Spirit MTA from Spirit Realty
(29 May 2018) This new Retail REIT focuses on the operating critical assets for businesses. The company may be an extremely risky purchase but with great potential if it is able to effectively divest its Shopko assets. Valuing this company presented some strange numbers showing how difficult Retail operations were over the past few years.
Parent Ticker: SRC
Announced Record Date: 18 May 2018
Announced Distribution Date: 31 May 2018
Anticipated Ticker: SMTA
Spirit MTA will be a newly formed real estate investment trust with a portfolio including nearly 20% Shopko tenents.
Parent Child comparison
Spirit MTA (SMTA) looks to be a spinoff of what ails the Spirit Realty (SRC) portfolio. SMTA's portfolio will have 19.7% of its portfolio tied up in Shopko properties. The next largest tenent is AMC with 4.6% of the portfolio. The two companies will both be REITs. This transaction provides an opportunity to divest the parent of the risky retail properties that Shopko represents and move on with operations. SMTA itself indicates it will be divesting the Shopko assets.
SRC's pre-spin debt load is about 3.944 Billion. SMTA will assume 2.06 Billion of that debt. This will create a highly leveraged company. This alone could create some outsized returns for an investor but it does add additional risk.
1 share for every 10 shares of SRC.
The form 10-12b/a that was filed on 4 May 2018 does not have a pro forma cash flow statement. However, using the income statement and deducting the costs associated with continuing operations, the cash flow is likely around 170 million for the year ended on 31 Dec 2017. Using pro forma data, the cash flows likely exceeded 150 million each of the past 3 years.
SMTA will have a cash position of over 3 billion when the spinoff finishes.
Revenues continue to decline from SMTA's predecessor. This is partly due to the poor performance by Shopko over the past few years. A portfolio with more of such poor assets should continue to decline.
SMTA will be externally managed, this means that it may not be managed according to the shareholder's best interests.
Activist Investor Activity
Activist investor activity appears unreported.
There are several retail REITs. The advantage of having almost 20 comparable companies is that the consistency of valuation will likely be pretty solid. The disadvantage is understanding that the company will have significant competition. SMTA will need to divest Shopko assets in order to return to decent profitability. In general, retail REITS generate around 36x their operating earnings (Revenue-cost of sales-selling/administrative expenses-depreciation/amortization). Using comparables prices on 29 May 2018, The new REIT should trade somewhere between 22.50 - 28.25. This does not take into account the possible loss of all Shopko assets.
This may be a great turnaround story, however, it is likely to be an extremely bumpy ride for this new company. A purchase at less than $10/share may still not offer the buyer sufficient risk adjusted return potential.