Home Featured Spirit Realty Capital’s Spin-Off Plan, SpinCo, Expects to Have Over 925 Properties

Spirit Realty Capital’s Spin-Off Plan, SpinCo, Expects to Have Over 925 Properties


Dallas-based Spirit Realty Capital Inc., a net lease REIT that primarily invests in single-tenant, operationally essential real estate, recently revealed the planned spin-off of a separate publicly traded REIT. SpinCo, which will focus on high quality assets and will be operated by tenants under master leases, expects to have an $2.7 billion in gross real estate investment.

According to a prepared release, incremental debt proceeds target of $400 million are expected to be raised for Spirit’s future growth, debt reduction or share repurchases.

Spirit intends to spin-off substantially all of its properties leased to Shopko and its assets that collateralize Master Trust 2014 (part of Spirit’s asset-backed securitization program, “Master Trust A”) into a separate, publicly traded REIT.

Jackson Hsieh, president and CEO says that “Having evaluated various alternatives to enhance stockholder value with our team of advisers, we plan to commence a transaction to leverage and spin-off our properties leased to Shopko and our assets that collateralize Master Trust A, which we believe provides stockholders with the best risk adjusted strategic alternative to move forward.”

Hsieh continues that “We believe this plan will generate significant proceeds for growth, remove and isolate certain structural impediments, and create two companies that have unique capital structures with strong tenancy to fit their specific business strategies. I am very excited about this plan, which we expect will result in better alignment of capital structure with assets, position each company with a competitive cost of capital and liberate value inherent in our company.”

Following completion of the transaction, Spirit is expected to own more than 1,540 properties, with a gross real estate investment of $5.4 billion and investment grade equivalent tenancy of 45%. Spirit is expected to have approximately $395 million in annualized Contractual Rent, with no tenant larger than 5% of total annualized Contractual Rent.

SpinCo is anticipated to have over 925 properties with over 60% of assets under master leases and 73% of tenants providing financial information. SpinCo is expected to have approximately $220 million in annualized Contractual Rent. The majority of the Board of Directors of SpinCo will be independent and there will be shared service, asset management and strategic alliance agreements with Spirit.

According to a prepared statement, the key expected benefits of the spin-off for Spirit stockholders are:

Alignment of capital structure with investment strategy: Spirit will pursue assets with higher investment grade equivalent tenants, with a desired focus on larger portfolios. SpinCo will evaluate and focus on asset acquisitions utilizing the benefits of investment grade leverage through the Master Trust Funding vehicle, while pursuing a wide range of strategies to reduce exposure to Shopko, including sales, out-parcel development and redevelopment. Spirit will externally manage SpinCo.

Cash proceeds for growth: Spirit intends to issue new notes in Master Trust A, targeting 75% loan to value in Master Trust A, and raise additional debt proceeds on certain assets contributed into SpinCo. The total target loan proceeds, which will remain in Spirit, are targeted to be $400 million and are expected to be used for incremental real estate acquisitions, debt reduction or share repurchases.

Enhanced capital structure with removal and isolation of Shopko concentration: SpinCo will be able to pursue a wide range of tactics to optimize the large and valuable Shopko portfolio by utilizing future sale proceeds from properties leased to Shopko as capital for future growth. At the same time, SpinCo removes and isolates the Shopko properties, a structural impediment for Spirit since its IPO.

Optimization of tenant, industry and portfolio weightings: Spirit’s portfolio will be primarily focused on tenants in the service and industrial sectors. Furthermore, its investment grade equivalent tenancy will increase to approximately 45%, portfolio segmentation will improve significantly and no tenant will represent more than 5% of total Contractual Rent.

Improvement in financial position for Spirit: Post spin-off, Spirit’s balance sheet is expected to have significantly improved credit metrics, with an initial target range of net debt to EBITDA of 5.0x or below, on a pro forma basis, assuming no redeployment of capital, and 76% of assets will be unencumbered.

Accretive in year one: The Adjusted Funds from Operations per share of the combined companies and planned capital redeployment one year after closing of the transaction are expected to be accretive to the expected 2017 results for Spirit absent the proposed transaction.

Upon completion of the planned spin-off, Spirit stockholders will receive a stock distribution. SpinCo intends to elect to be treated as a REIT for U.S. federal income tax purposes. The spin-off is expected to close by the end of the first half of 2018. SpinCo expects to file a Form 10 registration statement with the Securities and Exchange Commission by the end of the fourth quarter of 2017.

Morgan Stanley and Moelis and Co. are acting as financial advisers to the company. Latham & Watkins LLP is serving as legal adviser to the company.