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Spirit Realty Capital Inc (NYSE:SRC)
Q3 2019 Earnings Call
Nov 5, 2019, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the Spirit Realty Capital Third Quarter 2019 Earnings Call. [Operator Instructions].

At this time, I will turn the conference over to Pierre Revol, Senior Vice President of Strategic Planning and Investor Relations. Mr. Revol, you may now begin.

Pierre Revol -- Senior Vice President, Head of Strategic Planning and Investor Relations

Thank you, operator, and thank you everyone for joining us today. Presenting our 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'd 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 contain 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 in 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 website. For prepared remarks, I'm now pleased to introduce Mr. Jackson Hsieh. Jackson?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Thanks, Pierre, and good morning everyone. I'm happy to report that we are now 100% complete in our process of making Spirit a simplified triple net-lease REIT. Well, I can't believe I just said that. In the third quarter, SMTA closed the previously announced $4 billion sale of the properties in the Master Trust 2014 portfolio and three Flying J Centers previously owned by Spirit. In conjunction with that transaction, Spirit received $265 million in proceeds and I resigned as Chairman and Director of SMTA, and I can now devote 100% of my attention to Spirit Realty.

So what's next? With the removal of 770 properties under Spirit management, I'm focused on harnessing the increased bandwidth across various departments within the Spirit platform to beat our operating, acquisition and financial targets. We have an exceptional battle-tested team and a very scalable platform that we can utilize to grow shareholder value and we're already making good progress.

As I'm sure you've noted from our earnings release this morning, we're increasing this year's acquisition guidance to $1.1 billion to $1.3 billion, along with increasing our earnings guidance. This acquisition volume is not by accident. When we completed our forward common stock issuance in May, we did so knowing that several opportunities to deploy capital will present themselves, and we needed to have the ability to execute on those situations efficiently. I'm happy to say that by year-end, the equity capital we raised and the proceeds from the SMTA termination will be fully deployed and we will enter 2020 with very low leverage and robust capacity on our line of credit. Mike will go into greater detail in his remarks on the capital markets activity we completed in the third quarter, but the takeaway is that we had an excellent quarter across all fronts.

Now onto a rundown of our third quarter operating results and key financial metrics. We generated AFFO per diluted share of $0.87, excluding the impact of the SMTA termination fee. We had strong operational performance on all fronts with portfolio occupancy of 99.6%, lost rent below 0.2%, it was actually 16 basis points, and 1.5% property cost leakage. We grew same-store sales by 1%, which was below our last quarter, primarily based upon the timing of rent bumps, and we increased our weighted average lease term to 9.9 years.

Now turning to capital allocation. We acquired 69 properties totaling $270.6 million during the quarter and invested an additional $5.9 million in revenue producing capital, with an initial cash yield of 6.84% and economic yield of 7.61%, a weighted average lease term of 13.7 years and average annual rent escalators of 1.7%. The investment activity representing key attributes that we look for, including publicly listed tenants that are aligned with our industry view, our lease structures that provide higher organic rent growth.

Investment categories acquired included car wash facilities, professional services, dollar stores, entertainment and auto service. Approximately 61% of the total investment was derived from public tenants and represents key real estate and their underlying business. The split in rents from service retail, traditional retail and industrial other was 39%, 24% and 37% respectively. Our top 10 -- our top 15 tenancy has and will continue to evolve as we execute our investment strategy.

Dollar Tree, Family Dollar has now increased to our 5th largest tenant from a rent contribution perspective. The 32 units that we acquired are secured by three master leases. Bank of America moved up to the 11th in rental contribution. We review office buildings very selectively and we like the critical composition of business lines within this building. The long-term tenant history and recent investment by BoA in the building. In addition, we like the real estate submarket, trade area demographics, rent economics, price per square foot of this asset, and the numerous amenities around this 3.5 million square foot submarket such as the town center, light rail and strong school system.

During the quarter, we disposed of $67.7 million in occupied properties at a 6.05% cap rate and one vacant property. The most notable sale transaction was the 3 Flying Js to HPT for $55 million at a 5.7% cap rate. We also sold the Red Lobster, Walgreens and Tractor Supply.

Now, before I turn the call over to Mike, I want to remind everyone about our Investor Day event in New York City on December 5th. I'm excited to have you see, meet and hear from a large number of our associates across many departments who will be presenting. As a result of our upcoming investor day, we are not attending the NAREIT sessions in Los Angeles.

With that, I'll turn it over to Mike. Mike?

Michael Hughes -- Executive Vice President, Chief Financial Officer

Thanks, Jack, and good morning everyone. It was another exciting quarter for Spirit, again marked by capital markets activity and capital deployment.

Starting with the balance sheet. On September 9th, we issued $300 million of 3.2%, seven-year senior unsecured notes due in 2027 and $500 million of 3.4% 10-year senior unsecured notes due in 2030 and use the proceeds to repay the amounts outstanding under our term loan facilities. These offerings allowed us to take advantage of a low interest rate environment, locking in a seven-year and 10-year treasury yield of 1.565% and 1.627% respectively, and utilize our improved credit spread which tightened another 20 basis points on the 10-year since our June issuance. This transaction has also further simplified our balance sheet, removing all floating rate debt exposure outside of our revolving credit facility and extending our weighted average debt maturities to 7.1 years.

Despite funding $277 million of acquisitions and revenue producing capital and repaying $26.4 million related party mortgages, we ended the quarter with an unprecedented amount of liquidity at Spirit. This liquidity was driven by the SMTA transaction and the settlement of all the remaining shares of common stock previously issued in May under forward contracts in anticipation of our fourth quarter acquisition activity.

I do want to point out, their leverage this quarter of 4 times was positively impacted by the SMTA fees, dividends and interest income on MTA notes received through September 20th. Third quarter leverage excluding this income would be approximately 4.4 times. In any event, our leverage is certainly low and we expect it to move closer to our target range by year-end.

Now turning to the key operating metrics. During the third quarter, annualized contractual rent which annualizes the rent in place at quarter-end were $13.6 million compared to last quarter, approximately $17.7 million of the increase was attributable to acquisitions and contractual rent increases, offset by a reduction of $4.1 million attributable to dispositions. Unreimbursed property costs or leakage was basically flat compared to last quarter at 1.5% and lost rent was affected by non-existent.

There are few items I want to point out on the income statement this quarter. G&A was again artificially elevated by share-based awards issued by the SMTA Board of Trustees to the SMTA CEO, who is an employee of Spirit. As our employee benefited from this awards in accordance with the accounting rules on share-based payments, we recorded non-cash asset management fee revenues of approximately $500,000 for the corresponding offset to G&A. Recording of this non-cash transaction did not impact our net income or any of our non-GAAP earnings metrics, and this arrangement will not reoccur in future quarters.

Finally, other income included a make-whole payment of $900,000 to the repayment of our Master Trust 2014 notes in conjunction with SMTA sale of the Master Trust. As penalties for mortgage and lease terminations are considered to ordinary course in our business, this penalty is included in the AFFO per share excluding AM termination fee net of tax. Excluding the make-whole payment, we reduced our calculated AFFO by approximately $0.01 per share.

Now turning to our guidance. Our updated guidance is being presented relative to the previous guidance provided assuming the sale of SMTA's Master Trust 2014 on September 20th. For the full year 2019, we are raising our projected AFFO per share range from $3.27 to $3.31, to $3.31 and $3.34. Please note that fourth quarter AFFO will include approximately $1.4 million in mortgage prepayment penalties, which will be reflected in other income and a repayment of $23.8 million in mortgage receivables. We're raising our projected capital deployment comprising acquisitions, revenue producing capital and redevelopments from $700 million to $900 million, to $1.1 billion to $1.3 billion. We're maintaining our asset dispositions range of $225 million to $275 million, excluding the sale of the Flying Js to HPT, and we are reducing our adjusted debt-to-annualized adjusted EBITDA ROE range from 5 times to 5.4 times, to 4.8 times to 5.2 times.

And with that, I will open up the call for questions.

Questions and Answers:

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Thank you. The first question comes from the line of Greg McGinniss with Scotiabank. Please proceed with your question.

Greg McGinniss -- Scotiabank -- Analyst

Hey, good morning everyone. So, Jackson, we got another quarter and another increased acquisition guidance. And I think you mentioned some opportunities you knew were coming, you can now take advantage of, could you talk about those opportunities a bit more? And then, should we expect a similar level of acquisitions next year, maybe just less the SMTA-related income?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Thanks for the question, Greg. Look, what we have this year, there has been a number of different portfolios and opportunities in the market this year. At the beginning of the year, we suspected that that would be the case. What I can tell you about the fourth quarter, because obviously we took the equity down in the forward contract is that the -- the things that we have, I'll call it, we're confident in closing and one other confidentiality are very granular. So if you sort of look at the average size of investment this year, year-to-date, just about $3.5 million of property, and I think you can sort of suspect that that's going to have the same relationship, assuming we hit the lower to upper end of that guidance range. So it applies like $350 million to $550 million of acquisitions in the fourth quarter. As it relates to next year, we haven't really obviously come up with the guidance yet and we will at some point in the future, but we will give the investment community a little more detail now once we sort of complete this year.

Greg McGinniss -- Scotiabank -- Analyst

That's something maybe we would get to hear at the Investor Day?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Well, on the Investor Day -- first of all, I'd encourage you to really come, it's going to be good. About 20% of the Spirit team is going to present. So you're going to get a full rundown on how we do the business. There might be some surprises there. So you definitely want to come.

Greg McGinniss -- Scotiabank -- Analyst

All right. Well, I'll be there. And then Mike, I just got a real quick question for you, and I apologize if you addressed this before, but is there any plan for the 2021 convertible. Any reason to take that one out early?

Michael Hughes -- Executive Vice President, Chief Financial Officer

No plans today. We would love to do it, but I don't think it's going to be practical to get those out. It's just -- yeah, I don't think I can get the people to sell those back to me, but if you know anyone who wants to sell some, let me know.

Greg McGinniss -- Scotiabank -- Analyst

All right. Thanks guys.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Thank you, Greg.

Operator

Our next question is from the line of Shivani Sood with Deutsche Bank. Please proceed with your question.

Shivani Sood -- Deutsche Bank -- Analyst

Hey, good morning. We've seen some cap rate compression in terms of where you guys have been investing throughout the year. So can you just give us a sense of how much of that has been related to the decline in the 10-year versus sort of your cost of capital improvement and what you're willing to buy at these levels?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Good morning, Shivani Sood. Yeah, I give it a shot. I mean we -- I think you've heard us in different meetings talk about a 7% cap kind of area where we've sort of targeting, It could be a little bit below or above in the course of an -- in course of the year. You know when I think about acquisitions, it's sort of hard to time the stuff, right. These things kind of don't especially come as predictables as we would like. We obviously have a pretty high degree of focus on property rankings and heat map and things like that.

So what I'll tell you is, based on this calendar year, the cap rates have sort of trended more in just in the high 6% range, but we are still targeting about 7% area, and I don't think it's a function, necessarily the market cap rates declining, it's just what we see that's available that makes sense for our heat map and our strategy, well that's at. So there is obviously a lot of things that we're not pursuing and the things that we are pursuing just happen to be at a slightly lower cap rate, but I do think that we're going to -- we sort of have a target around 7% as an overall average cap rate that we're trying to acquire in any given year.

Shivani Sood -- Deutsche Bank -- Analyst

That's certainly helpful. And then Mike, you had mentioned that Spirit is at 4.4 times from a leverage perspective exiting the quarter, sort of, excluding that SMTA benefit. Updated guidance has a lower range. So just trying to get an idea if this is the new norm or how much of it is just related to deploying the SMTA as related liquidity?

Michael Hughes -- Executive Vice President, Chief Financial Officer

Yes, it's not the new norm. I think we will migrate back to -- I look at the stabilized range of 5 times to 5.4 times. So just the nature of the process you brought in from SMTA, the equity we took down and the acquisition volume we expect at fourth quarter, we're going to end the year a little lower than our target range. So you'd expect it would probably migrate back to that 5 times to 5.4 times next year, which gives us a little bit of capacity going into the 2020.

Shivani Sood -- Deutsche Bank -- Analyst

Okay. Thank you so much.

Michael Hughes -- Executive Vice President, Chief Financial Officer

Welcome.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Thank you.

Operator

Our next question is from the line of Brian Hawthorne with RBC Capital Markets. Please proceed with your question.

Brian Hawthorne -- RBC Capital Markets -- Analyst

Hi. Can you break down the drivers of the increased investment volume by increased relationships, improved cost of capital leading to a larger opportunity set or higher closer rate?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

I answered lot of questions. Let me -- good morning. Look, I think, if you step back and look at Spirit in this calendar year, obviously our cost of capital has dramatically improved as the calendar year has progressed, you know that's a function of a lot of different things, obviously, good work here by the team. But our cost of capital is not necessarily what's necessarily driving what we're acquiring. I would say, once again, we have a very specific heat map strategy.

So for instance, we talked a lot about why we like car washes, you know high margin business, very fragmented, you've got handful of consolidators out there, we love that business. We want to do more. So this quarter, we did two separate transactions with different car wash operators. If I were to tell you, I wish our acquisition volume was a little bit more straight line through the quarters, but if you sort of think about where we started the year, where I think our cost of capital was not that great, it was sort of like probably the mid-7s. Stock price was like $38 when we closed last year. There are G-spreads, much wider than they are now.

So as we've migrated down, it is kind of, I'll call it, 5 [Phonetic] area. Yeah, sure. It gives us an opportunity to look at more things, but we still are focused on trying to maintain that spread relationship and we think that our sweet spot is right around 7% to be a little bit below -- to be a little bit above on an annual run rate basis.

And I think the last thing is, if you look at our supplemental, we closed 22 transactions year-to-date, so it's about 7-ish a quarter. To be honest, I've talked about this a lot, we are actually tweaking some things that will present in our Investor Day, but we'd like to see that number to get up to 14 to 20 transactions a quarter. Yeah, so it's a little bit lumpy. But like I said, we're still a little bit work in progress, we're not 100% there, but I'd expect next year in 2020 you'd see a little bit more for a smoother, straight line, healthy acquisition activity as the year progresses. I hope that answers some of your stuff.

Brian Hawthorne -- RBC Capital Markets -- Analyst

Yes, OK. So it sounds like to improve cost of capital, like, so far though has been like, the primary driver, but the other -- the other -- the relationships and the close rates are working well?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Well, the relationships, we still are doing quite a bit with relationships, but the thing is, for us, we really do take that heat map pretty seriously when we look at at least industries that we invest in. And I think you've heard us talk that we want to do more with relationship driven acquisitions. In our Investor Day, we're going to talk a lot about that and a lot about how we're -- we are organizing ourselves internally to attack that. So I think it will improve. Yeah, like -- like it should be better, but given where we are, I'm pretty happy with what we bought, how we've done so far, and the direction in what we're going into 2020.

Michael Hughes -- Executive Vice President, Chief Financial Officer

Yeah, I will comment on the cost of capital piece of it. If you go back to beginning of the year, our guidance was originally $400 million to $550 million of acquisitions and that was really driven by our cost of capital. It wasn't the opportunities that we saw available in the market, it was more our ability to issue capital, reasonably priced. And so as our cost capital did improve, you've seen us issue quite a bit more capital and increase your acquisition guidance throughout the year. So that has been certainly a driver. It hasn't changed the weighted average target cap rate that we're going forward as Jackson has mentioned several times today, but it certainly has allowed us to -- to be more inquisitive and buy more assets. It make more sense.

Brian Hawthorne -- RBC Capital Markets -- Analyst

Got it. Thank you guys.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Thank you.

Operator

Our next question is from the line of Haendel St. Juste with Mizuho. Please proceed with your question.

Haendel St. Juste -- Mizuho Securities -- Analyst

Hey, good morning. So, I guess, the question on the investment front Jackson. I guess, I'm curious, are there any portfolios today out there that interest you, are you seeing more that make more sense given the improvement in your cost of capital and your leverage profile and is there anything embedded in the fourth quarter acquisition guidance from a portfolio perspective?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Well, thanks. Good morning, Haendel. Just -- to step back, you know this earlier -- this entire year we've looked at several different portfolios to be honest with you. There have been a number out there for a variety of different reasons. Year-to-date, we haven't been successful and either it's been because of the nature of the properties or ranking process or our view of value, view of value relative to our cost of capital, all those things sort of factor in. You know, like you said on the fourth quarter, we obviously are confident that we're going to do a significant amount, which we're set on doing, but we don't want to get too specific as to what it is, but what I can tell you is the end result of what we expect to do will be very granular and consistent with kind of our portfolio. I hope that's helpful.

Haendel St. Juste -- Mizuho Securities -- Analyst

That is. And perhaps, this is a question you may not be willing or wanting to answer, but understand that HPT, who bought the SMTA Master Trust is actually looking to sell some of those former assets. So I'm curious if there is a scenario that you may be interested in potentially buying back some of those assets or it could we completely roll that out?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

No, we usually don't. We don't really like to comment on acquisitions at this point. So what we said is, we're pretty confident about the fourth quarter. It's going to be pretty granular. We've looked at lot of portfolios this year and we'll continue to look at portfolios.

Haendel St. Juste -- Mizuho Securities -- Analyst

And then, just wanted to follow-up on the commentary about the office assets, the BofA, certainly sounds like that's an opportunity that you're increasingly attractive too. So curious how much more activity we could see on that front and perhaps what level exposure you might be willing to have to that type of asset in your portfolio?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

I appreciate the question. First, I guess, just make sure everyone -- make sure you understand our office exposure right now. We have 37 buildings that characterize in the office segment if you look at our stuff. 30 of those buildings are really medical service related MOBs, oncology centers, they're not what we -- you and I would call it office building. So the seven buildings that you and I would call office, you know are basically smaller net-leased -- triple-net leased offices to an end user.

And as you know, when we spun off SMTA, we did spin off assets like the Station Casinos headquarters and some other headquarters building. This BofA building, which I've physically been in, but physically been on most of the floors, walked on trade area, it's a great piece of real estate. It's the best office building that we have in the portfolio. The reason I like this one was, it was $270 bucks a foot. It's a super tight submarket in suburban Maryland. It's in the Hunt Valley area. So that's a -- that's a Class A market with 33 buildings, it's got 6.8% vacancy. Market rents are about $22.50 a foot. We're in at $18 a foot with our tenant. There hasn't been any kind of spec building for 10 years in that market. So it's very mature. There is no land sites in that area available for development. So we want to build a new spectrum than buy an existing one.

And the other thing I liked about it was, trade area is outstanding. So like the five-year pop is like $90,000 income is -- I'm sorry 5-mile income is like $90,000, it's got a super-educated workforce like 80% of the people within five miles of this property have either advanced degree, bachelors, associate or some college. And really if you look at the tenants in that area, it's mostly financial services and computer gaming industry. So getting back to why, this one makes a lot of sense for us, it's -- first of all, it's great the BofAs in there. We have annual rent escalators north of 2%. BofA has been in this facility for -- they originally was MD&A's headquarters building and BofA acquired it. They basically did a sale leaseback on this building back in 2008 and they basically get another 10-year early renewal after putting more money back into the properties.

And the thing that's unique about this is that, it's got its -- they do anti-fraud and that kind of stuff in the building. So that's obviously pretty important for a financial institutions. And this is one of the redundant facilities that they have in the country. The other thing about it is, they are putting in Merrill Edge. Merrill Edge is going to add 600 new employees into the building and the building is already built out. So it's pretty cool situation. So we like the fact that has got pretty critical functions as it released to anti-fraud BofA's. It's got a growing wealth management platform that they're putting in. They've got like airplane leasing and other functions within BofA in that building. Super tight market.

So to answer your -- along with your question. We love this building. It's got great credits. It's got all the things that match up for our property ranking and stuff. Long-term office is going to be about 5% of our portfolio. So I mean, we're not -- we've looked at a lot of office things and this is the one that kind of made a lot of sense for those reasons. There's a lot of others that like we wouldn't do, like, we wouldn't do probably -- an office in a very high vacancy suburban style market, this is very unique.

Last thing on this is, right adjacent to this property is light rail. You've got a new town center that's doing a $150 million redo. It's got great school system. So it's got a really -- it's a very unique asset. We saw it and I wanted, so we're done. A significant deal for us and we've got in a very good price.

Haendel St. Juste -- Mizuho Securities -- Analyst

Great color. Thank you.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Thanks.

Operator

The next question is from the line of John Massocca with Ladenburg Thalmann. Please proceed with your question.

John Massocca -- Ladenburg Thalmann -- Analyst

Good morning.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Good morning. Hi, John.

John Massocca -- Ladenburg Thalmann -- Analyst

Just to follow-up the last question, what percentage of your portfolio is office today then, is it at that 5% level right now?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

It's just about 5%, and then with this, I think it goes up to like 6%. And as we continue to grow the portfolio, it will get back to 5%.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. And then maybe switching gears to the other big acquisitions this quarter. Can you give us some color on how you source the Family Dollar transaction and what is the kind of remaining term on those properties?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Yeah, I think -- look, the impact to term yield, it's 10 plus years on the -- it's three pools and this is actually -- just to give a little more color on this, these are -- these have CPI bumps and are in the master lease structure. So we kind of like that. We like the area these were in. So I would say that this was unique, because of the characteristics of the lease structure for us. That's what made it really interesting. Yeah, I don't -- not going to go out and who we bought it from, how we bought it, but it was obviously bought -- it was not a direct deal with the developer, this was another existing institutional owner that owned it.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. And then maybe kind of more broadly speaking, what partners are you finding the most kind of transaction opportunities with, is it more through the sale leaseback market, broker relationships or potentially even transactions with other REITs?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

In today's market, it's all the above. I think you'll hear longer-term, we'd like to do a much higher percentage of business with our existing tenants. But you can't really predict that, that's not as predictable a deal flow. Actually it is, but it's -- in terms of how we're trying to scale up, it will sort of grow into that portion of the business. But there's still a lot of broker deal flow, there is a lot of other -- not just REITs, there's other institutions that are selling things. We've been selling things as you know. So it's a pretty functional market. I mean, for us the key thing is, it's got to be good real estate, it's got to have the right lease structure, it's got to be in the right industry, got a score well in our property ranking system. You know that -- we're trying to improve the quality of our real estate, quality of our tenancy, and sort of improve on the annual rent bumps within our current structure and build out the vault.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. Understood. And then one last, kind of, modeling detail question. Just -- what's kind of relatively the timing of the pull down of the forward?

Michael Hughes -- Executive Vice President, Chief Financial Officer

Yeah, we pull that down right at the end of the third quarter.

John Massocca -- Ladenburg Thalmann -- Analyst

I guess it's right at the end.

Michael Hughes -- Executive Vice President, Chief Financial Officer

Yeah, right at the end.

John Massocca -- Ladenburg Thalmann -- Analyst

All right. Perfect. Thank you very much. That's it from me.

Michael Hughes -- Executive Vice President, Chief Financial Officer

Welcome.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Thanks.

Operator

Thank you. [Operator Instructions] The next question is from the line of Rob Stevenson with Janney Montgomery Scott. Please proceed with your question.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Good morning guys. Jackson, I appreciate the color on your thoughts on office. How are you guys thinking about industrial these days. It seems like it's hard to buy and expand that segment given where pricing is, do you take advantage of how hot that market is and sell and redeploy into other higher yielding assets opportunistically over the next few years. How does that factor into your thoughts?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Rob, good morning. We do like industrial and distribution. Obviously, we did a transaction with Party City last quarter. We're out -- we're out -- trying to seek industrial opportunities. I mean, you're not going to see us pursue what I'd call, flex industrial with five-year average lease maturities. That's not our multi-tenant industrial, that's really not what we do. But things that have criticality to a company and the credit that we like, that's got good real estate characteristics, I mean, we're definitely -- we're definitely looking at a lot of those opportunities right now. Hard to line up is got to be the right price. And your comment on pricing is, like, if you're looking at an Amazon facility, those are -- those are probably a little bit out of our reach right now.

But there is a -- there is a good opportunity set out there for industrial with BB equivalent kinds of credit with good rent bumps, good structure. For us, we've looked at a lot. It's got to be -- it's got to be with the counterparty what we think they can be competitive from a e-commerce standpoint. We've talked a lot about our heat map. So I would say, there's a lot of things that we passed on, but there are a lot of things we pursued, come short a couple of times, but we believe that's an area that we're going to continue to get after and try to grow into.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Okay. And then conceptually these days, when you think about the future, how important is it in terms of when you add tenants. Is that a mix of those B investment grade. I mean, the origins of this Company was not -- was not investment grade, but then through coal and some of the other transactions over the years, you've had more and now post-SMTA, you have a decent amount of investment grade tenants. How important and how do you guys think about that in terms of the tenant mix and acquisitions going forward?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

You know, I'd tell you, the more important point here that we're looking at these days, you know our actual IG is about 24% today. And our shadow rated tenants or Moody's equivalent is about another 17%. So about 41% investment grade, but the thing that we're really a little bit more focused on these days right now is that we've got higher degree of interest in looking at public tenants. So they don't necessarily have to be investment grade.

And I think that -- so if you look at sort of like single-B, BB equivalent public tenants. So like Party City falls in that bucket and there are a lot of others. But a lot of these are may be smaller cap that will be used. They've got access to capital, but I find that we're able to get sort of better lease structures, able to buy their real critical real estate. I think that's -- there is more of an opportunity there.

In the investment grade land, we're dealing with strong BBB. We're just not going to get the lease term that -- and the lease structures that we're looking for, not to say we wouldn't do those, and I think the pricing dynamic gets to be a little bit more aggressive. So I wouldn't say that we have a outright. Hey, we want to take investment grade up to 50%, that's really not what we're trying to do. What we're trying to do right now is, is slightly shift the weight toward more public tenancy for now. And as we continue to go up, there's obviously a lot of private equity and private operators that we still deal with as well, but probably what you're not going to see us do as much, which is maybe what old Spirit did. We're not going to do the one or two operator -- one to three or one to 10 unit operator kinds of deals anymore. That's something that probably -- that doesn't really make sense for us. So we're trying to drive to a more institutional oriented counterparty that doesn't necessarily have to be investment grade.

And then the other thing is, with the privates. You have some private operating companies, franchisees that are better than investment grade, better systems, better -- better coverage, stickier. So we will continue. We're not going to foreclose those out either.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Okay. And then a couple of quick questions -- numbers questions. Any significant viewing as to the timing of third quarter acquisitions front or back end loaded?

Michael Hughes -- Executive Vice President, Chief Financial Officer

Yeah, I think most of the acquisition is back-end loaded and that's certainly baked into our assumptions in the fourth quarter. Now we will see how that plays out, but it seems like throughout this year, most of that has been back-end loaded. I don't understand yet the game theory behind why that is. People seem to get more focused as the quarter comes to an end all side, but that seems to have been the case throughout the year and certainly was the case with third quarter and we expect that to be the case for the fourth quarter as well.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Okay. And then lastly, when you adjust for all the various footnoted adjustments for SMTA tax expense, etc. What is the $3.31 to $3.34 AFFO guidance implying as the range for fourth quarter?

Michael Hughes -- Executive Vice President, Chief Financial Officer

It's about $0.74.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

At the midpoint?

Michael Hughes -- Executive Vice President, Chief Financial Officer

Yeah.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Okay.

Michael Hughes -- Executive Vice President, Chief Financial Officer

Throughout the midpoint.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Thanks guys. Appreciate it.

Michael Hughes -- Executive Vice President, Chief Financial Officer

Sure.

Operator

Thank you. At this time, I will turn the floor back to management for closing remarks.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Thank you. Well, thank you all for joining our call this morning. As you can see, we're often running. And I hope you'll attend our Investor Day event in New York City on December 5th. I promise you it will be worth your while, and we appreciate your interest and support. Thank you.

Operator

[Operator Closing Remarks].

Duration: 39 minutes

Call participants:

Pierre Revol -- Senior Vice President, Head of Strategic Planning and Investor Relations

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Michael Hughes -- Executive Vice President, Chief Financial Officer

Greg McGinniss -- Scotiabank -- Analyst

Shivani Sood -- Deutsche Bank -- Analyst

Brian Hawthorne -- RBC Capital Markets -- Analyst

Haendel St. Juste -- Mizuho Securities -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

Robert Stevenson -- Janney Montgomery Scott -- Analyst

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