National Retail Properties Inc

NYSE:NNN

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, hello and thank you all for joining the National Retail Properties’ Fourth Quarter 2019 Operating Results Conference Call. [Operator Instructions]

And with that I‘m pleased to turn the floor over to Chief Executive Officer, Mr. Jay Whitehurst. Welcome, Jay.

[Jay Whitehurst, President and Chief Executive Officer]

Thank you, Jim. Good morning and welcome to the National Retail Properties Fourth Quarter 2019 Earnings Release Call. Joining me on this call is our Chief Financial Officer, Kevin Habicht. After some opening remarks, I'll turn the call over to Kevin to discuss our financial results in more detail.

2019 was a year of significant milestones for National Retail Properties. Our 35th year in business, our 25th year listed on the New York Stock Exchange and most importantly our 30th year of consecutive annual dividend increases. Very few public companies and only two other REITs have matched this impressive track record of increasing the dividend for 30 consecutive years. Maintaining a safe and growing dividend is at the heart of our corporate culture and there's nothing in which we take more pride than returning to the owners of the company a meaningful cash return on their investment each year.

With the dividend coverage ratio of 72% as of year-end, we remain well positioned to continue the string of dividend increases into the future. Our steady execution continued to produce impressive outcomes as our core FFO per share increased by 4.2% over 2018 and our total shareholder return was 14.8% for 2019. As you've heard many times before, we run our business with a long-term focus on multi-year results. True to that philosophy, National Retail Properties delivered total shareholder returns that exceeded the REIT averages and many major indices over the past two, three, five, 10, 15, 20 and 25 year periods respectively.

Turning to our quarterly and annual results, our broadly diversified portfolio of over 3,100 Single Tenant Retail properties remains healthy with an occupancy rate of 99% which exceeds our long-term average of 98%. Our high lease renewal rate continued in 2019. Approximately 85% of our expiring leases were renewed by the current tenants at approximately 104% of the expiring rent, without material investment of lease incentives or tenant improvement dollars.

On the acquisition front, we concluded an active fourth quarter, investing $243 million in 79 new Single Tenant Retail properties at an initial cash cap rate of 6.8%. For the year 2019, we invested $752.5 million in 210 Single Tenant Retail properties at an initial cash cap rate of 6.9%. And with an average lease duration of almost 18 years. And an average acquisition price of about $3.5 million per property. We continue our underwriting emphasis on low-cost and low-rent per property, which we believe are meaningful contributors to our high occupancy rate and steady income stream.

Over 80% of our dollars invested in 2019 were with our portfolio of relationship tenants. We invested in properties leased to almost three dozen relationship tenants in 2019 including 11 relationship tenants with which we did no business in the prior year. We also had an active fourth quarter of dispositions, selling 16 properties for over $31 million. For the year 2019, we sold 59 properties, raising $126 million of capital to be recycled into new investments. Our disposition cap rate in 2019 was 5.9%, which is significantly below our yield on new investments. Accretive recycling of capital remains a strategic advantage for National Retail Properties. As we look ahead to 2020, there are a few other strategic differences between National Retail Properties and many other REITs that I would like to highlight.

We've mentioned these differences previously, but they bear repeating. First, per share results are what really matter. You will never meet a management team more concerned with per share results and less concerned with growth for the sake of growth than the management team at National Retail Properties. REIT headlines are often devoted to the volume of acquisitions in any given quarter or year. To us what matters is consistent multi-year growth in per share results, while maintaining a conservative balance sheet, not headline growth in our asset base. This approach to creating shareholder value allows us to be highly selective in our acquisitions and positions us to perpetuate our long-term track record of consistent core FFO per share growth, with less execution risk and more focus on quality real estate.

Second, National Retail Properties’ portfolio embodies the healthy, vibrant section – segment of retail and retail real estate. Our tenants typically operate large regional and national businesses that focused on customer services, customer experiences and e-commerce-resistant consumer necessities.

We have very little exposure to apparel or other retail concepts that are struggling with e-commerce and getting negative headlines, the primary lines of trade that make up our tenant mix are expanding and adding stores, and our major tenants are playing offense in their respective businesses. Moreover, our focus is on acquiring good real estate locations at reasonable rents. By concentrating our underwriting on these factors, we create an enduring margin of safety that better withstands any turmoil in the general economy or in any tenant’s individual business.

During the depths of the recession in 2008 and 2009 our occupancy rate never dipped below 96.4% and for the last seven years our occupancy rate has hovered around 98% to 99%. Third, and probably most important, our exceptional people make all the difference. In all aspects of our business we're running a marathon, not a sprint. And that philosophy is reflected in our dedicated and talented associates.

The long-tenure of our team is a key strategic benefit. Our senior executives average 19 years with the company. More than 50% of our associates have been with us for at least 10 years and over 70% of our associates have been with the company for five years or more. This is a stark contrast than many other REITs and a competitive advantage when it comes to institutional memory and commitment to our business model. I'm awed and humbled every day by the talent and commitment of our associates.

Along this line, I also want to note the continued evolution of our Board of Directors, in the last few years we have refreshed our board with new high-powered talented Directors, bringing broader diversity of background experience, tenure and gender than ever before. Our Board of Directors is well positioned to provide effective and valuable oversight as we look ahead to the new decade.

Let me comment briefly on one last key differentiator which investors should consider, consistency. As we've said before, the best word to describe National Retail Properties is consistent. Consistent investment focused on Single Tenant Retail properties, consistency of people and culture, consistently raising the dividend for 30 consecutive years, consistent conservative balance sheet philosophy that maintains flexibility and dry powder, and consistently generating mid-single-digits per share growth on a multi-year basis. Our consistent business plan, focus and execution has positioned National Retail Properties to weather inevitable market turmoil and take advantage of opportunities that may arise.

Let me now turn the call over to Kevin for more color on our quarterly and annual numbers.

[Kevin Habicht]

Thanks, Jay. And as usual, I'll start with a cautionary statement that we will make certain statements that may be considered to be forward-looking statements under federal securities laws and 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 fourth quarter of 2019. Full year 2019 core FFO results were $2.76 per share, which is 4.2% higher than prior year results and is consistent with our projections and guidance. We continue to grow per share results while maintaining a strong and liquid balance sheet.

As Jay mentioned, and we're required to say every 15 minutes we increased our annual dividend for 30 consecutive year in 2019; and our AFFO dividend payout ratio for the year was 72.2%, which was down a modest 20 basis points from 2018. Occupancy was strong at 99% at December 31st. G&A expenses 5.8% of revenues for the fourth quarter and 5.6% for the year 2019.

For purposes of modeling future results, the annual base rent for all leases in place as of December 31, 2019 was $674.3 million. So the one way to model rent for 2020 is to use this amount as your annual run rate as of January 1, 2020 and then add or subtract rent for assumed acquisitions or dispositions. This alleviates needing to try to estimate the timing of Q4 acquisitions and dispositions for purposes of projecting 2020.

You all are obviously aware that the capital markets environment for both debt and equity have been favorable. We continued to take advantage of that in 2019 and raised $525 million of common equity via our DRIP as well as the equity offering in September and our ATM. Additionally, we sold $126 million of properties in 2019. So this $126 million of disposition proceeds plus $525 million of new common equity plus $129 million of retained operating cash flow, that's after all dividend payments, totaled $780 million of equity-like capital raised in 2019, which notably exceeds the $752 million of total 2019 acquisition activity.

As we pointed out in the past and consistent with our past couple of decades of practice, we expect to behave in a relatively leverage neutral manner over time. We remain in very good leverage and liquidity position, which will allow us to maintain an active acquisition effort into 2020.

This morning we also – we maintained our 2020 core FFO guidance of $2.83 to $2.87 per share and AFFO guidance of $2.90 to $2.94 per share, which implies 3% to 4% growth in per share results and that’s consistent with where we started our guidance for growth in 2019. Assumptions for 2020 guidance can be found on Page 7 of the Press Release and include: $550 million to $650 million of acquisitions in the mid-6 cap range; G&A expense of $42 million to $43 million, which is 5.9% of revenues; no change in occupancy; property expenses net of reimbursement of $8 million to $9 million; and property dispositions of $80 million to $120 million.

We do not give guidance on capital market plans. While we clearly have made some assumptions in that regard, we never feel particularly bound to follow them. We try to be opportunistic in getting capital when it's available and well-priced and went in doubt, get more sooner. As I believe I mentioned on the call last quarter, we try to keep capital raising and capital deploying somewhat separated in our mind, but you should expect our behavior to remain consistent with the past 25 years, meaning maintaining a conservative leverage profile with a multiyear view of managing the company and the balance sheet. Our investment strategy in terms of property type, tenant type, balance sheet strategy have been very consistent for many years.

Looking at the balance sheet, we ended 2019 with $134 million outstanding on our $900 million bank line. Notably, our weighted average outstanding balance for 2019 was only $24 million and only averages $75 million for the past six years. In October 2019, we redeemed $287.5 million of our 5.7% preferred stock. We were able to redeem this preferred equity with common equity proceeds on an accretive basis, which does not happen often with a 5.7% coupon preferred.

Leverage metrics remain very strong. Our next debt maturity is October 2022 and our weighted average debt maturity is now 8.3 years. Our balance sheet remains in good position to fund future acquisitions and the weather potential economic and capital market turmoil. Quarter end and year end leverage metrics. Net debt to gross booked assets was 35.3%. As you know, we're not particularly sound market cap based leverage metrics, particularly relevant, more relevant net debt-to-EBITDA was 4.9 times at December 31st; interest coverage was 5.0 times and fixed charge coverage was 4.0 times for 2019 only five of our 3,118 properties are encumbered by mortgages totaling $12 million.

So 2019 was a down the middle year for us, and 2020 looks to be another year of solid growth in operating results, but we trust – but I should say trust that as we move through 2020 we are also thinking about how to continue those results in 2021 and 2022.

With that Jim, we will open it up for any questions.

[Operator]

[Operator Instructions] We'll hear first from the line of Christy McElroy at Citi.

[Christy McElroy, Citi]

Hey, good morning. Thanks guys. Kevin, appreciate your comments on leverage and understand you don't give guidance on capital markets plans, but just more philosophically in regard to maintaining that conservative leverage level. Is it a fair assumption that embedded in your 2020 assumptions? You would be – you would maintain a consistent leverage level with what you what you average during 2019?

[Kevin Habicht]

Yes, I think that's generally fair. I will say in both 2018 and 2019 we over equitized a bit. And I will say too, I think at this point I'll point out while we raised a lot of equity-like capital in 2019, I view the preferred that we redeemed as equity. And so in my mind – and I know not all investors think of preferred and the equity bucket. But in my mind, we reduced equity somewhat, and so I view that – I understand it's a deleveraging action, but I view it as eliminating some equity. So some of that was tempered – some of the equity raised from 2019 was tempered by the fact we were deemed preferred equity. But to answer your question, yes, you should assume we're going to be leverage-neutral for the year.

[Jay Whitehurst, President and Chief Executive Officer]

Yes. Christy, this is Jay. Just to add on to that, we – as you know, we're very committed to maintaining a significant volume of dry powder all the time. But in the event the need to use some of that dry powder were to arise due to market conditions or some great opportunity, we're prepared to use it.

[Christy McElroy, Citi]

Okay. Thanks for that. And then I guess, just sort of in that context, as you think about your acquisition pipeline and what you might have in the deal pipeline currently and what you might have completed or have under contract year-to-date, I'm wondering how we should be thinking about timing in regard to your guidance? And also, if you could maybe comment on cap rate trends that you're seeing?

[Kevin Habicht]

Sure. Well, I'll start with the last part first. Cap rates, the last two years probably, I've said cap rates are generally flat to maybe trending down a little bit. And so let me just reiterate that comment again. Cap rates are not going up by any means; they may be drifting down a little bit. We've been consistent in the 6.8%, 6.9% initial yield ballpark for the last couple of years. And we think it may be – it may trend down a little bit this year, but generally stay pretty close to where they've been. Pipeline looks good out there. But the vast majority of our acquisitions are through our relationship tenants, and we continue to do off-market direct business with those relationship tenants. That gives us great comfort about deal flow.

[Jay Whitehurst, President and Chief Executive Officer]

I think, Kevin, I'd say, our guidance is a little bit back-end loaded.

[Kevin Habicht]

Yes, which is fairly typical for us. I think of it as kind of 40, 60, if you will, first half, second half of 2019, probably in that ballpark again this year.

[Jay Whitehurst, President and Chief Executive Officer]

Yes. We had a very active fourth quarter where some of the things that might have slipped into the beginning part of this year, we closed at the end of last year. So an active fourth quarter sets you up nicely for the upcoming year.

[Christy McElroy, Citi]

Okay. That’s helpful. Thanks, guys. Appreciate it.

[Operator]

Thank you. Next, we'll hear first from the line of Brian Hawthorne with RBC Capital.

[Brian Hawthorne, RBC Capital]

Hi, good morning. Can you talk about the key relationship, unit growth expectations for 2020? And then all the units that you guys are buying, are these units that are available because they were new to the relationships so that they brought them to market or are these kind are these kind of older properties that have been owned by your key – owned by the key relationships for a while now?

[Jay Whitehurst, President and Chief Executive Officer]

Yes. Brian, good morning. Our – the business that we do with our relationship tenants runs the gamut of both of the types of transactions that you described. In some instances, it's funding new construction or new buildings for them. In some instances, it's doing sale leaseback of existing built-landed building that is on the tenant's books. In some instances, sometimes our relationship tenants are doing M&A activities; they're acquiring another company and using the real estate of the target company to be part of their capital structure for that acquisition.

So when we have a relationship with these tenants, there's all kinds of different programs that we offer to them and different ways for us to do business with them. We do – in the last few years, it's been around 80% of our dollars invested have been with our relationship tenants. This year, maybe, I expect we'll be somewhere in that same kind of ballpark. But it just depends on what else is for sale out there and that. So we don't give guidance on the level of volume with our – specifically with our relationship tenants. But to follow up on the first question, and yours, we remain very comfortable with the overall acquisition guidance that's out there.

[Brian Hawthorne, RBC Capital]

Great. Thank you.

[Operator]

Thank you. Next, we’ll hear from the line of Rob Stevenson over at Janney.

[Rob Stevenson, Janney]

Hi, good morning guys. Jay, looking at your leasing data at the back of the supplemental, anything abnormal about the mix of renewals with the same tenant versus vacancy release to the new tenant mix in 2019 versus prior years and versus what it's likely to be in 2020? I mean, you're releasing totals close to flat in 2019. Is that something that we should be expecting in 2020 and rolling forward here? Is there anything abnormal that happened in 2019 that would impact that one way or the other?

[Jay Whitehurst, President and Chief Executive Officer]

Yes. No, Rob, that's a good question. And I would say there's really nothing abnormal at all. It felt very consistent and down the middle of the fairway to me. The renewals with the same tenants, it was about 85% of the leases that came due, renewed with the same tenant at 104% of prior rent. And so that's actually a little bit better than our long-term average. Our long-term average is around 80% renewals at about 100% of prior rent. So that was a little bit to the good side, but generally consistent with history. And then on re-leasing the 23 properties that we re-leased at just about 80% of prior rents, that was also probably on the high side of the bandwidth.

We – what we've told folks all along is that, generally, our re-leasing is – of those few properties that don't get renewed, our re-leasing is – of those few properties that don't get renewed, our re-leasing is around 70% of prior rent. So we did a little bit better in 2019. But again, I wouldn't take that as any kind of a particular trend. I do want to stress on the re-leasing, that we're very focused on re-leasing the properties as is as opposed to putting in TI dollars and lease incentive dollars that might make the re-leasing stats look better, but we don't think that's a great investment of our capital. We would rather re-lease properties as is and keep the rent as low as possible rather than put money in and crow about a higher re-leasing spread.

[Rob Stevenson, Janney]

Okay. And then how are you guys feeling these days about the auto parts business? Number 9 line of trade for you guys. Obviously, Advance Auto Parts has had some issues. Some of the other guys have had issues on and off or whatever. How do you guys think about that and your mix within the auto parts business rolling forward for the next few years?

[Jay Whitehurst, President and Chief Executive Officer]

Yes. We're – the tenants that we – that make up that category for us are some of the strong national tenants. So we feel very good about the overall companies that are our tenants there. And the real estate that makes up those properties, there's a lot of smaller retail locations at very reasonable low rents. And so, yes, over time, we think those real estate locations will, if necessary, find another user another user over time. That their – we have good security in that real estate, we feel like.

[Rob Stevenson, Janney]

Okay. And then, Kevin, how are you feeling about preferred stock these days? And where do you think you'd price today at 155 treasury?

[Kevin Habicht]

Yes. My gut is, at the moment, we're not leaning in that direction. The way we think about this and stacking up alternatives is thinking about 10-year debt, 30-year debt and then perpetual preferred and comparing those absolute rates as well as the relative rates between those. And today, I'd probably lean more in the debt category than the preferred equity category. But it's not to say we won't do it. Again, we have one existing preferred tranche outstanding, 5.2%, $345 million or 5.2% preferred. I don't – that feels like a good piece of capital for us. But today, preferred would get price close to a 5% rate, maybe a touch lower. And so it is attractive. I don't think that's something we plan to pull the trigger on this year. But as I said, we don't give guidance around that. We try to be opportunistic but at the moment, it doesn't feel like that's the route to go.

[Rob Stevenson, Janney]

Okay. Thanks guys. Appreciate it.

[Operator]

Spenser Allaway with Green Street Advisors. Please go ahead with your questions. Your line is open.

[Spenser Allaway, Green Street Advisors]

Thank you. Would you mind providing some color on your tenant watch list? And maybe just along the same lines, just curious how much of your disposition guidance do you guys expect to be strategic, just in terms of reducing exposure to their particular segments or tenants?

[Jay Whitehurst, President and Chief Executive Officer]

Yes. I mean, I'll speak to the watch list. It hasn't changed materially since we last talked a quarter ago. We've got Logan's Roadhouse on there; Barnes & Nobles on there, Ruby Tuesday is on there, Pier 1, PetSmart, Petco. But the sum total of all those, or I should say, each of those are under 1% exposures and in total, the composition and size of the watch list, as we define it, which is a bit of an art form, is not changed from where it was a quarter ago. We currently have two tenants that are in bankruptcy, but the total of those two are less than 1% of our total annual base rent. So we don't expect any real noise there.

[Kevin Habicht]

Spenser, I'd add that that's our credit watch list. Separately, we also analyzed the underlying real estate parcels for what's a good location, what are reasonable rents with these tenants that are on the credit watch list. And the culling in our disposition process where we sell some of our noncore properties are typically the ones where we might be worried about the tenant's credit or thinking about the tenant's credit, but we also look at the real estate and say, "This is going to be harder to replace this rent with a second tenant." A lot of – the vast majority of the real estate owned by the tenants or leased to the tenants on our credit watch list are good locations that we're happy with and feel like we can do well enough if we have to get them back.

[Spenser Allaway, Green Street Advisors]

Okay. Thank you.

[Operator]

Todd Stender at Wells Fargo. Please go ahead. Your line is open.

[Todd Stender, Wells Fargo]

Hi, thanks. I may have missed this. I didn't hear what you sold in the quarter. Maybe you can characterize some of the – by lease term, maybe rent coverage or tenant, any characteristics you can share?

[Jay Whitehurst, President and Chief Executive Officer]

Yes. Todd, the – broadly, I think for the dispositions for the quarter were maybe two-thirds vacant properties and one-third leased properties. Any one particular quarter, I think, I wouldn't put too much emphasis on because it's such a small subset of the whole thing. Over the course of the year, our dispositions, I think, were around kind of 60% of the dollar volume was vacant properties and 40% was leased properties at the 5.9% cap rare.

Job one, as it relates to vacant properties, job one here is to re-lease those vacancies. And, but what I – what we realized over time was, that we were carrying properties for a longer period of time than we probably should have, before we said that we're not going to successfully re-lease these properties in a fashion that feels like a good risk adjusted decision to us and so let's go ahead and sell them.

The duration of the vacant properties that we sold in 2019 was a little bit under – it was like nine – average nine months to a year. So you are more likely to see us going-forward deciding to sell vacant properties after trying to lease those for that kind of a time period as opposed to continuing to hold onto them and bear the carrying costs, while we're trying to find other tenants.

[Todd Stender, Wells Fargo]

And no CapEx has to go into those to sell them. Is that correct?

[Kevin Habicht]

Correct. They're sold as is.

[Todd Stender, Wells Fargo]

Okay. Does that drag down the cap rate? I know year-to-date or for the full year 2019 at a cap rate in the 5%’s. I think your cap rate in Q4 was low 6%, is that drag?

[Kevin Habicht]

Yes, the cap rate that we quote is just on the properties that are leased. So it's not – it's not going into, the vacants aren't going into the cap rate.

[Todd Stender, Wells Fargo]

Got it. Okay. That's helpful. And just switching gears, property tax increases have been elevated in Texas and then there's certainly the threat of a repeal of Prop 13 in California. Are these outsides increases or at least the threat of increases, are they factoring into your underwriting at this point? I know your leases are triple net, but maybe you're more observant of rent coverage and the ability of the tenant to pay should there be a bigger increase?

[Jay Whitehurst, President and Chief Executive Officer]

Yes. We do think about that in our underwriting. And we talk with our tenants about that, as they're looking at their occupancy cost for the States where taxes may go up. If – I will say it hasn't caused us to not buy anything yet, but it's something else that you have to think about in your underwriting.

[Todd Stender, Wells Fargo]

Yes. Great. Thank you.

[Operator]

Thank you for your question, Todd. Next, we'll go to Ladenburg and I do apologize, sir, if I could – if I mispronounce your last name, John Massocca of Ladenburg, please go ahead. Your line is open.

[John Massocca, Ladenburg]

It was actually very good. Good morning everyone. It's been butchered way worse than that.

[Operator]

Thank you.

[John Massocca, Ladenburg]

So just a question, follow-up on, you mentioned the two small tenants that were currently going through bankruptcy. Are they current on their rent right now?

[Jay Whitehurst, President and Chief Executive Officer]

Well, no. No, not right now. But, the process – the bankruptcy process is relatively fresh for both of them. So one of them we actually expect to get February rent shortly. The court has just approved it, just in recent day here. So – but it's an amount on both of those that are not going to move our thoughts around numbers really at all.

[John Massocca, Ladenburg]

Okay. And then as I think about kind of same store rents that you reported for the year, is that number that we got for kind of the 2019 same store-rent, is that maybe typical of what we should expect on a go forward basis or was there something, I know there were some vacancy kind of early in the year or some kind of tenant credit issues early in the year that may have pulled that number down. Is that kind of 0.1% number maybe what we should expect on a kind of same store including vacancy as you look out into 2020 and 2021?

[Kevin Habicht]

I'd call it a little on the low-side, but I think I alluded to this on last quarter's call and my – in general, we get about 1.5% rent increase. But I always assume that there's going to be 1% of the 1.5% is going to get consumed by some sort or level of tenant pain and problem. And so in my mind, I think we should be closer to 0.5% than 0.1% and you know, that's not a big difference, but it might be a touch low for 2019, but yes, it gets impacted by issues that kind of just rolling through the numbers, Shopko or what have you. And those kinds of things drive that down over time.

[Jay Whitehurst, President and Chief Executive Officer]

Yes. John, I would say this is anecdotal, but I think if we look back over the last few years, I suspect Kevin's right on that, it's probably 0.5% plus or minus 0.5%.

[John Massocca, Ladenburg]

Okay, understood. And then it looked like your exposure to convenience stores jumped a little bit quarter-over-quarter. Is that going to be a big kind of acquisition avenue for you guys going forward? And if so, is that potentially being driven by maybe some of the M&A activity in the space or is that more with existing tenants that are just looking for sources of capital to maybe fund their existing business?

[Kevin Habicht]

We do like the convenience store business a lot. We think that's a very good business. And we like convenience store real estate, those are good and well located often signalized corners or parcels along high traffic roads, with good access and visibility and signage. And they've really been very – we've got very few problems with our convenience store real estate. So you should expect us to continue to look at a lot of those deals and do the ones that make sense.

We did buy a small portfolio – mid-sized portfolio of convenience stores in the fourth quarter to add to that. And the source of our convenience store business will be, like you described John, there will be some M&A activity out there in the world that may be a source of some business for us as well as just some smaller transactions with relationship tenants. But we remain very interested in doing convenience store transactions with strong operators.

[John Massocca, Ladenburg]

Got it. That's it for me. Thank you very much.

[Operator]

Thank you for your question today, John. [Operator Instructions] We'll hear next from Collin Mings at Raymond James.

[Collin Mings, Raymond James]

Thanks. Good morning guys.

[Jay Whitehurst, President and Chief Executive Officer]

Good morning, Collin.

[Kevin Habicht]

Good morning, Collin.

[Collin Mings, Raymond James]

First one for me, just as it relates to making the sell decision on vacant properties a bit sooner than you have historically, are you adjusting your thinking at all, as it relates to investing TIs and just other capital into assets? Historically, as you've noted, I mean you've seemed pretty reluctant to invest much capital into assets, but just could you talk, maybe does it make sense just as you look to avoid carrying vacancy to maybe be more active on investing capital on a selective basis?

[Kevin Habicht]

Right. Collin, that's a good question. We do think about it all the time, it's just that we often come to the conclusion that it makes more sense to go ahead and sell a property as is. But we do a full economic analysis. Our asset management and leasing folks do a very good job of presenting all the alternatives. When we decide what we want, whether we want to lease a property or sell it. And redeveloping it or putting CapEx into the property is definitely on that menu of items that we look at.

[Jay Whitehurst, President and Chief Executive Officer]

Yes. For us it's really just a net present value exercise. And so – but what we've seen many times in commercial real estate where tenant improvement dollars are added to projects, the economic returns on those are frequently dismal because those TI dollars have little used to the next tenant. And so you just have to be thoughtful about that in realistic.

So we kind of demand that we get a return on the incremental capital we're putting in. It's not just free money we're throwing in there. It needs to carry itself and so that shows up in rent and will impact the decision whether to lease or sell.

[Collin Mings, Raymond James]

Okay. And then just one other question for me. I just wanted to get an update on just how you're thinking about potential feeder investments at this juncture. A little less than 5% of the portfolio, down maybe just a hair, what, year-over-year. But just wanting to get your latest thoughts on the exposure and appetite on the feeder front?

[Jay Whitehurst, President and Chief Executive Officer]

Yes. We were comfortable with the portfolio that we've got. We've looked at other portfolios and we've passed on the other portfolios primarily due to cost per property. They – some of the portfolios felt pricey per asset to us. We've got good relationships with AMC and Cinemark, and so you may well see us do occasional theaters with our relationship tenants from time-to-time, but it will be in situations where we feel like that the price per property is a good number and the location is good as well as having a strong operator.

[Collin Mings, Raymond James]

Okay. Thank you both.

[Operator]

And gentlemen, we do have another signal from our listening audience today. We'll hear next from Vikram Malhotra at Morgan Stanley, please go ahead. Your line is open.

[Jay Whitehurst, President and Chief Executive Officer]

Vikram?

[Vikram Malhotra, Morgan Stanley]

Hello. Can you hear me? Hello? Can you hear me?

[Jay Whitehurst, President and Chief Executive Officer]

We can hear you.

[Vikram Malhotra, Morgan Stanley]

Is it better? Okay. So thanks for squeezing me in. Sorry, I dialed-in late and if I missed this, I can follow offline. But you mentioned two specific bankruptcies I caught, could you say which tenants or sectors are those? And then specifically, do you have any exposure to any of the Sonic franchises in SD Holdings that just filed?

[Jay Whitehurst, President and Chief Executive Officer]

Yes. That is why we generally don't talk about specifics, but Sonic is one of them that is in the public domain, the other one is a small, a very small private operator. But yes, and that's the Sonic we own a number of those stores and those are in two master leases and it's going through the process now. It appears the franchise or Sonic is going to get involved in pushing that through bankruptcy, but time will tell.

[Kevin Habicht]

And I will add to that again, we don't comment about these things kind of rather in process, but that bankruptcy was not driven by the performance of our locations. That was driven by other factors at the tenant. Our stores continued to perform well.

[Jay Whitehurst, President and Chief Executive Officer]

Just a reminder, the sum total of those two bankrupt tenants are less than 1% of our annual base rent.

[Vikram Malhotra, Morgan Stanley]

Okay. And I think you mentioned you've built some of that into guidance, you usually do every year.

[Kevin Habicht]

Yes. We all – like I said, we always assume we've got a level of pain in whether it shows up in occupancy or just lower rent. And again, it shows up in the same store rent number we just talked about. We always assume there's probably 1% of pain in there.

I'm not saying we're going to have any notable pain from either of these two. I mean time will tell, but many times you – a tenant gets in the bankruptcy and you come out just fine. And so we'll see how these play out.

[Vikram Malhotra, Morgan Stanley]

Okay. And then just last question, just wondering how you're thinking about funding, sort of the deals going forward in terms of equity issuances versus sort of hitting the ATM and just sort of leverage overall. You've let that drift down for several years now including the payout just sort of wondering how you're thinking about the mix and equity specifically.

[Kevin Habicht]

Yes. Again, probably not looking to change the mix notably at all. As Jay mentioned, we have the cushion to do that if we so chose. But at the moment I think the best base case assumption to make is, we're going to behave in a leverage neutral manner. And go from there and that's what it feels like today and given where debt and equity is priced.

[Vikram Malhotra, Morgan Stanley]

Got it. Okay. Thank you.

[Operator]

Vikram, thank you for your question. And thank you to each of our audience members who signaled for our question today. We have no questions standing by Mr. Whitehurst. I'd like to turn it back to yourself and to the leadership team for any additional or closing remarks.

[Jay Whitehurst, President and Chief Executive Officer]

Thanks Jim. And we thank you all for joining us this morning and look forward to seeing you at many of the upcoming conferences this spring. Good day.