Jackson Hsieh - President and Chief Executive Officer Phil Joseph - Chief Financial Officer

Vincent Chao - Deutsche Bank Anthony Paolone - JP Morgan Joshua Dennerlein - Bank of America Merrill Lynch David Corak - B. Riley and Company Vikram Malhotra - Morgan Stanley Daniel Santos - Sandler O'Neill Dan Donlan - Ladenburg Thalmann Neil Malkin - RBC Capital Markets

Thank you, operator, 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.

Before we get started, I would like to remind everyone that this presentation contains forward-looking statements. Although the company believes these forward-looking statements are based upon reasonable assumptions, they are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from those currently anticipated due to a number of factors.

I would refer you to the safe harbor statement in today's earnings release and supplemental information as well as most of our recent filings with the SEC for a detailed discussion of the risk factors relating to these forward-looking statements. This presentation also contains certain non-GAAP measures, reconciliations of non-GAAP financial measures to most directly comparable GAAP measures, and they are included in today's release and supplemental information furnished to the SEC under Form 8-K.

Both today's earnings release and supplemental information are available on the Investor Relations page of the company's website. For our prepared remarks, I'm now pleased to introduce Mr.

Jackson Hsieh. Jackson?

Good morning, and thanks for joining our third quarter 2017 earnings call. I'll begin the call with a brief update on the business and our quarterly activity.

Phil will then discuss our financial results. Finally, I'll discuss the materials that we posted on our website, providing an update on our plan forward and then we will open up the call for questions.

I'm extremely happy to report our diverse portfolio of high quality, net lease assets produced another quarter of strong operating results while further enhancing our balance sheet. Additionally, we continue to be on track for completion of our spin-off transaction on which I will update all of you later on this call.

Our operating results demonstrated improvement in earnings, occupancy rate, property costs, releasing spreads and loss rent reserves, and we continue to make progress on our process improvement initiatives that were identified and implemented when I joined the company in September 2016. For the third quarter, we reported $0.23 of AFFO per share and $0.64 of AFFO per share for the first three quarters.

Due to these strong results and improved visibility into year-end, we are increasing our earnings guidance for calendar year 2017. In the third quarter, our loss rent reserves were $713,000, which is only approximately 0.4% of quarterly revenue.

This is even lower than 2Q's loss rent reserve of $1.1 million and is a result of the number of operational and process improvements we put in place in late 2016. Finally, our same-store sales results for the quarter were up 1.2% across our portfolio.

From a capital allocation standpoint, we were a net seller of assets in 3Q. We have made strong progress on this initiative, having sold 56 properties for over 124 million, including 13 Shopko stores.

Importantly, as we stated in our press release, 42 of these properties were vacant. Reducing property cost leakage has been a key performance indicator for our team, and we expect to benefit from these sales.

During the quarter, we also acquired four properties for over 62 million. Additionally, we invested 11.1 million in expansion and newbuild opportunities for tenants including Main Event and CircusTrix.

These are two tenants in industries that rank high on our industry heat map. Finally, we repurchased 22 million of common stock, totaling 2.5 million shares at a weighted average share price of $8.75, bringing the total to over 222 million in year-to-date repurchases.

We ended the quarter at 6.5 times recurring debt-to-EBITDA as compared to 6.6 times in Q2. And pro forma for the preferred offering we completed subsequent to quarter end, our debt-to-EBITDA stands at 6.2 times.

Our balance sheet target of 6.3 times debt-to-EBITDA or lower is important for us to achieve, and our future capital allocation decisions will continue to reflect this objective. As of September 30, our portfolio, which is comprised of single tenant, operationally critical real estate properties in 49 states, was 99.1% occupied and had an average remaining lease term of 10.1 years.

44% of our contractual rental revenues were derived from master leases, and 89% of our leases have built-in rental increases. Over 95% of our tenants provide us financial information, and our weighted average unit level 4-wall rent coverage for our top 10 tenants remain at 2.5 times.

During the quarter, Spirit renewed five of six or 83% of our expiring leases, and our revenue recapture rate was 103.3%. During nine months ending on August 30, 2017, we renewed 26 of 31 or 84% of our expiring leases, recapturing 101.3% of expiring rent.

Now let me address Shopko. As previously disclosed on our website, Shopko sent a letter to its vendors updating their financial performance.

In their second fiscal quarter ending in July, 2017, our Spirit-owned Shopko same-store sales were down 3.4% with unit level 4-wall coverage increasing to 2.5 times. During the third quarter, we sold three revenue-producing Shopko stores for $18.5 million, which reflected an average cap rate of 7.75% and 10 vacant former Shopko stores.

Through September 30, 2017, we have sold 11 operating Shopko stores for 65 million at an average cap rate of 7.71% and 13 vacant Shopko stores for 9 million. We have reduced our Shopko rent concentration to 7.8% of Spirit's total contractual rent.

Overall, our third quarter results were demonstrative of the strength and stability of our diversified portfolio of freestanding triple-net real estate. I will pass the call on to Phil.

As previously mentioned, we reported AFFO of $0.23 per diluted share for the third quarter of 2017. Our reported AFFO per share represents an increase of $0.01 per share compared to the prior year third quarter.

Disciplined capital allocation, in addition to portfolio process improvements and prudent balance sheet management activities, largely contributed to our favorable operating performance quarter-over-quarter. From a capital allocation perspective, we have reduced our weighted average share count by approximately 5% as a result of our open market share repurchases.

Year-to-date, we have purchased approximately $222 million of stock at a weighted average price of $7.69, including $21.7 million of purchases during the third quarter. On the portfolio management front, over the trailing 12 months, we have been a net disposer of assets to the order of $115 million.

We have also actively redeployed capital on underperforming properties via asset sales and reletting certain assets to existing customers, which has helped regain top line revenue and reduced property cost leakage. Lastly, on the balance sheet management front, our proactive liability management and capital market activities have provided us with the liquidity and balance sheet strength to execute meaningful share repurchases and to have continual access to the public capital markets.

Our recently completed $172.5 million preferred stock offering was comprised of a high-quality institutional order book priced at an attractive perpetual coupon of 6% and the proceeds of which were used to retire near-term secured debt as well as term out line borrowings. Total revenues for the third quarter of 2017 were $169.6 million compared to $172.5 million in the third quarter of 2016.

Net disposition activity, lower fee-related income and capital redeployment friction largely contributed to the decline in revenues. Same-store rent growth for the quarter when compared to the prior year third quarter was up 1.2%.

Similar to the second quarter same-store performance, this increase is largely driven by organic rent growth in the portfolio as well as a theater development commencing rent in the second quarter. Going forward, we will continue to provide more transparent disclosure on organic rent growth in our portfolio with additional information on the embedded contractual rent growth and portfolio health.

As such, we plan on replacing our current same-store disclosure with these incremental operating metrics next quarter. Total expenses, excluding cost associated with the spin-off transaction in the current year and headquarter relocation cost in the prior year period, increased to $172.1 million in the current year third quarter from $149.9 million in the same period of 2016.

Non-cash impairments totaling $37.7 million, over half of which is related to Gander Mountain, largely drove this increase. With respect to run rate G&A, excluding noncash straight line rent write-offs of $2.4 million for terminated leases, it represented approximately 7% of total revenues for the quarter.

Our property cost leakage has notably improved over the course of the year, and our reduced vacant property count should help shore up leakage during the remainder of the year. Cash interest expense was only moderately lower compared to the prior third quarter, largely due to our higher line of credit balance.

As we continue to deleverage during the remainder of the year, cash interest expense will continue to improve. However, any benefit to AFFO will largely be offset by preferred equity dividends.

Over the trailing 12 months, we have extinguished approximately $167 million of secured debt with a weighted average coupon of 5.8%. And as of today, we only have $150 million of bullet debt maturities through the end of 2018.

As to our corporate liquidity, we currently have $482 million available under our line of credit and $96 million of cash balances, including $86 million in our Master Trust Notes release accounts. In terms of our financial standing, our third quarter 2017 reported fixed charge coverage stood at 3.4 times, and our $4.9 billion unencumbered asset base continues to represent over 60% of our gross real estate investments.

Our third quarter 2017 reported leverage was 6.5 times. And pro forma for the preferred stock offering, our debt-to-EBITDA is 6.2 times.

We continue to expect to end the year at or below 6.3 times on a debt-to-EBITDA basis. During the quarter, we declared dividends to common stockholders of $82.1 million, which represented an AFFO payout ratio of 79% compared to $84.6 million, representing an AFFO payout ratio of 78% in the comparable period a year ago.

In conclusion, we are encouraged by our progress on redeploying at risk capital and the result in benefits we are realizing in our operating portfolio performance. As a result of this progress, we are increasing our 2017 AFFO guidance range from our prior range of $0.80 to $0.84 to our new range of $0.84 to $0.86 per common share.

Directionally, our fourth quarter AFFO per share will moderate lower from a revenue perspective as we sell assets to reach our year-end leverage target in addition to lower fee-related income. Also, as I mentioned previously, while cash interest expense will decrease during the quarter as we deleverage, any savings will largely be offset by preferred dividends.

I will now turn the call over to Jackson so that he can update you on our planned spinoff transaction.

Thanks, Phil. I'd like to update you on the leveraged spinoff transaction we announced on our second quarter conference call.

As we discussed last quarter, we intend to spinoff Master Trust A and our entire Shopko store portfolio. We will call this new separate entity Spirit Master Trust.

Let me also remind you that this transaction does not require any tenant consent nor does any tenant bankruptcy or restructuring impact our ability or timing to complete this transaction. As I mentioned earlier, we are making good progress and now are on track on our progress towards completion of the transaction, which will be early in the second quarter of 2018.

This morning, we posted additional disclosure on our Web site outlining further details on our path forward for Spirit Master Trust. We would like to call out a few key points on our revised timing, update you on our financing plan and finally, discuss the structure and governance provisions of the transaction.

On the timing of the transaction, which is outlined on Page 5 of the Path Forward To deck, we plan on filing confidentially with the SEC our Form 10 document in late November, early December. We have completed our tax restructuring plan, pro forma 2015 and 2016 carve-out financial statements and made progress on our Form 10 document.

The advantages of filing confidentially include our ability to file without completion of a 2014 carve-out of financial statements, which will ultimately result in us being able to complete the spinoff earlier in 2018. After our initial confidential filing with the SEC, we can at any time make that document public, however to do so, would require inclusion of 2014 carve-out financial statements prior to the completion of our 2017 10-K.

Regarding the financing of the transition that we outlined, our expectation is to raise greater than $400 million as part of the recapitalization of Spirit Realty prior to the spinoff of Spirit Master Trust. We are considering adding approximately $200 million in additional assets into Spirit Master Trust that will help us optimize the financing, loan proceeds and the Master Trust.

We have a number of compelling CMBS proposals that we are pursuing and evaluating, and we are nearing completion of our work with S&P on the rating analysis of our anticipated Master Funding Notes offering. We anticipate completing these financing transactions in the early part of the first quarter 2018 if not sooner.

As appropriate, we plan on giving more details on the financing transactions in the future. Spirit Realty Capital and Spirit Master Trust will be operationally aligned in order for the company to execute on its mission statement, which is on Page 4 of our Path Forward To deck.

That mission statement is for the company to provide operational consistency across the entire tenant and property portfolio, while we continue to monetize the majority of the unencumbered Shopko store portfolio. Those proceeds will be reinvested into quality triple-net real estate opportunities that are consistent with our industry heat map and property ranking system.

If you refer to Pages 6 through 11 on the Path Forward To deck posted, you will see that the alignment between both companies will be contractual, operational and include ownership. As part of the additional $200 million asset contribution under consideration, Spirit Realty Capital expects to own interests in Spirit Master Trust prior to the spinoff comprised of approximately 10% common stock, $100 million in preferred stock and 5% retain interest in newly issued Master Trust Notes.

The board configuration, management fees, structure, promote, asset allocation, conflicts of interests and asset and property management agreements are all designed to create initial and longer-term incentives and alignment between two companies, which we believe will maximize stakeholder value over the long term. We believe that the services and duties required to service, asset manage and property manage Spirit Master Trust will be seamless in the same manner for which we are currently operating.

The Board of Spirit Master Trust will have the power and optionality to grow the business and approve the quality of the company's assets, focus on capital allocation and have the ability to unlock meaningful value for all stakeholders. Let me state that we cannot say much beyond what we have provided in our prepared remarks today and file today.

That said, we are happy to provide clarity and discuss the quarter. And with that operator, we will open for questions.

I know you said there's not a lot you can say about the spin besides what you've said so far. But I'm just curious, a lot of questions regarding Shopko in terms of a potential bankruptcy there and how that might change things.

Obviously, you said that, that wouldn't impact the spin. But would a potential Shopko bankruptcy, would that cause you to alter that 200 million, potentially add more than 200 million additional assets to help bolster coverage ratio, things like that?

I'm just curious how we should be thinking about if that happened before the spin were to be consummated.

So Vin, hey, good morning, it's Jackson. Look, the 200 million that we're contemplating putting in, we're only going to do that if we can actually meaningfully increase the target loan proceeds over 400 million, and we believe that right now there's a path to do that.

We'll obviously update you more as we get more details on it, but it's actually the additional 200 million have nothing to do with any of the tenants that are going over to Spirit Master Trust.

I guess, how should we be thinking about that if there is bankruptcy though before this deal happens?

Look, I don't really want to hypothesize on any of these kind of hypotheticals. But like I said, no change to -- any kind of tenant change doesn't impact the timing, doesn't impact our issue with the SEC.

Obviously, if a tenant has an issue, it affects rent and cash flow, but it has nothing to do with any of the financing structures that we're looking at. We're looking at obviously optimizing CMBS and Master Trust Notes that have kind of nothing to do with Shopko.

Okay. And then in terms of the confidential filing of Form 10, I mean, it sounds like you're doing that to expedite the process here.

But I guess, is the intention that you would then subsequently carve out the 2014 data so that we would see additional details?

The plan right now, the JOBS Act kind of created this opportunity with the confidential filing for us to expedite the timing. The real relevant numbers are 2017, obviously, and so the plan is not to include '14.

Okay. So we're not going to get any additional color beyond sort of these Path Forward updates.

No. Well, I think one of the things with this opportunity with the JOBS Act, we can update even though we're on file data.

And so we plan on actually trying to give the critical information to the market as we make progress. I think the next big progress objective on my mind is a financing update, and we hope to be able to do that as soon as we have more clarity.

Can you talk about your decision to retain any economic stake in the spin? It seems like the thrust of the spin was that stakes in these sorts of assets were being undervalued in the holdco and so removing them and putting them out on their own would kind of free you from that.

But why continue to hold stake then?

Well, I think one thing just to keep in mind from an operating strategy standpoint, our objective is to improve both companies' portfolio, portfolios along the best fit line in our industry heat map, which I know you've seen before. When you kind of specifically turn back to Spirit Master Trust, the mission statement there is really critical because everything is really structured around that mission statement.

First and foremost, we want to reinforce Master Trust A into a best-in-class triple-net portfolio, and we're going to do that by redeploying, obviously, Shopko sale proceeds into the assets, issuing more ABS notes. And so the reason for the ownership is just purely simply alignment, number one.

Number two, we actually think there's upside in the trust and actually upside in the Shopko disposition program that we're going to be able to execute in the first 24 months post spin. I mean, it's going to give us a lot more flexibility to do different things as it relates to expediting Shopko proceeds.

I think that alignment is really important for us as it relates to thinking about the stakeholders of Spirit Master Trust. So ownership is one, having skin in the game.

We think that's really important, plus we think there is upside. Having a dedicated CEO, that's going to have a full operating strength of Spirit Realty Capital behind it to execute on the mission statement is critical.

We believe a promote is better than annual incentive fees because once again, it's alignment, ownership and we believe there's upside in Spirit Master Trust. We think a fixed-based asset management fee is better.

We're not going to be charging for people's time. The only thing we'll be sort of charging is out-of-pocket actual third-party expenses.

And so as we continue to grow that Trust, I think that will be favorable for shareholders of Spirit Master Trust. We're going to -- we're having reducing termination fee multiple, which is lower than any other kind of multiple like that as it relates to externally advised REITs.

And last couple of things in terms of just alignment and ownership, the board is going to be majority independent. We've going to opt out Immuta.

And we've talked about allocation of protocols, but everything is designed, Anthony, to kind of revolve around that mission statement. And it's really critical for all of our stakeholders in that company.

And my follow-up is just in the second half of the year, I think last quarter you talked about $300 million of net dispositions, and it looks like you have about $250 million to go given what you reported for 3Q. Are you still on track with that?

Or is that changed given some of the other shuffling that's going on?

Look, I think that we're going to evaluate that because, obviously, we stated we're at 6.2 times debt-to-EBITDA today. If we execute on that disposition strategy, it's going to continue to improve the balance sheet.

Your next question would be what are we going to do with the capital? We've got a buyback program that -- obviously, we've got some room to go on.

So we're going just evaluate -- continue to evaluate on our capital allocation. But if we get the right pricing on the balance of the assets, we'll execute on them but -- and they are kind of related to financing as well.

So there's sort of a lot of -- there's a lot of different factors in play. But right now, we are kind of focused on executing the remaining portion of that disposition -- net disposition program that we talked about.

I was speaking with one of our clients who has access to Shopko credit card data, and they noted that the data has been, I guess, pretty reliable in the past versus actual results, a plus or minus 2%. But then the data has shown some pretty large year-over-year same-store sale declines for August down 13% and September down 12%, which is a pretty dramatic difference between -- different from the down 2% to 3% it had been up until July.

Do you have access to Shopko's monthly results? And if not, do you have any qualitative sense for why the business slowed significantly in the last couple of months?

Look, we don't have that monthly data just to answer it so, and I think we've pretty much updated you on as much as what we're able to do at this moment in time. We are under NDA with those guys beyond just our normal confidential statements within leases, so I would just leave it at they're -- based on the letter that we posted last week, their EBITDA is improving.

They're making progress, and they're getting ready for hopefully a very strong holiday season.

Okay. And are you able or willing to share the EBITDA or coverage ratio of Shopko with overhead included and not the 4-wall EBITDA or coverage that you typically disclose?

Do you even have that?

We actually have it. Once again, right now, we don't have approval to do that from Shopko, so we would have to kind of reevaluate that with them.

But we'll kind of -- we'll go back and come back to you on that and see if that's possible.

Can you walk us through kind of the process of how you determine the more significant components of the proposed management agreement, the fee stream, the cap termination? And then what won't be included in there?

In other words, what will be the G&A -- what other G&A will hit the income statement of Master Trust? Just trying to get a sense of the total kind of G&A alone.

Sure. So I mean, if you want to go to Page 7 in that deck, look, if you look at the different comparables and we studied various different external advise REIT agreements and mortgage REIT agreements, first and foremost on the termination multiple side, the average is about 6.5 times termination multiple.

We think it makes sense to have a sliding reducing scale. That puts the onus on us to do a great job for the Board of Spirit Master Trust, which we believe we'll be able to do.

We think that a fixed asset management fee makes more sense. Look, this is 1,000 properties.

The management fee as a percentage of aggregate value is a little bit north of 1%, something like in the order of like 1.2%, 1.3%. If you look at the average comparables out there, it's more like 1%.

The reason why we want to have it fixed is we don't want to be charging for people's time, which is sort of how other agreements are set up. We also believe that we're going to be able to grow the asset base of Spirit Master Trust with agreed deployment of the Shopko sales proceeds, levering the trust with more assets.

And so we don't want to be charging additional fees as this trust continues to grow. We think that the promote makes a lot of sense.

If you look at other base management fees, a lot of them are based on percentage of equity and have annual incentive fees. We want to be incented to drive shareholder value over the next 3.5 years with this management alignment.

So if you can just see the promote is structured only after total shareholder return after certain thresholds, and we think that makes more sense. I do think that having skin in the game is really important as you think about this but not only because we think there is upside, but I just think it really fully aligns us with the bondholders that are going to be participating in the Master Trust program and as well as equity.

And finally, you'll sort of see why did we make the termination fee three times in the first 18 months. We believe that we'll maximize value by executing our mission statement.

It's really critical. I think we're the best suited to execute the monetization of the Shopko stores, and we've got some additional plans to accelerate that.

The operations in the business itself is going to be seamless. The asset managers, the lease administrators, the legal department of Spirit, finance, acquisitions, it's going to be sort of seamless operations of those properties.

So everything is kind of designed around that. So I'll just stop there.

That's hopefully helpful.

And then just my $50 follow-up, if you look at some of the disclosure this quarter, it looks like you've changed the unit level coverage metrics from the total portfolio to just the top 10. Can you give us kind of the rationale behind that change and then maybe what the coverage numbers were for the total portfolio?

It just seems like we're going from coverage levels of over 400 tenants to just a handful. So just wondering what the rationale was there.

Yes, I'll take that question. We're in the process of changing how we disclose formal DSCR coverage to include the G&A allocation.

We made the conscious decision, as you mentioned, to just disclose the top 10 tenants. So next quarter, we're going to provide more disclosure in that regard.

I would say directionally, if you look at the entire portfolio, it's moderately below what we disclosed last quarter on a total basis. But again, what we're really focused on is just providing incremental disclosure as some of our peers do in terms of including G&A allocation.

I just wanted to clarify, you gave us some information on sort of the lost rent from 1Q. Can you maybe you just us an update sort of the $4 million run rate that you had outlined.

Where are we in sort of the recoup of that? What assets have been sold?

What are you looking to in terms of fee that, et cetera? Just some more clarity would be good.

Yes, hey, Vikram, it's Phil. The one thing to keep in mind is that a lost rent reserve is just an accounting base measure.

It's not a crystallized number that could be reversed or that occurs over the course of the year. I think the key thing to focus on in terms of our disclosure, we've been very transparent in terms of what our gross potential cash rent is in the portfolio.

We defined that as contractual rent. That amount this quarter was $608 million.

We also disclosed our annualized cash rent, which is net of loss rent reserves. The delta between our annualized cash rent and our contractual rent is about $3.6 million on an annualized basis.

When you divide $3.6 million by our contractual rent, that's like 60 basis points. So that's pretty indicative in terms of the overall health of our portfolio in that our loss rent reserve is less than 1% of our gross potential cash rent.

Got it. So you've reversed most of that now?

Well, we had some tenants come online, and there has been some reversals, exactly.

Okay. And then just a clarification on the 200 million that you may add.

How were you sort of deciding what assets go into the spin versus not? Just any color would be great.

Yes, look, I think that the assets that we're contemplating as part of that 200 million, I'll give you some sense of what they are. We have a Stations Casino headquarters building in Las Vegas that's under consideration.

We've got a portfolio of five Buehler's grocery stores, two CarMax facilities and a very large Mills Fleet Farm property. And we think that, first of all, those are fairly large assets, number one.

And two, I think that they have characteristics where I think we can get pretty significant secured leverage on them. So we're only going do this if we think we can actually really optimize the financing proceeds.

And obviously, if we put more assets in, one of the reasons -- another reason for "ownership" in Spirit Master Trust is [indiscernible] just kind of recoup some of that additional NAV that's going over into the company so we decided to do it.

Just a question on disposition. It looks like you guys sold a lot of vacant stores this quarter.

Should we interpret that to mean that selling empty assets is easier than backfilling? And sort of second to that, did the Shopko release impact your ability to sell Shopkos?

I guess I'll take the vacants. We had unusually high number of vacants come into the portfolio.

So if you recall, we had the Lone Star Steakhouse that was one of the 15 asset casual dining portfolios that we talked about in the first quarter. That came in at the portfolio in the third quarter.

That portfolio was dark. They were vacant.

We actually sold the portfolio for north of 17 million, actually more than what we paid for them. We also as part of a broader restructuring back in 2014 with Shopko, if you remember, Shopko had unitary large master leases.

We didn't have the ability back in 2014 to actually sell individual Shopko stores through breakout leases. In order to do that, as part of negotiation, we gave Shopko the opportunity to close over time 20 Pamida stores.

That kind of timing occurred over 2015, 2016, so we sold a large number of those Pamida stores aggressively in this quarter. And look, we're left with 21 vacant properties today.

8 of them of have secured CMBS on them, which are obviously harder to sell because you've got a servicer. And I would just tell you that our target is to try to keep our vacancy percentage -- or occupancy percentage, I'd like to keep it at 99%.

And then I would add on your Shopko question, we did sell 3 income producing assets for about $18.5 million, and it was still with a rather attractive dispo cap rate of about 7.75%.

And we continue to have signed contracts. There's a number of different Shopkos that are still in the market, and we have not seen an inability to sort of continue with our momentum there.

Just wanted to walk through the fee structure. I was just curious why the termination fee ratchet down -- or excuse me, ratchets up after a couple of months.

Is it your view that you want to kind of do this long term? Or kind of how do you feel about spinco and managing that longer term?

Well, actually, the fee -- the termination multiple ratchets down.

Yes, I got it wrong.

Yes, so we thought -- look, go back to the mission statement. We think it's going to take a minimum of 24 months for us to really kind of be able to have a meaningful disposition of that Shopko portfolio.

So we set the first threshold for 18 months where if we were terminated by the board, there will obviously be a higher termination multiple. But it does scale down.

It drops down to 2x after 18 months and then after the next threshold, it goes down to 1x. And so I guess what I would tell you is two years into this relationship, if the board decided, hey, someone else can do it better and cheaper, I guess, they could theoretically do that, number one.

And two, it puts us kind of more on the plate to do a great job, which we will.

Okay. And just kind of curious how you think about your getting credit for that in your NAV versus on the AFFO multiple or the AFFO earnings that you're going to achieve from that NAV.

Are you concerned that maybe you're not getting credit for in your NAV and therefore that kind of could potentially depress your multiple? I mean, how you're thinking about that longer term.

Yes, I mean, we didn't design this to be -- we're a REIT, we're focused on owning property. We thought that balancing fees with the promote and having ownership really aligned us to have success if we're able to execute the mission statement.

It's really critical, and so we are really focused on that mission statement for Spirit Master Trust. If we do a great job, we're going to make a lot of money.

We're not actually trying to be an asset manager. We're not trying to create very long-term fee streams.

To be honest, I don't know if we're going to get a lot of "NAV" credit for that fee stream, but I think that -- we believe there's upside in reconfiguring that portfolio. We think we're going to be hands-on, and I think we're really fully aligned with the bondholders that are going to participate in there as well as our shareholders.

I was wondering if you can talk a little bit about your watch list currently and/or if you can kind of give an update on any Gander Mountain or what Walgreens plans on doing with their Rite Aid stores.

Okay. Well, I think Phil has done a pretty good job talking about contractual rent, cash rent, and that's a really good proxy for what's going on with the portfolio and it's decreasing significantly, as you know.

As it relates to Walgreens and Rite Aid, so we own about 25 Rite Aids. Our judgment is that Walgreens is going to end up acquiring 1 of the 25.

Something -- and I think that we believe that actually this is a big positive for us because the remaining average lease term of our Rite Aid portfolio is about 6 years, and we think that -- one of the things that we had been working with Rite Aid prior to the merger or this transaction is working on trying to blend and extend some of these leases so we can actually sell some of those stores. We think that two things are going to happen as part of this Walgreens transaction: one, Rite Aid is going to be a much stronger credit with the proceeds coming in.

And two, we believe that we'll be able to kind of execute on that blend and extend extension of the lease. Rite Aid represents about 20% of our pharmacy exposure.

That portfolio sits in 5-mile population of about 149,000 people. The 5-mile income is about $52,000, so it's pretty good demographics.

And one of the things that is sort of important for us is post spin-off, Spirit Realty Capital will be probably be over-allocated in pharmacy exposure if you kind of look at our heat map. And so our plan is just to kind to try to reallocate a few dispositions -- some of our pharmacy exposure.

So we view this as a positive for us, and we'll be able to hopefully get Rite Aid focused on kind of getting that extension done.

Thank you, operator. First of all, I'd like to thank you all for taking an interest in our company and participating on this call.

We didn't really get the chance to talk about our significant operational changes that we've put in place over the past year, which has really helped us not only have a good quarter but position us for future great quarters. I just want to assure you that we're completely focused on executing our strategy, and we'll be updating the market and investors as we continue to make progress on our spinoff transaction.

Thank you.