Monday, June 3, 2019

Spirit MTA REIT: Sells MTA Assets to HPT, Remains Compelling

[Apologies for another SMTA update, I'm still active, but I haven't really bought much new lately.]

Spirit MTA (SMTA) this morning announced the sale of the assets contained within the Master Trust to Hospitality Properties Trust (HPT) for ~$2.4B, after redeeming the Trust's debt and other transaction expenses will net SMTA approximately $450MM (I was hoping for more like $500MM, but this is a reasonable outcome).  HPT shareholders (bagholders?) might be asking why a hotel REIT is buying net leased retail assets, but it is good news for SMTA shareholders as the transaction is for cash that has committed financing from an investment grade borrower and doesn't require an HPT shareholder vote.  HPT is externally managed -- abused -- by RMR Group (RMR), they're interested in increasing AUM and resulting management fees, closing is targeted for the end of Q3.

Updating my NAV for the $450MM sale:
With no value to the remaining NAV pieces that are in question, the value to SMTA shareholders is approximately $7.90, so at today's price of $8.30 (and assuming the deal closes), you can buy the remaining assets for $0.40 with upside of potentially up to ~$2.50-3.00 of value on the workout and other assets.

Old news to those deep in the comment section of my earlier SMTA post this year, but here are additional thoughts on the remaining NAV components/risks:

As part of the spinoff, SRC via SMTA loaned Shopko $35MM via a term loan to receive access to ShopKo's periodic financials.  When Shopko filed for bankruptcy in January, SMTA wrote off the term loan and as a result, it doesn't appear in their NAV table, however, per the liquidation waterfall in the almost wrapped up Shopko bankruptcy, the term loan should be paid in full.
The low end estimate also shows essentially a full recovery, that's approximately $0.75/share, already well ahead on the $0.40 investment in the other assets above the MTA and cash.

The Academy Sports + Outdoors distribution center in Katy, TX is another big component to the other asset category, it is Academy's largest warehouse and home to their headquarters.  Like many other retailers, the company is struggling, it's owned by KKR and has significant debt that trades at a discount.  But if they were to restructure, I'm guessing they'd keep this warehouse as again, it's their headquarters, and it serves their largest/original market in Texas.  Katy, TX is outside of Houston, home to many large warehouses including Amazon.  Industrial real estate is hot right now, just this weekend Blackstone announced another deal (they've done several including GPT and FRPH).  As part of the CMBS financing transaction, the property was appraised at $144MM in 2018, and Academy's distress was very apparent at the time of this appraisal, below is the chart of the Academy term loan going back to issuance.  It trades for 75 today, down from early 2018 levels, but was still in distressed territory back then, it's not a new story.
In my NAV, I'm putting a 8.5% cap rate on the $9.5MM NOI, call it a 20-25% haircut from the appraised value done before the spinoff.

On the workout portfolio, many want to write these off completely, much of these are actively leased, just don't fit the portfolio profile of a publicly traded REIT but still of institutional type asset quality.  From the Q1 recorded conference call:
"Starting with portfolio activity, we continued to actively manage the portfolio during the first quarter, selling three properties for $5.4 million in gross proceeds. We also executed a lease with 7-Eleven on a former non-core vacant asset which we will look to dispose of at a far improved price above its previous start value.
In addition, the leases for two non-core assets formerly leased to Neighbors Health System have recently been assumed by new operators. We plan on contributing those two assets into the Master Trust, which allows us to deploy restrictive release account cash before that cash is swept to repay ABS notes with corresponding make whole penalties. In turn, these contributions will enhance our unrestricted cash position outside of the Master Trust."
The new tenant is Diagnostic Health and according to the servicer report, entered the trust with a collateral value of $8.41MM at a cap rate of 13.6%, assuming the same cap rate across the rest of the workout portfolio plus the book value of the vacant properties nets out a $57MM value.  This number likely has the widest range of outcomes, much of the value is a multi-tenant office building leased to PwC in Columbia, SC, hard to get a read on how much that asset is worth, open to others thoughts.

Another risk people site is the Shopko CMBS lender coming back to SMTA, but it appears the CMBS lender has moved on, as mentioned in the SITE Centers (SITC) Q1 call:
"First, we signed a management agreement with Credit Suisse, providing them advisory and operational services for 83 assets leased to Shopko on which they have recently foreclosed. Importantly, the agreement came with rights of first refusal for 10 assets in the portfolio and allowed us to leverage our existing operating platform to generate nearly 100% margin on any fees we received. Credit Suisse's needs were ultimately short-lived, but we nonetheless earned the $1 million in the process which was a contributor to our strong quarterly results."
Later in the Q&A, they clarified it was a short lived asset management agreement because their client sold the portfolio quickly.

Putting it all together, I think it's pretty reasonable to come up with $10.70 NAV with some range of outcomes around that value primarily dependent on the Academy distribution center and other workout assets being sold for reasonable valuations.  The main risk from here is the timing, HPT didn't buy the SMTA holding company, so there will likely need to be a small holdback amount to address any clean up and other shut down expenses.  Maybe its $10 by the end of Q3 with the remainder sometime down the road after that?  The other concern might be the HPT deal requires a shareholder vote at SMTA, SRC is waiving their promote/incentive fee surprisingly, maybe to get in the good graces of a couple activist shareholders in Indaba and Mangrove, but surprising nonetheless for Jackson Hsieh to leave money on the table.  I find the valuation compelling today and added more, it's my largest position by a decent margin at this point.

Disclosure: I own shares of SMTA and Oct $7.17 Calls

47 comments:

  1. Just curious, you find the calls more attractive than the dividend?

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    1. I bought the calls a couple months ago, the dividends are classified as special dividends, thus the strike price gets adjusted down for them. For example, the April dividend was $0.33, the $7.50 strikes are now $7.17, and then get adjusted down again another $0.33 at the end of June.

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  2. I see most of the points I raised have already been discussed in more detail in the comment section of previous SMTA posts so I'll shut up for now and try to understand this a bit better.

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    1. Let me know if you do have thoughts, always appreciate your input, I'm likely too bullish on both price and timing. I did catch your comment, I'm not in the real estate industry but in structured finance which maybe gave me more confidence in the value of the MTA than others.

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    2. I looked a bit more at SMTA. I like the idea and bought a few shares. If they can get the deal to close (there's probably still a minimal deal risk? Seems like a ridiculous buy for HPT) I expect there could be a ~$7.50 distribution in ~6-8 months or something (ignoring the july dividend for simplicity's sake). The next distribution could take a while - also your model doesn't seem to take liquidation costs in account (or do you implicitly net these vs. expected income?)

      Stub is ~120m or $2.80 by your calculations but that seems a bit aggressive to me? To be conservative I'd peg it at 80m - 100m or ~$2 per share. Will probably take at least a year to get that money.

      If you model something like a $7.50 distribution this December and another $2 distribution end of 2020 I get to a 13% IRR. Not bad at all but it's not completely risk-free either. Doesn't look like something to go 'all-in' on. For example, at this point RHDGF looks like a better bet to me. But I don't live in the US - that one maybe has terrible tax consequences for you?

      But maybe I'm being a bit too pessimistic. What's your take on the timing / size of distributions? And still, an expected 13% IRR is not bad at all.

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    3. Given that SMTA has 1 employee and is basically renting managed services from SRC, pro forma for this deal closing, SMTA becomes basically a shell that owns a few real estate & financial assets currently "held-for-sale" plus expense accruals associated with getting those assets worked out and some CMBS debt.

      Thus, except for potential early redemption/make-whole penalties, I'm having difficulty projecting liquidation costs that high (assuming your differential is due to liquidation/unseen costs). I may be over optimistic though.

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    4. I don't think liquidation costs will be > 10m either. I'm a bit more conservative about the Academy Sports asset mostly. Also valuing the term loan at 100%, even if a recovery is likely, seems optimistic. Liquidations have a tendency to take longer than I expect them to take - I think my expected distribution schedule might be optimistic, hence I don't mind being a bit too conservative on the valuation side. Liquidations always tend to take longer than I expect - even if I take that into account.

      Again, I'd be curious to hear others' expectations regarding distribution size and timing.

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  3. Great update. Particularly like the colour around Academy being a HQ and around a rough cap rate estimate for the workout assets.

    Now I don't see why timing is a risk unless the investor is long the calls (which I am as well).

    The activists are both long around $8 PF for the most recently announced special dividend. So they make a 30% ish return if your numbers hit. The promote would have eaten into that, so appeasement is one reason Hsieh waived it. Another reason is the massive termination fee and management contract he had already extracted from SMTA, plus the $55M paid to SRC for travel centers included in the deal (I wonder if HPT would really have asked for $2.4B less $28M if SRC wasn't interested in getting someone to buy those travel center assets). Plus the fact that it doesn't seem like they pushed the envelop much to get max value for the SMTA structure. All reasons, but then my appraisal of Hsieh's shareholder alignment is nothing new at this point lol. So I think it's much more like keeping the promote would have been a no-no.

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    1. Thanks - I've appreciated our conversation around the situation, your input has been helpful!

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  4. It feels like the story is coming to an end here. I've enjoyed following your articles and comments on Spirit and SMTA over the past year.

    I am long SMTA and SRC, no calls, and now I am thinking about exit strategy.. Although there is some risk and uncertainty with the remaining assets, it feels like I am leaving money on the table at the current price. But I am eyeing other opportunities, and it feels as if most/85%+ of the money has been made. The main thesis has always revolved around the sale of MTA at a reasonable cap rate, and that is now playing out. The remaining assets are smaller pieces and in my opinion generally not compelling. Run off can take some time to liquidate and that's another risk.

    If you still own SRC, the end of SMTA is also quite interesting to SRC valuation. Hsieh has been pushing the idea that SRC should be valued similar to other net lease REITs and that SMTA/ShopKo association has unfairly hurt SRC's valuation. SRC wants to be valued like O and STOR of the world, and we are close to having a clean, pure play net lease REIT now.

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    1. I rolled my SRC into SMTA yesterday, I do subscribe to the re-rating thesis at SRC but it might take a little while for the Seeking Alpha authors to bless the simplification story. I get Ben's skepticism towards Jackson Hsieh, but he's done just about everything he laid out over the past couple of years, I've backed off the idea that someone would acquire SRC (the share issuance at $41 points to wanting to go into asset gathering mode), but sure, probably adds a few turns to its FFO multiple over the next 12-18 months.

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  5. re: shopko tl, looks like bcy judge rejected confirmation plan Monday but part 2 of plan hearing tomorrow so maybe get more info then; seems like shopko tried to jam it thru amidst many objections; will have to figure those out b4 plan can proceed

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    1. Shopko Doc: 1528 gives a good summary of at least McKesson's concerns regarding the Second Amended Plan. I am not an expert in Ch. 11, but I dont see anything in McKesson's concerns per se that would impact the proposed recovery for the TL. The Third Amended Plan is also available Doc: 1495. In short the fuss is about releases for certain insiders and treatment of Administrative Claims, of which McKesson has a bunch.

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    2. ***My emphasis***

      From the Shopko Docket (1546):

      "Order (RE: related document(s)1495 Third Amended Joint Chapter 11 Plan filed by Debtor Specialty Retail Shops Holding Corp.). Hearing held June 7, 2019. Steve Serajeddinni appeared for Debtors. Jeffrey Garfinkle appeared for McKesson Corporation. Robert Feinstein appeared for Official Unsecured Creditors Committee. Jerry Jensen UST appeared. Patrick Turner appeared for Sobel Wetex Inc. & Tiajin QuinBaiyi Furniture Co. Dan Ferretti appeared for CGP Canadian, Ltd; CGP Orofino, LLC; CGP Seymour, Ltd; CGSK Tulia, Ltd. Evidence admitted: #1539, 1540, 1495, 1386, 229, 229, 684, 571, 1361, 1367, 215, 1204, 1421, 1427, 1427-1, 1428, 1459. For the reasons stated on the record, ***McKessons remaining objection is overruled. Proposed confirmation order to be submitted***. Movant is responsible for giving notice to parties in interest as required by rule or statute. ORDERED by Judge Thomas L. Saladino. (Text only order) (dkk) (Entered: 06/07/2019)

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  6. I'm lowering my expectations here, NAV is probably more like $9.50:

    The workout assets should be significantly marked down, the Columbia office building leased to PwC is attached to a largely vacant mall (Richmond Mall), the lease is year-to-year. Then they have 3 boxes leased to Childern's Adventure Learning, which is in bankruptcy, SMTA is having trouble getting them out. EPR has them as a tenant too, was able to find a new tenant, but given SMTA's tight timeframe, external management, etc, not sure how much value they'll save there.

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  7. One more thought - we thought it was strange that SRC gave up its promote - if at the end of the day the number is under $10, the promote would be pretty small anyway, likely a signal that they're not being overly generous to shareholders here.

    Still a decent buy at $8.40 or whatever, but not as compelling as I thought initially, was a little too excited.

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  8. does anyone know the tax consequences here? seems like you get a reit div and short term capital loss once the sale to hpt occurs.

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  9. MDC did u make any other adjs to NAV to get to $9.50; if left everything else the same it seems u dropped total workout props value from 57 to 9; that right?

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    1. Just quoting round numbers to get to $9.50, there are probably more liquidation expenses to account for outside of the total payment to SRC.

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  10. Seeking Alpha crowd coming around?: https://seekingalpha.com/article/4270048-spirit-longer-spooky

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    1. I rolled my eyes when I saw that this morning, he's been negative on SRC/SMTA the whole way without actually looking into what was happening underneath the surface. But it's also what makes these unconventional REITs interesting, the retail heavy shareholder base likes things in a clean format, if they're not, gets punished.

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    2. Jackson may forward that to his board, however...just as he planned. ;o)

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  11. does anybody have a good valuation for the workout assets? thanks

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  12. The Shopko Bankruptcy docket @ prime clerk hasn't been working for me for the last few days, anyone else having the same problem?

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  13. I suspect you all have seen it, but Liquidation Range in proxy issued today:

    "If our shareholders approve the Sale and Plan of Liquidation proposals, we currently anticipate making an initial cash distribution to shareholders shortly after the closing of the Sale in an amount ranging from $6.00 to $7.75 per SMTA common share, less applicable withholding taxes. In total, including the initial distribution and all subsequent distributions, we expect our shareholders will receive aggregate liquidating distributions (from SMTA and/or a liquidating trust or other liquidating entity established following closing of the Sale) that we estimate will range from $8.50 to $9.35 per SMTA common share, less applicable withholding taxes. "

    Delta on the initial cash amount due to timing of closing of Academy DC which is under contract.

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    1. Thanks - I actually missed it until you commented. So the Academy DC is under contract for $94MM? Eh, a little over 10% cap rate, not great, I was hoping they would do better there. Received back $24MM of the B-1 Shopko term loan, curious if that's it or if there is additional recovery potential. Still like SMTA here, you'll get most of your investment back in the next 90 days and the tail has some upside to it if you're comfortable with illiquidity.

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    2. 8K confirms Academy sales price. http://www.snl.com/Cache/c398738780.html

      As for the Shopko note, I am still hopeful, based on the docs we discussed earlier, that they get the $34mm or thereabouts. The "half-full" guy in me notes that the following sentence says "all" not "any":

      "While there can be no assurances that we will recover *all* additional amounts due to us under the Shopko B-1 term loan, we intend to continue to pursue all of our rights and remedies in connection with the bankruptcy proceedings, with the goal of maximizing the receipt of amounts due to us under the Shopko B-1 term loan."

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  14. I expect there to be additional recovery from the Shopko loan. The $24MM is just what they've revived so far. All of the recent court docs I've seen expect full recovery. Where are you getting the $94MM Academy number from?

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    1. https://www.sec.gov/Archives/edgar/data/1722992/000119312519193537/d775664d8k.htm

      In January 2019, the Company listed for sale, via a third-party broker, a distribution center owned by a subsidiary of the Company, Spirit AS Katy TX, LP (“Spirit Katy”) and leased to Academy Sports + Outdoors (the “Distribution Center”). As a result of such efforts, 45 potential buyers requested access to and were provided diligence materials regarding the Distribution Center. In February 2019, five parties (three institutional and two private national industrial buyers) submitted first round bids to acquire the Distribution Center. An additional party not part of the formal bidding process reached out to the Company directly to indicate its interest in the Distribution Center, but did not submit a letter of intent. The broker continued the competitive bidding process by seeking second and third round bids. In each round, certain bidders dropped out of the process for various reasons. In April 2019, following three rounds of bidding, the Company approved the sale of the Distribution Center to a buyer, but in May 2019, that buyer decided not to pursue the transaction. Later in May 2019, another bidder (the “Distribution Center Property Buyer”) made a final offer to acquire the Distribution Center. On July 3, 2019, Spirit Katy entered into a purchase and sale agreement with the Distribution Center Property Buyer with respect to the sale of the Distribution Center for a gross purchase price of $94,000,000. The net proceeds to be received by the Company from the sale, after accounting for transaction and loan assignment and assumption expenses, is approximately $10,000,000. In addition to the satisfaction of ordinary course real estate transaction conditions, the consummation of the sale of the Distribution Center to Distribution Center Property Buyer is conditioned upon obtaining the approval of the CMBS lender to (i) the assumption by Distribution Center Property Buyer of Spirit Katy’s obligations under the loan documents, and (ii) the release of Spirit Katy and Spirit MTA REIT, L.P. from all further obligations under such loan documents.

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  15. Anyone figure out whether that estimated liquidation proceeds range includes the uncollected shopko TL balance (~$0.24 per share)?

    Btw, it's pretty clear now why SRC "valiantly" forfeited the promote: they weren't going to earn more than $3M at the mid end of that proceeds range. After reading through the merger backgrounder, other than the unfortunate fact that $2 per share of value was probably extracted by SRC at above-market management rates, the way HPT revised its bid and implicitly valued the three travel center properties is tres shady.

    From a $2.4Bn equity bid excluding the travel center properties to a $2.4Bn cash bid including the travel center properties to a revised bid that values the travel center properties at $100M, and then discussions with SRC about its "willingness" to sell the travel center properties (whose mortgages are held by SMTA) to "facilitate" the transaction with HPT... etc etc. The lawyers have to craft these transcripts very carefully of course, so shadiness is unprovable. But the prospect of $1 per share for each $43M leakage certainly makes one's eye bulge more at each little detail.

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    1. "Anyone figure out whether that estimated liquidation proceeds range includes the uncollected shopko TL balance (~$0.24 per share)?"

      Good question. Would've been nice to see pro forma financials in the proxy.

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  16. Few tidbits from the latest quarterly and accompanying press release:

    + Subsequent to quarter end they sold the Crown distribution center for $11.7m net (was on the books in the proxy for $11m).
    + Total recoveries from the term loan $25.5m so far.
    + 113.8m in cash and cash equivalents.
    - New expected proceeds from the Academy sports sale $7m (down from $10m initially).

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  17. Looks like CMBS liability now out of the way. From the 10-Q:
    "On July 29, 2019, SMTA resolved the dispute with the Shopko Lenders and reached a confidential settlement. The Company has recorded the cost of the settlement in Shopko-related expenses in the consolidated statements of operations and comprehensive (loss) income for the three and six months ended June 30, 2019".

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  18. In the call he says that "shopko-related expenses" were already baked into their estimated liquidation proceeds.

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  19. Seems like we're already above the bottom of the range:
    $450 for HPT deal
    $7 for Academy
    $12 for Crown
    $99.5 in proforma cash (remove July dividend)
    $4 additional Shopko proceeds after 6/30
    -$203 to SRC
    ~$8.60 pre share before ongoing expenses, remaining upside is additional recovery on the Shopko loan and whatever the other workout properties bring.

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  20. ~$8.60 pre share before ongoing expenses, remaining upside is additional recovery on the Shopko loan and whatever the other workout properties bring."

    what's your updated best guess of what upside is left? was Crown part of the workout assets? assuming full recovery for shopko, that's an add'l $0.18; then any add'l upside for workout assets; assuming 5x 6.5 mln noi = could be $0.75, so total of $0.93 upside beyond $8.60 not incl expenses

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    1. I've been consistently over-optimistic on SMTA (still worked out nicely for me) but yeah, I'm eyeing the higher end of the range ~$9.35

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    2. Up almost 2% on this massacre day, nice! Getting close to a range where I would consider trimming my position. Current price is a ~9% discount to the top of the guided range. On top of that there are some timing issues: if you are unlucky and they convert to a liquidating trust the final distribution could easily take more than a year. Liquidations always tend to take longer than expected. And there are still some (granted, minimal) deal risks with the HPT transaction.

      Imho during the ride from $8.12 (adjusted for dividend) to $8.60 the past few weeks this was priced for a double digit IRR, now I think we're getting closer to a single digit IRR. Consider me also skeptical about my ability to judge that proceeds will be > $9.35 when management says the expected range is $8.50 - $9.35.

      Still holding on for now though.

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  21. Any deal risk? I know they need HPT shareholders approval...haven’t seen any pushback from any holders yet

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    1. They actually don't need HPT approval, structured the deal to avoid an HPT vote thankfully, but they do need SMTA shareholder approval which I assume they'll get. If you read the background to the transaction, sounds like HPT will be spinning out the SMTA assets along with their travel center portfolio into another REIT to be managed by the RMR Group.

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  22. https://www.sec.gov/Archives/edgar/data/1722992/000119312519237763/d791167dex991.htm

    HPT deal approved, Shopko loan fully recovered, now we wait on if they can close the Academy transaction (and get the servicer's approval)

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  23. Why was there a huge volume and drop after hours yesterday. There were over 6 million shares traded (might be a pre-arranged sale). The stock fell some 25 cents. What do they know that we don't. Makes me worry a bit.

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    1. Not entirely sure - maybe it was someone who can't hold a liquidation? Only spooky thing I can think of is the Academy distribution facility, will SMTA need to meet the net worth requirement or can they get a waiver from the servicer? Will Academy reorg before it closes? That will determine the initial distribution and impact the IRR.

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    2. MDC, are you still holding your October options. I have some ITM at a different strike price. Looks like the play is to exercise them on termination and get the intrinsic value to avoid the spread leakage.

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    3. I am, actually been adding to mine in the last week as I think the top of the range is within reason.

      Could you dumb down the spread leakage question? I don't quite follow, I do wonder if we get the $7.75 distribution, what happens to $6.84 strike calls? Haven't seen a negative strike before, so I was thinking I'd have to exercise before then, but I've been able to pick up some additional calls at no premium, so essentially free leverage going into the distribution, seemed like a decent opportunity.

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    4. yes, I just meant the inability to get intrinsic value compared to current market price, due to big spread between bid and asked.

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  24. From the OCC website - If strike reduction would result in a strike of zero or less, then the amount of the dividend will be added as a cash component to the option deliverable

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