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Why Spirit Realty Capital, Inc. Stock Plunged 23%

By Jordan Wathen – May 4, 2017 at 1:01PM

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The REIT lowered guidance as weakness in the retail industry weighed on its first-quarter earnings report.

What's happening?

Shares of retail REIT Spirit Realty Capital, Inc. (SRC -0.30%) are trading down by about 23% as of 11:30 a.m. EDT after the company reported that it experienced an "abnormally high credit loss" due to weakness in the retail sector in its first-quarter earnings report.

So what

Spirit Realty updated its adjusted funds from operations (AFFO) guidance for the full year 2017. It now expects to generate AFFO of $0.80 to $0.84 per share, down from earlier guidance of $0.89 to $0.91 per share.

The company also withdrew its $250 million net acquisition target for the full year, believing that it would be imprudent to increase the company's leverage in light of elevated bankruptcies in the retail industry. In a presentation, the company disclosed it is well within covenants on its senior unsecured borrowings. 

Spirit Realty's largest tenant, Shopko, is shuttering stores. Shopko made up 8.1% of its normalized revenue at the end of the first quarter, down from 9.1% in the same period a year ago. The company disclosed that it sold five more Shopko stores after the end of the first quarter. Shopko stores make up 14.2% of its real estate by square footage.

Five people sitting on a bridge with shopping bags nearby

Shoppers aren't visiting retail stores as much as they used to, weighing on the share prices of retail REITs like Spirit Realty. Image source: Getty Images.

The income statement tells the story here. Impairment charges tallied to $34.4 million, up from $12.6 million during the year-ago period. Of the first-quarter impairments, $18.5 million were due to weakness in Spirit Realty's retail property portfolio, according to its 10-Q. 

Investors who use AFFO guidance as a guide for the future should mind the rules of accounting. Impairments are added back to net income to arrive at AFFO, and thus the REIT's updated AFFO guidance doesn't offer any insight into future impairment losses stemming from retail store closures. The company reported AFFO of $0.20 per share in the first quarter.

Now what

Spirit Realty finds itself as the face of widespread deterioration in the retail industry. A recent report by Cohen & Steers found that the United States has 24 feet of retail space per capita, 50% more than Canada, and more than two times that of Australia. National retailers have announced they will close 3,200 stores across the United States this year.

Seemingly every sell-side analyst piled on to downgrade Spirit Realty following its first-quarter results. Mizuho, JPMorgan Chase, Sandler O'Neill, UBS, and Ladenburg Thalmann are among those who downgraded the stock after its first-quarter earnings report. 

Spirit Realty primarily invests in single-tenant properties that it leases on terms spanning a decade or longer. With 75% of its portfolio by square footage categorized as retail property, continued weakness in retail could be a recurring drag on its earnings for some time to come.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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