A week ago, I published an article with my first impressions of a REIT in transition — Spirit Realty Capital SRC and toward the end of last week, I took a small, hybrid stock-option position in the shares as detailed in my Covered Call Corner update article.

The reasons that I felt comfortable taking the position without doing a full valuation was first, that a quick, back-of-the-envelope calculation of the firm’s net asset value (NAV) turned up a number in the mid-$9 per share range, and second, that the firm is small and undergoing a transition, so I thought was relatively likely to be misunderstood.

Working with Robert Ruggirello, CFA from Brave Eagle Wealth Management on a valuation of this idea showed that the idea was good but perhaps not great. He has scheduled a call with Spirit’s investor relations team, so we may make some changes to the valuation in the days ahead, but our initial work is detailed in the Valuation Waterfall and model linked in this article.

A few important points about Spirit:

  1. The firm is fairly new — only being listed in 2012 — so the historical data does not extend a full 10 years.
  2. The historical data we do have is not representative of the company going forward since it has just spun off about 40% of its properties into another REIT, Spirit MTA REIT SMTA.
  3. Spirit is building a portfolio of high credit quality tenants similar to that of Realty Income O, a company about which we have published extensive research while spinning off low credit quality tenants into SMTA.
  4. The company just announced it would pay quarterly dividends that implies an annualized dividend of $0.72 per share — a yield of over 9% on the present stock price.
  5. We believe that the company will either have to cut this dividend or increase its financial leverage and borrow from Peter to pay Paul. If the annual dividend cut drives a fall in the share price, we will increase the allocation to this idea from its present very small position (1% stock + 0.25% short put).
  6. Again, we may tweak our valuation assumptions after speaking with management. With this valuation, we believe we are “mostly right” and not “precisely wrong.”

Framework Investing Integrated Valuation Model for Spirit Realty (SRC) 

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