DALLAS—Spirit Realty Capital (SRC) said late Thursday afternoon it planned to spin off substantially all of its properties leased to Shopko Stores into a separate publicly traded REIT. Known for the moment as SpinCo, the spinoff REIT is expected to have $2.7 billion in gross real estate investments.

Among the primary objectives of the spinoff, which also will encompass assets that collateralize SRC's Master Trust 2014, is to enable SRC and SpinCo to pursue two separate investment strategies. At present, the SRC platform encompasses investment grade tenants on the one hand and small- and medium-sized tenants on the other, SRC's president and CEO, Jackson Hsieh, said on a conference call Thursday evening.

“While many of our operational processes can effectively be applied to both investment strategies, we've concluded that it's more efficient to have separate financing approaches focused on each investment strategy,” Hsieh said Thursday.

Hsieh said he was “super excited” about the spinoff plan, “because it's going to result in better alignment of capital structure with assets, unlock value inherent in our company and finally, remove and isolate certain structural impediments that have been present” since Spirit's initial public offering in 2012. He added, “The separation impact on Spirit is simply awesome.”

SRC has sought to reduce its Shopko exposure since the IPO. In late '14, for example, the net lease REIT signed an amended master lease agreement with the Green Bay, WI-based retailer, its largest tenant at 7.9% of total rent, that gave SRC greater leeway to sell Shopko locations singly or in small groups. The separation will focus SRC's portfolio more squarely on service-oriented retail as well as the industrial and distribution sectors.

Post-spinoff, Spirit is expected to own over 1,540 properties, 76% of which are unencumbered, with a gross real estate investment of $5.4 billion and an investment grade equivalent tenancy of 45%, up from 37% at the end of the second quarter. SpinCo is expected to have over 925 properties leased to 196 tenants, with more than 60% of its assets under master leases and 73% of its tenants providing financial information.

Shopko initially will be SpinCo's biggest tenant by far, representing 22.9% of its rental income. However, the separation will provide SpinCo with a wide range of strategies to reduce exposure to Shopko, including sales, out-parcel development and redevelopment.

SRC will externally manage SpinCo post spinoff, which is expected to occur in the first half of 2018. Morgan Stanley and Moelis and Co. are acting as financial advisers to SRC in connection with the spinoff plan, while Latham & Watkins LLP is serving as legal adviser.

Q2 results for SRC, also announced after the markets closed on Thursday, saw the REIT reporting net income of $0.05 per share, missing a consensus estimate by two cents per share, and adjusted funds from operations of $0.21 per share, in line with estimates. Other net lease REITs have posted solid earnings reports for the quarter; for example, W. P. Carey's Q2 results, issued Friday morning, beat consensus estimates with earnings of $1.38 per share, compared to the $1.15 consensus. And VEREIT, which announced Q2 results before the markets opened on Thursday, reported net income of $0.02 per share, compared to a loss of $0.04 per share in the year-ago period, and beat consensus estimates on revenues.

Instant Insights /

Spirit Realty Plans Spinoff to Remove Shopko Exposure

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