Who Doesn’t Like a Plot Twist? See this Net Lease REIT.


  1. Improvements to the debt position of Spirit Realty Capital, a net lease retail REIT, led Standard & Poor’s to raise the company’s credit rating to investment grade (from ‘BB +’ to ‘BBB-‘) last Friday.
  2. Spirit is coming from a bad experience with a major tenant that filed for Chapter 11.
  3. Spirit has underperformed in the last twelve months and for the last two years. Also, multiples have been one of the lowest among retail net lease REITs.
  4. The upgrade might be the catalyst that Spirit needs.

Who doesn’t like a plot twist? I do, and Spirit Realty Capital’s turning out to be one. Last week, Spirit received an important seal of Standard & Poor’s, which validated the management’s long-term effort to strengthen balance sheet, increase number of unencumbered properties, and reduce tenant concentration.

S&P granted Spirit an investment grade corporate credit rating (from ‘BB +’ to ‘BBB-‘). This external validation may be what Spirit needed to address years of poor stock performance and brush off last year’s blunder.


Spirit is coming from a bad experience with a major tenant. Haggen, an up and coming grocery store retailer in the Pacific Northwest, filed for bankruptcy relief last September, less than a year after Spirit closed with them on 20 properties via a $224 million sale leaseback transaction. Their rental income represented 2.4% of total revenues. This was a blow to the company’s portfolio and further caused investors to doubt its underwriting process.

Over the months, the situation with Haggen has cleared up and, although it hasn’t run out of its course till to the end, the company seems to have a better control of the properties. Out of the twenty properties involved in the sale leaseback, nine were immediately leased to new tenants in equivalent terms, five were kept by Haggen whose operations will be sold to a new operator, and six were vacated/sold. In conclusion, the situation hasn’t been completely resolved yet, but Spirit was able to reduce the size of the problem.

chart02In addition, over time the company has focused on reducing its Shopkco concentration. Shopkco once represented 16% of Spirit’s rental income, but that figure has now been reduced to around 9%. And with additional asset sales, the company expects it to be around 5%. The result has been a less concentrated portfolio than Realty Income and National Retail Properties.

Spirit also improved leverage indicators. For example, the percentage of unencumbered assets has increased significantly, adjusted debt to the enterprise value has been reduced and fixed rate coverage ratio is now above its target of 2.5x.

However, little progress in the financial market front has been seen over the past years. Compared with Realty Income and National Retail, the stock has underperformed, especially in the last twelve months as well as the last two years. This year, however, the stock performance has been at par with their peers. The difference is that there has been a positive sentiment in favor of net lease retail.

chart03In summary, Spirit’s situation has improved. The external validation might finally help the stock catch up with their peers. With high dividend yield and low FFO multiple, this could be a buying opportunity.

Source: Spirit Realty Capital, Inc.(NYSE:SRC),Realty Income Corporation(NYSE:O),National Retail Properties, In(NYSE:NNN)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.


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