NNN REIT, Inc. (NNN) Q4 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the National Retail Properties Yearend 2016 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 are reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Craig Macnab, CEO of National Retail Properties. Thank you. You may begin.

Audrey, thank you. Good morning and welcome to our 2016 yearend earnings release call. On this call with me is Jay Whitehurst, our President and soon to be CEO along with Kevin Habicht our long time Chief Financial Officer, who will review details of our fourth quarter as well as our yearend financial results, following my opening comments. 2016 was another excellent productive year for NNN as we increased our core FFO per share by 5.9% to a record level of $2.35 per share. In the fourth quarter, we were active in the capital markets accessing well priced capital, which further lowers our long-term cost of capital. Kevin will provide the details in his comments. The demand for both of these offerings was well in excess of the amounts that we raised, which suggests to me that investors respect the financial strength of NNN as well as the consistency of our performance plus our retail-only focus. In executing our strategy, our team remains focused on delivering multiyear results and we now had five consecutive years of terrific per-share growth in core FFO. Significantly, we've achieved these results while using modest amounts of debt as Kevin will expand upon in his comments. As indicated in our press release, we acquired 313 net leased retail properties last year, investing a record amount of $847 million. The average initial cash yield on these acquisitions was an impressive 6.9%. As many of you are aware, this attractive initial yield improves over time as the rent increases over the duration of our very long yield long leases yielding what we estimate to be just under 7.9%. One interesting detail of our acquisition activity is that the vast majority of the transactions were single property acquisitions throughout the year, many of which are purchased from existing tenants with an average investment per property of only $2.7 million. We've continued to adhere to our strategy of focusing on acquiring carefully underwritten retail properties at low price per property at initial cash yields that are both above what is found in the broker auction market as well as comfortably in excess of our cost of capital. We are proud that in 2016, we consummated acquisitions with 40 relationship tenants. Our strategy continues to focusing in on what we think of as small box retail and our current pipeline of deals is predominantly made up of opportunities in these categories. We like well-located retail properties, which is generally with small box retail is found. Small box retail is very granular within the range of 30% to 40% of our investment comprising land and importantly, we've experienced that there are multiple users interested in these sites if we have to release them. Our fully diversified portfolio continues to be in excellent shape and at the end of the year, we were 99% leased, which we are proud of. As of the end of the year, we owned 2,535 properties, which were leased to about 400 different national or regional tenants across 48 states. These tenants operate in about 30 different segments of the retail industry, which provides us with very broad diversification. Finally, on average, these tenants are contractually obligated to pay us rent for just over 11.5 years. Last year we were modestly more active in our capital recycling, predominantly using our in-house expertise and team to sell 38 properties for $103 million, generating $27 million of gains that are not included in FFO. In conclusion, as I approach the end of my career at NNN, I am delighted to be leaving the company in excellent hands with a superb management team to further develop our strategy. I have every confidence that Jay, Kevin and all of our colleagues will in the years ahead, produce excellent, consistent results for all of our shareholders, which will provide the opportunity to continue to annually increase our dividend. Kevin?

Craig, thank you for your kind words. We do appreciate your leadership here over the past 13 years. It's been a great pleasure to work with you and I obviously wish you the very best in the chapters ahead. Let the transcript show that a high five across the table was executed. So anyway, we'll get to the more mundane items here. I'll start with our normal cautionary language. We'll make certain statements that may be considered to be in the forward-looking statements under federal securities law that actual results -- future results may differ significantly from the matters discussed in those forward-looking statements and we may not release revision 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 announcing fourth quarter results of $0.60 per share of core FFO, operating results and $2.35 per share for full year 2016 core FFO, that represents about a 6% growth over prior year 2015 results. These are record operating results for NNN, which coupled with our record 2016 acquisition pace that Craig mentioned and a strong and liquid balance sheet really positions us well for more the same in 2017. During 2016, we increased our common dividend just over 4%, which marks the 27th consecutive year of dividend increases, while maintaining an AFFO dividend payout ratio of 74%. Occupancy was fairly consistent throughout the year, ended the year at 99.0% and that's above even our normally high occupancy. We were able to drive additional operating efficiencies in 2016 as G&A expense decreased 40 basis points to 6.8% of revenues and just one note for purposes of modeling 2017 results, the annual base rent for all leases in place as of December 31, 2016, was $543.4 million. We did maintain our 2017 core FFO guidance of $2.42 to $2.48 per share and that represents 4.3% growth to the midpoint. Hopefully, we can improve upon that as the year unfolds. Detail of that guidance can be found on Page 6 of today's earnings press release. During the fourth quarter of 2016, we were active in the capital markets. In early October, we completed a $345 million perpetual preferred stock offering, which was priced at a 5.2% yield, which is the second lowest preferred coupon in the REIT industry. We believe perpetual capital priced at 5.2% is very attractive and belongs in our capital stack and while the preferred offering was not contemplated just a few months earlier, we did want to take advantage of the market when it was well priced. Today that type of pricing would not be available. Additionally, in December, we issued $350 million of 10-year fixed rate debt at an attractive credit spread and risk treasuries plus 135 basis points and that pencil down to a 3.73% yield. However, due to an interest rate loss that we had entered into last July, we reduced the effective interest cost on those bonds to 3.28%. Subsequent to yearend in January, we announced that we were redeeming $287.5 million of our six and 6.58% Series D preferred shares, which will be completed in 10 days on February 23. As you match fund this redemption with our October issuance of the 5.2% preferred stock, it would have produced $4.1 million of annual preferred dividend savings, which is just under $0.03 per share, an accretive refinance using the same perpetual duration capital. Turning to the balance sheet, at year-end we had no outstanding amounts on our $650 million bank credit facility. Notably our average amount outstanding during 2016 was $70 million. So, we're not milking the -- not milking per share accretion from using material amounts of short-term floating rate debt. All of our debt was fixed rate year-end funding for all of our $847 million of 2016 acquisitions was done with long-term capital, bank's common equity, disposition proceeds, retained AFFO after dividends and a little new incremental preferred equity, net of redemption next week as well as 10-year fixed rate debt, no short-term debt, no variable rate debt. So, we remain very well positioned from a liquidity perspective and a leverage position. Our weighted average debt maturity is 6.6 years and that's all debt of any kind and a weighted average interest rate of 4.4%, which again has no benefit of short-term variable rate debt and that debt maturity is $250 million of 6.78% notes that are due in October of 2017, which should be an another accreted refinance opportunity. However, that will largely inure to the benefit of 2018 and beyond. Our balance sheet's in great position to fund future acquisitions and to weather potential economic capital market turmoil. Looking at 1231 leverage metrics, which we will sight pro forma next week's preferred redemption since that has a fairly material impact. Debt-to-gross book assets was 34.5%. As you know, we don't manage our balance sheet around market cap based leverage metrics. More importantly, debt to EBITDA was 4.6 times at December 31. Interest coverage was 5.0 times for the fourth quarter, 4.8 times for full year 2016 and fixed charge coverage was 3.4 times for both the fourth quarter and full year 2016. Only five of our 2,535 properties are encumbered by mortgages, totaling $14 million. So, 2016 was another good year for us with 6% growth in per-share results, which is consistent with the past three years. Notably again this is achieved while not leveraging up or using short-term variable rate debt capital. When making capital allocation investment decisions for assets, we intend to own for the long-term, we are evaluating those returns versus our long-term cost of capital in our short-term marginal cost of capital. We think this approach will generally lead to more selectivity and presumably less volume, but more per-share accretion and operating results. We're optimistic, 2017 will be another year of solid growth in per-share operating results. We continue to maintain a conservative balance sheet profile and like the optionality the flexible balance sheet gives us. The strategy has been very consistent for years. We're optimistic we'll be able to perpetuate our 27th consecutive year track record of raising our dividend, which has been an important part of consistently outperforming REIT equity indices and general equity market indices, which we did again in 2016 and for the past 25 years. Anyway, with that, we'll open it up to any question.

Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session. [Operator instructions] The first question comes from the line of Nick Joseph with Citigroup. Please proceed with your question.

Thanks. Just wondering what you're seeing in terms of the transaction market today for cap rates, any movement there and any movement in terms of bid ad spreads.

Nick, hey it's Jay Whitehurst. I'll take that one, but before I answer -- get to that question, I want to join Kevin in saying thank you to Craig for the last 13 years. You really can't say enough about the positive impact he's had on National Retail Properties. We grew from up a small company that was a little over $1 billion to full size company that is nearly $7 billion in assets. I think it's something like 14% total shareholder return during the Craig Macnab era and Nick more -- as important to that, may be more important is that he mentored and coached our whole executive team to be able to carry on the mission after his retirement. So, we're going to miss him terribly, but we are going to be able to carry on his mission, our mission to create shareholder value. And I think one phrase that really is -- tells you great story about somebody when they're stepping down from a role is that Craig is leaving us much better than he found us. So, I just wanted to get that on the record as well. To your question Nick, cap rates -- our pipeline looks great. We're seeing deal volume in all of our typical categories and cap rates really feel like they're flat right now. I can't say they're trending up, but I also would not say they're trending down. So, we feel like there's good volume out there and opportunities and the pricing is about flat these days.

Thanks. I just wondering there's been a lot of talk about potential tax changes and if something did happen with the 1031 transactions and those were no longer able to be done, how do you think that would affect your relative position within the transaction market?

We don't think that -- we're keeping an eye on that I'll say and there's a lot of conversation about changes big and small out there in the world. But in terms of changes to the 10/31 rules, we think that would be pretty much neutral to us. A lot of the one-off properties that are trading in the 10/31 exchange market, those cap rates may moderate higher in that situation. We're both a buyer and a seller in that market. So, it's kind of net neutral to us, but we do very little transactions or acquisitions in that market. We look at it all the time and we're trying to find assets that are mispriced, but it's not a big part of our acquisition program at all. We're primarily focused on doing deals with this 40 retail -- relationship retail tenants that Craig talked about. Overall, we think it's pretty close to net neutral if there are significant changes to the 10/31 business.

Thanks. And then Kevin is the Series D preferred redemption included in updated guidance?

It's excluded from that. So, as we gave guidance, we excluded what will be an estimated $9.9 million preferred stock redemption charge. So, it's not included in that. So, we've already excluded that from the guidance.

Right, but is the preferred savings I guess included in guidance?

Sorry, I didn't catch that. Yes, it's somewhat baked in there. We don't give guidance around our capital markets activity, but given that both of these things one happened in the prior year and one happened early in this year, I think you should assume that in our re-forecast, we've assumed that that got paid off in February '13.

Thanks and congratulations again Craig.

Thank you, sir.

Thank you. Your next question comes from the line of Vikram Malhotra with Morgan Stanley. Please proceed with your question.

Thank you. And congratulations, Craig. I assume now for those that follow you will be watching a lot of cricket now.

And watching India prevail a lot of -- all the opposition, yes.

So, two quick questions. One, more tenant-specific because there has been a lot of news at least around Gander Mountain and the broader category. Any comments or updated thoughts would be helpful. I

Vikram, hi it's Jay. Just a reminder, we own 12 Gander Mountain stores that are diversified across nine different states in the Midwest and Southeast and comprise about 2.2% of our annual base rent. The sporting goods sector in general and Gander in particular have been struggling and we've talked about that on prior calls. And our portfolio of 12 Gander stores is a typical bell curve with some of the stores that are performing well and some that are struggling and I would note that the majority of our stores, the vast majority of our stores were acquired between 2004 and 2012. So, our rents were set long ago with Gander. As we sit here today, we still expect them to be able to weather the storm that's out there, but there is in talking to media about their potential filing and if they do file bankruptcy, we expect it to be a Chapter 11 reorganization and in that instance, experience tells us that some of our stores will stay open. Some will require a rent reduction to stay open and some will be closed and for the stores that are closed, the historical recovery rate for us is about 70% of prior rent. And everything I am talking about now is speculation, but if you apply these typical assumptions to our Gander Mountain stores, you end up with a possible and I do emphasize possible rent loss of a few million dollars out of our total portfolio of annualized rental income stream of almost $550 million. So, we're paying attention and we take this situation with Gander Mountain seriously, but we really also want to keep the magnitude of the issue in context.

That's a fair point. Just to clarify, have you heard directly from Gander in terms of maybe what's going on because obviously, we don't have any information, but would be -- if you've heard and then what other -- could you give us some examples of given the size of the individual stores, what are the alternative uses?

We're really not in a position to talk about any of the conversations that we might've had with the Gander folks. I think you should just kind of look at what's been up there in the -- can't add anything aside of the media, I guess I should say and as you take the sports authority file bankruptcy about a year ago, if you take the situation there with those stores, we had two that were leased quickly to actual subtenants of those stores, because sports knew that they were getting out of a few of them. Our other two stores have -- we've had very good success. We're not in a position yet to announce anything on that, but the other two stores are going well and the overall average on those stores is going to be at or slightly above, we do believe our average of that 70% recovery rate.

Okay. And just want to clarify, in guidance versus when you first issued '17 guidance, there is nothing incremental in terms of any Gander stores potentially being vacant for a while or there is nothing different from what you provided last time?

Yes, we've not changed our guidance from last time as it relates to Gander and at the moment, we don't feel like we need to either. So, we feel very comfortable with our guidance out there. Let me put it that way.

Okay. Great. And then just a bigger picture question and I'll hop off, there's a lot of talk about general retail weakness across several categories and obviously, some of the exposure you have is different on net lease in general is different, but are you thinking about the portfolio any differently than you were maybe post the last recession and anything you're seeing that is similar to when there was weakness the last cycle versus this cycle and anything that's different?

Vikram, I think the point you made in the middle of your question is really the beginning of the answer. Our portfolio is very healthy at 99% occupied and it's primarily in categories and with retailers that are not suffering the general retail malaise. We have very few apparel retailers in our portfolio and primarily our lines of trade and our tenants are in categories that have our consumer necessities and both internet-resistant and eCommerce resistant and recession resistant. So, we're not seeing any kind of trouble with our portfolio given the other -- the other prevails that general retailers are suffering.

Yes, and I think our balance sheet also undergirds a few -- any kind of choppiness that might be in the retail world out there and again this is -- as retailers go bankrupt from time to time, it's nothing new and there will be more in the future and we again think our approach on focusing on good real estate and maintaining a conservative balance sheet holds us in good stead in that environment.

Thank you. Our next question comes from the line of Josh Dennerlein with Bank of America. Please proceed with your question.

Hey. Good morning, guys. Curious on your thoughts on the Bob Evans restaurant sale to the private equity company, Golden Gate capital. How do you view that? Is that an upgrade or downgrade?

Josh, hey good morning. It's jay. Just as a reminder, we own 117 Bob Evans restaurants that were acquired in early 2016 and to your question, Bob Evans is spinning off its entire restaurant division to Golden Gate Capital and there is no effect on national retail properties leases of any of those properties. We have five master leases that contain pools of those Bob Evans restaurants. Our tenant that is being spun off will continue to operate over 500 restaurants, including all of those that are leased to NNN and we will continue to have a lease guarantee from Bob Evans parent company, which includes Bob Evans Farms to process food side of the business that's being retained by the public company. We like the original structure, but we view this spinoff as generally positive. Golden Gate's an experienced investor in other restaurant concepts and the CEO of the restaurant company, Saed Mohseni of whom we think very highly, is staying with the restaurant company and most importantly, we bought these properties right at $1.35 million per site. So, low investment equals low rent equals greater security when transactions like this occur, but we view it as a net positive.

Okay. And it sounds like there could be potential opportunities to expand or acquire more assets from them. Is that something you would be interested in?

It would be something that we would definitely look at Josh. Golden Gate acquired Red Lobster a few years ago, and ended up as folks recall, did a major sale leaseback of those properties. Whether they decide to do that again or not, we are very happy with the portfolio of properties that we've got. We were able to get a self-selected pool of higher performing stores when Bob Evans did the first -- did their sale leaseback with us a year ago.

Okay. Thanks Jay. Did you guys have a rent coverage metric across your portfolio on any top 10 tenants available that you can disclose?

Yes, we do disclose that typically in our institutional investor presentation. We did publish that in our Annual Supplemental on Page 12 today and the range on our rent coverage is 1.1 to 7.4 times and the average was 3.6 times with the weighted average of 3.8 times to our top tenants who have more than 2% of our rent, which comprises of about 50% of our total rent profile, but yes so that number is out there and it's glacial in its movement and it hasn’t moved much at all.

Okay. Thanks. Appreciate that.

Thank you. And our next question comes from the line of Vineet Khanna with Capital One Securities. Please proceed with your question.

Yes hi. Good morning, guys and thanks for taking my questions and Craig, I just want to pass my congratulations along to you as well. Just along the lines of the rent coverage, it looks like that range increased from 2015 at 2016. Is there anything there or any big major movements that we should be mindful of?

Hi, this is Kevin. I don't think so. As again I say that the range will move a bit from time to time, but the averages are fairly slow moving and so there's not a lot to I don't think to read into it. No, I guess the answer is and it relates to -- it goes to a related question I guess around just credit watch list. Gander Mountain has been along for a long time. Logan's was on it. We're not surprised by any of this and to the extent we have concerns we try to make sure the market is aware of tenants that we have of note that might be struggling but we don't have any particular worries at the moment.

Vineet, this is Jay. I think one other point to add here just talking about the existing tenants is we've had a couple of our larger tenants have had really excellent credit upgrades over the course of the year. AMC completed a merger with Carmike and Camping World really best-in-class operator and their recreational vehicle space went public and is just doing very well. So, we've got some really great success stories among our portfolio of relationship tenants.

Okay. Great. Great. And then just along those lines Kevin, maybe you can talk about your bad debt expense assumptions for '17 and how compare to 2016 or past few years?

Yeah so if you look at our balance sheet and our K which will get filed later today. We have about $3 million in tenant receivables outstanding that's about the amount we had the year before that and the year before that. We don't carry a big receivable balance and we don't carry bad debt. We're not inclined to -- the good news is our tenants are large retailers. So, we're generally meaning that operate hundreds if not thousands of stores and so this isn’t the drycleaner or the nail salon. This is large retailers and so the rent payment is very binary to be quite honest and so they pay rent very regularly without fail right up until they file bankruptcy and so we're not in the business of carrying 120-day late payments or etcetera on a bunch of small retail tenants. So, our bad debt expense is virtually zero and our receivables outstanding reflect that as a very low number $3 million on as Jay mentioned $543 million annual base rent in play. So, it's kind of a non-event here.

Okay. And then just last one for me, did you guys take a look at the 7/11 portfolio that traded hands towards the end of 2016?

Vineet, hey, this is Jay. You should assume that we look at all of all portfolios of retail properties and there is -- when we -- at our cost of capital, we're in a position to be able to acquire all the portfolios that we look at that had a good risk-adjusted return from our perspective. In that instance, those were some great properties as we understood it, but the pricing on that portfolio may not have been at a level that we -- that made sense to us. I should also -- should also point out that in our portfolio, 7/11 is in the top 10 tenant list. There are about 3.3% of our rent with 77 stores that we -- that we own that are leased to 7/11 right now and those paying to us through the relationship calling effort that we've been engaged in for a number of years, we did business with regional convenience store operators who were best in class in their markets and ultimately, those stores were acquired by 7/11. That is to us the preferred way to end up with some of these very highest credit operators is to find regional operators that are ultimately consolidated with the multinational companies.

Okay. Great. Thanks for the time guys.

Thank you. Our next question comes from the line of Daniel Donlan with Ladenburg Thalmann. Please proceed with your question.

Thank you. And good morning Craig. I just want to say congrats on the retirement. It's been a lot of fun listening to these conference calls over the years. I guess I do have one question for you, are you really retiring or we'll be able to here you again at some form or fashion in the public?

Again, thanks for your precious words. I think Jay said it nicely. National Retail Properties is in great hands and it's in great shape and I look forward to watching the success of my great colleagues. In terms of retiring, I got lots of energy and the good news is I've got plentiful interests and I suspect that there will be lots of opportunities. The most important part though you can rest assured about one thing; I am not competing with National Retail Properties in any way at all. For me, I have a large investment in the company and it's in great hands. So, Dan, thanks for your support.

Yeah. No problem Craig. Just one not last one on Gander here, did they pay rent for February?

Dan, it's Jay. We don't confirm whether any particular tenant paid rent for any particular month, but I can confirm that we haven't received any notification of any bankruptcy filing.

Okay. Thanks. Appreciate it. And just wanted to -- couple questions on Page 12, weighted average rent coverage is about 3.8 times, that's based on all the tenants listed on that page, is that correct?

This is correct.

So, it looks like you get about 80%, 79% of your tenants reporting store level financial. So, what does that stat look like if you included everybody?

Yeah, I don't have that in front of me Dan, but it wouldn't vary dramatically from the averages of the largest most impactful tenants.

Okay. And as we look at the range there on the high end, it there ability for you to maybe adjust those rents? You're getting really great coverage at seven plus times, it seems like you might be given a little pivotal on rent, is there any way you can recapture some of that, or is that just the fact that they're just high-performing stores?

Yeah, they're just high-performing stores and that the reality of our business again whether the coverage is super high or is on the low side what probably matters more to us to be quite honest is where is market rent. There are retail concepts that can afford to pay lots of rent, but that doesn’t change necessarily the market rent for that property, which is what's most important to us.

Okay. That's it for me. Appreciate it.

Thank you. Our next question comes from the line of Michael Carroll with RBC Capital Markets. Please proceed with your question.

Yes thanks. How do you guys think about the potential border adjusted tax? It seems like the portfolio is pretty well insulated, but does that change how you pursue additional investments?

Yeah, it obviously could have meaningful impact on particular retail lines of trade and so apparel might be among the chief of those and as you know we don't have hardly any of that in our portfolio and so it will impact it. I am a little reluctant to speculate on the tax reform. We're watching it and thinking about it, but what actually happened versus what gets discussed might end up being two different things but we're on it.

Michael, you're intelligent to focus in on that, but I think one of the ways to think about this is our mix of top 20 lines of trade and both Jay and I and our comments have emphasized small box retail, whether it's convenience stores, restaurants, automotive service, health and fitness, family entertainment centers, you go down the list, you will observe that we have very little exposure to that possible tax policy.

Okay. Great. Thank you. I appreciate that. And then what percentage of your investment activity is usually derived from new relationships first existing relationships?

Michael, hey it's Jay. That's an excellent question. When we develop a relationship with the retailer, what we see is that it perpetuates itself over a number of years. I looked at 2016 and of the 40 relationship retailers that we did business with, 11 of them were new, not that we didn't do any business with them in 2015. So, that's kind of a 25% rollover there or addition I guess in 2016. I don't have long-term historical numbers on that, but that feels like a little more than usual. We typically add a few relationships each year and have a few drop off. I will say that 40 -- doing business with 40 relationship retailers is the biggest year we've ever had for a number of relationship retailers and 100% of our dollars invested in the fourth quarter in 2016 were with relationship retailers and typically that percentage is more in the two thirds of dollars invested number.

Okay. Great. And then I guess finally for me, can you give us an update on the progress of the 30 bank branches that are coming back to you in 2018? I know it's still early, but do you have an idea of how you're going to reposition those assets?

Our leasing team is working on those right now. We have 31 SunTrust leases that will not be renewed in April 2018. So, we've got a little bit more than a year before the current rest stops on those properties and the rent on those properties comprises about 0.7% of our overall base rent. So again, just to keep that in perspective, it's very nominal amount in the big picture. Our leasing team is working on the assets and we're off to a very good start, but it's too early to report any material news yet. I think also maybe just one other factors that there's no effect on our 2017 numbers or guidance with respect to those 31 properties. Perhaps should also add that we are scheduled to sell 10 of the SunTrust properties back to SunTrust at the end of the first quarter of 2017. That transaction does look like it's on track and that's at a 5.65% cap rate.

Great. I appreciate it.

Thank you. Our next question comes from the line of Michael Knott with Green Street Advisors. Please proceed with your question.

Hey guys, good morning and Craig, congratulations. Quick one for you guys. Just another one on Gander if you don't mind, I am just curious I presume as you guys look at the situation in that space that you view that as probably one example in the portfolio of eCommerce disruption and just curious if that's the case if you feel like there will be similar challenges with the rest of your exposure to that space, which is very tiny apart from Gander. And then how you think about investing in that space potentially going forward. I presume it doesn't meet your small box retail guideposts.

Michael, let's touch on the last point first. We're primarily focused on small box retail and have built the portfolio that we've got, but there is room in our portfolio for larger boxes and we look at those deals all the time and Kevin mentioned that what we focus on a great deal is market rent when we're underwriting our acquisitions and so we would -- we will look at big-box deals and you may see us do some of those deals over time. But they will be thoroughly selectively underwritten. Sporting goods stores are to a large degree apparel stores and that's been a tough topline of trade for folks and that's what was difficult for sports authority and it's been difficult for Gander also this winter with not cold enough, long enough to generate the customer demand that sporting goods retailers were hoping for. All of that -- and we have very little additional exposure to sporting goods, maybe nothing or next to nothing, but we'll continue to look at big-box fields in any categories depending on the price, the rent per square foot and the market rent and that's what we'll use to evaluate whether it's the right risk-adjusted return for us.

Okay. Thanks, and then just as it pertains to 10/31, just curious if you have any thoughts on if that does go away, but OP units are retained in the tax quo just curious how you would think about utilizing that in the future potentially to the extent you did play in that space but you said you don't play a lot right now?

Yeah, the reality is for us 10/31 is -- really has no impact on the acquisition front and it comes into play occasionally on the disposition front meaning we're selling properties to a 10/31 exchange buyer. So, that at the margin, that's the only place it might come into play and it would not impact our desire or interest in up REITs or units etcetera. So, I don't think it will impact us in any way there.

And Michael, especially when you think about it, we specialize in lots and lots of small transactions $2.7 million average and try to create an up REIT issue OP units in that small dollar size. The complexity just isn't worth it given that there are so many opportunities that we evaluate.

Okay. Fair enough and then last one for me and just another tax reform question I guess, any thoughts in terms of how maybe the dueling interest I guess of interest deductibility versus immediate expense in the real estate could affect your business and tenant demand for leases versus tenants owning our properties etcetera?

Should we talk about this when we know what the policy is. We're speculating like everybody else. I'll be curious again what comes out because I don't know anyone's really thought through the first, second and third derivative impacts of some of the things they think about. You think about taking away interest deductibility. I hope they think that through and so that could have ramifications not forget REITs throughout the financial system and so I'm not sure how much of this will actually come into play. At the moment, I think tenants and what we say, we kind of have a little bit around this issue with lease accounting change and will that impact people if they had to keep the leases on about and to date it has not changed anyone's economic behavior from the leave changes and so we'll see how the tax policy plays out. But I have a feeling that sale-leaseback financing will remain a viable piece of the capital stack for a good variety of retail tenants.

Okay. Thanks.

[Operator instructions] Our next question comes from the line of Todd Stender with Wells Fargo. Please go ahead.

Hi thanks and Craig nice job all these years. We'll miss you. Just one question for me, most of my stuffs has been answered, the 10-year treasury moved just shy of a 100 basis points from the beginning of the fourth quarter till now. Much of that is really led to higher growth expectations, but what did you see as far as the transaction market just between buyers and seller expectations, any disruption there and then maybe you just call in on how you're seeing seller expectations here in early '17?

Todd, it's Jay. We saw very little disruption in that market. Again, our primary focus is on doing transactions with those 40 relationship retailers and growing that pipeline of business, but we didn't see deals coming around. We didn't see folks pulling the plug on transactions. Looking forward I think that there is -- it feels Todd like it's just going to be -- 2017 is going to be a whole lot like 2016 that there's going to be good properties out there for sale with willing sellers and competition if you're a buyer.

And I'll say too in one sense I like the choppiness in the capital markets whether it's equity or that market you're referring to because usually what happens is to the extent that carries on for a period of time, it creates a little more discipline in the marketplace for acquisitions and that's a better environment for us versus one where capitals is widely, widely available at crazy cheap prices. And so, we actually like it when things tighten up a bit in the capital market that forces a little more discipline in the acquisition market. So, it's better for us.

That's helpful and Kevin you nailed a 5.2% coupon on your preferred in October, what do you think that coupon would look like today?

Yeah, I haven’t really priced it down. I am guessing high-fives today. It got to low 6% recently. I think it might be in the high 5%, 6% range today would be my sense.

Great. Thank you.

Ladies and gentlemen, that does conclude our question-and-answer session. At this time, I will turn it back to Mr. Craig Macnab for closing remarks.

Audrey, thanks very much. We appreciate your interest. We look forward to seeing some of you at the City Show and best regards. Cheers.

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