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Executives

Craig MacNab - Chairman and Chief Executive Officer

Kevin B. Habicht - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Treasurer, Assistant Secretary, Director, Director of CNL Commercial Finance Inc. and Director of Commercial Net Lease Realty Services Inc

Julian E. Whitehurst - President and Chief Operating Officer

Analysts

Daniel K. Altscher - FBR Capital Markets & Co., Research Division

Emmanuel Korchman - Citigroup Inc, Research Division

Jonathan Pong - Robert W. Baird & Co. Incorporated, Research Division

R.J. Milligan - Raymond James & Associates, Inc., Research Division

Daniel P. Donlan - Ladenburg Thalmann & Co. Inc., Research Division

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Cedrik Lachance - Green Street Advisors, Inc., Research Division

Todd Stender - Wells Fargo Securities, LLC, Research Division

Juan C. Sanabria - BofA Merrill Lynch, Research Division

National Retail Properties (NNN) Q4 2013 Earnings Call February 11, 2014 10:30 AM ET

Operator

Greetings, and welcome to the National Retail Properties Fourth Quarter and Year-End 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Craig MacNab, Chairman and CEO for National Retail Properties. Thank you. You may begin.

Craig MacNab

Diego, thank you very much. Good morning to all of you, and welcome to our 2013 year-end earnings release call. On this call with me is Jay Whitehurst, our President; and Kevin Habicht, our Chief Financial Officer, who will review details of our fourth quarter, as well as our year-end financial results, following my opening comments.

2013 was another excellent productive year for NNN, as we increased our recurring FFO per share by a meaningful 10.9%, expanded our already fully diversified and well-occupied portfolio, all while maintaining a fortress-like balance sheet.

As our press release indicated, we acquired 275 net lease retail properties last year, investing $630 million. The average initial cash yield on these acquisitions was an impressive 7.9%. As you are aware, this attractive yield improves over time, as the rent increases contractually over the duration of our very long leases. One interesting detail of our acquisition activity is that the vast majority of these transactions were single-property acquisitions throughout the year, many of which are purchased from existing tenants with an average investment per property of only $2.3 million. Only 2 of our deals in 2013 were larger than $100 million in size, so we continued to adhere to our strategy of focusing on carefully underwritten retail properties at low price per property, at initial cash yields that are both above what is found in the broker auction market, as well as comfortably in excess of our cost of capital.

This past year, we evaluated 4 of the large transactions that were being sold by intermediaries, and in several cases, made offers that were not surprisingly less than these portfolios traded for. As many of you are aware, our strategy is to seek as many noncompetitive acquisitions as possible. And we strongly prefer to deploy capital where it results in per-share accretion for our shareholders. Paying more than anybody else in a highly competitive transaction, simply to increase our size, is not appealing to National Retail Properties.

One more point worth mentioning is that we have a strong preference for acquiring retail properties where the rent increases over time. This means that we seldom purchase investment-grade properties at very low yields that have flat rent through the duration of the lease.

Our portfolio continues to be in excellent shape. And at the end of the year, we were 98.2% leased. By the way, this is the 10th consecutive year that we have been at least 96% leased, which speaks to the stability and consistency of our portfolio. Over the next 3 years, we have very modest lease roll over, with only 4.7% of our leases coming up for renewal through the end of 2016.

As of the end of the year, we owned 1,860 properties, which are leased to over 300 different national or regional tenants in 47 states. These tenants operate in over 30 different segments of the retail industry, which provides us with very broad diversification. On average, these tenants are contractually obligated to pay us rent for approximately 12 more years.

Last year, we continued our multiyear track record of capital recycling, selling 30 properties for $61 million, generating solid gains that are not included in FFO. Importantly, the sale of these properties has the effect of qualitatively strengthening our portfolio, as many of these dispositions involved the sale of weaker assets.

In conclusion, our portfolio is in excellent shape. And very importantly, as you'll hear from Kevin, our balance sheet is fortress-like, which will allow us to take advantage of the carefully underwritten acquisitions that we expect to make this year.

Finally, although it's still early in the year to be making predictions, we are cautiously optimistic that 2014 will mark our 25th consecutive dividend increase. Kevin?

Kevin B. Habicht

Thanks, Craig. And I'll start with the usual cautionary statement that we will make certain statements that may be considered to be forward-looking statements under federal securities law. 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.

With that, this morning, we did report fourth quarter FFO of $0.50 per share, as well as recurring FFO of $0.51 per share and AFFO of $0.52 per share. For the year 2013, we reported recurring FFO of $1.93 per share. As Craig mentioned, that represents a 10.9% increase over 2012's $1.74 per share result.

For the year, AFFO increased 8.2% to $1.99 per share. As Craig mentioned, 2013 marked the 24th consecutive year of increases in our annual dividends paid to shareholders, and our payout ratio has now decreased to 80% of AFFO.

This quarter's and this year's strong results were a combination of maintaining high occupancy, making accretive acquisitions while keeping our balance sheet more than strong. Occupancy was up to 98.2% at year end. That's up 10 basis points from prior quarter and up 30 basis points from a year ago. And as Craig mentioned, we completed $60 million of accretive acquisitions in the fourth quarter and $630 million during 2013.

Over the past 3 years, we have acquired over $2.1 billion of properties, funding 80% of those acquisitions with permanent capital, that would be equity and asset dispositions, with the other 20% largely funded with 10-year fixed rate debt. With interest rates of 30 -- near 30-year lows, we are not particularly tempted to fund with short-term debt. But let me go to a few details on the fourth quarter.

Compared to 2012's fourth quarter, rental revenue increased $14 million or 17%. That's primarily due to the acquisitions we made over the past 4 quarters. In-place annual base rent as of December 31, 2013, was $395.6 million on an annual run rate as of year end.

Property expenses net of tenant reimbursements for the fourth quarter totaled $1.6 million, and that compared with $1.3 million in the immediately prior third quarter. G&A expense decreased to $7.4 million in the fourth quarter. The decrease was largely attributable to lower incentive compensation expense. Full year 2013 G&A expense came in at $32.6 million, which is a 1.2% increase over 2012.

But the big picture bottom line on 2013's results are that the core fundamentals, occupancy, rental revenue, expenses, they're all performing well with no material surprises or variances. And 2013 marks the 3rd consecutive year of 8%-plus per share growth.

Now turning to the balance sheet. After a busy first half in 2013 in the capital markets, we were able to stand aside when capital markets got more volatile and less friendly in the second half. During 2013, we retired $223 million principal amount of our 5 1/8% convertible notes. Notably, and this is really kind of below the surface if you're not looking closely, but we funded 100% of our $569 million of net acquisitions -- acquisitions net of dispositions. We funded 100% of net acquisitions with common and preferred and retained earnings, yet we were still able to deliver strong per-share growth. This positions our balance sheet, we think, very well for future acquisitions.

Year-end leverage metrics. Total debt-to-gross book assets was 32.9%. We have only $46 million outstanding on our bank line, leaving $454 million of availability on that bank credit facility. Debt-to-EBITDA was 4.2x for the quarter -- fourth quarter. Interest expense was 4.5x, and fixed charge was 3.1x despite the fact we had a large preferred offering in May. Only 6 of our 1,860 properties, well under 1%, are encumbered by mortgages, totaling under $10 million.

So despite the significant acquisition activity over the past 3 years, our balance sheet remains in very good shape. 2013 was another good year of strong per-share results, and we're well capitalized to make 2014 another good year. We do continue to believe we are 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.

And with that, we will open it up to any questions.

Craig MacNab

Thanks, Diego.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Juan Sanabria with Bank of America.

We'll move on to the next question. Our next question comes from Dan Altscher with FBR.

Daniel K. Altscher - FBR Capital Markets & Co., Research Division

I noticed there was no updates to the 2014 guidance. And I'm wondering, just looking and based upon this quarter's results on both FFO and AFFO, it looks like you're well in excess to exceed even the top end of your guidance for next year. So just wondering what the current thoughts are around that.

Kevin B. Habicht

Yes. I mean, none of our key assumptions for the year have really changed at this point, so we weren't looking to make a change in our reforecast in our guidance. The year continues to shape up pretty much as we planned. We anticipate or guided to $300 million of acquisitions; g&A expenses, $33.5 million, $34 million; no real change in occupancy. And so we don't really see any real fundamental reason for us to be tweaking our guidance at this point in time.

Daniel K. Altscher - FBR Capital Markets & Co., Research Division

Okay. And then maybe a question for Jay. From what I could gather, it looked like fourth quarter, in general, for retail net lease, cap rates continued to compress. Looks like there was not a lot of supply and maybe some year-end demand rush for year-end buying. What are you seeing now early on in January into February? Is that trend continuing or has kind of that year-end demand kind of slowed down a little bit?

Julian E. Whitehurst

Dan, this is Jay. We feel like the pipeline looks good for 2014. Nothing really notably outside of kind of typical. There's enough good product out there, and cap rates continue to stay low and feel some compression. There is a lot of money chasing after quality deals. But we feel like with our focus on dealing with the retailers directly and sourcing our properties kind of off-market, we feel comfortable with hitting and hopefully exceeding the guidance that we've given.

Daniel K. Altscher - FBR Capital Markets & Co., Research Division

So I guess, presumably, though, still even in the noninvestment-grade market, you're still seeing some tightening or compression of cap rates, at least over overall 2013 levels though?

Julian E. Whitehurst

Certainly, no loosening. And I think you could say some tightening.

Operator

Our next question comes from Emmanuel Korchman with Citigroup.

Emmanuel Korchman - Citigroup Inc, Research Division

Jay, maybe we can stay on the same topic for a second. In sort of the years you've been doing this, how long does it takes to trickle down in sort -- or the compression in cap rates for the broader market to reach the retailers and sort of bring those relationship deals or put pressure on those relationship deals that you guys have typically been able to do?

Julian E. Whitehurst

Well, Manny, the beauty of doing -- calling on retailers directly and being the capital partner for these strong retailers is that we're not just selling cap rate. We're selling certainty and reliability as well. And so there is some value to our relationship partners in that -- in those other attributes, and we get a benefit in the cap rate for that. You always have to be at or near market with your relationship retailers. But there is more than just cap rate going on in the discussions we have with our folks, and I think that is an enduring value. That's one of the -- it is very hard to build these relationships, but it is worth the work from our perspective.

Kevin B. Habicht

I think, Manny, this is Kevin. You see the 10-year run up late last year. And I think the somewhat knee-jerk reaction is to say, okay, cap rates are moving higher because the 10-year has moved up 100 basis points. That -- it doesn't -- there is not a direct 1-for-1 cause and effect there. And the timing is, I don't think, well defined. And so we're in a market that obviously is influenced by the cost of capital, but there's other forces that are around.

Emmanuel Korchman - Citigroup Inc, Research Division

Great. And Kevin, you mentioned there are no major changes to your '14 guidance assumptions, but you did mention that G&A was lower in the fourth quarter than you expected. Is the G&A guidance still the same?

Kevin B. Habicht

Yes. For the next year, $33 million to $34 million. So yes, if you think about fourth quarter, we're -- relative to that run rate in 2014, that we're a little light in the fourth quarter on G&A relative to that. Again, it's primarily related just to compensation accruals.

Operator

Our next question comes from Jonathan Pong with Robert W. Baird.

Jonathan Pong - Robert W. Baird & Co. Incorporated, Research Division

This question is for Kevin. For 2014 guidance, what are you guys assuming you do with the $150 million unsecured note that's expiring in June? And if it's through another debt issue, what all-in rate do you think you could get on a comparable 10-year note today based on your credit?

Kevin B. Habicht

Yes. I think we're -- June 2014, $150 million comes due. It's a 5.9% effective rate, I think a 6.25%, 6.15% coupon. And yes, we look to take -- refinance that in our normal course of capital raising activity. If we were issuing 10-year debt today, I think we would be in the low 4s for 10-year fixed-rate debt. So it will be an accretive refinance, if that's the question.

Craig MacNab

So Jonathan, just to supplement that, we are going to continue to following our strategy of terming out our debt, certainly the short-term debt available at lower coupons. We think at that kind of cap rates, Kevin -- I mean, at the kind of yield Kevin mentioned, 10-year debt's awfully attractive. And I'm sure in 2015, we'll be thinking about the same.

Jonathan Pong - Robert W. Baird & Co. Incorporated, Research Division

It makes perfect sense. And then this is just kind of digging into the Q4 acquisitions. Can you give us a sense of the quality of these deals, whether it's from a lease duration perspective or investment-grade concentration?

Julian E. Whitehurst

Yes. The Q4 acquisitions were right down the middle of the fairway for our typical portfolio. I think we -- 12 of the 14 properties that we acquired were from our existing retailer relationships. I think it was with 9 different retailers in that mix. And the average per property for the fourth quarter was a little higher than average. But that's because there was -- there were just a couple of somewhat bigger boxes in there, but nothing outside the norm of our portfolio mix. And the pipeline looks the same as well.

Jonathan Pong - Robert W. Baird & Co. Incorporated, Research Division

Okay. I know you guys haven't historically given this out. But in terms of your entire portfolio, what percentage would you say is investment grade or investment grade-like in terms of tenant quality?

Kevin B. Habicht

I won't speak to the investment grade-like, because I guess that's an eye of the beholder. But we're -- investment grade rated is right around 20% for us. And a lot of that comes from tenants who actually have improving credit. And we've noted that in prior discussions where, over recent years, we've seen a number of our meaningful larger tenants actually have tenant improvements of significance.

Operator

Our next question comes from R.J. Milligan with Raymond James.

R.J. Milligan - Raymond James & Associates, Inc., Research Division

What was the cap rate on the acquisitions in the fourth quarter?

Julian E. Whitehurst

R.J., we don't give out specific information too much. But I think, what we did say that the last year was a 7.9%, I think, for the year. And the fourth quarter was a little better than that. Yes, it's pretty close.

Kevin B. Habicht

But generally, it's in line with kind of the year.

R.J. Milligan - Raymond James & Associates, Inc., Research Division

Okay. And I noticed -- or obviously, the acquisition volumes of the third quarter were a little bit lighter than the first half of the year, $90 million, and $60 million in the fourth quarter. Just trying to get an idea of how you guys are thinking about timing in terms of acquisition volume for next year, if anything's sort of held up the acquisition pace in the back half of the year that you think might trickle into 2014.

Craig MacNab

Jay, I don't think there was anything that spilled over from '13 that we've already closed in '14. Right now, our outlook is solidly in line with the guidance. In terms of a question somebody asked earlier with our differentiated strategy of sourcing retail deals, earlier this morning, Jay and I reviewed our travel schedules for the next 45 days or so. And I would observe that Jay is on the road almost every week with acquisition officers, visiting existing tenants, as well as a couple of new opportunities that we've been working on. So we're pretty comfortable with our outlook. I think our first quarter is shaping up to be a nice solid quarter. And if we have the opportunity to raise guidance during 2014, I promise you, we'll be as happy as you are.

Operator

Our next question comes from Dan Donlan with Ladenburg Thalmann.

Daniel P. Donlan - Ladenburg Thalmann & Co. Inc., Research Division

Craig and Kevin, you guys have always been pretty conservative with guidance, but I think this one might take the cake here. Your run rate is $0.51, and your midpoint in guidance would assume like a $0.49 run rate on the FFO. So I'm just trying to figure out how we bridge the gap to get to that level. I mean, are you anticipating some major tenant move-outs? Are you anticipating refi-ing the $150 million of debt with, say, a $300 million or $400 million offering in the first quarter? I mean, how could we -- how can we get to the $0.49?

Kevin B. Habicht

Yes. I mean, I think one of the things I alluded to earlier, our G&A is probably at $0.01 per quarter of that in there. If you look at our fourth quarter G&A of $7.4 million and you compare that to, call it, $33.5 million, $34 million in 2014, that's closer to $8.5 million. So there's $1 million in that number just because I think G&A was somewhat artificially low in the fourth quarter. So that may be half of kind of the delta, maybe, you're thinking about. But other than that, I don't know in terms of your model or...

Craig MacNab

But I think -- just one more thing. I think your comment earlier is accurate, that we're not going to refinance the $150 million with an offering of $150 million. We are certainly going to do benchmark-sized deal. And in the recent past, those deals, for us, have had a 3 in front. Who knows, we might even do it -- if rates are attractive, we might do it a couple of days premature.

Daniel P. Donlan - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And -- but again, Kevin, if that's half of the delta, then you still have $300 million of acquisitions. You don't need to raise any equity. It just seems to be highly, highly conservative not to move the guidance up even just a touch.

Kevin B. Habicht

No. We like how we're positioned. We -- you're correct that we don't need to raise equity, and we may or may not. But again, we try to be opportunistic on the capital front. It has served us well over the years, including last year. And so we'll see how it unfolds. But this is the guidance where we are at the moment.

Daniel P. Donlan - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And then as it pertains to kind of the fourth quarter, going back the last 3 fourth quarters, you've done, I don't know, I think it was $270 million in the last fourth quarter, $300-plus million the quarter before that and somewhere above $100 million in 2010. So why the -- why was this fourth quarter so light relative to year's past? Normally, this is a pretty big quarter for the net lease REITs. And is there something that was specific to you guys? Or was the market in general relatively soft in the fourth quarter?

Craig MacNab

Dan, you've asked an interesting question and I think it's a differentiated point about National Retail Properties. And we're going to continue to emphasize that we are not volume-oriented. We are selective and disciplined about deploying capital. We are looking to acquire properties in off-market transactions at very good yields. In calendar 2013, an initial cash yield on average, 7.9%, with growth coming from almost every single deal. That is hard work and we plan to do it. We are not motivated in the belief that more is better, especially if you're effectively just trading dollars, raising equity and investing at very low yields where there is no rental growth. It doesn't make sense for us.

Daniel P. Donlan - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And then there has been some talk of some retailers. And I think Darden's right in your backyard there, potentially doing a large sale-leaseback transaction. Are you starting to get more inbound calls from people that are looking to do more opportunistic type of deals like that? Or what's your thought process there? What have you been hearing?

Craig MacNab

So Dan, that gets to an important part of our strategy again. And I appreciate these questions, because our core acquisition approach is to be proactive, not reactive. Almost by definition, when we respond to somebody calling us, we should probably assume they've called every single other one of our competitors. It doesn't matter if you get the first call or the last call, you just want to be in that process. But while we do play in that game, as I mentioned in my prepared remarks, and we make offers, we are not chase -- we're not trying to be the highest bidder at the lowest yield. So there are some deals out there. And I have every confidence that in 2014, we'll get our fair share.

Operator

Our next question comes from Rich Moore with RBC Capital Markets.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Thank you, by the way, Kevin, for the additional disclosure on the debt tranches that you have. And I'm curious, going back to a previous question, is the $0.02, call it, of interest rate savings baked into your guidance? Or would that just be gravy when that occurs?

Kevin B. Habicht

No, that's baked in our guidance. I mean, we have assumptions. Like Craig said, it will make a difference as to when we pull the trigger on issuing debt this year. And so that can go a long way to moving the needle positive or negative, depending on that timing. And so -- but yes, we've assumed we'd refinance that debt, and that's included in our guidance.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay, good. And then there's been more talk lately, it seems, from the banks about what they're going to do with their branches. And I'm wondering what you guys are hearing and maybe if you have any concerns for the bank portfolio, the branch portfolio that you have now.

Craig MacNab

Rich. Yes, I think in every category, there's always chatter about what may or may not happen and so forth. But the good news about our -- the SunTrust portfolio we purchased is 2 really, really important things that gave us terrific comfort when we did our underwriting. The first one is those branches on average have more deposits than SunTrust has across their portfolio, so we are dealing in the top half of the barrel. Secondly, our average dollar investment in each property was only $1.7 million. And if you go out there in the marketplace, take a look at LoopNet or NNN 1031, you will see that bank branches that are above average in deposit base sell for well north of $1.7 million. So at a low price point, we have very good branches. It's a good position to be in.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay. So Craig, you're not hearing increased chatter from SunTrust or others that the bank branches are sort of on their way out?

Craig MacNab

Rich, absolutely not. Definitely not in there. But let me just give you a little bit of commentary. We live down here in the sun in Florida and interestingly, Chase, JPMorgan Chase, is pursuing Florida aggressively. And how are they doing it at the retail level? They're opening bank branches. So JPMorgan has probably pretty smart folks, and they think that a retail strategy makes sense to them.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay. Got you. On dispositions, guys, did you give any guidance for this year? And if you didn't, what are you thinking in terms of your appetite for additional dispositions?

Kevin B. Habicht

Yes. No, I mean, our typical assumption is that we'll find our, again, our fair share of dispositions. And we usually throw in an amount of around $40 million to $50 million in any given year as a base amount. And as we go through the portfolio, we may ramp that up a little bit, as we did last year and the year before. But it's a fairly modest amount in the scheme of things.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay. And then a real quick, Kevin, on this mortgage residual interest that you impaired, is there anything special we should know about that? I mean, are you getting rid of that? Is that why the impairment or -- what is happening, I guess...

Kevin B. Habicht

No, that's a long -- that asset, we've owned for a long period of time, and actually it's performed very well. We paid $9 million in 2005. And so far, we've gotten back $40 million in the last 8 or 9 years. And so it's been a home run. The downside to that investment, which we don't plan making any more of those, this was special circumstances, that you have quarterly mark-to-market accounting. And so you have to go through -- we have a third party valuation that goes through this securitization waterfall, present-value discounting, to come up with what they think the value of the residuals are. And depending on the performance of the loans, which they've actually been pretty good, and their anticipation for prepayment speeds, et cetera, they come out with a new valuation. And so that was lower this time. And so it's on our books. We're at, I think, around $11 million at the moment. It's a very small asset. We still are making good money off of it, and we've made tons of money off of it over the years, but it creates some accounting noise with these noncash impairments every now and then. So if you look back over the years, you'll see it pop up every now and then.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay, good. And then the last thing I had, I just want to go back to Dan's question on Darden. I mean, they're very actively looking to do something with their real estate. Have you guys actually talked to Darden here at all?

Craig MacNab

Rich, we're trying to talk to every retailer that we think has real estate that they might sell.

Operator

Our next question comes from Cedrik Lachance with Green Street Advisors.

Cedrik Lachance - Green Street Advisors, Inc., Research Division

I actually just wanted to go back to Richard's question on dispositions, but taking it maybe a little bit broadly. Craig, you've differentiated the company by being a more active participant in disposing of assets than, perhaps, some of your competitors. In an environment of low cap rates, an environment where the equity market has been more volatile, where is disposition fitting in your financing plans and how can it increase over the next year or 2, given the environment in which we are?

Craig MacNab

Cedrik, thank you for picking up coverage and it's a thoughtful questions. So we are always evaluating, debating internally. But one of the things that we have decided is that selling a very low-cap-rate property probably means you're selling an excellent asset. And we just don't think that makes sense, even at these kind of cap rates. Our strategy is slightly different. We want to sell properties from the bottom half of our portfolio. And in 2013, we did sell some of the SunTrust Bank branches. But aside from that, we did a very good job of selling some weaker assets. So the approach is 2 things: one, qualitatively improve the portfolio; and then two, use dispositions as a source of capital when you need it. I think you, more than most people on this call, are an NAV fan. And when NAV's in our -- or not in our favor from an equity standpoint, we've got a lot of properties that we can sell, and we have shown a willingness to do it.

Kevin B. Habicht

Yes. Just as a reminder on that note is we've, over the years, we've -- about a 3 or 4 year period, we sold about over $1 billion worth of properties. And so, I guess, to the point, we're not gun shy about selling properties when we think appropriate. Nobody's sold as much as we have in our arena.

Cedrik Lachance - Green Street Advisors, Inc., Research Division

Sure. So if I think about the pool of properties you could be drawing from -- so if you think about the asset quality you may not want to keep over the longer term, what percentage of your portfolio is that?

Julian E. Whitehurst

Cedrik, this is Jay. I think that maybe a little bit broader answer to your question, the -- our disposition strategy and activity is affected for the positive in our acquisition strategy of dealing directly with the retailers. When we are buying from the retailers, they are self-selecting those properties that they want to -- that they are committed to and want to sign a 15- or 20-year lease on. And so we are not buying from the retailers a broad spectrum of properties that are, some are great, most are good and some are bad. We're buying a better spread. If all portfolios are bell-curved, our properties are skewed to the good, high-quality side of that bell curve. And so what we found is that when we look back through the portfolio, we don't identify a high percentage of properties that we are really unhappy with owning for the long period of time. I don't have a specific percentage for you on your question. But in general, our properties are at the top of the retailers spectrum, and I think that's reflected in how well the occupancy rate has held up through good times and bad.

Cedrik Lachance - Green Street Advisors, Inc., Research Division

Okay. Just on the topic of dispositions, in regards to what was sold during the year, you booked an accounting gain of $5 million. Would there have been a gain if it had been calculated on the acquisition costs of these assets?

Kevin B. Habicht

Cedrik, I'll have to get back to you there. I don't know the answer to that question on this group, so I'll circle back to you on that.

Cedrik Lachance - Green Street Advisors, Inc., Research Division

Okay. And then just thinking about occupancy rates, if we were to think of your portfolio just on a same-property basis, so basically, what you owned a year ago, would occupancy have grown in that portfolio? Or is the occupancy growth that we've seen this year a function of assets that have been acquired?

Craig MacNab

Cedrik, I don't have that exactly in front of me. But I think what happens is that our leasing activity offset, almost dollar-for-dollar or property-for-property, those that were not renewed.

Kevin B. Habicht

Yes. Just to go to your question, I -- we're up a few basis points in terms of occupancy. We have 33 vacant properties at year-end. I don't recall from last year, but I'm guessing it was 35 or 37 last -- so to your point, I'd say we are pretty flat in terms of number of vacant properties for the year. So the small uptick in occupancies, in part driven by the denominator impact.

Operator

Our next question comes from Todd Stender with Wells Fargo.

Todd Stender - Wells Fargo Securities, LLC, Research Division

Craig, you mentioned that you did participate in some of the portfolio auctions. How big are you guys comfortable going? Or I guess we're used to kind of the one-off acquisitions and maybe small portfolios, but just wanted to get some color on how big you're looking at and just based on size.

Craig MacNab

Todd, that's an interesting question. It doesn't occur to me to think about it in terms of size. I think about it, if it makes good sense for shareholders, I'm sure the size is the right thing to do.

Todd Stender - Wells Fargo Securities, LLC, Research Division

Think you can still maintain your strict underwriting? I know when you talk about large portfolios, there's obviously some properties you probably would dispose of sooner than later. Can you still maintain your strict underwriting when you look at those?

Craig MacNab

Todd, I think as I said in my prepared remarks, and I appreciate the question, we evaluated all of those large deals. Several of them had assets in them that we underwrote and frankly didn't like, and we priced them accordingly. As a result, our offer for some of those portfolios was less than what they cleared for. So you are 100% correct, we're going to continue to underwrite each and every property. If it make -- if there is a larger deal out there that makes sense for our shareholders, we are absolutely going to do it.

Operator

[Operator Instructions] Our next question comes from Juan Sanabria with Bank of America.

Juan C. Sanabria - BofA Merrill Lynch, Research Division

Just a general question on how you think about your cost of capital, particularly on the equity side, relative to sort of the cap rates you're seeing? And if you could just comment on the -- on what you're seeing in the cap rates in terms of have they fluctuated at all with some of the volatility we've seen. And apologies if you've hit on this earlier, as I joined late.

Kevin B. Habicht

Yes. I mean, I think, as I've alluded to earlier, it's not a direct 1-for-1 correlation doing cap rates and 10-year debt or our share price, to be quite honest. But our cost of capital, from an accounting cash cost standpoint, a lot of companies, I think, gravitate to some measure around the inverse of their multiple, if you will. And so you're suddenly showing kind of a 6% accounting cash cost of capital. We tend to, in our minds and in our thought process and as we think about allocating capital, burden that cost of equity at a higher rate, something close to what we might think a reasonable investor might expect as a total return over the near to immediate term. And so we tend to burden it a little higher. And hence, I do think that helps us be a little bit more selective as we allocate capital and make sure that it's impactful to the bottom line.

Julian E. Whitehurst

And Juan, as it relates to cap rates, we did talk about that earlier. But the short answer is that competition remains very strong and cap rates are staying down and perhaps even compressing further in the retail net lease world.

Operator

And there are no further questions at this time. I'll turn the conference back to management for closing remarks.

Craig MacNab

Diego, thank you very much. Folks, we really appreciate your participation. A couple of excellent questions there. We look forward to talking to you -- many of you in the months ahead, as we're on the road a little bit. And if nothing else, we'll see some of you at these conferences. Thank you very much.

Operator

This concludes today's conference. All parties may disconnect. Have a great day.

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