NNN REIT, Inc. (NNN) Q3 2015 Earnings Report, Transcript and Summary

Greetings. And welcome to National Retail Properties Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. Craig MacNab, Chairman and CEO of National Retail Properties. You may begin.

Rob, thank you very much. Good morning. And welcome to our third quarter 2015 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 third quarter financial results, following my brief opening comments. In addition, Kevin, will update you on our guidance, plus provide some of the key assumptions for how we envision 2016 on folding. We have just completed another consistent predictable quarter at NNN. As indicated in our press release, we are projecting another year of terrific FFO per share growth. We delighted that we are maintaining our full year track record of high single-digit growth in per share results. In the third quarter, we had an extremely quarter acquiring 97 properties and investing $264 million at an initial cash yield of approximately 7.15%. When the rental growth from these properties kicks in, we will receive an average yield from these acquisitions that will be in the low 8% range. This quarter our retail properties were acquired from 14 tenants in 29 states across 11 retail lines of trade. So, again, very well-diversified and further evidence that our differentiated deal sourcing capability is excellent. By the way, the average lease maturity for the third quarter acquisitions was 18 plus years. We are very pleased that so far this year we have invested $567 million in 190 different properties at an initial cash yield of just below 7.2%. As a result, we are now projecting to acquire around $630 million of retail properties this year. Our fully diversified portfolio continues to be almost fully occupied and it’s now just over 99% occupied, which reflect a slight up tick from prior periods. This exceptional occupancy reflects two things to me, firstly, the merits of well-located retail properties, which generates extremely predictable cash flow for a long period of time, and then, secondly, the success of our selective disciplined acquisition approach, along with careful underwriting of each and every property. Based on the tenant financial information that we received, our tenants remained in very good shape. In addition, the announced acquisitions of Rite Aid and Pep Boys will result in meaningful credit upgrades for both of these tenants. National Retail Properties continues to be very well-positioned, our balance sheet is strong, our portfolio is in excellent share and from a growth perspective, we have multiyear track record of sourcing through our differentiated approach well-located retail properties for acquisition. Kevin?

Thanks, Craig. I will start with my normal cautionary language that we will make certain statements that maybe considered to be forward-looking statements under Federal Securities laws. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not release revisions to these forward-looking statements to reflect changes after the statements were made. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in this morning's press release. With that headlines from this morning’s press release include reporting record third quarter FFO and recurring FFO of $0.58 per share, which represents an 11.5% increase over prior year results. As we noted in the press release, well these amounts do include rent settlement income from a prior tenant of $1,950,000. So excluding that income results would have been $0.57 per share of FFO and recurring FFO for the quarter and that represents a 9.6% increase over prior year results. Year-to-date, per share results increased 8.5% to 9% or about 8% if you exclude this rent settlement income. But so, anyway you look at it, NNN is producing very good year-over-year results and continuing a string of years with 7 plus percent growth in per share results. As we have noted in the past, we have not achieved this results with using more leverage or shorter term debt or variable rate debt and we continue to operate more efficiently with year-to-date G&A expect as a percent of revenues declining from 7.8% in 2014 to 7.0% in 2015. And if you look, over 90% of 2015 year-to-date incremental revenue has found its way to the bottomline and that includes covering increased interest expense due to higher outstanding debt amount. As Craig’s comment indicated, the acquisition pace quickened in recent months and we are now guiding to around $650 million of 2015 acquisition. This has allowed us to raise our FFO per share guidance for 2015 to $2.20 to $2.23 per share, which is a $0.04 increase over prior guidance. So 2015 we are on track to perpetuate growing our per share results on a multiyear basis, while maintaining a strong balance sheet, the annual base rent for all leases in place as of September 30, 2015 was $476 million. Craig mentioned, occupancy continues to hold up well and in the quarter at 99.1%. The portfolio is in pretty good shape. We continue to have tenant being applied by higher rated retailers. As Craig noted, with the most recent announcement of Walgreens’ acquiring Rite Aid, which at the margin will help our Rite Aid credit and we do have more Rite Aids than Walgreens. So it’s really a net credit positive for us. Also Bridgestone announced its acquisition of Pep Boys', which we have 16 stores or about 1.5% of the annual base rent, and that will be a notable credit improvement for us a well. During the third quarter, we increased our quarterly dividend 3.6% to $43.5 per share. Our year-to-date AFFO payout ratio is 75% -- 75.0%, which is about where it should end up for the year. In 2015, it marks the 26th consecutive year of increased annual dividends for NNN, something that only three other REITs can say and less than 100 U.S. public company. The consistency of each results and our long-term perspective in managing the company have been critical components of that track record. We also introduced 2016 FFO guidance this morning of $2.28 to $2.34 per share and AFFO guidance of $2.32 to $2.38 which suggest 4 plus percent growth in results based on our current assumptions. And those assumptions include one, $400 million to $500 million of acquisitions in the high fixed cap range with a little over 60% closing in the second half. Two, G&A expense of $35.5 million and that does not include $1 million of real estate acquisition transaction cost. Number three, no change in occupancy. Number four, $1.8 million of mortgage residual interest income, which is about flat with this year. Number five, property expenses net of tenant reimbursements of $5.6 million and that’s flat with this year and then lastly, $75 million to $100 million of property dispositions. While we don’t give any guidance on our capital market plans, you can assume, we will maintain one of the more conservative balance sheets in the industry. Turning to balance sheet. We raised $38 million of common equity in the third quarter primarily from our ATM equity program. And we raised $125.6 million during the first nine months of 2015. And as you can calculate from our disclosure, our average selling price for the year was just over $39 per share. For the trailing 12 months, we’ve raised $330 million. This equity coupled with $48 million of dispositions and $41 million of retained earnings over the past 12 months totals $419 million of equity-like capital, which has funded 64% of our $653 million of acquisitions made over the past 12 months. At quarter end, we had $282 million outstanding on our bank credit facility. However, three weeks after quarter end, we paid off that entire amount with the proceeds from our recent $400 million offering of 4% notes due 2025. And despite the very choppy corporate credit markets over the past several months including some deals that got pulled due to poor conditions, our offering is well received in nearly five times of what we subscribe. Pricing on our transaction was only 10.5 basis points wider than our May 2014 10-year note issuance. So we are well positioned from a liquidity perspective. The weighted average debt maturity performing this recent debt offering and paying off our bank line and paying off the $150 million of debt that comes due next months is right at seven years. And we currently have no floating rate debt. Our balance sheet remains in great position to fund future acquisitions and weather potential economic in capital market term loan. Looking at September 30, leverage metrics, debt-to-gross book assets was 34.9%, debt to EBITDA was 4.6 times at September 30th. Interest coverage was 4.8 times for the third quarter and 4.7 times for the first nine months. Fixed charge coverage was 3.4 times over the third quarter and 3.3 times for the first nine months. Only 8 of our 2,231 properties are unencumbered by mortgages that totaled $24.5 million. So despite the significant acquisition activity over the past four plus years, our balance sheet remains in very good shape. So 2015 will be another good year for NNN, 2016 will try to continue that trend in recent years. We’ve been reminding investors of some of the distinctives which largely come from maintaining a consistent strategy for 20 plus years. We remain focused on our single property site. We believe retail properties offered better risk adjusted returns over the long-term compared to other net leased property sectors. And our core competency is in retail properties. Additionally, we’ve always maintained a conservative balance sheet profile and we don’t plan to change that. We like the optionality that creates especially if the capital markets becomes less friendly. So strategies has been very consistent for years. Our overwriting goal remains to grow per share results and manage our balance sheet on a multiyear basis. And if we do this we are optimistic. We’ll be able to perpetuate our 26th consecutive year track record of raising our dividend which has been our important part of consistently outperforming REIT equity indices and general equity market indices for many years And Rob, with that, we will open it up to any questions.

Thank you. [Operator Instructions] The first question comes from the line of Nick Joseph with Citigroup. Please proceed with your question.

Great. This is John here with Nick. On the investment side, could you give us idea, what you're seeing on current investments spreads and any color on competition you're seeing on bidding?

Yes. So I think that so far this year and frankly what we’re looking at next year is cap rates appear to have stabilized. The market continues to be robust. There are lots of properties available and we’re going to continue to be selective as we look at assets.

What lack in terms of investments spreads, do you guys have a number?

Investment spreads against what?

Acquisition versus disposition.

This is dispositions. While we’re going to acquire lot more than we’re going to sell. I think that given that we sell a very small number of properties, the disposition cap rate moves all over. In this current quarter of disposition cap rate on average was slight -- was about 6.85%. So obviously that’s very attractive source of capital and we deployed the money accretively. But to be honest, we don’t really think about that very much because it’s a very, very small source of capital. We sold $8.5 million of properties, a couple of those were -- and generally what now. We’re selling assets that we think over the medium term, other people are better owners than we are.

Okay. Thank you.

Our next question is from R.J. Milligan with Robert W. Baird. Please proceed with your question.

Hey guys, good morning.

Good morning R.J.

Craig, just touching on the disposition side, given the fact that cap rates have moved lower and continue to stay low, there is a lot of appetite in the 1031 market. Have you thought about increasing some of those dispositions and maybe you can provide us some color in terms of what specific industries there is more demand for on the 1031 market versus where there is not a whole lot of demand?

Yeah. So, R.J. two things. To be honest with you, first one in terms of amounts, you might recall that we have maintained an in-house team that focuses on dispositions for us and frankly, this team has been in place for close to 10 years, have very good added and occasionally respond to as you say, 1031 opportunities that we think are miss crossed. And certainly, when buyers or people completing a 1031 exchange, as time pressures, it creates opportunities for us. And as it so happens in this current quarter, we are seeing just a little bit of that. The amount of disposition guidance for 2016 that Kevin is talking about is slightly higher, I will correct is doubled what we have currently sold this year, 75 to a 100 million versus the approximately 35 million this year. So, you are going to see us continue to selectively sell assets, some of which we think are mispriced and some of which are weaker assets. We have a very good assets. We just don’t see the point in selling a great asset even if we can realize a price that is, on his face appealing. In terms of the types of assets, the sweet spot generally, the net lease retail properties is a smaller asset size. So if you want to single point estimates, it’s about $2.5 million. In terms of what those are, the most attractive property types into that markets are branded, quick service, restaurant properties, which will sell in the $1 million to $2 million size range. And then as you start getting above that you are into the full service restaurants category. I do think that in the bigger picture for National Retail Properties, sure, we have 2,200 different properties, all of which are cannon fodder for disposition if we choose to do it. But over the multi-year timeframe, we build more value for shareholders by expanding that portfolio than by selling assets.

Okay. Thanks, Craig. Curios if you guys, since we are seeing a lot of the retailers look to, either spinoff the real estate or to sell leaseback transactions. Are you seeing an increase in the number of retailers or [Technical Difficulty] that want to monetize the real estate and potentially increase the number of sale leaseback transactions we will see next year?

R.J. Hey, it’s Jay Whitehurst. We are in dialog with folks on a number of those kinds of opportunities as you’ve heard I will say before. We see all the deals that are out there and as you know, our focus is on building programmatic relationships with retailers. And for us, this has been a great year for that. About 85% of the dollars that we’ve invested this year have been with our direct relationship tenants. So this has been a spectacular year for us. We have 39 different retailers that make up our relationship business for this year and so that is certainly the sweet spot and the bread and butter for us. And we are calling on the other retailers, a number of whom are in the situation you’ve talked about where they’ve got real estate to be monetized, to try to continue to grow that business for us but I just can’t reiterate. This year has been just a great year for us with relationship business.

Thanks, Jay. And one last question on Texas. 20% of the rents coming from Texas, curios wonder if you are seeing any fundamental weakness in terms of convenience store, same-store sales or any sort of disruption there given what’s going on in the energy markets? And two, if that presents an opportunity to potentially increase your exposure there or if you would be adverse to increasing your exposure in Texas given potential disruption?

R.J., it’s a fair question. And when we take a look at the tenant financial reporting, which we are getting for many of our properties, we are not seeing disgrace for sure. The price of oil is a lot lower but if you take a look at what’s going on in Texas, job creation continues to be very, very high. Through September, I think that they created more jobs this year than even California, which is state double the size, potential number of people. So, our portfolio in Texas continues to do well. Just a little more color on that. As you are aware, ironically in the c store space, gasoline margins widened when the price of gasoline’s going down. So, our convenience store tenants continue to do very well. I guess it’s good or bad news. In Texas, distances are wide and people drive lots and lot. So the gasoline volumes continue to be very good. In terms of whether Texas is an opportunity for us or not, we actually are very, very bottoms-up focus. So each and every property that we acquire is individually underwritten by our team and then [Garrett] [ph] cooperating our investments committee, we are making risk adjusted capital allocation decisions. If we see a good opportunity in Texas, we will jump on it tomorrow. If we see a better opportunity in Florida, we will do that in lieu of the property in Texas. So, I think the overriding comment, R.J. is that our portfolio is in extremely good shape right now.

Thanks, Craig. And one last question for Kevin real quick is the acquisition guidance for ’15, I think I missed it. What is the full year acquisition guidance for ’15 and then did you give us’16 number included in our guidance?

We’ve got 2015 around $650 million for 2015. And then for next year, $400 million to $500 million with a little over 60% of that penciled in for the second half of the year.

Thank you very much, guys.

Thank you.

Our next question is from Vikram Malhotra with Morgan Stanley. Please proceed with your question.

Thank you. Just on the cap rate guidance for next year, Craig you mentioned sort of seeing maybe a stabilization in the cap rates, but I think the high success would represent sort of another maybe 20, 30 basis point decline. So what is -- is it to reflect may be just different assets that you may be seeing or just some further compression over the next few months, new few -- next six months or so?

Yeah, Vikram, thanks for noticing. I think that the average cap rate is very much a function of what the mix of assets are and I think cap rates are very, very stable. So far this year, we have been able to come in just above 7%. Some of that was properties that we contracted to purchase in calendar 2014, that’s closed this year. Some of which is on development funding where historically we’ve been able to get higher returns. I think it’s at a high level. The difference between the 10 or 15 basis points is really not that much of a game changer. I think cap rates are very, very stable right now. There continues to be a large demand for net lease retail properties and frankly we don’t see that changing in calendar 2016.

Okay. And then Kevin, you mentioned sort of you’ve been prepping the balance sheet and I guess for a couple of years now you’ve steadily taken the risk down and probably in anticipation of some sort of dislocation in the market. So maybe could you just remind or maybe three or four sort of indicators of some red flags that you maybe looking out for that would sort of may be change your mind in terms of how you fund that future growth?

At the moment, we are not inclined to use our dry power and the good news is we don’t need to that we created on our balance sheet in terms of our leverage profile. So for us, it’s about creating multi-year long-term growth and per share results. And one of the ways you do that is if you can grow results and delever at the same time, that’s a good environment to take advantage of that, because that just helps you perpetuate per share growth. So there is not anything per se that we are looking for to happen. We do understand though that trees don’t grow to the sky. Capital markets aren’t always vital than and/or friendly. And so one they have been open for so long and so wide, it does just encourages us to create a little dry powder for a day where that may not be the case.

Okay. And then just last one, the transaction with Frisch's Restaurants, they are new top tenant for you guys now, can you just walk us through the process there for I think was 19 assets that you guys bought, was that sort of a relationship driven, was it sort of bit competitive process, how that came about?

Vikram, it’s Jay Whitehurst. I will gladly talk you through that. The Frisch's transaction was a bigger transaction than 19 stores that you talked about. We actually -- Frisch's is public company, iconic brand through the Ohio, Kentucky, West Virginia, Midwest area, very stable business just to give you a little background. They have been around since 1960, profitable every year since 1960, paid a cash dividend every quarter for 55 years. So Kevin was kind of jealous of them. And did a going private transaction earlier this year with a private equity firm that we got to know and felt very good about. And we ended doing 74 units for a $170 million as part of that going private transaction. To us, it’s a straight down the middle real estate deal, again though we’re about $2.3 million per property. And for that, we got about 5000 square foot building sitting on about an acre and half on average. All of the units that we got have been remodeled within the last five years. They were all well over 2 times covered at the store level. Rent was in the mid $20 range, $25 to $28 a square foot range. Rent to sales was very reasonable. So the whole thing was just up right down the middle real estate transaction for us with a good brand sitting on good real estate. That’s a color on that.

Okay. And then just the lease structure on I think, are they bump hope we could be there?

Yeah, it’s a 20-year lease. It has effectively what we felt to be the same kind of bumps that we got across the whole portfolio, call it kind of 1.5% per year bumps. This isn’t very material to us, but it seems to be the 100 bumps, it is in the master lease, but we were very happy with the individual valuation of these properties. And so the master lease, it’s just something that we were able to get but not anything that we felt we -- something that was a mitigate to any issues because we’re very happy with the base real estate for this transaction.

Okay. Thank you very much.

Our next question is from Dan Altscher with FBR. Please proceed with your question.

Thanks. And good morning, everybody. Kevin, I was wondering if you could just give us a little bit of color on the nature of that defaults on, and I know it was a very big at $2 million, but if you could just help to understand kind of and you want to define that?

Yeah, that’s not a lot of story to it. I mean, we had a tenant of handful of convenience stores, put them in default because of issues and hanged out for a couple of years over settling that and ended up with a good outcomes. The more important news frankly related to all that is that we re-leased the vast majority of those stores to Tesoro and big oil operator and they are fully occupied. And so that’s really the most important thing, but we were able to scrap some settlement from rent that we would have earned otherwise. So it’s lumpy, it’s why we called it made special note of it in our results. It’s just a big number.

I mean, we have smaller amounts but like this kind of things happen from time to time. During this year we got a check from Circuit City for $190,000. And so years after tenant issue of some sort, you occasionally get a check and normally it’s not particularly material this quarter it happened to be.

Got it. Okay. That’s fine. I know some of the earlier questions from something folks were on the asset sales and maybe of the reason why, I think Craig maybe in the last quarter you talked about asset sales and simplifying the business maybe just doing some cleanup. I mean, it seems like that’s what you’re saying really happen this third quarter that was maybe the clean up and there’s nothing really of size or nature like going forward that resembles this quarter is up. Is that the right way of what you are trying to say?

Yeah. Dan, thanks very much for paying attention. Absolutely right now, we are looking to sell some of the really small properties that we have that are consuming more property management times in their work and we are selling some of those. In addition, occasionally, we do respond to 1031 opportunities and we have a small number of those currently ongoing, which is one of the reasons why we think disposition by this next year will be slightly higher than this year. And I think small dollars in comparison to what we’re deploying in acquisition stand.

Yeah. Okay. Now that’s perfects. Thanks so much.

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

Hey, good morning, guys. It’s actually Josh Dennerlein with Juan. Just one quick question for you guys. With the Walgreens' Rite Aid transaction, any thoughts on potential starts to best shares given over the last for SEC requirements or where do you expect management team to try and monetize more of the real estate?

Josh, hey, it’s Jay Whitehurst. Just to give you a little color on our exposure there, but the highlight answer is to us it’s really a non-event. So we’re just going to kind of watch it from a distance and see what happens. We own 17 Rite Aid in the portfolio and 7 Walgreens, so it’s really a small concentration. The overlap between those two is non-existence. We actually only have two Walgreens that are in the same time zone as the Rite Aid and the Rite Aids run up and down the eastern seaboard. The big notable facts for us about those properties are in both cases the rents are very reasonable. Our Rite Aid rent averages $22 across the portfolio and the median is $20. And our Walgreens rent averages $23 a foot, so both very reasonable. We’ve got five, six years left on both of the concepts. So we’ve got a number of years left. And at $20 to $23 a square foot of rent on good drug store corners, we feel like we’ve got a very faith investment there. And whatever happens in terms of dispositions by Walgreens in order to make it work or whatever, the landlord is still getting get their rent for the balance of the lease term. And whatever else happens, you did a new tenant that comes along. And in our case with low rents on these properties, we just feel very secured.

Great. Thanks. Appreciate it. That’s it for me.

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

Hi, guys. Just want to get a little bit of color on re-leasing activity during the quarter. So, for example, what percentage of assets did you re-leased for the same tenants versus the new tenants and at what percentage they’re acquiring rents?

Okay. Tyler, hey, it’s Jay Whitehurst. I’ll give you what we’ve got on that. For the quarter we renewed 15 of our -- we have 17 leases expired and renewed 15 of them for 100% of what we were getting previously. And so that’s pretty much on track with our long-term average across there. And then we also, what did we do, we leased -- how many new vacancies, Kevin?

Eight.

Eight new leases of vacant properties and those were at about two-thirds of the prior rent that we were getting. And, again, that works out to be just about the long-term average for us.

Sure. And then just, again, based upon the long-term average, what percentage of non-renewed assets you end up selling versus trying to re-lease?

Well, I know we try to re-lease every single property. We are not in the business of selling vacancy assets, so happens in this current quarter. We did sell two properties, which were vacant, one of which we sold for about $150,000, we -- it came to us with a portfolio that we purchased seven or eight years ago at the purchase price of that property in that portfolio was almost exactly the same dollar amount. So consistent with what I said to Dan in the previous question, selling small properties. And then we did sell one of the structural vacancy that we had. But our in-house leasing team enjoys the opportunity of leasing up our portfolio.

All right. Sure. And then just in terms of the structural vacancy that you reference, where were you able to sell that relative to the initial cost?

We did not make any money and frankly, we lost about $2 million on it, Tyler.

Okay. All right. And then, just moving on to your development pipeline, given where we are in the cycle, do you expect to see more or less than I believe 100 million that you had put out there at one-time historically?

Yeah. So, just and I know you understand this, but maybe some other people on the call don’t. We are not taking any development risk at all. It is just how we fund a property that one of our relationship tenants is opening. So it’s a new store, we’ll buy the land under an existing lease with them and then we’ll fund the construction and it’s essentially just becomes typical sale lease-back once it’s finished. This is obviously very, very good business for us, because we’ve got a very clear line of site on capital deployments over the next nine months or so. So it’s just a function of the 39 relationship tenants and their plans to open new stores. We are not taking development risk.

All right. Perfect. That’s all the questions from me. Thank you.

Our next question is from Rich Moore with RBC Capital Markets. Please proceed with your question.

Hi. Good morning, guys. I wasn’t clear when I looked your purchase website, if that -- is that all of the purchase that 74 or they have more?

Yeah. Rich, hey, it’s Jay Whitehurst. There are number of more stores. And there are also some franchises out there. I think the overall concept is north of a 125 units altogether.

Okay. And all of yours are right with the company, not with the franchises.

Correct. Yeah. We’re all company-owned company-operated stores.

Got you. okay. And then on your drug stores, since you guys don’t break out, can you break out Rite Aid and Walgreen’s exposure over the 2.4% of rent for us?

Yeah. Rite Aid is about 0.9% of our rent and Walgreen’s is about half of that.

Okay. Got you.

Which is to say, we have a small number of CVS as well, Rich.

Okay. We get there exactly, you play great. And then the Pep Boys is how much is that?

Pep Boys, we have 16 storage which is about 1.5% of year end.

All right. Thanks. And then, I guess last thing is I don’t really understand anymore what recurring FFO is and what the difference between that and the main REIT definition never seems to be different, and like we have the one-time gain this quarter, that even those in recurring. So, why do we have recurring again?

I mean, we debated this. I mean, $1.950 million that character or the nature of that kind of income is something we get all the time except for the fact that it was much larger than what we get. Like I referenced earlier, we got some money from Circuit City in this past year. And we get dribs and drabs from various retailers overtime usually several years after there has been a bankruptcy or defaults or something going on. So, the income is recurring I guess. And then I fully understand in your mind that it should go on recurring like that. We understand that approach. We chose not to and decided just to highlight the amount and that transaction. So people could make adjustment. I don’t know that there is an official definition of recurring FFO. We have historically tenant to use it for more non-cash items that wouldn’t get caught out and the main REIT definition of FFO, for example, impairments on our commercial mortgage residual assets. That wouldn’t get add back in FFO and we tend to throw it that before in the recurring FFO. We think a non-cash charge. And so that’s what we tend to put as an adjustment to come to recurring FFO book, understand your comment.

Well, I mean, I just personally like the single definition main REIT definition which everybody would just use that and almost seems like, these differences are few and far between at this point. And like you say Kevin you can always explain them and just say, well there is incremental thing and which is what you did this time?

Yeah. I mean we do report the main REIT definition of FFO. That’s our first and primary metric confirm that. We created two others, one called recurring and one called AFFO which doesn’t seem that I have a consistent definition either. And so -- but we do report and focus on FFO per share as defined by main REIT.

Exactly. I appreciate that. Thank you, guys.

[Operator Instructions] Our next question is from Chris Lucas with Capital One Securities. Please proceed with your question.

Yeah. Good morning, guys. Just few quick ones. Craig, on the Frisch transaction that pushed your full-service restaurants over 10% in terms of exposure, I guess maybe if you could just remind us what your views are pm risk management at the line of trade level in terms of concentration that you’re towering itself?

Yes. Chris, that’s a good question. And we do like the full-service restaurants business where the hub property investment is modest. As Jay mentioned, the precious suite’s about $2.2 million both property and the rate coverage was extremely high and the rent to sales factors are well south of what is customary in the industry. So, it depends on mix of what we looking at. But if it gets above 10%, which it has been in the past, we will be pretty fine with that. And just as a reminder, our conveniences store exposure at one point in time was just over 25% and today, it’s moderated nicely.

Okay. And then…

Just the ebb and flow over time. We don’t have a hard line on any of those numbers.

Okay. And then as it relates to the Frisch deal offering, I guess, you will hit back any way. On the Frisch deal, have you worked with the private equity shop before on other transactions or is this your first transaction with them?

The way that came around is that we were dealing with the company for quite a period of time, close to two years before this transaction. And as a result of that, we’ve interacted with this private equity firm that has expertise and is set-up around the restaurant business for about a year on this. But just to be clear, Chris, we had not previously done a deal with the new owners of Frisch's.

Okay. Then my last question on the few transactions you highlighted, the Walgreens, Rite Aid and then the Pep Boys, Bridgestone, I guess if I could give maybe a guess as to what you think the value the cap rate compression is by the improved credit backing of those two companies is?

Yes. And obviously, it depends on each property and older risk. But I would point out to the follow, Chris. In the third quarter, just ironically, we purchased one Rite Aid property that’s in near Duke University in North Carolina. And it actually has very high sales and serendipitously it does not have a Walgreens nearby. It is in a very dense demographic area and I just talk to our in-house disposition guys a couple of days ago. And they feel that the compression in cap rates on that particular property is close to 200 basis points as a result of the Walgreens deal. But it is property by property, clearly there is some accretion. But the big point at the end of the day is what Jay Whitehurst mentioned. We expect our Rite Aid’s to continue to paying us for a long period of time and the reason is simple, that the range per foot is very low in the context of big drug stores around the country.

Great. Thank you, guys. Appreciate it.

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

Well. Thanks very much. Folks, we appreciate you dialing in today. We wish you all a wonderful holiday season. And we look forward to seeing some of you in Las Vegas at NAREIT's Meeting. Thanks very much.

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