NYSE: SRC H. Attar, M. Briggs, T. Krauter Apr. 2016

Transcription

1 NYSE: SRC H. Attar, M. Briggs, T. Krauter Apr $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $ Share Price Volume (Millions)

2 Schedule 1. Introduction a) REIT Terminology & Valuation Methodology b) Company Overview c) Industry Overview 2. Key Business Features a) Investment Strategy b) Leasing Strategies & Deal Structure c) Portfolio Composition & Distribution d) Buyer Mix e) Recent Developments 3. Industry Considerations a) Residential Real Estate Trends & Expectations b) SRC vs. Comparable REITS 4. Variant Perception a) Market Perception Summary b) BIG Discrete Nonconformities Qualitative c) BIG Discrete Nonconformities Quantitative 5. Financial Review a) Model Strategies & Key Assumptions b) Possible Outcomes Examination c) Valuation Outcome Weighting d) SRC vs. Comparable Companies Metrics e) Comparable Valuation - Football Field Analysis f) Credit Analysis 6. Q/A 2

3 Introduction Introduction Key Business Features Industry Considerations Variant Perception Financial Review Q/A 3

4 REIT Terminology & Valuation Methodology Terminology Impairments Non-cash expense used to write down assets worth less than their balance sheet carrying amount. Funds from Operations (FFO) Net income plus D&A and impairments. Used to evaluate REITs in lieu of EPS. Adjusted Funds from Operations (AFFO) FFO minus capital expenditures and other situational adjustments. Used to more accurately portray operational performance. Sale-Leaseback (SLB) Transaction Sale of an asset followed by a long-term lease to the original owner. Essentially a loan from buyer to seller, where payments take the form of rent. Increases capital access for seller and capital utilization for buyer. Triple Net Lease Tenant is solely responsible for all of the costs relating to the asset being leased (including taxes, maintenance, etc.) in addition to the rent fee. Valuation Methodology REITs are often compared to each other using their Price/FFO or Price/AFFO ratios, which captures net value to investors. Asset-oriented investors also compare REITs using Price/NAV, which helps to appraise capital value in cases of liquidation or restructuring. Since REITs are required to pay out 90%+ of their earnings to shareholders each year as a dividend, the yield is also useful in measuring net investor value. Care must be taken, as REITs can utilize leverage to temporarily issue high, unsustainable dividends. 4

5 Company Overview Business Description Spirit Realty Capital (SRC) is a REIT with a portfolio focused on single tenant operationally essential real estate Operates across 49 states with large clusters in CA, TX, IL, and GA Rents ~2,600 properties to 455 tenants across 28 industries with 99% occupancy Portfolio is 87% retail, 7% industrial, and 6% commercial real estate Percent of Total Normalized Revenues Key Differentiators Specializes in Sale-Lease Back transactions to unlock value in capital Has triple-net leases with 10+ year terms, isolating revenue from cyclical pressure Low buyer concentration as largest tenant holds 9.1% of revenue and top 10 tenants hold 26.5% of revenue Master-lease structure cross-protects lower-quality portfolio holdings Lease and Deal Composition 22% 46% 54% 78% Single Lease Master Lease Sale-Lease Back Other 5

6 Industry Overview Description REITs are financial companies which offer highly liquid exposure to real estate markets Equity REITs invest in and own properties, mortgage REITS invest in and own mortgages, and hybrid REITs do both The industry is mature and competitive, with revenue and income growth rates closely tied to property markets Industry Revenue and Growth Rates Growth Drivers Interest rates determine how aggressively REITs are able to grow the balance sheet to increase rental/mortgage income Demand for real estate, which is driven by economic growth and job creation, drives down cap rate Core value proposition of cap rate > cost of capital as demand for real estate increases/financing decreases Product and Services Segmentation $100 $80 $60 $40 $20 $56.5 Revenue ($ Bln.) Growth % $56.9 $36.3 $69.9 $80.0 $85.4 $ % 40% 20% 0% -20% -40% 6.0% 1.4% 13.9% 20.4% Equity - Residential Equity - Retail Equity - Other Commercial Mortgage $ (A) 2006 (A) 2007 (A) 2008 (A) 2009 (A) 2010 (A) 2011 (A) 2012 (A) 2013 (A) 2014 (A) 2015 (A) 2016 (A) 2017 (E) 2018 (E) 2019 (E) 2020 (E) 2021 (E) 2022 (E) -60% 58.3% Hybrid Source: IBISWorld 6

7 Key Business Features Introduction Key Business Features Industry Considerations Variant Perception Financial Review Q/A 7

8 Investment Strategy Bottom-Up Underwriting Approach Rent Coverage 1 1. Unit Level Profitability Evaluate the cash flows at the property level 2. Real Estate Focus placed on operationally essential assets 3. Industry Expertise 4. Corporate Credit Perform credit reviews x 2.7x 2.7x 2.8x 2.9x 2.8x 2.8x 2.8x 2.8x 2.8x 2.9x 2.9x Operationally Essential Assets are essential to the tenant s generation of sales and profits Makes it difficult for a tenant to move from profitable locations Reduces risk that tenants would chose not to renew a lease or reject a lease in bankruptcy 100% 80% 60% 40% 20% 0% High Occupancy Over Time 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% Occupancy GDP Growth Sources: March 2016 Investor Presentation and company filings 1 Based on data from 63.8% of tenants who report financials to SRC 8

9 Key Investment Criteria Metric Range Average (Since 2011) Unit Level Coverage 2.00x to 3.00x 2.60x Lease Structure Master Lease or Spirit Form 70% Rent Escalations 1.25% to 2.00% Annually 1.58% Annually Investment Size $5 to $30 million $12 million Target Tenants Investment grade and equivalent non-investment grade small companies < 50 locations and $10 to $100 million in annual sales Credit rating must be higher than B- Investment grade and equivalent non-investment grade middle market companies locations and $100 million to $2 billion in annual sales Credit rating must be higher than B- Will take advantage of situational opportunities with Large Companies > 500 locations and $2+ billion in annual sales SRC will not invest in speculative companies of any size (<CCC+ credit rating) Source: March 2016 Investor Presentation 9

10 Leasing Strategy & Deal Structure Long Term Triple-Net Leases 86% of leases (based on revenue) are triple-net, in which tenants are contractually obligated to pay all operating expenses Prevents inflation having a negative impact on operating expenses Risk: If a property becomes vacant, expenses become SRC s liability Master Lease Structure Lease multiple properties to a single tenant on an all or none basis Prevents tenants from cherry picking premium properties Majority are 2 to 8 properties 124 master leases with weighted average remaining lease life of 13.6 years (46% of rental revenue) Rent Escalations 88% of properties contain one of the following contractual rent escalators: 1. Fixed amount (varies btwn. leases) 2. The lesser of: a. 1 to 1.25x any increase in CPI over a specified period b. A fixed 1% to 2% increase per year 36% 12% 52% Contractual Fixed Increases CPI-Related Flat Sources: March 2016 Investor Presentation, company filings 10

11 Portfolio Composition & Distribution Highly Diversified Across Industries Automotive Parts & Services 3.0% Lease Expirations as % of Revenue 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Health and Fitness 3.5% Sporting Goods 3.7% Medical / Other Office 4.0% Other 27.1% Building Materials 5.5% General Merchandise 11.4% Restaurant - Casual Dining 9.7% Restaurant - Quick Service 7.2% Convenience Store 6.5% Movie Theatres 6.4% Drug Store / Grocery 6.0% Pharmacies 6.0% 3.8% 3.3% 3.7% 3.5% 4.3% 5.7% 3.9% 5.5% 3.4% 5.6% 57.3% Post 2025 Source: Company filings Key Takeaways Aggressive diversification reduces the risk associated with adverse developments affecting a particular tenant, property, region or industry - Occupancy has never fallen below 96% and remained at 99% in 2008 and 2009 Long-term leases assure that no more than 5.7% of leases (based on revenue) are going to expire in a given year through Most leases have renewal options for additional terms Master leases provide additional protection to exposure within any one industry 11

12 Buyer Mix Top 10 Tenants Properties % of Revenue % % % % % 6 1.8% % % 8 1.3% % Top % Weighted Avg. Remaining Lease Term 11.4 yrs... Weighted Avg. Unit Level Coverage 2.5x... Source: March 2016 Investor Presentation Spirit Portfolio Considerations Properties 2,629 Occupancy 98.6% States 49 Tenants 438 Industries 28 Weighted Avg. Remaining Lease Term 10.7 yrs Weighted Avg. Unit Level Coverage 2.9x Top Tenant Concentration by % of Rev 40.0% 36.3% 37.9% 35.0% 30.0% 26.5% 25.1% 25.0% 21.2% 19.4% 20.0% 15.0% 10.0% 9.1% 5.9% 6.9% 5.0% 0.0% SRC NNN O Top Tenant Top 5 Tenants Top 10 Tenants 12

13 Recent Developments Cole II Merger In July 2013, SRC merged with Cole II, nearly doubling the size of SRC s real estate assets The surviving entity is managed by the original SRC executive team 2 board members added in association with Cole II 747 properties added, along with 69 secured mortgage loans Haggen Fiasco Haggen was one of SRC s top tenants (2.7% of revenue) when it declared bankruptcy earlier this year Originally invested in $224 million in 20 properties SRC s investment actually appreciated during Haggen s tenancy but questions were raised about management s judgment IPO SRC completed its IPO in September 2012, issuing million shares of common stock SRC originally went public in 2004 and was taken private in 2007 by a group of private equity investors SRC has been able to use access to the public markets to grow its investment portfolio and improve its balance sheet 2,000 1,500 1, Recent Capital Raised Revolver Term Loan Master Trust Notes Covertable Notes Share Issuance Accordian Feature Source: Company filings, news reports 13

14 Industry Considerations Introduction Key Business Features Industry Considerations Variant Perception Financial Review Q/A 14

15 Recent Real Estate Trends & Expectations REITs During 2008 Recession REITs overleveraged their balance sheets in expectation of continuously increasing property prices High debt levels made financing more expensive à hard to service debt or refinance the balance sheet Average returns in 08 were -40%, but equity REITs more robust Medium-Term Expectations 2.4% annualized top-line growth expected through 2021; estimates on position in current commercial real estate cycle vary SRC growth mainly endogenous and linked to SRC s specific operations Value created through strong, resilient business model, access to capital and strategic management in refinancing Source: IBISWorld, news reports REITs Since 2008 Recession Renewed access to capital, increasing property prices and SME business growth spurred REIT growth and strengthened their balance sheets Property values continue to increase significantly and FFO increased 10%, while NOI increased 13% in 2015 alone May be reaching the upper limit of RE prices w/o entering bubble territory Forward Interest Rate Sensitivity Low continue to see expansion of balance sheets and strategic refinancing Medium slower growth of balance sheets and some difficulty refinancing with lower rental incomes High Refinancing becomes expensive, REITs aim to decrease balance sheet to maintain financial health 15

16 SRC vs. Comparable REITs Business Models Triple net lease common, but not universal Operationally essential vs. more diversified holding types Management s compensation tied to performance (AFFO, occupancy, acquisitions) with checks and balances Occupancy Rates high within the industry (>95%), although SRC enjoys particularly high occupancy at 99% with low variability Source: Company filings Debt Levels and Financing SRC s Net Debt/EBITDA of 7 in line with average of 6.5; high debt levels common among REITs due to reliance on balance sheet as a source of revenue Share issuance widely used by REITs as a cheap source of capital for use in accretive acquisitions Reliance on multiple layers of debt to finance acquisitions, with SRC decreasing high-yield debt over time - 9/20/12 9/20/13 9/20/14 9/20/15 SRC EPR KIM NNN VER O BXP RE ETF 16

17 Variant Perception Introduction Key Business Features Industry Considerations Variant Perception Financial Review Q/A 17

18 Market Perception Summary (1/2) Haggen Meltdown Haggen, a tenant representing ~2.7% of normalized revenue, declared bankruptcy due to overextension Investors are concerned about management s underwriting and due diligence, as well as the credit profile of SRC s tenants in general Lack of tenant diversification concern in the past Share Issuance ATM Program allows SRC to issue 350 million shares (432 million shares outstanding currently). SRC issued 30 million shares in early April, leading investors to believe their equity stakes will continue to be diluted and decreasing investors conviction in management s ability to generate shareholder value Tenant s Risk Profile 61% of SRC s tenants are non-investment grade, making management s ability to successfully underwrite critical 64% of tenants provide unit-level P&L; half of non-reporting tenants are noninvestment grade SRC unable to independently verify validity of unit level financial reporting Potential Slowdown in Acquisitions Company s relatively high cost of capital has investors doubting SRC s ability to continue successfully purchasing properties with reasonably priced funds Potential timing in the property market cycle has investors worried about the SRC s ability to maintain its spread in cap rates 18

19 Market Perception Summary (2/2) SRC Moving HQ SRC is moving its HQ from Scottsdale to Dallas, which is expected to cost $20 million (at least). Loss of top talent, as well as time and money expected to be spent are a concern for investors Move will take approx. half a year to complete and so far only 20 of 70 employees are set to move with SRC $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $11.83 $10.53 SRC s Investment Grade SRC is currently a non-investment grade firm, due to high levels of debt, including significant portion of high-yield debt Lack of investment grade alienates both conservative personal and institutional investors, in particular mutual funds Price Movement: Recent Earnings Reports vs. Expectations Q4 14 Earnings Released; On target Q1 15 Earnings Released; 5% over target $9.63 $9.84 Q2 15 Earnings Released; 10% over target Q3 15 Earnings Released; On target $0.00 1/2/15 3/2/15 5/2/15 7/2/15 9/2/15 11/2/15 1/2/16 3/2/16 $10.31 Q4 15 Earnings Released; On target $11.40 Source: NYSE 19

20 BIG Discrete Nonconformities - Qualitative SRC Moving HQ ~12% of revenue comes from Texas, creating an operational incentive to move to the area Texas as a focal point with respect to SRC s 4 largest states based on normalized revenue Move to Dallas unlikely to lead to loss of top talent/management Legislative and tax incentives Haggen Calamity/Tenant Diversification 9 of 20 stores already re-let, 2 more stores sold. All other stores in the process of being sold or re-let Bankruptcy expected to leave the company with $40 million net gain (less low transaction costs) Shopko decreasing significantly as percent of normalized revenues from 14% in 2014 to 9% in 2015 with 5% goal Share Issuance Equity offerings provide cheaper access to important funds Recapitalization at the forefront of management s considerations Investors focus on dilution, but fact funds from offerings will drive profitable acquisitions and enable recapitalization, increasing net value per share 20

21 BIG Discrete Nonconformities - Quantitative Haggen Bankrupcy 9 stores re-let immediately with no days worth of rent lost 5 stores sold, others to follow From a financial perspective: overblown; SRC netted a 15% IRR on its investment on Haggen properties As a reflection of management s underwriting decision making: hard to say did mgmt. demonstrate growth? Share Issuance à Recapitalization Share issuance serves as an important source of funds for three reasons: 1. Continue to acquire properties at competitive cap rates 2. Recapitalize the balance sheet 3. Reduce debt levels à improve debt coverage, attracting more conservative investors Slowdown in Acquisitions (1) Completely undrawn LOC of up to $1bn on much more favorable terms (lower yield and unsecured) Term loan extension to $600 million, with possibility with two one year optionalities to defer principle payments and fund significant acquisitions within investment horizon Slowdown in Acquisitions (2) ~90% of leases contain annual escalations of varying amounts, typically between 1-2%. This creates top line growth of 1-2% on at least 60% of properties through 2025 Minimum contractual revenue $607 million (95% of revenue) for next fiscal year 21

22 Financial Review Introduction Key Business Features Industry Considerations Variant Perception Financial Review Q/A 22

23 Model Strategies & Key Assumptions Overview The model describes the financial future of SRC given a certain combination of operating assumptions Those financials are then evaluated on a DCF basis to determine present value Key levers: cap rate, investment rate, and expenses as a percentage of revenue It also looks at comparables for relative pricing and credit metrics to analyze risk Dependency Chart Debt Assumptions We assume SRC pays 10% mandatory amortization on its term loan and makes management-projected payments on mortgages Taking into account the cash required to pay the dividend, finance investment, and maintain a minimum balance, SRC then draws down/repays the revolver to make up the balance as necessary Output Analysis Income Statement DCF Comparables Credit Metrics Balance Sheet Operating Cash Flow Present equity value given assumptions Relative cost regardless of expectations Future credit risks given assumptions CF from Investing + Financing Debt Schedule Expectations determine return (not risk) Describes value using assets and FFO Describes costs of value in terms of risk 23

24 Possible Outcomes Examination (1/3) Revenue Growth Rate Conservative Rental income as a % of RE assets declines from 7.9% à 7.5% over 5 years, consistent with a long demand glut Other streams grow at 7.5% à 3.0% over 5 years, which is below the CAGR Base Rental income as a % of RE assets starts at 8.5% and increases geometrically by 1% per year due to contractual rate hikes in most leases Other streams grow at 10% à 5%, which is near the CAGR Optimistic Rental income as a % of RE assets from 8.7% à 9.0% over five years, consistent with a continuing increase in demand for retail space and contractual rate hikes Other streams grow at 12.5% à 8.0%, which is above the CAGR Operating Expenses Conservative G&A expense higher than 2015 at 7.5% Property costs from 4.4% à 4.5% over five years, reflecting potential increases in the price of maintenance Assumes another ~$5 million in restructuring fees in 2016 Base G&A expense even with 2015 at 7.2% Property costs even with 2015 at 4.2% Assumes no additional restructuring fees in 2016 Management has not indicated margins will change, so level expenses is the most probably outcome Optimistic G&A expense lower than 2015 at 6.9% Property costs lower than 2015 at 4.0%, reflecting potential improvements in maintenance efficiency Assumes no additional restructuring fees in 2016 Impairments drop significantly from 8.0% à 6.0% over 5 years, reflecting increased asset value and less need to impair 24

25 Possible Outcomes Examination (2/3) Share Issuance Rate Buybacks Management executes $200 million buyback program which has already been authorized by the board in , undertaking additional financing risk to do so Share issuance programs halt Mgmt. only plans to issue buybacks if the stock price drops to critical levels Constant Issuance Management does not execute share buyback program; this is most likely as buybacks would place additional strain on the already highly-levered balance sheet Share issuance programs halt; management has not issued guidance, so it is possible SRC will see further dilution, but unlikely Accelerating Issuance Management does not execute share buyback program Management continues to issue shares at the CAGR, which is plausible depending on credit availability and the rate of investment Minimum Cash Balance Conservative Management dramatically expands end of year cash balance from ~$20 million in 2016 to $100 million to assuage the fears of creditors Will cause notable slowdown in investment Neutral Management responds to creditors fears regarding exceptionally low Q4 cash balance by increasing cash targets to $50 million Assuming financing policy does not change substantially, the rate of investment slows by less than 5% in 2016 compared to a $25 million cash balance Aggressive Management keeps minimum cash target in the $20 - $25 million range Allows for maximally rapid investment, but may prevent gains in financing terms and perception of creditworthiness 25

26 Possible Outcomes Examination (3/3) Rate of Annual Investment Conservative Annual investment increases from -$25 million to $200 million over 5 years Most protective of credit, but reduces revenue growth as total assets are lower Neutral Annual investment increases from $0 to $300 million over 5 years Represents a middle ground where management is able to continue to invest near historical levels without unduly damaging the balance sheet Still pushes SRC to relatively high debt burdens Aggressive Annual investment increases from $25 million to $400 million over 5 years, with significant frontloading Deleterious to recent improvements in balance sheet health without coterminous share issuance, but necessary to maintain historical investment levels Dividend/FFO Decreasing Dividend decreases to 75% of FFO from 80% of FFO Management could pursue this option to reduce financing burdens in critical years like 2017, but investor confidence would be seriously hampered Constant Dividend stays constant at 80% of FFO for 5 years Management would be very hesitant to decrease the dividend, and increasing it would run counter to their stated objective of achieving investment grade credit ratings, so this is by far the most likely outcome Increasing Dividend increases to 85% of FF from 80% of FFO and stays there for 5 years Requires a significant increase in the amount of leverage taken on to balance cash flows May be realistic in scenarios where management wants to alleviate the pain of continued share issuance 26

27 Valuation Outcome Weighing Plug Probabilities Bear Base Bull Revenue Growth Rate 30% 40% 30% Operating Expenses 30% 40% 30% Share Issuance Rate 10% 50% 40% Minimum Cash Balance 40% 50% 10% Rate of Annual Investment 35% 50% 15% Dividend/FFO 10% 80% 10% Methodology Since there are 729 possible composite cases, 4 representative cases were selected to convey the scope of possibilities and construct a price target The weight of each representative case is equal to the chance of all of its plugs happening divided by the probability of any representative case occurring Representative Cases Un-weighted Weighted Return 1 Level growth, standard balance sheet mgmt % 49.3% 20.0% Increasing growth, aggressive balance sheet mgmt % 01.3% 36.1% Economic turndown, conservative balance sheet mgmt % 12.4% -33.5% Level growth, conservative balance sheet mgmt % 37.0% 25.3% Total/Average % 100.0% 15.54% 1 This figure represents the percentage by which SRC s equity is undervalued. It does not consider dividends or changes in shares outstanding. 27

28 SRC vs. Comparable Companies Metrics Share Price Enterprise Value (EV, $ Bln.) Net Revenue Debt/EBITDA (TTM, $ Mln) FFO/Share, TTM (FFOPS) Net Asset Value per Share (NAV/S) Annualized Yield FFO Growth/Share Past 3 Years Price/FFO (P/FFO) Price/NAV (P/NAV) Spirit Realty Capital (SRC) EPR Properties (EPR) Kimco Realty Corporation (KIM) National Retail Properties (NNN) $11.24 $ $660 $0.82 $ % 50.03% $65.77 $ $418 $4.44 $ % -2.42% $28.29 $ $1,170 $1.56 $ % 15.56% $45.92 $ $483 $2.15 $ % 12.74% Vereit (VER) $9.01 $ $399 $0.63 $ % n/a Realty Income Corp (O) Boston Properties (BXP) $63.08 $ $1,023 $2.77 $ % 14.94% $ $ $2,491 $1.21 $ % 8.71% Average (Excl. SRC) $56.74 $ $997 $2.13 $ % 9.90% P/FFO Discount: 25.0% P/NAV Discount: 33.2% 28

29 Comparable Valuation Football Field Analysis TTM P/FFO TTM P/NAV Dividend Yield $0.00 $5.00 $10.00 $15.00 $20.00 $25.00 This analysis compares SRC s valuation to the comparable REITs according to P/FFO, P/NAV, and yield: P/FFO SRC is trading below the 25 th percentile on a P/FFO basis highlighting the market s belief that they will not able to maintain their growth P/NAV On a P/NAV basis, SRC is well below the average indicating possible undervaluation of their assets Dividend Yield SRC boasts one of the highest dividend yields, indicating unwarranted fear of a risky dividend Note: The analysis shows the 25 th to 75 th percentiles for the comparable REITs 29

30 Credit Analysis Best Case Fiscal Year Ending December 31, Debt Service Coverage Ratio (DSCR) Debt Ratio Current Ratio Debt/EBITDA Neutral/Most Probable Fiscal Year Ending December 31, Debt Service Coverage Ratio (DSCR) Debt Ratio Current Ratio Debt/EBITDA Worst Case Fiscal Year Ending December 31, Debt Service Coverage Ratio (DSCR) Debt Ratio Current Ratio Debt/EBITDA Management Goal: Debt/EBITDA of < 7.00 Source: Earnings call transcript 30

31 Recommendation We recommend a buy and suggest a 6-8% position. Summary of reasoning: Focus on SLB transactions lets SRC operate in a market with low competition and high yields. These transactions offer the buyer massive leverage. The opportunities in and security of the space are widely undervalued. Limited market risk despite being in a highly cyclical industry as evidenced by SRC s resiliency during the Financial Crisis of yr. leases, operationally essential property, and 40%+ master leases protect rental cash flows (~95% of revenue). High value versus comparable companies as measured by Price/FFO and Price/NAV. Multiples pushed down by concerns over tenant solvency which BIG discounts heavily. Market questions about management s judgment over Haggen and HQ relocation mitigated by consistency in meeting revenue, FFO and EPS targets. SRC s yield provides downside protection. Locked in rents through 2020 essentially guarantee the dividend. Depreciation in share price will draw capital as yield increases. Schedule for Future Due Diligence: Reexamine multiples vs. comparables after Q1 SEC filings are released. If SRC s share price appreciates to the 50 th percentile on any metric (bottom of red zone on football field graph) reevaluate potential for additional appreciation. If Debt/EBITDA exceeds 7.5x or 2016 FFO falls short of guidance, reevaluate critically. 31

32 Q/A Introduction Key Business Features Industry Considerations Variant Perception Financial Review Q/A 32

33 Appendix 1. Sale-Leaseback Transaction 2. Credit Metrics - Definitions 3. SRC Leadership 4. Management Compensation Incentives 5. Debt Maturity Schedule 6. Proactive Risk Management 7. Development Since IPO 8. Abbreviated Income Statement Most Pessimistic 9. Abbreviated Income Statement Neutral 10. Abbreviated Income Statement Most Optimistic 11. Abbreviated Balance Sheet Most Pessimistic 12. Abbreviated Balance Sheet Neutral 13. Abbreviated Balance Sheet Most Optimistic 33

34 Sale-Leaseback Transaction A Sale-Leaseback (SLB) Transaction is the sale of an asset followed by a long-term lease to the original owner Essentially a loan from buyer to seller, where payments take the form of rent and the seller may or may not have the option to buy back the property at the end of the term Increases capital access for seller and capital utilization for buyer Sellers are generally unable to raise sufficient capital through traditional channels due to either lack of creditworthiness or existing overleverage; SLB transactions are good solutions because possession of the real estate asset limits the importance of seller s credit to the buyer Property Regular Rent Payments Sale Price 34

35 Credit Metrics - Definitions Debt Service Coverage Ratio (DSCR) = Net Operating Income / Total Debt Service. A value less than 1 indicates that the company has sufficient income to pay its obligations. Debt Ratio = Total Debt / Total Assets. A debt ratio of less than 1 indicates that the company has more assets than debt. For REITs, debt ratios are typically high since balance sheets tend to be large. Current Ratio = Current Assets / Current Liabilities. A ratio under 1 indicates that the company would be unable to meet their short-term obligations if they all came due. Debt/EBITDA = Debt/EBITDA. Used by credit agencies as a metric for how likely the company is to default on debt. Also a critical rating in the evaluations done by ratings firms to determine the grade of the company s debt. 35

36 SRC Leadership Thomas H. Nolan, Jr. Chairman & CEO - 30 years Real Estate and Portfolio Management experience - Managed over $75 billion of real estate transactions - Prior President of AEW Partners Private Real Estate Equity Funds - Joined SRC in Sept Philip D. Joseph, Jr. Executive Vice President and Chief Financial Officer - 23 years Real Estate experience - Over $35 billion of public and private capital raised in global markets - Previously Global Treasurer of Prologis - Joined SRC in Apr Mark L. Manheimer - Executive Vice President Asset Management - 15 years Banking and Real Estate experience - Previously with Realty Income and Cole Real Estate Investments - Joined SRC in Apr (circa IPO) Gregg A. Seibert Executive Vice President and Chief Investment Officer - 27 years Real Estate and Net Lease experience - Executive at FFCA for 7 years prior to sale to GE Capital - Joined SRC at inception in Sept Sources: March 2016 Investor Presentation, company website, news reports Key Takeaways SRC post-ipo has a mostly new senior mgmt. team Experience of new execs is formidable Proven ability to deliver on stated goals, as metrics highlighted in communication with investors have improved dramatically since 2012 Caveat: all of these execs were part of Haggen disaster 36

37 Management Compensation Incentives Executive AFFO Debt to EBITDA Thomas H. Nolan Phillip D. Joseph, Jr Gregg A. Seibert Mark L. Manheimer Occupancy Acquisitions Individual Performance 17.5% 17.5% 17.5% 17.5% 30.0% 17.5% 26.3% 13.1% 13.1% 30.0% 17.5% 8.8% 8.8% 35.0% 30.0% 17.5% 8.8% 21.9% 21.9% 30.0% Note: Figures may not add up to 100% due to rounding. 37

38 Debt Maturity Schedule $800 $700 $600 $500 $400 $300 $200 $100 $0 6.15% 5.80% 2.73% 3.00% 4.73% 4.55% 5.61% 5.37% NA 6.00% 4.65% Line of Credit CMBS Debt Unsecured Term Loan Master Trust Convertible Notes Source: March 2016 Investor Presentation 38

39 Proactive Risk Management Default Risk Termination Risk Expected Loss Calculates expected default frequency (EDF) based on a tenant s financials Shadow ratings calculated using Moody s software when actual ratings are unavailable Based on unit level profitability (typically FCCR) 63.8% of tenants are required to provide P&L statements Half of non-reporting tenants are investment grade Expected loss is determined by analyzing the potential loss through the sale of an asset or the cost associated with releasing an asset to another party Average Expected 1-Year Rental Loss Each tenant is assigned a risk rating of 1-6 Tenants with ratings of 4-6 are placed on a credit watch list and reviewed at weekly credit watch meetings A risk rating of 4 has a 5% expected loss rate Source: March 2016 Investor Presentation 39

40 Development Since IPO Source: March 2016 Investor Presentation 40

41 Abbreviated Income Statement Most Pessimistic ($ in thousands, except per share data) Fiscal Year Ending December 31, Revenues: Rentals $255,672 $266,567 $404,402 $574,456 $634,151 $591,199 $581,778 $581,094 $584,011 $586,622 Other Income $7,558 $6,548 $15,065 $28,415 $33,184 $35,673 $37,902 $39,797 $41,389 $42,631 Total Revenue $263,230 $273,115 $419,467 $602,871 $667,335 $626,871 $619,681 $620,891 $625,400 $629,253 % Growth 3.8% 53.6% 43.7% 10.7% -6.1% -1.1% 0.2% 0.7% 0.6% Expenses: Interest $169,343 $156,220 $179,267 $220,070 $222,901 $215,402 $221,438 $230,572 $243,019 $255,751 Depreciation and Amortization 103, , , , , , , , , ,821 General & Administrative 27,854 36,252 35,146 44,252 47,730 47,015 46,476 46,567 46,905 47,194 Impairments (Recoveries) 5,646 8,918 (185) 36,019 69,734 62,687 61,968 62,089 62,540 62,925 Property Costs 4,693 5,176 11,760 23,383 27,715 27,582 27,886 27,940 28,143 28,316 Other Expenses 553 1,054 59,079 16,653 9,795 26,896 2,479 2,484 2,502 2,517 Total Expenses $311,268 $312,604 $449,121 $588,343 $638,508 $638,698 $618,502 $630,953 $649,178 $667,525 Operating Income from Continuing Operations ($48,038) ($39,489) ($29,654) $14,528 $28,827 ($11,826) $1,179 ($10,062) ($23,777) ($38,273) % Margin -18.2% -14.5% -7.1% 2.4% 4.3% -1.9% 0.2% -1.6% -3.8% -6.1% Non-Operating Expenses $0 ($65,044) ($4,810) ($129,500) ($6,324) $0 $0 $0 $0 $0 Income Tax (Expense) Benefit 60 (504) (1,113) (673) (601) Income (Loss) from Continuing Operations ($47,978) ($72,515) ($33,172) ($50,895) $25,064 ($11,826) $1,179 ($10,062) ($23,777) ($38,273) % Margin -18.2% -26.6% -7.9% -8.4% 3.8% -1.9% 0.2% -1.6% -3.8% -6.1% Income (Loss) from Discontinued Operations (13,149) (369) (2,077) 3, Gain (Loss) from Disposition of Assets ,240 88, Net Income (Loss) ($63,863) ($76,233) $1,677 ($33,799) $114,730 ($11,826) $1,179 ($10,062) ($23,777) ($38,273) % Margin -24.3% -27.9% 0.4% -5.6% 17.2% -1.9% 0.2% -1.6% -3.8% -6.1% Total Adjustments for FFO 136, , , , , , , , , ,747 FFO $72,991 $52,831 $139,299 $236,875 $355,563 $309,976 $321,402 $313,329 $304,831 $295,474 % Margin 27.7% 19.3% 33.2% 39.3% 53.3% 49.4% 51.9% 50.5% 48.7% 47.0% 41

42 Abbreviated Income Statement - Neutral ($ in thousands, except per share data) Fiscal Year Ending December 31, Revenues: Rentals $255,672 $266,567 $404,402 $574,456 $634,151 $636,054 $643,759 $664,705 $692,519 $720,606 Other Income $7,558 $6,548 $15,065 $28,415 $33,184 $36,502 $39,788 $42,971 $45,979 $48,277 Total Revenue $263,230 $273,115 $419,467 $602,871 $667,335 $672,557 $683,546 $707,676 $738,497 $768,884 % Growth 3.8% 53.6% 43.7% 10.7% 0.8% 1.6% 3.5% 4.4% 4.1% Expenses: Interest $169,343 $156,220 $179,267 $220,070 $222,901 $204,959 $181,950 $171,723 $182,849 $194,308 Depreciation and Amortization 103, , , , , , , , , ,617 General & Administrative 27,854 36,252 35,146 44,252 47,730 48,424 49,215 50,953 53,172 55,360 Impairments (Recoveries) 5,646 8,918 (185) 36,019 69,734 60,530 58,101 56,614 59,080 61,511 Property Costs 4,693 5,176 11,760 23,383 27,715 28,247 28,709 29,722 31,017 32,293 Other Expenses 553 1,054 59,079 16,653 9,795 22,690 2,734 2,831 2,954 3,076 Total Expenses $311,268 $312,604 $449,121 $588,343 $638,508 $624,436 $580,838 $577,775 $603,389 $629,164 Operating Income from Continuing Operations ($48,038) ($39,489) ($29,654) $14,528 $28,827 $48,121 $102,708 $129,900 $135,109 $139,720 % Margin -18.2% -14.5% -7.1% 2.4% 4.3% 7.2% 15.0% 18.4% 18.3% 18.2% Non-Operating Expenses $0 ($65,044) ($4,810) ($129,500) ($6,324) $0 $0 $0 $0 $0 Income Tax (Expense) Benefit 60 (504) (1,113) (673) (601) Income (Loss) from Continuing Operations ($47,978) ($72,515) ($33,172) ($50,895) $25,064 $48,121 $102,708 $129,900 $135,109 $139,720 % Margin -18.2% -26.6% -7.9% -8.4% 3.8% 7.2% 15.0% 18.4% 18.3% 18.2% Income (Loss) from Discontinued Operations (13,149) (369) (2,077) 3, Gain (Loss) from Disposition of Assets ,240 88, Net Income (Loss) ($63,863) ($76,233) $1,677 ($33,799) $114,730 $48,121 $102,708 $129,900 $135,109 $139,720 % Margin -24.3% -27.9% 0.4% -5.6% 17.2% 7.2% 15.0% 18.4% 18.3% 18.2% Total Adjustments for FFO 136, , , , , , , , , ,128 FFO $72,991 $52,831 $139,299 $236,875 $355,563 $368,236 $420,938 $452,447 $468,506 $483,847 % Margin 27.7% 19.3% 33.2% 39.3% 53.3% 54.8% 61.6% 63.9% 63.4% 62.9% 42

43 Abbreviated Income Statement Most Optimistic ($ in thousands, except per share data) Fiscal Year Ending December 31, Revenues: Rentals $255,672 $266,567 $404,402 $574,456 $634,151 $653,564 $670,595 $704,653 $743,888 $775,333 Other Income $7,558 $6,548 $15,065 $28,415 $33,184 $37,332 $41,439 $45,375 $49,005 $52,926 Total Revenue $263,230 $273,115 $419,467 $602,871 $667,335 $690,896 $712,033 $750,028 $792,893 $828,258 % Growth 3.8% 53.6% 43.7% 10.7% 3.5% 3.1% 5.3% 5.7% 4.5% Expenses: Interest $169,343 $156,220 $179,267 $220,070 $222,901 $204,959 $181,950 $163,143 $168,274 $184,907 Depreciation and Amortization 103, , , , , , , , , ,285 General & Administrative 27,854 36,252 35,146 44,252 47,730 47,672 49,130 51,752 54,710 57,150 Impairments (Recoveries) 5,646 8,918 (185) 36,019 69,734 55,272 53,403 52,502 51,538 49,695 Property Costs 4,693 5,176 11,760 23,383 27,715 27,636 28,481 30,001 31,716 33,130 Other Expenses 553 1,054 59,079 16,653 9,795 22,764 2,848 3,000 3,172 3,313 Total Expenses $311,268 $312,604 $449,121 $588,343 $638,508 $618,411 $579,666 $574,537 $595,597 $626,481 Operating Income from Continuing Operations ($48,038) ($39,489) ($29,654) $14,528 $28,827 $72,486 $132,367 $175,491 $197,296 $201,777 % Margin -18.2% -14.5% -7.1% 2.4% 4.3% 10.5% 18.6% 23.4% 24.9% 24.4% Non-Operating Expenses $0 ($65,044) ($4,810) ($129,500) ($6,324) $0 $0 $0 $0 $0 Income Tax (Expense) Benefit 60 (504) (1,113) (673) (601) Income (Loss) from Continuing Operations ($47,978) ($72,515) ($33,172) ($50,895) $25,064 $72,486 $132,367 $175,491 $197,296 $201,777 % Margin -18.2% -26.6% -7.9% -8.4% 3.8% 10.5% 18.6% 23.4% 24.9% 24.4% Income (Loss) from Discontinued Operations (13,149) (369) (2,077) 3, Gain (Loss) from Disposition of Assets ,240 88, Net Income (Loss) ($63,863) ($76,233) $1,677 ($33,799) $114,730 $72,486 $132,367 $175,491 $197,296 $201,777 % Margin -24.3% -27.9% 0.4% -5.6% 17.2% 10.5% 18.6% 23.4% 24.9% 24.4% Total Adjustments for FFO 136, , , , , , , , , ,981 FFO $72,991 $52,831 $139,299 $236,875 $355,563 $387,866 $449,624 $502,132 $535,022 $549,758 % Margin 27.7% 19.3% 33.2% 39.3% 53.3% 56.1% 63.1% 66.9% 67.5% 66.4% 43

44 Abbreviated Balance Sheet Most Pessimistic ($ in thousands) Fiscal Year ending December 31, Assets: Real Estate Investments $7,193,796 $7,527,369 $7,439,682 $7,477,714 $7,615,625 $7,753,085 $7,890,159 Less: Accumulated Depreciation (752,210) (860,954) (1,120,069) (1,378,324) (1,639,625) (1,905,694) (2,176,515) Other Investments, Net 875, , , , , , ,543 Cash and Cash Equivalents 176,181 21, , , , , ,252 Deferred Costs and Other Assets, Net 185, , , , , , ,679 Goodwill 291, , , , , , ,421 Total Assets $7,970,669 $7,918,996 $7,795,361 $7,365,537 $7,207,447 $7,192,564 $6,906,538 % Growth -0.6% -1.6% -5.5% -2.1% -0.2% -4.0% Liabilities: Mortgages and Notes Payable, Net 3,629,998 3,079,787 2,820,153 2,265,417 1,979,920 1,807,135 1,676,019 Revolving Credit Facilities $15,114 $0 $0 $0 $395,142 $395,142 $519,523 Convertible Notes, Net 678, , , , , , ,098 Term Loan, Net 0 322, , , , , ,670 Other liabilities 329, , , , , , ,836 Total Liabilities $4,652,568 $4,429,165 $4,113,248 $3,481,470 $3,571,822 $3,359,361 $3,329,146 % Growth -4.8% -7.1% -15.4% 2.6% -5.9% -0.9% Stockholders' Equity: Capital in Excess of Par Value 4,361,320 4,721,323 5,171,319 5,621,314 5,621,314 6,071,310 6,071,310 Accumulated Deficit (1,046,249) (1,234,882) (1,492,600) (1,740,645) (1,989,087) (2,241,511) (2,497,320) Common Stock ($0.01 Par Value) $4,113 $4,418 $4,423 $4,427 $4,427 $4,432 $4,432 Accumulated Other Comprehensive Loss (1,083) (1,028) (1,028) (1,028) (1,028) (1,028) (1,028) Total Stockholders' Equity $3,318,101 $3,489,831 $3,682,113 $3,884,068 $3,635,626 $3,833,202 $3,577,393 % Growth 5.2% 5.5% 5.5% -6.4% 5.4% -6.7% Total Liabilities and Stockholders Equity $7,970,669 $7,918,996 $7,795,361 $7,365,537 $7,207,447 $7,192,564 $6,906,538 44

45 Abbreviated Balance Sheet - Neutral ($ in thousands) Fiscal Year ending December 31, Assets: Real Estate Investments $7,193,796 $7,527,369 $7,466,839 $7,558,737 $7,802,123 $8,043,044 $8,281,533 Less: Accumulated Depreciation (752,210) (860,954) (1,120,539) (1,380,667) (1,646,600) (1,920,917) (2,203,534) Other Investments, Net 875, , , , , , ,091 Cash and Cash Equivalents 176,181 21, ,804 75,956 52,571 53,808 55,032 Deferred Costs and Other Assets, Net 185, , , , , , ,577 Goodwill 291, , , , , , ,421 Total Assets $7,970,669 $7,918,996 $7,806,611 $7,390,791 $7,350,027 $7,322,648 $7,283,120 % Growth -0.6% -1.4% -5.3% -0.6% -0.4% -0.5% Liabilities: Mortgages and Notes Payable, Net 3,629,998 3,079,787 2,820,153 2,265,417 1,979,920 1,807,135 1,676,019 Revolving Credit Facilities $15,114 $0 $0 $0 $488,418 $880,935 $1,225,282 Convertible Notes, Net 678, , , , , , ,098 Term Loan, Net 0 322, , , , , ,670 Other liabilities 329, , , , , , ,841 Total Liabilities $4,652,568 $4,429,165 $4,113,248 $3,481,470 $3,672,764 $3,885,080 $4,092,910 % Growth -4.8% -7.1% -15.4% 5.5% 5.8% 5.3% Stockholders' Equity: Capital in Excess of Par Value 4,361,320 4,721,323 5,171,319 5,621,314 5,621,314 5,621,314 5,621,314 Accumulated Deficit (1,046,249) (1,234,882) (1,481,350) (1,715,392) (1,947,449) (2,187,145) (2,434,503) Common Stock ($0.01 Par Value) $4,113 $4,418 $4,423 $4,427 $4,427 $4,427 $4,427 Accumulated Other Comprehensive Loss (1,083) (1,028) (1,028) (1,028) (1,028) (1,028) (1,028) Total Stockholders' Equity $3,318,101 $3,489,831 $3,693,363 $3,909,321 $3,677,264 $3,437,568 $3,190,210 % Growth 5.2% 5.8% 5.8% -5.9% -6.5% -7.2% Total Liabilities and Stockholders Equity $7,970,669 $7,918,996 $7,806,611 $7,390,791 $7,350,027 $7,322,648 $7,283,120 45

46 Abbreviated Balance Sheet Most Optimistic ($ in thousands) Fiscal Year ending December 31, Assets: Real Estate Investments $7,193,796 $7,527,369 $7,497,097 $7,743,695 $8,091,193 $8,439,655 $8,789,959 Less: Accumulated Depreciation (752,210) (860,954) (1,121,063) (1,384,917) (1,659,056) (1,945,244) (2,243,529) Other Investments, Net 875, , , , , , ,508 Cash and Cash Equivalents 176,181 21, , ,012 41,635 42,899 44,068 Deferred Costs and Other Assets, Net 185, , , , , , ,154 Goodwill 291, , , , , , ,421 Total Assets $7,970,669 $7,918,996 $8,115,272 $8,006,162 $7,633,587 $7,716,932 $7,788,581 % Growth -0.6% 2.5% -1.3% -4.7% 1.1% 0.9% Liabilities: Mortgages and Notes Payable, Net 3,629,998 3,079,787 2,820,153 2,265,417 1,979,920 1,807,135 1,676,019 Revolving Credit Facilities $15,114 $0 $0 $0 $176,408 $662,947 $1,101,407 Convertible Notes, Net 678, , , , , , ,098 Term Loan, Net 0 322, , , , , ,670 Other liabilities 329, , , , , , ,660 Total Liabilities $4,652,568 $4,429,165 $4,113,248 $3,481,470 $3,335,110 $3,649,177 $3,958,854 % Growth -4.8% -7.1% -15.4% -4.2% 9.4% 8.5% Stockholders' Equity: Capital in Excess of Par Value 4,361,320 4,721,323 5,471,316 6,221,308 6,221,308 6,221,308 6,221,308 Accumulated Deficit (1,046,249) (1,234,882) (1,472,689) (1,700,021) (1,926,236) (2,156,957) (2,394,987) Common Stock ($0.01 Par Value) $4,113 $4,418 $4,426 $4,433 $4,433 $4,433 $4,433 Accumulated Other Comprehensive Loss (1,083) (1,028) (1,028) (1,028) (1,028) (1,028) (1,028) Total Stockholders' Equity $3,318,101 $3,489,831 $4,002,024 $4,524,692 $4,298,477 $4,067,756 $3,829,726 % Growth 5.2% 14.7% 13.1% -5.0% -5.4% -5.9% Total Liabilities and Stockholders Equity $7,970,669 $7,918,996 $8,115,272 $8,006,162 $7,633,587 $7,716,932 $7,788,581 46