NNN REIT - Earnings Call - Q4 2024
February 11, 2025
Executive Summary
- Q4 2024 was steady operationally: Revenues were $218.5m (+1.0% YoY; flat QoQ), diluted EPS was $0.52 (vs $0.53 YoY/QoQ), and Core FFO/AFFO per share were $0.82 (down from $0.84 in Q3 as occupancy dipped to 98.5% on Badcock/Frisch’s vacancies).
- 2025 guidance was initiated at Core FFO per share of $3.33–$3.38 and AFFO of $3.39–$3.44; plan assumes $500–$600m acquisitions, $80–$120m dispositions, G&A of $47–$48m, and elevated property expenses of $15–$16m due to vacancy carry.
- Balance sheet/liquidity remain strengths: zero drawn on the $1.2b revolver at year-end, weighted-average debt maturity 12.1 years, and net debt/EBITDA of 5.5x; free cash flow in 2024 was ~$196m, funding 61% of acquisitions alongside disposition proceeds.
- Catalysts: faster-than-expected re-leasing/resolution of Badcock/Frisch’s (management already re-leased/sold 35%+ of affected sites with attractive economics), and an active relationship-driven acquisition pipeline despite some cap-rate compression at the margin.
What Went Well and What Went Wrong
-
What Went Well
- Relationship-driven acquisitions at attractive initial yields: Q4 deployed $216.8m into 31 properties at a 7.6% initial cash cap rate with ~20-year WALT; >80% through relationships; portfolio-level disposition yield remained below buys (7.3% in Q4).
- Proactive portfolio management: Early outcomes on Badcock (11 stores re-leased/sold) imply ~113% rent recovery versus prior rent when reinvestment proceeds are considered, highlighting strong real estate positioning and capital recycling.
- Financial flexibility intact: zero revolver balance at 12/31, $1.2b capacity, 12.1-year WAM, and net debt/EBITDA 5.5x support 2025 external growth without heavy capital markets reliance.
-
What Went Wrong
- Occupancy declined to 98.5% (vs 99.3% at 9/30 and 99.5% at 12/31/23) due to the Badcock liquidation and Frisch’s non-payment/evictions in Q4, creating income downtime and elevated property expenses into 2025.
- Non-repeatable items: 2024 benefited from unusually high lease termination fees ($11.4m FY vs ~$3m five-year average), creating a headwind for YoY growth optics as this normalizes.
- Modest sequential downtick in per-share FFO/AFFO (0.82 in Q4 vs 0.84 in Q3) as vacancies hit, with management guiding 2025 property expenses net of reimbursements above normal ($15–$16m) before fading in 2026.
Transcript
Operator (participant)
Greetings. Welcome to the NNN REIT Inc. Fourth Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Steve Horn, CEO. You may begin.
Stephen Horn (CEO and President)
Hey, thanks, Holly. Good morning and welcome to NNN REIT's Fourth Quarter 2024 Earnings Call. Joining me today is the current Chief Financial Officer, Kevin Habicht, and our incoming CFO, Vincent Chao. As outlined in this morning's press release, NNN delivered 1.8% core FFO growth for 2024, alongside over $550 million in acquisition volume.
The year concluded with a strong 98.5% occupancy rate, while our dispositions of income-producing assets were executed at a cap rate 40 basis points lower than our acquisition yield, including several strategic and defensive asset sales. These achievements reflect the dedication and the expertise of our best-in-class team at NNN, positioning us well for the near term.
Key highlights I'm particularly proud of for the year: 35 consecutive years of annual dividend increases, maintaining a sector-leading 12.1-year weighted average debt maturity, and strategically positioning our executive team for the future.
Despite the overall theme of maintaining a light capital markets footprint for 2024, our core philosophy remained unchanged, delivering long-term value with below-average risk for our shareholders. At its simplest, our strategy focuses on a bottom-up investment approach, continuing to increase the annual dividend while maintaining a top-tier payout ratio.
FFO growth per share in the mid-single digits over multiple years. This disciplined approach drives our acquisition and disposition strategy, as well as our balance sheet management, ensuring we stay on track to achieve our objectives. Before diving into the market conditions and operational updates, I would like to formally welcome Vincent Chao to the executive team.
Vincent joins NNN in early January and officially assumes the CFO role at the start of the Q2. He brings extensive public company and investment banking experience with an expertise in capital markets, corporate finance, and investor relations.
I look forward to our partnership as we continue to grow NNN. And now to Kevin. After over 30 years of dedicated service, including four CEOs and over $5 billion of cash dividends paid, Kevin's commitment to excellence is an integral part of the fabric of NNN. His work ethic, leadership, and passion for doing the right thing have been consistently evident, leaving an indelible mark that is woven deeply into the very DNA of NNN.
Through every challenge, he has not only contributed to our success but has shaped the values of the culture that will continue to guide us long after his departure. His legacy is not just in the work completed, but in the principles and standards he's instilled to those who had the privilege to work alongside him.
With that, Kevin, on behalf of the entire company, the board, the analysts, and the investor community, we want to express our heartfelt gratitude and knowledge that you will be undoubtedly missed. As we move forward, as you move forward to the next chapter in your life, we wish you nothing but the best. This is when you kind of wish you, you know, record these phone calls.
Hey, as we move forward to the Q1 of 2025, NNN maintains a robust position. We anticipate another strong quarter of acquisitions and are making significant progress with the assets related to Frisch's and Badcock Home Furniture. Kevin will provide a lot more detail on the activities concerning these tenants during the upcoming remarks. Regarding the Q4 financial highlights, our portfolio now comprises 3,568 freestanding single-tenant properties, and they continue to perform exceptionally well.
Occupancy decreased to 98.5% due to the challenges with two specific tenants. However, this rate remains above our long-term average of roughly 98% plus or minus, and I anticipate the level increasing as the year progresses because, as we report today, I feel good about the remaining tenants in the portfolio and the activities the leasing team is generating currently.
In terms of acquisitions during the quarter, we invested $217 million in 31 new properties, achieving an initial cap rate of 7.6%, average lease duration basically 20 years. Over 80% of the capital deployed this quarter was allocated to our business relationship partners.
Additionally, the long-term projected yield on these acquisitions would be 8.8%, reflecting our preference for the sale-leaseback acquisition model opposed to purchasing existing shorter-term leases, despite they may offer higher yields. They don't align with the assessment of our optimal risk-adjusted returns.
Disposition activity was elevated this year, with nearly $150 million sold at a 7.3% cap. At the start of the year, as I mentioned earlier, the team identified several non-performing assets for strategic and defensive sales, leading to more of a compressed spread between disposition and acquisition cap rate compared to previous years. However, this proactive portfolio management enhances the overall strength of the portfolio as we move forward.
You need to go back over a decade to find an acquisition year with an initial cap rate higher than our 2024 deal flow. The current pricing for the pipeline coming in this quarter will be slightly tighter than the Q4 of 7.6%, and as I look ahead to the next few quarters, I expect pricing to compress a little bit further at the margins due to the heightened competition as market players push to achieve high acquisition volumes.
That said, I'm confident in our team's ability to identify and execute the right risk-adjusted deals to meet our 2025 annual objective. With that, let me turn the call over to Kevin for the final time to provide more color and detail on our quarterly numbers and 2025 guidance.
Kevin Habicht (EVP and CFO)
Great. Thanks. Thank you, Steve. As usual, I'm going to start with a cautionary statement that we will make certain statements that may be considered to be forward-looking statements under federal securities law, although 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.
Stephen Horn (CEO and President)
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. Okay. With that, headlines from this morning's press release report: quarterly core FFO results of $0.82 per share for the Q4 of 2024.
Kevin Habicht (EVP and CFO)
That's flat with year-ago results once you adjust 2023 results for the incremental accrued rental income that we noted in footnote one on the press release. AFFO results were $0.82 per share for the Q4, which was also flat compared to year-ago results. For the year, core FFO and AFFO were $3.32 per share and $3.35 per share, respectively, and that results in a 1.8% increase in core FFO per share results for 2024 and a 2.8% increase in AFFO per share.
These results were generally in line with our expectations and put us at the top of our previous guidance range. Results in the Q4 did include $1.2 million of lease termination fee income and for the full year of 2024, $11.4 million, which, as we noted throughout last year, is well above historical norms and was above our full year 2023's $2.4 million of lease termination fee income.
Also, in the Q4, 2024 G&A expense included a state franchise tax refund due to a retroactive change in Tennessee tax law that reduced G&A by $1.7 million to $8.7 million for the Q4 and to $43.3 million for the full year. And that represents 5.1% of total revenues for the year and 5.2% of total NOI.
Occupancy was 98.5% at quarter end, which, as anticipated, dipped 80 basis points for the quarter due to two failing tenants we talked about on last quarter's call, more about which in a moment. Our AFFO dividend payout ratio for the year 2024 was 68.2%.
That resulted in approximately $196 million of free cash flow, and that's after the payment of all expenses and dividends. We ended the quarter with $860.6 million of annual base rent in place for all leases as of December 31, 2024, which would take into account all the acquisitions and dispositions completed through year-end. So first, yeah, a quick update on our two troubled tenants, which we discussed last quarter.
First, Badcock Furniture, which was in liquidation. They completed their going-out-of-business sales, and in the Q4, rejected the leases on all 32 properties we had leased to them.
Prior to the Q4, those leases produced $5.2 million of annual base rent, and that was 0.6% of our ABR at the beginning of the Q4. Prior to rejecting the leases, Badcock paid us roughly half of what they would normally have paid us during the Q4. We've been working on plans to lease or sell these properties, and we've had a good start in that effort, given we just got possession of the stores mid-Q4.
So by year-end, we were able to release five of those properties at roughly our long-term average of 70% rent recovery, again with no TIs for our vacancy releasing. Additionally, we were able to sell six properties, generating net proceeds of $21.8 million, which, using prior Badcock rent on these properties, would produce a 5.1% cap rate on those dispositions.
So assuming we invested these sale proceeds at the Q4's 7.6% acquisition cap rate, this would result in generating 49% more rent on those stores than Badcock was previously paying us. If you combine the outcome of the five re-leased properties and the six sold properties, the rent recovery on those 11 stores is approximately 113% of prior rent.
Now, while these averages may not hold up for all Badcocks, we are off to a very good start in terms of economic outcome, as well as minimizing the downtime for this first batch of, or call it, 35% of our former Badcock stores. Next, second tenant of note is Frisch's. That's a Midwest Big Boy hamburger concept that's been around for several decades.
They only paid us half the rent owed us in the Q3 last year, and they paid us no rent in the Q4. We owned 64 Frisch's properties at the beginning of the Q4, which represented 1.5% of our annual base rent, or $12.6 million.
As you may recall, in this case, the tenant did not file for bankruptcy, so we had to go through the time-intensive process of getting back possession of the stores through evictions. We've initiated that eviction process for all 64 stores and, as of year-end, had possession of 33 stores. Of those 33 stores, we've released 28 of those stores to another restaurant operator.
Because we had a read on prior store sales for these properties, and also in order to speed up the leasing process on a large group of properties, we were willing to trade off some base rent for more potential percentage rent. So these 28 stores will produce approximately $2.8 million of annual base rent, but we will also get 7% of store sales above a fixed breakpoint.
That rent commences May 1 of 2025. At this time, we're not looking to articulate other lease terms, and as we have a number of other Frisch's to release, we will soon have possession of all the former Frisch's properties and are in full releasing mode on that batch of stores.
Bigger picture, and really the key point of the combined Badcock, Frisch's vacancy, you know, consistent with these early resolutions I just reviewed, we remain optimistic to, A, get them leased, re-leased, or sold more quickly than usual, and B, hopefully improve upon our typical vacant property rent recovery of 70% versus prior rent with no TIs.
We will provide further updates with Q1 results, but most importantly, when the dust settles on all of this in, say, 2026, we believe per share results should be impacted by less than 1% versus the prior rents we were getting from the original tenant. So a very modest impact on bottom-line results when the dust settles. Okay.
With that, switching gears, today we initiated our 2025 core FFO guidance at a range of $3.33-$3.38 per share, and 2025 AFFO guidance with a range of $3.39-$3.44 per share. Page eight of the press release gives you some details on the key assumptions underlying that guidance, and it includes $500-$600 million of acquisitions, $80-$120 million of dispositions, G&A expense of $47-$48 million, and property expenses net of reimbursements of $15-$16 million, which is higher than usual due to the Badcock and Frisch's vacancy.
Hopefully, we will have the opportunity to drift FFO guidance higher as the year progresses, as we have done in the past.
Moving to the balance sheet, we ended the year with no amounts outstanding on our $1.2 billion bank line, so we're in very good leverage and liquidity position as we roll into 2025. Our next debt maturity is November 2025, and our weighted average debt maturity stands at 12.1 years at year-end. Maintaining our light capital market footprint, we funded 61% of our $565 million of 2024 acquisitions with free cash flow of $196 million plus $149 million of disposition proceeds.
Net debt to gross book assets was 40.5% at year-end. That's down about 150 basis points from the year before. Net debt to EBITDA was 5.5 times at December 31st. Interest coverage and fixed charge coverage was 4.2 times for 2024, and as a reminder, none of our properties are encumbered by mortgages.
So we remain focused on working to appropriately allocate capital, which to us means ensuring we're getting what we believe are sufficient returns on equity while controlling risk through property underwriting and maintaining a sound balance sheet. Valuing equity adequately, whether that equity is produced by free cash flow, disposition proceeds, or new equity issuance, is at the heart of growing per share results over the long term, and it helps us not to confuse activity with achievement.
And Steve, thanks for your kind words earlier. In closing, I will say it's very bittersweet for me to be on my last quarterly earnings call. I think I've been on well over 100 of them. NNN is in very good shape, and its approach to navigating investment opportunities and capital markets is well ingrained in this institution.
So I leave you in the capable, very capable hands of Steve and Vin and the rest of the team here at NNN. Thanks to so many of you on this call whom I've known and worked with for many years and who have been gracious to tolerate my many issues.
These long-term relationships have made the journey for me much more enjoyable and satisfying. And as I've said a number of times this past month, the boundary lines of my life have fallen in pleasant places, and that has included my time and relationships in REIT world. It's been a great ride, and I can be nothing but thankful to the investor and capital markets community, and especially my colleagues here at NNN.
I will cherish the memories and welcome the opportunity to stay in touch. With that, Holly, we will open it up to any questions.
Operator (participant)
Certainly. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press Star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. One moment, please, while we poll for questions. Your first question for today is from Brad Heffern with RBC.
Brad Heffern (Managing Director)
Hey, good morning, everyone. Congratulations, Kevin. Hope you have a great retirement. Knowing you, I suspect you've been saving up for it, and welcome to Vincent as well.
For the AFFO guidance, I'm a little surprised that you're able to deliver this 2% growth just given the elevated lease termination from last year, the impact of Badcock and Frisch's. There's also this 4Q tax benefit. Is there some sort of offset to that that I'm not thinking of, or just any color you can give on the bridge that would sort of preserve that growth number?
Kevin Habicht (EVP and CFO)
Yeah, not in particular. We are having, I would say, somewhat better than expected kind of releasing outcomes or resolving our Frisch's and Badcock. That's all happening more quickly. Particularly, timing is of great value, as you know, in that process. And so that's been very helpful. But yeah, there's no other big major items to speak of.
Lease termination fees are always we don't give guidance, and they're always they're so difficult to give guidance on, and so that'll play out the way that plays out during the year. But yeah, nothing else to speak to of note. Timing is really critical. And we had a solid Q4 acquisitions, a solid second half of 2024 acquisitions, and that really accrues to the benefit primarily of 2025. And so all those things kind of add up to help push results along a little bit.
Brad Heffern (Managing Director)
Okay. Got it. And then maybe you didn't give this on purpose, but the $2.8 million for the released Frisch's, how does that compare to the prior rent on those stores? And then for the percentage rent, is that set at a level where you would expect to regularly realize that right away, or is that something that requires upside?
Kevin Habicht (EVP and CFO)
Yeah, yeah. So, fair question.
Yeah, the $2.8 million, I would call it roughly 50% of prior rent. And like I said, we were willing to take that kind of pain, if you will, on the annual base rent to get the benefit of what we think will produce notable potential percentage rent on those stores. And we had the prior store sales, and this was a way, again, for us to speed up the process. We just got these 33 stores back in the Q4, and we had them released in the Q4.
So it's very quick, again, with no TI. And so we saw material value in that part of the equation. And so because we had prior store sales, we're optimistic that we'll be able to achieve something north of our normal 70% rent recovery on releasing vacant spaces. We'll see how much better we can do than that, but we think there is upside there, so.
Brad Heffern (Managing Director)
Okay. Thank you.
Operator (participant)
Your next question is from Spenser Allaway with Green Street.
Spenser Allaway (Analyst)
Thank you. I'm just curious on the transaction front, what you guys have been seeing in terms of 4Q activity and then 1Q, just as it relates to the mix of portfolio deals versus one-off, anything that you're doing outside of relationship deals.
Stephen Horn (CEO and President)
Yeah. I mean, outside the relationship deals, there hasn't been much large-scale portfolios for our market. It's been a little bit slow. That's why we've been mining 80% of our deal flow in the Q4 was through the relationships, which one of the transactions was pretty notable, which did not get marketed just as a direct deal.
Q1 is looking pretty good right now, but it's what I would call doubles, kind of that $20-$30 million deal range. We're not seeing the $150-$200 million deal. Now, there is one potential large portfolio coming out, kind of in the family entertainment space that we're aware of, but it's a little early to say the pricing on that right now.
Spenser Allaway (Analyst)
Okay. And then, Kevin, yes, congratulations. We will miss you. One just last one for you. Has anything changed since last quarter just in terms of the amount of credit losses being underwritten for 2025?
Kevin Habicht (EVP and CFO)
Yeah, not materially. So in our guidance, and I might have should have added this into the comments on the last question from Brad, was for this year, we've assumed 60 basis points of rent loss. Historically, we've been more in the closer to 100 category.
We typically don't experience that level. So we think we've got enough baked in for credit loss for this year. We don't really have any other tenants in the immediate horizon that it feels like we have real exposure to in terms of credit loss. A, and B, that 60 basis points, obviously, any pain from Badcock and Frisch's is above and beyond that 60 basis points. Let's put it that way if folks are wondering. And so yeah, we think we're in good shape on that front and, like I said, are not pointing investors to any other notable concerns at the moment for tenant credit.
Spenser Allaway (Analyst)
Great. Thank you.
Kevin Habicht (EVP and CFO)
Yep.
Operator (participant)
Your next question for today is from Michael Goldsmith with UBS.
Michael Goldsmith (Analyst)
Good morning. Thanks a lot for taking my questions, and congratulations, Kevin, on a wonderful career.
Kevin Habicht (EVP and CFO)
As a going-away president, I'll ask you to walk us through kind of what you've baked into your guidance for Frisch's and Badcock's related to the timing of releasing and recovery rate for 2025. Thanks.
Yeah. And in my usual way, I'll be sufficiently elusive because it's a work in process and progress, I should say. And so it's unfolding as we speak. The only thing I can say is we've remained, historically, over the years, releasing something in nine or 12 months was kind of normal and typical. It's going along more quickly than that on both Badcock and Frisch's, as evidenced in the Q4, and that continues into the Q1. I mean, I don't have a lot of details to kind of give you on that releasing effort.
Like I say, it's very current, and it's just tough for us to put a hard stake in the ground on that as we speak. But it's only to say it's going better than normal in terms of timing as well as economic outcomes.
Michael Goldsmith (Analyst)
So just to clarify that, right, so we should assume that you're baking in something better than historical of the 9-12 months and the 70% recovery rate, but the rest is, I guess, kind of you're not giving anything else beyond that.
Kevin Habicht (EVP and CFO)
Yeah. No, we're in a state of flux until we get some of these pinned down, but we've got a number of deals in the hopper working, and we'll see how that all shakes out. But the process and our guidance has the opportunity to drift higher, hopefully, throughout the year if we can improve upon things.
Michael Goldsmith (Analyst)
Got it. And then on the 60 basis points of credit reserve for 2025, right, lower than what you've seen historically or what you typically bake in at 100 basis points, maybe you can just provide some context in terms of what's the long-term average for that and how that 60 basis points compares to it, just to put some perspective because you just went through two large events, and now you're reducing what you're baking in for the year. So I'm just trying to understand.
Kevin Habicht (EVP and CFO)
Yeah. Fair question. Yeah. Absent, which was a highly unusual two tenants simultaneously going away, which that was 200 basis points. And so historically, our credit loss typically runs in kind of the 30 to 50 basis points kind of range.
And so there is some assumption on our part that we've got two of our biggest credit concerns out of the way in some respects and resolved outside of that 60 basis points that we really don't need 100 in our guidance. And so we, frankly, hope that there's maybe a degree of conservatism in the 60 basis points given our historical averages and, like I say, having cleared out two of the weaker links, if you will, in our tenant credit.
Michael Goldsmith (Analyst)
Got it. Congrats again.
Kevin Habicht (EVP and CFO)
Thank you.
Operator (participant)
Your next question for today is from John Kilichowski with Wells Fargo.
John Kilichowski (Analyst)
Good morning, and congrats again, Kevin. Maybe if we could start, just kind of go back to the transaction market here and just talk about how deal flow looks at this point versus maybe this time last year.
I know you talked about it sounded like elevated deal flow, but also elevated competition. Maybe how do you think that that can manifest in changes to your acquisition guide near the low or high end, or if there's room to maybe push above the high end? And then when you talk about that elevated competition, who is that, and what are the returns that they're looking for?
Stephen Horn (CEO and President)
Yeah. No, that's a good question, John. As far as our guide for the year, historically, we've beaten our guide over many years. Just the visibility is only 90 days for the transaction market. So we're conservative, so we usually start on the lower end. What I know is pricing in the Q1, I'm confident we have a good start to that guide for the year. The market is elevated as far as deal flow compared to last year.
Last year, when we came into the year, it was more of a capital markets issue that we didn't want to access the equity market. So we set our expectations for the year on the lower end to primarily use the free cash flow to fund acquisitions. As far as competition, I've been doing this 20-plus years. Kevin's been doing it 30-plus years. It's always a competitive market. It's just the names have changed.
There's only a few of us that have been around that long. Now, as far as there's some private money coming back into the market a little bit, but their return expectations are a little bit higher. But more importantly, the amount of money they have to deploy into acquisitions is significantly higher than ours.
So they are going to go after what we would call the elephant deal flow, not the antelope deal flow or base hits. So they really don't play in our world. And again, 80% of our deal flow came from relationships, which we have a pretty good moat around that to avoid competition playing in our field.
But no, overall, I feel good sitting here today on the call as far as the activity, what's in the pipeline, what our team is evaluating. And there's no deals our competitors have done that we did not see. So until then, I know our acquisition guys are doing the right thing.
John Kilichowski (Analyst)
Great. And appreciate the analogy. And maybe if we could jump to rent coverage levels. I know they're not provided, but if you can kind of give any color on how those are trending within the portfolio, maybe particularly in the car wash and QSR space where we've heard of some pressure anecdotally.
Stephen Horn (CEO and President)
Yeah. I mean, well, let's just address the car wash space. NNN does a fabulous job meeting with management teams. We view ourselves indirectly as an investor in the company. So we meet with all the management teams, hear their game plan. I can argue that we institutionalized the car wash business doing sale-leasebacks back in 2005 when we initially started with Mister Car Wash, our number two tenant. So we have a fair amount of experience, and we have zero ZIPS. And that's kind of the recent headline in the car wash industry. Our car wash is just Mr.
wash, year-over-year, rent coverage went up. It's north of four. And the other car washes that we've been doing, kind of in the two-and-a-half to three-and-a-half range, and they're performing well. We're highly selective when we do car washes, that we actually, for the most part, shut it down in the Q4 and let things kind of stabilize. QSR, we're kind of seeing sales flat for the most part.
They're still trying to absorb the labor issues where their margins got compressed. But overall, I'm comfortable with our QSR exposure, and there's no tenants that we're concerned with on the QSR or car wash side of things currently.
John Kilichowski (Analyst)
Great. Thank you.
Operator (participant)
Your next question is from Farrell Granath with Bank of America.
Farrell Granath (Analyst)
Hi. Good morning. This is Farrell Granath.
I want to say congratulations to both Kevin and Vincent for your next chapters in your life. But I also wanted to ask about the type of demand that you're seeing for both the Badcock and Frisch's assets. Are you receiving a lot of inbounds, and are they within the same industry verticals?
Stephen Horn (CEO and President)
We're seeing a ton of interest on the Frisch's and a fair amount on the Badcock, as Kevin addressed kind of in his remarks. We're doing really well with the Badcock, but it's a portfolio, and the easier assets to sell are the good ones, and they go first. So our team has some work to do as we move through the process. As far as industries, yeah, you're getting a lot of restaurant interest, and it's not only casual dining. There's QSR, again, back to car washes.
There's a fair amount of car wash interest and auto service. So it's across a wide range because the reality is there are 5,000-6,000 sq ft boxes on an acre and a half. There's a lot of tenants that like that use. I would be concerned if they were 20,000-30,000 ft boxes. That makes it a little more challenging to release. But a small restaurant on an acre and a half, well-located, hard corner, there's a lot of users for those.
Farrell Granath (Analyst)
Okay. Thank you, and I also wanted to comment on the 60 basis points. I know we've been harping on it a little bit of the credit loss assumed in guidance. I know you made some commentary about there's no near-term tenants that are raising a concern, and that was also a factor in the reduction. But do you still maintain a credit watch list, and is there a certain percentage of ABR that's associated with that?
Kevin Habicht (EVP and CFO)
Yeah. Yeah. Those who know me well, I'm perpetually worried about a lot of tenants, always, but none rise to the level that influence our thoughts around what credit loss might be for this year. And so, yeah, we've talked about names over the years. We don't need to really talk as much about Frisch's and Badcock anymore, but At Home's been one that we've thought about and still watching, very leveraged.
AMC, of course, has been on the list, but to be quite candid, we've passed the point that they seem to have found. A, their business is getting better, and so the fundamentals are better, and B, they're perpetual issuers of capital that has kept landlords very happy, and I have really no near-term concerns about their ability to pay us rent in 2025.
And so the ones that remain on the list, and there's a number of them. A, they generally are not larger exposures, and B, I don't feel like they're imminent kind of at risk of not paying rent. But we think the 60 basis points should comfortably handle whatever exposure we have on that list.
Farrell Granath (Analyst)
Thank you so much.
Kevin Habicht (EVP and CFO)
Yep. Thank you.
Operator (participant)
Your next question for today is from Smedes Rose with Citi.
Smedes Rose (Analyst)
Oh, hi. Thanks. I just wanted to follow up.
You mentioned that you might see or there might be a larger portfolio of family entertainment assets coming. Is that something that you—I mean, I guess price-depending—but is that an area that you would be interested in increasing your exposure to if it were to come to market at a price that is reasonable to you?
Stephen Horn (CEO and President)
Yeah. Making sure everything fits in our underwriting philosophy, price being important. Yeah. If the economics make sense, but more importantly, the real estate fundamentals make sense, it's something we would look at and do it. Now, the question is, at the start of the year, as you know, Smedes, people are coming out with guidance and get overly aggressive on acquisitions.
If I had to do $1.5 billion, I'd probably have this answer a little more confident, like, "Yeah, absolutely, we would do it." But with the guide trying to do kind of that, "It's $500 million-$600 million," we get a little bit more conservative on the underwriting, and our box gets a little bit tighter. And I think that's kind of proving out with the Badcock and the Frisch's on our releasing efforts.
Smedes Rose (Analyst)
Right. I just wanted to ask you kind of big picture too. It sounds like you expect kind of a slight sort of maybe downward bias in cap rates over the course of the year, given some of the things you've talked about. I mean, so does this sort of imply, I guess, that the spreads for you are compressing a little bit? And given elevated debt costs, how are you kind of thinking about your investing spreads at this point?
Stephen Horn (CEO and President)
As far as the cap rates, yeah, I mean, at the margin, I'm seeing them go down. Is it 10-15 basis points? But that's just a result of having to win deals, and our competition is going to drive them down. But as far as looking at spreads, Kevin, do you want to answer it?
Kevin Habicht (EVP and CFO)
Yeah. I mean, it's our typical 60/40, roughly, equity and debt. And the way we think our debt, long-term 10-year debt today for us is around 5.5%. So that's called 40% of the equation. And then the way we think about equity when we're making these kind of capital allocation investment decisions that we've historically—we've burdened our equity internally at about 8.5%. And so that creates a weighted average cost of capital hurdle.
We don't need a spread above a hurdle in the low sevens. And so as long as we're kind of operating in that low to mid-seven range, we feel like we're producing sufficient returns to shareholders and returns on equity to allow to consider making capital allocation or investment.
Smedes Rose (Analyst)
Okay. I appreciate it. And I wanted to ask you just one quick one. We've just seen some negative headlines around Denny's, and I was just wondering, is that sort of showing up on your screen at all? Sorry for asking which ones you own and which ones they're talking about. And just is that on your watch list, or?
Kevin Habicht (EVP and CFO)
Yeah. We own some Denny's. I will say, again, which is critical for us, is the price per square foot that we own those stores at, and therefore the rents on those stores are very attractive.
Some of them are operated by franchisees of Denny's. And so, yeah, sometimes it's hard when you're looking at headlines to appreciate kind of whether that's particularly applicable to us or not. But yeah, the chain Denny's has been struggling for a while, don't get me wrong. We've been watching that for a while, but we feel like our locations and particularly the rents on our locations are at levels that we're not too anxious about.
Smedes Rose (Analyst)
Okay. Thank you very much.
Stephen Horn (CEO and President)
Yeah. Real quick, Smedes. Our Denny's, for the most part, were bought in 2006. Yeah. Yeah.
Smedes Rose (Analyst)
Got it. Okay. Thank you.
Operator (participant)
Your next question is from Ronald Kamdem with Morgan Stanley.
Ronald Kamdem (Analyst)
Hey. Congrats, Kevin and Vin. Just two quick ones. One, obviously, is just on the bad debt.
And I'm sure as you guys sort of thought about the guidance for this year, you debated whether it was 100 basis points like historical or going with 60. I'm just wondering what sort of got you comfortable to be able to put this number out. The CFO transition's happening.
It's still early in the year. Is it literally just because the two bankruptcies went through, or is it because January's going better? Just try to give us a sense of what got you the comfort to go out with the 60 basis points here versus 100 basis points historical. Thanks.
Kevin Habicht (EVP and CFO)
Yeah. Well, A, historically, we've not ever really used the 100 basis points. It's more been kind of that 30 to 50 kind of range, and so that's part of it.
But two, to your point, yeah, some of the deadwood is cleared out already, and the near-term most acute credit concerns are accounted for elsewhere, if you will, outside of that 60 basis points. And then lastly, then layered on top of that, we just don't have any particular tenants that we have immediate concerns about. And so all those things made us comfortable to do that. And so that's how we got there.
Ronald Kamdem (Analyst)
Great. And then my follow-up question, which is a quick two-parter. One is just I think you talked about releasing the boxes are probably happening faster than you expected. Can you talk about sort of the mark-to-market on rents as number one? And then number two is just on the debt coming due this year. What are the plans for that, and where do you think you could issue? Thanks.
Kevin Habicht (EVP and CFO)
Yeah. In terms of, I'll speak to the debt first. Just, yeah, we think 10-year debt for us today is around 5.5%. That maturity is not till November, and so we have a good bit of flexibility in deciding where to actually execute a transaction to refinance that debt. And obviously, along the way, we could always hedge some of that or lock in some of that interest rate risk ahead of time if we wanted to.
But historically, we've not given guidance on capital markets activity, so I don't have much more specific than that. As it relates to releasing spreads on the Frisch's and Badcock, well, I mean, the initial round of Badcock, if you look at the releasing, which the lease portion was close to our typical 70% kind of number, but if you layer in the dispositions on Badcock, that was well above.
You reinvest those sale proceeds at kind of our mid-seven kind of acquisition cap rate. You end up with rent well above 113% combined for the release and the disposition sold Badcocks. So that's going very, very well. As I said, we don't expect that likely to hold up at those levels, but the early indication for the first 35% of our Badcock exposure is going very well.
So we're encouraged about that. On the Frisch's, I think it'll be more of the same. In the first big batch, we took. We're willing to take a little bit of pain on annual base rent, and we'll capture more potential rent from percentage rent upside there. So we think we can get back to equal to or better than our historical 70% kind of number.
We know what the store sales were at those locations previously, and we know that given that the company went out of business, maybe they weren't run the best that they could have been. And so we're optimistic about that. But we think timing will go faster than typical for us, and we remain optimistic that at the end of the day, we can improve upon our 70% recovery.
Ronald Kamdem (Analyst)
Great. Thanks so much.
Operator (participant)
Your next question for today is from Rich Hightower at Barclays.
Rich Hightower (Analyst)
Hi. Good morning, guys. And again, congrats to Kevin on a great career in REITs, and congrats to Vin on the incoming into that seat.
Obviously, covered a lot of ground on the call this morning, but I want to go back, and I must have missed this, but on the releasing of the Badcock space in particular, did you guys mention maybe the retailer-tenant mix that is occupying that space or what that looks like? And then I've got one follow-up after that.
Stephen Horn (CEO and President)
Yeah. No, we didn't mention the retailer mix. There's actually a couple of them on the releasing. We're home furniture tenants. And then the other releasing aspect, Kevin's making the assumption, we sold those assets and then redeploying the sales proceeds at a 7.6% as far as the recapture rate.
Kevin Habicht (EVP and CFO)
But yeah, it's coming from a variety on the Badcocks, it's a variety of uses. We've seen interest from kind of medical kind of space, and so it's a plethora. It's a plethora, yeah. Some hardware. It's a real mixture of uses for that box is 17,000 sq ft. Our rent was $9 a sq ft from Badcock, and so it's sufficiently fungible, and we think we can end up with a reasonable outcome there on the releasing efforts.
Rich Hightower (Analyst)
Okay. Great. I'm going to make sure to put potpourri in my notes here.
Kevin Habicht (EVP and CFO)
Potpourri. It's a big seller.
Rich Hightower (Analyst)
Yeah. And then just a quick follow-up as I kind of scroll through the top tenants list. I mean, I appreciate the fact that maybe no immediate watch list worries as you guys have articulated on the call so far. But if I think about Mr. Car Wash, Dave & Buster's, Camping World, and I just look at the equity values of all of those companies, some of which are coming off of maybe a post-COVID high, and the car wash business is kind of its own separate category.
But is there anything differentiating about your locations in particular that makes you less worried than perhaps the average location in the portfolios generally for those companies?
Stephen Horn (CEO and President)
Well, I mean, Mr. Car Wash, we primarily did in 2005, 2006 timeframe, a long time ago. And our cost basis in those assets, and as I've mentioned earlier in the call, is extremely low, but the rent coverage on the property level is north of four at the Mr. Car Wash exposure. So very comfortable with those assets.
Because Mr. Car wash is a true operator of car washes. Unlike, there's a lot of entrants in the car wash where private equity money flocked. So they were maximizing proceeds so they didn't have to put any equity in the deals. Camping World, I would say over the years, we've done business with them for a long time, and we've culled the portfolio with management of substitution or dispositions to ensure that we have the assets that they want to operate in the long run.
And it's kind of the same as with Dave & Buster's. We've been doing business with them for a long time, and that business is at the asset level, our cost basis has been holding up.
Rich Hightower (Analyst)
Okay. Great. Thank you.
Operator (participant)
Your next question is from Rob Stevenson with Janney.
Rob Stevenson (Analyst)
Good morning, guys. Kevin, you talked about the revenue from Badcock and Frisch's, but can you talk a little bit about any material elevation of expenses that you guys are getting hit with today that might burn off over the course of 2025?
Kevin Habicht (EVP and CFO)
Yeah. Yeah. Fair question. Yeah. So yeah, you notice in our 2025 guidance, the net property expense number of $15-16 million is probably $4-5 million higher than what I would think of as kind of normal for triple-net in most years. And so you can attribute pretty much all of that related to Badcock and Frisch's. So yeah, as you roll into 2026, yeah, that should fade away. Yeah.
Rob Stevenson (Analyst)
Okay. That's helpful. And then are you guys expecting to put you talked about releasing the Frisch's without any CapEx. Are you expecting to put any material amount of money in the Badcock assets or anything else in the portfolio in 2025 from a leasing or from a development redevelopment standpoint?
Kevin Habicht (EVP and CFO)
We always consider it, but you know our predisposition is. We'll trade off lower rent for no TIs generally. That's not an absolute rule. Will there be some property or two or three that we make the decision that's the best economic decision to make?
So we may put some in, but it shouldn't be a large number in the scheme of NNN size. And so yeah, I don't think we're going to waver too much from that. But there might be a little bit more repairs and maintenance, a little bit. Some of that will flow through property expenses rather than TI CapEx.
But yeah, we're inclined to not think there's a whole lot of value in TI's, but from time to time, we'll consider it. And if it fits in the equation, if you will, in terms of what we're going to get in rent and what the alternatives are, we may pull the trigger on some of that.
Stephen Horn (CEO and President)
But as we sit here right now, Rob, there's no deals in the pipeline that require any significant TI.
Rob Stevenson (Analyst)
Yeah. Okay. And then, Steve, other than the Kent Kwik stores, any major concentrations in the Q4 acquisitions that you guys did?
Stephen Horn (CEO and President)
No, it was Kent Kwik was the primary one. And just to kind of give you a little bit of color, that relationship goes back as far as the first deal we closed was 2019, and we did a little bit 2019, 2020, or 2020.
And then two years later, they did an M&A opportunity in Florida, which we helped finance that. And then we did a fairly substantial sale-leaseback in the Q4 with them. So it's just a relationship that we've maintained for a long time. And then the other one was Super Star Car Wash that rolled into our top 20. That was just some reverse build-to-suit stuff we had in the pipeline over the year that completed in the Q4.
Rob Stevenson (Analyst)
Okay. And then, Kevin, as my going away present for you, one last one here. You talked about the lumpiness of term fees. Anything known in 2025 thus far, either received or known of any materiality?
Kevin Habicht (EVP and CFO)
Yeah. I mean, not that we are giving any kind of guidance on, and so that's I mean, which we don't. We've historically not.
Historically, so the answer is we're not, yeah, putting out any guidance on that front. But historically, for us, we generate about $3 million a year historically of lease termination fee income. So I expect there to be some. It's a bit of a wild card as to knowing the amount and the timing for that over the course of a year, which is why we don't give guidance.
Rob Stevenson (Analyst)
Okay. Thanks, guys. Have a good day.
Kevin Habicht (EVP and CFO)
Thanks, Rob.
Operator (participant)
Your next question is from Alec Feygin with Baird.
Alec Feygin (Analyst)
Hi. Congrats, Kevin. It was a pleasure to work with you, and also congrats, Vin. Excited to work with you. Kind of to go off the last question on the termination income, is there anything assumed in guidance on that front?
Kevin Habicht (EVP and CFO)
Yeah. We always have a general assumption in there for lease term.
Like I say, normal for us is $3 million a year, and we've made some assumptions for that in guidance. But like I say, we don't publish that because, to be candid, we never know precisely where that's going to end up ourselves. And so we're reluctant to kind of go out in public and put a stake in the ground on that number, so.
Alec Feygin (Analyst)
Fair. And then does the non-reimbursed expense guide assume additional leasing of the recently vacated assets?
Kevin Habicht (EVP and CFO)
Yeah. Yes. It had some in there, but the expenses will hit if you're talking about the non-reimbursed property expenses, the guidance of $15 million-$16 million, that should be fairly steady throughout the year. I mean, I think it's probably a little bit more front half loaded and a little less second half loaded going from memory.
But just as we get things leased up, then some of those property expenses become the tenant's obligation. But yeah, that's all loaded into our thoughts around getting these properties resolved, sold, or re-leased.
Alec Feygin (Analyst)
Got it. Thank you.
Operator (participant)
Your next question is from Linda Tsai with Jefferies.
Linda Tsai (Analyst)
Hi. Thanks for taking my question. Congratulations, Kevin. You have a lot of fans and will be missed, and congrats to Vin too. The increase in G&A guidance, you highlighted a one-time benefit from last year, but you're also good at cost control. Do you think there's some room on that G&A guidance to come in lower? And then, Kevin, is there a charge for your retirement embedded in that range?
Kevin Habicht (EVP and CFO)
Yeah. So the way we've handled executive retirements, we have a separate line item for that. And so whatever cost involved with Kevin will be in that line item.
To answer your question, it's not in G&A. I guess the one thing to keep in mind on G&A is 2024's actual number came in at, where are we? $44.3 million. And so to normalize that, you really need to add, if you will, that $1.7 million that would take it up to $46 million. And so compare the $46 million to our next year guide, 2025 guide of $47-$48 million is the way I would kind of think about it. So there's kind of a general inflationary increase in that number. But again, as a percent of revenues, it's not moving materially.
Linda Tsai (Analyst)
Thanks. And then just one other one. Any thoughts on how dollar stores are thinking about their store expansion plans these days?
Stephen Horn (CEO and President)
No. Like I said, Steve, we don't do much with the dollar stores. It has nothing to do with the business model.
It was just always primarily the real estate. But over the years, they've been one of the big expansion groups for the net lease business. But yeah, we don't regularly call in the dollar store corporate and/or developers. So don't have much insight for you there.
Operator (participant)
Thanks. Your next question for today is from John Massocca with B. Riley.
John Massocca (Analyst)
Thank you for taking my questions. And Kevin, thank you for taking all of our questions over the many, many years. Just kind of looking for a little color maybe on the outlook for 2025 lease expirations. Anything notable that stands out? And I guess you're kind of expecting the typical recovery rate on rent that's expiring.
Kevin Habicht (EVP and CFO)
Yeah. I think it should play out typically. I think we're a little bit heavy in convenience stores in terms of lease expirations this year, and they're pretty solid performers. So we're not expecting adverse outcome relative to historical norms. So yeah, nothing of note in my mind.
John Massocca (Analyst)
Okay. And then maybe bigger picture, given transaction volumes have typically been focused on relationship tenants, how much of the investment outlook beyond maybe the LOI and PSA portion of the pipeline is contingent on those tenant partners being kind of active in the M&A space? And I guess the M&A space being kind of robust more broadly.
Stephen Horn (CEO and President)
Outside of kind of let's go back pre-2020, I would say a lot of our relationship business was driven by the M&A market side of things. And then kind of post-COVID, when the M&A market was slowing down, but yet our large sophisticated tenants still felt the need to grow. So they did a lot of kind of development for themselves. So we were kind of leaning in.
If you recall a couple of years ago where our build-to-suit, our split-funded deal ramped up to $300 million, where historically it was kind of $100 million. But what I'm seeing in 2025 is the M&A market is picking up a little bit in the auto services and convenience store. That part of our guide does include a little bit of the M&A, but it's definitely not dependent on the M&A side of things and the relationships.
John Massocca (Analyst)
Okay. And then you touched on a little bit, but in terms of the released Frisch's assets or former Frisch's assets, is there any reason the percentage rent would be a 2026 event versus 2025? Or should we kind of think about that as something that potentially impacts your 2025 earnings leases get started?
Kevin Habicht (EVP and CFO)
Well, beyond the fact that the rent on that first batch doesn't start till May 1st. So there's that. So in the first half, call it zero, close to zero. And so, but yeah, starting in the second half of this year, you should get some ramp-up in percentage rents related to that batch of stores. And obviously, for full year next year as new restaurant operators get things up and running, so.
John Massocca (Analyst)
Okay. That's it for me. And Kevin, Massocca, my peers, wishing you the best going forward.
Kevin Habicht (EVP and CFO)
John, thanks very much. It's been fun.
Stephen Horn (CEO and President)
We'll miss him at breakfast.
John Massocca (Analyst)
Yeah, exactly.
Stephen Horn (CEO and President)
You know what I was going to order? Oatmeal for $30.
Operator (participant)
As a reminder, if you would like to ask a question, please press star one. Your final question for today is from Omotayo Okusanya with Deutsche Bank.
Omotayo Okusanya (Analyst)
Oh, I'm locked up. Also, a member of the Kevin Fan Club, you will be missed. Best of luck in retirement.
And also a member of the Vin Fan Club. So Vin, welcome aboard at NNN. My question is around acquisitions. Again, the $500-$600 million outlook for the year and also the disposition outlook. Just kind of curious from an acquisition perspective, retail categories that maybe you are looking to get a little bit more invested in versus on the sale side categories that you're looking to lighten up on. And also if the world of tariffs kind of impact any of that in terms of industries you've suddenly become more attracted or less attracted to.
Stephen Horn (CEO and President)
Yeah. You know our philosophy. We look at the real estate more than the category. Who's operating the site isn't as important as long as the real estate fundamentals are in line with market. Because at the end of the day, if that tenant goes away, we get market rent back.
But because we are so relationship-focused, I see 2025 being very similar to our current portfolio where we will dig up our convenience stores and auto service sectors. And we're starting to see a little bit more activity in the QSR side of things, which I really like the QSR because that acre and a half, 3,000 sq ft box is very fungible on the real estate side.
So I'm looking more for QSRs, convenience stores, and auto services percolating up in 2025. As far as dispositions, that's more even if it's a good industry, these retailers don't always pick performing assets over a 15-20-year lease. Markets change. Consumer behavior changes. So we work really hard with the retailer, and that's where the relationship value is.
And I think that's why 85% of our leases renew at the end of terms is we look to kind of prune the portfolio each year a little bit, that $100 million range, and start weeding out the underperforming assets where the retailer assists us in determining which ones to sell. So it's not a particular category. I would say last year, medical kind of urgent care was a targeted sector we disposed of.
And we kind of took advantage of the COVID bump on their sales and sold those into the 1031 market. But this year, there's not a particular sector I'm looking to get out of. It's more individual assets that aren't performing up to the levels of the tenant would like.
Omotayo Okusanya (Analyst)
Thank you very much.
Operator (participant)
We have reached the end of the question and answer session, and I will now turn the call over to Steve Horn, CEO, for closing remarks.
Stephen Horn (CEO and President)
Hey, guys. I appreciate you taking the time today. Thanks for joining us, and we'll see you guys in person in the upcoming conference season. Kevin, one last goodbye.
Kevin Habicht (EVP and CFO)
Thank you.
Stephen Horn (CEO and President)
Thank you. All right, guys. Thank you.
Kevin Habicht (EVP and CFO)
Good fun. Thank you all.
Operator (participant)
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.