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Edited Transcript of SRC earnings conference call or presentation 5-Nov-19 2:30pm GMT

Q3 2019 Spirit Realty Capital Inc Earnings Call SCOTTSDALE Dec 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Spirit Realty Capital Inc earnings conference call or presentation Tuesday, November 5, 2019 at 2:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jackson Hsieh Spirit Realty Capital, Inc. - President, CEO & Director * Michael C. Hughes Spirit Realty Capital, Inc. - Executive VP & CFO * Pierre Revol Spirit Realty Capital, Inc. - Senior VP and Head of Strategic Planning & IR ================================================================================ Conference Call Participants ================================================================================ * Brian Michael Hawthorne RBC Capital Markets, Research Division - Senior 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 * Robert Chapman Stevenson Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst * Shivani A. Sood Deutsche Bank AG, Research Division - Research Associate ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings. Welcome to the Spirit Realty Capital Third Quarter 2019 Earnings Call. (Operator Instructions) Please note that this conference is being recorded. At this time, I will turn the conference over to Pierre Revol, Senior Vice President of Strategic Planning and Investor Relations. Mr. Revol, you may now begin. -------------------------------------------------------------------------------- Pierre Revol, Spirit Realty Capital, Inc. - Senior VP and Head of Strategic Planning & IR [2] -------------------------------------------------------------------------------- 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? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thanks, Pierre, and good morning, everyone. I'm happy to report that we are now 100% complete in our process of making Spirit a simplified triple net-lease REIT. Wow, I can't believe I just said that. In the third quarter, SMTA closed the previously announced $2.4 billion sale of the properties in the Master Trust 2014 portfolio and 3 Flying J centers, previously owned by Spirit. In conjunction with that transaction, Spirit received $265 million in proceeds, and I've resigned as Chairman and Director of SMTA. And I can now devote 100% of my attention to Spirit Realty. So what's next? With the removal of 770 properties under Spirit management, I'm focused on harnessing the increased bandwidth across various departments within the Spirit platform to beat our operating, acquisition and financial targets. We have an exceptional battle-tested team and a very scalable platform that we can utilize to grow shareholder value, and we're already making good progress. As I'm sure you've noted from our earnings release this morning, we're increasing this year's acquisition guidance to $1.1 billion to $1.3 billion, along with increasing our earnings guidance. This acquisition volume is not by accident. When we completed our forward common stock issuance in May, we did so knowing that several opportunities to deploy capital would present themselves, and we needed to have the ability to execute on those situations efficiently. I'm happy to say that by year-end, the equity capital we raised and the proceeds from the SMTA termination will be fully deployed, and we'll enter 2020 with very low leverage and robust capacity on our line of credit. Mike will go into greater detail in his remarks on the capital markets activity we completed in the third quarter, but the takeaway is that we had an excellent quarter across all fronts. Now on to a rundown of our third quarter operating results and key financial metrics. We generated AFFO per diluted share of $0.87, excluding the impact of the SMTA termination fee. We had strong operational performance on all fronts, with portfolio occupancy of 99.6%, lost rent below 0.2%. It was actually 16 basis points, and 1.5% property cost leakage. We grew same-store sales by 1%, which was below our last quarter, primarily based upon the timing of rent bumps, and we increased our weighted average lease term to 9.9 years. Now turning to capital allocation. We acquired 69 properties totaling $270.6 million during the quarter and invested an additional $5.9 million in revenue-producing capital with an initial cash yield of 6.84%, an economic yield of 7.61%, a weighted average lease term of 13.7 years and average annual rent escalators of 1.7%. The investment activity represented key attributes that we look for, including publicly listed tenants that are aligned with our industry view and lease structures that provide higher organic rent growth. Investment categories acquired included car wash facilities, professional services, dollar stores, entertainment and auto service. Approximately 61% of the total investment was derived from public tenants and represents key real estate in their underlying business. The split in rents from service retail, traditional retail and industrial other was 39%, 24% and 37%, respectively. Our top 15 tenancy has and will continue to evolve as we execute our investment strategy. Dollar Tree, Family Dollar has now increased to our 5th largest tenant from a rent contribution perspective. The 32 units that we acquired are secured by 3 master leases. Bank of America moved up to the 11th in rental contribution. We review office buildings very selectively, and we like the critical composition of business lines within this building, the long-term tenant history and recent investment by BofA in the building. In addition, we like the real estate submarket, trade area demographics, rent economics, price per square foot of this asset and the numerous amenities around this 3.5 million square foot submarket, such as a town center, light rail and strong school system. During the quarter, we disposed of $67.7 million in occupied properties at a 6.05% cap rate and one vacant property. The most notable sale transaction was the 3 Flying Js to HPT for $55 million at a 5.7% cap rate. We also sold a Red Lobster, Walgreens and Tractor Supply. Now before I turn the call over to Mike, I want to remind everyone about our Investor Day event in New York City on December 5. I'm excited to have you see, meet and hear from a large number of our associates across many departments, who will be presenting. As a result of our upcoming Investor Day, we are not attending the NAREIT sessions in Los Angeles. With that, I'll turn it over to Mike. Mike? -------------------------------------------------------------------------------- Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [4] -------------------------------------------------------------------------------- Thanks, Jackson. Good morning, everyone. It was another exciting quarter for Spirit, again, marked by capital markets activity and capital deployment. Starting with the balance sheet. On September 9, we issued $300 million of 3.2%, 7-year senior unsecured notes due in 2027 and $500 million of 3.4%, 10-year senior unsecured notes due in 2030 and used the proceeds to repay the amounts outstanding under our term loan facilities. These offerings allowed us to take advantage of the low interest rate environment, locking in a 7 and 10-year treasury yield of 1.565% and 1.627%, respectively, and utilize our improved credit spread, which tightened another 20 basis points on the 10-year since our June issuance. These transactions also further simplified our balance sheet, removing all floating rate debt exposure outside of our revolving credit facility and extending our weighted average debt maturities to 7.1 years. Despite funding $277 million of acquisitions and revenue-producing capital and repaying $26.4 million in related-party mortgages, we ended the quarter with an unprecedented amount of liquidity at Spirit. This liquidity was driven by the SMTA transaction and the settlement of all the remaining shares of common stock previously issued in May under forward contracts in anticipation of our fourth quarter acquisition activity. I do want to point out that our leverage this quarter of 4x was positively impacted by the SMTA fees, dividends and interest income on MTA notes received through September 20. Third quarter leverage, excluding this income, would be approximately 4.4x. And in the event, our leverage is certainly low, and we expect it to move closer to our target range by year-end. Now turning to the key operating metrics. During the third quarter, annualized contractual rent, which annualizes the rent in place at quarter end, grew $13.6 million compared to last quarter. Approximately $17.7 million of the increase was attributable to acquisitions and contractual rent increases, offset by a reduction of $4.1 million attributable to dispositions. Unreimbursed property costs or leakage was basically flat compared to last quarter at 1.5% and lost rent was effectively nonexistent. There are a few items I want to point out on the income statement this quarter. G&A was again artificially elevated by share-based awards issued by the SMTA Board of Trustees to SMTA's CEO, who is an employee of Spirit. As our employee benefited from these awards, and in accordance with the accounting rules on share-based payments, we recorded noncash asset management fee revenues of approximately $500,000, with a corresponding offset to G&A. Recording of this noncash transaction did not impact our net income or any of our non-GAAP earnings metrics, and this arrangement will not reoccur in future quarters. Finally, other income included a make-whole payment of $900,000 for the repayment of our Master Trust 2014 notes in conjunction with SMTA's sale to Master Trust. As penalties for mortgage and lease terminations are considered ordinary course in our business, this penalty is included in the AFFO per share, excluding AM termination fee net of tax. Excluding the make-whole payment we reduced that calculated AFFO by approximately $0.01 per share. Now turning to our guidance. Our updated guidance is being presented relative to the previous guidance provided, assuming the sale of SMTA's Master Trust 2014 on September 20. For the full year 2019, we are raising our projected AFFO per share range from $3.27 to $3.31 to $3.31 to $3.34. Please note that fourth quarter AFFO will include approximately $1.4 million in mortgage prepayment penalties, which will be reflected in other income with the repayment of $23.8 million in mortgage receivables. We are raising our projected capital deployment, comprising acquisitions, revenue-producing capital and redevelopments from $700 million to $900 million to $1.1 billion to $1.3 billion. We're maintaining our asset dispositions range of $225 million to $275 million, excluding the sale of the Flying Js to HPT, and we're reducing our adjusted debt to annualized adjusted EBITDAre range from 5 to 5.4x to 4.8 to 5.2x. And with that, I will open up the call for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) The first question comes from the line of Greg McGinniss with Scotiabank. -------------------------------------------------------------------------------- Greg Michael McGinniss, Scotiabank Global Banking and Markets, Research Division - Analyst [2] -------------------------------------------------------------------------------- So Jackson, we got another quarter and another increased acquisition guidance. And I think you mentioned some opportunities you knew were coming, that you can now take advantage of. Could you talk about those opportunities a bit more? And then should we expect a similar level of acquisitions next year, maybe just less the SMTA-related income? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thanks for the question, Greg. Look, when we -- this year, there's been a number of different portfolios and opportunities in the market this year. And at the beginning of the year, we suspected that, that would be the case. What I can tell you about the fourth quarter because, obviously, we took the equity down in the forward contract, is that the things that we have -- I'll call it, we're confident in closing and learner confidentiality are very granular. So if you sort of looked at the average size of investment this year, year-to-date, it's just about $3.5 million of property. And I think you can sort of suspect that, that's going to have the same relationship, assuming we hit the lower to upper end of that guidance range. So it implies like $350 million to $550 million of acquisitions in the fourth quarter. As it relates to next year, we haven't really obviously come up with guidance yet, and we will at some point in the future. But we'll give the investment community a little more detail now once we sort of complete this year. -------------------------------------------------------------------------------- Greg Michael McGinniss, Scotiabank Global Banking and Markets, Research Division - Analyst [4] -------------------------------------------------------------------------------- Is that something maybe we'd get to hear at the Investor Day? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Well, on the Investor Day -- first of all, I'd encourage you to really come, it's going to be good. About 20% of the Spirit team is going to present. So you're going to get a full rundown of how we do the business. And there might be some surprises there, so you definitely want to come. -------------------------------------------------------------------------------- Greg Michael McGinniss, Scotiabank Global Banking and Markets, Research Division - Analyst [6] -------------------------------------------------------------------------------- All right. Well, I'll be there. And then, Mike, I just got a real quick question for you, and I apologize if you've addressed this before. But is there any plan for the 2021 convertible? Any reason to take that one out early? -------------------------------------------------------------------------------- Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [7] -------------------------------------------------------------------------------- No plans today. We'd love to do it, but I don't think it's going to be practical to get those out. It's just -- I don't think I can get the people to sell those back to me. But if you know anyone who wants to sell some, let me know. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Our next question is from the line of Shivani Sood with Deutsche Bank. -------------------------------------------------------------------------------- Shivani A. Sood, Deutsche Bank AG, Research Division - Research Associate [9] -------------------------------------------------------------------------------- We've seen some cap rate compression in terms of where you guys have been investing throughout the year. So can you just give us a sense of how much of that has been related to the decline in the 10 year versus sort of your cost of capital improvement and what you're willing to buy at these levels? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [10] -------------------------------------------------------------------------------- Shivani, yes, I'd give it a shot. I mean we -- I think you've heard us in different meetings talk about a 7% cap kind of area where we're sort of targeting. It could be a little bit below or above in the course of a year. The thing about acquisitions, it's sort of hard to time this stuff, right? These things kind of don't especially come as predictable as we would like. We obviously have a pretty high degree of focus on property rankings and heat map and things like that. So what I'd tell you is that based on this calendar year, the cap rates have sort of trended more in just in the high 6% range, but we're still targeting that 7% area. And I don't think it's a function necessarily of the market cap rates declining. It's just what we see that's available that makes sense for our heat map and our strategy. Well, that's that. So there's obviously a lot of things that we're not pursuing and the things that we are pursuing just happen to be at a slightly lower cap rate. But I do think that we're going to -- we sort of have a target around 7% as an overall average cap rate that we're trying to acquire in any given year. -------------------------------------------------------------------------------- Shivani A. Sood, Deutsche Bank AG, Research Division - Research Associate [11] -------------------------------------------------------------------------------- That's really helpful. And then, Mike, you had mentioned that Spirit is at 4.4 from a leverage perspective, exiting the quarter, sort of excluding that SMTA benefit. Updated guidance has a lower range. So just trying to get an idea if this is the new norm? Or how much of it is just related to deploying the SMTA with the latest liquidity? -------------------------------------------------------------------------------- Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [12] -------------------------------------------------------------------------------- Yes. It's not the new norm. I think we'll migrate back to -- I look at the stabilized range of 5 to 5.4x. So just the nature of the proceeds we brought in from SMTA, the equity we took down and the acquisition volume we expect in the fourth quarter, we're going to end the year a little lower than our target range. So you'd expect it would probably migrate back to that 5 to 5.4x next year, which gives us a little bit of capacity going into the 2020. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Our next question is from the line of Brian Hawthorne with RBC Capital Markets. -------------------------------------------------------------------------------- Brian Michael Hawthorne, RBC Capital Markets, Research Division - Senior Associate [14] -------------------------------------------------------------------------------- Can you break down the drivers of the increased investment volume by increased relationships, improved cost of capital, leading to a larger opportunity set or a higher close rate? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [15] -------------------------------------------------------------------------------- Well, that's a lot of questions. Let me -- look, I think if you step back and look at Spirit in this calendar year, obviously, our cost of capital has dramatically improved as the calendar year has progressed. That's a function of a lot of different things, and obviously, good work here by the team. But our cost of capital is not necessarily what's necessarily driving what we're acquiring. I would say, once again, we have a very specific heat map strategy. So for instance, we've talked a lot about why we like car washes. High-margin business, very fragmented. You've got a handful of consolidators out there. We love that business. We want to do more. So this quarter, we did 2 separate transactions with different car wash operators. If I were to tell you, I wish our acquisition volume was a little bit more straight line through the quarters. But if you sort of think about where we started the year, where I think our cost of capital was -- it wasn't that great. It was sort of like probably in the mid-7s. Our stock price was like $38 when we closed last year, and our G-spreads were much wider than they are now. So as we've migrated down into this kind of, what I'll call, 5 area, yes, sure, it gives us an opportunity to look at more things. But we still are focused on trying to maintain that spread relationship. And we think that our sweet spot's right around 7%, could be a little bit below, could be a little bit above on an annual run rate basis. And I think the last thing is, if you looked at our supplemental, we closed 22 transactions year-to-date. That's about 7-ish a quarter. To be honest with you, and I've talked about this a lot, we are actually tweaking some things that we'll present in our Investor Day, but we'd like to see that number get up to 14 to 20 transactions a quarter. So it's a little bit lumpy. But like I said, we're still a little bit work in progress. We're not 100% there, but I'd expect next year in 2020, you'd see a little bit more sort of smoother straight line, hopefully, acquisition activity as the year progresses. I hope that answered some of your stuff. -------------------------------------------------------------------------------- Brian Michael Hawthorne, RBC Capital Markets, Research Division - Senior Associate [16] -------------------------------------------------------------------------------- Yes. Okay. So it sounds like the improved cost of capital, so far, though, has been like the primary driver, but the other -- the relationships and the close rates are working well. -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [17] -------------------------------------------------------------------------------- And well, the relationships -- we still are doing quite a bit with relationships. But the thing is, for us, we really do take that heat map pretty seriously when we look at, at least, industries that we invest in. And I think you've heard us talk that we want to do more with relationship-driven acquisitions. In our Investor Day, we're going to talk a lot about that and a lot about how we're reorganizing ourselves internally to attack that. So I think it will improve. I'd like it to be better but given where we are, I'm pretty happy with what we bought, how we've done so far and the direction that we're going into 2020. -------------------------------------------------------------------------------- Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [18] -------------------------------------------------------------------------------- Yes, I will comment on the cost of capital piece of it. If you go back to the beginning of the year, our guidance was originally $400 million to $550 million of acquisitions, and that was really driven by our cost of capital. It wasn't the opportunity that we saw available in the market, it was more of our ability to issue capital at reasonable price. And so as our cost capital did improve, you've seen us issue quite a bit more capital and increase our acquisition guidance throughout the year. So that has been certainly a driver. It hasn't changed the weighted average target cap rate that we're going for, as Jackson has mentioned several times today, but it certainly has allowed us to be more acquisitive and buy more assets that made more sense. -------------------------------------------------------------------------------- Operator [19] -------------------------------------------------------------------------------- Our next question is from the line of Haendel St. Juste with Mizuho. -------------------------------------------------------------------------------- Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [20] -------------------------------------------------------------------------------- So I guess, the question on the investment front, Jackson. I guess I'm curious, are there any portfolios today out there that interest you? Are you seeing more of that make more sense, given the improvement in your cost of capital and your leverage profile? And is there anything embedded in the fourth quarter acquisition guidance from a portfolio perspective? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [21] -------------------------------------------------------------------------------- Well, thanks, Haendel. Well, just to step back, this -- earlier, this entire year, we've looked at several different portfolios to be honest with you. There's been a number out there. For a variety of different reasons, year-to-date, we haven't been successful. And either it's been because of the nature of the properties or our ranking process or our view of value relative to our cost of capital. All those things sort of factor in. Like I said, on the fourth quarter, we obviously are confident that we're going to do a significant amount, which we're set on doing, but we don't want to really get too specific as to what it is. But what I can tell you is the end result of what we expect to do will be very granular and consistent with kind of our portfolio, if that's helpful. -------------------------------------------------------------------------------- Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [22] -------------------------------------------------------------------------------- That is, that is. And perhaps this is a question you may not be willing or wanting to answer. But I understand that HPT who bought the SMTA Master Trust is actually looking to sell some of those former assets. So I'm curious, if there's a scenario that you may be interested in potentially buying back some of those assets or could we completely rule that out? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [23] -------------------------------------------------------------------------------- No, we usually don't -- we don't really like to comment on our acquisitions at this point. So what we said is we're pretty confident about the fourth quarter. It's going to be pretty granular. We've looked at a lot of portfolios this year, and we'll continue to look at portfolios. -------------------------------------------------------------------------------- Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [24] -------------------------------------------------------------------------------- And then I just wanted to follow up on the commentary about the office assets, the BofA, certainly sounds like that's an opportunity that you're increasingly attracted to. So curious, how much more activity we could see on that front? And perhaps what level of exposure you might be willing to have to that type of asset in your portfolio? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [25] -------------------------------------------------------------------------------- No, I appreciate the question. First, I guess, just to make sure everyone -- make sure you understand our office exposure right now. We have 37 buildings that are characterized in the office segment if you look at our supp. 30 of those buildings are really medical service-related, MOBs, oncology centers. They're not what we -- you and I would call an office building. So the 7 buildings that you and I would call office are basically smaller net-lease -- triple net-leased offices to an end user. And as you know, when we spun off SMTA, we did spin-off assets like the Stations Casino headquarters and some other headquarters building. This BofA building, which I've physically been in, physically been on most of the floors, walked around trade area, it's a great piece of real estate. It's the best office building that we have in the portfolio. The reason I like this one was -- it was $270 a foot. It's in a super tight submarket in suburban Maryland, it's in the Hunt Valley area. So that's a Class A market with 33 buildings. It's got 6.8% vacancy. Market rents are about $22.50 a foot. We're in at $18 a foot with our tenant. There hasn't been any kind of spec building for 10 years in that market. So it's very mature. There's no land sites in that area available for development. So if someone wanted to build a new spec building, they'd have to buy an existing one. And the other thing I liked about it was trade area is outstanding. So like the 5-year pop is like 90,000. Income is -- I'm sorry, a 5-mile income is like $90,000. It's got a super educated workforce. Like 80% of the people within 5 miles of this property have either an advanced degree, Bachelors, associate or some college. And really, if you look at the tenants in that area, it's mostly financial services and computer gaming industry. So getting back to why this one makes a lot of sense for us, it's -- first of all, it's great that BofA is in there. We have annual rent escalators north of 2%. BofA has been in this facility for -- well, it originally was MBNA's headquarters building. And when BofA acquired it, they basically did a sale leaseback on this building back in 2008, and they basically did another 10-year early renewal after putting more money back into the properties. And the thing that's unique about this is that it's got its -- they do antifraud and that kind of stuff in the building, so that's obviously pretty important for financial institutions. And this is one of the redundant facilities that they have in the country. The other thing about it is they're putting in Merrill Lynch. Merrill Lynch is going to add 600 new employees into the building. And the building is already built out, so it's a pretty cool situation. So we like the fact that it's got pretty critical functions as it relates to antifraud for BofA. It's got a growing wealth management platform that they're putting in. It's got like airplane leasing and other functions within BofA in that building. Super tight market. So the answer -- long-winded question, we love this building. It's got great credit, it's got all the things that match up for a property ranking and stuff. Long-term, office is going to be about 5% of our portfolio. So I mean we're not -- we've looked at a lot of office things, and this is the 1 that kind of made a lot of sense for those reasons. There's a lot of others that, like, we wouldn't do. Like we wouldn't do probably an office in a very high vacancy suburban style market. This is very unique. The last thing on this is -- right adjacent to this property is light rail, you got a new town center that's doing a $150 million redo. It's got great school systems. So it's got a really -- it's a very unique asset. And when we saw it, when I walked it, I said we're done. It's a good deal for us. And we got it at a very good price. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Next question is from the line of John Massocca with Ladenburg Thalmann. -------------------------------------------------------------------------------- John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [27] -------------------------------------------------------------------------------- Just quick follow-up to the last question. What percentage of your portfolio is office today then? Is it at that 5% level right now? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [28] -------------------------------------------------------------------------------- It's just about 5%. And then with this, it -- I think it goes up to like 6%. And as we continue to grow the portfolio, it will get back to 5%. -------------------------------------------------------------------------------- John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [29] -------------------------------------------------------------------------------- Okay. And then maybe switching gears to one of the other big acquisitions this quarter. Can you give us some color on how you sourced the Family Dollar transaction? And what is the kind of remaining term on those properties? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [30] -------------------------------------------------------------------------------- I think -- look, I'll unpack the term yield, it's 10-plus years on the -- it's 3 pools. And this is actually -- just to give a little more color on this, these have CPI bumps, and they're in the master lease structure. So we kind of like that. We like the area that these were in. So I would say that this was unique because of the characteristics of the lease structure for us. That's what made it really interesting. Yes, I don't -- I'm not going to go into who we bought it from, how we bought it, but it was obviously bought -- it was not a direct deal with a developer. This was another existing institutional owner that owned it. -------------------------------------------------------------------------------- John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [31] -------------------------------------------------------------------------------- Okay. And then maybe kind of more broadly speaking, what partners are you finding the most kind of transaction opportunities with? Is it more through the sale leaseback market? Broker relationships? Or potentially even transactions with other REITs? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [32] -------------------------------------------------------------------------------- It's -- I'd tell you, in today's market, it's all of the above. I think you'll hear -- longer-term, we'd like to do a much higher percentage of business with our existing tenants. But you can't really predict that. That's not as predictable a deal flow, well actually it is, but in terms of how we're trying to scale up, we'll sort of grow into that portion of the business. But look, there's still a lot of broker deal flow. There's a lot of other -- not just REITs. There's other institutions that are selling things. We've been selling things, as you know. So it's a pretty functional market. I mean for us, the key thing is it's got to be good real estate. It's got to have the right lease structure. It's got to be in the right industry, got to score well on our property ranking system. We're trying to improve the quality of our real estate, quality of our tenancy and sort of improve on the annual rent bumps within our current structure and build out the walls. -------------------------------------------------------------------------------- John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [33] -------------------------------------------------------------------------------- Okay. Understood. And then one last kind of modeling detail question. Just what was the kind of relatively the timing of the pulldown of the forward? -------------------------------------------------------------------------------- Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [34] -------------------------------------------------------------------------------- Yes. We pulled that down right at the end of the third quarter. -------------------------------------------------------------------------------- John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [35] -------------------------------------------------------------------------------- Okay. So it was right at the end? -------------------------------------------------------------------------------- Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [36] -------------------------------------------------------------------------------- Yes. Right at the end. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- (Operator Instructions) The next question is from the line of Rob Stevenson with Janney Montgomery Scott. -------------------------------------------------------------------------------- Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [38] -------------------------------------------------------------------------------- Jackson, I appreciate the color on your thoughts on office. How are you guys thinking about industrial these days? It seems like it's hard to buy and expand that segment given where pricing is. Do you take advantage of how hot that market is and sell and redeploy into other higher-yielding assets opportunistically over the next few years? How does that factor into your thoughts? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [39] -------------------------------------------------------------------------------- We do like industrial and distribution. Obviously, we did a transaction with Party City last quarter. We're out trying to seek industrial opportunities. I mean you're not going to see us pursue, what I'll call, flex industrial with 5-year average lease maturities. That's not -- or multi-tenant industrial. That's really not what we do, but things that have criticality to a company and the credit that we like, that's got good real estate characteristics, I mean we're definitely looking at a lot of those opportunities right now. Hard to line up. It's got to be the right price. And your comment on pricing is, look, if you're looking at an Amazon facility, those are probably a little bit out of our reach right now. But there is a good opportunity set out there for industrial with BB equivalent kinds of credit with good rent bumps, good structure. For us, we've looked at a lot. It's got to be with a counterparty where we think they can be competitive from an e-commerce standpoint, we've talked a lot about our heat map. So I would say there's a lot of things that we passed on, but there are a lot of things we've pursued, stopped short a couple of times, but it's an area that we're going to continue to get after to try to grow into. -------------------------------------------------------------------------------- Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [40] -------------------------------------------------------------------------------- Okay. And then conceptually, these days, when you think about the future, how important is it in terms of when you add tenants that a mix of those be investment grade? I mean the origins of this company was not investment grade, but then through coal and some of the other transactions over the years, you've had more. And now post-SMTA, you have a decent amount of investment-grade tenants. How important and how do you guys think about that in terms of the tenant mix and acquisitions going forward? -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [41] -------------------------------------------------------------------------------- Well, I'll tell you, the more important criteria that we're looking at these days, our actual IG is about 24% today. And our shadow rated tenants or Moody's equivalent is about another 17%. So we're about 41% investment grade. But the thing that we're really a little bit more focused on these days right now is that we've got a higher degree of interest in looking at public tenants. So they don't necessarily have to be investment grade. And I think that -- so if you look at sort of like B, BB-equivalent public tenants. So like Party City falls in that bucket. And there are a lot of others. But a lot of these are maybe smaller cap BBs. They've got access to capital. But I find that we're able to get sort of better lease structures, able to buy their real critical real estate. I think that's -- there's more of an opportunity there. In the investment-grade land, if we're dealing with a strong BBB, we're just not going to get the lease term that -- and the lease structures that we're looking for. Not to say we wouldn't do those, and I think the pricing dynamic gets to be a little bit more aggressive. So I wouldn't say that we have an outright, hey, we want to take investment-grade up to 50%. That's really not what we're trying to do. What we're trying to do right now is slightly shift the weight towards more public tenancy for now. And as we continue to go up, there's obviously a lot of private equity and private operators that we still deal with as well. But probably what you're not going to see us do as much, which is maybe what old Spirit did, we're not going to do the 1 or 2 operator -- 1 to 3 to 1 to 10 unit operator kinds of deals anymore. That's something that probably -- that doesn't really make sense for us. So we're trying to drive to a more institutional-oriented counterparty that doesn't necessarily have to be investment grade. And then the other thing is with the privates, you have some private operating companies, franchisees that are better than investment grade, better systems, better -- just better coverage, stickier. So we'll continue -- we're not going to foreclose those out either. -------------------------------------------------------------------------------- Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [42] -------------------------------------------------------------------------------- Okay. And then a couple of quick numbers questions. Any significant skewing as to the timing of third quarter acquisitions front or back-end loaded? -------------------------------------------------------------------------------- Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [43] -------------------------------------------------------------------------------- Yes. I think most of the acquisitions are more back-end loaded, and that's certainly baked into our assumptions. I mean fourth quarter, we'll see how that plays out. But it seems like throughout this year, most of the acquisitions have been back-end loaded. I don't understand yet the game theory behind why that is. People seem to get more focused as the quarter comes to an end on all sides, but that seems to have been the case throughout the year, and certainly was the case for the third quarter, and we expect it to be the case for the fourth quarter as well. -------------------------------------------------------------------------------- Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [44] -------------------------------------------------------------------------------- Okay. And then lastly, when you adjust for all the various footnoted adjustments for SMTA, tax expense, et cetera, what is the $3.31 to $3.34 AFFO guidance implying as the range for fourth quarter? -------------------------------------------------------------------------------- Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [45] -------------------------------------------------------------------------------- It's about $0.74. -------------------------------------------------------------------------------- Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [46] -------------------------------------------------------------------------------- At the midpoint? -------------------------------------------------------------------------------- Michael C. Hughes, Spirit Realty Capital, Inc. - Executive VP & CFO [47] -------------------------------------------------------------------------------- Yes. It's right at the midpoint. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- At this time, I will turn the floor back to management for closing remarks. Thank you. -------------------------------------------------------------------------------- Jackson Hsieh, Spirit Realty Capital, Inc. - President, CEO & Director [49] -------------------------------------------------------------------------------- Thank you. Well, thank you all for joining our call this morning. As you can see, we're off and running. And I hope you'll attend our Investor Day event in New York City on December 5. I promise you it will be worth your while, and we appreciate your interest and support. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.