What’s going on with Spirit Realty (SRC)?

In reporting 1Q17 earnings it came to light that SRC has some tenant defaults which are interrupting their revenue stream.  Most notably, many of the Haggen stores and ShopKo stores have stopped paying rent.  This has caused SRC to miss on the quarter by $0.02 as they got $0.20 instead of the anticipated $0.22.  Along with the miss, SRC has lowered AFFO guidance to $0.80-0.84 or a reduction of about $0.06.

The market took the news harshly, selling SRC down over 20% from its already reduced price.  It is clear at this point that I was wrong about this pick.  This was not my first bad pick nor will it be my last.

What to do now?

Selling now will not undo the losses we have already endured, thus we should only sell if the value, adjusted for new information, is less than market price.  This will depend on a number of factors including whether these defaults were just the tip of the iceberg and what the recovery looks like.

Only a portion of the ShopKo stores have stopped paying rent, so it would be plausible that the impact will end up being greater than what we have seen so far.  In terms of recovery, the Haggen stores are very well located and are likely to be sold or released with minimal harm.  SRC has a presentation out suggesting they will make substantial profit on the Haggen stores, but their credibility is a bit tarnished at this point.  Recovery on the ShopKo stores is likely to be worse with many being sold at a loss.

I have bought more shares today below $7.00 as I believe the reaction was a bit overdone.  Even at the reduced guidance, SRC is fully covering their dividend which now yields in excess of 10%.  Further tenant defaults are already priced in and the market price could rally if the Haggen recovery is anywhere close to as good as management claims.

This is a tough call and involves some risk.  Please use your own discretion as to whether this is the right move for you.  Commentary may contain forward looking statements which are by definition uncertain.  We retain no obligation to update or correct forward looking statements should the available information change.  Actual results may differ materially from our forecasts or estimations.