Spirit MTA REIT (SMTA) – Liquidation – 11% upside

Price: $8.43

Expected Liquidation: $8.50 - $9.35

Upside: 1% - 11%

Expiration date: Q3 - Q4 2019

Press release

 

This idea was shared by David.

 

Spirit MTA is a fresh (spun off May 18’) REIT that been recently hit by the bankruptcy of its largest tenant ShopKo (18% revenue) and appropriation of the rented property by mortgage lenders. Management has decided to liquidate the company and has already agreed to sell $2.5bn of properties which after closing will leave only $56m of debt unencumbered assets (9 rented properties + 4 vacant lots) on the balance sheet.

Shareholder meeting (to vote on the asset sale and liquidation) date has not been set yet, but current asset sale closing is expected in Q3. SMTA guides liquidating distributions to total $8.5-$9.35/share (1%-11% upside from the current levels) out of which $6-$7.75/share will be returned shortly after the initial asset sale.

Management didn’t present any detailed pro-forma numbers so it is not clear what additional expenses and assumptions are included in their distribution estimates. However, there seems to be sufficient margin of safety incorporated in the figures (more details below).

So far liquidation seems to be on good track - aside from sale of Master Trust 2014 ($2.4bn) the buyer for the largest remaining asset Academy Sports + Outdoors ($94m) has also been found. The company paid out two special dividends in excess of distributable cash generated by REIT. Moreover, SMTA has just recovered $24m (out of $35m) on ShopKo’s debt, which is quite impressive given the bankruptcy. On top of that, management has already paid out two special dividends in excess of distributable cash generated by REIT.

 

Spirit MTA and ShopKo

Spirit MTA is externally managed by Spirit Realty Capital (SCR).

SMTA spin off was done mainly to reduce their exposure to problematic tenants such as department store chain ShopKo (2017 Q4 call):

A key goal was to eliminate certain strategic structural impediments that conduct the result within a single entity. The structural impediments include the need to isolate our ShopKo investment and to better align our asset base with the appropriate capital structures, which will allow for the full maximization of the leverage capabilities of the secured Master Trust structure.

Similar to other B&M retailers ShopKo has been struggling for a long time due to the increased competition from e-commerce. From the pre- and post-spin off SRC earning calls (2018 Q1, Q2, Q3) it was clear that SRC is trying their best to reduce the exposure to ShopKo by selling ShopKo properties, amending their master leases, closing two financing to the tenant and etc. Given that, it is likely that SMTA was intended to be a liquidation vehicle from the very start.

SMTA CEO Mr. Rodriguez interests seem to be well aligned with shareholders. Upon closing of the Master Trust sale he will receive an award of $1m + additional $250k after disposal of the remaining assets (considerable amounts given his annual salary is about $258k + up to 75% bonus). Additionally, Mr. Rodriguez holds about $1.1m of SMTA shares (including currently unvested portion). The only negative is that the asset sale awards do not seem to be tied to the amount or timing of the eventual distributions.

 

Valuation 

The table below shows NAV calculation as of Q1'19 as well as Q3'19. Numbers for the Q1'19 pro-forma NAV are mostly based on figures provided by management in the asset sale press release, whereas Q2-Q3 expenses/income numbers are derived using Q1 financials excluding ShopKo assets (as per Q1 earnings release). All in all, Q2/Q3 expense levels are likely to be similar to the ones of Q1 as one-off costs related to ShopKo bankruptcy during Q1'19 were likely replaced by costs associated with asset sales and liquidation. I also assume company will continue generate revenues from all of its assets till the sale of Master Trust closes at the end of Q3 (if the sale closes earlier then revenue and AFFO will be lower).

table SMTA

The main take-away of this exercise is material spread of $24m/$60m between my estimated NAV as of Q3'19 and management's estimates of the eventual distributions. While $24m/$60m margin of safety on itself might not seem large enough for a liquidating REIT with $2.5bn in assets, one has to keep in mind that after the sale of Master Trust and Academy Sports + Outdoors properties (for both of which agreements have already been signed) all of the balance sheet will be made out of cash except for $56m of real estate assets. In other words, if management simply gives away all of the remaining assets for free and liquidates the company at the end of Q3, then investors would break-even at current market price levels. Full list of remaining 'Workout Assets' from the proxy:

SMTA workout assets

Management gives two data points on these 'Workout Assets' (Academy Sports + Outdoors needs to be excluded from the table above) - annualized contractual rent of $6.5m and annualized property cost leakage of $2.3m. It is not explained what is meant by cost leakage, but I am guessing depreciation is the biggest part of that figure. This would mean that 'Workout Assets' generate in excess of $5m cash before corporate overheads and so receiving BV=$56m in a sale of these assets does not seem like a stretch.

Obviously, part of the $24m/$60m spread will be consumed by expenses beyond Q3, by final liquidation costs, asset sales below BV, CEO severance/bonuses and etc (almost all of which are hard/impossible to estimate for outsider), but I think margin of safety is sufficiently large in this case.

After Master Trust sale, ongoing expenses will be drastically reduced - management fee will drop to $0.25m per quarter and other expenses should amount not more that $1m per quarter - G&A stood at $2m in Q3-Q4 of 2018, when company was not burdened by ShopKo bankruptcy and strategic review. Thus even if it takes couple more quarters to sell the 'Workout Assets' cash burn from overheads is likely to be immaterial. Also properties remaining on the balance sheet will still be generating income which might partially/fully offset these costs.

All in all, I think it is reasonable to expect that eventual liquidating distributions will be closer to management's indicated the upper limit (or at least within the range), providing 11% upside to current prices.

 

Risks:

  • If Master Trust sale to HPT fails then liquidation will be cancelled or significantly prolonged. Alongside HPT there were numerous other interested parties out of which 3 have made indicative proposals and one was interested in acquiring part of Master Fund, but for a 8.25% cap rate (vs current offer of 7.1%). Thus obtaining similar value for the Master Trust assets might prove difficult. I do not think SMTA shareholders will vote down the transaction and HPT seems to be locked in the purchase unless there is a breach of representations and warranties.
  • Master Trust sale price is subject to adjustments (based on closing date property, credit and working capital) and expected net proceeds of $450m will be disproportionally effected by any adjustments to the sale price due to leverage. These adjustments might be both positive or negative for SMTA.
  • Liquidation costs and other expenses might turn out larger than management expects in their distribution guidance, however margin of safety seems to be sufficient.
  • The remaining 'Workout Assets' might get sold materially below BV or with unexpected delays, however the amount of annualized rent these assets generate seems to support the BV valuation.

51 COMMENTS

  1. work 22

    Thanks for sharing this idea. It is interesting. I’m concerned about the book values in the table above though– some of these properties have apparently been vacant lots for years? Will they really sell for those levels? Of course i don’t know, just a concern. I will probably wait until the HPT deal closes and then zero in on the final stub assets. Winthrop Realty (FUR)’s liquidation saw some of the last, hardest to sell, properties go for less than expected book values. And that one’s taken a very long time for the final amounts. Each situation is different, but it seems like with real estate liquidations with lots of properties you need a serious price discount for the lengthy sales processes etc. Anyway, could be good though.

  2. over2u

    On SMTA balance sheet I also found payables on $20.5m, which may affect the NAV calcs in the example above.

    1. davea500

      Yes, and SRC CEO said indicated in most recent conference call that the MTA transaction is scheduled to close 9/20/19, assuming approvals are received from shareholders.

  3. Writser

    Q2 financials are out. Unrestricted cash now $113.8m despite paying out the first dividend. Sold the Crown distribution center for $11.7m net, slightly above book value. Academy sports sale net proceeds now estimated to be $7m rather than $10m. They continue to get some more money back from the Term loan (as of August, 8 $25.5m).

    Taking the midpoint of management estimates probably results in a high single digit IRR at current prices. I agree with this article that management estimates seem conservative but who knows where they can burn some more money. Don’t get too enthousiastic.

    Still, I like it and own it.

  4. jackolantay

    Hi does the estimate liquidation value also include the the current dividend yield that SMTA also gives out?

    1. Ilja

      Yes it does – both for the April and July distributions. There will be no further dividends before the sale of MTA.

  5. Michael Lax

    Company announced results of shareholders meeting in favor of liquidation, as well as recovery of shopco loan. Any thoughts on valuation?

    1. Ilja

      Assuming Q3 AFFO and Capex will be similar to Q2 results, I get Q3 pro forma NAV at $430m, which is in line with previous calculations. Management has also reiterated the expected distribution range.

  6. davea500

    Master trust sale closed: http://investors.spiritmastertrust.com/file/Index?KeyFile=399771834

    Excerpt from press release re: upcoming distribution:
    “The Company anticipates that in early October the Board of Trustees will declare a cash distribution for payment in late October to shareholders of the Company. At some point thereafter, as determined by the Board of Trustees, in accordance with the Plan of Voluntary Liquidation previously approved by the Board of Trustees and shareholders, the Company will terminate its existence and transfer all of its remaining assets (including remaining cash) to a liquidating trust, which will assume all of the Company’s remaining obligations and liabilities.”

    1. lyjgeorge

      does that mean at the end of day we will receive cash which transfered from stock?

  7. Ilja

    It also seems that after repurchasing preferred shares ($150m) and termination fee ($48m) the net proceeds that the company has received stand at $241m, which is slightly lower than in the calculations above ($246m), but its a minor thing and overall NAV should still be very much in line with management’s expectations.

  8. work 22

    FYI, SMTA going to pay out $8 in a few days, then most likely delist and go into a Liquidating Trust. Last bits in a real estate liquidation always seem to go for less than intended and take longer than intended. Anyway, i sold at $8.66 though would buy back cheaper. Thanks for the profitable idea.

    1. Writser

      In my opinion you are selling a bit too soon, unless you see other attractive (and time-sensitive) ideas. In the latest press release management confirmed that aggregate distributions should be in the middle of the $8.50 – $9.35 range. Midpoint is ~$8.92. Given that you are receiving the dividend in a few days you effectively sold the stub at a ~30% discount. That is cheapish.

      On top of that stubs attached to a giant dividend tend to trade significantly higher after the ex-date. People who currently think the stub is attractive can probably not afford to buy a 50% position just to end up with a desired ~5% position in the stub, while people who don’t like the stub think: “fuck it, it’s attached to a massive dividend, who cares about the last dime, let’s sell it.”. That’s not hard science, but I see it happening over and over and over. For a recent example, check out ENZN. Or FWP in 2017, RENN in 2018. Massive squeezes happen sometimes.

  9. nostradamus

    Does anybody know about the tax consequences of this dividend for non-US holders? Will it be tax free or 15% withheld?

    The Proxy Statement (as always) is difficult to read; the guys that make up these things always seem to prefer putting comma’s in a way that you’re not sure what refers to what exactly.

    1. work 22

      nostradamus might make sense to call your broker directly and ask if liquidation payments have any withholding. Theoretically they shouldn’t, but you don’t know how the broker handles it

    2. lupolupus

      page 76 of the proxy (tax consequences for non-US holders): “The IRS takes the position that, under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), liquidating distributions by a REIT that are attributable to gain from the REIT’s sale or exchange of U.S. real property interests (FIRPTA distributions) generally are taxable to non-U.S. holders as if such gain were effectively connected with a U.S. trade or business. Non-U.S. holders thus generally would be taxed on FIRPTA distributions at the same capital gain rates applicable to U.S. holders. We generally will be required to withhold U.S. tax equal to 21% from any such FIRPTA distributions. ”

      It seems that REIT distributions are really a special case, and to me it reads as if the 21% could in principle be levied on the entire distribution, not just the gain for the investors, but the phrasing is pretty unclear.

      1. nostradamus

        you missed the part that comes right after that:

        “The 21% tax withheld may be claimed by a non-U.S. holder as a credit against its reported U.S. federal income tax liability. In addition, corporate non-U.S. holders may be subject to a 30% branch profits tax on FIRPTA distributions made by us unless such non-U.S. holder is entitled to treaty relief or other exemption. However, FIRPTA distributions made by us generally would not be treated as effectively connected income for a non-U.S. holder if (i) the FIRPTA distribution is received with respect to shares that are regularly traded on an established securities market located in the United States and (ii) the non-U.S. shareholder has not owned more than 10% of the SMTA common shares at any time during the one-year period ending on the date of the distribution.”

        It’s not clear (to me) whether the part that comes after the “however” relates to the 30% branch profits tax alone, or applies to the entire preceding paragraph. If the latter, the distribution is tax free. If the former, it isn’t.

        1. lupolupus

          I got a response from IB on the tax status of the dividend. They say that they currently have it as an ordinary dividend in their system, with a 15% withholding tax. However, they are awaiting final tax status from the clearing house.

        2. Vinn

          So it could be that first the tax will be withhold and then later when it’s 100% and verified that it’s not subject to tax, it will be corrected. This also happened to TheStreet liquidation distribution.

        3. lupolupus

          Response from SMTA IR “The tax treatment of SMTA distributions will not be available until after year-end. We’d recommend that you speak to your tax advisor regarding the taxability of the transaction and liquidating distributions as we are unable to provide any definitive detail at this time.”

  10. lupolupus

    I am also confused about the ex-dividend date. The NASDAQ website says tomorrow, but on other websites I have seen today … quite puzzling.

        1. nostradamus

          My (behind paywall) data-source also says 24th. They have been wrong on occassion, but usually not.

          (As on 07/10/2019) USDIVINVEST
          Symbol SMTA
          New.Amount 8
          Exchange NYSE
          Div.DecDate 10/04/2019
          Div.ExDate 10-24-2019
          Div.RecDate 10-14-2019
          Div.PayDate 10-23-2019

        2. Writser

          So, I guess you sold then? ~100% upside, ~3% downside.

      1. work 22

        yes my guess too Vinn, a due bill attached etc. Though it always feels a bit dicey to buy around these times, just in case!

        1. Writser

          Yes that’s what all other sources suggest too. The one strange thing is that the Nasdaq website seems to have it wrong. That’s not even SMTA’s primary listing but it is strange nonetheless.

      1. Dan Silverstein

        Cash dividend not in my Etrade account. Etrade’s response is that the money will be there Wed or Thurs.

        1. Dan Silverstein

          Cash distribution showed up today. No withholding at Etrade for me.

      2. nostradamus

        you had it under receivables, so it didn’t really matter, right? anyway, dividend came in on today’s statement for me. taxfree as well, hooray!

        1. Vincent

          I finally received payment yesterday in my IB account. It matters only I can use proceeds when in receivables.

        2. Writser

          It’s a bit strange though. The whole point of a special dividend, with an ex-date the day after the pay-date, is that you don’t have to wait for your cash. Yet we have to wait for the cash.

  11. Terence

    Trading upon turning ex-dividend: Oct 24 Th – opened nearly “flat” at 65c (previous day it traded $8.60+, less $8 dividend). After a few minutes of trading at this level, it quickly rose to high 70’s where it settled for the day. Oct 25 Friday – opened high at 85c, but slowly dropped to low 70’s in the late afternoon. Seems to be settling in at this level today Monday. So in summary, quite a wide range 65c to 85c for the 2+ days ex-dividend, and seems settling now at 71c, which is still 25% from the $8.92 midpoint which management thinks is the best estimate.

    Writser’s post above (on pre vs post dividend trading) on Oct 9 – I find this post very useful – thanks.

    On another matter which was probably pointed out already, and may be of concern to some of us: “at some point” SMTA will be liquidated and the shareholder interest will be transferred to a liquidating trust, which is non-transferable except after death of holder or by law.

    Any estimate as how long the liquidation will be?

    https://finance.yahoo.com/news/spirit-mta-reit-announces-initial-212500466.html

    1. work 22

      Real estate liquidations can take years. It all depends. Winthrop Realty (FUR) has been liquidating for years, with a sizeable payment still left. One would hope the bulk of the payments (the easy land to sell) will come quickly though, and the difficult property residuals later. It usually helps to make sure mgmt is aligned– that they own a lot of stock. More likely to get faster payments that way. (I bailed on NYRT in part because mgmt did not virtually any stock and was mostly incentivized to manage the assets over a long period of time. Nor would NYRT mgmt care that much what price they sold the assets for, since it wasn’t their money.)

      1. Terence

        Thanks, Work 22. This should help explain the gap of the price to the midpoint. And also holding it in a non-transferable liquidating trust during this long wait is not appealing.

        1. work 22

          I agree the long wait is not appealing. Considering mgmt guided to the midpoint of the range, about 92 cents, 73 cents is not quite compelling enough price for all that possible time. I could be wrong, but i’m waiting to buy a bit lower. It might not trade back down again though.

  12. Dan Silverstein

    SMTA 10-Q is out. Estimated remaining distribution is $.74

    “Net assets in liquidation did not change during the period September 1, 2019 through September 30, 2019. Subsequent to September 30, 2019, $345.4 million, or $8.00 per share, of the net assets were distributed to common shareholders, see Note 14. The remaining undistributed net assets in liquidation of $31.8 million would result in liquidating distributions of approximately $0.74 per share. This estimate of liquidating distributions includes projections of timing and amounts of future sales, as well as costs and expenses to be incurred during the period required to complete the Plan of Voluntary Liquidation as described in Note 4. There is inherent uncertainty with these projections, and they could change materially based on the timing and amount of the sales, the performance of the underlying assets and any changes in the underlying assumptions of the projected cash flows.”

    1. Writser

      Yes, but the real estate leased to CLA might be valued conservatively: “[..] we used comparable vacant sale properties to derive the net realizable value of the three Children’s Learning Adventure USA, LLC (“CLA”) properties. CLA is currently in bankruptcy and is paying its rental income in accordance with the lease agreement. In the event that CLA successfully emerges from bankruptcy, there is potential for a significant increase in value for these properties.

      CLA was already in bankruptcy when management came up with their guidance and afaik nothing significant has happened since. Maybe ‘middle of the range’ is now slightly optimistic, but $0.74 seems a bit pessimistic. The truth is probably in the middle.

      But yeah, the 10Q was a bit disappointing.

  13. Terence

    74c. What happened to the “closer to the middle of the previously provided range of $8.50 to $9.35″ or 92c per news, just not too long ago on Oct 4 ??! It seems the market knows about the 74c, since it’s been trading around here after the $8 dividend.

    The 10Q adds: “There is inherent uncertainty with these projections, and they could change materially based on the timing and amount of the sales, the performance of the underlying assets and any changes in the underlying assumptions of the projected cash flows. “

  14. Dan Silverstein

    I wrote investor relation, asking them to explain the seeming discrepancy between the $.925 midpoint number used on Oct 4th and the current number of $.74. I’ll let you know their response, if any.

  15. Terence

    12-31-19: last trading day, converts to Liquidating Trust as planned.

    “… the Liquidating Trust units will not be transferable or assignable, except by will, intestate succession or operation of law. The Liquidating Trust units will not be certificated and will not be listed on any exchange or quoted on any quotation system or otherwise tradeable in any public or private transactions.

    The Liquidating Trust will seek to sell the Company’s remaining assets as soon as practical. However, there can be no assurance as to the likelihood, timing or pricing of any sale or sales of these remaining assets.”

    https://finance.yahoo.com/news/spirit-mta-reit-announces-date-125100438.html

  16. DendriteResearch

    I don’t see the appeal buying at 70 cents here. It’s going to take forever for them to sell all these properties.

    SMTA exists in the first place because SRC spun it off as a holder for its worst assets. The Master Trust, Shopko (which promptly went bankrupt), and then these miscellaneous things. So these 11 properties have made it through two screens for suckiness — SRC wanted to dump them, and SMTA hasn’t found a buyer in 6 months.

    If they manage to finish liquidating by end of 2020, management estimates 74 cents return. You’ve maybe got some upside if CLA comes out of bankruptcy, but that could just as easily provide management an excuse to prolong the liquidation. After all, the CEO and board keep getting paid for as long as the liquidation keeps going on.

    1. davea500

      After some research, I think the CLA properties could get out of Chapter 11 in January 2020. A hearing date is set for mid-month and filings indicate a good case can be made to dismiss Chapter 11 (and not go into Chapter 7).

      I also think (and this is just a guess) that management might have buyers in the wings for the CLA assets pending an emergence from Chapter 11. If this is the case, one could envision a scenario in which some cash is returned relatively quickly in 2020.

      If the three CLA properties and the other three rent paying properties can be monetized in short order, I think the IRRs can be attractive.

      The five vacant properties, in my analysis, represent only about $0.07 in NAV. They may be the toughest to sell.

      Finally, I don’t think the economics of the new management agreement with SRC are so compelling that SRC would drag this out. I think Jackson would like nothing more than to say SMTA is complete.

  17. davea500

    SMTA NAV as of 12/31/19 – $1.02 per 10K. Note, pre-COVID valuation date.

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