National Retail Properties' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 2.13 | About: National Retail (NNN)

National Retail Properties, Inc. (NYSE:NNN)

Q2 2013 Earnings Conference Call

August 2, 2013 10:30 AM ET

Executives

Craig Macnab – Chief Executive Officer

Kevin B. Habicht – Executive Vice President and Chief Financial Officer

Julian E. Whitehurst – President and Chief Operating Officer

Analysts

Juan C. Sanabria – Bank of America Merrill Lynch

Emmanuel Korchman – Citigroup

Dan Altscher – FBR Capital Markets & Co.

Dan Donlan – Ladenburg Thalmann

Jonathan Pong – Robert W. Baird

Todd Stender – Wells Fargo Securities

Operator

Greetings, and welcome to the National Retail Properties Second Quarter 2013 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Craig MacNab, Chief Executive Officer. Thank you, sir. You may begin.

Craig MacNab

Donna, thanks very much and good morning. Welcome to our second quarter 2013 earnings release call. On this call with me are Jay Whitehurst, our President; and Kevin Habicht, our Chief Financial Officer, who will review details of our second quarter financial results, following my brief opening comments.

We are pleased to have produced another strong quarter at National Retail Properties with continued FFO per share growth. Importantly we are delighted to have raised our dividend for the 24th consecutive year, which is a milestone that places us in an elite category of just over 100 large public companies that have this multiyear record of consistently raising our dividend.

By the way, our per share results were actually stronger than reported for two reasons. Firstly, we incurred over a penny of acquisition costs that we do not normally incur. Plus, perhaps secondly more importantly, we measurably strengthened our already fortress-like balance sheet, which Kevin will be further discussing.

In the second quarter, our acquisitions team was very active acquiring 209 properties, investing $438 million at a very attractive initial cash yield of 7.7%. Our team is continuing to identify off-market transactions as well as likely marketed net leased retail properties for us to acquire. These deals were completed in 23 separate closings this past quarter, with an average purchase price per property of $2.1 million per asset, which is right in our sweet spot.

The largest transaction was our acquisition of 139 southeastern bank branches leased to SunTrust Bank, which as most of you is a large investment grade financial institution with a leading presence in the southeast. From an underwriting standpoint, there were several positive features of this acquisition, including the credit and overall quality of what is now one of our biggest tenants, SunTrust Bank. The amount of deposits held at each of the local branches is pretty solid, as well as the fact that we paid just over $1.7 million per branch, which we conservatively determined as being about 75% of replacement cost.

Our fully diversified portfolio continues to be in outstanding shape, and we are now 98.1% least. Given this very high level of occupancy and with long duration leases, we have modest internal growth. By the way, leasing up previously occupied space has never struck me as an attractive business model.

However, as we have evidenced quarter after quarter, we can source attractively priced, well underwritten acquisitions at an initial yield comfortably in excess of our cost to capital. Further, it gets better than this, as the contractual rate on these properties then increases 1.5% to 2% over time.

NNN is very well positioned with a terrific business model that endures all economic and interest rate cycles. Finally, having raised plenty of attractively priced capital earlier this year, we look forward to investing our dry powder on additional carefully underwritten acquisition opportunities, where we like the real estate. Kevin?

Kevin B. Habicht

Thanks, Craig. Let me start off with the usual customary statements that we will make, certain statements that may be considered to be forward-looking statements under Federal Security laws. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not release revisions to these forward-looking statements to reflect changes after the statements were made. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in this morning's press release.

So with that, we did this morning report second quarter FFO of $0.45 per share, and AFFO of $0.47 per share. For the first half of 2013, we reported FFO of $0.92 per share and $0.93 per share of recurring FFO, which represents a 9.4% increase over 2012's $0.85 per share.

As Craig alluded, these strong results allowed us to recently increase our common dividend, putting 2013 on track to be NNN's 24th consecutive year of increases in our annual dividend paid to shareholders as well as reduce our payout ratio. Additionally, our increased 2013 FFO guidance is projected to result in 8% per share growth at the midpoint of our guidance range, which I'll discuss more in a moment.

As usual, this quarter's strong results were a combination of maintaining high occupancy and making new accretive investments while keeping our balance sheet strong. Occupancy was 98.1% at quarter end. That's up 30 basis points from prior quarter and down 10 basis points from a year ago.

And as Craig mentioned, we completed $438 million of accretive acquisitions in the second quarter, over half of which closed late in the quarter. If you look back over the past two years, the last eight quarters, we've acquired over $1.8 billion of properties while, improving our balance sheet metrics and lowered our dividend payout.

I’ll spend a little more time on the balance sheet in a minute, but first a few details about second quarter results. Compared to 2012's second quarter, rental revenue increased $15 million, or 19%, primarily due to the acquisitions we made in 2012. In-place annual base rent as of June 30, was $391 million on an annual run rate. Property expenses net of tenant reimbursements for the second quarter totaled $1.2 million and then that has been ticking down for several quarters.

G&A expense increased to $9.4 million in the second quarter. The increase in G&A expense as Craig mentioned was largely attributed to real estate transaction costs, which totaled $1.6 million for the second quarter. Typically, we have a fairly modest real estate transaction costs that gets expensed meaning $400,000 to $500,000 annually. And we’ve included a little bit more details at the bottom of page seven in the press release to give you some comparable data for prior periods. But the big picture bottom line on this quarter's results are that the core fundamentals – occupancy, rental revenue, expenses, are all performing well with no material surprises or variances.

As I mentioned this morning, we also announced an increase in our 2013 guidance to a range of $1.86 to $1.90 per share for FFO, that translates into a range of $1.94 to $1.98 per share for AFFO. This is a $0.01 increase in the top and bottom end of the range and it follows $0.04 increases in each of the prior two quarters and is largely driven by an increase in our 2013 acquisition volume guidance to $550 million to $600 million. The timing of those acquisitions and the ability to execute capital market transactions at a very attractive rates

Hitting the midpoint of our new 2013 guidance will represent growth of 8% over 2012’s recurring FFO per share results. But importantly, 2013 per share results are tampered with continued strengthening of our balance sheet leverage metrics, which provide additional safety today and more opportunity for growth tomorrow.

Looking at AFFO, $0.09 of non-cash adjustments bring estimated 2013 AFFO results to $1.94 to $1.98 per share, with the primary AFFO adjustments being the non-cash interest expense on our convertible debt and the non-cash stock-based compensation expense. We remain one of the few REITs that produce AFFO that is higher than our reported FFO.

Now, turning to the balance sheet and capital markets activity, we were fairly busy in the first half of 2013. We have raised $877 million of very attractively priced long-term capital and that included $255 million of common equity, $278 million or 5.7% perpetual preferred, and $344 million of net proceeds or 3.3% fixed rate 10-year debt and that had a 3.39% effective yield.

We are more aggressive on the capital front than we anticipated at the beginning of the year. And while this obviously weighs on near-term per share results, it made sense to us to capture more rather than less capital when it was priced so well and to remain focused on the long-term rather than the near-term. Having said that, our per share results continue to move higher despite the short-term headwind.

Also, we called for redemption our 5.08% convertible notes. This effectively forced conversion of those notes which we'll settle in the third quarter. The $223 million principal amount of the notes will be paid off with cash and any premium over par will be paid in common shares. These shares importantly have been included in our diluted share count, so there will be no meaningful impact on our results from this share issuance.

But just stepping back a bit, if you include paying off these convertible notes with our June 30 cash balance, so far this year in round numbers, we have had a net $69 million decrease in debt and $480 million of acquisitions funded only using permanent capital, common and preferred equity. So despite funding all of our acquisitions of permanent capital, we continue to post solid per share result growth for 2013, and we think it demonstrates our commitment to thinking about the long-term, which sometimes comes at the expense of the short-term.

Looking at our June 30, leverage metrics total debt net of cash to total gross book assets was 33.7%, and that compares with 39.0% at the beginning of the year and we have full availability of our $500 million bank credit facility. Debt net of cash to EBITDA was 4.4 times for the quarter. Interest coverage was 3.7 times and fixed charge coverage is 3.0 times. Only six of our 1,838 properties all well under 1% are encumbered by mortgages.

Despite the significant acquisition activity over the past two plus years, our balance sheet remains in a very good shape. So we’re pleased with how 2013 is shaping up and importantly, we have positioned ourselves to make 2014 another good year. We’ve not used this environment to push and leverage metrics or payout ratios higher.

To the contrary, we're using this favorable environment to grow current results while building capacity for future growth. We continue to believe we’re well positioned to deliver the consistency of results, dividend growth, and balance sheet quality that has supported attractive absolute and relative total shareholder returns for many years.

With that, Donna, we will open it up for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator instructions) Our first question is coming from Juan Sanabria of Bank of America. Please proceed with your question.

Juan C. Sanabria – Bank of America Merrill Lynch

Hi, good morning, guys. Just a couple of quick questions, I think you mentioned it, Kevin, what was the acquisition guidance for the full year? I'm sorry, it was just a little quick for me to catch.

Kevin B. Habicht

Yeah, it’s $550 million to $600 for the full year.

Juan C. Sanabria – Bank of America Merrill Lynch

Okay, great. And can you just speak a little bit about the pipeline, what you're seeing, how it has changed if at all post through the tapering fears in late May and what you're seeing in terms of cap rates? Have you pushed your sort of your price point, your cap rate assumptions up a bit and if sellers sort of reacted or is there a lag expected?

Julian E. Whitehurst

Juan, this is Jay Whitehurst, how are you?

Juan C. Sanabria– Bank of America Merrill Lynch

Good. How are you, Jay?

Julian E. Whitehurst

Good man. I’ll take this question. As it relates to cap rates, Juan, really, I think it kind of – the answer to that question depends on where you start from. There have been some portfolios out there that we’ve all seen trade – that have traded at very low cap rates yet seemingly at least in part due to people having a very high stock price. And – but that's not the world that we have been playing in. What we spend, as you know, what we spend is a lot of time individually underwriting properties and dealing directly with tenants.

And in that world, the cap rates remain lower, albeit because of the efforts that we put in, in dealing with the tenants individually, we're achieving much higher rates than these portfolios are trading at. So I think from our perspective we see a good pipeline or strong pipeline and while cap rates are remaining somewhat under compression or being pressed, what we are getting is in line with the guidance we're giving folks, and we're very comfortable with the guidance we’re giving folks and we’re very comfortable with the guidance. So all in, I think it's from our perspective, it’s going to be business as usual with cap rates and with the pipeline.

Craig MacNab

So, Juan, let me just add one thing to that before your follow-up question. There is a whole lot of discussion from people in the industry et cetera that the world is coming to an end, because there is a slight uptick in the 10-year treasury rate. And I hate to rebut that the conventional wisdom. But we’re just not impacted by it one little bit.

As Kevin pointed out in his comments, we have essentially financed $480 million of acquisitions this year, with common equity or preferred at a very healthy spread against the initial yield and then that initial yield has healthy bumps on top of that. So it’s going to take a material change in the 10-year, material to move the needle in terms of cap rate.

Kevin B. Habicht

And I guess – lastly I add that, we’ve operated very successfully over many years at much higher interest rate. So we don’t think that’s the end of the world.

Juan C. Sanabria – Bank of America Merrill Lynch

Okay. And just another sort of follow-up on acquisitions, can you just talk about sort of your appetite for shorter lease durations, sort of sub-ten years, potentially with the view of an improving economy and sort of what cap rate differential you would have to have versus sort of longer-term, 10-year to 15-year leases, to make up for that presumably assumed risk?

Craig MacNab

I think that’s a good question. And we obviously look at all different types of deals both long duration leases. And clearly with our average duration – lease duration in our portfolio at 12 years, we’re predominantly doing long duration deals. We look at short duration deals. However, we have got to convince ourselves that we’re being paid to take that risk. And we have seen some deals in the marketplace earlier this year, where cap rates were measurably lower not higher lower than what we are getting for 15-year leases. So there is a little bit of a logic gap in terms of perusing those, number one.

Let me address a little technical point, number two, which is that in almost every lease that tenant has options at fixed prices to extend the lease. So in your lease, you are bound by the terms of it, and while it would great to just push rents higher, that doesn’t happen in the real world.

Juan C. Sanabria – Bank of America Merrill Lynch

Yeah.

Craig Macnab

So interesting opportunity, but not a very good economic strategy.

Juan C. Sanabria – Bank of America Merrill Lynch

Just a quick follow up while you mention that, what would you say just theoretically your mark-to-market on leases would be if you could take them up all the way? I know you just said you can't but just to have in our mind, what’s that spread?

Craig Macnab

Firstly, we don’t spend a lot of time on theoretical stuff, but let me point out. I mean, it’s just so whacky to think about the notion of it and being an investment merit. But let answer it this way Juan, as I mentioned in my prepared remarks, we have just purchased a larger SunTrust portfolio. On average, there was over an acre of land. The vast majority of these properties are well located corner locations, where by the way, on most of them the branch deposits were in the top three for SunTrust in that County, and we paid $1.7 million per branch.

So if you think about it out there in the real world, an acre of dirt on a good corner is generally $1 million, but obviously that depends, whether it’s in Atlanta or whether it's in Charlotte or whether it's in a different community. But if you just take $1 million, we paid essentially 700,000 for the building. Well, we've got on average 5,000 square feet and 200 bucks of foot, before you know it, you are up to $2 million. So the mark-to-markets on that would be well above the range our tenants is paying.

Juan C. Sanabria – Bank of America Merrill Lynch

Okay.

Craig Macnab

And above as much as 50%, Juan.

Juan C. Sanabria – Bank of America Merrill Lynch

Okay, that's helpful. Thank you very much.

Craig Macnab

But it's only theoretical, because our tenants has multi-year lease.

Juan C. Sanabria – Bank of America Merrill Lynch

That’s great. Thanks, guys.

Operator

Thank you. Our next question is coming from Emmanuel Korchman of Citi. Please proceed with your question.

Emmanuel Korchman – Citigroup

Hey, good morning, guys.

Julian E. Whitehurst

Hey, Manny.

Emmanuel Korchman – Citigroup

Jay, maybe this is a question for you. A deal like the SunTrust deal, how long does that sort of take from you walking in to them and saying yes, we have this portfolio that we want to sell, to actually closing it?

Julian E. Whitehurst

Manny, that deal probably was in the 45 days kind of category. What we find is that we can move as quickly as anyone. All of our due diligence components are in–house. And so we quickly strike a deal and we’re able to kind of quickly get through the due diligence and then close right after that, given the cash we had and at that time we had the cash in the bank to invest in it. So what we do is approach these things with the goal of looking at all of the components of due diligence that we want to look at, but looking at them very quickly.

Craig Macnab

And then Manny, just to go to the other side of the extreme in the most recent quarter, we closed a convenient store deal where we purchased 58 properties. From the time we had a handshake and I don’t have the exact date, but it was about one year to closing.

Julian E. Whitehurst

That’s wasn’t due to us Manny.

Emmanuel Korchman – Citigroup

Yeah. Maybe that's more the gist of the question sort of if we look at your guidance for the back half, which is $70 million to $120 million, roughly, if there was a big deal in there, I guess my question is, would you kind of know about it or could it pop up in the next five months?

Julian E. Whitehurst

Yeah, deals could definitely pop up and we be able to get them closed. You could see that at the end of year when we had that very busy December. And a lot of those deals didn’t come around until October and November.

Craig Macnab

So at this point in time, in our pipeline are a lot of our core relationship deals one property at a time. And there are couple of deals, smaller deals that we’re working on that may or may not happen depending on whether the tenants pursues the opportunity. But right now we’re not – we have certainly in the last couple of years, we have generally stayed away from these large portfolio deals, which seem to trade at prices that for us we don’t understand the value proposition.

Emmanuel Korchman – Citigroup

And maybe this is an offshoot of Juan's questions earlier, but we had heard in other sectors that are similar to yours that there has been sort of a pause, maybe not from the cap rate compression or expansion side, but just sellers sort of saying, let me wait this out, because you're telling me that cap rates should be going up and I'm telling you that I want what I want. Have you seen sort of deals that were about to, whether it be handshake or due diligence or wherever you are, get paused as the sellers are sort of scared of the environment?

Craig MacNab

Manny, no, we have not seem that. There is still good deal flow out there in our world and people want to go ahead and move their businesses forward.

Julian E. Whitehurst

Manny, I think you also just got to step back with respect so. And just think about what you just said, which is that if you’re a seller, you’re presumably going to accelerate your transaction in the event you think pricing is going to move higher. So if people are telling you that sellers are getting skittish, I think that tends to suggest interest or cap rates are going lower. And I find that hard to believe.

Emmanuel Korchman – Citigroup

Thanks for the time guys.

Operator

Thank you. Our next question is coming from Dan Altscher of FBR. Please proceed with your question.

Dan Altscher – FBR Capital Markets & Co.

Thanks. Good morning, everyone. With the SunTrust acquisition, banks as a percentage of your overall portfolio has become a little bit larger and now looks like number six. Is this a new strategy or a new preference for banks or is this just kind of a one-off and we'll just see portfolio reallocation as it comes or is this a definitive initiative to get more into financials?

Kevin B. Habicht

Dan, I guess to step back one of the things your question points out is that we got a very diversified portfolio. And we’re always looking at bank deals when they are out there. This particular one was very compelling given the real estate metrics and the quality of the real estate and so we jumped on it. If others came along we would it. But it’s all part of the just building a very diversified portfolio.

Dan Altscher – FBR Capital Markets & Co.

Okay. And then with the convert that needs to get I guess, paid down, I guess the question is, is there going to be a tranche or a drawdown in the credit facility to pay for that, or do you think that's just going to be straight cash off the balance sheet?

Kevin B. Habicht

Yeah, that will come straight from cash. At quarter end, I think we had about $237 million of cash on our balance sheet that convert – the principal amount of that converted $223 million. So we used $223 million to pay that off and any premium above par due to converting, shareholders will be paid in common shares. And as I pointed out those shares are already accounted for in our dilutive share count, so really not much impact there. But that will all settle in the coming days here in August.

Dan Altscher – FBR Capital Markets & Co.

Great. And then just one more, with the move up in the 10-year and the world hopefully not coming to an end, how do you think about financing our capital structure on a go-forward basis? I mean, have you looked at or considered what your new cost of debt would be today versus the great rate you got earlier in the quarter or is there a preference now towards using more preferred or equity or do you think the debt markets are still open and at attractive rates that make sense for new acquisitions?

Kevin B. Habicht

Yeah, I think generally capital is still reasonably priced. We'll put it that way, I guess. If you drag out a 30-year interest rate chart, I think it’s hard to argue that rates are high now. Having said that, obviously rates were better two months ago than they are now and we fortunately we’re able to capture a good bit of capital in that environment and frankly, more capital than we had anticipated at the beginning of the year and more capital than we frankly needed.

But it felt like the pricing of it was compelling enough to take on that capital despite whatever short-term headwind that creates for maybe per share results. But yeah, our 5.7% preferred that we issued two months ago might be 100 basis points more cost more than that today. But even in that environment – in the current environment our cost of capital is sufficiently low enough to make very accretive acquisitions.

Dan Altscher – FBR Capital Markets & Co.

Okay, thanks. Good quarter.

Operator

Thank you. Our next question is coming from Dan Donlan of Ladenburg Thalmann. Please proceed with your question.

Dan Donlan – Ladenburg Thalmann

Thank you and good morning. Just real quick on kind of the investment spread that you guys are seeing right now, Craig or Jay, could you kind of talk about how this looks relative to the past five or six years? I mean do you think this is on the more attractive times that you've seen in quite sometime and could you maybe put that against how you see the acquisition environment in terms of deal flow?

Craig MacNab

Dan, congratulations on your firm. In terms of the spread, as I mentioned a moment ago, in the most recent quarter, our 7.7% initial yield with bumps on top of that, but if you just take that 7.7% and you think to yourself, well maybe they financed some of it with our 5.7% preferred or alternatively we did issue a lot of equity in the past six months. And if you take the nominal cost of that the inverse of our multiple, it is at a very wide spread, and we’re not even taking advantage of our less expensive debt.

If you go back historically that spread has generally remained fairly constant. And it is clear, on a cap rate basis that there has been some cap rate compression in the past 30 months, not a lot, but we were doing deals in the mid 8% initial yield over a year ago and today we’re a little lower than that. But I guess the thing that I would try to focus in on is that regardless of what happens to the 10-year, the spread is very wide. And three consecutive years of 8% plus FFO per share growth while measurably strengthening our balance sheet points to the merit of the business model.

Dan Donlan – Ladenburg Thalmann

Yeah, I don't disagree. I guess I think maybe what investors might have a problem with is how repeatable is this going forward AFFO streaming and evidently space is very wide and deep, but do you think these mid to high single-digit increases in AFFO, can they continue?

Craig MacNab

Well, the only thing I would suggest is if you take a look at our 10-year return or our five-year return or 24 consecutive years of dividend increases, it seems to me that we are in a pretty good space.

Dan Donlan – Ladenburg Thalmann

Understood. And then just lastly kind of on the dividend, I was expecting a little bit more growth in the dividend. It looks like your AFFO coverage is really is now kind of low 80% and is probably going to move south of 80% once you put all the capital that you have to work over the next couple quarters. Why didn't you raise it a little bit more than you did?

Kevin B. Habicht

That’s just something we’ve been pursuing over the years, frankly is continuing to make the current dividend more safe by letting the payout ratio drift lower. I think you’re probably on point, as we get closer to 80% maybe on an AFFO basis and we comfortable we’ll let it and the dividend increase more in line with our AFFO growth. But again it’s maybe somewhat consist with our balance sheet strategy is dividend strategy of having capacity for better times tomorrow.

So a little bit of conservatism on our part, but – and we have good use for the proceeds. I mean, I guess the ultimate question is what you’re doing with AFFO you’re not distributing, and we think we got good opportunity to use it. So combination of safety capacity in the future and good use of those funds for current acquisitions led us to where we bumped it up $0.1 per share and continue to push our payout ratio lower.

Dan Donlan – Ladenburg Thalmann

Okay. Thanks, guys.

Operator

Thank you. Our next question is coming from Jonathan Pong of Robert W. Baird. Please proceed with your question.

Jonathan Pong – Robert W. Baird

Hey, good morning, guys. Maybe just looking at the investment spread question a little bit, in a different way. If you look at sort of your cap rate spread between relationship deals and marketed deals over the last three years, I think you see about a 60 basis point spread there. What’s your outlook going forward as to whether or not that’s repeatable and sustainable?

Julian E. Whitehurst

Yeah, Jonathan, this is Jay. One of the great benefits of these relationships that we work so hard to build with tenants is that there is a certain stickiness in those cap rates. We always need to be in market with our good relationships and not take advantage of it. But there is a bit of a benefit in there that we derive, and we feel comfortable with that that will continue. And the spread over the relationship cap rates versus what we buy in the direct market is really just completely driven by what we decided to buy in the those very efficient auctions that brokers and investment bankers run out there.

As you know, as we've talked with you about before, we look at all of those deals and compare them with what we're doing with our relationships and what's the quality of the real estate and the quality of the lease and then chase after the ones we want to pursue. But that, I guess, the short answer to your question is, I think that spread will be consistent over time, but it just depends on what we decide to stretch for in these open market deals.

Jonathan Pong – Robert W. Baird

Got it, that makes sense. And then maybe for Kevin, as we look at the ATM, what is your appetite for capping that going forward and what’s your thought on it there?

Kevin B. Habicht

We’ve been fairly active users of that over the last 12 to 15 months. At this point we’re probably not as aggressive on it, but in part, that will continue to be driven by our visibility on acquisitions and our needs for capital, but we do have a fair amount of balance sheet capacity as we’ve said a few times. So the need to push more shares down on the ATM frankly is not there. But we’ll see – at the acquisition and investment opportunity environment drive some of that.

Jonathan Pong – Robert W. Baird

Got it. Thank a lot guys.

Operator

Thank you. (Operator Instructions) Our next question is coming from Todd Stender of Wells Fargo. Please proceed with your question.

Todd Stender – Wells Fargo Securities

Hi, good morning, guys. Can you provide more details on the SunTrust deal? Craig, I think you mentioned it was a 20-year lease. Did I get that right?

Craig MacNab

No, I didn’t say that. What I did comment about was the fact that we purchased it at what we think is 75% of replacement cost, I talked about the very strong deposit attributes of this portfolio just to give you a little bit a metric on that. The average deposit in our portfolio is $54 million and the – I believe if you go to SunTrust website, you’ll see their median across their 1500 or so branches is $48 million, so clearly this is in the better half their branches.

Todd Stender – Wells Fargo Securities

And is this under one master lease?

Craig MacNab

Actually under several masters leases.

Todd Stender – Wells Fargo Securities

And are they various average lease terms?

Craig MacNab

No. All of the leases expire at the same time.

Todd Stender – Wells Fargo Securities

And can you share what the length of the lease is?

Craig MacNab

Yeah. It’s a shorter duration lease and it has about six yeas left today.

Julian E. Whitehurst

Todd, hey, it’s Jay, just one thing to add to that. We in going through our underwriting we look at – did a very deep dive into the likelihood of lease renewals in these pools and the renewal period is for 10 years. And so our underwriting gave us a great deal of comfort that the vast majority of these sites. And it gets a little technical and I’m not going to get into all of that, but the vast majority of these sites are, we think are very highly likely to be renewed. So we took a land value kind of underwriting approach to it, but we also recognized that it’s really likely that these are 15-year leases predominantly.

Todd Stender – Wells Fargo Securities

Okay. And any rent bumps? What do the metrics look like? Is this flat or are there any fixed rent bumps?

Craig MacNab

Good news is when they renew they are a decent rent bumps.

Julian E. Whitehurst

And it kind of commensurate with what we did in the rest of our portfolio.

Todd Stender – Wells Fargo Securities

Okay. So essentially, it sounds like they're flat for now and then upon renewal they'll bump up higher?

Craig MacNab

They’re flat only, because we’ve just taken a rent increase that we purchased portfolio, yes.

Todd Stender – Wells Fargo Securities

Okay. Any vacancy that came along with this deal?

Craig MacNab

No, sir.

Todd Stender – Wells Fargo Securities

Okay. Thank you. And then just looking at the mid-Atlantic convenience stores, are these largely Circle Ks? Is that their brand name?

Craig Macnab

That's correct, Todd.

Todd Stender – Wells Fargo Securities

Okay. And same idea, several master leases or this is one deal?

Craig Macnab

One is really one long duration lease deal.

Todd Stender – Wells Fargo Securities

Okay. And can you share what that length is?

Craig Macnab

It's at least 15 years.

Todd Stender – Wells Fargo Securities

Okay. Thank you very much.

Craig Macnab

Thanks, Todd.

Operator

Thank you. Our next question is a follow-up coming from Dan Donlan of Ladenburg Thalmann. Please proceed with your question.

Dan Donlan – Ladenburg Thalmann

Hey, sorry, Kevin, I’ve got to ask this What’s the capitalized interest related to? What are you guys building right now?

Kevin B. Habicht

Yeah, I mean, we’ve always had a program, what we call slip-funded if you will, where we are, with a particular tenant we made by the land that tenant proceeds and builds the building and we may fund the construction of that building and upon completion, obviously we end up with land, building, and a long-term lease. And so during that construction period, we will potentially have some capitalized interest related to that. But it’s typically not a big number in the scheme of things, but it's there.

Dan Donlan – Ladenburg Thalmann

Okay, thanks.

Kevin B. Habicht

Yeah.

Operator

Thank you. At this time I would like to turn the floor back over to management for any additional or closing comments.

Julian E. Whitehurst

Donna, thanks very much. We appreciate all of your interest. We hope you enjoyed the balance of this summer, and we look forward to talking to you all in the weeks and months ahead. Thanks very much.

Operator

Ladies and gentlemen thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.

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