Wednesday, January 16, 2019

Spirit MTA REIT: ShopKo Files Chapter 11, Plan Accelerated

SMTA's primary tenant, ShopKo Stores, filed for bankruptcy protection today and thus the reason for SMTA's existence is coming to an end.  As a reminder, Spirit Capital Realty (SRC) spunoff their Shopko assets alongside their asset-backed securitization vehicle ("Master Trust A" or "Master Trust 2014") as SMTA in order to clean up the portfolio at SRC and make it comparable to peers in the triple-net lease space.  SMTA's stated mission was to workout the ShopKo assets and other non-core properties and use the proceeds to fund more Master Trust notes.

Back in November, SMTA entered into a $165MM non-resource mortgage collateralized by the Shopko assets to put a floor under the valuation.  That looks incredibly smart in hindsight as they mentioned in their press release today that they are "working with the lender under the non-recourse mortgage loan, including potentially to satisfy the loan by relinquishing to the lender the ShopKo Stores securing the loan."  They're going to mail back the keys, and for the most part sit out the bankruptcy process (other than their $35MM term loan B to ShopKo, likely worthless but was instrumental in getting timely financial statements and might have triggered the mortgage financing transaction), they'll be rid of their ShopKo exposure in short order.  As a result the company announced a process to explore strategic alternatives, so what's left?  In my year-end post, I laid out an NAV of around $13 a share, that appears to be close with what the company disclosed in their presentation accompanying today's announcement:
At the time of the Master Trust refinancing (end of 2017), the collateral value of the Master Trust assets was $2.596B, using the contractual rent number above, that's about a 6.8% cap rate, seems reasonable in today's environment, add in the restricted cash inside the securitization and the mortgage loans but leaving out the vacant properties nets us $690MM in equity value within the Master Trust.  Let's exclude the Academy distribution center, workout/vacant assets, and the ShopKo term loan, but obviously include the cash, gets us to $792MM of asset value, subtracting out the termination payment to SRC and preferred to SRC gets an NAV of $13.70 per share.  This number is highly sensitive to the cap rate used to value the Master Trust, at a 7.5% cap rate the NAV under the same methodology would drop below $9 per share.

Who will buy SMTA?  I think there's a wide range of buyers for the Master Trust (typical equity buyers in structured products: insurance companies, hedge funds, etc.), but there is a new public REIT that's run by former SRC executives and pursues a similar ABS funding strategy, Essential Properties Realty Trust (EPRT) that would make sense as a buyer.

I increased my position a bit first thing this morning, but still keeping it fairly small due to the leverage, plus SRC will be a beneficiary of any strategic transaction as it will further simplify SRC making clearly apparent its undervaluation compared to peers like O and NNN.

Disclosure: I own shares of SMTA, SRC

12 comments:

  1. MDC, I thought that STMA has a CMBS asset. I did not see that in your analysis.

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    1. That's the Academy Sports distribution center, their term loan trades for about 70 cents on the dollar, so that one might also be turned over to the lender. It would need to sell for an 11% cap rate to cover the CMBS debt, it might, but guessing there isn't enough residual value there to move the needle much.

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    2. Given secondary trading for Academy's debt, curious that SMTA's NAREIT investor deck (June 2018) plugged in $144M for the CMBS asset, which would imply like 6.5% cap rate on that. Does management have a history of not being conservative on NAV estimates or was this a case of avoiding "talking down their book?"

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    3. That was the collateral value assigned when the CMBS was put in place, it was an independent valuation agreed to by the lender, Spirit, rating agencies etc. Unlike the ShopKo non-recourse mortgage, SRC was the beneficiary of the timing on that cash out refinancing, but it appears well timed as well because Academy Sports is circling the drain. That was an intentional move by SRC, wasn't as bad of a credit as ShopKo at the time of the spin, but another effort to rid SRC of a problem tenant. I don't think you can draw parallels to the MTA directly, but I'm bias.

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    1. The company slide lays out the remaining assets: the equity in the MTA, workout assets, unrestricted cash and the Shopko term loan. The unencumbered (non-Shopko) workout assets might be worth $20MM, so that's another $0.50/share, the Shopko term loan is pari passu to the ABL (secured by crap inventory) which is maybe worth $0.25/share too if we're lucky.

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  3. I am struggling with this one- you are basically betting on 50bps of cap rate on the trust (7.5% vs. 8%) to be up 25% or down 20%. Do you have any insight into recent market transactions for this type of trust asset? Thanks

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    1. I agree, there's a big swing based on that assumption, I don't have a specific transaction on the securitization, but based on implied cap rates triple net lease REITs trade anywhere from ~7.4% at VER (high end) to ~5.0% at O (low end). I'm guessing the MTA will be toward that high end of 7.0-7.5%, when it was refinanced at the end of 2017, it was valued at a 6.88% cap to derive the 75% LTV debt capacity.

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  4. MDC--Do you know anything about management alignment with SMTA. Thanks.

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    1. SMTA is externally managed by SRC, SRC receives $20MM annually plus expenses and a total return promote (using $10.01 as a base, adjusted down for the $1.58 received in dividends), their termination fee is 1.75x the annual fee plus expenses or $47.3MM. SRC wants to wrap up SMTA quickly, they'll get their termination fee plus the $155MM in preferred they own back, utilize that cash to invest in more net lease properties that will actually grow revenue. Analysts are rightly or wrongly not giving SRC full credit for the AFFO they're receiving from SMTA, none of the other net lease REITs have a similar satellite entity, in order to push their valuation up they want to resolve SMTA.

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    1. In addition to the base management fee, there's a "promoted interest fee" that acts as an incentive compensation, above a 10% IRR SRC gets 10%, above 12.5% SRC gets 15%, and above 15% SRC gets 20%. $10.01 is the base, its an IRR calculation so it won't be exact, but back of the envelope SRC needs to get $9.42 to get any incentive fee (since they already paid out $1.58 in dividends since the spin) if this was sold around the first anniversary of the spin.

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