NNN REIT, Inc. (NNN) Q2 2014 Earnings Report, Transcript and Summary

Greetings, and welcome to the National Retail Properties' Second Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Craig MacNab, Chairman and CEO. Thank you. You may now begin.

Kristen, thanks very much. Good morning, and welcome to our second quarter earnings release call. On this call with me are Jay Whitehurst, our President; and Kevin Habicht, our Chief Financial Officer, who will review details of our second quarter financial results following my brief opening comments. We are pleased to have produced another consistent strong quarter in National Retail Properties with continued predictable FFO per share growth. Also, we are happy to be raising guidance for 2014. We're delighted to have raised our dividend for the 25th consecutive year, which is a milestone that places us in an elite category of just over 100 large public companies that have this multi-year record of consistently raising our dividend. In the second quarter, we acquired 34 retail properties, investing $92 million at an initial cash yield of 7.5%. We are pleased to be able to maintain these very attractive initial cash yields in the current low cap environment. As you saw in the press release, initial cash yields for the $186 million of properties that we have acquired this year is 7.6%. As you are aware, these acquisitions also have internal rate growth tied to future inflation increases. Our second quarter acquisitions substantially came from within our existing tenant base and relationship tenants. The average lease duration in the second quarter is just over 19 years, and for all the acquisitions completed thus far in 2014, it is just over 17 years. While we are continuing to be selective and disciplined on our acquisitions, we are in the final stages of underwriting several opportunities. So we are raising our acquisition guidance to a range of $500 million to $550 million. Given that most of this new activity will not close until late in the year, these acquisitions, assuming they do close, will have modest impact on 2014, however this volume sets us up well for next year. Our fully diversified portfolio is in outstanding shape, and as the press release indicated, we are now 98.5% leased. As you can see in the press release, we have very, very few leases expiring in the next 30 months. Our tenants continue to perform well, and as previously discussed, we are very pleased with the meaningful credit upgrades that many of our larger tenants have achieved. In the last 18 months, we have taken advantage of what the capital markets have offered, and we have deliberately strengthened an already fortress-like balance sheet. At NNN, we have not utilized short-term debt or our bank line of credit to enhance our financial results. To the contrary, we have raised capital well in excess of our short-term needs as evidenced by having $85 million of cash on the balance sheet at quarter end. Equally importantly, we have aggressively raised equity, which means that we have plenty of dry powder to deploy on additional accretive retail acquisitions. Kevin?

Thanks, Craig, and I'll start off with my usual cautionary statements that we will make certain statements that may be considered to be forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not release revisions to these forward-looking statements to reflect changes after the statements were made. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in this morning's press release. With that, this morning, we did report second quarter FFO and recurring FFO of $0.50 per share, as well as AFFO of $0.51 per share. This represents 11.1% increase over prior year recurring FFO results and was largely in line with our expectations. The dividend payout ratio was 79% of AFFO for the second quarter. This morning, as Craig mentioned, we also announced an increase in 2014 guidance, increasing the FFO guidance to $2 to $2.04 per share, which is a $0.045 increase from the prior guidance midpoint. Likewise, 2014 AFFO guidance was increased to $2.05 to $2.09 per share. So 2014, our tracking to show about 6% growth in per-share results, and accounts for multiple prior years, including last year, are not easy. We have been able to post this per share growth using long-term and permanent capital and more modest selective acquisition volumes at attractive spreads over a cost of capital. As we evaluate these acquisition opportunities, as well as capital market activities, growth in per-share results and sustainable growth in per-share results is a driving consideration. Now a few details on this quarter. The strong results were a combination of maintaining high occupancy and making new accretive investments while keeping our balance sheet more than strong. Occupancy was 98.5% at quarter end. That's up 30 basis points from prior quarter and up 40 basis points from a year ago. As Craig mentioned, we completed $92 million of accretive acquisitions in the second quarter. Compared to 2013 second quarter, rental revenue increased $8.9 million or 9.6%. That's primarily due to the acquisitions made over the past 4 quarters. In-place annual base rent as of June 30, 2014, was $406.4 million on an annual run rate. Property expenses, net of tenant reimbursements for the second quarter, totaled $1.5 million, and that compares with $1.2 million in the second quarter of last year. G&A expenses decreased to $8.1 million in the second quarter, but we see full year of 2014 G&A expense coming in at a little over $34 million. The big picture of 2014 is tracking well, and the core fundamentals -- occupancy, rental revenue, expenses -- they're all performing well with no material surprises or variances. As I mentioned, we are able to increase our 2014 guidance to put us in position to grow per-share results around 6% this year. The primary assumption change is the increased acquisition guidance to $500 million to $550 million with the incremental acquisition guidance fairly back-end loaded in the remainder of 2014. G&A will be about $500,000 higher to $34.6 million due to projected higher acquisition transaction expenses. The other underlying operating assumptions are essentially unchanged. Turning to the balance sheet. We completed a $350 million, 10-year unsecured note offering in May at 3.92%. And in June, we paid off $150 million of maturing 6.25% notes. Our average debt to maturity of all debt, including the bank line, is 7.4 years at the moment. Our next maturity is $150 million of 6.15% notes that come due in December of 2015. We did raise $54 million of additional common equity during the second quarter, and our balance sheet remains in great position to fund future acquisitions and weather any economic and capital market turmoil. Looking at June 2014 leverage metrics, total debt to total-gross-booked assets was 34.9%. And as Craig mentioned, with $85 million of cash and nothing outstanding on our $500 million bank line, we have significant liquidity. Debt-to-EBITDA was 4.4x for the quarter. Interest coverage was 4.2x through second quarter, and fixed-charge coverage was 3.0x, and that's despite the large preferred offering we did last May. Only 5 of our 1,927 properties are encumbered by mortgages, totaling about $9 million. Despite the significant acquisition activity over the past 3 years, our balance sheet remains in very good shape. Lastly, as Craig mentioned, we are pleased that Standard & Poor's upgraded our unsecured debt rating to BBB+ last month, with their press release noting in their words, "NNN's consistently solid operating performance and prudent growth strategy which strengthened their overall position relative to their peers, as well as the capital structure that is conservative with relatively low leverage, largely fixed rate debt structure and comfortable maturity schedule." So 2014's shaping up well, and we're optimistic we can produce another year of solid per-share results, growing, including making this our 25th consecutive year of increased dividends per share, an important milestone which is shared by relatively few companies, REIT or otherwise. We continue to believe we're well-positioned to deliver the consistency of results, dividend growth and balance sheet quality and that has supported attractive, absolute and relative total shareholder return for many years. With that, Kristen, we will open it up to questions.

[Operator Instructions] Our first question is from the line of Nick Joseph with Citigroup.

I'm wondering if you can give any additional details on the expected acquisitions that you mentioned and if the expected cap rates are generally in line with what you've done so far this year.

Nick, it's a fair question, and welcome to covering National Retail Properties. We're pleased to have you on the team. I think the cap rates appear to have stabilized at the current levels depending on the mix of properties acquired, which differs by credit quality, by lease term or by the type of tenant. Cap rates may be slightly lower than what we have experienced so far this year, but not a meaningful change.

Having said that, our guidance, I think, for this year was 7.25% cap rate, and I think for the year, we'll probably be very close to that for the year.

So then you mentioned your current leverage levels and liquidity. I'm wondering if you can compare those to the kind of your target longer-term metrics?

Yes, we have always tried to maintain the balance sheet with maybe more availability and capital than definitely needed, and so we tend to operate on the conservative side. I can't that say that we have a target. It's somewhat acquisition, as well as capital market dependent. And so when -- for example, last year, we did a large preferred stock offering despite the fact that was not in our game plan, and it -- but when it got priced so well, we wanted to take advantage of that. So at the moment, I don't see leverage decreasing from these levels, but I -- at the moment, I also don't see them meaningfully rising despite the fact that we probably have some flexibility to just let it drift higher. We don't see the need to do that. We think we can still drive accretive per-share result growth that's important to us without really changing our capital profile.

So for the remaining acquisitions this year, do you think they'll be on -- funded on a leverage-neutral basis?

I don't know about any given quarter or 2, but over a multi-quarter period, I think you should expect our leverage to be in the same zip code that it is.

Our next question comes from the line of Dan Donlan with Ladenburg Thalmann. Daniel P. Donlan - Ladenburg Thalmann & Co. Inc., Research Division: Just real quick on, Kevin, on the expense reimbursement, your recovery ratio. Looks like that ticked down a little bit this quarter, kind of from your mid-70s range to kind of down into the higher 60s. Is there any reason for that? In the quarter, anything we should be thinking about, on any onetime issue?

No, you shouldn't read too much into that. To be honest, it's -- the number in that -- to be honest, I don't think about it as much as a ratio, and it kind of depends on any given order what you -- what bills we have to pay and what we get reimbursed for. I think about it on a net absolute dollar amount. So for the quarter, it was about a negative $1.5 million, meaning reimbursements less real estate expenses, are about negative $1.5 million, and for the year, it's going to be $5.5 million, $6 million. And so that's what had, I think, guided to, and so it's very much in line with what we expect. And so on an absolute dollar basis, it's right in the middle of the fairway, and -- but any particular quarter, the ratio of those 2 numbers can slide around a little bit. Daniel P. Donlan - Ladenburg Thalmann & Co. Inc., Research Division: Okay. Understood. And then in terms of the increase in acquisition guidance is it's fairly robust. How should we think about your -- I mean, you have a decent amount of cash but don't have anything on the line of credit, and you still have a lot of cash flow in excess of your dividend. So how should we think about potential debt raises? In other words, how much do you feel comfortable running up your credit facility before you decide to term it out?

I mean, a, we don't really give any guidance around our capital market activities, but I will say historically, the bank balance got more than $200 million, we think which will probably motivate it to do something about that, whether that's long-term debt or additional equity. Again, we try to position the balance sheet in a way that we can somewhat pivot to whatever piece of capital that the capital markets are pricing, particularly attractive at the moment and go with that. And so I don't think you're going to see us move and have a big balance outstanding on our bank line, which is consistent with how we've operated in the past.

Our next question comes from the line of Juan Sanabria with Bank of America.

I was just hoping you could talk a little bit about the type of deals targeted for the second half of the year. Are those mainly relationship deals, single-asset deals? Or are there any portfolio transactions to get to that new guidance of $550 million -- or $500 million to $550 million?

Juan, it's Jay. I think, first, to point out that if you look at acquisitions that we've done so far this year, the nearly $200 million, it is almost all our relationship deals, and so we're very happy with that. We're very happy with the way our team continues to build these relationships. And also, just stepping back, I think, one thing, to make sure that we work with the right definition, we define relationship to mean an ongoing program with retailers or the developers for retailers, not with brokers. I think out there in the world, some folks define relationships to include brokers, and we don't -- that doesn't fit into our definition. That's not the way we look at it, but all of that said, when you look at our pipeline going forward, it's very much like what we've done in the past. There are a lot of relationship deals that make up. There also are some deals that are marketed out there right now that we are -- that we're very interested in. And I think at the end of the day, when we get to the end of the year, the mix will look a whole lot like what we've done in prior years that primarily, relationship deals with some marketed deals that have good real estate attributes, with good operators where we weigh in and prevail.

Okay, great. And any thoughts on dispositions and taking advantage of how pricing for, particularly, investment-grade credit? Any desire on your part to try to monetize some of those assets and some of the mark-to-market improvements you had in some of your assets?

Juan, that's a good question, and we have had terrific credit upgrades, which suggests that in the event we wanted to sell those properties, they would get sold at a price well in excess of what we paid. Of course, the question then becomes what do we do with that capital? And can we replace those assets with the same quality of real estate and tenant and the yield that we are currently getting? And having thought about it and debated it extensively internally, we are inclined to sell weaker properties when there is terrific demand for real estate, and the good news is we have very few of those. So we are selling little bits of real estate at the margin and are not tempted to sell excellent properties at the very low cap rates that may be available.

Could you just comment a little bit, following up on that, on the range of cap rates for the high-quality investment-grade, of long-term leases, maybe not investment-grade long-term leases, and then kind of where you see the sub sort of 10-year lease duration assets trading at?

So Juan, 2 questions there. The first one is the high-credit, flat lease cap rates, and if you take a look at just, say, the benchmark of a Walgreen's lease depending on the real estate location, it's in the high-5s, perhaps, to the low-6s. And that is for a lease that has no rent bumps. And you could sort of go to another category, say, the Dollar stores, which there are plenty of those available in the market. They're generally in second relocations. Dollar General is a metal building, so you've got to take that into account when you think about it. And those are trading even at the secondary and tertiary locations in the 6.5% to 6.75% in the open market. Very, very limited range growth. Again, we don't find either of those to be of value to our shareholders. In terms of shorter lease duration, the way we think about it is we definitely look at short-term lease duration properties almost, by definition, those are not relationship deals. Because if it's a relationship deal, we're going to have a long-duration lease with our tenant. But we look at those, we check in with our tenants, our relationship tenants to see how that story's doing, and whether it is in their future plans to be renewed. If it's a good quality asset, the increase in cap rate is not as much as you would think it would be, and I qualify that as a good asset. So we take a look at those. As you could see in the second quarter with an average lease duration on our new properties, about 19 years, we certainly don't do much business in that category. But in the second half of the year, if the sun, the moon and the stars align properly, we've got a couple of deals in that category that we might close. The short answer is burning yield by getting higher yield for a riskier lease is not an attractive proposition to National Retail Properties.

Our next question comes from the line of Vikram Malhotra with Morgan Stanley.

Just on that -- just building off that question, would it be fair to say that today, the relationship-driven deals and cap rates are kind of in the high-7s, that 7.6, 7.7 that you mentioned versus maybe last year, they were in the 8 -- in the mid-8s, if I remember correctly?

Yes, I think without getting pinned down on the actual number, I think it is fair to say, Vikram, that cap rates in the last 12 months, maybe 18 months, have reduced to 70 to, maybe, 100 basis points. Cap rates have definitely declined. Obviously, our guidance has reflected that, but at the -- in November last year, when we announced guidance for 2014, we were talking about a 7.25% cap rate. As Kevin mentioned, lo and behold, we're going to be pretty close to that when 2014 is over. And that number is 75 or so basis points lower than what it was in calendar 2013.

And just clarifying on that, you mentioned most of the deals. I think Jim mentioned most of the deals will still be relationship deals with some, maybe, marketed deals. But as you kind of get to that 7.25, it would imply you have to do the remaining deals at kind of in the 7, low 7 range. We've been very high, 6 range. So is it just a mix of assets are likely to be different and yet they'll still be relationship driven?

Vikram, yes, this is Jay. I think you pretty much hit on it, that's -- as Craig mentioned, cap rates have compressed some, and there's other factors that go into the appropriate cap rate for different deals, but I -- yes, I think you got your math right.

So let's just step back a second. We see every deal out there in the market. In addition, our team spent a lot of time on the road visiting tenants and talking to them. Soon as we get off this call, a group of us internally are going to be talking to a meaningful tenant with a scheduled conference call. We have prioritized that for years and have deep relationships with both executives at growing retailers, as well as their real estate people. Now those people don't sell us properties at prices that are measurably lower than what they could get if they sold them in the open market. But what they do, do is they sell us those properties without having duplicate costs involved. There's no broker. There's no developer, et cetera, and we get to share some of that benefits. So it's how we source it, which is our magic. It's not that the tenants give us a great deal. It's how we do it and how we select and underwrite the real estate. I think that -- just a couple of other points, Vikram, we -- if you take a look at the number of properties that we acquired in the second quarter and the amount of dollars that we spent, you can see that, that is lots of small properties, and small properties include fast food restaurants, which we did acquire in the second quarter, and those trade at lower cap rates than, say, a movie theater or, which is if you will, a special purpose property. So mix is very, very important in what the cap rate is. So what we do, just as a reminder, is we look at every deal. We source a lot of deals, and then we make risk-adjusted judgments about what we want to target.

That makes sense. I mean, just last one for me. Kevin, some of your peers have started giving some numbers around re-leasing spreads. I'm wondering if you can just give us a rough idea or a range, at least, of where the spreads have been maybe in the first half of '14?

Yes, I mean, a, the amount of activity we have in any given quarter is very small and very immaterial, but historically, we're still running right around our historical averages that about 90% of our tenants tend to renew. They tend to renew somewhere at 95-plus percent of expiring rent, and those that -- those 10% that don't renew depending -- every property is different and has a story, but on average, we're going to get 75% of expiring rent. Importantly, though we tend to do that without contributing in any tenant improvement dollars. Our goal is to not drive up rent by putting more and more dollars in. We tend to view TI typically as being not a great economic investment despite the fact that it can help you choose releasing spreads, et cetera. We tend -- we're happy to take the lower rent and keep our investment basis lower.

Our next question comes from the line of Jonathan Pong with Robert W. Baird. Jonathan Pong - Robert W. Baird & Co. Incorporated, Research Division: Part of your acquisition strategy historically has been to acquire properties with tenants, maybe not quite investment-grade, but on the brink of or -- with the potential of becoming investment-grade rated. I think last quarter, you said with the Susser acquisition, I heard, you transfer. You guys were sitting at about 25% investment grade in your portfolio. I'm wondering if you could share whether at this point of the cycle, there might be runway from more of your portfolio to achieve a ratings upgrade organically to drive that percentage higher in near term.

So Jonathan, thanks for the question, and it's a good one. We -- as we're underwriting tenants, we pay a lot of attention to the real estate metrics, and that is our primary focus. Secondarily, we'd pay a great deal of attention to the quality of the company that we're underwriting. And if we are effective in making those qualitive discussions for a valuation of a tenant, they are -- good things are going to happen in the future, which is they're either going to go public one day or maybe even get acquired by somebody and get a higher credit rating. Now they might get acquired by a private equity firm, and then, by definition, the credit changes. But again, it's a reflection of the fact -- that transaction is a reflection of the fact that it's a good business, and we have underwritten a good operator. Point number two, we don't think that it makes sense to purchase leases that don't have rental growth. And in general, in retail, investment-grade quality tenants have been able to negotiate no rent bumps. We don't -- and those leases, in general, are inferior to our leases, and the price per foot that you pay, in other words, the cost of the real estate is as high as any in the market. So for 3 reasons, we don't like those. We don't think measuring the investment-grade quality is ultimately a great thing. If we thought it was important, there is plenty of investment-grade quality real estate out there in the market. We've had great people here. We've sourced a lot of it, and our FFO per share growth rate would decline. Does that answer the question, Jonathan? Jonathan Pong - Robert W. Baird & Co. Incorporated, Research Division: Yes, I mean, I guess, would it be safe to say you think you guys are pretty much stuck in that 25% level and don't see yourselves getting credit for tenants materially? I guess, giving you guys the benefit of a ratings upgrade organically, where maybe a year ago or 5 years ago, or whatever it might be, you paid a noninvestment-grade pricing for that asset?

I don't think it's quite as easy as that. So just two things: one, in addition to the investment-grade, we have plenty of good tenants that have gone public in the last 24 months. The fact that they have gone public doesn't necessarily mean that they are investment-grade. We are not using an implied investment-grade rating when we give you that data point. But by definition, if they've raised equity and sold down debt, their balance sheet is materially improved. But let's talk about the second one which is debt. Earlier, we answered some questions on what cap rates may be right now in the marketplace, and that was a generic comment around a Walgreen's lease, et cetera. If you take fast food restaurants, even if it's a franchisee for a big system, such as Taco Bell, those trade as low as 5.5%. So does that mean you're getting the benefit of the credit? Or do you get the benefit of the real estate and the quality of the property?

Jonathan, this is Jay. To -- just to supplement, one more thing. If your question is do we think that some of our tenants will have as good a success in the future as others have had in the recent past, the answer is kind of unequivocally, yes. We are very pleased with the performance, the corporate performance of a number of our relationship tenants, and we are actively pursuing as many deals as possible with some of these relationships, with the expectation that over time, they're going to have good outcomes like Susser had recently.

But yes, I think the big point, Jonathan, is that, yes, we're not managing to that number. We, again, are underwriting from the bottom up, we focus -- we think real estate metrics matter more than tenant credit. And the fact that we are at 25%, we don't have a plan to move it to 35% or 15%. It's an outcome of doing business with good retailers that they tend to get better over time, but we don't manage to that number.

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

Just interested to get more details on the dispositions this quarter. How many of those properties were vacant versus leased? What was the cap rates on those that were leased? And in terms of the gains reported, curious as to what's the gain on gross book value rather than the net book value gain that was reported?

Cedrik, let me answer the qualitative part first. We did, in this quarter, sell a couple of vacant properties, one of which was a vacant, formerly Walmart, in Winfield, Alabama that, to be honest, we took a bath on. We've tried to re-lease it for years. It was in a secondary, tertiary market. We'd owned it for, pick a number, 15 years beforehand, and we lost good money on it under any criteria. GAAP, cash, everything, we lost money. I mean, on GAAP, we had actually written it down, so it's kind of neutral. But I think in terms of a bigger point, the biggest dollars of a single property that we sold in the most recent quarter was kind of an interesting transaction. It's a property that, a tenant that we've got fairly modest exposure to, definitely a relationship tenant, and they opened an excellent store, very well-located, and it just did not work for them. And we've managed to enter into a deal with them, where they agreed to buy it back from us at effectively our cost, so there was really no gain or loss -- we had a little bit of dollars either way, but really small. But what that does for us is they were then able to finance it with bank debt and get a better deal for themselves, and we were able to get a losing property. And out of $1,900 or so, it's really at the margin, but it's symptomatic of how we think about in this company, every property is important. We manage every property carefully, and our relationship with the tenants is such that, that could be a win-win outcome. Now if you want the actual numbers, our dispositions were a small amount of cash lost, dramatically influenced by that former Walmart property overwhelmingly. In fact, it was all of it. And so I mean, to be honest, the decision there was after trying hard to lease it, do we just take our medicine? And that was an easy decision. Qualitatively, we took our medicine.

Okay. So based on the comments made earlier in the call there's a lot in previous instances -- basically, when you sell properties, we can assume that those are assets that were weaker or were challenged in various ways, and the story is such that, perhaps, there will be losses in most cases when you sell properties?

Yes. I wouldn't say there will be, but certainly, consistent with what we have communicated, we have been selling weaker properties. And so far this year, we have got rid of a small number of vacant properties. Now we don't have a lot, but we have disposed of those at quite good prices.

And for those that were not vacant, what was the cap rate during the quarter?

Well, the only one that had a property on was -- I mean, had a tenant on -- sorry, that was in the first quarter. But in the second quarter, I think it was in the mid-7s, yes.

Yes, yes.

Are you changing tracks? The recent decision by the National Labor Relations Board that could -- may change the dynamic in how franchisees and franchisors interact, in particular, in terms of the employee relations, employee contracts. And the bottom line there is potentially higher labor costs in franchisees, so therefore, probably, in a lot of the restaurants that you end up buying. Does that make you rethink your strategy in terms of the industries that you'll be targeting over time?

Cedrik, that's a good, astute question. Just for what it's worth, coincidentally, this morning, I had breakfast with the CEO of a very large restaurant company, and we talked about that subject. What he said is it is simple. Prices to the consumer will have to go up if that becomes the law. So I don't think that, that is going to change anything. It is just going to impact inflation. The restaurant operator is not -- or franchisees are not going to be able to absorb that cost.

Right. And you think that will be a real problem to consumers so you don't plan on changing the industry makeup, which you'll be targeting. Correct?

I don't think so, Cedrik.

And just a final question. In terms of the cap rates, you talked about cap rate -- cap rate decreases over the last 12, 18 months. You had forecasted a relatively low cap rate versus history in terms of your acquisitions. Was it a question, again, of asset mix that you were envisioning of transacting into? Or did you expect to see cap rates decline? And what are you going to be buying in the second half of the year is only crystalizing your vision of lower cap rates in 2014?

Cedrik, this is Jay. It's the latter in your comment. I think that we expected cap rates to be -- to have continued downward pressure this year, and our relationship focus allows us to do a little better than the average that's out there in the market. But we always expected that, that would slowly compress over time, and so we're kind of right on track with what we thought.

And our sense is that the things we acquire in the first half, frankly, were likely priced in late 2013. So a little bit better pricing.

Our next question comes from the line of Chris Lucas with Capital One Securities.

Most of my questions have been answered, but I wanted to just follow up on 2 points. Kevin, on the sort of attractiveness of capital question. Today, as you think about the credit upgrade, where we are with interest rates and where your stock price is, if you had to make a capital decision today about taking out or fixing a piece of your capital, what would be your preference in terms of preferred long-term bonds or equity?

Yes. No. It's funny because I had this dialogue in recent months and quarters, frankly. Lots of different types of capital are very well priced right now, and so it actually becomes a little bit harder to sort it out because it's attractive. And so if you look back over the last 3 years, we raised a lot of permanent capital. We had an inclination towards longer-duration capital, and so when that's well priced, we lean in that direction, and so because that doesn't happen all the time. Meaning, long-duration capital was well-priced, and so that's our inclination. Having said that, I mean, we just did debt in May. So it doesn't feel like we're headed back to the debt markets this year, but we'll see what unfolds on the acquisition front and our need for capital. Preferred, we did well last year with the 5.7% coupon last May, and it's probably a little above that now, probably not go-to at this point, and equity is well-priced at the moment. So at the moment, we're going to use our $85 million of cash. We've got full bank line availability. We'll use that in the interim. But our inclination is to lean more towards permanent or longer-term duration capital in this kind of environment.

Okay. And then on the acquisition mix for the quarter, the price per square foot was high relative to what we've seen over recent quarters at over $4.30 a foot. What is it about this quarter's acquisition composition that drove that pricing to that level?

Chris, it's Jay Whitehurst. I think the price per property was pretty close to our long-term average. I think that would just indicate that there were smaller buildings on -- in this portfolio. It was -- a fair amount of what happened in the second quarter was QSRs, fast food restaurants, so just smaller buildings. But overall, we're very happy with those investments on a real estate location basis and a price per property and rent per property.

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

Kevin, on the balance sheet, you have $8 million of real estate held for sale. So should we think that, that is going to be sold this quarter? And maybe think in terms of $15 million or $20 million total for the quarter in terms of dispositions?

Yes, no. I mean, it's classified that way. It doesn't mean it's going to happen this quarter. The rule, really, is, say, the thought is you'd sell it within the next year, and so we generally are not a highly motivated seller. So we don't have a gun to our head, but this year, we -- I think our guidance for the year was about $50 million of acquisitions -- I'm sorry, dispositions, and it feels like we're kind of on that track.

Okay, good. I got you. And then on the cash balance that you guys have, is that -- I mean, I'm assuming there's no reason to keep the cash balance. Is that right? And so in essence, the first $85 million of acquisitions you make going forward are basically free?

Absolutely correct. Yes, so there's really -- yes, that's the way to think about that. At the margin you have, it doesn't have any capital cost to us. We are incurring capital cost. I understand that. But that's really the balance of the proceeds from our May debt offering. And so yes, but we'll -- that will be the first go-to. Historically, if we're running at a balance on our line, we're going to have $5 million of cash, not $85 million.

Okay, good. Got you. And then you don't have any more development-type stuff in progress, do you? I kind of lost track of that, but it doesn't seem like there's anything left of that.

No, no.

Rich, the good news is we've got out of the development business many years ago.

It was always small, Craig, and I -- and I think we just lost track of it, but yes, you're saying there's nothing there.

It's so small that it's a good thing to lose track of. We just don't think the risk-adjusted returns makes sense when we could buy properties fully occupied at a 7.5%, 7.25% cap rate.

All right. I got you. And then, in looking at a couple of your tenants real quick. On the ETP Susser transaction, now that it's gone a few months, do you still feel comfortable that -- in what you're hearing from ETP that nothing will change with regard to the Susser portfolio?

Rich, that deal should close in the next couple of weeks, and Jay Whitehurst, who's sitting on this call, is going to be meeting with the senior management there in the next 10 days, 1 week, as it so happens. And to the contrary, we feel very, very good about that.

Okay, good. And then the last thing. Can you give us a couple of thoughts on Mister Car Wash and how that's -- I mean, I'm trying to get information, I guess, and to see out they're doing, and it's a big tenant for you guys. So what can you, I guess, share with us on what's going on at Mister Car Wash?

Rich, Mister Car Wash is a privately -- is the largest, privately held carwash operator in the country, and we have -- they've grown through consolidation, so they've become the dominant player in a very fragmented industry. And we review their financial performance by property and at the company level on a very consistent basis. And just for what that -- so you ask me, what does that mean? That means 12x per year. So that's monthly and then annually. And we gained confidence in their ability to execute as they took the rent coverage ratio up on the properties we purchased from around 2x when we purchased them to around 3x over the months ahead as they operated with their discipline and structure. So the good news is that the financial performance of Mister Car Wash has been outstanding.

Okay. So they're still running at 3x level? Is that basically, right?

Certainly, our properties are, Rich, and company-wide, yes, and frankly, maybe even a little better.

Our next question comes from the line of Todd Stender from Wells Fargo Securities.

Just for the acquisitions made in the quarter, what new tenants, if any, did you pick it up or add to? And what was the range in lease duration?

The acquisitions were substantially all from existing tenants or -- and as it so happens, there was one property that we acquired with a new tenant, and it involves swapping them a vacant piece of dirt, getting to Cedrik's question on a -- from an accounting standpoint, we lost money on the vacant dirt, which is a long heritage from our development days of a long time ago, and then we got a very good yield on the property we acquired. So in between, it was a good deal for them and a good deal for us. So only new tenant, 1 new tenant, 1 property. And then in terms of the lease duration range, it was somewhere between 11 and 20 years, with an average of 19 years, average. So if you think about how do we get an average of 19 with a range of 11 to 20, you should assume that the vast majority were 20 years.

I think that's fair. This is probably a tough comp, but it looks like you've parted with one 7-Eleven. I know in the past, we've talked about some theoretical cap rates as that investment-grade convenience store. Is that -- any fair comp you can give us for that one store?

Yes. Sure, Todd, and well done for paying attention to the details, and I am impressed that you found that. We hope the buyer of that property is very, very happy. It's located just west of us. Lease had come to full term, and the tenant renewed it with a 5-year option, and with 5 years of remaining lease term, we sold it at about a 7 cap.

Our next question comes from the line of R.J. Milligan with Raymond James and Associates. R.J. Milligan - Raymond James & Associates, Inc., Research Division: Most of my questions have been answered. I just had a quick question for Jay. Just curious, we saw a lot of the nontraded portfolios come to market last year, a lot of activity in that space. And I'm just curious if you thought we would see more of those large portfolio deals, whether it be from the nontraded or coming from elsewhere to exchange hands here in the next 6 to 12 months?

So RJ, thanks. We look at all of those, and we -- honestly, we don't spend a whole lot of time guessing ahead as to which portfolios that nontraded REITs might trade around. We've tried to focus on what's out there in the market for sale. But I guess, if you're going to speculate, probably so that, that will continue -- they will continue to be big portfolios that are out there, and we'll look at them all, but it is certainly not a focus of where we want to spend our energy. We would much rather deal with retailers directly.

And so RJ, just to think about it, just to add to that. This morning, it was announced that Griffin Healthcare, which is a nontraded REIT, is being acquired by NorthStar. We don't consider that in our line of trade. Secondly, it's well written about in the real estate REX that CCIT is up for sale. Again, it's got a very different property mix to what we focus on. So as we think about how we build value for shareholders, we are very focused in achieving wide spreads on the dollars that we deploy. And getting big with very little accretion doesn't strike us a good way to build value for our shareholders over the short and the medium term. R.J. Milligan - Raymond James & Associates, Inc., Research Division: Okay. Jay, are there any specific retail category type where you're seeing a lot of product come to market or a disproportionate amount of product coming to the market? Anything that's out there in terms of categories that are particularly attractive today?

Not really. I think it looks like a broad spectrum that kind of matches our overall portfolio. There's restaurant deals out there. There are some other deals. It feels very typical, really, RJ.

Mr. MacNab, there are no further questions at this time. Would you like to make any closing remarks?

Kirsten, thank you very much. We appreciate all of you participating. Some excellent questions. Jay, Kevin and I will be manning our posts, and if you have any follow-ups, please give us a call. Otherwise, enjoy the balance of the summer, and we look forward to talking to you in the near future. Thank you very much.

This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.