National Retail Properties' (NNN) CEO Craig MacNab on Q4 2015 Results - Earnings Call Transcript

| About: National Retail (NNN)

National Retail Properties, Inc. (NYSE:NNN)

Q4 2015 Earnings Conference Call

February 11, 2016 10:30 AM ET

Executives

Craig MacNab – Chief Executive Officer

Kevin Habicht – Executive Vice President and Chief Financial Officer

Jay Whitehurst – President and Chief Operating Officer

Analysts

Vikram Malhotra – Morgan Stanley

Camila Torrente – Bank of America Merrill Lynch

Rob Stevenson – Janney Montgomery

Nick Joseph – Citigroup

Vineet Khanna – Capital One Securities

RJ Milligan – Robert W. Baird

Frank Lee – UBS

Amit Nihalani – Oppenheimer

Todd Stender – Wells Fargo

Tyler Grant – Green Street Advisors

James Bambrick – RBC Capital Markets

Dan Donlan – Ladenburg Thalmann

Operator

Greetings and welcome to National Retail Properties Fourth Quarter and Year-End 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I’d now like to turn the conference over to your host, Mr. Craig MacNab, Chairman and CEO. Thank you, you may begin.

Craig MacNab

Thank you, Rob. Good morning, and welcome to our 2015 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.

2015 was another excellent productive year for NNN as we increased our recurring FFO per share by 6.7%, expanded our already fully diversified and well-occupied portfolio, while at the same time, maintaining a fortress-like balance sheet.

We remained focused on delivering multi-year results and have now had four consecutive years of terrific per share growth in recurring FFO. Significantly, we have achieved these results while using modest amounts of debt as Kevin will expand upon in his comments.

As our press release indicated, we acquired 221 net lease retail properties last year, investing $726 million, helped by a slightly better than anticipated fourth quarter. The average initial cash yield on these acquisitions was an impressive 7.2%, despite the cap rate compression that seems to have occurred in all property types. As you are aware, this attractive yield improves over time as the rent increases contractually, frequently tied to CPI over the duration of our very long leases.

One interesting detail of our acquisition activity is that the vast majority of the transactions were single property acquisitions throughout the year, many of which were purchased from existing tenants with an average investment per property of only $3.3 million. Only one of our deals in 2015 was larger than $50 million in size, and we did not have competition on this particular transaction.

So we continue to adhere to our strategy of focusing on acquiring 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 to capital. Last year, we had great success with repeat transactions with approximately $600 million being invested with our relationship tenants.

In the last couple of years, we have defaulted to one-off transactions helped by our significant number of relationships. We have looked at all of the larger deals that have taken place, and frankly, others were prepared to pay more than we were for the so-called portfolio premium. In 2016, the tide may be shifting back to a more normal environment, where larger amounts of money command a premium, and we will continue to carefully review some of the portfolios that we expect to come to market.

We continue to favor what I characterize as small box retail and our current pipeline of deals is predominantly made up of opportunities in these categories. We like well-located retail properties, which is predominantly where small-box retail is found.

Small-box retail is very granular, about 40% of our investment tends to be in the land, and importantly, we have experienced there a multiple users interested in these sites if we do need to release them. And by the way, our experience is this does not often occur. Our portfolio continues to be in excellent shape and at the end of the year, we were 99.1% leased. Again, our portfolio is effectively fully leased. This year we’re very modest rollover with only about 1% of our leases coming up for renewal.

As of the end of the year, we earned 2,257 properties which are leased to just over 400 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. Finally, on average, these tenants are contractually obligated to pay us rent for just over 11 years.

The health of our tenants continues to be good. The decline in the price of oil is assisting the gas margins realized by our convenient store tenants who are obtaining elevated margins at the pump. Our restaurant tenants are performing well with many of them experiencing same-store sales growth, which obviously assists them in their ability to pay out rents. We have provided additional disclosure in your year-end supplements and you can read that the rent coverage and portfolio health is solid.

Last year, we continued our multi-year track record of capital recycling using our in-house expertise to sell 19 properties for $39 million, generating $10 million of gains that are not included in FFO. As Kevin will discuss, we are planning to realize slightly greater proceeds from our dispositions this year and this capital will fund new investments.

In conclusion, our portfolio is in excellent shape and very importantly, our balance sheet is fortress-like, which will allow us to take advantage of the carefully underwritten acquisitions that we are currently evaluating. Kevin?

Kevin Habicht

Thanks, Craig, and I’ll start with our usual cautionary language. On this call, 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, headlines from this morning’s press release include reporting record per share operating results, completing $726 million of new investments in 2015, increasing our 2016 guidance slightly, while maintaining a low leverage profile and full availability of our bank credit facility. We believe the results in metrics compare favorably within the REIT industry and it’s an important part of our total shareholder return continuing to outperform REIT and general equity averages in 2015, as well as most periods over the past 25 years.

Now, getting into some of the results, we reported fourth quarter recurring FFO of $0.56 per share, that’s a 1.8% increase over prior year results. Full year 2015 recurring FFO per share results increased 6.7% over 2014 results in bringing the average increase over the past four years to 9% annually.

And again, as we’ve noted in the past, we’ve not achieved this by using more leverage or shorter-term debt or variable rate debt. If you look at 2015, 83% of the incremental revenue found its way to the bottom line, meaning recurring FFO, and that includes covering increased interest expense due to higher outstanding debt amounts associated with acquisitions. They exclude interest and expense impact is 92% of the incremental revenue found its way to the bottom line.

Dividend paid per share increased 3.6% in 2015, and our AFFO payout ratio decreased 250 basis points to 75.3%. 2015 marks the 26th consecutive year of increased annual dividends for NNN, something that only three other REITs can say and less than a 100 U.S. public companies. And the consistency of results in long-term perspective in managing the company have been critical components of that track record.

As Craig’s comments indicated, the acquisition pace quickened in recent months and finishing 2015 on a strong note has allowed us to increase our 2016 FFO guidance by a $0.01 per share to $2.29 to $2.35 per share. The annual base rent for all leases in place as of December 31, was $487.4 million and occupancy continues to hold up well, ending the quarter at 99.1%. In the fourth quarter, one item included in FFO but excluded from recurring FFO and AFFO was a $9.6 million non-cash charge for writing-off our deferred tax asset. During the fourth quarter, we made a decision to convert the tax status of our taxable REIT subsidiary entities and convert those to qualified REIT subsidiaries, which are tax-free.

And so we accomplished this by revoking the TRF tax status on those entities, which triggered this one-time $9.6 million non-cash write-off of accumulated deferred tax assets. Continuing to book non-cash income tax expense like we’ve done in the past would have reduced this deferred tax asset over time, but eventually this expense is non-cash expense would become a cash tax expense. So it made sense to make the conversion from a taxable REIT subsidiary to a qualified REIT subsidiary and eliminate any GAAP or cash income tax expense.

Just for some background. These taxable REIT subsidiary entities were set up many years ago when we were buying and developing properties with the expressed purpose of selling them immediately. As well as some other non-REIT tax friendly activities over the years, which at one point you may recall we are operating from [ph] car washes (12:25) in California when a tenant defaulted on those leases.

But at this point, we have no need for those entities to be operating as a taxable REIT subsidiary, since they only generate rental revenue now. So accordingly, we’ve revoked their TRF tax status and going forward, there should be virtually no income tax expense on our P&L. As I mentioned, we’ve slightly increased 2016 FFO guidance by $0.01 to $2.29 to $2.35 per share and AFFO guidance to $2.34 to $2.40 per share would suggest 4.5% growth to the mid-point based on our current assumptions. Our current assumptions are largely unchanged from our prior guidance and they include $400 million to $500 million of acquisitions in the high fixed cap range, with a little over half of that – 60% of that closing in the second half of 2016.

G&A expense of $35.5 million, plus $900,000 of real estate acquisition transaction costs, we’re not budgeting any change in occupancy. The guidance includes $1.8 million of mortgage residual interest income, it also includes property expenses net of tenant reimbursements of $5.7 million and that’s not to be confused with $900,000, I think at earlier version of the supplemental data indicated, property expenses net of tenant reimbursements is $5.7 million for 2016 guidance.

And then lastly, dispositions as Craig mentioned of $75 million to $100 million of dispositions in 2016, that’s up from $39 million in 2015. While we don’t give any guidance on our capital market plans, you can assume we will maintain one of the more conservative balance sheets in the industry. Today, we also released some additional supplemental data regarding our acquisitions, dispositions, leasing and same-store rents.

As we’ve noted in the past, some of these metrics have very little activity on a quarterly basis, which is immaterial and/or may paint an inaccurate picture of the whole for better or for worse. But this annual information provides a larger, more representative picture. Even so, some of these annual amounts are not particularly material, but we understand the desire for some color on these metrics.

Turning to our balance sheet, during the fourth quarter, we completed the issuance of $400 million of 10-year fixed rate unsecured notes with a 4% coupon and a 4.03% yield. Despite the notable choppiness in the credit markets in the fourth quarter and the perpetual angst about higher interest rates and fed actions, our deal was well-received, nearly five times over-subscribed. It is interesting to note that this debt issuance in the fourth quarter was only 11 basis points higher in rate than the 10-year note offering we completed 17 months earlier in May of 2014.

We used the proceeds of this debt issuance to pay-off our bank line and to fund the $150 million December 2015 maturity of 6.15% notes. So, was obviously was an accretive refinance of that debt maturity. Also during the fourth quarter, we raised $202.6 million of common equity, that was primarily through our ATM equity program bringing total 2015 equity raise to $328 million.

This equity if you couple it with our $39 million of disposition proceeds and $76 million of retained earnings, which I’m defining as AFFO minus our dividends, you get to a total $443 million of equity-like capital proceeds during the year, which funded our acquisitions. At quarter end, we had nothing outstanding on our $650 million bank credit facility, so we’re very well-positioned from a liquidity perspective. The weighted average debt maturity is now seven years and we have no floating rate debt.

Our balance sheet remains in great position to fund future acquisitions and weather potential economic and capital market turmoil. If you look at year-end 2015, leverage metrics, debt to gross book assets was 33.2%, debt to EBITDA was 4.4 times at December 31. Interest coverage was 4.4 times for the fourth quarter and 4.6 times for the full year. Fixed charge coverage was 3.2 times for the fourth quarter and 3.3 times for the full year. Only eight of our 2,257 properties are encumbered by mortgages totaling just under $24 million, so despite the significant acquisition over the past four plus years, our balance sheet remains in very good shape.

2015 was another good year for NNN, and 2016 looks like it can continue that trend of recent years. We’ve been reminding investors of some of our distinctives, which largely come from and maintaining a consistent strategy for 20 plus years. We remain focused on a single property type. We believe retail properties offer better risk adjusted returns over the long-term compared to other net lease property sectors, and our core competency is in retail properties.

Additionally, we’ve maintained a conservative balance sheet profile and don’t plan to change that. We like the optionality that creates, especially if the capital markets become less friendly. Our strategy has been very consistent for years. Our overriding goal remains to grow per share results and manage our balance sheet on a multi-year basis. And if we do this, we’re optimistic that we’ll be able to perpetuate our 26th consecutive year track record of raising our dividend, which has been an important part of consistently outperforming REIT equity indices and general equity market indices for many years.

Rob, with that, we will open it up for any questions.

Question-and-Answer Session

Operator

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Vikram Malhotra with Morgan Stanley. Please proceed with your question.

Vikram Malhotra

Thank you. Congrats on the strong results. I just wanted to maybe touch, if you could give us more color, Craig, on your comments about returning to a more normal environment where large amounts of money will come under premium, are you sort of referring to what we’ve seen in terms of portfolio premium versus smaller transactions? And maybe if you can just touch on any larger transactions you’re seeing, what types they are and kind of what your interest level would be?

Craig MacNab

Vikram, good morning, and thank you. I think what I was trying to say is that firstly we’re going to continue to remain disciplined in our process. And an example of discipline is that when there was a so-called portfolio premium, which is to say people were paying more for a pool of assets than individually they would go for, we went back to doing it the old fashioned way, one property at a time, and I think our yields that we achieved in 2015 show that.

For sure, it stresses the organization because as a practical matter we’ve closed on almost one property a day throughout 2015. I think that you know better than I, capital markets are clearly shifting and it seems intuitive to me that we’re going to get back to a world where if people are deploying large amounts of capital, you’ll get a satisfactory premium for deploying that capital as opposed to a discount. So we’re pretty energized at what we’re looking at.

I think in terms of your second question, which is what we are looking at out there in the markets and I’m reverting back to the fact that we are continuing to focus on what we call small-box retail. So, the biggest categories in our portfolio include convenient stores and restaurants, the health of those tenants is good, and we’re identifying opportunities in those sectors. So, obviously, early in 2016, we got a long way to go to convert some of these opportunities to close transactions, but so far, our visibility is quite good.

Vikram Malhotra

Okay, great. Thanks. And Kevin, two quick questions for you. One, just on what you’re seeing – what we’re all seeing in the debt markets. I think the last time you went to the debt market. You did an unsecured around 4%, if I’m not wrong. What would you – what do you think you’d be able to raise that today? And then just a second question if you just comment on sports authority and your exposure there?

Kevin Habicht

Sure. Yes, so debt cost which are very volatile at the moment, even the 10-year treasury today is making double-digit basis point moves hourly it seems, so it’s a little hard. It’s pretty choppy and so I think what you’re going to see, and what we’ve seen in recent weeks and months is that the all-in rate doesn’t move that much. Meaning to the extent treasuries drop 20 basis points, you see credit spreads widen 15, and so – and vice versa, and so I think all in we still think that our long-term 10-year fixed rate cost is probably pretty close to 4%.

Like I say, we’re not in the market now, and so I haven’t pushed – tested that number to a great detail. But I think that’s a pretty good estimate of where it would be today. With regard to Sports Authority, we have four stores, it’s about – its 0.5% of our rent and two of those stores are in Florida, one in Tennessee and one in New Jersey.

Vikram Malhotra

Okay. Thanks, guys.

Operator

Our next question comes from the line of Juan Sanabria with Bank of America Merrill Lynch. Please proceed with your question.

Camila Torrente

Hi, this is actually Camila with Juan. Are you seeing any signs of softness in your Texas exposure and are you happy with your current leading to Texas?

Jay Whitehurst

Good morning, it’s Jay Whitehurst. With regard to your – the Texas question, just to step back, as you know we’ve – our concentration in Texas is about 20% of the overall portfolio. But that concentration is primarily in convenient stores. About 40% of our Texas properties are convenient stores, which are well located properties, operated by really premier, best-in-class operators in that state, and that business has been very solid.

Just in general, the Texas – our experience with the Texas economy is that it is holding up very well. Dallas, San Antonio, Austin, Southern – South Texas are all still doing quite well. I was in San Antonio a couple of weeks ago and we couldn’t find a road that wasn’t under construction. That’s anecdotal but it is a big diverse economy and we aren’t seeing any negative impact yet on our diverse pool of retailers there in Texas.

Craig MacNab

I think the other thing to remember, I think it matters a little bit by property type and tenant type if you will. So on an apartment REIT they had different exposure of – who their tenant is. Our tenants are large, regional and national retailers. So to the extent there is weakness in any particular market, they have lots of stores and lots of other markets. So the tenants are diversified, on top of our diversification and so that we think insulates us a little bit from any softness in any particular geography.

Camila Torrente

Okay. And one more question for Sunoco. Any impact – have you seen any impact on rent or corporate level coverage given the weaker oil prices in Texas?

Craig MacNab

Yes, no, we have not. No, it’s continuing very good performance. I think within that conglomeration of entities the Sunoco LP is the better performing one, if you will, which is where all the retail marketing assets are, it’s interesting. If you look at the other convenient store public companies out there, that you – and just look at their stock, so I’ll try to give you one indication. You can tell that they’re going very well. Whether it is Casey's, Couche-Tard, 7-Eleven, any of those companies that C store sector as Jay alluded to earlier is doing very well, even despite the fact that the oil prices is creating some volatility. Their margins on gas are very good.

Camila Torrente

Okay, thank you.

Operator

Our next question is from Rob Stevenson with Janney Montgomery. Please proceed with your question.

Rob Stevenson

Good morning, guys. Just one quick for me. Of those $75 million to $100 million expected dispositions in 2016, can you comment on how much of this is a standard where you’re either selling vacants or locations where you’re starting to sour on the tenant of the location versus maybe more offensive dispositions where you’re taking advantage of a strong bid to sell assets in the four and five cap rates and redeploy the proceeds?

Craig MacNab

Rob, thanks very much, and we appreciate you picking up coverage. I think we have – are sticking to what we’ve said historically, which is we sell for both offensive and defensive purposes, and defensive is where as you pointed out, we have concerns of our tenant’s outlook et cetera. And offensive is where we get a – what we consider in above markets offer, which is above market in terms of dollars and a very low cap rate.

So, we’re looking at all of those, but I do want to give you just a little bit more color and we’ve again talked about this in prior calls and in investor meetings. We’re going through a process and have been going through a process of selling some of the very small marginal properties in our portfolio. And if I take a look at the activity and calendar 2015, several of the number of transactions were these very small properties, frankly, less than a $1 million in asset size and we’re going to continue that process into 2016. Part of it is an efficiency initiative that we have, and secondly, it’s a risk management program. But I think in terms of the totality of our 2,257 properties and the number of dollars, it is at the margin.

Rob Stevenson

Okay. Thanks, guys.

Operator

Our next question is from Nick Joseph with Citigroup. Please proceed with your question.

Nick Joseph

Thanks. Just going back to tenant health, there have been any changes to the watch list or in terms of bad debt?

Craig MacNab

No change in bad debt, we’re – and really have not had to deal with that over many years. As I mentioned, our tenants tend to be large retailers, and so you tend to get paid rent up until the point they may file for bankruptcy and reject the lease. But we don’t have a lot of 120-day late times of rent and historically over the years.

In terms of just overall health of the portfolio, we always have tenants who are – because we lease to retailers, are going through some level of difficulty. And so we’ve – the total composition of our watch list, if you will, has really not changed materially. I mean, Sports Authority has been on that list for a good period of time. We have a restaurant concept called Logan, that’s been on the list.

We’ve also had over the recent years a number of our tenants go the other directions, in terms of upgrade, so whether it’s Rite Aid or Pep Boys, and some of those. And so it’s always a mixed bag. At the moment, it doesn’t feel like we are getting any different difficulty, if you will, from our tenant base today.

Nick Joseph

Thanks. And in the supplemental, you have a table showing how your leverage and credit metrics have improved over the last five years. With your current cost of equity and disposition plans, should we assume leverage continues to come down from here or will you look to grow in a more leverage neutral manner.

Craig MacNab

Yes. You should assume leverage neutral, but we always reserve the right to pivot. And that’s what I’m trying to get at in some of my comments. We create that optionality and hopefully can tap the capital markets when they present we think compelling opportunities, whether debt, or equity, or preferred, or whatever flavor of capital it might be at any point in time.

We want to be able to take advantage of that. We think our balance sheet is in a great position to use that optionality to the extent equity or preferred or even 10-year debt becomes very attractive. You will note over the years, that we have pushed our leverage lower for that very reason because long duration capital was well-priced, it’s still well-priced, but I think in terms of an operating assumption you should assume leverage neutral for now.

Nick Joseph

Thanks.

Craig MacNab

Yes.

Operator

Our next question comes from Vineet Khanna with Capital One Securities. Please proceed with your question.

Vineet Khanna

Hey guys, good morning. Just given that shares are trading in an all-time high and the 10-year sort of where it is today. What’s your preference for incremental capital going forward?

Craig MacNab

I think given that we’re on a path of leverage neutral assumptions, you should assume we’re going to have a mix of both going forward. I think, again, we’d like longer duration capital in this environment, so we’ve not used short-term debt or variable rate debt. But with that one caveat, we’re going to use a mix of the kinds of capital that we currently have probably going forward.

Vineet Khanna

Sure. And I guess to continue on the capital markets trends. So you issued $5.5 million via the ATM in the fourth quarter. Should we view the ATM as sort of the preferred method for raising equity going forward just because it’s a better match funding tool for acquisitions?

Craig MacNab

Not necessarily. I appreciate the comment on the match fund because that’s the way we acquire properties is in smaller amount in the ATM, you can put out equity on smaller amounts. We did do a regular way equity offering, if you will, late in 2014, so we will continue to do that from time-to-time, but the ATM is an excellent source of fill-in equity capital, and so you should assume we’ll do both going forward.

Vineet Khanna

Okay. And then just finally two quick questions. Could you provide some color on the uptick in G&A in the quarter, it looks like it’s above sort of the 2016 trend and where it was throughout 2015?

Kevin Habicht

Yeah, I mean you shouldn’t read too much into that. I think our G&A ended up pretty much, exactly where we said it would for the year, which is the way we think about it. There is some variability from quarter-to-quarter and this past fourth quarter just some compensation accruals that took place in the fourth quarter of 2015 that didn’t quite take place and they might have taken place earlier in the year in 2014, so you get some swings on a quarterly basis. But if you look at it on an annual basis, our G&A is up a little over 6% for the year, but as a percent of revenue, total G&A continues to decline down to 7.2% today versus 7.5% last year – 2014.

Vineet Khanna

Sure. Thanks for the time.

Kevin Habicht

Yeah. Thank you.

Operator

Our next question comes from RJ Milligan with Robert W. Baird. Please proceed with your question.

RJ Milligan

Hey, good morning guys. Craig, you mentioned that you expect a couple of portfolios come to market, larger portfolios this year. I was wondering if you could give any color as to how many portfolios and the size of those?

Craig MacNab

RJ, I’m sorry, I caught. What I can tell you is that right now we are working on a variety of deals, evaluating them, looking at them. Historically, we’ll reject most of these. But the deal flow right now is quite good.

Jay Whitehurst

RJ, this is Jay Whitehurst. I can’t give you any more color either. But I can add that that just a reminder, we really do see every retail portfolio that’s out there. So if it’s out there, you should assume that we’re looking at it.

RJ Milligan

Okay, thanks. And so a lot of talk on Sports Authority and I was wondering if that has raised any concerns about your Gander Mountain exposure and any comments on what’s going on with Gander?

Craig MacNab

RJ, I think it’s an ebb and flow. My guess is in the near-term Gander Mountain will get a little bit of benefit from what’s happening at Sports Authority. You’re also aware that’s a publicly traded company that we had no exposure to Cabela’s has announced that they’re evaluating alternatives or maybe an activist is encouraging them to do it.

I think that the – and you can see it frankly in the Dicks numbers that the sporting good category has been flat to slightly down. Different companies are executing better than others. Gander Mountain is a well-run company. It is a private company, so they don’t have the balance sheets strength that some of these others do. The equity investors behind Gander Mountain are extremely affluent individuals with considerable money in other investments. Gander Mountain is doing just fine. I will tell you this, that as we look at deploying capital going forward, we are going to probably do more deals in the small-box retail category.

RJ Milligan

And to that point, Craig, is there a category where you’re going to be doing less deals, a specific sector that you’re going to avoid this year or maybe there’s just the size of the individual assets?

Craig MacNab

Yes, RJ, fair question, and I think that what we encourage our acquisition officers and our team to do is evaluate all deals and look at them from a bottoms up approach. And then in the sort of the corner office, those of us that are here around this table, we tend to allocate capital where we think there is the safest and the best risk adjusted return. And so if there is a bigger box retail with an excellent operator where rents are low and land is a high percentage of the value, we will do those deals, but in terms of the pipeline that we’re looking at now, I’ve been pretty clear. We are looking at lots of small-box retail opportunities.

RJ Milligan

Great. Thank you, guys.

Operator

Our next question is from Ross Nussbaum with UBS. Please proceed with your question.

Frank Lee

Hey, guys. This is Frank Lee with Ross. We just want to get a better deal performance in the same-store portfolio. Do you guys have the same-store rental growth percentage number that includes properties that you’ve taken upon lease expiration? Maybe what is your reasoning behind excluding the vacant properties in the same-store cap? Thanks.

Craig MacNab

Yes, Frank, we’ve stuck with I guess what has become the definition of same-store rents within our sector, which is the properties that are leased at during both periods and so that’s what shows up in that number in our supplemental. Obviously, to the extent occupancy is going up, then that’s number might be a little higher. If you included that to the extent occupancy drifts lower, then same-store numbers would drift lower as well. But at the moment, that’s what we’re following kind of our sector definition of properties leased during both periods.

Frank Lee

Okay, thanks.

Operator

Our next question comes from Amit Nihalani with Oppenheimer. Please proceed with your question.

Amit Nihalani

Hi, good morning. Can you comment on where you see CapEx spending and what industries would you like to either increase or decrease your concentration in?

Jay Whitehurst

Amit, good morning. This is Jay Whitehurst. And really with respect to your cap rate question, I think what we see is that they are just kind of staying where they are. The cap rates, they are not trending higher for quality properties. They may be – I’d say they are flat to trending slightly down for good quality retail real estate properties I’d just say. And in terms of what we are looking at, it’s really, as Craig mentioned earlier, it’s across the Board of our entire portfolio. We’re seeing, as Craig mentioned, some great opportunities in small box retail, but our overall pipeline looks a great deal like our diversified portfolio mix.

Craig MacNab

And let me just do a little more on that. In 2015, our average initial cash yield was about 7.2% and as Kevin pointed out in his prepared remarks, we are guiding towards high sixes in calendar 2016 for an initial cash yield.

Amit Nihalani

Okay. And following-up on Texas, how much of the 20% exposure to Texas is concentrated in Houston?

Kevin Habicht

About 3% to 4%. So 15% of the 20%, I guess, is the way to think about that or 3% or 4% of our total portfolio would be in that MSA, again, mostly a lot of convenience stores which are performing just fine.

Amit Nihalani

Got it. Thanks. That’s it for me.

Operator

Our next question is from Todd Stender with Wells Fargo. Please proceed with your question.

Todd Stender

Thanks, guys, and thanks for the supplemental this quarter. It’s very, very helpful. Just to stick with you, Kevin. You raised $200 million in the quarter from equity on the ATM and again you highlighted it’s about the same size as your last overnight back in Q4 of 2014. Just trying to get a sense of how deep is that well? What kind of demand are you getting? Because we get to see in an overnight, where the bond offering is over subscribed, can you just give us a sense of how deep you can tap that?

Kevin Habicht

Yeah. Off late in recent months it’s been fairly deep. There’s been meaningful interest in our shares. We’ve had not just in the last quarter or two, but really in years past as well, reverse inquiries of size and so sometimes that presents an opportunity to execute a larger trade via the ATM and create some meaningful proceeds. But the interest level has been high and obviously, that’s extended into 2016 given the volatility in the market they’ve been greater interest and in shares off late.

Todd Stender

Great.

Kevin Habicht

Obviously, we’ve been in a blackout period of for recent weeks here, ending this earnings release.

Todd Stender

When does that go away, can you tap it the day after, how long is that?

Kevin Habicht

Usually it’s a couple of days after, so today is Thursday, you should assume, as early as next week we could, not saying we will or – and the good news is we don’t need to because that’s where we always want to be on the capital front, as we don’t have to raise equity. And so but in terms of legally, technically, the ATM should become available to sometime next week. And that’s true with all companies are just – couple of days after earnings you can free up legally to proceed.

Todd Stender

And then just on the preferred market. Generically I was kind of think about 300 basis point spread to what the 10-year is doing. With the 10-year dropping like it is on the yield, how does the preferred market look to you guys right now?

Kevin Habicht

Its – we like that kind of capital because it’s long duration, so we crave that and it’s something we have on our radar. It wasn’t on our radar six months ago just because of pricing. You obviously saw one good sized deal get done here in the last month or so in the REIT industry, that was a quite a good benchmark. And so to the extent preferred rates become more compelling, that would definitely be still on our radar of potential capital source.

Our last issuance of preferred stock was in May of 2013 and I mentioned that just because in December of 2012, it was not on our radar because of where it was priced. It wasn’t in our budget, or wasn’t in our guidance, but the coupon rates on preferred in the second quarter of 2013 got very interesting and compelling in our opinion, and so we issued $288 million of 5.7% perpetual preferred. And so we thought that was a good price and moved forward with that. I guess the only other item of note as it relates preferred is that we have a 6 and 5, 8 series, our Series D that’s outstanding that would potentially become redeemable next February, so a year from now.

Todd Stender

Okay, that’s helpful. Thanks, Kevin. And Jay, can we hear more details on the properties you’ve acquired in the quarter? If you just give us the range of lease terms, any coverages to note, and anything you’re seeing the market now that we’re kind of getting well into the current cycle?

Jay Whitehurst

Sure, Todd. The fourth quarter really, there’s just a few headlines on the fourth quarter acquisitions really. We did four separate small portfolio transactions all in the $15 million to $25 million range and it was across the spectrum of our portfolio.

We did a convenience store portfolio. We did a convene – a QSR portfolio, an auto service and family entertainment, so a little bit of some of our typical industries. And all of the balance with the fourth quarter were one-off acquisitions. And the cap rates were all kind of in a narrow band that was really right around our year-end average, so there wasn’t anything very notable there. And the majority of those dollars again were with our relationship tenants. Three of our four portfolio acquisitions in the fourth quarter were with our relationship tenants. And lease term for those, I think within the 18-year range, the 15-year to 20-year leases, but a little bit on the high end of that on the overall average.

Todd Stender

So nothing below 10, everything was in excess [indiscernible]?

Jay Whitehurst

Right, yes. Todd, I don’t think there was anything below 15.

Todd Stender

Yes. Okay, that’s helpful. Thank you, Jay.

Operator

Our next question comes from Tyler Grant with Green Street Advisors. Please proceed with your question.

Tyler Grant

Hi, guys. Just a quick question for me. So in light of the recent market turmoil that we have experienced, have you seen any changes in the composition of the bidding tenants? So for example, anybody entering the tents or leaving the tent, I will let you take it from there.

Craig MacNab

For acquisitions you’re talking about?

Tyler Grant

Yes.

Craig MacNab

No, no.

Kevin Habicht

No. The competitive landscape feels very similar to what it was through all of 2015.

Tyler Grant

All right, perfect, that’s helpful. And then just a quick question on your portfolio, could you talk about the percentage of space that’s vacant, but it’s still paying rents?

Craig MacNab

Yes. We always have some of that and the good news is that tenants are obviously still required to pay us rent for the full term of the lease and because their tenants are typically in pretty good shape, they have the ability to do that. We always view that as an opportunity to go find a new tenant if we can and then approach that current tenant and negotiate a lease terminations fee and put in our new tenant. But we view that as potential upside, but the total is around less than 1% of our current rent would fall in that bucket of dark but paying rent.

Tyler Grant

And that’s the number as of the end of the year.

Craig MacNab

Correct, Tyler.

Tyler Grant

All right, perfect. And do you have any idea what the average remaining lease duration is on those assets?

Craig MacNab

Yes, another good question because that’s obviously something we look at. I don’t have an average for you, but it’s – I’d put it in the five-year range. It’s not two and it’s not 12, but I don’t have that exact number in front of me.

Tyler Grant

Right, thank you, guys. That’s it for me.

Craig MacNab

Thanks, Tyler.

Operator

[Operator Instructions] Our next question comes from James Bambrick with RBC Capital Markets. Please proceed with your question.

James Bambrick

Hi, guys. Good morning. Your stock is at a high currently and historically you have issued equity to hold cash on the balance sheet when the timing is right. Is this shaping up to be one of those times when you hold cash and wait for things to shake out?

Craig MacNab

Yes, I mean, you’re correct to note that we at times have taken advantage of capital markets when it’s available and well-priced and the preferred offering I mentioned a bit ago in 2013 was an example of that. In April of that year, we issued $350 million of 10-year debt and a month later, issued $288 million of preferred, but we’re constantly looking to keep our balance sheet in a liquid position and we’re constantly thinking about capital on a multi-year long-term basis.

And so with that in mind, we tend to get longer duration capital when it’s available. I’m not giving you – I’m being a little elusive here because like I said, we don’t give guidance on our capital markets activity, but we maintain our balance sheet that gives us great optionality to pivot to the type of capital that’s readily available and well-priced.

James Bambrick

Okay, thank you. That’s all for me.

Operator

Our next question is from Dan Donlan with Ladenburg Thalmann. Please proceed with your question.

Dan Donlan

Thank you and good morning. These conference calls are starting to get longer and longer it seems. Just a quick question on the activity you talked about the portfolios. Is that a result of REIT spin offs being banned by the government, Craig or Jay, just kind of curious if that’s driving some of it?

Craig MacNab

Dan, I think that that is not really the driver. I think the driver is a little bit more activists contacting companies that own real estate, managements, Boards realizing that owning real estate and for a retailers not the highest and best use of their capital. And then frankly, within the categories that we have very good relationships, some of these tenants continue to grow and they need real estate capital to finance their new stores. So it’s a lot of different things. It’s not simply that IRS ruling.

Dan Donlan

Okay, that’s helpful. And then...

Craig MacNab

Somebody – just one more thing, Dan. Somebody asked a question which is very good question, what’s happening in the competitive landscape? I think one thing that I’m anticipating, and maybe I’m being optimistic here, but in the last couple of years, there have been any of a number of people that pursued some of these bigger transactions, looking at leverage returns in an environment where interest only loans were available for real estate, and my guess is those people are going to be out of business this year. So there’s lots of opportunity. We play in a very big sector. We just want our share and maybe a little bit more.

Dan Donlan

And then maybe sticking with that line of thinking. How is –is Amazon a factor in single tenant retail? Are they looking at single tenant boxes, are you aware, or is it more malls? What’s your thought on that and what are you hearing there?

Craig MacNab

Who is in? We didn’t hear that.

Dan Donlan

Sorry, Amazon.

Craig MacNab

Amazon.

Dan Donlan

Are they interested in...?

Craig MacNab

Amazon is not going to be a great opportunity for us as we look at the outlook. I think what you’re probably going to see them doing is a lot of urban retail initially, given the number of stores that are being talked about. One day there maybe an opportunity for us, but it’s certainly not on our target list as we look at companies to call on in 2016.

Dan Donlan

Okay.

Craig MacNab

You might say we’re not too ambitious enough. Who knows, Dan.

Dan Donlan

Okay. And then lastly, I appreciate the new disclosure, guys, but just a question on the coverages, is the coverages that you list there, is that only for the top 20 tenants or is that for the whole portfolio?

Craig MacNab

That’s correct, that’s the group of tenants that you see the disclosure for, it covers those tenants, correct.

Dan Donlan

What do you think the disclosure looks like for the entire or does the coverage look like for the entire portfolio?

Craig MacNab

Yes, we don’t give financials on our entire portfolio, so we don’t – that’s one reason why we don’t put that out there. So we only get financial information about 70%, 75% of our portfolio.

Dan Donlan

So if I look at 70%, 75%...

Craig MacNab

Dan, I think it’s a [indiscernible]

Kevin Habicht

Yeah. And this – so if we give financial information on 70, 75%, I think that our tenant restructuring is on 45% plus of our total rental is covering more than half of the data that we have.

Dan Donlan

Okay. I was just kind of curious if the other 30% was more or less inline with kind of where the top 20 are?

Kevin Habicht

We believe, yes, it’s representative, correct.

Dan Donlan

Okay. All right, thank you. I really appreciate it. Have a good day.

Operator

There are no further questions. At this time, I would like to turn the call back over to Craig MacNab for closing cements.

Craig MacNab

Rob, thanks very much. We appreciate all of your interest, all of us, Jay, Kevin and myself. We’ll be manning our post if you have any additional questions, please call us. Thank you very much for your interest and we wish you a great 2016. Cheers.

Operator

This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.

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