The problem with the Spirit Realty IPO is that three of the company's largest tenants have questionable business models and even with the debt reduction (from the IPO proceeds), the company will have high leverage and considerably high payout ratios (Spirit reported a loss of $21 million, or 82 cents, a share based on historic results for the first half, during which revenue totaled $141 million).
As explained by Kyle Gore, managing director of CGA Capital:
One has to wonder whether the recent spate of REIT IPOs -- particularly in the net lease sector -- signals a 'top tick' in investors' never-ending quest for yield, to the detriment of a focus on value, residual risk, and overall safety.
Somehow, everyone forgot the mantra that returns are supposed to be risk-adjusted! Witness the Spirit offering, in which over 40% of the asset base consists of a small town grocery stores net leased to a private equity-backed entity, movie theaters net leased to a chain focused almost exclusively on small and mid-sized communities, and specialty lumber yards net leased to a company whose primary business depends on homebuilders.
While those tenants may prove to be well-run entities (note that Carmike Cinemas (CKEC) reported a record second quarter this year, but still generated relatively low net income) or backed by owners with strong resources (Sun Capital in the case of Shopko, and a Forbes 400 member in the case of 84 Lumber), in each case, the underlying assets would have very low residual value or appeal to other users in the event of non-renewals or credit defaults.
In today's uncertain economic environment, I would steer away from Spirit Realty and instead consider companies with a low cost of capital and established dividend payment histories.
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