A New Triple-Net REIT You Should Leave on the Street

NEW YORK (TheStreet) -- A new publicly traded REIT began trading on the New York Stock Exchange Thursday.

Spirit Realty Capital (SRC) is a triple-net sector REIT based in Scottsdale and backed by Macquarie Group Holdings and hedge fund TPG-Axon among others. Morgan Stanley (MS) is the lead underwriter of the offering.

Spirit planned to sell 27.06 million shares between $16 and $18 each. It opened at $15.

Excluding fees, Spirit Realty expects to generate about $418 million from the IPO (assuming mid-point price of $17 per share) and of that, $399 million will be used to pay debts.

Spirit counts $3.6 billion in real-estate investments and loans. Its 1,183 properties nationally were roughly 98.2% leased as of midyear.

The majority (98.3%) of the company's assets are free-standing triple-net properties (1,096) and the remaining (1.7%) are commercial mortgages and equipment loans (87 properties). The weighted average lease term for the portfolio is 11.4 years and 96% of the properties provide for increases in future base rent.

The portfolio of 1,096 owned properties are located in 47 states and are leased to approximately 165 tenants. Spirit's tenant base is comprised of 18 different industries, including general, specialty, and discount retail; restaurants; movie theaters; automotive dealers; educational and recreational facilities; and supermarkets.

Spirit appears to have a diverse portfolio of tenants spread across markets and industries. According to the company's S-11, Spirit focuses on investing in properties leased to unrated small and middle market companies that are determined to have attractive credit characteristics and stable operating histories.

My concern with Spirit's portfolio is that the tenant base has a high degree of non-rated credit and the exposure could lead to breaches or delay in payment of rent that may materially and adversely affect the company. Spirit's three largest tenants (based on average base rent) are Shopko/Pamida, 84 Properties and Carmike Cinemas -- representing around 40% of the overall portfolio.

In an IPO, the owners are attempting to raise capital for expanding the business, to cash out their interest for estate planning or any other myriad of reasons that all result in one thing: a premium price that offers little chance for buying your stake at a discount.

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