Spirit Realty Capital Shares Still Cheap, But Not Cheap Enough

November 9, 2017

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Courtesy of Benzinga.

Spirit Realty Capital, Inc (New) (NYSE: SRC) shares fell close to 25 percent on May 4 in reaction to its announcement that it sees issues with a number of its credit watch list tenants. The shares have rebounded from the low, prompting an analyst to move to the sidelines.

The Analyst

Baird analyst RJ Milligan.

The Rating

The firm downgraded shares of Spirit Realty Capital from Outperform to Neutral and lowered its price target from $10 to $9.

The Thesis

Following its rebound since May 4, Spirit Realty Capital’s stock was now at a more reasonable valuation, although still cheap, Milligan said. That said, the analyst doesn’t believe the current valuation provide an attractive enough risk-adjusted buying opportunity.

In April, the company announced the spin-off of substantially all of its properties leased to Shopko and its assets that collateralize Master Trust 2014 into a separate, publicly traded REIT.

Although a believer in the spin-off strategy, Baird expects the new Spirit Realty Capital “remain-co” to emerge with a distinctive cost of capital disadvantage, making it difficult for the company to compete with other net-lease peers.

Related Link: 3 REITs To Get Bullish On In 2018

The firm also said investors in spin-co could face liquidity issues, given the expected leverage and the tenant mix.

“While shares appear cheap (7.8% implied cap), obstacles remain for SRC management (obtaining recap financing, potential ShopKo issues) and believe the current discount to peers is warranted,” analyst Milligan said.

The spin-off is planned for the second quarter of 2018, the analyst added. If the spin-co fails to achieve a higher cost of equity over time, the analyst thinks it could face the prospect of being bought, given its smaller size, lower leverage, improved tenant diversification, and more service-focused orientation.

Shopko continues to be a concern for Spirit Realty Capital, given the retailer’s declining same store sales and the poor environment for general merchandise retailers, Milligan noted.

Price Action

Spirit Realty Capital stock is down 20.9 percent for the year-to-date period. However, since it hit a low on May 4, the stock has been up about 28 percent.