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Spirit Finance Makes Large-Scale Move

Nicholas Yulico

Spirit Finance (SFC Quote) announced plans Wednesday for an $815.3 million acquisition of retailer ShopKo's real estate assets, a move that could help ease investors' fears about the real estate investment trust's ability to meet its impressive growth target this year.

Spirit Finance, which went public in 2004, operates in the triple-net lease sector. REITs operating such properties -- which are long-term leased with very minimal rent growth each year -- aren't known for reporting impressive growth results. Instead, investors are rewarded with high dividends.

TheStreet.com highlighted Spirit Finance as an attractive yield candidate in April.

The ShopKo acquisition includes 112 ShopKo properties and 66 Pamida retail properties. The seller was an affiliate of Sun Capital Partners, the private-equity shop that took ShopKo private last year.

With the ShopKo purchase and other acquisitions in the first quarter, Spirit Finance has now purchased $1 billion of properties so far this year, surpassing its acquisition target of $800 million for 2006.

"This is the first large-scale corporate transaction that Spirit has executed," Bank of America analyst Russ Nussbaum, who rates the company buy, wrote in a research note Wednesday.

"Provided SFC has continued access to equity and debt capital, we expect the company to consummate similar transactions going forward," Nussbaum wrote. "Management indicated that seven deals in excess of $100 million are currently in the acquisition pipeline."

The deal led Spirit Finance to raise its growth expectations for the year. The REIT now sees 2006 FFO of 99 cents to $1.04 a share, up from a prior view of 93 cents to 98 cents. Analysts had forecast that the company would grow fund from operations 33% to 95 cents a share in 2006.

The company also reported Wednesday that its first-quarter FFO increased 61% to $16.5 million, or 21 cents a share. The results were a penny below Thomson First Call's mean estimate.

Spirit Finance shares rose 4.3% to $11.51 in early trading Wednesday. That price amounts to a 7.3% dividend yield.

Spirit won't be able to keep up its growth forever, but Nussbaum believes it is reasonable to expect double-digit FFO growth through at least 2007. Now that the company's healthy dividend is being covered by cash flows, "Spirit represents a unique combination of yield and growth," Nussbaum wrote.