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Edited Transcript of SRC earnings conference call or presentation 21-Feb-19 2:00pm GMT

Q4 2018 Spirit Realty Capital Inc Earnings Call

SCOTTSDALE Apr 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Spirit Realty Capital Inc earnings conference call or presentation Thursday, February 21, 2019 at 2:00:00pm 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

* John James Massocca

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

* Joshua Dennerlein

BofA Merrill Lynch, Research Division - Research Analyst

* Ki Bin Kim

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Shivani A. Sood

Deutsche Bank AG, Research Division - Research Associate

* Vikram Malhotra

Morgan Stanley, Research Division - VP

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Presentation

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Operator [1]

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Greetings, and welcome to the Spirit Realty Capital, Inc. Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, today, Mr. Pierre Revol, Senior Vice President of Strategic Planning and IR. Please proceed, sir.

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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 today. Presenting on 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 the risk factors relating 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 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?

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

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Thanks, Pierre. Good morning, and thank you for joining us today. 1.5 years ago, we announced the spin-off of SMTA, and I want to reiterate what I said back then. The separation impact to Spirit is simply awesome. Today, Spirit is liberated from the impediments it faced in the past. The portfolio is stronger across every key metric, and our balance sheet is significantly enhanced. Over the course of this year, our results have proven out that statement. Our operational performance has been strong with de minimis lost rent, healthy same-store rent growth and record occupancy. We are proud that we were able to deliver AFFO at the high end of our expectations while maintaining low leverage.

As I mentioned last month, the last step is to make Spirit a simplified, pure-play, triple-net REIT with a strong balance sheet that can deliver consistent AFFO and dividend growth. Much of the heavy lifting has been done. We believe our internal processes and tools are at the cutting edge of the industry, our portfolio is high quality, and our balance sheet is efficient, flexible and low-leveraged. We have assembled a first-class senior leadership team that is completely aligned, focused and able to take Spirit forward and maximize value for our shareholders. We have come a long way, and I firmly believe that we are entering the final innings of a plan that started with an unconventional idea and took a great deal of hard work and fortitude to realize. In short, I think this is an exciting time to be a Spirit shareholder.

Throughout 2019, we will focus on 3 critical initiatives to position Spirit for long-term success. The first is to assist the SMTA independent trustees in their accelerated strategic process. Finalizing this process and decoupling Spirit from SMTA is the most critical step in making Spirit simple and understandable for investors. We are already underway with the marketing of the master trust and resolution of the other assets within SMTA. The second is to continue to improve predictive analytics and our tenant relationships in order to maintain high-quality operations and deliver strong consistent results. And the third is to execute on the acquisition and disposition targets that have been incorporated in this year's earnings guidance.

As I mentioned earlier, we had a solid finish in 2018. Excluding the Haggen settlement, our fourth quarter and full year AFFO per diluted share of $0.84 and $3.78, respectively, met the high end of our expectations. Our leverage, calculated as adjusted debt to annualized adjusted EBITDAre, ended the year at 5.1x, which was one turn below the low end of our target. Our portfolio occupancy ended the year at 99.7%, the highest in Spirit's history with only 5 vacant properties. And our same-store sales grew 1.6% during the quarter, principally benefiting from the QSR, movie theaters, health and fitness, grocery and medical office categories.

Turning to capital allocation. We acquired 3 new properties during the quarter totaling $24.2 million, which includes a new Topgolf facility in Baton Rouge, Louisiana. For the year, we invested a total of $287 million in acquisitions and revenue-producing capital projects, with an initial cash yield of 7.1% and an economic yield of 8%. I would like to point out that at the end of the second quarter, we had only deployed $19.1 million in acquisitions and revenue-producing capital projects. So the net $267.9 million, all occurred in the second half of 2018.

Many new service-oriented tenants were acquired in the second half of 2018, including Life Time Fitness, which is our sixth-largest tenant; Topgolf; and Alaska Club Gyms. We also expanded existing relationships with Main Event and Studio Movie Grill. We will continue to focus on adding high-quality tenants with solid real estate and favorable lease terms in the industries that align with our Heat Map.

Fourth quarter dispositions totaled $55.4 million at a weighted average cap rate of 6%. For the year, dispositions totaled $103.3 million at a weighted average cap rate of 6.5%. Our 2018 disposition plan for income-producing properties focused primarily on optimizing industry concentrations. Some of the assets sold included Circle K c-stores, drugstores and grocery stores.

We had some other notable highlights this quarter. First, we are pleased to announce that we received the final Haggen bankruptcy settlement payment of $19.7 million in the fourth quarter. To recap the Haggen situation, our original $224.4 million investment was committed in late 2014 and funded through the course of early to mid-2015. Subsequently, Haggen sought Chapter 11 relief in 2015. Since then, Spirit has been able to generate $165.5 million in property sales and settlement fees and $43 million in rent. We have 7 former Haggen properties currently long-term leased to Smart & Final and Albertsons and one remaining vacant property in Las Vegas, which is currently on the market. The total annual rent of $6.2 million for the remaining income-producing properties implies a current yield of 11% on our remaining $59 million original Haggen investment.

The positive outcome from this investment is a result of the efforts and effectiveness of our asset management team. More detail on these results can be found in the Investor Relations section of our website in the presentation titled Haggen Update, which was posted this morning.

We're also happy to announce that we recently completed the restructuring of our Taco Bueno master lease. Prior to Taco Bueno filing Chapter 11 bankruptcy, our 35-unit master lease had less than 3 years remaining term. We recently restructured the lease with the new owner of Taco Bueno, resulting in a 23-unit master lease and 3 individual leases, all with 17 years of lease term. We agreed to take back 7 vacant stores, which are currently being marketed for sale or lease by our asset management team. Thus far, we have received a great deal of interest in our vacant stores for both sale and re-leasing. The new Taco Bueno owner-operator purchased all of the company's senior debt, leaving the restructured company a much stronger tenant. Overall, with the enhanced credit profile of Taco Bueno, our extended lease term and our expected recovery on the vacant stores, this lease restructure is very favorable to Spirit, and I again credit our asset management team for securing this outstanding result.

Finally, we recast and expanded our senior unsecured credit facility, which addresses all of our near-term maturities. Mike will elaborate more on this in his prepared remarks, but we believe this quarter's results represent strong execution across the board.

Before I turn the call over to Mike to walk through the specifics of our 2019 guidance, I want to give you some color on the key components and how they relate to our go-forward strategy.

As I discussed last quarter, we have invested a lot of time and effort improving our analytics and processes internally. As a result of our analytical tools and processes, we have a deeper understanding of where we want to take Spirit's portfolio in the future. Our acquisition target of $400 million to $550 million will be focused on existing and prospective tenants that fit our Heat Map and our Efficient Frontier. And I am excited about our pipeline. These acquisitions will improve our weighted average lease term, credit quality and organic growth.

On the disposition front, we are using our proprietary analytical tools and property rankings to identify the $250 million to $350 million we plan on disposing this year. These dispositions will further improve Spirit's weighted average lease term, reduce our double-net and multi-tenant lease exposure, improve our portfolio credit quality and optimize our industry winnings.

While this year's disposition pipeline is large and was originally targeted to be spread over the next 3 years, we believe that finalizing our portfolio repositioning this year, concurrent with the resolution of SMTA, best achieves our ultimate goal of making Spirit a simplified, pure-play, triple-net REIT that will generate steady and predictable earnings and dividend growth for our shareholders.

In summary, our acquisition and disposition plan, in combination with an SMTA resolution, solid operations and maintaining low leverage, will best position Spirit for future success and value creation for our shareholders.

Finally, I want to note the additions we have made to our Board of Directors over the last several months. As part of our effort to promote strong corporate governance, Diana Laing, who is most recently CFO at America Homes 4 Rent (sic) [American Homes 4 Rent]; and Elizabeth Frank, who was the EVP, Worldwide Programming and Chief Content Officer for AMC Theatres, have both joined our board. With these changes, we have expanded our board to 9 members from 8 previously, 8 of which are independent, and we have reduced overall board tenure. We expect to benefit from their real estate and service-oriented retail experience and look forward to both of their contributions as we move forward.

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 Jack mentioned, we had a very active fourth quarter, and I'm very pleased with our results on all fronts. We're at the high end of our AFFO expectations for both the fourth quarter and the year, the high end of our expectations for capital deployment and dispositions and beat the low end of our leverage targets. Successful outcomes of our final settlement with Haggen and our lease restructure with Taco Bueno also provided for a strong finish.

Finally, in January, we executed a new $1.62 billion credit facility, which replaced our previous $800 million revolver and $420 million term loan. The draw spreads for the new revolver and term loan reduced by 15 and 10 basis points, respectively. The facility also included a $400 million delayed-draw term loan that will be used to repay our $402.5 million convertible notes due on May 15.

In conjunction with the new facility, Spirit entered into a $400 million interest rate swap that fixes LIBOR for 5 years at a rate of 2.816%. This new facility resolved all of our near-term maturities and, pro forma for the repayment of the convertible notes, extends our weighted average debt maturities to 4.5 years.

Now turning to the income statement. First, we have changed the geography of one of our revenue line items. The new accounting statement, ASC 842, requires all components from a lease contract accounted for under ASC 842 to be included in one revenue line item, which is required to be adopted January 1 on a prospective basis. To give our investors comparable presentations for historic periods, we have chosen to retrospectively apply this presentation in our current 10-K, resulting in the inclusion of tenant reimbursable income and rental income.

During the fourth quarter, rental income, excluding $2 million of tenant reimbursements, grew $2.5 million compared to last quarter. Annualized contractual rent, which annualizes the rents in place at quarter end, grew $700,000 compared to last quarter. Net dispositions reduced contractual rents by $1.7 million, primarily offset by contractual rent escalations. We had very few tenant credit issues during the fourth quarter, and reserve for lost rent remained low at 0.3% of contractual rents.

We had several nonrecurring items this quarter. Other income was $19.4 million or $18.9 million higher than last quarter, of which $19.1 million was attributable to the Haggen settlement. General and administrative expense was $13.2 million during the quarter, of which $1.8 million was associated with onetime employee bonuses related to work performed to effectuate the spin-off of SMTA. You will also note a new line item titled other expense in the amount of $5.3 million. That expense represents the reserve for a loan guarantee that Spirit assumed during equity acquisition of a former tenant many years ago whose credit profile has deteriorated. Aside from this reserve, Spirit has no further exposure. As each of these previously mentioned revenues and expenses are onetime and nonrecurring in nature, they're excluded from our calculations of AFFO and adjusted EBITDAre.

Now turning to guidance. Due to the timing uncertainty of SMTA's accelerated strategic process, we have included a fee and dividend income from SMTA for the entire year. For the full year 2019, we project AFFO per share of $3.32 to $3.38; capital deployment, comprising acquisitions, revenue-producing capital and redevelopments, of $400 million to $550 million; asset dispositions of $250 million to $350 million; and adjusted debt to annualized adjusted EBITDAre of 5 to 5.4x.

And there are just a few points I want to make about our guidance before I open up the call for questions. On the surface, our AFFO per share guidance, growing. 01 per share in 2019 at the midpoint of our range compared to our fourth quarter 2018 annualized, may seem conservative. But there are few factors that are driving that projection. First, we are repaying our 2.875% convertible notes coming due on May 15 with proceeds from our delayed-draw term loan. That repayment of loan results in $0.03 of AFFO per share dilution compared to 2018. Second, 14.6% of our AFFO is currently derived from the fees and preferred dividends paid by SMTA, which are flat and puts a drag on our year-over-year growth rate. If you were to just pro forma our AFFO for those 2 factors, meaning remove both the interest impact from the convert repayment and remove SMTA-related income from each year, our AFFO per share growth rate at the midpoint of our guidance range would be approximately 3.5%.

In addition, our capital allocation strategy, mainly our sizable disposition pipeline and low leverage maintenance, does mute our AFFO per share growth this year. However, as Jackson mentioned, we believe these strategic initiatives, paired with the resolution of SMTA, put Spirit in the best possible position to produce consistent and sustainable earnings and dividend growth for years to come.

And there are 2 last points I want to make about the cadence of our projected earnings throughout the year. First, the impact of the convertible notes repayment will primarily be felt in the back half of the year. Second, we expect our dispositions to also be heavier in the last 2 quarters, which simply means that we expect AFFO per share to be somewhat better in the first half of 2019. So please keep that in mind for your earnings models.

Again, we are pleased with our 2018 results, which met or exceeded all of our expectations, and we look forward to another good year that will position Spirit for long-term success.

I will now 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 comes from Greg McGinniss with Scotiabank.

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Greg Michael McGinniss, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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Jackson, you mentioned one of the main goals for Spirit is being able to generate dividend growth. Now the payout ratio to date is obviously below peer average. But following the loss of SMTA-related income, how should we be thinking about dividend growth and the target payout ratio?

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

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Well, I think we initially set the payout ratio to encompass this reduction in the participation of SMTA. So we expect to hit obviously the high end of our acquisition guidance this year. And in combination with that and having less lost rent, better same-store growth, this will enable us to move our dividend rates up as the portfolio continues to increase.

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

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Yes, I mean, Greg, I think if you'd just look at pro forma for SMTA -- and like Jackson said, we did set it low post-spin in anticipation of SMTA going away at some point, we would kind of drift up just pro forma to a level that we're comfortable with, kind of low 80s, and then grow the dividend from there.

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Greg Michael McGinniss, Scotiabank Global Banking and Markets, Research Division - Analyst [5]

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Okay. And Mike, in your view, what is the threshold you need to tap an [RS] or tap an ATM as the source of funds? And if the stock price holds or grows from that point, do we potentially see the ATM help fund capital deployment above the guidance range?

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Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [6]

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Absolutely. I mean, I don't want to give a number of my target pricing, but I think you saw us hit the ATM just a little bit in the fourth quarter. We certainly are willing to tap the ATM to fund acquisitions, especially if we're able to meet or exceed the high end of our acquisition range. As long as the capital is well priced, similar to what our peers do. So we definitely think there are opportunities for us that happen, and we will be issuing the ATM if those opportunities occur. But that being said, our guidance -- we can hit our guidance without issuing any equity, and so we'll just have to see what opportunities present themselves.

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

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Great. And just one more question here. Jackson, I just want to dig into the comment on dispositions you made in opening remarks, pulling forward the 3 years of disposition pipeline. So how much do you envision forward -- how much do you envision that forward dispositions will be less than the $300 million in 2019? And does this imply less future capital deployment as well? Kind of how should we be thinking about those 2 items?

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

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Well, I mean, I'd characterize what's in this disposition plan as -- to give you some categories, we talked about drugstores, supermarkets, multi-tenants. There's a big PetSmart facility in there. There's some Haggen assets that are in this disposition bucket. This is really for us, I'd call it, opportunistic sale opportunity. We -- these are things that I think over the course of 3 years, that have been identified as things that we would potentially sell. And I think, in my view, right now, we've got an opportunity this year to cut it clean, everything up, which we plan to do. Because I go back to, I really believe we are in this final 10%. None of us ever talked about that big tenant with the S word behind us. So the things that are in front of us now are just -- are very manageable. And where I'd like the company to be at the mid to late part of this year is people can sort of see this as a very clean company, looks just like the peers. And as it stands today, I think we're pretty cheap relative to the best-in-class triple-net peers that are out there.

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Operator [9]

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Our next question comes from Shivani Sood with Deutsche Bank.

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Shivani A. Sood, Deutsche Bank AG, Research Division - Research Associate [10]

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I appreciate that there has been general refrains from commenting on SMTA, but Jackson you spoke of marketing the master trust there. Can you give us some color on how demand has been sort of versus your expectation?

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [11]

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Look, we sort of categorically said we wouldn't talk about that, but I would tell you that we are aggressively in conjunction working with the trustees to move as fast as we can to get this resolved in terms of the completions. I would characterize the interest to be better than I expected. I'll just leave it at that.

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

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Fair enough. And then in terms of Taco Bueno and the restructuring of the master lease, if we look at the contractual rent level where it was as of 4Q December, can you give us an idea of how many more at-risk master leases are in that amount and sort of the exposure from an annual rent perspective?

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [13]

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Sure, sure. I mean, look, we think that the portfolio is very clean. I mean, we -- Taco Bueno was something we mentioned before. I guess, the best way of thinking about our company, Shivani, is look at our lost rent. I mean, that's continued to drift downwards. The operations of this company are really, really good right now. We obviously were able to move a lot of at-risk tenancy into SpinCo. So I think there's one -- Taco Bueno was a unique circumstance as it relates to that opportunity, but we don't really see a lot of other at-risk situations right now.

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Operator [14]

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Our next question comes from Vikram Malhotra with Morgan Stanley.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [15]

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Jackson, just wanted to -- it's great, I guess, you are pulling forward the dispositions and trying to get everything sort of cleaned up. What sort of changed in the last 3 months in the thinking in terms of just pulling forward all those dispositions to this year?

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [16]

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I mean, if we did not have that situation with the big tenant, if -- and SMTA sort of changed direction and the board had not ended up accelerating their strategic process at SMTA, we would not have pulled forward these acquisitions. So this really was something -- sorry, dispositions. This really came about kind of in relation to -- once again, the fact that this earnings stream from SMTA, we know is going to go away in pretty short order. We decided, at that point, this is the right time to pull forward our disposition program. So it wasn't contemplated 2 months ago. It really -- we'd look at this as a unique opportunity to do it now.

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Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [17]

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Yes. I think, Vikram, we identified the assets 2 months ago with the pulling forward. Our whole goal this year is, "Let's get Spirit to be just a clean company that looks great in every metric where we execute on everything we can. We think that gives us the right cost of capital that really makes the machine work, and so let's just get it all done."

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

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I mean, Vikram, I think you've seen our BI tools. I mean, if I -- if we showed you the model of what happens when these assets move out and what it does to the RemainCo of Spirit, I mean, across every measurement, metrics improved dramatically. And then you couple that in with the high end of our acquisition target, really makes a big difference in the company. And that's where we want to be at the end of this year, when we kind of show what our weighted average lease term is, our industry mix, it's just going to -- it's going to look very favorable if we were to execute on this plan.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [19]

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Okay. And just to clarify, the -- when you say you identified them in the past 2 months, I thought, in an earlier question, you said these are all the assets that you had identified a while ago, the drugstores, et cetera. So are there more assets in here than you'd previously anticipated?

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [20]

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No. Remember, like, we have every asset that's ranked in this company, right? So we sort of know top to bottom every single asset. And so it's -- the simple answer is these were identified through our -- just our general ranking process of things that we in time not must sell, but if the right opportunity come up, we would sell. And so that's how we kind of do our forward planning. And like I said, this -- so that's part of our sort of annual review process. And that was really around late September, early September is when we completed our ranking process. So that's when I would say in September of 2018 is where we sort of formulated that these are the assets that we believe make sense to move out of the portfolio over the next 3 years. And remember, we've got the ability, with some of these tools that we have, to run different scenario analyses as to what the actual impact on the portfolio is if these move in and out. So it's quite unique in that regard.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [21]

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Okay. And then on the remaining, on the Taco assets that will retain the restructure, what is the new rent versus the prior rent? What's the difference?

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [22]

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I'll let Ken do that one.

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Kenneth Heimlich, Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management [23]

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Yes. It's depending on how you look at it. The -- if you remember, we had a 35-unit master lease. We now have 26 units, 23 of those in another -- in a new master lease and 3 individual leases. If you look at the aggregate rent for those 26 units compared to the 35, it's about a 20% reduction. I would kind of echo what was mentioned earlier. At the end of the day, we feel there's a perspective that we're in a better position today given the new 17-year term. The 7 units we took back, we think we'll do very well on as far as vacants.

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Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [24]

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Their tenant credit.

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Kenneth Heimlich, Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management [25]

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Yes.

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [26]

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In a different way, I would say, like, if you looked at that portfolio pre-bankruptcy with the 3-year remaining lease term versus what we had today, the cap rate differential is over 200 basis points on the value of those assets just given the nature of the long-term lease we're able to retain and the fact that the tenant now has no debt, no long-term debt versus the prior owner.

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Kenneth Heimlich, Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management [27]

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And this is the tenant that is one of the largest restaurant operators, franchisees on the country. So we're very comfortable with that.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [28]

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And the bumps are the same?

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Kenneth Heimlich, Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management [29]

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We retain bumps in the structure that are equal to what they were prior.

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Operator [30]

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Our next question comes from Ki Bin Kim with SunTrust Robinson Humphrey.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [31]

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Going back to your disposition commentary, I know it's all hindsight, but I thought that kind of cleaned-up portfolio would have been in 2018 with the spin-off. Why not -- why didn't you add more to the spin-off? I know it's hindsight 2020, but just curious if it was -- was there any element of credit deterioration or just kind of risk with these tenants that made you put these in the disposition bucket this year?

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [32]

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Well, I mean, remember when we laid out this plan, I'm going back to when we did the first path forward, we laid out very specific debt-to-EBITDA end targets, AFFO kind of targets. That was a pretty precise calculation to get to that end for each of those pieces. As you know, I think if you kind of do the scorecard, we exceeded pretty much everything we said. If not, we met with -- most of that we exceeded, most of the things that we laid out since I took over this company. If we had taken out these assets early on, it would have had an impact in how we set up the restructuring, how much debt had to be raised on the master trust, the end result. So this was -- it might seem like, oh, why didn't you just fill those in? But it was quite a complex derivative to kind of get this company to end where we ended up, which is now over 5.1x. And -- but Ken, if you want to add something else.

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Kenneth Heimlich, Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management [33]

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Yes. I think there's -- I just want to make sure, if there's a perception that this, call it, $300 million is a workout pool, and that is not the case. There are a lot of factors that we use when we identify what we think we want to dispose of, double-net leases, multi-tenant. There's a variety of factors. These are not tenants that were afraid or going to not make the rent payment next month. That's not the idea, not what was behind building this disposition plan.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [34]

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So if you exclude the...

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Kenneth Heimlich, Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management [35]

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Yes.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [36]

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So if you exclude any kind of vacant asset that you might be selling this year, what is the cap rate range that we should expect on the sale?

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

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We're not putting out a cap rate range at this time. The disposition pool is going to be flexible. Some of the assets that we think we want to dispose of right now, that may evolve throughout the year. But we will hit the overall guidance.

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

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I mean, as Ken laid out, there's going to be some low-cap assets, some high-cap assets. And it just -- we're just going to have to see how it progresses through the course of the year. So -- and I, of course, don't have to tell you, but that's the best we can tell you right now.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [39]

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All right. And just a quick one on Albertsons. I noticed that the ADR decreased. Is that because of a sale or something happened or something else? And it wasn't listed as your top 100 tenant in Page 13 of your supplemental. Was that just a typo? Or did something else happen there?

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Kenneth Heimlich, Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management [40]

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Yes, no. We did sell one Albertsons in the fourth quarter. But if you look in the sup, we changed the identification to United Supermarkets, which is a wholly owned sub of Albertsons.

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Operator [41]

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Our next question comes from John Massocca with Ladenburg Thalmann.

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

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Just a question. With regards to kind of the other side of your guidance, what kind of weighting are you expecting for capital deployment spending kind of quarter-over-quarter? And as we look out over the course of the year, just could it potentially end up being more back-end weighted, specifically looking at what you guys did in terms of capital deployment in 4Q, which is maybe a little bit light versus 3Q?

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Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [43]

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Yes. I mean, there's always a chance that dispositions and acquisitions can shift on you, which we have in fourth quarter. But I would expect, from an acquisition standpoint, we're pretty leveled throughout the year for '19 on the acquisition side. We've had more time to build our pipeline, and last year, we were dealing with the spin-off. For dispositions, though, they are going to be more heavily weighted towards the back end, I would say very, very light in the first quarter and kind of spread pretty evenly between second, third and fourth quarter, which means obviously a lot more in the back half compared to the first half. So that's, John, the way I'd think about it.

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

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Okay, very helpful. And then with regards to the kind of leverage, given any final resolution to the kind of situation with SMTA to be considered kind of a derisking transaction for SRC, could that type of event cause you to maybe raise your leverage targets going forward?

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Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [45]

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It could, but we're going to focus on our long-term cost of capital. And I think that getting, say, an upgrades on credit rating would be extremely helpful for that on the debt side. So I think we'll continue to be pretty conservative to make sure that we are -- get the highest rating we can and help the weighted average cost of debt side of it. And so we -- I wouldn't expect this to increase at any time soon. I think that's just more of our long-term philosophy than it is any short-term risk that we see with SMTA.

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Operator [46]

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Our next question comes from Joshua Dennerlein with Bank of America.

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Joshua Dennerlein, BofA Merrill Lynch, Research Division - Research Analyst [47]

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Could you maybe elaborate a little bit more on your internal growth assumptions implied in guidance? Like how long do you expect those 7 vacant Taco Bueno assets to remain? And then are there any other, like, moveouts or renewals that you're watching? Or maybe is there another credit event that you might be assuming?

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Kenneth Heimlich, Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management [48]

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Regarding the Taco Buenos, we are not in a position where we think we need to start disposing of those. We -- those, I would say, would be opportunistic. Now that they're restructured, they are highly liquid assets, and they're what we call bite-sized. So they were very well accepted in the 1031 market. But right now, we don't see -- there's no risk reason to jump on and throw those into the dispo plan. But other than that, right now, no, they're -- we do not see anything on the horizon, any meaningful things. You're always going to have a tenant here and a tenant here that struggle, but as far as anything meaningful, don't see anything on the horizon right now.

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Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [49]

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Josh, there's nothing unique, kind of big onetime nonrecurring stuff built into our '19 guidance. It's pretty straightforward as we laid it out. You guys know about the convert refi. Obviously, we have the flat fees affecting growth. It's really -- at the end of the day, what's going to move our numbers around the range are going to be acquisitions and dispositions and how quickly we do stuff, what cap rates we get. So nothing big on the tenant credit issue side or anything unusual that would -- that's built into our guidance for '19.

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Joshua Dennerlein, BofA Merrill Lynch, Research Division - Research Analyst [50]

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Okay. And just to clarify, the 7 assets you took back from Taco Bueno, like how long of a downtime do you expect before you could pre-lease them?

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Kenneth Heimlich, Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management [51]

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We don't have a specific target, but we're always on a sooner rather than later. We look at each one and identify whether it makes more sense to work on a relet versus a sale. We're -- suffice it to say, we're pretty happy with the quality of those 7 sites. QSR sites tend to be very fungible, having -- we're pretty happy with those, and we've gotten a lot of activity already.

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Joshua Dennerlein, BofA Merrill Lynch, Research Division - Research Analyst [52]

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Okay, good, good. And then you mentioned in the opening remarks that reserve for that credit event -- or that credit enhancement that you inherited years ago. Could you just elaborate on that a little bit more? And then how should we think about that kind of...

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Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [53]

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Yes. I mean, just structurally, sometimes when you buy a group of assets, you do an asset purchase or you do an entity purchase. This particular one that was done, this acquisition that was done a while back, a long time ago, was the purchase of an entire entity versus the assets. And so when you purchase an entity, you can inherit, unfortunately, the liabilities that can come with that entity. And soon as you do those for the tax driven and whatnot, and we inherited a loan guarantee with that. Now that reserve, we're going to hit the former tenant, not the current tenant, that reserve is -- it's a noncash reserve. We don't know for sure if we'll actually ever have to -- if there'll ever be a claim on that. We'll certainly update you guys if that does become an actual cash charge. But we thought was prudent to just go ahead and reserve it because the tenant's credit quality has deteriorated significantly.

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Operator [54]

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(Operator Instructions) Our next question comes from Brian Hawthorne with RBC Capital Markets.

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Brian Michael Hawthorne, RBC Capital Markets, LLC, Research Division - Associate [55]

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The first one's, I was -- so I haven't seen the Heat Map. Has any -- any industry has changed in terms of what you're looking to invest in?

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Kenneth Heimlich, Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management [56]

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No meaningful change.

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [57]

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No, no meaningful change.

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Brian Michael Hawthorne, RBC Capital Markets, LLC, Research Division - Associate [58]

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Okay. And then just second one. On your developments, what kind of developments are those? Are those ground-up? Or are they just kind of repositioning backfills?

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Kenneth Heimlich, Spirit Realty Capital, Inc. - Executive VP & Head of Asset Management [59]

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It's a combination. There are some ground-up. Some of them are situations where we work with a tenant. If they want to, say, renovate the facility that they're in, we will contribute some dollars and get a return on those dollars.

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [60]

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Some of the acquisitions are development oriented, like the Topgolf facilities were development oriented. Some of the CircusTrix are development oriented. Sometimes we're doing takeouts on completion somewhat better. So it's certainly across the board. But suffice it to say, you're going to get a better return on opportunities where you're either forward-committing or providing development capital. And obviously, we're going to be mindful of not overweighting that as it relates to overall -- the overall contribution to the acquisition plan.

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Brian Michael Hawthorne, RBC Capital Markets, LLC, Research Division - Associate [61]

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So will it stay in kind of just, well, I think, maybe $100 million a year range? Is that what your expectations are?

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [62]

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No, it depends. Look, we're focused on dealing with a lot of tenant -- existing tenants. The nice thing about when you develop a really strong tenant relationship is you kind of understand what's important for them, what's important for us, try to meet in the middle. And that's where we're seeing our best opportunities, that some of them are, I would call them, development sort of takeout opportunities. So for us, I guess what we do is we look at how important is that tenant, how's the lineup on our Heat Map, is this the pricing relative to our cost of capital and how we would compare it relative to buying an existing asset. And all of that factors in. I wouldn't say we've got the hard-line number. So we're just -- stepping back, we're just looking for the best risk-adjusted returns right now given our cost of capital. So it's -- I would say it's a balance.

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Brian Michael Hawthorne, RBC Capital Markets, LLC, Research Division - Associate [63]

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Sure, okay. And then just looking at G&A, how do you kind of balance that with the kind of dilution from your dispositions in a post-SMTA world?

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [64]

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Well, SMTA, first of all, even if it disappeared tomorrow, no just contractually, it doesn't just disappear for us. As I've said in the past, it would -- for that contract to go away requires 6-month notice, 8 months transition. So there's already a built-in lump-sum amount even if SMTA resolves tomorrow, which it can't obviously because it's a public company. So I think that's one -- so we have some time. Regardless of the outcome of the resolution, there's some built-in time. I'd say the second is, look, this is going to be a bigger company, and we're going to find more things that we can do that generate positive returns and spread and improve the quality of this company. So we're committed to that, and we've come a long way. And so I think our G&A is rightsized for where this company will be in 18 to 20 months.

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Operator [65]

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There are no further questions in queue at this time. I would like to turn the conference back over to Mr. Jackson Hsieh for closing comments.

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Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [66]

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Thank you. So one more? Okay. All right, in closing, I guess, I'll sort of leave you with a couple of things as we finish and thank you all for joining. I guess, first and foremost, why own Spirit today? I think we have like 4 group -- 4 sort of reasons -- main reasons why. We have an excellent portfolio, people and processes. We're very cheap in comparison to our best-in-class peers. We are in the final 10%, and it's -- I'd say it's a pretty short putt to complete what we need to do this year. We've exceeded most, if not all the things that we've said since I've taken over as CEO. We're focused on what I'll call the big 3 in 2019, that's what I'm going to brand it: sell SMTA, continued operating excellence and meet or exceed our acquisition, disposition and debt targets. If we do all that, SRC will result in a simplified, pure-play, triple-net REIT. And so I thank you all for joining us, and thank you.

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Operator [67]

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This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.