obviously seen a lot of them put those programs out there. And candidly we’ve also seen a lot of them not being utilized.
What I would be remised to say that we don’t consider this from time to time. But we just don’t think it’s the most efficient use of capital.
Juan Sanabria
Okay. And then just on the potential headquarter relocation.
Is the new hire, Michelle, and Human Resources, is she based out of Dallas or Scottsdale? And then what do you see as the benefits from moving the company, have you looked at the potential key-man risk of losing people if you do move headquarters?
Tom Nolan
Well, couple of questions there, so let me answer the first one. Michelle is resident in Dallas, she’s aware that we haven’t made the decision to move.
And she is committed to spend as much time here in Phoenix for as long as, as much time and for as long as necessary. As to the key-man, I can tell you that the assessment that I referred to earlier is not being done just by me, but it’s being done by the entire senior management team.
And this is an effort that has been undertaken by the senior management team. And that the four individuals who you’ve heard speak hear today, Phil, Mark, Greg and myself are all committed to this to the extent that we pursue it.
And so that there is not, there will not be from that perspective key-man loss as the key elements of that company that was I think important to all of us. And as I said, this was a group assessment and that group and the four of us are committed to reaching the appropriate outcome.
Juan Sanabria
But what’s the main potential driver for switching to Dallas, what benefit does that bring to Spirit and to shareholders?
Tom Nolan
I think it brings, I mean, obviously the decision that we’re making is where we can be most effective, where we can be most efficient, where we can retain, attract and retain the best talent for this organization. The Scottsdale location was a legacy location that doesn’t really have anything to do with the executives that are in this room.
I don’t think it’s an accident, the Texas is the most popular location for corporate relocation it’s number one for corporate relocations. I think there is a reason for that.
It’s a business friendly environment, very centrally located, much better efficiency from a travel standpoint. There are lots of elements that go into it.
But it is the ambition of the working group as looking at this we’re looking for effectiveness and efficiency going forward. That will be the standard that we’re utilizing and making.
Juan Sanabria
Okay. Also income tax is nice too.
Thanks. That’s it from me.
Operator
Thank you. We do ask that you limit yourself to two questions and you may rejoin the queue.
The next question comes from Vincent Chao of Deutsche Bank. Please go ahead.
Vincent Chao
Hi, good afternoon everyone. I was just wondering if you could just go back to Haggen for a second.
I understand there is some interest in some of the boxes already, request from Haggen on certain other boxes, but can you just give us a timeframe when you think all this will be resolved in terms of how you decide to modify it or not modify the master lease?
Phil Joseph
Sure, I can take that one. In terms of timing, the bids have come in.
The due date for those was Monday. Then they’re going to kind of try to work with, work with the bidders and come up with a list of who they think the winning bidders are tomorrow.
And then there will be the auction and sales hearing starting next Monday. That being said, there is, it’s a dynamic process.
We still need to agree to some kind of breaking up of a master lease in order to kind of go along with the way that Haggen has approached this process. That being said, they have had a substantial amount of interest as you alluded to, with the stocking order bids we’re aware of the fact that there have been other bids and also we’re still receiving a rather large amount of reverse enquiries for the real-estate.
So, in terms of when it gets wrapped up, it’s a dynamic process. We don’t have full visibility but we do feel like it is moving quickly and that is in Haggen’s best interest to make it move quickly as well as ours.
Vincent Chao
Got it. And at this point, I mean, just given the demand that you’re seeing from the reverse increase, plus the bids that are out there, I mean, how many boxes do you think would actually come back to you as opposed to getting re-tenanted or being backfilled fairly quickly?
Phil Joseph
I hate to speculate, we’re going to get a lot more information here in the next couple of weeks. And we’ll continue to update the fact-sheet on our website as more information comes in.
Vincent Chao
Okay, thanks. And just one last question from me on the Shopko side of things, another three units sold this quarter.
Looks like the average cost per unit was about 8,000 or so, I think the year-to-date is more like 10,000. Just curious if there was anything different about the ones that were sold this quarter, maybe they were smaller square footage wise or something?
And then also, are there any Shopkos currently in the market today?
Phil Joseph
Yes. And in terms of the price, it’s always going to be heavily dependent on what the rent is the ones that’s sold.
We’re not going to comment too much. But they were in the normal sized boxes.
And then, we do have ample of Shopkos in the market, we will continue to look to lower our concentration in Shopko. But as we mentioned on last quarter’s call, we were going to stop giving quite as much detail as we were noted in the market is kind of a not distress seller but a seller that was very motivated, and so taking that motivation out of the equation has helped our appraising on the assets.
Vincent Chao
Okay. Thank you.
Operator
The next question comes from Dan Donlan of Ladenburg Thalman. Please go ahead.
Dan Donlan
Thank you, and good afternoon. I just wanted to focus in on one of the line items in the income statement, the other income and interest from real estate.
That number tends to, it’s bounced around a little bit quarter-to-quarter. So I’m just kind of curious what is actually in that and kind of how much of that is recurring versus maybe non-recurring, at $3 million for the third quarter is a fairly large number?
Phil Joseph
Yes, most of that is going to be attributable to lease settlement, lease termination fees. And as I mentioned in my script, we did have a lease termination here with a tenant that essentially accounted for almost three years of rent.
That’s going to happen from quarter-to-quarter, you’ll see that the same thing happen with certain of our peers. I saw that number reported in the same this quarter.
So, Dan, I would say, on a run rate basis, as it relates to run rate, lease termination fee income, I think $2 million to $3 million per year is a pretty good average to assume.
Dan Donlan
Okay, perfect.
Mark Manheimer
I typically refer to them as recurring, non-recurring items because when you have a portfolio of this size, there just seems to be one that’s pops up once or twice a quarter.
Tom Nolan
Right. And we’re, Mark is very proactive with the portfolio.
And so if he sees things that he can do in terms of better managing the portfolio, we’re going to take those opportunities.
Dan Donlan
Okay. Yes, I’m just trying to get a decent run-rate here that makes complete sense.
And then just kind of curious on the net book value of vacant assets that you guys provided, I really appreciate that detail. You list about $68.7 million of those.
So, just kind of curious as we think about obviously there’s no income there. So as we think about kind of the value for any repurposes, we’re just kind of curious what type of discount we should ascribe to those properties?
Is it 25%, is it 10%, is it 50%, just kind of a general rule of thumb, when you saw vacant assets, how much have they gone for relative to book value?
Tom Nolan
So, let me start with that. I mean, again, all we can do Dan is give you guys the building blocks for NAV.
And you guys can ascribe whatever discount you want. I mean, it’s that’s really at the minimum amount.
But I’ll let Mark kind of…
Mark Manheimer
Yes, Dan, I feel like whether we determine we’re going to sell the assets or lease them will be kind of what will drive that but in most cases, if we’ve gotten a property back that’s already been impaired. So I feel like there is a $68 million is probably a fair number for you.
Dan Donlan
Okay. And I’m going to take one more question as well.
Was just kind of curious if you could give us maybe the acquisitions by month in the quarter, because in looking at the definition that you guys provide for when you do your tenant concentrations and I think that’s maybe why Vik was having issues with the number of properties versus the percentage, that it still seems to me like why you exclude the sales from any intra-quarter sales, you don’t normalize it for acquisitions made in that last month of the quarter, is that correct? Am I right to assume that?
I was just reading the definition in the back of the supplement and just wanted to make sure I was getting that down correctly?
Tom Nolan
Dan, are you talking about you the definition of annualized rents, what are you talking about?
Dan Donlan
Yes, exactly, exactly.
Tom Nolan
Okay. Again, so we’ve talked about this before.
So, the definition of annualized rents, whatever tenants are in place as of the last day of the quarter, we give them a full month’s rent and then it’s annualized. That’s how that’s calculated.
Dan Donlan
Okay. That’s it from me.
Tom Nolan
Thanks Dan.
Operator
The next question comes from Tyler Grant of Green Street Advisors. Please go ahead.
Tyler Grant
Hi, guys, just a quick question from me. During the quarter you released five of your six planned lease expiries and sold three assets that were vacant, but occupancy dropped by about 20 basis points.
Back of the envelope, that suggests that eight unexpected vacancies occurred during the quarter. Can you walk us through that a bit or talk about the assets?
Tom Nolan
Could you just run that math by me one more time and then I’ll let Mark comment on that. I just had a little trouble tracking that.
Tyler Grant
Do you want me to repeat it, you said?
Tom Nolan
Yes, if you wouldn’t mind.
Tyler Grant
Yes, sure. So during the quarter you guys released five of your six planned lease expiries and then you also sold three assets that were vacant, but whereas your occupancy actually dropped during the quarter by about 20 basis points.
So, if I do a little bit of back of the envelope math, it suggests that you had eight assets that became vacant unexpectedly. Can you describe those assets or why the vacancies occurred?
Phil Joseph
I mean, the vacancies occurred because we had tenants not renewing leases. And then in terms of why our vacancy dropped which going from 20 basis points change, it’s simply because the number of assets increased in the portfolio.
And keep in mind, we also had other vacant assets that were relapsed or sold. So there are 21 new vacant properties and 21 realized or dispositions with our vacant properties.
So the number stayed at 37 but the number of our total properties changed.
Tyler Grant
All right, sure. All right, then impairments for the quarter were $21 million, can you explain why those impairments were taken?
Phil Joseph
Yes, so the impairments related primarily to one asset in Salt Lake City, a distribution center leases coming due to mature, I think in June of next year. We’re having impairments from time to time in our portfolio.
But I guess when I look at it for the year our impairments are probably 50 basis points of our gross real-estate investment for the year, so.
Mark Manheimer
Yes, and as Phil mentioned that there was one kind of, there is one asset that was a larger asset leased to Hewitt-Packard as to distribution center in Salt Lake City that we identified as the risk before the merger with Cole II that’s part of that portfolio. And as we get inside of one year of expiration on leases that we know were fairly certain that are not going to renew.
We view that as, we run that through our impairment analysis and that asset became impaired.
Tyler Grant
All right, great. That’s all from me.
Thanks guys.
Operator
The next question comes from Rich Moore of RBC Capital. Please go ahead.
Rich Moore
Yes, hi, good afternoon guys. I wanted to ask you, Tom, I wanted go back to the equity question.
If you guys found a big portfolio or a $300 million or $400 million of acquisitions that you wanted to close on near-term, would you think about going to the common equity market to help finance that with your stock price where it is, or would you be inclined to pass on something like that?
Tom Nolan
You probably won’t be shocked with this reply, Rich. But it’s probably difficult to speculate and I don’t think it’s useful speculating on potential capital market transactions.
All I can do is point to our history. All I can do is go back and say these folks have been the stewards of this equity capital now or for three years.
When did they tap the equity market, why have they tapped the equity market, was it rational to make it tap the equity market. And I think our scorecard on that by most accounts is very good.
So, you can’t, it’s really difficult because I just, I don’t know what the price of that portfolio would be, I don’t know where my stock would be. All I can again do is point you I guess in the rear-view mirror and say, how we look at equity.
We view equity as precious as any company does. And we would certainly expect the appropriate return on that to the extent that we utilize it.
Rich Moore
Okay, all right. Fair enough, thanks.
And then I wanted too, thinking about Haggen a bit, I mean you guys, as you pointed out, have done a great job of underwriting real estate in general for the acquisitions that you do. And I’m curious, maybe how you underwrite the operator, because I didn’t know Haggen either particularly.
They weren’t entirely big until they started this whole activity. But the more I’ve read about them and talk to people about them, it didn’t sound like anybody really liked them as an operator, whether it was customers or others who dealt with them, et cetera.
So it sounded like there was information out there that they maybe weren’t that great an operator. So, I’m curious what you guys do to study the operator, not just the real estate?
Tom Nolan
Yes, I’m happy to answer that. Because that’s what we do obviously underwrite the operator.
I think in last quarter’s call, we shared the fact that this was the distinction for us, this was an unusual underwriting and that we were underwriting an asset and then we were putting another operator to replace the operator that had produced the historical performance. That’s very unusual for us, say 99% of every other transaction we’ve done, we’re underwriting the operator and we’re underwriting the assets.
So we’re doing the asset in the very box that we’re buying. This was unique in that context.
As to your second question, Haggen was an inferior operator. I think our perspective on that would differ.
We did do due diligence on them as an operator, in their whole market, in the Pacific Northwest. We compared their operating results versus competitive groups.
We compared their operating results against various people or within the stores that we were buying. And what we found was that they were a solid operator and in many cases they were out-performing their peers in the market that they were in.
Now, again, they were not able to translate that beyond their core markets. But I don’t think that at least, we did not reach the conclusion and I’m not sure the facts support that they were suboptimal operator in the Pacific Northwest.
Rich Moore
Okay. So, maybe this was just biting off more than they could chew is kind of what you’re thinking?
Tom Nolan
Well, they certainly did. I mean, I think the outcome supports that thesis.
They were over ambitious, they didn’t act acute and it failed.
Rich Moore
Great. Okay, good.
Thank you, Tom.
Tom Nolan
You’re welcome Rich.
Operator
The next question comes from Paul Puryear of Raymond James. Please go ahead.
Paul Puryear
Hi, thanks, good afternoon. Tom, we did want to hear a little bit more about this move, prospective move to Dallas.
What’s the total cost for doing something like that?
Tom Nolan
We haven’t finished the due diligence as I said in my opening comments. But I guess just to give you some comfort here, I mean, the cost we do not expect the cost to be material.
We’re a large company and assets but we’re not a large company in people, it’s one of the virtues of this space. So we neither have a lot of real-estate nor do we have a lot of people relative to again the asset base that we have.
So there will be one-time cost associated with it, which is the utilization of our resources. Again, I think any expenditure of our resources whether on buying property or investing in our people, I think any one of those seriously and I’m looking for a return on our assets, I’m looking for return on our people, I’m looking for return on any place that we put money.
And that’s why I referred earlier to we’re looking to improve efficiency going forward, not increase our cost going forward but to improve efficiency going forward. And there will be a one-time cost for that but it really isn’t going to be material.
Paul Puryear
So does the G&A run rate change?
Tom Nolan
No, we do not expect the regular, actually we have the one-time cost here, we do not expect that there will be a change in our G&A perspective going forward.
Paul Puryear
Okay, that’s it for us. Thanks.
Operator
And we have a question from Chris Lucas of Capital One Securities. Please go ahead.
Chris Lucas
Yes, good afternoon everyone. Tom, just sort of a big picture question, maybe if you give us some context as it relates to the spread between sort of portfolio pricing and one-off pricing.
What have you seen over the last three to six months on that?
Tom Nolan
I’m going to let our resident expect Mr. Seibert comment on that.
I’ll throw off my perspective as we all sit around the table. There has been a price correction in the triple-net sector in general over the last six months.
And you saw a lot of I think excitement about some portfolio transactions earlier in the year. I think we talked about them in the last conference call, so we don’t need to necessarily go over now.
But, overall kind of again triple-net price correction, gives us at least I’ve witnessed and we have seen in the market I think less kind of enthusiasm for stepping up and paying the big portfolio premiums to get big chucks of assets. We really haven’t seen much of that lately, but I’ll turn it over to Gregg.
Gregg Seibert
Right. There were a couple of large transactions in the market, maybe in the late spring that were being priced.
But they were delayed a little bit. And they ended up closing in October.
And on those transactions, I think there was probably 25 basis points to 40 basis points pick up and where the rate ended up from where the expectation was perhaps in May of 2015. On the smaller transaction side, it probably had a comparable type pick up a little bit.
It has not really seen a diminishment in the number of bidder but just an uptake in cap rates reflecting a little tighter credit market particularly on the CMBS side.
Mark Manheimer
And then, this is Mark. I would just also say, depending on how far you want to go down the scale, the really small assets where you’re competing with 1031 type investors that are not impacted by the pull-back in REITs and aren’t looking to finance with CMBS.
Those prices continue to be aggressive. So there has not been that type of pull-back in the really small 1031 type properties which has created opportunity for us on the disposition side as we can acquire at higher cap rates and larger deals and then dispose individual assets on the smaller scale at lower cap rates.
Chris Lucas
Okay. And then just a technical clarification for me, I need to go back to this, on the tenant diversification.
Last quarter the Shopko store count was 159 and then this quarter it’s153, what am I missing?
Tom Nolan
Yes, we had a couple of Shopko hometowns which are the smaller boxes, we re-let those to other tenants.
Chris Lucas
Okay. Appreciate that.
Thank you.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Mr.
Tom Nolan, Chairman and CEO for any closing remarks.
Tom Nolan
Thank you operator, and thank you everyone for joining us today. As you are aware we changed our reporting format to allow more time between the release of our earnings and our call.
We made that change based on feedback from our investors and analysts, and hope it was well received. We’re happy to take any additional suggestions that can improve this process.
Our ultimate goal is to produce industry-leading results and a best-in-class net-lease real-estate portfolio. I’m pleased to be working with this team committed to reaching these objectives.
We look forward to seeing many of you in Las Vegas in a couple of weeks at the NAREIT REIT World Conference. Thank you, and good night.
Operator
The conference has now concluded. Thank you for attending today’s presentation.
You may now disconnect.