Aug 4, 2017
Executives
Jackson Hsieh – President and Chief Executive Officer Phillip Joseph – Executive Vice President, Chief Financial Officer and Treasurer
Analysts
Alexander Goldfarb – Sandler O'Neill Frank Lee – UBS Vikram Malhotra – Morgan Stanley Anthony Paolone – JPMorgan Joshua Dennerlein – Bank of America-Merrill Lynch Vincent Chao – Deutsche Bank David Corak – FBR Dan Donlan – Ladenburg Thalmann Ki Bin Kim – SunTrust Michael Knott – Green Street Advisors Michael Carroll – RBC Capital Markets Chris Lucas – Capital One Securities
Operator
Good day, and welcome to the Spirit Realty Second Quarter Earnings Conference. [Operator Instructions] And please do note that today’s event is being record.
I would now like to turn the conference over to Brad Cowen [ph]. Please go ahead sir.
Unidentified Company Representative
Thank you, operator. Good afternoon, and thank you, everyone, for joining us today.
Presenting on today's call is President and Chief Executive Officer, Mr. Jackson Hsieh; and Chief Financial Officer, Mr.
Phil Joseph. And before we get started, I would like to remind everyone that this presentation contains forward-looking statements.
Although we believe these forward-looking statements are-based upon reasonable assumptions, they are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from those currently anticipated due to a number of factors. I refer you to the safe harbor statement in today's earnings release and supplemental information as well as our most recent filing with the SEC for a detailed discussion of the risk factors relating to these forward-looking statements.
This presentation also contains certain non-GAAP financial measures. Reconciliations of non-GAAP financial measures to most directly comparable GAAP measures are included in today's earnings release and supplemental information furnished with the SEC under Form 8-K.
Both today's earnings release and supplemental information are also available on the Investor Relations page of our website. For our prepared remarks, I'm pleased to introduce Mr.
Jackson Hsieh. Jackson.
Jackson Hsieh
Good afternoon. And thanks for joining our second quarter 2017 earnings call.
I want to begin the call with a brief update on our business and quarterly activity. Hsieh is going to then discuss our financial results.
I’ll finish back up with a more detailed discussion following-up on our website regarding our plan forward. As everyone knows, in the first quarter we had a confluence of events that required us to revise our guidance and capital allocation plan for the year.
We also did a poor job of articulating that message on the call. This was, however, by no means a reflection of the many outstanding attributes that make up Spirit, including its portfolio, people, prophecies, and balance sheet.
I'm also especially satisfied that many of the initiative that I put into motion over the past 10 months within a Spirit have began to take effect and are already enhancing our capabilities and results. As everyone knows, last quarter, we experienced a higher than normal amount of delinquent win in certain workout situations and tenant bankruptcies, including Gander, hhgregg, Gordmans, Lone Star and Unique Ventures.
That resulted in loss representatives of approximately $4.2 million. This was an aberration and by no means a reflection of our portfolio quality, operational capability and diversification of our business.
We've tried to provide investors additional disclosure on our portfolio as a means to substantiate this statement. And most recently, if you look in our supplemental, we now show gross potential annualized rent, which is referred and defined as contractual rent, as well as annualize cash rent on our NAV page.
Using these two numbers you can calculate the net loss rent reserves. Also in April, we terminated a third-party servicer who managed over 60% of our assets.
We took on those lease administration, property management and tenant surveillance responsibilities in the second quarter. We believe this is going to provide us much better visibility into our assets.
In the second quarter, our loss rep reserves were $1.1 million, which is approximately 1% of quarterly revenue. While Q1 was an aberration, in this quarter we saw the benefit of a number of operational process improvements that were put into place in late 2016.
Our same-store result I'm happy to say, for the quarter, are up 1.1% across our portfolio. Once again a significant improvement, compared to last quarter's Q1 negative 0.5%.
This is a further indication of the positive health of our portfolio. From a capital allocation standpoint, we were net seller of assets in the second quarter.
However, we repurchased $200 million of common stock, totaling 26.3 million shares at a weighted average price of $7.59. This resulted in a reduction of our float by 5.4%.
We also acquired nine properties that totaled over $92.8 million, 97% represented existing tenets, such as Home Depot, Federal Express, Dave & Buster, Sonny's BBQ and White Oak gas stations. On the disposition front, we saw 48 properties that totaled over $109.6 million, which also included five Shopko stores.
Preservation of balance capacity and flexibility is important and our future capital allocation decisions will continue to reflect this objective. We entered the quarter at 6.6 times recurring debt to EBITDA, as compared 6.5 times in Q1 and this is net of Tom’s severance charges.
Our leverage target for yearend remained at 6.3 three times debt to EBITDA. And our expectation is to continue to modestly acquire and sell assets throughout the balance of this year to achieve this target.
As of June 30, our portfolio, which is comprised of single-tenant, critical operated real estate assets out in 49 states was 97.7% occupied and had an average remaining lease term of 10.3 years. 44% of our contractual rental revenues were derived from asset releases and 89% of our lease have built in rental increases.
Over 95% of our tenants provide us financial information and our weighted average unit four-wall rent coverage remains at three times on tenants that provided us unit financials. Also, we renewed six of eight expiring leases in the quarter and our revenue recapture rate was 94.7%.
During a six months ending June 2017, we renewed 21 of 25 expiring leases, recapturing 98.7% of expiring rent. Now let me address Shopko.
In the first fiscal quarter, ending in April 2017 our Spirit owned Shopko same-store sales were down 2.9%, with unit level coverage remaining at 2.48 times. Our Shopko-owned stores are in good real estate locations and we own the majority of the most profitable stores within the Shopko operating company.
We’ll continue to sell Shopko stores throughout 2017. During the second quarter we sold five Shopko stores for $25.5 million.
The most recent Shopko sale was in late July, where we saw a store in Kennewick, Washington for $9.3 million that is 7.4% cap rate. We've reduced our Shopko rent concentration to 7.9% of Spirit’s total contractual rent.
Overall, our second quarter results are more demonstrative of the strength and reliability of our diversified portfolio of freestanding triple net real estate. I'm going to pass the call along to Phil and after he finishes I’ll go into more detail on our plan.
Phillip Joseph
Thanks Jackson. As previously mentioned, we reported AFFO of over $0.21 per diluted share for the second quarter of 2017, which includes non-recurring cash severance expense of approximately $4.2 million.
Excluding cash severance expense, adjusted AFFO was $0.22 per diluted share. Our reported AFFO per share represents a decrease of approximately $0.01 per share, compared to the prior year second quarter.
The primary drivers related to this year-over-year performance are as follows. First, we have been very disciplined from a capital allocation perspective, as evidenced by our moderate net investment activity of approximately $80 million or the trailing twelve months including, our strategic 84 Lumber portfolio disposition.
In addition, cash severance expense and moderately lower fee income also contributed to the variance from the prior second quarter. Lastly, to the upside, our well-planned balance sheet management has notably reduced our cash interest expense during the year-over-year period.
AFFO also notably improved sequentially quarter-over-quarter, largely due to the rent loss reserve improvement that Jackson mentioned. We expect our rent loss reserve to moderate below our reported first quarter 2017 figure for the remainder of the year.
Total revenues for the second quarter of 2017 were $168.6 million, compared to $171.7 million in the second quarter of 2016. As already noted, moderate net acquisition activity and lower fee related income, contributed to the decline in revenues.
Same-store rent growth for the quarter, when compared to the prior year second quarter, was up 1.1% largely driven by organic rent growth in the portfolio, as well as our theater development matching rent. On the expense front, we have separately disclosed transaction expenses related to the planned spinoff transaction.
Total expenses, excluding costs associated with the spinoff transaction in the current year and headquarter relocation costs in the prior year period increased to $159.9 million in the current year second quarter, from $147.1 million in the same period of 2016. Severance related expenses totaling $11.1 million in addition to higher property costs largely drove the higher reported expenses.
While non-cash impairments were also moderately higher. With respect to run rate G&A, excluding severance related items, it represented approximately 7% of total revenues for the quarter.
We continue to expect a run rate G&A to approximate 7.5% of total revenues for the year. Our higher property costs are expected to moderate over the course of the year as we aggressively reduce our vacant property count via asset sales in addition to redeploying invested capital on underperforming properties.
Offsetting these higher expense categories was lower cash interest expense, which notably decreased by approximately 11% or $5 million during the year-over-year period. Our weighted average cash interest rate improved by approximately 27 basis points from the prior second quarter and now stands at 4.18%.
Over the trailing 12 months we have extinguished approximately $439 million of secured debt with the weighted average coupon of 5.7%. In addition, our unencumbered asset base currently stands at $4.9 billion, has increased by approximately $708 million year-over-year and continues to represent approximately 60% of our total real estate investments.
As of today, we have $264 million of debt coming due to the end of 2018, excluding non-recourse debt transitioning the debt forbearance, as well as our $420 million unsecured term loan, which is extendable on our option. Our corporate liquidity currently stands at $442 dollars, including $10 million in unrestricted cash and $52 million of liquidity available in our Master Trust notes release accounts.
We expect to be a net disposer of assets for the year and our corporate liquidity will as a result improve over the course of the year. In terms of our financial standing, our second quarter 2017 reported fixed charge coverage, excluding non-recurring severance expense stood at 3.6 times.
In addition, our second quarter 2017 reported leverage, excluding non-recurring severance expense, was 6.6 times. As previously mentioned, during the second quarter, we completed our previously authorized $200 million share repurchase program, which equates to approximately 5,4% of our pre-buy back share count at a weighted average purchase price of $7.59.
While our leverage has moderately increased sequentially, compared to the first quarter, due to these share repurchases we continue to expect to end the year at 6.3 terms and will primarily achieve this via asset sales throughout the remainder of the year. During the quarter we declare dividends to common stockholders of $82.4 million, which represented an AFFO payout ratio of 86%, including severance charges, compared to $83.9 million representing an AFFO payout ratio of 80% in the comparable period a year ago.
In conclusion, we are affirming our 2017 AFFO guidance range of $0.80 to $0.84 per common share. As previously communicated, the timing of our capital allocation activities, most notably due leveraging from asset sales during the second half of the year, as well as the timing of capital redeployment activities on underperforming assets will directionally drive our earnings during the second half of the year, relative to our guidance range.
I will now turn the call back over to Jackson to comment on our planned spin-off transaction.
Jackson Hsieh
Thanks Phil. Before I get into the discussion, I wanted to give you some background on our strategic discussion.
But I'd also like to describe many of the conflicting forces at play within Spirit. Since the time that I joined Spirit.
I’ve observed our business as two diverse core investment strategies on one platform. The first one, acquiring good real estate from investment grade tenants and larger portfolios and the second, acquiring good real estate with small and medium sized tenants under mass release.
We also have a conflicting liability structure of investment grade senior unsecured funding and secured investment grade master funding vehicles. And all the while we've been trying to focus on reducing our Shopko concentration.
While many of our operational processes can effectively be applied to both investment strategies, we’ve concluded that it's more efficient to have separate financing approaches focused on each investment strategy. This is going to result in more effective capital structures.
The reality is we're currently under utilizing these financing structures, we're not capturing their benefits and opportunities and they're actually canceling each other out. Our Shopko investment is going to play a vital role to one of the strategies in that the sale proceeds of the Shopko properties will be the growth capital for the future.
As we explored how to best implement the removal of structural impediments and maximizing shareholder value, we've also overlaid our primary objectives to improve our balance sheet capacity and flexibility to generate cash proceeds to grow our business, optimize out tenant industry and portfolio weightings, which will likely result in a competitive cost to capital. Our Board, in consultation with our advisory team, Morgan Stanley, Moelis & Company and Latham & Watkins, evaluated a wide range of strategic avenues for creating shareholder value.
As an overlay to these alternatives, various complex tax constraints, tax liability, prepayment costs, consent processes, counterparty uncertainty, length of time and probability of success, were major considerations for each strategic alternative. After thorough review, we've developed a practical and executable strategy to drive our business forward, which addresses our primary objectives.
If you all turn to Page 3 of the path forward addendum we posted on our website, I’d like to take you through a few of the slides. Or plan is to leverage and spin off 2014 Master Funding Trust, we've started that as Master Trust day, at our Shopko real estate portfolio into a separate REIT, which we’re defining as referring to a Spinko, which is on the right.
We're going to continue to operate an asset management Spinko and Shopko assets will be unencumbered in this new company. This separation plan is the best risk adjusted strategic alternative, which is practical and executable to maximize shareholder value.
I'm super excited about this plan, because it’s going to result in better alignment of capital structure with assets, unlock value inherent in our company and finally, remove and isolate certain structural impediments that have been present since Spirit’s IPO. Spinko is going to be able to pursue a wide range of tactics to optimize our large and valuable Shopko real estate portfolio.
Spinko will be able to continue to sell individual Shopko stores and pursue all parts of the development on the over 70 acres of all parts of lots we've identified around our Shopko properties. And this company continues to divest the unencumbered Shopko stores, the proceeds will be reallocated into quality real estate assets funded by the Master Trust day at a comparable loan to value.
Leveraging and spinning off Master Trust day and Shopko into an independent company results in a business that can evaluate and focus on asset acquisitions, utilizing the benefits of secured investment grade leverage through the master funding vehicle. The company will focus on high quality real assets operated by small and medium sized tenets under the Master leases.
The separation impact on Spirit is simply awesome. Spirit will be liberated from many constraints currently present, resulting in significant, enhanced growth prospects, portfolio segmentation of balance sheet.
Our plan is to issue new notes in Master Trust day, resulting in the 75% of loan to value in the trust. Our preliminary third-party appraise valuation, performed in connection with the proposed notes offering, indicates an appraised value of $2.36 billion or 6.75% cap rate on annualized cash rent.
We’ll also raise additional debt proceeds on a few contributed assets in the Spinko. The total target loan proceeds, which will remain in Spirit are expected to be approximately $400 million.
We expect the AFFO per share of the combined companies and planned capital redeployment one year after the closing of the transaction to be accretive to our expected 2017 results for Spirit. Approximately 20% to 25% of our expected 2017 AFFO will be reallocated to Spinko post transaction.
The end result of Spirit post-operation is a company that will target initially net debt to EBITDA of five times or below on a performa basis, assuming no redeployment of capital and 76% of our assets will be unencumbered. This is a game-changing improvement from where we sit today.
Apart completion of the transaction, our company’s portfolio of investment grade equivalent tenancy will increase to approximately 45%. Portfolio of segmentation will improve significantly.
No tenant will result in more than 5% of contractual rents and the raised loan proceeds will greatly enhance our growth profile. With the additional procedures generated as part of this transaction, Spirit will carefully evaluate acquiring real estate assets and/or repurchasing stock.
New Spirit will own over 1,540 properties, have investment of $5.4 billion be largely service retail and industrial focus with those largest five tenants being Walgreens, Church's Chicken, Circle K, Home Depot and CVS Drugs. If you now turn to Page 10 of our presentation, you’ll see that the Company's top 10 tenants will comprise 25% of the new company’s total rent.
And seven of the top ten tenets will have investment grade equivalent ratings. Approximately 80% of the revenue of New Spirit will be from the current top 100 tenets of Spirit, which you can see in our additional supplemental.
The top 10 industries will approach almost 61% of the Company's total contractual rents and be predominantly service retail-oriented. This will truly be a unique and fortress-like company in terms of its portfolio, people and balance sheet, one of the best in the triple-net REIT sector.
SpinCo will enter into an advisory contract with Spirit prior to the separation. They’ll be an independent Board of Directors for the Company and we will have dedicated people running the business.
New Spirit will provide all of the asset management, lease administration accounting and acquisition support for SpinCo and its Board of Directors. The two companies will enter into a number agreements, including shared services, asset management and strategic alliance arrangements, including a defined asset allocation policy and conflicts of interest protocol.
If you refer to Page 8, you’ll see that Spinko has gross real estate investment of $2.7 billion, is comprised of 928 properties, 196 tenets, 73% reporting tenant unit financial and have over 60% of its assets under mass releases. All of the Shopko assets in Spinko will be unencumbered.
The company will have no near-term debt maturities. We expect to follow our Form-10 document in the fourth quarter of this year, complete the note issuance in Master Trust day and have the separation transaction completed by the end of second quarter of 2018.
Inclosing, our Board, and team of advisors and employees have worked expeditiously to evaluate the best path forward that is practical and executable to maximize value. This plan, achieves many positive outcomes, it provides the right investment grade capital facilities for our two business strategies of acquiring good real estate with investment grade tenants and good real estate with small and medium sized tenants.
It provides a medium which can preserve and realize meaning value from our Shopko real estate portfolio, it maximizes the funding potential of our master funding vehicle, which will directly enhance the balance sheet, liquidity and credit metrics, of New Spirit. And it provides both companies with competitive cost of capital.
I'm super excited about the prospects to both Spirit and Spinko and I'm encouraged by the many operational improvements we've made over the past few months, which are producing good results. Before we open up the questions, I'd like to cover a couple administrative matters.
We plan to provide more detail and economic data on our plan after we file our Form-10 document. Until then we're not going to be able to delve into the specifics around the legal and economic arrangements between Spinko and Spirit.
We’re also still under NDA with Shopko though and will be limited in our responses to any questions related to them. With that operator will you please open up the lines.
Operator
Thank you. We will now begin the question-and-answer session.
[Operator Instructions] With that our first question is from Alexander Goldfarb from Sandler O'Neill. Please go ahead.
Alexander Goldfarb
Hey I guess good afternoon. It's been a long earnings day.
The main question Jackson is when you look back over the past six months, a lot of these actions that you guys have outlined here aren't really new. So in a sense the one quarter conference call sort of seems like an aberration.
So how much of this stuff were you guys working on before? And then going forward, I understand where Spirit the RemainCo wins out.
But when you think about Spinko, it's still going to be over 20% exposed to Shopko, it's still going to have to slowly liquidate. Right now the environment for trying to develop new pads doesn't seem that great.
So how do you – how do we get excited about where Spinko ends up versus RemainCo?
Jackson Hsieh
Alex, how are you doing? Thanks.
Well, if you go to Page 8 just focuses on that point in minute in that path forward deck, Alex. The thing that the market I don't think really had a good understanding is the valuation of National Trust Bay is quite significant.
Obviously it’s $2.36 billion on appraisal basis. Spinko, when I really talked about liberating New Spirit, it’s actually Spinko as well because the – there's actually going to be a very symbiotic relationship between the Shopko stores and National Trust Bay within Spinko.
As we’ve continued to sell those stores off and we will continue to do that, within Spinko, what you have to kind of keep in mind is the ability to reinvest those proceeds. We reinvested into real estate for every dollar of Spinko – of Shopko real estate that we sell, we can buy $4 of other real estate financing at 75% of LTV through Master Trust day.
So if you take it to its full conclusion, will if you put eight cap, on our current rent for Shopko, that $600 million in equity sales of Shopko stores can buy $2.4 billion of real estate, which if you assume a cap rate of 7.5%, will drive over 50% growth in AFFO Spinko. It can also repurchase stock, right.
And so but we don't know where Spinko is going to trade we’ll see where it trades, but I think it's going to have a very competitive cost of capital first of all, but if it decided – the Board decided to repurchase shares and it took that same math, you could retire probably 70% of the outstanding flow to Spinko. So we think it's got a very attractive growth profile and it's going to be very efficient from a G&A standpoint.
Alexander Goldfarb
But Jackson because it's being managed by Spirit, in a sense it seems like the logical conclusion for Spinko is liquidation, unless you guys are going to cede it with the tone management otherwise it seems like a distraction for you guys to run this sort of more investment grade oriented Spirit, versus the resolving Spinko.
Jackson Hsieh
Yes, well I mean, I think, the priority for Spinko is going to really be want to go work through a monetized Shopko, for the benefit of Spinko. And I guess Alex the way to think about it is we own Shopko today and we've been committed to reducing our exposure.
It really doesn't move the needle in terms of improving the balance sheet of Spirit in totality, but when you think about the impact that it has on Spinko, it's actually quite significant. I mean very, very significant.
Alexander Goldfarb
Okay, thank you.
Operator
And the next questioner will be Frank Lee with UBS. Please go ahead.
Frank Lee
Hey Jackson, I just want to get your thoughts on your decision to do the spin versus kind of your thought process in selling the company versus doing the spin? Thanks.
Jackson Hsieh
Okay thanks Frank. So look, we've been working with our team of advisors and we've had an extremely extensive view of various alternatives to create value.
I guess before you – when you kind of think about different alternatives, you really have to really overlay, REITs have very complex rules as it relates to buying and selling real estate, as you know. The tax basis in our assets is generally lower than the market value.
We've got very significant yield maintenance to the extent we for instance prepaid these National Trust notes. We consider time the element of time in terms of best execution and counter party risk and also weighing probability of success.
But I would say probably the most important thing, as it relates to the overlay of alternatives, was basically the residual impact on whatever we did, about the other aspects of Spirit. So when you kind of think about well we've completed, we believe that we've completed, we've got the best plan that's practical, executable and will provide the best risk-adjusted return for shareholders.
Operator
And the next questioner today is Vikram Malhotra with Morgan Stanley. Please go ahead.
Vikram Malhotra
Thanks. Just staying away from the spin, can you maybe update us on action you’ve taken during the quarter or maybe just during the past few months on resolving tenant issues that you had over the last few months?
Where are you with that and where do you expect to be sort of in the next few months?
Jackson Hsieh
Well we – thanks, last quarter obviously, as I said, we didn't do a great job of articulating the messages on that call. I guess the takeaway would be just look at our operations this quarter.
We've got 1.1% same-store growth in our loss rep reserves or $1.1 million, occupancy rates going up. We retired 5.4% of our float.
And our cash rents increased from $604 million to $611 million. The disclosure that we decided to put out this quarter changing from normalized rental revenue to contractual rent, it is sort of the best cash proxy of what our assets can earn.
So every quarter you're going to be able to look at our supplemental, go to Page 19, go to Page 21 and you can take do the additional or subtraction there to figure out what the net loss rent was.\ Last quarter was an aberration. I have to tell you, we've got a really high quality group of tenants in our portfolio we try to outline every one of them.
And if you think about $1 million of lost rent on a business that’s generating over $150 million of revenue, it's really pretty small.
Vikram Malhotra
Of the $4 million in rent that you outlined last quarter, per quarter and then if you extrapolate that you mentioned it was $16 million in a year as part of your guidance to the low end. How much of the $4 million you’ve actually covered?
Phil Joseph
Well I think I’d really kind of get your focus on is kind of moving forward. I don't think we did a great job of articulating a lot of those issues.
So the change in disclosure will make it completely transparent for you.
Vikram Malhotra
Okay, I'm just trying to figure out so – because you've kept the guidance as same. So I’m assuming the moving parts that you had described earlier still exists to some extent because of your other moving parts.
So if you have – well it's the 10 tenants or 15 tenants or whatever accounted for the $4 million, can you just highlight what has been resolved, like has the cinema being resolved, has the restaurant being – just I'm trying to look for some more color on what has been resolved, versus what is still pending?
Jackson Hsieh
The cinema is basically where we've executed we're finalizing a new lease with a new operator. One of the restaurant portfolios is under contract.
The other restaurant portfolio paid rent through the second quarter.
Vikram Malhotra
Some of the…
Jackson Hsieh
Actually fair enough though, Vikram I’ll come comeback to you if get back in the queue, but actually…
Vikram Malhotra
Okay.
Jackson Hsieh
So folks you got to get back we appreciate it, thanks.
Vikram Malhotra
Okay, cool.
Operator
And our next questioner today is Anthony Paolone with JPMorgan. Please go ahead.
Anthony Paolone
Thanks. And I’m probably going to be the dead horse here.
But on the Master Trust at a very elementary level, can you just describe what’s the value of that is because it seems like you're scrapping a lot of value to having that structure. And it just seems right you're just using more leverage, which I would imagine you could in lots of things and you don't need to Master Trust.
I'm just trying to understand whether these Master Trusts are really like handcuffing you, or whether there's really value to that? And is it just in automatic thing that you can lever them up 75% on the value that you guys came up with there?
Isn't there a market that has to kind of clear that? How does this thing work?
Jackson Hsieh
Yes well I just thanks Antony. The Master Trust’s the other companies use them well there's a cars Master Trust lease and there's other triplet operators that use these facilities.
The investors the reason why they buy these type of notes is these are extremely diverse rosters of tenants and properties. And the Master Trust has very specific rules to not overweight industries or locations.
And so they focus a lot on LTV and that's really because of the rating agencies. So there's a whole structured rating process that goes along with this.
So the best way for me to try to describe how we think about it is, The Master Trust wants to constantly issue notes and constantly kind of redeploy capital and wants to do it more efficiently at much higher leverage than it currently is levered, may be the way we have it. And it's sort of diametrically opposite from what our unsecured bond holders want where they want less secure collateral, less LTV.
So if you think about what we're doing is we're basically giving it out National Trust and Shopko to our shareholders, but we're taking out a massive amount of debt and returning capital to Spirit to rebalance our company that’ll at a fortress REIT.
Anthony Paolone
So effectively you are not subject to how the stock market thinks about valuing the Spinko assets, you will be able to pull 75% of the value that out, no matter what through the debt.
Phil Joseph
It’s through the financing hill. And the one thing that is interesting is if you think about the cost of capital for that company, that company is going to have all of this unencumbered Shopko collateral that it's going to sell.
If I were to kind of drop what it's cost capital, it’s 75% of the Cap Stack is at 4.5% kind of interest rate and the other 25% which would be the public equity looks assume to traded with ten times in our portfolio. That would be a cost of capital below 6%.
So it's really quite interesting opportunity for shareholders.
Anthony Paolone
And right now the appraisal on Spinko is a cap rate that's inside of where all of Spirit in trading today. Is that fair?
Phil Joseph
Yes, and once again cap rate is in on the 1,000 or so properties within National Trust day. It's been appraised every assets, it's been appraised by third-party.
And so there's individual asset valuations on each page. And what would be kind of interesting is if you remember that addendum that we gave out on the supplemental on Page 3, which gave our real estate net asset value components; if you sort of said how is this portfolio, how would it be kind of illustrative of what the rest of Spirit.
If you took a six and three quarter cap rate and thought about the rest of the business there would be one conclusion. If you want to Page 5 of our past forward deck, you’ve see not histogram before, right we spent a lot of time talking about how we rank our portfolio, the blue shaded area, those are the assets of National Trust day and Shopko.
And you can see the green which is the rest of the company is very comparable. So I'm not going to tell you what the cap rates are for our NOV, but we just went to a pretty lengthy exercise with the pricing curve.
Anthony Paolone
Thank you.
Phil Joseph
Thank you.
Operator
And our next questioner will be Joshua Dennerlein with Bank of America-Merrill Lynch. Please go ahead.
Joshua Dennerlein
–
Jackson Hsieh
Well I mean look, we’re fiduciaries, of course if we found a compelling – our stock sold every day. If there was a compelling price or concept, I'm sure we would consider it.
But we believe that this path forward is really the one that's going to maximize most values in the kind of the best, most practical and official way.
Joshua Dennerlein
Did you guys looks for buyers or just was this kind of internal debate you had?
Jackson Hsieh
Well once again, just to kind of mention we have a very high quality team of advisors, financial advisors that a lot of time with our Board. And obviously we rely on them to give us judgments about the market, and the viability of various different alternatives.
And look, I think, that they are also very supportive of our plan.
Joshua Dennerlein
Okay. On the Master Trust, be there, or remain in the New Spirit RemainCo.
What's your plan with that, can you eventually resolve that some business a little bit in RemainCo?
Jackson Hsieh
First of all the assets in National Trust B, we really like the assets, just like we like the assets in A. There's a little bit of yield maintenance cost to dissolve National Trust B if we were to do that.
And so I think we’ll reevaluate – it's a much smaller trust and the amount of secured debt after those transactions can be quite insignificant. So we'll look at that at a later date, it’s sort of down in the priority list.
Joshua Dennerlein
Okay. I’ll give way for other questions.
Jackson Hsieh
Thanks.
Phil Joseph
Thanks.
Operator
And our next questioner today is Vincent Chao with Deutsche Bank. Please go ahead.
Vincent Chao
Good afternoon everyone. Just maybe a follow-up on the last question I mean I guess why was the Master Trust B not included in Spinko?
Jackson Hsieh
Well I mean, I think, National Trust – Spinko doesn’t mean to National Trust, I mean they’ve got one that’s pretty powerful. And with National Trust B, look I think, we've probably highlighted the value of the things, beyond just the asset value.
So look I think we’ll evaluate different options with B that it’s extremely valuable real estate I think the structure is very valuable. So will reevaluate options a lot in the later date, but we didn't think it made sense to – one National Trust with the Shopko, is a right symbiotic relationship, because that trust is going to issue a lot of new notes, going forward.
Vincent Chao
Got it, got it. And just maybe one question on the accretion that you mentioned one year out for the combined company on AFO, what does that assume in terms of the $400 million of proceeds that will be generated at the New Spirit, as well as on the Shopko sales front and reuse of those proceeds?
What does that assume in that accretion comment?
Phil Joseph
We kind of assume that if we got that $400 million of capital into New Spirit, that we would buy 2x that amount of capital in real estate at a certain, at different cap rate ranges. And we actually didn’t use too much assumption on Spinko, because that’s a harder one to calculate based on the pace of the sales, but if you work through that one, you could actually generate quite a bit of additional earnings on a combined basis.
Vincent Chao
Okay, but that wasn’t assumed in your comment?
Phil Joseph
No, not [indiscernible].
Vincent Chao
Got it. Thank you.
Operator
And next questioner today will be David Corak with FBR. Please go ahead.
David Corak
Hey good afternoon. I mean your remarks will be a little bit limited on Shopko given the NDA, I’m just wondering what Sandro will be going down this route, may be you comment on any, it’s all that they had in the process.
And more impotently with the Shopko Chapter 11 bankruptcy changed the planning?
Jackson Hsieh
Well for first of all to do this transaction it doesn't require any concern from Shopko. And as you know dually noted – we are not going to comment on hypotheticals.
But if there were a change in any way to our Shopko portfolio, would not preclude us from completing this transaction.
David Corak
I guess another way of asking is if tomorrow morning you came out and you saw Chapter 11, do you still go down this route?
Jackson Hsieh
We're committed to this – plan. And like I said, if there were other more interesting opportunities create value we would consider it.
But change in any type of change in A for Shopko would not preclude us from completing this or stop us.
David Corak
Okay, fair enough. And then, last one from me.
Can you talk about the strategic alliance agreements between the companies that you mentioned some potential conflicts of interest that you are working on. Any color you can you kind of five us around that?
Jackson Hsieh
Yes look on that one, we've given – you’ve probably got a lot to think about and digest it with all those discourse we put out. But we’ll go in a much more detail after we file our Form-10 later this year.
Inter lay out the exact relationships and…
David Corak
Okay, thanks.
Jackson Hsieh
Thank you.
Operator
And the next questioner to me Dan Donlan with Ladenburg Thalmann. Please go ahead.
Dan Donlan
What happened is, one question limit Jackson.
Phil Joseph
Sorry. Yes the last call was so long, we just figured, we tried it.
Dan Donlan
Appreciate it, appreciate it. I’m jut curious on the converts.
What is – what happens there on the spin, is it considered a change control, do you have to – is there – do you have to redeem them? Just kind of curious there.
Phil Joseph
See because this is a dividend and that's not a substantially all dividend, it's just a slight reset. So it's a slight reset of conversion price, yes the strike price, straight strike price.
Dan Donlan
You don’t to – you're not required to redeem them?
Phil Joseph
No, just the strike price where we set based on the distribution.
Dan Donlan
Okay, perfect. And then just real quick Phil.
On the 610 cash rent number, how do you see that trending through the end of the year? You mentioned that you thought you'd see property operating expenses moderating.
But in guidance is that number proceed to kind of stay flat, to move down, to move up, irrespective of any additional asset sales?
Phil Joseph
Hey Dan, yes directionally, obviously we're not giving guidance on cash rent, but one of the things I mentioned in terms of the time your capital allocation is this will drive our earnings guidance throughout the year. Obviously the timing of asset sales is directionally going to drive our cash rent number.
One thing to keep in mind is that we're going to continue to have organic rent growth in the portfolio. Also what to keep in mind as it relates to cash rent is that characterization yet that we sell.
Yes we will be selling as income producing assets but we also are at going to be monetizing non-income producing assets, think vacant assets. As you mentioned look to reduce our property cost leakage over time.
So look – from a cash rent perspective, I would expect it to moderate lower throughout the course of the year. But again there's going to be, as you can imagine, this timing factors relating to capital allocation decisions that also the character of the asset that we sell.
Dan Donlan
Okay, but in terms of not factoring in any type of timing though, you think that 610 number moves up or down. And you're saying you think it moves down slightly, that's because of the timing though, not because of further credit issues is that what I'm trying to get at?
Phil Joseph
Yes a couple of things. It’s going to moderate lower because we're going to be selling more income producing assets and it’s also from a credit issue perspective, we expect or credit loss rent reserves to moderate lower most of the year as well.
So directionally, it will be low.
Dan Donlan
Okay, and then just lastly on the dividend, is there any change contemplated with that with the spinoff does the dividend stay where it is? And have you looked at policy there in terms of what will be for the RemainCo, or New Spirit and then Spinko?
Phil Joseph
Yes we’ll give a more update on the dividend, for around the time, after we do a Form 10.
Dan Donlan
Okay, thank you.
Phil Joseph
Thank you.
Operator
And just a reminder to everyone, in respect to everyone's time please – we do please ask that you stick to one question. And our questioner of today will be Ki Bin Kim with SunTrust.
Please go ahead.
Ki Bin Kim
You don’t try forcing it on me now, the timing, okay. So I’m trying to digest this all but one way this works, it seems like it hinges on your ability to raise $400 million.
But that hinges on a lot of different variable. That’s one question.
Is there any what are the kind of high level covenants in Master Trust A?
Jackson Hsieh
There really no covenants, the only thing is specific to court rules is when you put collateral and or you want to substitute collateral or you sell a property and you want to redeploy cash. There are specific rules around that but there is really – there is not technically covenants what we think about bank facility.
So the Master Trust A is pretty straightforward, these facilities literally raise billions and billions of dollars of capital for student loans, credit card receivables, timeshare I mean the real estate application it kind of only works, it works really well for this asset class because small granular properties very diversified. So it's a pretty straightforward, it’s a very tried and shrewd financing vehicle in the asset-backed market.
Ki Bin Kim
So there is no debt to asset value limitations.
Jackson Hsieh
No, there is no financial covenants, it sort of like it's like structured finance like a CMBS there's collateral and there's structured ratings.
Ki Bin Kim
Okay. And so if I think about the deal, it feels like and sorry for my cruel in office life [ph] in the short period of time, its all I can come up with but it feels like kind of corporate level liposuction.
You have the fact that you want to get rid of the Shopko and all these problems and you are kind of separate the two so that remaining company looks lot prettier. But it makes sense I think to the point where if you are addressing it up for a sale the RemainCo is that the case it just makes it lot more easier for someone else to digest that without a Shopko?
Jackson Hsieh
No, I mean it’s…
Ki Bin Kim
Go ahead, sorry.
Jackson Hsieh
Go ahead and finish, I’ll try to answer what was your last?
Ki Bin Kim
No, the thing is that what the kind of end goal is or is it more this is the kind of cleaner goal in concern and that’s what we are going to run with and the kind of RemainCo asset sale is not really in the cards, right now?
Jackson Hsieh
Just stepping back kind of remember where we are – it’s really important to remember what we are solving for I mean it's really critical. Right now, we don't have a great cost of capital leverage of 6.6 is too high in my opinion, for this type of growing company.
We need to diversify our tenant roster with our largest tenant, which is going to take based on run rate where we saw a $100 million of Shopko’s a year kind of on average it takes six years to wind that position down. So we're solving for to try to create great good cost of capital, removing our impediments obviously, we want to deleverage, we want to do something that's accretive to NAV and growth or do something that’s simply and flexible.
And we want to make sure, its actionable and if you kind of step back and you have to digest this thing but just separating the business in the way we done it actually accomplishes all those things for a new Spirit, we call RemainCo. But for Spinko, Spinko is going to be a great little company when you step back and start to analyze and think about it, look at Page 13, path forward that’s kind of there’s a lot of growth in that company and I guess the thing if we try to do it altogether, which we’ve been doing over the last two years, you kind of like fighting with your arms are kind of tight it's very difficult.
Ki Bin Kim
Okay, well, I’ll limit myself to two questions and I’ll go back in the queue. Thank you.
Jackson Hsieh
Thanks.
Operator
[Operator Instructions] And our next questioner will be Michael Knott with Green Street Advisors. Please go ahead.
Michael Knott
Hi, guys. Jackson on the spin, I hear you on what you’re trying to solve for, I just – I guess is I think about it from a combined basis, combined both companies.
I mean it sounds like we are talking about levering up to either buy assets or buyback stock and incurring a little bit of G&A to do so. So I guess my question is, is any of the assumption here predicated on the idea that there might be a free lunch with regard to the valuation of the new REIT that you are putting out there, is this going to have super high leverage, super high tenant concentration.
So just curious how you are thinking about that? Is there sort of an assumption of a free lunch?
Jackson Hsieh
I mean I think the way we look at it, if you go to Page 8, path forward, the Master Trust A is got great assets in it, some of our best assets are in that company. We’ve got first is all of our Popeye’s Restaurants – in that trust, all of our HT supplies are in that trust, all of our [indiscernible] some of our best concepts are in that trust.
But that trust is almost like a standalone entity but it doesn't have growth capital. And so that's the secret of our belief, right, it makes so much sense.
We’ve been very clear that we want to monetize Shopko just given the concentration, we have. And so monetizing Shopko within Spirit today it just doesn’t really move the needle or in Spinko it does make a big difference in terms of what an investment.
And in terms of like free lunch on the G&A look if you think about both companies, Spirit, new Spirit is going to buy $800 billion with the capital that’s left – that’s part of the dividend. On Spinko and Spinko is going to buy quite a bit of real estate as well.
So both companies are going to grow asset base. But it’s also the same G&A of Spirit, so it’s going to be just much cheaper.
It’s much more efficient, much cheaper there is a tremendous knowledge in operating base that’s in this company that’s going to be shared between the two companies the rating system is same, the way we look at the world, do we think about risk. And if you think about the additional G&A load and we’ll get into more specifics, after we follow the front end, but setting up a board it’s not really a lot of additional G&A expense.
Michael Knott
I guess part of my comment was your comment about the – that Spinko might have a really attractive cost of capital because effectively what you said was 75% of the capital structure would be guidance, I just wonder, I don’t know if any of us know how that 25% of the equity will actually trade. Thanks.
Jackson Hsieh
Yes, I don’t know of either but what I can say is earnings from growth, the dividends as a result dividend coverage will get better. And the Board of Spinko is going to be an independent Board there maybe strategic options for that company later down the line but first and foremost its going to get growth capital from the sale of Shopko stories, they kind of build out its self out.
Operator
And our next questioner today will be Michael Carroll with RBC Capital Markets. Please go ahead.
Michael Carroll
Thanks, Jackson, can you kind of – just give us a quick highlight of what’s the goal is with Spinko, it sounds like it is the goals to wind down these investments over time. Or do you consider Spinko going concern from this point going forward?
Jackson Hsieh
Spinko, the beauty of the Master funding vehicle is that they – you can continue to roll over loads so where we have maturity, tranche of loads and Master Trust A, we can basically, we do the appraisal go back to rating agencies and self opinion notes out of the same collaterals. So its kind of like the beauty of this trust is versus the CMBS, its almost like its own company and so the way to think about it, its almost like a Perpetual Life fund, and it’s better than that, because it can constantly issue mean loads as the collateral value and the trust increase.
It’s a very, very efficient and effective vehicles for small assets that are very diversified. So I would say that we design Spinko to really succeed, its got a real its not dependent on raising public equity to succeed.
That’s the key. Thanks.
Operator
And the next questioner will be Chris Lucas with Capital One Securities. Please go ahead.
Chris Lucas
Good afternoon, everyone. On the – I just want to make sure I understand what the transaction will look like from where we are today on the liability side to where we will be post-spin as it relates to the remaining or the new Spirit.
So today you’ve got bank debt, CMBS debt, Master Trust debt and unsecured notes. And it sounds like after the spin you're going to have the same basically pieces of the debt structure so the debt structure for the new Spirit will not be any less complicated.
Fair?
Jackson Hsieh
That’s right.
Chris Lucas
And then just a quick one on the Master Trust Notes whether they're the 2013 series or the 2014 series. Do they have the ability to redeem it par in – essentially prepay early without penalty?
Jackson Hsieh
No, it’s a yield maintenance, it’s the way to redeem them. And then…
Chris Lucas
There’s no optionality to redeem early though is what I'm asking.
PhilJoseph
One thing on that so is that there is one series related to 2013 trust that we can redeem early in December at par.
Chris Lucas
Is that most series A or the 2013 one?
Jackson Hsieh
That’s 2013.
PhilJoseph
2013 series. That’s right.
But most of the series are subjected to yield mix.
Jackson Hsieh
And one of the reasons why, you know, you just went through the liability structure, and I appreciate it. If you think about Master Trust A, just give you some – it is currently as it sits today.
Master Trust A represents about 25% of Spirit's total contractual rent, yet it represents 34% of our outstanding debt, long-term debt or just outstanding debt. And that's in its current form before we lever it.
So by just removing Master Trust A, just literally removing it, actually delevers the company. In this case, we're just raising a lot more money around it and that’s one of the benefits of just this dividend distribution in the way we’re contemplating it.
Chris Lucas
Okay. That’s helpful.
Thank you.
Operator
Ladies and gentlemen, this will conclude our question-and-answer session. Now I would like to turn the conference back over to Jackson Hsieh for his closing remarks.
Jackson Hsieh
Well, thank you everyone for joining my first call as Spirit’s CEO. Yes, I know we've come a long way since last quarter's call.
But I did want to remind everyone, when we met at NAREIT right after the call that we're all kind of path forward was, no, I’ll just go back to that. First and foremost we committed that we would – try to provide best-in-class disclosure as it relates to what’s in the triple-net leases sector.
Second was we’re going to remove structural impediments. The third was we’re going to repurchase stock in a leverage neutral way.
Fourth was we’re going to optimize our portfolio. And fifth was we’re going to preserve our balance sheet and capacity.
So there's obviously been a lot of material that we’ve released, we relieve and consider, and we hope it's helpful, and look forward to speaking with you soon. Thank you.
Operator
And the conference is now concluded. Thank you all for attending today's presentation.
You may now disconnect your lines.