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Edited Transcript of SRC earnings conference call or presentation 2-May-19 1:30pm GMT

Q1 2019 Spirit Realty Capital Inc Earnings Call

SCOTTSDALE May 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Spirit Realty Capital Inc earnings conference call or presentation Thursday, May 2, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jackson Hsieh

Spirit Realty Capital, Inc. - President, CEO & Director

* Kenneth Heimlich

Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management

* Michael C. Hughes

Spirit Realty Capital, Inc. - Executive VP & CFO

* Pierre Revol

Spirit Realty Capital, Inc. - Senior VP and Head of Strategic Planning & IR

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Conference Call Participants

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* Brian Michael Hawthorne

RBC Capital Markets, LLC, Research Division - Associate

* Greg Michael McGinniss

Scotiabank Global Banking and Markets, Research Division - Analyst

* Haendel Emmanuel St. Juste

Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst

* John James Massocca

Ladenburg Thalmann & Co. Inc., Research Division - Associate

* Joshua Dennerlein

BofA Merrill Lynch, Research Division - Research Analyst

* Kevin Rich Egan

Morgan Stanley, Research Division - Research Associate

* Paul Douglas Puryear

Raymond James Ltd., Research Division - Research Analyst

* Shivani A. Sood

Deutsche Bank AG, Research Division - Research Associate

* Spenser Bowes Allaway

Green Street Advisors, LLC, Research Division - Analyst of Retail

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Presentation

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Operator [1]

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Greetings, and welcome to the Spirit Realty Capital's First Quarter 2019 Earnings Conference Call (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pierre Revol, Senior Vice President of Strategic Planning and Investor Relations. Thank you. You may begin.

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Pierre Revol, Spirit Realty Capital, Inc. - Senior VP and Head of Strategic Planning & IR [2]

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Thank you, operator, and thank you, everyone, for joining us this morning.

Presenting today's call will be President and Chief Executive Officer, Mr. Jackson Hsieh; and Chief Financial Officer, Mr. Michael Hughes. Ken Heimlich, Head of Asset Management, will be available for Q&A.

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'd 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 Risk Factors related to these forward-looking statements. This presentation also contains certain non-GAAP measures. Reconciliation of non-GAAP financial measures to most directly comparable GAAP measures are included in today's release and supplemental information furnished the SEC under Form 8-K. Both today's earnings release and supplemental information are available in the Investor Relations page of the company's website.

For our prepared remarks, I'm now pleased to introduce Mr. Jackson Hsieh. Jackson?

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [3]

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Thanks, Pierre, and good morning, everyone. We had a strong start to the year and are very pleased with our first quarter results. Before I get into the details, I want to reiterate the 3 critical 2019 initiatives that I laid out on the last call. First, execute on the acquisition and disposition targets that have been incorporated in this year's earnings guidance. Second, continue to improve predictive analytics in our tenant relationships to maintain high-quality operations and deliver strong consistent results. And third, assist the SMTA independent trustees in their accelerated strategic process.

As I've said before, finalizing this process and decoupling Spirit from SMTA is the most critical step in making Spirit simple and understandable for investors. We are laser-focused on all 3. As it relates to the first 2 initiatives, I'm very pleased with what we've accomplished both operationally and from a capital deployment standpoint.

During the first quarter, we generated AFFO per share of $0.86, an increase of $0.02 per share compared to last quarter, excluding the Haggen settlement. We had solid operational performance on all fronts with portfolio occupancy of 99.3%, lost rent just under 0.2% and less than 2% property cost leakage. Our same-store sales grew 1.8% driven by c-stores, QSRs, gyms and movie theaters. Our leverage, calculated as adjusted debt-to-annualized EBITDAre, ended the quarter at 5.2x, an increase of only 0.1x compared to last quarter despite significant acquisition volume.

Turning to capital allocation. We acquired 22 properties during the quarter totaling $160 million and invested an additional $18 million in revenue-producing capital with an initial cash yield of 7.16%, an economic yield of 7.93%, a weighted average lease term of 14.8 years, and average annual rent escalators of 1.7%. Of the total investment activity, 58% was generated from existing tenants and approximately 2/3 of our new tenants were directly sourced.

Notable categories included warehouse club and supercenters, casual dining and home furnishings. One tenant, of note, At Home, which is headquartered in Dallas, moved from #33 to our #7 tenant, which we are very excited about. We believe At Home has a great and sustainable business model, delivering a full range of home furnishings and decor at discount prices that are below the prices of online retailers. In fact, as they noted on their last earnings call, At Home has achieved 19 consecutive quarters of over 20% sales growth and 20 consecutive quarters of positive same-store comps. In addition to the positive business fundamentals, the real estate is outstanding with [no revs]. We look forward to continuing to build our relationship with At Home and welcome them to our top 10 tenant lineup. Overall, we're very pleased with our first quarter acquisition activity and feel bullish about our pipeline for the remainder of the year.

During the quarter, we disposed the 4 income-producing properties for $36.1 million, consisting of a drugstore, dollar store, grocery store and a single-tenant office building. I'm also pleased to announce that subsequent to the first quarter, we sold a PetSmart distribution center in McCarran, Nevada. This reduces PetSmart from our #11 to #57 tenant in terms of contractual rent. Since our last earnings call, we received several questions from analysts and investors about the disposition program. So I want to take a minute to clarify our thinking behind our plan.

First, and most importantly, the assets in our disposition plan are not properties or tenants that we are afraid of or give us any particular concern. As portfolio managers of real estate, we're always evaluating the best way to optimize and recycle our portfolio, and we have the technology and tools to effectuate that process. While the size of our disposition basket is large this year, I want to reiterate what I said on our last call. The dispositions laid out in our guidance are opportunistic and subject to change depending on market pricing, company capital raises and acquisition volume. I hope that answers any questions that resulted from our last call.

On the third initiative, without getting into the details on the Master Trust sale process, I can tell you that the process is moving along as planned. When SMTA announced their accelerated strategic process, our team was well prepared to hit the ground running. We continue to support the SMTA trustees in any way we can and look forward to the conclusion of their process.

In summary, we've made great progress executing on our 3 critical initiatives this quarter, and everything is going along according to plan. Our acquisition and disposition pipeline continues to align our portfolio with our heat map and efficient frontier, improve our weighted average lease term, credit quality and organic growth while our operations produced strong results. The people, tools and processes that were put in place over the last 2 years are bearing fruit, and I applaud the entire Spirit team for their hard work and dedication.

With the new bank facility put in place in January, our balance sheet is in great shape with extended maturities, liquidity and flexibility. I'm also pleased with our ability to utilize our ATM program this year, which Mike will discuss in more detail.

Finally, we remain focused on helping the trustees of SMTA to finalize their strategic process, which will be the final step in making Spirit a simplified pure-play triple-net REIT. As we have just lapped the first quarter of 2018, the last full quarter prior to the spin-off, I think it's important to remember how far we have just -- have come in just a year.

Our #1 tenant is no longer a general merchandise retailer accounting for 7.9% of our revenues. Our leveraged and fixed charge coverage have both improved more than a full term. Our unencumbered asset ratio has improved 23%. Our lost rent has improved 30 basis points and is at a historic low. Our occupancy is 40 basis points higher. Same-store sales growth is 30 basis points higher. We're raising and deploying capital accretively. And most importantly, we have done everything we said we would do.

As I've said several times over the past few months, we're down to the final 10%, and I believe that the Spirit platform and this team can deliver results and create shareholder value for years to come.

With that, I'll pass the call over to Mike.

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Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [4]

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Thanks, Jackson, and good morning, everyone. As Jackson mentioned, we had a great quarter with good operations and robust capital deployment. I'm especially pleased with our bank facility refinancing in January and our ability to issue well-priced equity that allowed for accretive, low leveraged acquisitions.

During the first quarter, rental income, excluding $3.4 million of tenant reimbursements, grew $1 million. Unreimbursed property costs or leakage declined by $1 million, representing 1.7% first quarter rental revenues. Annualized contractual rent, which annualizes the rent in place at quarter end, grew $13.3 million. Approximately $10.1 million of the increase was attributable to net acquisitions and revenue-producing capital and $3.7 million was attributable to rent escalations partially offset by vacant properties.

We had de minimis tenant credit issues during the first quarter with lost rent returning to our historic low of 0.2%. Lost rent was driven almost entirely by 1 c-store operator and those properties have already been re-leased to an existing Spirit c-store tenant. The rest of the P&L was pretty straightforward this quarter. The one item of note is our G&A, which is elevated by $700,000 driven by $200,000 in audit fees related to our 2018 10-K, which affects only one quarter each year, $200,000 in employer tax withholding on prior year bonuses paid during the first quarter, accelerated 401(k) matching on those bonus payments and annual medical savings account contributions.

As Jackson mentioned, our adjusted debt-to-annualized adjusted EBITDAre was 5.2x at quarter end. While we invested $178.6 million in acquisitions and revenue-producing capital, we disposed of $46.5 million in assets and issued 900,000 shares of common stock under our ATM program with gross proceeds of $34 million, which helped keep leverage low. Year-to-date, we have issued 2.3 million shares of common stock under our ATM program at an average price of $39.19 per share. A portion of the shares issued after quarter-end were issued under 4 contracts, which have yet to be settled.

We continue to maintain a high level of liquidity. As of April 30, total liquidity consisting of cash and availability under our revolving credit facility and delayed draw A-2 term loan was $1 billion. We intend to use the availability under the A-2 term loan and cash to redeem the $402 million of convertible notes due May 15. Pro forma for the redemption of the convertible notes, our weighted average debt maturities, is 4.4 years.

Turning to our guidance. For the full year 2019, we are raising our projected AFFO per share from $3.32 to $3.38 to $3.35 to $3.39. We're raising our projected capital deployment comprising acquisitions, revenue-producing capital and redevelopments from $400 million to $550 million to $450 million to $600 million. We're lowering our projected asset dispositions to $250 million to $350 million to $225 million to $325 million. And we're maintaining our adjusted debt-to-annualized adjusted EBITDAre range of 5 to 5.4x.

As a reminder, due to the timing uncertainty of SMTA's accelerated strategic process, we've included the fee and dividend income from SMTA for the entire year. In addition, as I noted on our last call, the impact of the convertible notes repayment will primarily be felt in the back half of the year, and our dispositions will be heavier than the last 2 quarters. So please keep that in mind for your earnings models.

With that, I will open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is coming from Haendel St. Juste of Mizuho.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [2]

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Jackson, I guess a question for you. Perhaps, you can expound on the comments you made earlier. I'm curious if you can talk about how your improved stock price and your WACC is impacting your thoughts on capital allocation? You tapped your ATM for bit of equity here in the first quarter, lowered the disposition guidance a smidge. I guess I'm wondering if we should read this as a sign that you'd be more inclined to use your equity as a source of capital going forward as opposed to some of the opportunistic dispositions you outlined?

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [3]

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Thanks, Haendel. We -- remember when we set guidance for this year, we assumed a kind of no equity issuance program because the company hasn't really issued equity since this new management team really came in. And we obviously had a challenged stock price at the end of the year. So the plan we laid out, once again, this opportunistic dispo pipeline, was based on a self-funding acquisition disposition program. The reason why I was so specific about, it might change, is obviously we do look at our stock price, we do look at our cost of capital and there is no shortage of things that we look at that look very attractive. So I guess what I -- I think we'll look at our stock price and act accordingly. But at this point, you can see that we've kind of proven out the model. We're able to accretively acquire. We're accretively able to do it via the ATM. And we always have the option to look at that disposition program, if necessary. So I don't know - I hope that answers it.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [4]

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That does, that does. And maybe following up, can you talk a bit about some of the compelling opportunities you're seeing out there that are aligned with both your heat maps and your cost of capital? And how is that universe of opportunities changing as your cost of capital has improved? And by the way, do you have the assets under contract?

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [5]

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Well, I wouldn't want to talk about assets under contract. But what I can tell you is, is that the volume of opportunities has increased dramatically from what we can see today versus, say, 3 months ago. I think that's a function of obviously low interest rates. There's a -- a lot of the companies that are in the triple-net sector are performing well. So there are a lot more opportunities. I'd say, there's also larger opportunities, larger portfolios that are out there that obviously a lot of us are evaluating right now.

As it relates to the things that we've bought this year or at least in the first quarter, we're quite happy with them. And I think that these will be indicative of what we do going forward. So At Home, for instance, was a tenant that we under -- had 7 stores in -- where we had 7 At Home stores. This is a company that we've been looking at. We like the business model. And so when we met with the CEO and the whole team up at their offices, Lewis Bird, it's a great business model, and we knew that we wanted to bring them in the top 10. We're going to probably do more with them. We love the business model and they're expanding. It's a public company, which is great and we've got really good lease structure.

If you look at the casual dining portfolio that we bought, that was a direct sale leaseback. All the stores were in Utah, and we love Utah as a kind of economic growth area. This particular portfolio had 15-year lease with bumps, really good rent to sales, proven stores. And so we -- that was another great example of something that was in our kind of wheelhouse. And then the superstore that we bought, that was a Walmart. It was a single asset, kind of very attractive. We liked the location, liked the profile.

So if you think about what we bought in the first quarter, it was like kind of a range of different things. And the net result was we brought -- if you think about the last 2 quarters, we've brought Life Time up into the top 10, we've brought At Home up into the top 10. PetSmart went down, obviously Shopko is out. So we're still reconstructing our top 10 tenancy. And there will probably be some other ones that come up in the course of the year into the top 10 that are not there right now.

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Operator [6]

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Our next question is coming from Greg McGinniss of Scotiabank.

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Greg Michael McGinniss, Scotiabank Global Banking and Markets, Research Division - Analyst [7]

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And I know you're constantly -- just kind of getting into Haendel's question as well, but I know you're constantly evaluating the portfolio, utilizing the heat map to determine stronger sectors. So I was hoping if you could give us your updated thoughts on the industries where you have higher concentrations. And in particular, if you could address drugstores that had a tougher earnings season last month and casual dining, which continues to sound like a challenged business.

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [8]

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Well, I mean just -- if you look at our -- here's the thing on the dispositions that we've completed in the first quarter. If you dig into them, they're -- we sold a Dollar General for like a 7.2% cap rate. We sold a Walgreens store for like just under a 6.8% cap rate. We sold the Smart & Final grocery store, which was one the Haggen assets, at a 6.3% -- 6.2%, sorry. And so the blended cap rate looked a little higher because we sold a single tenant office building that sort of had 4 years left on the lease. It was fine, it was probably going to renew. But it was a double-net asset, didn't make sense. So each of those were sold for a very particular reason.

And so as you think about -- to answer your question on the heat map, look, there are a lot of things that make a lot of sense for us to grow. Home furnishings is one area that we're really focused on. And we continue to look at industrial select manufacturing assets. Obviously, we did a lot in the gym space. So we're going to continue that area but we're going to have a high focus quality. So the good news about our strategy today is just given we were able to remove so much real estate out of the spin, we're just well positioned to grow up of multiple industries right now. And just one point on sort of the dispos as we think about it.

So coming back to Haggens just for a minute, so we basically have gotten all our money back through this most recent sale. We sold this property in Atascadero, California. So we still have 6 occupied stores in the Haggen portfolio and one vacant that's on a contract. Those are all long-term lease, really good real estate. Yes. we're going to continue to evaluate those. And we don't to have to sell them, but obviously we've sold them at very low cap rates and that was one of the things that went into the calculus as we came up with the dispo plan this quarter.

On the drugstore issue, look, I can just tell you from my retirement accounts, I bought Walgreens stock and CVS stock, love the companies. I would tell you that the stores that we own, we own drugstores that were primarily from the Cole acquisition and the Cole II acquisition that Spirit completed. So I'd characterize those drugstore leases as your typical developer lease: single site, flat rents, no master lease. So yes, there is a good market for those. And for us, we -- I love the drugstore industry but I'd say that developer leases, they're not that great for us. There's not a lot of rental growth. You can see what our same-store sales are and our rent bump -- contractual rent bumps and owning drugstores are sort of dilutive to that, if you think about it. So if we find opportunities to selectively modify these (inaudible), we'll do it.

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Greg Michael McGinniss, Scotiabank Global Banking and Markets, Research Division - Analyst [9]

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All right. Great. And then I guess just sticking with dispositions a little bit. Now I know you're not worried about the assets in the pipeline. And previously, you mentioned you're looking to sell assets that are in the wrong industry, flat restructure -- flat lease structures to fund acquisitions. But I'm curious what separates this larger batch of 2019 dispositions from the more regular portfolio maintenance dispositions you expect to conduct in 2020 and beyond?

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [10]

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Well, yes, there's some double-net assets in that big pool. Yes. double-net -- we're trying to improve property cost leakage as a measure, and we're trying to improve our same-store sales growth rate. So that's one of the target areas in this kind of bucket that we refer to.

The other thing is, we still have a few of these, I'll call them, power centers that were acquired through the Cole acquisition that -- there's good credit in those centers but there is leakage. And so once again, our property cost leakage this quarter was 2%. I'd love it to go down lower. And the only way it goes lower is attacking that sort of bucket that we're relating to. So like I said, we're not concerned about the rent capability of those locations but they do drag on our kind of net cash flow.

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Operator [11]

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Our next question is coming from Shivani Sood of Deutsche Bank.

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Shivani A. Sood, Deutsche Bank AG, Research Division - Research Associate [12]

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Mike, you had mentioned in your opening remarks that we should expect this acquisition to be back half weighted. Can you give us some color there on timings? And whether we should expect the mass there to be pretty equal? Oh, sorry (inaudible).

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Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [13]

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Yes. I mean -- acquisitions or dispositions?

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Paul Douglas Puryear, Raymond James Ltd., Research Division - Research Analyst [14]

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Acquisitions.

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Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [15]

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Yes. Acquisitions, they're a bit -- they can be chunky. I would expect it -- if I was guiding at the beginning of the year, I'd probably say it'd be pretty even across each quarter. Obviously, we had a really good first quarter. So it's hard to tell. I mean it's -- we have a lot in our pipeline. And the interesting thing about a pipeline is you develop it, you get a lot of stuff under different forms of OI contracts and things take different times to close and (inaudible) your project (inaudible) get through something, sometimes it takes longer. So it's hard to say.

So if I were to guess, I would kind of take the remaining guidance for the year and kind of divide it by 3. And that would be my honest guess, just depending on how these things shake out. Dispositions, I think we have a little more control over. So that's why I just say it is more back-half weighted. It's probably pretty equally split in the last 3 quarters of this year on the dispo side. But yes, as you saw in the first quarter, it was pretty light. And so you're going to have a little more in the back half of the year relative to the first half.

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Shivani A. Sood, Deutsche Bank AG, Research Division - Research Associate [16]

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Great. And then occupancy has been pretty high, well above 99%. And there are some vacancies in the portfolio. But how much higher can we reasonably expect it to get?

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Kenneth Heimlich, Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management [17]

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This is Ken. I think we think it can go higher. We always have our eye on -- our preference is to never let it go below 99%, but we look at our vacant portfolio and we're opportunistically either reletting or selling when it makes sense. But we don't have any concerns about the occupancy levels.

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [18]

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And I think in this one, Taco Bueno, if you want to talk about that a little bit?

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Kenneth Heimlich, Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management [19]

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Yes. As you know, we got through the Taco Bueno resolution and part of that was we took back 7 units. You can see, we went from 5 units in the vacant portfolio at year-end. We took in 7. We obviously got rid of a couple. So we're at 10 right now where we've got a couple of those Taco Buenos in the disposition pipeline, and we're very happy with the interest we've got on all 7.

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Operator [20]

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Our next question is coming from Spenser Allaway of Green Street Advisors.

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Spenser Bowes Allaway, Green Street Advisors, LLC, Research Division - Analyst of Retail [21]

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Can you provide some color around how much your capital deployment guidance for 2019 you guys expect to be allocated to new property acquisitions versus the revenue-producing CapEx?

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Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [22]

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Yes. I think we expect the majority of that, I'd say, maybe $30 million to $40 million would be revenue-producing CapEx in redevelopment and the remainder would be new acquisitions.

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Spenser Bowes Allaway, Green Street Advisors, LLC, Research Division - Analyst of Retail [23]

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Okay. And then maybe just in regards to the deals you guys source year-to-date, would you guys say that you're seeing more portfolio or one-off deals in the market right now? And would you say that pricing has changed at all in recent months?

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [24]

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No. It's -- I'd define it more as quality. And quality by definition is well-located real estate, reasonable rents, especially relative to market, the right concept, right lease restructure. When you get those things lined up, the cap rates are pretty aggressive. And that's one area, Spencer, why we look at some of this CapEx-type spending. When you have a tenant that matches all those things and they're looking for funding, you can generally get a premium on cap rate for those opportunities.

I think that there are portfolios out there. I don't think there's portfolio premiums necessarily out there, but there's a wide range of interesting things out there right now. And one of the things that I'm doing with the way I spend my time, I think some of you know, we've restructured some of my reporting lines at the beginning of the year. So as opposed to having 9 direct reports, it's been reduced down to 6. So that's enabled me to spend a lot more time with the acquisition team. I go to their weekly meeting. I'm on the road with these -- with the team, and I think that's where we're getting some benefit. And I also spend a lot of time obviously with SMTA. The CEO there reports directly to me.

So that -- those are kind of 2 areas of focus for me. And I can just tell you from what I see that there is -- anybody that's thinking about selling net lease properties today, if they sort of missed it last year, they're reevaluating it. And a lot of the companies, like At Home, there are concepts out there that are trying to grow. So it's sort of a -- if you like -- if you're constructive in the industry and the tenant, you've got a relationship with them, you can find the right opportunities whether they're single asset, CapEx-oriented or portfolio.

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Operator [25]

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Our next question is coming from Vikram Malhotra of Morgan Stanley.

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Kevin Rich Egan, Morgan Stanley, Research Division - Research Associate [26]

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This is Kevin on for Vikram. Just a quick couple of questions for me. Just in terms of the nature of the acquisition, I noticed there's a Residence Inn on the top 100 tenants. Can you provide any further color around maybe cash flow coverage -- or sorry, rent coverage, cap rates and hospitality in general is something that you'd be looking to expand your exposure to?

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Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [27]

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Yes. This is Mike, I'll take that. Hospitality or limited service hotels are something that we've been looking at for quite a time since I came in the company. And we think it makes a lot of sense in the triple-net lease space. And this is a true triple-net lease. It's the same type of lease we've put on a BURGER KING or a c-store. Cap rates are good on those type of assets right now mainly because it's just a new market. And so you're not really competing with anybody at this point. So the yields are very high for us. Coverage is very strong. It's much higher than say what a lender would actually loan money on to a hotel, and I have a lot of experience with that. So very, very strong coverage in a really triple-net lease.

We evaluate the real estate in this particular hotel. We evaluate the market. We evaluate demand generators in the market supply, just like you would at a regular hotel. And we also spend a lot of time looking at the tenant and credit quality. And this is a regional operator with multiple hotels, kind of owner/operator. And looking for growth capital to do more hotels. So for this particular operator, we would do more hotels with and create a master lease.

And one of the things we really like about hotels in addition to just the good cash flow coverage, especially on limited service hotels, which much simpler box, low capital requirements, more predictable earnings, we like -- we really like that underlying real estate because if you look at your typical retail box, if your tenant blows out of that and if you can't relet it, you get a dark box back.

With a hotel, should you ever have to take the asset back, you end up with an operating asset. You could hire a third-party manager very easily. The brand stays on the hotel. This is a Marriot, so you have one of the best brands in the world. And so it really retains its full value.

So your recovery in a bad situation, I believe, is much better, and these limited source hotels are very liquid, and liquidity is always something we talk about. So just overall, we love the real estate and we think that, that limited service model, we wouldn't do full-service or resort or anything like that, but that limited service model is a very simple and good box to put a triple-net lease around. And the yield is very...

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Kevin Rich Egan, Morgan Stanley, Research Division - Research Associate [28]

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Great. And then just in terms of the revenue-producing CapEx, you have 8.25% initial cap -- initial cash yield on that. Just arithmetically, how are you arriving at that? Is that taking into account what you think the re-leasing spread would be if you did invest new capital? Or is this capital that's not being invested on a expiring lease altogether?

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [29]

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I think what you're referring to that's the actual return on our invested capital.

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Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [30]

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Right. Yes.

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [31]

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So I mean, we have -- in the quarter, we had a number of different locations where we're funding either hard cost or TI. So that range of cap rate from a low to a high was from 7% to 10% across the portfolio of assets that were under that revenue-producing CapEx category. So for instance, there were some Topgolf facilities in that bucket, there was a couple of restaurants in that bucket, some entertainment assets, there was a Shooters World asset in there. So there's different kinds of things in there from tenants that we have experience with where we get higher yield.

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Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [32]

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Yes. And then that's yield. When you invest the capital, you get yield on it day 1. They're paying incremental rent. A good example would be like you have a BURGER KING operator and BURGER KING wants them to do a reimaging update, and they need some capital to do that. If you give them that capital, you add it to their rent. And of course, we underwrite that to make sure the rent coverage is good, rent to sales, all that, but that's an immediate return for us with an existing tenant.

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Kevin Rich Egan, Morgan Stanley, Research Division - Research Associate [33]

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But I suppose to get to that 8.25%, you'd have to have an idea of what it would be without the additional capital. So was that something that you estimated? Or was it pretty firm that if you did not spend any additional capital, this rent would be x and therefore, if we do put it in, we get cap -- rent of y and therefore...

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Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [34]

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Yes. No. I mean their rent is x. They need additional capital and you add y to it. So it's completely incremental to their existing rent. Their existing rent is what it is. This is additional capital with additional return, and that's why we know exactly what it is. On that $18 million, and it's in our supplemental, we invested $18 million and our return, our rent generated from that is the 8.25%. So they're paying $1 million a year in rent, they're paying additional rent for that capital.

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Operator [35]

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Our next question is coming from Brian Hawthorne of RBC Capital Markets.

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Brian Michael Hawthorne, RBC Capital Markets, LLC, Research Division - Associate [36]

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I'm looking at the 2021 lease expirations. I guess I just wanted to know, are there any tenants in there that concern you? And as we get closer, should we expect that to come down? Do you have those assets in the disposition plan? Or is that more from -- did that come down more from tenant renewals?

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Kenneth Heimlich, Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management [37]

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This is Ken. The short answer is, no, we're not concerned about that cohort that expires in 2021. There's a couple of things. If you look at that same cohort at the end -- fiscal year end '18, it was about 7.9% of rent. It's now rolled down to 7.1%. I would expect every quarter that we move forward, it will continue to roll down. But then when you look at the actual leases that are in that cohort, no, there's nothing in particular that gives us a lot of concern. And as far as dispositions, that may be a little bit of an ingredient when we go through and say, do we want to sell an asset but it's not going to be a driver.

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [38]

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Yes. And just to come back on that for the earlier question on that CapEx. Sometimes when we're in discussion with an existing tenant and putting capital into existing facilities, one of the tools that we use is lease extension as part of the negotiation. So a good example would be the Walgreens store that we sold. So that was a property in Cincinnati, Ohio. We got a blend and extend done to make that a 10-year lease and we ended up selling the property.

Typically, when you're looking for lease extensions, you're sort of programmatically and potentially looking at -- if you're looking at a dispo, you want a longer lease to get more value for it. So when we use CapEx, it's not just for higher incremental return on invested capital but strategically, it gives Ken and his team the ability to programmatically look at lease extensions particularly in an existing national lease.

So it's a very dynamic discussion, it's not compartmentalized. But we're looking to try to maximize the value of this real estate. So capital is one item, blend and extend is the other way, adding properties into existing national leases with existing tenants gives you that leverage to have that conversation. So there are a lot of tools to mitigate lease expiration. That's what -- my point here.

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Brian Michael Hawthorne, RBC Capital Markets, LLC, Research Division - Associate [39]

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So, okay. So -- of those properties, do more of them fall under your current disposition plan then?

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [40]

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No. I would say no. The disposition plan, as I said, there's double nets in there. There's things that have flat leases. I mean if you think about what we're trying to accomplish, we want as high same-store rent bumps as we can in this portfolio. We want as low real estate leakage, i.e., we're responsible for roof or structure or parking lot. We want as little of that as possible. We're trying to create just cash flow and triple-net lease structures. That's really what we want, with good bumps. So some of the assets that comprise this bucket of opportunistic disposition sort of fit that profile. They -- we have certain landlord expenses that are not great for us. We don't like that or they're flat leases or they're not great bumps. There's a whole different sort of set of criteria but that's the nature of what's in there.

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Operator [41]

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Our next question is coming from John Massocca of Ladenburg Thalmann.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [42]

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You kind of mentioned power centers in single-tenant office earlier. Is that all categorized in that 1.4% of rent that comes from "other?"

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Kenneth Heimlich, Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management [43]

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No. That's not necessarily the definition of that bucket. Other is really a collection of industries that in and of themselves are not big enough to create its own bucket.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [44]

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Okay. So what percentage of the portfolio today then is power centers or single-tenant office, kind of roughly?

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Kenneth Heimlich, Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management [45]

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Well, for the power center, what we would call true multi-tenant, it's less than 5%. I believe it's in the 3% to 4% range.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [46]

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Okay. And then single-tenant office, is that -- I imagine it's de minimis.

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Kenneth Heimlich, Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management [47]

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Not meaningful.

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [48]

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Yes. A lot of the single-tenant office got spun off into SMTA, like the Stations, headquarters, the Casual Male headquarters, building Academy Sports. And by the way, we're not afraid of single office. They're just -- those were the ones that got sort of spun off.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [49]

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Would the power centers then be something that you would really be looking to kind of include in that disposition guidance in order to kind of maybe simplify the story a little bit? Or -- and improve on the leakage?

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Kenneth Heimlich, Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management [50]

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Yes. The multi-tenant power centers had a several of the boxes that we look for and we say, "hey, what do we want to put through the disposition." Number one, I would suggest is leakage. They just tend to have that. Number two, there's -- when you build a shop to manage, when you build your asset management systems, there's one way of building it to handle multi-tenant and then there's another way where you're dealing with single tenant. And the multi-tenants are not the most efficient assets. So we -- given that we have so few of them, we have elected to say, "hey, over the long term, we're going to reduce our exposure to that area."

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [51]

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Okay. And then on -- you guys also mentioned -- Jackson you mentioned Topgolf. How many of those do you have under development? And then also, you may have been addressing this in the earlier questions, so apologies if you kind of went over this. But with kind of developments like that where you're maybe not getting rent day 1, I mean, does that come into the revenue-producing CapEx bucket on the investment line item here in the supplemental? Or does that not essentially count as an acquisition until the development is delivered?

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Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [52]

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Yes. So if a property is under development, a couple of things. One, we are getting rent day 1, but we don't put that rent in earnings, it has to be capitalized and then when the project comes online, we then take that capitalized rent and we amortize over a thin straight line over the life of the lease. So when it's not being recognized on the P&L and we're not counting it as revenue-producing capital in our supplement. So it really has to be earning day 1.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [53]

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So if -- for instance, something like a Topgolf, would it be counted as maybe a new tenant acquisition when you got a delivery? Is it just something kind of supplemental...

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Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [54]

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To talk about Topgolf that Jackson mentioned, that was constructed. It is operating, and we did put some capital into that one. So that is in our revenue-producing capital because we are recognizing -- we are getting the earnings and we're recognizing in the P&L because that is up and running and operational.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [55]

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Okay. And then just a quick detail question. How much is the -- I think I was calculating roughly $1.4 million issued on the ATM subsequent to quarter was via the forward. And roughly, what price was that issued at just in terms of whether it's going to create kind of some weird GAAP dilution?

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Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [56]

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Yes. So what we issued after or subsequent to the end of the quarter, about $25 million was regular way and the remainder was on the 4 component. Off the top of my head, I believe the average share price of that was in the high 39s. We use the treasury stock method to account for forward sales. So the way that basically works in laymen's terms, if you get to the end of the quarter and the share price is higher than where you issued the forward, you'd recognize the incremental dilution between those 2 prices. And if the share price is lower then it'd be anti-dilutive and you wouldn't recognize any dilution in your shares.

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Operator [57]

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Our next question is coming from Joshua Dennerlein of Bank of America Merrill Lynch.

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Joshua Dennerlein, BofA Merrill Lynch, Research Division - Research Analyst [58]

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I appreciate the comments on At Home in the opening. I'm not really familiar with the business. Could you maybe add a little color to that? And what is it that you like about their business? And how should we think about home furnishing and kind of the potential or nonpotential threat from e-commerce?

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [59]

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Okay. Thanks, Josh. So At Home, it's an interesting business model. I mean the way I would describe it is that they're able to kind of do knockoffs. So they -- if you look across the board as to different kinds of home furnishing venues, what At Home can do is that they can manufacture either private label or slightly different knockoffs for a lot of these kinds of products. That's number one.

The second thing is, their productions -- ability to deliver goods into the country with their vendors is quite impressive whether it's home furnishings, paintings, photos. The other thing about these stores is they're all sort of north of 100,000 square feet in size. So when you go into them, they're almost like mini distribution centers. So if you went and looked at bar stools at their store up here in -- just north of our office here, they literally have a whole SKU of bar stools. Not just one, but there are 8 to 10 stacked and each of a particular brands that they offer.

If you're looking for 40 by 60 inch painting -- wall painting, oil paint, they literally have one entire side of the building stacked with different knockoffs from China. And you look at it and you go, "wow, those are -- I've seen those paintings." They're not exactly like some of the -- they're replicas but not exactly from a trademark standpoint, and they're like $90. So what they offer is -- they just offer a tremendous wide range of things within that store. They also attract a lot of entry-level. So if you're sort of a college kid, you're trying to fit out a door room, it's an awesome place to go to. And we really like what they do. I think they're extremely competitive.

From a size standpoint, they have 180 stores right now in the country, and they're looking to probably expand to 600, is the total number that they're targeting. It's a super formulaic approach. So when you go in to look at the merchandising, the merchandising is very simple and it's very consistent. From a labor standpoint, there are not a lot of people in the store. They're just a really unusual venue. And if you look at their pricing, they're actually cheaper than Wayfare and Amazon and a lot of different kind of areas. So they're very competitive.

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Joshua Dennerlein, BofA Merrill Lynch, Research Division - Research Analyst [60]

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Okay. Interesting, interesting...

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [61]

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Yes. They're worth seeing. If you come down, if you go in, I was quite impressed, obviously. We owned already a number of them, but after we had a chance to really spend time with the senior leadership and the CEO up there, he's formerly the president -- he is a senior person up at Nike and GAP. It's really impressive business model. We like it a lot.

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Joshua Dennerlein, BofA Merrill Lynch, Research Division - Research Analyst [62]

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Interesting. I have to check it out. And then for the disposition guidance, you lowered it. The stuff that came out of the guidance, is that stuff you still want to sell but it's just maybe a 2020 or a later event at this point?

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [63]

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Look, it's just going to depend on if we raise money during the year or if we buy more things. It's all a function of -- it's a source of capital for us, is #1 priority. And like I said, the good news about that disposition group of assets is we don't have to sell them, right? These are credits and properties that are fine. But like I said, they don't have to -- they're not accretive to our same-store sales or rent bumps. They're not accretive to our triple-net portfolio. So if we got an opportunity to sell them and -- so there's a lot of other considerations that go into it. That's the thing. That's the key.

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Operator [64]

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At this time, I'd like to turn the floor back over to Mr. Hsieh for closing comments.

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [65]

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Thank you very much. I guess I think the point I would leave all of you is that I do think that we are very, very close in the final 10% way of our process to completing our path forward. But I also want to just reiterate, this business plan is working. We are raising capital. We're deploying -- our pipeline is -- acquisition pipeline is very attractive for this year, and we're really quite enthusiastic about the prospects of the company. So appreciate you all dialing in and look forward to speaking with you soon.

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Operator [66]

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Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time and have a wonderful day.