National Retail Properties Inc

NYSE:NNN

Earnings Call Transcript 2019-Q3

[Operator]

Good day, ladies and gentlemen and welcome to the National Retail Properties' Third Quarter 2019 Earnings Call. After today's presentation, there will be a question-and-answer session. [Operator Instructions]

At this time, it's my pleasure to turn the floor over to Mr. Jay Whitehurst, CEO, Sir, the floor is yours.

[Jay Whitehurst, CEO]

Thank you, Tom. Good morning and welcome to the National Retail Properties third quarter 2019 earnings call. Joining me on this call is our Chief Financial Officer, Kevin Habicht. After some brief opening remarks, I'll turn the call over to Kevin for more detail on our results.

Since today is October 31, let me open by saying Happy Halloween to you all and I'm pleased to report that NNN delivered treats, not tricks for the third quarter of this year. Some highlights of those third quarter treats include increasing our common stock dividend for the 30th consecutive year and strengthening our balance sheet by raising over $434 million of equity, which together with our healthy portfolio and our consistent steady performance in acquisitions and dispositions positions us today to raise our 2019 guidance for core FFO to a range of $2.74 to $2.77 per share and to introduce 2020 core FFO per share guidance of $2.83 and $2.87 per share. Kevin will provide more details on our guidance, but I would like to remind you that strategically, we continue to focus our business model and execution on consistent per share growth over a multi-year basis; this approach we believe creates the greatest long-term shareholder value.

Our guidance for 2020 core FFO per share reflects a growth rate of 3.4% over the midpoint of our increased 2019 guidance, which is consistent with our goal of steady per share growth on a multi-year basis. And with regards to the recent dividend increase, I want to emphasize that our enviable track record of 30 years of increased dividends is a feat matched by only two other REITs and less than 90 public companies in the US. Moreover, our dividend remains very safe with a dividend coverage ratio of only 72% of AFFO, thus positioning us to perpetuate our record of consistent steady dividend growth into the future.

Delving into the quarterly results; our broadly diversified portfolio of 3,057 single-tenant retail properties remained very healthy as our occupancy rate picked up 30 basis points to 99.1%. As you've heard us say many times, our long-term occupancy rate is 98% plus or minus 1% and we remain at the top-end of that range. Our broadly diversified portfolio consists primarily of large regional and national tenants operating e-commerce resistant businesses, focused on customer services and consumer necessities such as convenient stores, fast-food restaurants, car washes and tire stores. We remain largely unaffected by the disruption of mall and shopping center based tenants that sell primarily apparel.

In the third quarter, we acquired 17 new single-tenant retail properties at an investment of just under $117 million and with an initial cash yield of 6.8%. Year-to-date, we've now invested almost $510 million to acquire 131 single-tenant retail properties at an initial cash yield of 6.9% and with an average lease duration of 17 years.

Our focus on executing repeat programmatic business with our portfolio of relationship tenants continues to bear fruit. Almost 80% of our dollars invested in 2019 have been with our broad portfolio of relationship tenants. As we've said before, it's time consuming hard work for our acquisitions team, our asset management team and our senior management to build and maintain these deep tenant relationships, but all that effort enables us to acquire stronger real estate locations with favorable lease terms and a lease document that's tailored to our long-term perspective.

Based on our acquisition pipeline, we are increasing our guidance for 2019 acquisitions to $650 million to $750 million and we are establishing our 2020 acquisition guidance of $550 million to $650 million. But let me remind you that our focus is never on the volume of acquisitions. Our focus is on acquiring high quality real estate locations leased to strong regional and national operators under long-term leases at reasonable prices and with reasonable rents. Our deep market penetration bolstered by our numerous tenant relationships makes us confident that these investment goals are achievable while remaining highly selective in our underwriting.

During the third quarter, we also sold 13 properties generating almost $33.5 million of proceeds. Year-to-date, we've raised almost $95 million from dispositions of 43 properties at an average sale cap rate of 5.7%. Accretive recycling of capital remains a significant differentiator between National Retail Properties and many of our peers. Kevin will discuss our balance sheet and financial metrics in more detail, but I do want to acknowledge our well-timed equity offering in the third quarter. In a highly oversubscribed overnight offering, we raised almost $400 million from the issuance of 7 million shares at a compelling price of $56.50 per share. Then early in the fourth quarter, we utilized $288 million of these proceeds to redeem our 5.7% Series E preferred stock, making us one of a very few REITs, which has ever accretively redeemed preferred equity with common equity. Kudos to Kevin and his team for accessing well-priced capital when it's available and utilizing that capital to strengthen our balance sheet and position us for continued per share growth in 2020 and beyond.

In closing, let me reiterate that we run our business with a long-term focus characterized by consistent per share growth on a multi-year basis. Our guidance for 2019 and 2020 indicates that we continue to march to that consistent beat.

I'll now turn the call over to Kevin for his additional comments.

[Kevin Habicht, CFO]

Thanks, Jay. And as usual, I'll start with their 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, headlines from this morning's press release report quarterly core FFO results of $0.70 per share for the third quarter of 2019, which is 4.5% higher than prior year results and consistent with our projections. These results along with our current view of the fourth quarter allowed us to raise our full year 2019 core FFO per share guidance to a level producing 4% growth to the midpoint versus our 2018 results and we do all of this while maintaining a strong and liquid balance sheet. We increased our annual dividend for the 30th consecutive year in the third quarter and our AFFO dividend payout ratio for the first nine months of 2019 was 72.2%. Occupancy was 99.1% at September 30th and that's up 30 basis points versus the prior quarter. G&A expense was 5.2% of revenues for the third quarter and 5.5% for the first nine months of 2019.

For purposes of modeling future results, the annual base rent for all leases in place as of September 30 2019 was $658.3 million and this allows you to take some of the guess work or estimation out of timing of Q3 acquisitions and dispositions for purposes of making projections that start October 1 of 2019.

As you all know, the capital market environments for both debt and equity have been favorable. We opted to take advantage of the opportunity to raise $435 million of common equity in the third quarter. For the first nine months of 2019, we raised $522 million of equity at a net price just over $54 per share. Third quarter dispositions totaled $33.5 million and first nine-month dispositions totaled $95 million. So this $95 million of disposition proceeds plus the $522 million of common equity raise plus approximately $94 million of retained operating cash flow and that's after all dividend payments, that totaled $711 million of equity-like capital raised in the first nine months of 2019, which notably totals the midpoint of our 2019 acquisition guidance. As we've noted in the past and consistent with the past couple of decades, we expect to behave in a relatively leverage neutral manner over-time, but we remain in a very good leverage and liquidity position, which will allow us to maintain an active acquisition effort into 2020.

As Jay mentioned, we did raise our 2019 core FFO guidance by raising the lower end by $0.03 and the top-end by a penny to a revised range of $2.74 to $2.77 per share. Additionally, we increased our acquisition guidance by $100 million to $650 million to $750 million. But otherwise, the underlying assumptions are largely unchanged. We expect G&A expense to end up at about $37 million to $38 million or 5.6% of revenues for the full year of 2019 and note that, that includes $2.3 million of income taxes, which I know a number of REITs report on a separate line item. This core FFO guidance excludes the estimated $9.9 million of preferred stock redemption charge that will show-up in the fourth quarter in connection with the redemption of our 5.7% preferred stock in October. And you can get details of our 2019 guidance on page seven of today's press release.

Likewise, this morning we introduced 2020 core FFO guidance of $2.83 to $2.87 and AFFO guidance of $2.90 to $2.94 per share, which implies 3% to 4% growth in per share results, which is consistent with where we started guidance for growth in 2019. Assumptions for 2020 guidance include one, $550 million to $650 million of acquisitions in the mid-6 cap range; two, G&A expense of $42 million to $43 million, which we approximate to be 5.9% of revenues; three, no change in occupancy; four, property expenses net of reimbursement of $8 million to $9 million for the year and five, property dispositions of $80 million to $120 million. I'll note the G&A expense increase is largely connected with stock-based compensation expense as well as a little bit of headcount growth here at NNN. We don't give guidance on our capital market plans, but you should expect our behavior to remain consistent with the past 25 years, meaning that we will maintain a conservative leverage profile and get capital when it's available and well-priced, all with a multi-year view of managing the company in the balance sheet.

We ended the quarter with no amounts outstanding on our $900 million bank line and $354 million of cash. We did use $287.5 million of that cash to redeem our 5.7% preferred stock in October right after quarter-end. As Jay mentioned, notably, we were able to redeem this preferred equity with common equity on an accretive basis, which does not happen often with a 5.7% coupon on the preferred. The weighted average outstanding balance on our bank line for the first nine months of 2019 was $8 million, continuing several years of very modest bank line usage and maintaining significant liquidity. Leverage metrics remain very strong. Our next debt maturity is in October 2022 and our weighted average debt maturity is now 8.6 years. So our balance sheet remains in good position to fund future acquisitions and weather potential economic and capital market turmoil.

Looking briefly at quarter-end leverage metrics; net debt to gross book assets was 33.8% as you know were not -- haven't found market cap based leverage metrics particularly relevant and we don't manage around those. Net debt to EBITDA was 4.7 times at September 30th. Interest coverage was 5.0 times and fixed charge coverage was 3.9 times for the nine months. Both of those metrics were 20 basis points higher than year-end 2018. Only five of our 3,057 properties were encumbered by mortgages totaling $12 million. So we work to source capital when it's available and well-priced. We work to deploy capital when we can get risk adjusted returns that are sufficiently accretive on a per share basis. Sometimes raising capital and deploying capital makes sense nearly simultaneously, but certainly not always. We attempt to keep the capital raising and the capital deploying decisions somewhat separated in our minds. Well-priced capital doesn't validate paying above market for our property. Our share price going up $2 a share doesn't make the property down the street worth more. This approach has helped produce solid returns over many years.

2019 looks to be another year of solid growth in operating results and the comps for multiple prior years are not easy and 2020 has the opportunity to be more of the same. Our investment strategy in terms of property type and tenant type and our balance sheet strategy have been very consistent for many years.

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

[Operator]

[Operator Instructions] We'll take our first question from Christine Mc with Citibank.

[Katy McConnell, Citibank]

Good morning. This is Katy McConnell on for Christy. Could you talk about or maybe provide some color on how exactly you arrived at the 2020 acquisition guidance range. And based on what you're seeing in the market today, would do you expect the pace to be front-end loaded at all just given the pipeline is already pre-funded to an extent?

[Jay Whitehurst, CEO]

Katy, good morning. Our primary source of acquisitions is through our relationships with our tenant relationships and you can never have a solid clear view of total acquisition volume or the timing, but we have confidence from those tenant relationships that there will be business that will come our way in 2020. Our guidance for 2020 is very consistent with where we started our guidance for 2019. Our pipeline feels good. The available properties out in the market, that seems like there's plenty adequate supply of properties out in the market and it's really a question of timing, as you mentioned, whether it's front-end loaded or back-end loaded, we are historically conservative with our guidance. And so in our minds it's a little more back-end loaded. But we are confident with the number and it's consistent with what we said we would do when we started to 2019.

[Katy McConnell, Citibank]

Okay, great. And then can you just elaborate a little bit more on what you said as far as pricing expectations. It sounds like you're expecting cap rates to be a little bit lower than the year-to-date phase [ph]?

[Kevin Habicht, CFO]

Yes. Cap rates are flat to trending a little bit lower out in the market for high quality properties. And so our expectation is right now is that they may be a little lower going into 2020. I do want to point out one other thing that when we talk about cap rates, we are always talking about initial cash yields on our investments. We structure our leases with -- so that we are not straight-lining the rent bumps. We get approximately 1.5% to 2% annual bumps in our acquisitions, but that is not a straight line based on the way we structure the lease and when you have a 15 year to 20 year lease with 1.5% to 2% bumps in it, you get about an additional ballpark, 75 basis points to 100 basis points and 25 additional basis points of anticipated additional yield. And so when we talk about our initial cash yields being in the upper 6% range, there is another close to 80 basis points to 100 basis points or so of additional growth anticipated in those leases based on the rent bumps that's not being straight lined. And based on a 98% occupancy, plus or minus 1%, we're highly confident that we'll get that additional yield. So it works out to an anticipated long-term yield in the high -- upper 7% range for our investments, which is well accretive, given our cost of capital.

[Katy McConnell, Citibank]

Okay, great. Thanks for the color.

[Operator]

We'll take our next question from Vikram Malhotra with Morgan Stanley.

[Vikram Malhotra, Morgan Stanley]

Thanks for taking the question guys. Just one on the occupancy change, nice pick-up over the last, call it two quarters. Can you sort of break down the occupancy move between kind of maybe just lease-up and then may be selling vacant assets?

[Jay Whitehurst, CEO]

Kevin, you may have some additional comments on this, but hey Vikram, good morning. Job one for us is to re-lease vacant properties. We are a retail real estate company. So our leasing department has been very active and efficient in re-leasing those vacancies where we can put in a new tenant somewhat quickly. What we've also looked at is once the carrying costs of properties that stay vacant longer and so we've been more focused on going ahead and selling vacant properties once we've concluded that the better long-term risk adjusted return is to harvest those proceeds and reinvest in new investments instead of continuing to hold on to properties where we don't have -- we may not at the moment have great tenant interest and have some carrying costs. I think over the course of the year Kevin, we're kind of in the -- 60% of the vacancy change would be sales and 40% re-leases.

[Kevin Habicht, CFO]

Vikram, it's in that ballpark.

[Jay Whitehurst, CEO]

Yes. That's right.

[Vikram Malhotra, Morgan Stanley]

Okay, that's helpful. And then just maybe one bigger picture question for you guys. Given the diversity of your tenant base in both geography and diversity and all the questions around kind of where we are -- the economy or the innings of the economy, anything you're seeing that or hearing from your tenant base that would suggest any specific segments in your base are sort of slowing or maybe taking more of a wait and watch approach?

[Jay Whitehurst, CEO]

Vikram, we deal primarily with large regional and national operators who are continuing to grow their store count and grow their market share. And then we are not hearing from them indications of particularly slowing down their business. We are focused on companies that are intending to grow and so that's not -- that shouldn't be a big surprise. We are hearing also that their customers are continuing -- they're continuing to focus on bringing in customers, but their customers are still coming. We do hear from a lot of our retailers that finding employees is hard, but they are otherwise continuing to grow their business and add new stores.

[Kevin Habicht, CFO]

And I'd add on to that. This is a bit of a segue into maybe or -- as we think about credit watch. Our credit watch-list hasn't really changed. Clearly retailers have struggles and issues, but their ability to pay us rent has not changed, notably in our minds in recent quarters. So that we're not seeing anything really new there on that front and the credit watch-list is fairly static from where it's been.

[Vikram Malhotra, Morgan Stanley]

And just, sorry, just lastly to clarify on that watch-list or not the watches, but just the coverage levels. I know you update this in your book that you put out, but can you remind us where coverage levels are versus maybe at the start of the year?

[Kevin Habicht, CFO]

They're fairly -- compared to the start of the year -- I don't have those numbers in front of me, to be honest. It has not moved notably over the course of this year if you look at our averages and weighted averages for the portfolio.

[Vikram Malhotra, Morgan Stanley]

Okay, great. Thank you.

[Operator]

And we'll take our next question from Brian Hawthorne with RBC Capital.

[Brian Hawthorne, RBC Capital Markets]

Just one from me. So we've seen some re-traits [ph] that a blip of 4%. Can you guys or would you guys be able to take out any of your debt replacement with kind of lower cost at this point?

[Kevin Habicht, CFO]

Definitely. We could refinance on that. I mean, yes. To counter balance that with prepayment penalties, etcetera; and then obviously you got to think about the duration. We're always inclined to get longer duration debt, so that augurs for not being particularly accretive to refi, but you de-risk the balance sheet by taking a two or three-year maturity and push it to 10 years or 30 years. We think there is value in that beyond whatever accretion there might be. But at the margin, there is still some what I call refinance tailwind. A year ago, we probably all saw that was coming to an end, but has gotten new life to that in recent quarters as rates have ticked lower.

[Brian Hawthorne, RBC Capital Markets]

Great, thank you.

[Operator]

We'll go next to Joshua [ph] with Bank of America.

[Unidentified Analyst]

For the disposition bucket for next year, any assets that you're targeting or maybe industry types that you're targeting? And then maybe stepping back a bit, when we look at your industry buckets, what areas do you expect to grow over the next few years and which one is maybe you expect to trim or hold steady as a percentage of your overall portfolio?

[Jay Whitehurst, CEO]

Yes. Josh, good morning. I think if you look at the lines of trade that make-up our portfolio now, when you look back at the end of 2020, it will not be very different. With our pipeline, we expected our -- 2020 acquisitions will reflect pretty closely to make-up of our overall portfolio. So it will be convenient stores and tire stores and car washes and the categories that make-up our top lines of trade, primarily small box properties located along well-traffic roads. As it relates to dispositions our strategic philosophy on dispositions is kind of a barbell approach. There are instances where people come to us with offers that figuratively knock our socks off for low cap rate acquisitions and so we will take advantage of some of these opportunities to sell some of our properties at low cap rates in 2020 we expect. And then the other end of the barbell is selling properties that we think are not good long-term holds for us. And maybe those are vacant properties that we've tried to lease and haven't had any leasing or maybe they are other properties that have some issues either with the tenant or with the real estate, but that is a property by property kind of analysis. It's not done broadly across lines of trade or any other kind of bright-line test. The folks in our asset management group are always looking at every property in the portfolio as to whether we still want to hold debt long-term or whether there is some other way that we can maximize the shareholder value of that particular property. So I can't really tell you that there is any anything more than just one by one property analysis for those dispositions.

[Unidentified Analyst]

Got it, thank you. And then maybe just one more Camping World acquisition of Gander Mountain, any color on how Gander Mountain properties are performing in their portfolio and how do you feel about those assets today?

[Jay Whitehurst, CEO]

See, we're still happy with those assets. We're happy with all of our Camping World assets, primarily we own the RV dealership properties leased to Camping World, that has always been their core business and we're very happy with the locations of those properties, the performance of those properties and the rent levels on those properties. Then with regard to the Gander Outdoor Properties that are leased to Camping World, we took a significant rent write-down on those Gander properties when we leased them to Camping World on long-term 20-year leases with regular rent bumps in those leases. And so the rent level in those properties is very comfortable. We don't have specific performance numbers from Camping World on those yet, but similarly we're very comfortable with the rent levels on those properties now.

[Unidentified Analyst]

Thank you. That's it from me.

[Operator]

[Operator Instructions] We'll go next to Spenser Allaway with Green Street Advisors.

[Spenser Allaway, Green Street Advisors]

Thank you. Maybe just going back to Vikram's question on dispositions that were occupied versus vacant in the quarter, so looking at your same-property metrics. Can you provide some color on how same-property occupancy and NOI moved in the quarter? I know you do provide enhanced color annually, but maybe some context just on how these changed during the quarter?

[Jay Whitehurst, CEO]

Yes, it hasn't changed much in the quarter. We don't publish anything, we do it on an annual basis. We think that's a better sample set once you have kind of a full year of disposition activity versus any given quarter. But as we've talked, the way we think about it is, there is probably 1% of credit issues whatever they may be, vacancies or credit-loss or rent reductions etcetera per year, that's the way we model our internal numbers as we just assume there's going to be some level of pain somewhere. We don't -- frequently don't know precisely where it will show up, but it's we think not wise to assume that there won't be any. So in our minds, we always assume that there is about 1% of rent in a given year is going to get consumed in some tenant having an issue of some sort, that like I say, even results in a vacancy or a rent reduction or some sort of negotiation. But yes, we don't -- we'll put that out at year-end in terms of our same-store occupancy results and try to give a little detail then.

[Spenser Allaway, Green Street Advisors]

Very helpful, color. But I mean I understand that you guys -- I understand the rationale for -- even the breakthrough that you just made is very helpful color. Is there any plans perhaps in your annual disclosure that kind of walk through those components or just even the thought process that you just conveyed and some sort of enhanced disclosure?

[Kevin Habicht, CFO]

We will take a look at that. I mean, fair point. We'll see what if there is something that's relatively simple yet. As Jay said, each of these properties have a bit of a story and so sometimes it's difficult to communicate so simply what's happening, but we will definitely revisit that, yes.

[Jay Whitehurst, CEO]

And especially we appreciate you and other folks trying to get their model as refined as possible. But I would be remiss if I didn't say the real driver for growth and the real metric to watch over is new rent from acquisitions, $700 million of acquisitions at a 7-cap is annually, almost $50 million of new rent and so that's the big driver.

[Spenser Allaway, Green Street Advisors]

Yes, understood. It's just obviously part of our [indiscernible] like you said refining model.

[Jay Whitehurst, CEO]

I understand.

[Spenser Allaway, Green Street Advisors]

So, okay. Well, thank you for your time.

[Operator]

We'll take our next question from Jason [ph] with Wells Fargo.

[Unidentified Analyst]

One more on dispositions if I could, please. Just wondering if you could give us a little more detail in terms of what kind of cap rates you saw on the 13 properties you sold in the quarter, maybe a range. And then also what kind of average lease term was remaining on this?

[Kevin Habicht, CFO]

Yes, Jason. Hey, good morning. The quarter -- I'll give you a little bit on the quarter. But at 13 properties, it's really not a very good sample size. So I'll give you a little bit of that information on the year-to-date I think is -- gives you a little bit more -- makes things seem a little bit more accurate. In the quarter, they were primarily defensive dispositions. I talked about that barbell approach. And so the quarters dispositions of leased properties average kind of an 8% cap rate. There was a low, there was a one-leased bank branch in there that sold for a sub-6 and then there was another leased property that we were did not want to be a long-term owner of that was at a much higher cap rate, but that's a small subset. I think if you look at the year-to-date dispositions of 43 properties, the cap rate range there is from as low as around 4% to again a few defensive sales that were around 10% cap rates. So it's a broad range. But in our mind, we're breaking it into two very distinct buckets. There is these offensive sales at low cap rates and then the others. We are less concerned about cap rate when it's a defensive sale.

[Jay Whitehurst, CEO]

And so I think the number on average for the nine months is we're selling at just under 6-cap.

[Kevin Habicht, CFO]

Yes. 5.7% for the nine-month period. So that's why -- it goes back to my last answer on the last question is, some of the quarterly data in our minds is not a great data point, because they can swing from, as Jay said, from a 5-cap to a 9-cap and neither one of those maybe is particularly representative of what you should think about as average is 5.7%. So that's why we've tended to be a little more annual focused on some of this information we published just because we think it presents a better more representative sample size. Yes.

[Unidentified Analyst]

Got it, thank you. And then just one more if I could, please. I know this isn't a big focus for you guys. But would you mind to update us on what your investment grade tenant mix is?

[Kevin Habicht, CFO]

Yes, we're right around 19% right now in terms of investment grade rated tenants. Reminder to everyone, we got there by virtue of having non-investment grade tenants become investment grade. Our approach has always been to focus on acquiring sub-investment grade tenant properties. We think our tenants are sufficiently large who operate hundreds or thousands of stores and has sufficient credit worthiness, but we think there is some detrimental things that's frequently come along with investment grade that we try to avoid, so we've got to our 19% kind of the hard way if you will. And to be honest, we don't manage anything at the company around that number. If that number was 15% in a year or 25% in a year, we wouldn't think any more or less of it and so it's just not our approach. Well, I guess the last point as it relates to that and this goes to our big deal on credit. We just don't find it prudent to focus too heavily on tenant credit. Look, as a part of our underwriting. It's important and our occupancy suggest we do a pretty good job at it. But the reality is, we really don't know which retailer is going to be in business 10 years from now or not. And so because of that, we want to stay particularly focused on real estate merits and metrics.

[Unidentified Analyst]

Thanks so much.

[Operator]

We'll take our next question from John Massocca with Ladenburg Thalmann.

[John Massocca, Ladenburg Thalmann]

Good morning. So you guys left real estate expenses, net of reimbursements for the 2019 guidance unchanged and that would seem to imply based on what you did in the last nine months a pretty big step-down in that cost in 4Q. I mean, can you provide some color may be on what's driving that?

[Kevin Habicht, CFO]

Yes. I mean this year has been a little bit elevated. I mean if you look at our 2020 guidance for example, on that same line item, you see a decrease as well. And so I mean it's not a big number in the scheme of things and so maybe it will be at the higher end of our 2019 guidance on net property expenses, but generally we see them drifting lower end of 2020, so that's consistent I think with our view. Look, it can always change and like I say it's dependent on what happens with particular tenants and properties, but that's our current view and I don't think it will -- we think our guidance is appropriate.

[John Massocca, Ladenburg Thalmann]

So, this is not like a specific sale coming in 4Q or that was late…

[Kevin Habicht, CFO]

No. Yes, most of our property-level expense comes from vacant properties generally. And so as vacancy goes down that line item tends to tick down. We don't have a lot of expense leakage if you will from our properties because they are triple-net leased and so it's really vacancy that will push that property expense number around a bit.

[John Massocca, Ladenburg Thalmann]

Okay. And then as you look at kind of the acquisitions you completed in the quarter, I know there were a couple of wholesale clubs in there, but anything else that was really kind of big within that mix in terms of industry or tenants that we just don't see because they're not in the top tenant list?

[Jay Whitehurst, CEO]

No, not really John. There was a one portfolio of restaurant properties with the regional operator. And then as you noted, there is two discount club properties and other than that it was just a whole bunch of small transactions with our relationship tenants.

[John Massocca, Ladenburg Thalmann]

Okay. And then within restaurant specifically, has your view maybe on franchisee restaurants changed at all, say in the last 12 months. I mean in terms of deals?

[Jay Whitehurst, CEO]

Yes, our view hasn't changed. As Kevin mentioned a few minutes ago, our focus is on good quality real estate. We analyze tenant credit and swap tenant credit. But at the end of the day, what we take -- our view is our most important security is getting good locations at reasonable prices and reasonable rents. And so when you take that focus, then you much more spend your time underwriting the real estate and making sure you're comfortable with that regardless of the operator that's on the real estate. That said, we do focus on -- when we do deals with restaurant operators, we're focused on dealing with larger operators. We want to deal with tenants and create relationships with tenants where they've got a full staff and some quote unquote body fat to be able to withstand the ups and downs in their particular business, whether they are restaurant franchisee or operate any other type of business.

[John Massocca, Ladenburg Thalmann]

Okay, that's it for me. Thank you very much.

[Operator]

And Mr. Whitehurst, there appear to be no further questions at this time. I'd like to turn the call back over to you for any closing comments.

[Jay Whitehurst, CEO]

All right. Thank you, Tom and we thank you all for joining us and we'll see many of you at NAREIT in the next few weeks. Good day.

[Operator]

This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time, and have a great day.