NNN REIT - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 revenue was $226.8M, up 4.6% year over year and above Wall Street consensus; Core FFO/AFFO per share rose 1.2% YoY to $0.84/$0.85, while diluted EPS was $0.54. Versus S&P Global consensus, revenue beat by $2.41M*, and Primary EPS modestly missed (0.476 vs. 0.489)*.
• Guidance raised: Core FFO and AFFO per share midpoints up $0.01; acquisition volume lifted to $600–$700M; disposition volume now $120–$150M; real estate expenses (net of tenant reimbursements) increased to $17–$18M.
• Balance sheet catalyst: Post-quarter issuance of $500M 4.600% senior notes due 2031, repaid revolver; pro forma liquidity ~$1.4B; sector-leading weighted average debt maturity ~11 years; no floating-rate debt.
• Dividend catalyst: Quarterly dividend increased 3.4% to $0.60 per share, marking 36 consecutive annual increases.
• Investment activity: $232.5M acquired at 7.4% initial cash cap rate; ABR up 6.7% YoY; occupancy improved to 98.0%.

What Went Well and What Went Wrong

What Went Well

• Revenue beat and recurring cash flow growth: Revenues $226.8M (+4.6% YoY) with Core FFO/AFFO per share up 1.2% YoY to $0.84/$0.85.
• Strategic investment pace and pricing: $232.5M invested across 45 properties at a 7.4% initial cash cap rate, WALT 17.8 years.
• Liquidity and capital structure: Issued $500M notes due 2031 and repaid revolver; pro forma ~$1.4B liquidity, no floating-rate debt; CEO: “well-positioned to raise our 2025 Core FFO guidance and execute our strategy through year end.”.

What Went Wrong

• EPS vs consensus: S&P “Primary EPS” missed modestly (0.476 actual vs 0.489 estimate)*, while diluted EPS reported at $0.54; call out methodology differences.
• Higher operating drag: Real estate expenses net of tenant reimbursements raised in guidance to $17–$18M (from $15–$16M) reflecting vacancy carry and re-leasing costs.
• Occupancy still below prior-year peak: 98.0% at quarter-end vs 99.3% prior year as tenant resolutions continue, despite sequential improvement.

Transcript

Speaker 7

Good day, everyone, and welcome to the NNN REIT Inc. Second Quarter 2025 earnings. At this time, all participants are on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Steve Horn, Chief Executive Officer of NNN REIT Inc. Sir, the floor is yours.

Speaker 2

Thank you, Matthew. Good morning and welcome to NNN REIT Inc.'s Second Quarter 2025 earnings call. Joining me today on the call, Chief Financial Officer, Vincent H. Chao. As outlined in the morning's press release, NNN REIT Inc. continued to deliver strong performance for the first half of 2025. Notably, we've improved our balance sheet flexibility following capital markets activity, with a sector-leading average debt maturity of 11 years, solid acquisitions driven by our tenant relationships, and we published the third annual Corporate Sustainability Report. These results and actions position us well to continue enhancing shareholder value as we enter the second half of the year and beyond. Also, as usual, we always have to mention the dividend. In July, we announced a 3.4% increase in our common stock dividend, payable August 15.

This marks our 36th consecutive year of annual dividend increases, a milestone that places us among very few, less than 80 U.S. public companies and only two other real estate investment trusts to have achieved such a track record. Before we get into the operational performance and market conditions, I'd like to touch on a few key recent events. First, I'm thrilled to welcome Mr. Josh Lewis to the executive leadership team as our new Chief Investment Officer. Josh has been with the company since 2008 and has played a pivotal role from day one. Known for his prolific dealmaking ability and deep market relationships, Josh ensures that shareholder capital is deployed towards the most compelling risk-adjusted opportunities. I'm fully confident we have the right person focused every day on driving long-term value for our shareholders.

On the capital markets front, we successfully completed $500 million five-year unsecured bond offerings with a 4.6% coupon. In true NNN REIT Inc. fashion, the execution and timing of the deal in today's market environment were exceptional. More importantly, the transaction positions us strongly to continue executing our strategy moving forward. Given our continued strong performance, we are also pleased to announce an increase in our 2025 guidance for core FFO per share, now expecting to range between $3.34 and $3.39. This update reflects the consistency of our multi-year growth strategy and the discipline with which we pursue long-term shareholder value. Turning to the highlights of NNN REIT Inc.'s second quarter financial results, our portfolio, consisting of approximately 3,663 freestanding single-tenant properties, including 410 tenants across all 50 states, is performing well. Our leasing and asset management teams are operating at a high level.

During the quarter, we renewed 17 of 20 leases. Those renewals align with our long-term historical trend of 85%, give or take, while achieving rental rates 108% above prior rent. Additionally, the team successfully leased seven properties to new tenants at rates 105% above prior rents, reflecting strong execution and ongoing demand for our assets. As we sit here today, I feel good about the overall health of the portfolio. There isn't a single tenant that currently gives me concerns keeping me up at night. We've had ongoing discussions with analysts and investors over many quarters regarding @Home, which finally officially filed for bankruptcy this past June. Regarding our exposure, none of our 11 properties were included on the initial closure list. Additionally, @Home remains current on all rent for all 11 locations post-filing.

We feel positive about the long-term prospects for these assets as the company works through the restructuring. Acquisitions during the quarter, we invested just over $230 million in 45 new properties, achieving an initial cap rate of 7.4% and an average lease term of more than 17 years. Notably, eight of the 11 closings this quarter were with existing relationships, partners whom we do repeat business. For the first half of 2024, we invested $460 million across 127 properties, achieving an initial cap rate of 7.4% and an average lease term of over 18 years. Based on our strong transaction volume year to date, the robust pipeline of assets currently under LOI or in contract, and the high level of activity across our acquisition team, we have raised the midpoint for our full-year acquisition volume to $650 million.

As one of the original net lease companies in the public markets, we have successfully operated through a wide range of economic and competitive cycles. While private capital has increasingly entered the space, raising competition, particularly for large portfolio transactions, we have consistently demonstrated our ability to execute in a highly competitive environment. We remain committed to a disciplined and thoughtful underwriting approach, while continuing to emphasize acquisition volume through sale-leaseback transactions with our long-standing relationships. During the second quarter, we sold 23 properties, generating over $50 million in proceeds to be redeployed into new acquisitions. Year-to-date dispositions have reached 33 properties, including 14 vacant assets, raising over $65 million in proceeds. Importantly, the income-producing properties sold were not considered the gems of our portfolio, and we sold at approximately 170 basis points below our investing cash cap rate of 7.4%.

This reinforces the strength of our underwriting and our ability to extract value from the underperforming holdings. While the primary focus remains on releasing vacancies, where our leasing team continues to deliver strong performance, we'll continue to dispose of underperforming assets when there is no clear path to generating stable rental income within a reasonable timeframe. This disciplined approach supports portfolio optimization and enhances long-term shareholder value. Our balance sheet remains one of the strongest in the sector, supported by the sector-leading average debt maturity of over 11 years I mentioned earlier. With nearly $1.5 billion in available liquidity, we are well positioned to fully fund our 2025 acquisition targets and maintain flexibility for additional opportunities. The financial strength provides us with a significant competitive advantage as we continue to execute our growth strategy without the immediate need for external capital. With that, I'll turn the call over to Vin.

He'll walk through our quarterly results and provide more detail on the updated guidance.

Speaker 0

Thank you, Steve. Let's start with our customary cautionary statements. During this call, we will make certain statements that may be considered 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 are made. Factors and risks that could cause actual results to differ from expectations are disclosed in greater detail in the company's filings with the SEC and in its morning's press release. Now on to results. This morning, we reported core FFO of $0.84 per share and AFFO of $0.85 per share for the second quarter of 2025, each up 1.2% over the prior year period. Annualized base rent was $894 million at the end of the quarter, an increase of almost 7% year over year.

Our NOI margin was 98% for the quarter, while G&A as a percentage of total revenues and as a percentage of NOI was about 5%. Cash G&A was 3.7% of total revenues. AFFO per share for the quarter was slightly ahead of our expectations, driven primarily by lower-than-planned bad debt. Free cash flow after dividend was about $50 million in the second quarter. Lease termination fees, as footnoted on page eight of the release, totaled $2.2 million in the quarter, or about $0.01 per share. This quarter's fees were in line with our expectations and were primarily driven by the termination of an auto parts store and a full-service restaurant. The auto parts store is under contract for sale, and the restaurant has already been relet and rent commenced to another restaurant concept, highlighting our proactive portfolio management strategy.

From a watchlist perspective, @Home is the major news for the quarter. We have been flagging @Home as a risk for some time, and as we discussed on last quarter's call, we believe we have appropriately accounted for them in our outlook and expect the final resolution to be within our budget for the year. To reiterate what Steve said, none of our 11 stores were on the initial store closure list, and given the quality of our locations, we have already received inbound interest from high-credit retailers. Outside of @Home, there have been no notable changes to the watchlist. Turning to the balance sheet. Just after the quarter ended, we significantly bolstered our liquidity and de-risked our capital requirements for the rest of the year by closing on NNN REIT Inc.'s inaugural five-year $500 million unsecured notes offering at an attractive 4.6% coupon.

While this offering was earlier and larger than we were originally planning, given the positive market backdrop and strong investor demand, we decided to move forward with the deal. Pro forma for the offering, which closed on July 1, we had close to $1.5 billion of liquidity, no floating rate debt, and no secured debt. Our debt duration remained a sector-leading 11 years, even after accounting for the new issuance. Our balance sheet is a source of strength, and we will continue to look for ways to utilize this competitive advantage to support growth while protecting downside risk. Also, given the positive momentum in the stock that we experienced at the end of the quarter, we issued 254,000 shares at an average price of just over $43 per share, primarily through our ATM program, raising roughly $11 million in gross proceeds.

We will remain opportunistic in the equity markets and issue if and when we believe we can achieve an appropriate cost of equity relative to our deployment opportunities. On July 15, we increased our quarterly dividend to $0.60 per share, up from $0.58 per share previously, which equates to an attractive 5.6% annualized dividend yield and a healthy 71% AFFO payout ratio. As Steve Horn mentioned, NNN REIT Inc. has now raised its annual dividend for 36 consecutive years. The ability to grow the dividend through various economic cycles and black swan events is a true testament to the strength of NNN REIT Inc.'s platform and its strategy. I will conclude my opening remarks with some additional comments regarding our updated outlook.

We are raising core FFO per share guidance to a new range of $3.34 to $3.39 and AFFO per share to $3.40 to $3.45, each up $0.01 at the midpoint. This reflects our outperformance versus plan year to date, as well as updated assumptions over the balance of the year. We now expect to complete $600 to $700 million of acquisitions, up $100 million from our initial expectation. We are also increasing our disposition outlook by $35 million to a new range of $120 to $150 million. Lastly, you will notice that we increased our net real estate expense forecast, which is the result of delays in the expected timing of the release of certain properties as we balance the impacts on near and long-term earnings. Despite this headwind, we are still in a position to raise overall earnings guidance for the year.

From a bad debt perspective, we continue to embed 60 bps of bad debt for the full year into our outlook, which includes about 15 bps booked through the second quarter. As you update your models, there are a few other items to point out. As noted earlier, we booked $2.2 million of lease termination fees in the second quarter, which is well below the first quarter level of $8.2 million, but still above what I would consider a typical quarterly amount. Also, this quarter, we took some non-cash write-offs of accrued rent and below-market rent related to @Home that in total added about $660,000 of income to core FFO, which should be excluded from your forward run rates. These non-cash items had no impact on reported AFFO. With that, I'll turn the call back over to Matthew for questions.

Speaker 7

Certainly. Everyone, at this time, we'll be conducting a question and answer session. If you have any questions or comments, please press star one on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star one on your phone. Your first question is coming from Jeffrey Alan Spector from BofA Securities. Your line is live.

Speaker 3

Great, thank you. Just the first on the investment guidance, I know you raised it. It does suggest a slower pace in the second half. I just wanted to confirm what's driving that implied deceleration, whether it's market opportunities, which it sounds like are robust. You mentioned increased competition, capital allocation, or is it just some conservatism in the outlook? Thank you.

Speaker 2

Yeah, I mean, given what we did in the first half, I see where it suggests a slower activity. We don't have any visibility to the fourth quarter, so we don't want to get over our skis. Third quarter is feeling pretty good right now. Everything you mentioned, the heightened competition, overall the market seems fairly robust, but it's more probably being conservative.

Speaker 3

Thank you. If I heard correctly, it sounded that eight, in terms of the acquisitions, eight out of the 11 were existing relationships. Can you talk about the new relationships and maybe the opportunity set there?

Speaker 2

Yeah, I mean, we're not going to disclose, you know, the few that we didn't, that weren't relationships, but they were just our acquisition guys' calling efforts that have been going on for many years, and deal flow happened. They were in the auto service sector. We only consider a relationship as repeat business, so we have to close one or two transactions with you before you become, quote, a relationship.

Speaker 3

Jeff, just to add to that, to your point, I think in any business, you want to have a good mix of existing deal volume as well as new volume. The new relationships do open up additional opportunities in the future. We're hopeful that that can continue.

Speaker 2

Great, thank you.

Speaker 7

Thank you. Your next question is coming from Spenser Bowes Glimcher from Green Street Advisors LLC. Your line is live.

Thank you. I'm just curious if you could provide an update on the available assets, either being marketed for sale or trying to re-tenant. I know last quarter you mentioned there was significant interest for these properties from strong national and regional tenants. I'm just curious how that process has been going.

Speaker 2

Yeah, I mean, as you could guess, Spenser, primarily it was the former furniture store Badcocks and a fair amount of restaurants from the Frisch's assets. Frisch's was in business for 60+ years, so they had a lot of infill locations. That's where the strong demand is coming from. As a result, kind of convenience stores, car washes, collision repair. There's still a lot of demand for those assets. Just to give you an idea, we'd call it 64 assets at the beginning. 28 of them, we're working with the tenant on releasing. The remaining 36, four of them have been sold and/or leased. 24 of those assets, we are in active negotiations, and there's different levels or stages of those negotiations. Eight of the 36 is just limited activity.

We're seeing encouraging signs across those assets, specifically the 36, and we're kind of expecting the rent recovery to eclipse historical averages, which would be 70%.

Thank you, actually.

Yeah, and then as far as the Badcock furniture assets, we are kind of, we're outperforming our expectations on those. Just to recall for everybody, there were 35 of those assets. 19 of them have been resolved at greater than 100% rent recovery. 12 are currently pending and are tracking to greater than 100% recovery. There are four that there's work to be done. The reality is, if you took a downside scenario of just the four, our total recovery for the furniture is expected to be greater than 100%.

Thank you. That's very helpful. Just the last one, cap rates were in line with one Q. Can you just talk about what you're seeing this far in the three Q?

Yeah, in the first quarter call, I said second quarter was going to be pretty flat. Yep, we were right there. Third quarter, I'm really not seeing any movement either way. It depends on the mix of closings in the quarter. However, I think give or take 5, 10 basis points either side could happen.

Great, thank you.

Speaker 7

Thank you. Your next question is coming from Ronald Camden from Morgan Stanley. Your line is live.

Hey, this is Jenny over Ron. Thanks for taking my question. First is regarding your November 2025 debt maturity approaching. Can you talk a little bit more about your specific refinancing strategies and so forth? Thank you.

Speaker 0

Hey, Jenny, this is Vin. Yeah, so we looked at that. I mean, really, we did the $500 million deal on July 1, and that kind of pre-funded that refinancing. We are sitting on a bit of cash right now as we work through acquisitions. Ultimately, those funds will partially be used to repay the $400 million refinancing. We may be back in the market later in the year. If you just think about our normal cadence of acquisitions, based on the new $650 million of acquisition volume at the midpoint, at 40% debt, that's, call it, $250 million-ish of net new debt that we would need. We've pre-funded some of that with the $500 million. We may be back in the market for a smaller amount later this fall.

Perfect. Second one, regarding the average time from like a vacant property to be released, maybe talk a little bit more about how does this like timeline compare with your historical average of 9 to 12 months. Thanks.

Speaker 2

Yeah, I mean, the nine to 12 months is when rent starts coming in. We'll have activity within, you know, kind of 30, 40 days of marketing that asset. To sell it or release it, there's usually contingencies in the contract before they start paying rent. If it's a redevelopment, that's really when the nine to 12 months comes into play. We are seeing, I mean, kind of why I said we were outperforming our expectations with the furniture assets because it all moved pretty quick compared to historical averages. The restaurants are good locations, really good dirt. That nine to 12 months is still going to be the majority because there's redevelopment with the large regional operators.

Okay, perfect. Thanks so much.

Speaker 7

Thank you. Your next question is coming from Smedes Rose from Citigroup Inc. Your line is live.

Speaker 4

Thanks. It's Nicholas Gregory Joseph here with Schneeds. Maybe just starting on the bad debt. You talked about 60 bps of bad debt embedded in guidance, but only 15 bps thus far. You also mentioned that there's no tenants keeping you up at night. Just trying to kind of understand the kind of keeping the 60 bps for now.

Speaker 0

Yeah, hey Nick, it's Vin. I'll start and let Steve jump in if he has anything to add. Really, as we think about the bad debt, we booked 15. We've got 45 basis points to kind of play with, if you will. We are still dealing with @Home. It's in bankruptcy, so we don't exactly know where that's all going to shake out. We're pretty happy with the progress so far. We don't have anything on the initial closure list. As we've talked on past calls, we feel pretty good about the real estate and the rents that are embedded there, which are only $6.50 per square foot. We feel good about our position, but they are in bankruptcy. We have to keep some dry powder in case something goes against us on that front.

I think typically we do have between 30 and 40 basis points of bad debt in any given year. We've still got two quarters left to go. We just don't want to, again, just similar to our investment thesis, we're not trying to get ahead of ourselves in terms of bad debt, just knowing that there's @Home out there. Plus, there's always normal turnover.

Speaker 2

Yeah, none of the tenants are keeping me up at night, meaning any substantial tenants, just to reiterate what Vin said, we do deal with retailers. You know, 60 days from now, something might shift. It is prudent to leave some of the bad debt in there.

Speaker 4

That's very helpful. Thank you. Maybe just back to cap rates. You'd mentioned kind of capital coming in, chasing larger volumes. How is portfolio pricing relative to individual assets right now? Are you seeing that spread widen a bit?

Speaker 2

I would say I've seen the spread widen. I think with the new money coming into the sector, we've been doing this a long time, and we've seen competitors come and go. I still think there's a pretty good portfolio premium on certain deals in that $100 million to $200 million range, which is a nice bite, but there's a lot of capital chasing it. We saw a handful of portfolios go off in the $65 million, $67.5 million range, and that's probably the retail levels on the individual assets.

Speaker 4

Thank you very much.

Speaker 7

Thank you. Your next question is coming from William John Kilichowski from Wells Fargo Securities LLC. Your line is live.

Speaker 0

Good morning. Thank you. Maybe just on the composition of the guidance rates, how much of that was driven by the actual increase in acquisitions versus then, you know, you noted that termination fees kind of came back slightly more normalized, but still above what you all were expecting. I know you haven't given a specific number, but maybe if you could size that for us.

Speaker 1

Yeah, sure. Hey John, it's Vin. Just to clarify, in my prepared remarks, the $2.2 million that we booked in the quarter, we were expecting that. That was part of the plan. It was embedded in our guidance last quarter. My comment about the $2.2 being above, you know, it's above historical levels, but down from the first quarter. That was the point I was trying to make on the $2.2. As far as the upside in the guidance, there's a couple of moving parts there. You've got about half a penny of upside on AFFO, just a little less than that through the first half. You do have net net expenses going up by just over a penny. That's a headwind to the guidance. I think the balance of it really is investment-related, as well as the bond offering that we did.

We're seeing a little bit of downside, call it half a penny or so from the bond offering relative to our initial guidance. We're sitting on a bit of cash right now. We're earning a pretty good rate on it, but not the same as what we're paying on the interest side of things. There's a little bit of headwind there. Offsetting all of that is acquisitions, which, one, it's timing of acquisition. We've definitely been a bit ahead of our plan in terms of timing. On the flip side, on the disposition side, we typically, when we give guidance on dispositions, we're assuming income producing. If you look at it year to date, we've got about half of our dispositions that have been vacant. We're picking up a little bit from that as well.

Speaker 0

Got it. That's helpful. Maybe just from a composition standpoint, can you talk about the sectors that you're targeting on both the acquisition and the disposition side?

Speaker 2

Yeah, I mean, the disposition side, it's more communicating with individual tenants. For example, you saw that our Camping World exposure dropped by a couple because that's some assets that weren't performing for Camping World. They weren't in the long-term plan. We sold some assets back to them. That's good for NNN REIT Inc. and good for the tenant relationship. As far as acquisitions, I think going forward, the auto service sector still seems to be the most robust activity if it's M&A or growth. I think also we're starting to see some activity in the QSR restaurants.

Speaker 0

Very helpful. Thank you.

Speaker 7

Thank you. Your next question is coming from Michael Goldsmith from UBS Investment Bank. Your line is live.

Speaker 6

Good morning. Thanks a lot for taking my question. The leverage ratio ticked up a little bit during the quarter. Is that a function of just kind of the temporary to pay down the line of credit, or just trying to get a sense? Vin, now that you're running as the Chief Financial Officer, how are you thinking about just like a target leverage ratio or where you want it to, where you want the leverage to be for the business? Thanks.

Speaker 1

Yeah, hey Michael, thanks for the question. I think from a quarterly leverage level of 5.7, it ticked up a little bit from the first quarter. That really has to do more with the timing of acquisitions, dispositions. We did a little bit of equity in the quarter, but it's really the earlier acquisition timing. Part of our initial plan obviously includes the benefits of free cash flow. Because we're buying ahead of plan, that's causing us to have a little bit of a bump up in leverage here in the near term. In terms of longer term, how do I think about leverage? Lower is better, obviously. We would love to be operating, I would say, targeting less than 5.5 times.

To put exact ranges, it's hard to say, but certainly, if we were in the five-ish range, that would give us a little bit more capacity to kind of lean in when opportunities arise. I'd love to get it down below 5.5 here shortly.

Speaker 6

Got it. Just to throw it at you, Vin, you have done a five-year bond issuance here, so a little bit more shorter term than you've done in the past. Can you just talk a little bit about the benefits of that and how you plan to use that kind of, you know, use shorter-term debt going forward?

Speaker 1

Yeah, I think it really goes down to asset and liability management. If you look at our debt duration, it's around 11 years. Prior to this deal, last quarter was 11.6 years. If you look at our average lease duration, it's just under 10, so like 9.8 years. From my perspective, that means we have a little bit of flexibility on doing a little bit of short-term debt in the near term just to balance out those assets and liabilities. The other part of it is we look at our maturity ladder, we look at where we have holes. We did have a hole in that five, call it five and a half year period, really. It's a combination of where do we have holes in the maturity ladder and how are we managing our assets and liabilities.

Speaker 6

Thank you very much. Good luck in the back half.

Speaker 1

Thank you.

Speaker 7

Thank you. Your next question is coming from Richard Allen Hightower from Barclays Bank PLC. Your line is live.

Speaker 8

Hey, good morning, guys. Just a quick one from me. We just noticed, I think, quarter over quarter, the ABR that's on sort of a cash basis payment ticked up from the first quarter. Not so much year over year, but, you know, quite a sequential jump. Likewise, kind of a big jump in terms of the GLA on cash. My question there is, is that just related to @Home or is there anything else kind of in the moving parts there that we should be aware of?

Speaker 1

Yeah, hey Rich, that's almost all of that is @Home. If you recall, that was, we're up about a little over 1% quarter over quarter in cash basis ABR and @Home's % of our ABR. Obviously, a bigger % of our GLA getting inside of the boxes.

Speaker 8

Exactly. Exactly. That was a difference from the first quarter, just to be clear. Is that just based on timing around the bankruptcy filing?

Speaker 1

Correct, correct.

Speaker 8

Okay, got it. That's all I got. Thank you, guys.

Speaker 7

Thank you. Your next question is coming from Wesley Keith Golladay from Robert W. Baird & Co. Incorporated. Your line is live.

Speaker 6

Hey, good morning, guys. Just a quick question on the deal flow. Are you starting to see your partners get more active on their business now that they have visibility on taxes and potentially more visibility on tariffs?

Speaker 2

Yeah, I think it's a good question. I think there's better visibility on the tariffs and the conversations that we have with our tenants. I don't think they're quite there yet that they're ready to ramp up the pre, you know, levels going back to 2018, 2019. We are starting to see, you know, inquiries come in about funding new builds, kind of the one-offs here and there. However, we do see some M&A activity picking up where the buyers are able to underwrite the cash flow. Quality of earnings.

Speaker 1

Okay, just to add to that, I mean, Steve mentioned earlier that all auto services is pretty robust right now. I can't say with certainty that that's because of tariffs, but to the extent that it costs a lot more to buy a new car, I think it's logical to assume that that's going to help our auto services business on the repair side as well as auto parts, which is more of a self-help kind of thing, DIY.

Speaker 6

Yeah, that makes sense. While I got you, when we look at your, you know, call it nearly $900 million of annualized base rent, some of the Badcocks and the Frisch's that you resolve, how should we think about timing of commencement for some of that, I guess we call it, you know, sign-out open pipeline?

Speaker 1

Yeah, that's a good question. It's definitely not something that we track as closely as we did in the shopping center space. For the most part, most of the annualized base rent is commenced. We don't have a ton of signed-out open per se. Off the top of my head, I can't think of any major tenants that have not yet commenced that are not, you know, in that annualized base rent number we gave you.

Speaker 6

Great, thank you.

Speaker 7

Thank you. Your next question is coming from Omotayo Tejumade Okusanya from Deutsche Bank AG. Your line is live.

Speaker 4

Hi, yeah, good morning everyone. Steve, I was hoping you could just kind of walk us through again. I know you kind of mentioned no tenants are kind of keeping you up at night, quote unquote. I was hoping you could kind of talk through again some of the retail categories that are still kind of seeing pressure, whether it is competition, whether it's just concepts dying, whether it's tariffs, what have you. Just to get a couple of thoughts around restaurants and drug stores and even furniture and consumer electronics that may get hit by tariffs. How are you thinking about that? How do you kind of think about 60 basis points of debt maybe covering any of that risk?

Speaker 0

Yeah, hey Jay, it's Vin. Good to hear from you. I'll start maybe just with a lot specific type of commentary. It's a little bit easier than to talk a lot by lot. There are some areas that are probably more impacted by, say, tariffs and some of that uncertainty than others. Thankfully, most of our tenant base is either necessity or service-based. It's about 85% of our annualized base rent. Maybe a little bit less direct impact on tariffs and more of an indirect economic impact if there is any. As far as restaurants go, just like most retail, there's winners and losers all the time. You look at the Chili's that's just absolutely crushing it right now. Then you have others, Texas Roadhouse, others that are not doing quite as well.

I think it really is, do you have a compelling product offering that gets people back in the door? That's across not just restaurants, but there's definitely winners and losers throughout. I think as pressure builds on some of the weaker players, that does open up an opportunity for the better players to take share. We are seeing that. I'll give you another example. Camping World is one that, obviously it's a big tenant of ours. We didn't reduce the exposure this quarter, but if you look at their earnings releases and calls, they are seeing pressure on their ASP. They are seeing pressure on certain parts of their business, particularly the new business, but they have a very strong used business, right? They are leaning into the parts of the investor or the customer base that are active.

On net, they're still able to drive EBITDA and top line growth. It's just, can you adjust to the changing marketing conditions or not? I think it's not as simple as just saying, hey, tariffs are going to impact tenants negatively. On net, an entire line of trade is good or bad. Having said that, if we can get some more clarity on the economy, on tariffs, job growth, etc., and people can feel more confident in making decisions, then I think that's just a net good for all lines of trade.

Speaker 4

Thank you.

Speaker 7

Thank you. Your next question has come from John James Massocca from B. Riley Securities. Your line is live.

Speaker 0

Good morning. Apologies. This was already kind of addressed, but was there something specific that drove the increase in non-reimbursed real estate expenses? I mean, was that tied to maybe some of the former Frisch's properties and the timing you're thinking about with resolving those vacancies or even just making it some conservatism given that @Home situation? Just kind of curious why that picked up related to a specific tenant, and they kind of called it out a little bit in the prior remarks.

Speaker 1

Yeah, hey John, I think without calling out specific tenants, I think you're spot on. I mean, it's definitely a little bit slower resolution of certain vacant properties that we are dealing with. I think part of it is we are seeing a lot of good demand, so we have some options in deciding, hey, do we want to release it immediately, or is there maybe a higher credit or a better long-term value play that we can take that maybe takes a little longer to lease up, but ultimately ends up better for us and for shareholders. We've made some decisions to delay certain openings to, you know, again, try to come up with a better long-term solution.

Speaker 0

Okay. Does that indicate maybe, you know, in terms of resolving some of these vacancies, there's more of a leasing kind of angle you're taking or vice versa, maybe more of a disposition angle, and that's kind of what's driving the differentiated timing versus what you were expecting at one Q?

Speaker 2

Yeah, I mean, I think things are moving a little slower on a handful of the assets than you would like. That's just real estate, you know, if it's permitting process. I think you're probably right as far as timing. Leasing route on some of the assets, that is creating a little bit more carry cost than they originally thought. Again, in the big picture, it's a pretty small number as far as the impact on our financials. In the long run, it will create the most shareholder value.

Speaker 0

Okay. You addressed this a little bit earlier in the call with regards to kind of your philosophy, but when you think about maybe issuing debt on a five-year basis versus 10-year, is that something you're comfortable doing again? Given what you're seeing today, the maturity window, obviously it's pretty attractive from a pricing perspective. Just curious, given that's potentially some additional financing needed, if not later this year, then next year.

Speaker 1

Yeah, look, I think the guidepost here is not necessarily, hey, we want to have short-term debt or we're trying to get the lowest cost of debt. I mean, obviously it is cheaper on the shorter end of the scale, so that's a benefit. I go back to just trying to balance our assets and liabilities. If we've got 11 years of duration on the debt and we've got under 10 years of duration on the leases, there is a bit of a mismatch there. To some degree, I think that gives us flexibility to opt for shorter-term debt if it makes sense, with regard to all the other decisions we have to make and all the other factors we have to consider. Ideally, I'd love to be issuing longer-term debt on a consistent basis.

We do have a bit of a mismatch between assets and liabilities, so again, that gives me some opportunity to do some shorter-term debt here.

Speaker 0

Okay. I appreciate the color. That's it for me. Thank you.

Speaker 1

Thanks.

Speaker 2

Thanks.

Speaker 7

Thank you. Once again, everyone, if you have any questions or comments, please press star then one on your phone. Your next question is coming from Linda Tsai from Jefferies LLC. Your line is live. Once again, Linda, your line is live.

Hi, sorry. Maybe you alluded to this somewhat in your response to the earlier question. In terms of line items running slightly above the historical average, lease term fees and net real estate expenses, is your expectation these trends conclude by year-end or could it continue potentially next year?

Speaker 1

Yeah, on lease termination fees, Linda, I mean, I think historically we've talked about $2 to $3 million, but it's certainly been higher than that over the last, call it, two years or so. Part of that is, you know, we have been actively managing the portfolio and trying to look for, you know, opportunities to address problems before they come to a head. The dark bepaying and the sublease tenant lists, those are the ones that we kind of fish around for, for these lease terminations to try to address them. As we talked about on this call, the two biggest deals that we did this quarter, we had resolution for both of them by the time we did the lease termination fee. That's the kind of outcome that we're looking for. It might be elevated for, you know, the next year or so.

I don't think it'll be the same as the last two years, but it could be higher than the $2 to $3 million in the next year or so. In terms of the net real estate expenses, yes, I think we'd hope to, by the end of the year, be back to a bit more of a normal level of real estate expense net, which is, call it, $13 to $14 million on an average year. Obviously, you know, that grows every year from an inflationary perspective. That is our hope.

That's related to releasing some boxes?

Speaker 2

Exactly. It's just, you know, with the tenants that we're working with, just holding the assets a little bit longer, trying to maximize value over rent.

Makes sense. In terms of your ability to extract value from underperforming holdings, could you just give us some more color on how you achieve this?

I think it's discussions with our tenants, understanding as lease term is burning off, that they may not renew that lease at the end of the term. Sell whether there's some term in value to a potential investor, opposed to letting it go vacant where you're getting a % of a recovery. If there's some lease term, the income-producing asset, you can maximize value by selling it into the 1031 market. At the same time, you know, actively manage our portfolio, strengthening it in the long run.

Thank you.

Speaker 7

Thank you. That does conclude our Q&A session. I'll now hand the conference back to Steve Horn, Chief Executive Officer, for closing remarks. Please go ahead.

Speaker 2

Thanks for joining us this morning. NNN REIT Inc., we're in great shape for the remainder of the year, opportunistic, hopefully. We look forward to seeing many of you guys in person in the fall conference season. Take care. Talk to you.

Speaker 7

Thank you. Everyone, this concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.