Spirit Realty Capital Inc

F:21S1

Earnings Call Transcript 2018-Q4

[Operator]

Greetings, and welcome to the Spirit Realty Capital Incorporated Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host today, Mr. Pierre Revol, Senior Vice President of Strategic Planning and IR. Please proceed sir.

[Pierre Revol]

Thank you, operator, and thank you, everyone, for joining us today. Presenting on today’s call will be President and Chief Executive Officer, Mr. Jackson Hsieh and Chief Financial Officer, Mr. Michael Hughes. Ken Heimlich, Head of Asset Management, will be available for Q&A.

Before we get started, I would like to remind everyone that this presentation contains forward-looking statements. Although, the company believes these forward-looking statements are based upon reasonable assumptions, they are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from those currently anticipated due to a number of factors. I would refer you to the Safe Harbor statement in today’s earnings release and supplemental information, as well as our most recent filings with the SEC for a detailed discussion of the risk factors relating to these forward-looking statements.

This presentation also contains certain non-GAAP measures. Reconciliation of non-GAAP financial measures to most directly comparable GAAP measures are included in today’s release and supplemental information furnished to the SEC under Form 8-K. Both today’s earnings release and supplemental information are available on the Investor Relations page of the company’s Web site.

For our prepared remarks, I’m now pleased to introduce Mr. Jackson Hsieh. Jackson?

[Jackson Hsieh, President and Chief Executive Officer]

Thanks Pierre. Good morning and thank you for joining us today. A year and half ago, we announced the spinoff of SMTA, and I want to reiterate what I said back then. The separation impact to Spirit is simply awesome. Today, Spirit is liberated from the impediments it's faced in the past. The portfolio is stronger across every key metric and our balance sheet is significantly enhanced. Over the course of this year, our results have proven out that statement. Our operational performance has been strong with de minimis lost rent, healthy same store rent growth and record occupancy. We are proud that we were able to deliver AFFO at the high end of our expectations, while maintaining low leverage.

As I mentioned last month, the last step is to make Spirit a simplified pure play triple net REIT with a strong balance sheet that can deliver consistent AFFO and dividend growth. Much of the heavy lifting has been done. We believe our internal processes and tools are at the cutting edge of the industry. Our portfolio is high quality and our balance sheet is efficient, flexible and low leverage. We have assembled the first-class senior leadership team that is completely aligned, focused and able to take Spirit forward and maximize value for our shareholders. We have come a long way and I firmly believe that we are entering the final innings of a plan that started with an unconventional idea and took a great deal of hard work and fortitude to realize.

In short, I think this is an exciting time to be a Spirit shareholder. Throughout 2019, we will focus on three critical initiatives to position Spirit for long-term success. The first is to assist the SMTA independent trustees in their accelerated strategic process. Finalizing this process and decoupling Spirit from SMTA is the most critical step in making Spirit simple and understandable for investors. We are already underway with the marketing of the Master Trust and resolution of the other assets within SMTA.

The second is to continue to improve predictive analytics and our term relationships in order to maintain high quality operations and deliver strong consistent results. And the third is to execute on the acquisition and disposition targets that have been incorporated in this year's earnings guidance.

As I mentioned earlier, we had a solid finish in 2018. Excluding the Haggen settlement, our fourth quarter and full-year AFFO per diluted share of $0.84 and $3.78 respectively met the high end of our expectations. Our leverage calculated as adjusted debt to annualized adjusted EBITDAre ended the year at 5.1 times, which was one-term below the low-end of our target. Our portfolio occupancy ended the year at 99.7%, the highest in Spirit's history with only five vacant properties. And our same-store sales grew 1.6% during the quarter, principally benefiting from the QSR movie theaters, health and fitness, grocery and medical office categories.

Turning to capital allocation. We acquired three new properties during the quarter, totaling $24.2 million, which includes a new TopGolf facility in Baton Rouge, Louisiana. For the year, we invested a total of $287 million in acquisitions and revenue-producing capital projects with an initial cash yield of 7.1% and an economic yield of 8%. I would like to point out that at the end of the second quarter we had only deployed $19.1 million in acquisitions and revenue producing capital projects. So the net $267.9 million all occurred in the second half of 2018. Many new service-oriented tenants were required in the second half of 2018, including Lifetime Fitness, which is our sixth largest tenant, TopGolf and Alaska Club Gyms. We also expanded existing relationships with Main Event and Studio Movie Grill.

We will continue to focus on adding high-quality tenants with solid real estate and favorable lease terms in the industries that align with our heat map. Fourth quarter dispositions totaled $55.4 million at a weighted average cap rate of 6%. For the year, dispositions totaled $103.3 million at a weighted average cap rate of 6.5%. Our 2018 disposition plan for income producing properties focused primarily on optimizing the industry concentrations. Some of the assets sold included Circle K C-stores, drug stores and grocery stores.

We had some other notable highlights this quarter. First, we are pleased to announce that we received the final Haggen bankruptcy settlement payment of $19.7 million in the fourth quarter. To recap the Haggen situation, our original $224.4 million investment was committed in late 2014 and funded through the course of early to mid 2015. Subsequently, Haggen saw Chapter 11 relief in 2015. Since then, Spirit has been able to generate $165.5 million in property sales and settlement fees and $43 million in rent. We have seven former Haggen properties currently long term leased to Smart & Final and Albertson's, and one remaining vacant property in Las Vegas, which is currently on the market. The total annual rent of $6.2 million for the remaining income producing properties implies a current yield of 11% on our remaining $59 million original Haggen investment.

The positive outcome from this investment is the result of the efforts and effectiveness of our asset management team. More detail on these results can be found in the investor relations section of our Web site in the presentation titled Haggen update, which was posted this morning. We are also happy to announce that we recently completed the restructuring of our Taco Bueno Master lease. Prior to Taco Bueno filing Chapter 11 bankruptcy, our 35 unit Master lease had less than three years remaining term. We recently restructured the lease with the new owner of Taco Bueno, resulting in a 23 unit Master lease and three individual leases, all with 17 years of lease term.

We agreed to take back seven vacant stores, which are currently being marketed for sale or lease by our asset management team. Thus far, we have received a great deal of interest in our vacant stores for both sale and the leasing. The new Taco Bueno owner operator purchased all of the company's senior debt, leaving the restructured company a much stronger tenant. Overall, with the enhanced credit profile of Taco Bueno, our extended lease term and our expected recovery on the vacant stores, this lease restructure is very favorable to Spirit and I again credit our asset management team with securing this outstanding result. Finally, we recast and expanded our senior unsecured credit facility, which addresses all of our near-term maturities. Mike will elaborate more on this in his prepared remarks, but we believe this quarter's results represent strong execution across the board.

Before I turn the call over to Mike to walk through the specifics of our 2019 guidance, I want to give you some color on the key components and how they relate to our go forward strategy. As I discussed last quarter, we have invested a lifetime and effort improving our analytics and processes internally. As a result of our analytical tools and processes, we have a deeper understanding of where we want to take Spirit's portfolio in the future. Our acquisition target of $400 million to $550 million will be focused on existing and perspective tenants that fit our heat map and our efficient frontier. And I'm excited about our pipeline. These acquisitions will improve our weighted average lease term credit quality and organic growth.

On the disposition front, we are using our proprietary analytical tools and property rankings to identify the $250 million to $350 million we plan on disposing this year. These dispositions will further improve Spirit's weighted average lease term, reduce our double net and multitenant lease exposure, improve our portfolio of credit quality and optimize our industry-ratings. While this years' disposition pipeline is large and was originally targeted to be spread over the next three years, we believe that finalizing our portfolio repositioning this year concurrent with the resolution of SMTA best achieves our ultimate goal of making Spirit simplified pure play triple net REIT that will generate steady and predictable earnings and dividend growth for our shareholders.

In summary, our acquisition and disposition plan in combination with an SMTA resolution, solid operations and maintaining low leverage, will best position Spirit for future success and value creation for our shareholders. Finally, I want to note the additions we have made to our Board of Directors over the last several months. As part of our effort to promote strong corporate governance, Diana Laing who is most recently CFO at America Homes for Rent and Elizabeth Frank, who is the EVP Worldwide Programming and Chief Content Officer for AMC Theaters, have both joined our board. With these changes, we have expanded our board to nine members from eight previously. Eight of which are independent and we have reduced overall board tenure. We expect to benefit from the real estate and service oriented retail experience, and look forward to both of their contributions as we move forward.

With that, I'll pass the call over to Mike.

[Michael Hughes, Chief Financial Officer]

Thanks, Jackson and good morning everyone. As Jackson mentioned, we had a very active fourth quarter, and I'm very pleased with our results on all fronts. We are at the high end of our AFFO expectations for both the fourth quarter and the year; the high end of our expectations for capital deployment and dispositions; and beat the low end of our leverage targets. Successful outcomes of our final settlement with Haggen and our lease restructure at Taco Bueno also provided for a strong finish.

Finally in January, we executed a new $1.62 billion credit facility, which replaced our previous $800 million revolver and $420 million term loan. The drawn spreads for the new revolver and term loan reduced by 15 and 10 basis points, respectively. The facility also included $400 million delayed draw term loan that will be used to repay our $402.5 million convertible notes due on May 15th. In conjunction with the new facility, Spirit entered into $400 million interest rate swap to fix its LIBOR for five years at a rate of 2.816%. This new facility resolved all of our near term maturities, and pro forma for the repayment of the convertible notes extends our weighted average debt maturities to 4.5 years.

Now, turning to the income statement. First, we have changed the geography of one of our revenue line items. The new accounting statement ASC 842 requires all components from a lease contract accounted for under ASC 842 to be included in one revenue line item, which would require to be adopted January 1st on a perspective basis. To give our investors comparable presentations for stored periods, we've chosen to retrospectively apply this presentation in our current 10-K, resulting in the inclusion of tenant reimbursable income and rental income.

During the fourth quarter, rental income excluding $2 million in tenant reimbursements grew $2.5 million compared to last quarter. Annualized contractual rent, which annualizes the rents in place at quarter end, grew $700,000 compared to last quarter. Net dispositions reduced contractual rents by $1.7 million, primarily offset by contractual rent escalations. We had very few tenant credit issues during the fourth quarter and reserves for loss rent remained low at 0.3% of contractual rents.

We had several non recurring items this quarter. Other income was $19.4 million or $18.9 million higher than last quarter, of which $19.1 million was attributable to the Haggen settlement. General and administrative expense was $13.2 million during the quarter, of which $1.8 million was associated with one-time employee bonuses related to work performed to effectuate the spin-off of SMTA. You will also note a new line item titled other expense in the amount of $5.3 million. That expense represents the reserve for loan guarantee that Spirit assumed during equity acquisition of a former tenant many years ago. This credit profile has deteriorated. Aside from this reserve, Spirit has no further exposure. As each of these previously mentioned revenues and expenses are one-time and non-recurring in nature, they are excluded from our calculations of AFFO and adjusted EBITDAre.

Now, turning to guidance. Due to the timing and uncertainty of SMTA's accelerated strategic process, we have included the fee and dividend income from SMTA for the entire year. For the full year 2019, we project AFFO per share of $3.32 to $3.38, capital deployment comprising acquisitions, revenue-producing capital and redevelopments of $400 million to $550 million, asset dispositions of $250 million to $350 million and adjusted debt to annualized adjusted EBITDAre of 5 to 5.4 times. And there are just a few points I want to make about our guidance before I open up the call for question. On the surface, our AFFO per share guidance growing $0.01 per share in 2019 at the midpoint of our range compared to our fourth quarter 2018 annualized may seem conservative, but there are few factors that are driving our projection.

First, we are repaying our 2.875% convertible notes coming due on May 15th with proceeds from our delayed draw term loan. That retained loan results in $0.03 of AFFO per share dilution compared to 2018. Second, 14.6% of our AFFO is currently derived from the fees and preferred dividends paid by SMTA, which were flat and put the drag on year-over-year growth rate. If you were to just pro forma our AFFO for those two factors, meaning remove both the interest impact from the convertible repayment and remove SMTA related income from each year, our AFFO per share growth rate at the midpoint of our guidance range would be approximately 3.5%.

In addition, our capital allocation strategy mainly our sizable disposition pipeline and low leverage maintenance, does mute our AFFO per share growth this year. However, as Jackson mentioned, we believe these strategic initiatives paired with the resolution of SMTA puts Spirit in the best possible position to produce consistent and sustainable earnings and dividend growth for years to come. And there are two last points I want to make about the cadence of our projected earnings throughout the year. First, the impact of the convertible notes repayment will primarily result in the back half of the year. Second, we expect our dispositions to also be heavier in the last two quarters, which simply means that we expect AFFO per share to be somewhat better than the first half of 2019. So please keep that in mind for your earnings models. Again, we are pleased with our 2018 results, which met or exceeded all of our expectations. We look forward to another good year that will position Spirit for long-term success.

I'll now open up the call for questions.

[Operator]

Thank you. At this time, we will conduct a question-and-answer session [Operator Instructions]. Our first question comes from Greg McGinniss with Scotiabank. Please proceed with your question.

[Greg McGinniss, Scotiabank]

Jackson, you just mentioned one of the main goals for Spirit is being able to generate dividend growth. Now, on the payout ratio today is obviously below peer average following the loss SMTA related income. How should we be thinking about dividend growth and the target payout ratio?

[Jackson Hsieh, President and Chief Executive Officer]

Well, I think we initially set the payout ratio to encompass this reduction in the participation of SMTA. So, we expect to hit obviously the high end of our acquisition guidance this year in combination with that and having less loss rent, better same store growth to enable us to move our dividend rates up as the portfolio continues to increase.

[Michael Hughes, Chief Financial Officer]

Greg, I think if you look at pro forma for SMTA and like Jackson we did set at low cost spend in anticipation of SMTA going away at some point. We would drift up just pro forma to a level that we are comfortable with, low 80s and then grow the dividend from there.

[Greg McGinniss, Scotiabank]

And Mike, in your view, what is the threshold you need to pass in order to tap in the ATM as a source of fund? And if stock price holds or grows from that point, we potentially see the ATM help fund capital deployment above the guidance range?

[Michael Hughes, Chief Financial Officer]

Absolutely. I mean, I don’t want to give a number of my target pricing, but I think you saw us hit the ATMs a little bit in the fourth quarter. We certainly are willing to tap the ATM to fund acquisitions to better grow to meet or exceed the high end of our acquisition range. The capital is well priced in line with our peers did. So we definitely think there are opportunities for us that happen and we will issue the ATM if those opportunities occur. But that being said, our guidance -- we can hit our guidance without issuing any equity and so we will just have to see what opportunities present themselves.

[Greg McGinniss, Scotiabank]

And just one more question here. Jackson, I just want to dig into the comment on dispositions you made in your opening remarks. You are pulling forward the three years of disposition pipeline. So how much do you envision that forward dispositions will be less than the $300 million in 2019, and does this imply less future capital deployment as well? How should we be thinking about those two items?

[Jackson Hsieh, President and Chief Executive Officer]

I characterized what's in this disposition plan as to give you some categories. We talked about drug stores, supermarkets, multi-tenants, there's a big PetSmart in there. There's some Haggen assets that are in this disposition bucket. This is really for us I call an opportunistic sale opportunity. These are things that I think over the course of three years that have been identified as things that we would potentially sell. And I think in my view right now we have got an opportunity this year to clean everything up, which we plan to do, because I go back to I really believe we were in this final 10%. None of us ever talked about that big tenant with the S word behind us. So the things that are in front of us now are just very manageable. And I would like to company to be at the mid -- late part of this year, and people can see this as a very clean company, looks just like the peers. And as it stands today, I think we are pretty cheap relative to the best in class triple net peers that are out there.

[Operator]

Our next question comes from Shivani Sood with Deutsche Bank. Please proceed with your question.

[Shivani Sood, Deutsche Bank]

I appreciate that there has been general refrain from commenting on SMTA, but Jackson you spoke of marketing and assets out there. Can you give us some color on how demand has been versus your expectations?

[Jackson Hsieh, President and Chief Executive Officer]

We categorically said we wouldn't talk about that. But I would tell you that we are aggressively in conjunction working with the trustees to move as fast as we can to get this resolved in terms of completions. I would characterize the interest to be better than I expected, I'll just leave it at that.

[Shivani Sood, Deutsche Bank]

And then in terms of Taco Bueno and the restructuring of the Master lease. As we look at the contractual rent level and with where it was as opposed to post your separation, can you give us an idea of how many more at risk master leases are in that amount and the exposure from an annual rent perspective.

[Jackson Hsieh, President and Chief Executive Officer]

So the portfolio is very clean. I mean, Taco Bueno was something we mentioned before. I guess the best way of thinking about our company, Shivani, is looking our loss rent, I mean that’s continued to drift downwards. The operations of this company are really, really good right now. We obviously were able to move a lot of at risk tenancy interest income. So, I think this one Taco Bueno was an unique circumstance as related to that opportunity, but we don’t really see a lot of other situations right now.

[Operator]

Our next question comes from Vikram Malhotra with Morgan Stanley. Please proceed with your question.

[Vikram Malhotra, Morgan Stanley]

Jackson, it's great I guess you are pulling forward the dispositions and trying to get everything cleaned up. What changed in the last three months in the thinking in terms of just pulling forward all those dispositions to this year?

[Jackson Hsieh, President and Chief Executive Officer]

We did not have that situation with the big tenants, and SMTA changed direction. And the board had not ended up accelerating their strategic process at SMTA we would not have pulled forward these dispositions. So this really came about in relation to once again the fact that this earnings stream from SMTA we now is going to go away in pretty short order. We decided at that point this is the right time to pull forward our disposition program. So it wasn’t contemplated two months ago really. We look at this as a unique opportunity and do it now.

[Michael Hughes, Chief Financial Officer]

Vikram, we identified the assets two months ago. With the pulling forward, our whole goal this year is let's get Spirit to be a clean company that looks great in every metric where we execute on everything we can. We think that gives us the right cost of capital and really makes machine work, and so let's just get it all done.

[Jackson Hsieh, President and Chief Executive Officer]

Vikram, I think you have seen our BI tools. I mean, if we showed you the model of what happens when these assets move out and what it does to remain co of Spirit I mean across every measurement metrics improve dramatically. And then you couple that in with the high end of our acquisition target really makes a big difference in the company. And that’s where we want to be at the end of this year when we show what our weighted average lease term loan is, our industry mix, it's going to look very favorable if we'll ever execute on this plan.

[Vikram Malhotra, Morgan Stanley]

And just to clarify, when you say you identified them in the past two months, I thought to a earlier question you said these are all the assets that you had identified a while ago, the drug stores, et cetera. So are there more assets in the here that you had previously anticipated?

[Jackson Hsieh, President and Chief Executive Officer]

No, remember we have every asset that’s ranked in this company. So we know top to bottom every single asset. And so the simple answer is these were identified through just our general ranking process as things that we in time not must sell, but if the right opportunity comes up, we would sell. So that’s how we do our forward planning. And so that’s part of our annual review process and that was really around late September, early September is when we completed our ranking process. So that’s when I would say in September of 2018 is where we formulated that these are the assets that we believe makes sense to move out of the portfolio over the next three years. And remember we have got the ability with some of these tools that we have to run different scenario analysis is to what the actual impact on the portfolio is as these moving out, so it's quite unique in that regard.

[Vikram Malhotra, Morgan Stanley]

And then on the remaining, on the Taco assets that will retain the restructure. What is the new rent versus the prior rent, what's the difference?

[Ken Heimlich, Head of Asset Management]

Yes, it's depending on how you look at it. If you remember, we had a 35 unit Master lease. We now have 26 units, 23 of those in a new Master lease and three individual leases. If you look at the aggregate rent for those 26 units compared to the 35, it's about 20% reduction. I would echo what was mentioned earlier at the end of day we feel there's a perspective that we're in a better position today given the new 17 year term. The seven units we took back we think will do very well on as far as vacant.

[Jackson Hsieh, President and Chief Executive Officer]

I would say if you looked at that portfolio to bankruptcy with three years remaining lease term versus what we have today, the cap rate differential is over 200 basis points on the value of those assets, just given the nature of the long-term lease we're able to retain and the fact that the tenant now has no debt, no long-term debt versus the prior owner.

[Ken Heimlich, Head of Asset Management]

This is the tenant that is one the largest restaurant operators franchisees in the country, so we're very comfortable with that.

[Vikram Malhotra, Morgan Stanley]

And the bumps are the same?

[Ken Heimlich, Head of Asset Management]

We retain bumps in the structure that are equal to what they were prior.

[Operator]

Our next question comes from Ki Bin Kim with SunTrust Robison Humphrey. Please proceed with your question.

[Ki Bin Kim, SunTrust Robison Humphrey]

Going back to your dispositions commentary, I know this all hindsight but I thought that was cleaned up portfolio would have been in 2018 with a spin off. Why didn't you add more to the spin off? I know about 2020, but just curious if it was. Was there any element of credit deterioration or just risk with these tenants that made you put these in the disposition bucket this year?

[Jackson Hsieh, President and Chief Executive Officer]

Well, I mean, remember when we laid out this plan, I'm going back to when we did the first path forward. We laid out very specific debt-to-EBITDA and targets AFFO targets. That was a pretty precise calculation to get to that end for each of those pieces. As you know, I think if you see the scorecard, we exceeded pretty much everything we said. We met with most of that we exceeded most of the things that we laid out since I took over this company. If we have taken out these assets early on, it would have had an impact in how we set up the restructure, how much debt had to be raised on the master trust, the end results. So it might seem like why don't you just fill those in, but it was quite a complex derivative to get this company to end where we ended up, which is now we're 5.1 times. But Ken, if you want to add something else…

[Ken Heimlich, Head of Asset Management]

I just want to make sure if there's a perception that this $300 million is a workout pool, and that is not the case. There are a lot of factors that we use when we identify what we think we want to dispose of, double net leases, multi tenant, there is the variety of factors. These are not tenants that were afraid are going to not make the rent payment next month. That's not the idea, not what was behind building this disposition plan.

[Ki Bin Kim, SunTrust Robison Humphrey]

So if you exclude any vacant assets that you might be selling this year? What is the cap rate range that we should expect on the sale?

[Ken Heimlich, Head of Asset Management]

We're not putting out a cap rate range at this time. This disposition pool is going to be flexible. Some of the assets that we think we want to dispose of right now that may evolve throughout the year, but we will hit the overall guidance.

[Jackson Hsieh, President and Chief Executive Officer]

I mean, there's going to be some low-cap assets, some high-cap assets. And we're just going to have to see how it progresses through the course of the year. And I know that sounds great and we have to tell you, but that’s what best we can tell you right now.

[Ki Bin Kim, SunTrust Robison Humphrey]

And just a quick one on Albertson's, I noticed that the ADR decreased. Is that because of the sale or something happened or something else? And it wasn’t listed as your top 100 tenant in Page 13 of your supplemental. Was that just a typo or something else happened there?

[Ken Heimlich, Head of Asset Management]

No, we did sell one Albertson's in the fourth quarter. But if you look in the sub, we changed the identification to United Supermarkets, which is a wholly owned sub of Albertson's.

[Operator]

Our next question comes from John Massocca with Ladenburg Thalmann. Please proceed with your question.

[John Massocca, Ladenburg Thalmann]

Just a question with regard to the other side of your guidance. What waiting are you expecting for capital deployment spending quarter-over-quarter? And as we look out over the course of the year just could it potentially that it had been more backend weighted, specifically looking at what you guys did in terms of capital deployment in 4Q, which is maybe a little bit light versus 3Q?

[Michael Hughes, Chief Financial Officer]

Yes, I mean there is always a chance that dispositions and acquisitions can shift, which we have in fourth quarter. But I would expect from an acquisition standpoint, we are pretty leveled throughout the year for '19 on the acquisition side. We have had more time to build our pipeline than last year when we were doing with the spinoff. For dispositions, they are going to be more heavily weighted towards the back end, I would say very, very light in the first quarter and spread pretty evenly between second, third and fourth quarter, which means obviously a lot more in the back half than the first half. So that’s the way I think about it.

[John Massocca, Ladenburg Thalmann]

And then with regard to the leverage, given your final resolution to situation with SMTA to be considered a de-risking transaction for SRC. Could that type of event cause you to maybe raise your leverage targets going forward?

[Michael Hughes, Chief Financial Officer]

It could, but we are really focused on our long-term cost of capital. And I think that getting say upgrades, our credit rating will be extremely helpful for that on the debt side. So I think we will continue to be pretty conservative to make sure that we get the highest rating we can and help the weighted average cost of debt side of it. And I wouldn’t expect this to increase at any time soon. I think that’s just more of a long-term philosophy than it is any short-term risk that we see with SMTA.

[Operator]

Our next question comes from Joshua Dennerlein with Bank of America. Please proceed with your questions.

[Joshua Dennerlein, Bank of America]

Can you maybe elaborate a little bit more on your internal growth assumptions implied in guidance? How long do you expect those seven stakes at Taco Bueno assets to remain? And then are there any other move outs or renewals that you are watching, or maybe another credit event that you might be assuming?

[Jackson Hsieh, President and Chief Executive Officer]

Regarding the Taco Bueno's, we are not in a position where we think we need to start disposing of those, those I would say would be opportunistic. Now that they are restructured, they are highly liquid assets and they are what we call buy size, so they are very well accepted in the 1031 market. But right now there is no risk reason to jump on and throw those into the dispo plan. But other than that right now, no, there do not seeing anything on the horizon any meaningful things. You are always going to have a tenant here and a tenant here that struggle. But as far as anything meaningful, don’t see anything on the horizon right now.

[Jackson Hsieh, President and Chief Executive Officer]

Josh, there is nothing unique or big one time non-recurring stuff built into toward '19 guidance. It's pretty straightforward as we laid it out. You guys know about the convert refi. Obviously, we have the flat fees effecting growth. It's really at the end of the day was going to move our numbers around the range are going to be acquisitions and dispositions, and how quickly we do stuff, what cap rates we get. So nothing big on the tenant credit issue side or anything unusual that’s built into our guidance for '19.

[Joshua Dennerlein, Bank of America]

And just to clarify the seven assets you took back from Taco Bueno. How long of a downtime do you expect, before you could pre-lease them?

[Ken Heimlich, Head of Asset Management]

We don't have a specific target, but we're always on a sooner, rather than later, we look at each one and identify whether it makes more sense to work on a re-let versus a sale. We're suffice to say we're pretty happy with the quality of those seven sites. QSR sites tend to be very fungible having -- we're pretty happy with those and we've gotten a lot of activity already.

[Joshua Dennerlein, Bank of America]

Okay. Good. Good. And then, you mentioned in the opening remarks that was reserved for that credit event -- or that credit enhancement that you inherited years ago, could you just elaborate on that a little bit more and then how should we think about that, kind of.

[Michael Hughes, Chief Financial Officer]

I mean just structurally sometimes when you buy a group of assets, you have to do an asset purchase or you do an entity purchase. This particular one that was done -- this acquisition that was done a while back, long time ago was the purchase of an entire entity versus the assets. And so when you purchase an entity, you're going to inherit it, unfortunately the liabilities that can come with that entity. As soon as you do those for the tax driven and whatnot and we inherited a loan guarantee with that. Now, that reserve going to hit the former tenant not the current tenant, that reserve is, it's a non-cash reserve. We don't know for sure, it will -- actually ever have to -- to ever be a claim on that. We'll certainly update you guys if that does become an actual cash charge, but we thought it was prudent to just go ahead and reserve it, because tenant's credit quality has deteriorated significantly.

[Operator]

[Operator Instructions] Our next question comes from Brian Hawthorne with RBC Capital Markets. Please proceed with your question.

[Brian Hawthorne, RBC Capital Markets]

First, so I haven't seen the heat map, has been any -- any industry has changed in terms of what you're looking to invest in?

[Jackson Hsieh, President and Chief Executive Officer]

No meaningful change.

[Brian Hawthorne, RBC Capital Markets]

And then just second one, on your developments, what kind of developments are those? Are those ground up or are they just repositioning back through?

[Ken Heimlich, Head of Asset Management]

It's a combination. There are some ground up, some of them are situations where we work with a tenant if they want to, say renovate the facility that they're in, we will contribute some dollars and get a return on those dollars.

[Jackson Hsieh, President and Chief Executive Officer]

Some of the acquisitions are development-oriented like the Topgolf facilities were development oriented, some of the CircusTrix are development oriented. Sometimes we're doing takeouts on completion from a broader, across the Board. You suffice to say you're going to get a better return on opportunities where you're either forward committing or providing development capital. And obviously, if we're going to be mindful of that overweighting that as it relates to the overall -- overall contribution to the acquisition plan.

[Brian Hawthorne, RBC Capital Markets]

So, what's the -- and kind of this, I think maybe $100 million a year range is that what your expectations are?

[Jackson Hsieh, President and Chief Executive Officer]

It depends. We're focused on dealing with a lot of tenant, existing tenants. The nice thing about when you develop a really strong tenant relationship is, you kind of understood what's important for them, what's important for us, trying to meet in the middle. And that's what we're seeing our best opportunity, then some of them are, I would call them, development sort of take-out opportunities. So, for us I guess what we do is, we look at how important is that tenant, how is the line up on our heat map? What's the pricing relative to our cost of capital? And how we would compare it relative to buying existing asset? And all of that factors in, I wouldn't say there's like a hard-line number. So we're just, stepping back, we're just looking for the best risk-adjusted returns right now, given our cost of capital. So, it's -- I would say it's a balance.

[Brian Hawthorne, RBC Capital Markets]

And then just looking at G&A, how do you kind of balance that with the delusion from the dispositions in a post-SMTA world.

[Jackson Hsieh, President and Chief Executive Officer]

Well, SMTA, first of all, even if it disappeared tomorrow, no, just contractually, it doesn't just disappear for us. As I've said in the past, for that contract to go away requires six-month notice, eight months transition. So there's already a built-in, lump-sum amount, even if SMTA resolve tomorrow which it can't, obviously, because it's a public company. So I think that's one. So we have some time regardless of the outcome of the resolution, there's some built-in time.

I'd say, the second is, look, this is going to be a bigger company and we're going to find more things that we can do that generate positive returns and spread and improve the quality of this company. So we're committed to that and we've come a long way. And so I think our G&A is right-sized, where this company will be in 18 to 20 months.

[Operator]

Thank you. There are no further questions in queue at this time. I would like to turn the conference back over to Mr. Jackson Hsieh for closing comments.

[Jackson Hsieh, President and Chief Executive Officer]

In closing, I guess I leave you with a couple of things as we finish. And thank you all for joining. I guess, first and foremost, why own Spirit today? I think there are really four reasons main reasons why. We have an excellent portfolio, people and processes. We're very cheap in comparison to our best-in-class peers. We are in the final 10% and I'd say it's a pretty short put to complete, what we need to do this year. We've exceeded, most if not, all the things that we've said, since I've taken over as CEO. We're focused on what I'll call the big three in 2019, that's what I'm going to brand it. Sell SMTA, continued operating excellence and meet or exceed our acquisition disposition and debt targets. If we do all that, SRC will result in a simplified pure play triple-net REIT. And so I thank you all for joining us. And, thank you.

[Operator]

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.