June 12, 2018 - 3:43pm EST by
2018 2019
Price: 9.91 EPS 0 0
Shares Out. (in M): 43 P/E 0 0
Market Cap (in $M): 425 P/FCF 0 0
Net Debt (in $M): 2,061 EBIT 0 0
TEV ($): 2,486 TEV/EBIT 0 0

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  • Liquidation
  • Discount to Liquidation Value
  • REIT


Summary Thesis
  • Ugly duckling SpinCo typical spin dynamics create the opportunity: (i) Small SpinCo value vs.RemainCo Value (SpinCo ~10% of total value); (ii) SpinCo Assets less desirable vs. RemainCo;
  • SpinCo asset backing and cash flow + capital return (distributions to shareholders) should underpin valuation: ~100% of current market cap to be returned over the next 3 years
  • Undemanding Valuation:
    • P/NAV: 0.47x
    • Cash Flow Available For Distribution Yield: 19% p.a.
  • Private Equity Style Incentive Structure: promote based on TSR: promote = 10%/15%/20% over TSR hurdle of 10%/12.5%/15% respectively
Background & Assets
The spin-off of Spirit MTA REIT (“SMTA”) from Spirit Realty Capital was completed on 1 June 2018. The rationale for the Spin was for SRC to rid itself of a troubled tenant, Shopko. The structure of the Spin was such that SMTA was comprised of three assets:
  1. Master Trust 2014: a non-recourse SPV (a securitization vehicle) that houses 790 assets. The assets are leased to a diverse collection of small-to-middle market tenants (largest exposure is 4.7% of contractual rent and top 10 is 23.9%). By securitizing the leases in this way SMTA is able to achieve leverage of 75% LTV and the SPV’s debt is investment grade rated. The market value of the assets in the Master Trust is $2.6bn and debt is $2.0bn;
  2. CMBS Asset: One asset has been funded in a CMBS structure (again non-recourse financing). The market value of this asset is $144m and the CMBS debt is $83m (LTV is 58%);
  3. Workout Assets: this is comprised of (i) a number of properties leased to Shopko ($336m book value); (ii) other workout assets ($106m); and (iii) a loan to Shopko ($35m). Total book value of these assets is $477m. The assets are unencumbered and have no debt funding
SMTA’s balance sheet is shown below. SMTA has ~$21/share of NAV of which ~$10/share is the non-workout assets (i.e. the equity in the SPV and the CMBS). SMTA is currently trading at 0.47x P/NAV at the current valuation. Thought of another way the market is ascribing zero value to the workout assets at the current valuation.
SMTA Strategy
SMTA is seeking to sell the workout assets. The sale proceeds will be partly returned to shareholders as a distribution and partly redeployed into new assets. The new assets will then be put into the securitization SPV. Therefore, every dollar of workout assets redeployed will get the benefit of 75% LTV funding (from the securitization SPV) the effective purchasing power will be magnified 4:1.
In its corporate presentation SMTA presents an illustrative use of workout sale proceeds as follows: (i) 50% to pay a special dividend to shareholders; and (ii) the remaining 50% leveraged through the SPV to purchase other (performing) assets.
Cash Flow Available For Distribution
SMTA laid out estimated cash available for distribution in its Form 10. Estimated cash flow for
shareholders before scheduled principal repayments in 2018 is ~$81m. SMTA’s intention is to retain
the SPV leveraged at 75% so I think this is the number to look at. $81m represents a 19% yield at
the current market value. Spirit has said that SMTA will have a very high pay-out ratio.
Approach to Valuation
The approach to valuation focuses on sustainable cash flow available for distribution and P/NAV. SMTA has stated its strategy is to sell workout assets and reinvest proceeds (as described above). Therefore, in order to calculate sustainable cash flow estimates are required for the following:
  • (1) Sale price of workout assets vs. current book value => range used (see below)
  • (2) % of sale proceeds distributed to shareholders as a special dividend => 50% (per SMTA corporate presentation)
  • (3) Acquisition yield for new assets=> 7% (estimate)
  • (4) LTV applied to acquisition assets => 75% (per existing LTV of SPV & intention to retain it leveraged at this level)
  • (5) Debt Cost => 5% (estimate, in-line with current rates in SPV)
For example, assuming:
  • (1) Sale Price of workout assets is at book value: $477m of sale proceeds realised
    • This would equate to a 9.8% yield for these assets ($47m NOI / $477m value = 9.8%)
  • (2) 50% of sale proceeds distributed to shareholders as a special dividend:
    • $239m special dividend paid to shareholders
    • Net Operating Income is reduced by $47m (as these assets have been sold) reducing cash available for distribution
  • (3) The residual $239m of sale proceeds (the portion not distributed as a dividend) levered at 75% LTV for $954m of buying power and invested in assets at a 7% Yield
    • $67m of Net Operating Income purchased ($954m x 7% = $67m)
    • $36m of incremental interest ($954m x 75% LTV x 5% interest cost = $36m)
    • Incremental Cash Flow: $67m - $36m = $31m
  • Shareholders would receive 56% of SMTA’s market value as a diviend/distribution ($239m / $425m = 56%); and
  • The pro-forma entity would have a Cash Flow Available For Distribution Yield of 35% ($425m current market value - $239m distribution = $186m PF market value vs. $65m CFAD = 35% yield); and
  • The pro-forma entity would be trading at 0.47x P/NAV
Valuation Matrix assuming various discounts to book value for the sale of the workout assets shown below. Key valuation metrics of focus:
  • Implied yield for the sale of the workout assets (this is a cross-check for the reasonableness of the sale value as a reference point Shopko assets have been monetised at single digit yields and low quality malls in the US (B/C, etc. are mid-teen yields)
  • % of current market cap returned as a distribution (I think this speaks to downside risk mitigation the higher this is the faster you buy down your capital at risk)
  • P/NAV
  • Cash Flow Available For Distribution Yield