NETSTREIT - Earnings Call - Q2 2025
July 24, 2025
Executive Summary
- Q2 2025 delivered steady operating performance with AFFO/diluted share up to $0.33 (+3.1% YoY) and net income/diluted share of $0.04; management raised full‑year AFFO/share guidance to $1.29–$1.31 and lifted net investment activity guidance to $125–$175M, citing improved cost of capital and robust pipeline.
- Investment execution was strong: $117.1M gross acquisitions at a 7.8% blended cash yield (company’s highest quarterly cash yield on record) and $60.4M of dispositions at a 6.5% yield; portfolio ended at 705 properties, 99.9% occupied, 9.8‑year WALT.
- Balance sheet/liquidity improved with $46.1M raised via the ATM, total liquidity of $594M, and adjusted net debt/Annualized Adjusted EBITDAre at 4.6x (5.9x on an unadjusted basis); weighted average interest rate was 4.58% and debt maturity 3.8 years at quarter‑end.
- Stock catalysts: guidance raise, record acquisition yields (though expected to normalize to ~7.4–7.5%), accelerating external growth, and potential credit rating pursuit; post‑quarter, NTST priced an upsized forward common stock offering at $17.70/share to support growth.
What Went Well and What Went Wrong
-
What Went Well
- Highest quarterly acquisition yield on record: $117.1M at 7.8% blended cash yield, supported by relationship-driven C‑store opportunities and long WALT (15.7 years).
- Guidance raised: AFFO/share midpoint up $0.01 to $1.29–$1.31; net investment guidance raised to $125–$175M on improved cost of capital and spreads; quarterly dividend increased 2.4% to $0.215/share.
- Balance sheet/liquidity: $46.1M raised via ATM; adjusted net debt/Annualized Adjusted EBITDAre at 4.6x with $594M liquidity; no material maturities until Feb 2028 including extensions.
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What Went Wrong
- GAAP EPS missed S&P Global consensus (see Estimates Context) despite revenue slightly topping expectations; mix shift and non‑cash items continue to create divergence between GAAP and AFFO.
- Rising interest expense and impairments weighed on GAAP; interest expense rose to $12.6M in Q2, impairments were $4.4M, and D&A increased, reflecting portfolio growth and recycling.
- Management cautioned Q2’s 7.8% acquisition yield is unlikely to repeat; back‑half opportunities are blending to ~7.4–7.5% given more investment‑grade mix and market pricing.
Transcript
Operator (participant)
morning and welcome to the NETSTREIT Corp second quarter 2025 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Amy An, Investor Relations. Thank you. You may begin.
Amy An (Director of Investor Relations)
We thank you for joining us for NETSTREIT's second quarter 2025 earnings conference call. In addition to the press release distributed yesterday after market close, we posted a supplemental package and an updated investor presentation. Both can be found in the Investor Relations section of the company's website at www.netstreit.com. On today's call, management's remarks and answers to your questions may contain forward-looking statements that define the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risk and uncertainties that may cause actual results to differ from those discussed today. For more information about these risk factors, we encourage you to review our Form 10-K for the year ended December 31, 2024, and our other SEC filings. All forward-looking statements are made as of the date hereof, and NETSTREIT assumes no obligation to update any forward-looking statements in the future.
In addition, some financial information presented on this call includes non-GAAP financial measures. Please refer to our earnings release and supplemental package for definitions of our non-GAAP measures, reconciliations to the most comparable GAAP measure, and an explanation of why we believe such non-GAAP financial measures are useful to investors. Today's conference call is hosted by NETSTREIT's Chief Executive Officer, Mark Manheimer, and Chief Financial Officer, Dan Donlan. They will make some prepared remarks, and then we will open the call for your questions. Now, I'll turn the call over to Mark. Mark?
Mark Manheimer (CEO)
Thank you, Amy, and thank you all for joining us this morning to discuss our second quarter 2025 results. Similar to past quarters, we continued to improve our tenant diversification by a thoughtful and accretive disposition, and we are now slightly ahead of pace as it relates to our year-end goals. On the external growth front, our team is actively sourcing attractive investments across a broad spectrum of tenants and industries, and we remain confident in our ability to find off-the-run opportunities that fit our underwriting standards. From a portfolio perspective, our tenants remain incredibly healthy, and our heavy concentration within the necessity, discount, and service industries has further stability to our cash flow. In addition, we provided new disclosure during the second quarter to illustrate our de minimis credit losses since investment and better demonstrate the overall strength of our portfolio, which I will discuss later.
We believe this enhanced disclosure, continued diversification efforts, and disciplined approach to capital deployment have all contributed to the improvement in our cost of capital. While there is still plenty of room for improvement on this front, we did take advantage of our favorable investment spreads to raise over $46 million via the ATM program this quarter. With all these positives in mind, we are increasing our AFFO per share guidance midpoint by a $0.01 to a new range of $1.29-$1.31, and we are increasing our net investment guidance by $50 million at the midpoint to a new range of $125 million-$175 million. Turning back to external growth, we completed $117.1 million of gross investments at a blended cash yield of 7.8% during the quarter.
While we are thrilled to achieve our highest quarterly cash yield on record in the second quarter, we do not expect this to repeat in the back half of the year, as the opportunities to have the best risk-adjusted returns are currently blending to a 7.4%-7.5% cash yield. The weighted average lease term for our second quarter investments was 15.7 years, with investment grade and investment grade profile tenants representing more than a quarter of these acquisitions. Additionally, more than half of our investment activity this quarter was accretively funded with disposition proceeds, which totaled $60.4 million across 20 properties at a 6.5% blended cash yield. As we look after the third quarter and beyond, we are currently seeing great investment opportunities across a variety of tenants and industries, including farm supplies, grocery, food service restaurants, auto service, and convenience stores, to name a few.
Turning to the portfolio, we ended the quarter with investments in 705 properties that were leased to 106 tenants operating in 27 industries across 45 states. From a credit perspective, 68.7% of our total ABR is leased to investment grade or investment grade profile tenants. Our weighted average lease term remaining for the portfolio was 9.8 years, with just 1.2% of ABR expiring through 2026. As mentioned earlier, we have updated our disclosure to better demonstrate the individual property risks within our portfolio, as well as provide more details around our best-in-class track record as it relates to credit loss. Moreover, we believe this disclosure serves to better illustrate the underwriting discipline that we have maintained since inception, which, as we've said before, goes well beyond just understanding the corporate credit.
We also emphasize unit-level performance and locations where we believe the rent is replaceable, which helps us to carefully manage lease expirations. We also focus on larger and more established operators that we believe are more capable of adapting to market changes. As you can see from our investor presentation, our portfolio-wide unit-level rent coverage ticked up to 3.9x from 3.8x when we initially provided the disclosure less than two months ago. To reiterate, we believe this disclosure provides excellent visibility into our best-in-class default and credit loss statistics while providing the necessary context around future risks within our portfolio. We believe this insight, which is not uniformly disclosed across the net lease industry, should provide investors with greater comfort in the future cash flow production of our portfolio, both on an absolute basis and relative to our net lease peers.
Before handing the call over to Dan, I wanted to reiterate a message that we have consistently provided in the past. We will not sacrifice our balance sheet for growth, nor will we grow to the stage of asset growth without an appropriate level of per-share earnings growth. However, with our cost of capital having meaningfully improved throughout the year, we can now afford to be more acquisitive, which is a welcome development for the NETSTREIT team. We very much appreciate the support of our shareholders, and we remain confident that our growth from a small-based narrative can gain additional traction as we execute our strategy. With that, I'll hand the call to Dan to go over second quarter financials and then open up the call for your questions.
Dan Donlan (CFO)
Thank you, Mark. Looking at our second quarter earnings, we reported net income of $3.39 million or $0.04 per share. Core FFO for the quarter was $25.69 million or $0.31 per share, and AFFO was $27.59 million or $0.33 per share, which is a 3.1% increase over last year. Turning to the expense front, our total recurring G&A in the quarter increased year-over-year to $5.4 million, which is mostly a result of our staffing levels normalizing after we restructured various roles last year. That said, with our total recurring G&A representing 11% of total revenues this quarter versus 12% in the prior quarter, our G&A continues to rationalize relative to our revenue base. Turning to capital markets activity in the second quarter, we sold 2.8 million shares via our ATM program, generating over $46.1 million of net proceeds. Additionally, we settled 1.1 million shares during the quarter.
Turning to the balance sheet, our adjusted net debt, which includes the impact of all forward equity, was $713.8 million. Our weighted average debt maturity was 3.8 years, and our weighted average interest rate was 4.58%. Including extension options, which can be exercised at our discretion, we have no material debt maturing until February 2028. In addition, our total liquidity was $594 million at quarter end, which consisted of $20 million of cash on hand, $373 million available on a revolving credit facility, and $202 million of unsettled forward equity. From a leverage perspective, our adjusted net debt to annualized adjusted EBITDAre was 4.6x at quarter end, which is down from 4.7x last quarter and remains well within our targeted leverage range of 4.5-5.5x.
Moving on to guidance for 2025, we are increasing our AFFO per share guidance range to $1.29-$1.31 from the prior range of $1.28-$1.30. We are increasing our net investment activity guidance range to $125 million-$175 million from the prior range of $75 million-$125 million. Additionally, we now see recurring cash G&A ranging between $15 million-$15.5 million for 2025. From a rent loss perspective, our guidance now assumes roughly 25 basis points of unknown rent loss at the midpoint of our range. Lastly, due to our outstanding forward equity, our midpoint is assumed slightly less than a payment dilution resulting from the shares restock method. Lastly, on July 21, the board declared a quarterly cash dividend of $0.215 per share, which represents a 2.4% increase over the prior quarter dividend.
The dividend will be payable on September 15 to shareholders of record as of September 2. With that, operator, we will now open the line for questions.
Operator (participant)
Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. To make the turn will exceed your line is in the questions. You may press star two if you would like to remove your question from the queue. With continuous speaker equipment, it may be necessary to take up your handset before pressing the star keys. One moment, please, while we poll for questions. The first question is from Haendel St. Juste from Mizuho Securities. Please go ahead.
Haendel St. Juste (Analyst)
Hey guys, good morning, great quarter. I wanted to ask you a question, I guess, Mark, a big picture one, and it kind of dovetails on your prepared remarks. The fact is, you know, 30% your WAC investment spread has improved pretty dramatically. I guess can you talk a bit more about how this improved WAC impacts the range of capital deployment alternatives available to you now and how much and where you can deploy capital? Your initial guide, obviously, was pretty conservative. Even the updated acquisition guide sits below where you've been in some other quarters recently. I was just curious on some thoughts on that front. Thanks.
Mark Manheimer (CEO)
Yeah, sure. Thanks, Haendel. It's going to continue to be pretty fluid as we continue to monitor our cost of capital. I think as it relates to our ability to deploy capital in and around the cap rates we've been, maybe not this quarter, which I think was maybe a little bit of an outlier, at 7.8%, I think kind of more normal for us in this environment is probably 7.4%, 7.5%, something like that. For us to be able to deploy net $150 million-$200 million would be pretty easy. It's just going to come down to our cost of capital and hopefully we can continue to see improvement there.
Haendel St. Juste (Analyst)
Got it. It sounds like a bit more IG will be part of the mix and part of why we expect yields to come down in the next couple of quarters?
Mark Manheimer (CEO)
Yeah, I think this quarter, you know, we had a couple of unique opportunities with some C-store operators where we have relationships where they were doing some add-on acquisitions from some smaller operators. We were able to get attractive leases, add these properties into existing net leases, extend the term out at four times rent coverage, at pretty attractive cap rates. Anytime we see those types of opportunities, we're going to jump all over them. We just don't expect to see that every quarter. We just really felt like this was a great opportunity for us this quarter, which is why you see that 7.8%. It's a larger operator, doesn't quite qualify for investment grade profile, doesn't have a credit rating, but has no debt for all of those operators. An operator we're very comfortable with and, of course, a four-time rent coverage net lease, you're pretty well protected.
Haendel St. Juste (Analyst)
Great, great. The second question is on the Walgreens, the Dollar Store disposition. Things seem to be proceeding pretty well. There may be some color on if you could compare and contrast the demand for the assets and the cap rates you're getting in the private market on those fronts, and then maybe some color on where we expect you to maybe add more exposure or deploy some of that capital.
Mark Manheimer (CEO)
Yeah, sure. I'd say as it relates to dispositions, similar to our acquisitions this quarter, the cap rate was a little bit better than what we've seen in the past. We did execute a number of pretty attractive dispositions, sold off some Advance Autos, kind of in a low 6% cap rate range, got that concentration really where we're more comfortable. Sold a CVS outside of Nashville at a 5.5% cap. Really had a couple of cap rates that kind of dragged that down a little bit. We're about done with what we need to sell with Walgreens. We may need to sell another one, one or maybe two for the rest of the year to get us below that 3% concentration that we outlined a couple of quarters ago. I feel pretty good about that.
The demand for Dollar Store, which I think that's really where we still have a little bit of a whip shot, there's just a ton of demand from both 1031 buyers as well as institutional investors at pretty attractive cap rates. Every quarter since inception, we've been able to accretively recycle capital, and I don't think that's going to be any different in the third and fourth quarter. I just don't think it's going to be started dramatically as it was this quarter.
Haendel St. Juste (Analyst)
Great. Thank you and best of luck.
Mark Manheimer (CEO)
Thanks, Haendel.
Operator (participant)
The next question is from John Kilichowski from Wells Fargo. Please go ahead.
John Kilichowski (VP of Equity Research)
Thank you. Good morning. Just kind of a follow-up to the first question. Mark, you answered this a little bit, and I'm not sure if you can give any more color here, but as we think about, you know, in the second half of the year, you've got IG % you're going to increase and cap rates are going to tighten a little bit and your increased investment guidance. How much of your new investment guide has some sort of conservatism for the uncertainty about your access to equity capital and maybe if the opportunity arises even in the near future for you to lock in more equity capital? Where do you think that investment guide could go to? What do you think the opportunity set is for you all?
Mark Manheimer (CEO)
Yeah, I mean, I think the opportunity set is pretty massive right now. The team is very excited to be able to start to really access the acquisitions market a little bit more than we have more recently. I think right now with the team we have in place, the market as it sits today, deploying $150-$200 million net acquisitions each quarter in and around the cap rates that we've been at with a similar mix of product is certainly doable. We're going to continue to be mindful about where our equity is trading and our cost of capital.
John Kilichowski (VP of Equity Research)
Got it. Maybe just on the debt funding equation, I know we've discussed our potential for a ratings upgrade. Curious if you've had any conversations with the rating agencies and what do you think the impact would be on your WAC and if that's considered at all in your guide?
Dan Donlan (CFO)
Yeah, hey guys, Dan, we don't have anything penciled in for our guidance for this year. If we were to receive a rating, we don't have a current rating, so there's nothing to upgrade. Certainly, if we were to get an investment grade credit rating, that would allow us to then utilize a leverage toggle, which would then look to reduce, bring down our term loan debt by 20 basis points. We'd also get the credit service adjustment. That's another 10 basis points. Basically, all of our debt would come down by about 30 basis points. As far as our conversations, we're going to start having those come later in the third quarter. We're optimistic that we can reach a favorable outcome, but that's just where we are today.
John Kilichowski (VP of Equity Research)
Yeah, very helpful. Thank you.
Operator (participant)
The next question is from Wes Golladay from Baird. Please go ahead.
Wes Golladay (Senior Research Analyst)
Hey, good morning guys. I'm just looking at the balance sheet. We have about $58 million held for sale. Will this be all done disposed of this year? Will this be the last of the heavy dispositions?
Mark Manheimer (CEO)
Yeah, I mean, I think we have a decent amount that we're still dealing with. The last few quarters have been pretty heavy. I think the third quarter will be pretty heavy again. We'll start to moderate a little bit in the fourth quarter. We can never guarantee that anybody that we're trying to sell a property to is actually going to close. I can't make any guarantees that that'll all be gone. I'd say the line appeared to have that should be gone. When you look towards next year, I would expect our disposition phase to moderate more closely to what it was maybe two, three years ago.
Wes Golladay (Senior Research Analyst)
Okay. When you look at the investment pipeline, is there a lot of loans in that?
Mark Manheimer (CEO)
There are some, but it's really about enough to replace what's getting paid off. It's not a massive amount.
Wes Golladay (Senior Research Analyst)
Okay. Just one more big last question. I know you love these. Do you have an update on the vacant lease?
Mark Manheimer (CEO)
Yeah, I mean, we've progressed pretty far along. We're negotiating, you know, really with two, but there are three LOIs where we're still kind of going back and forth with. Those two are just the two more likely operators, are national tenants and investment grade tenants. They're both willing to pay more rent than what Big Lots was. They need to get through their investment committee and kind of get through their process of what they need to actually do to the box to make it ready for them to move in. I would expect us to have an LOI signed this quarter before the next earnings call. By the time that they come in and start paying rent, we'll likely be early next year.
Wes Golladay (Senior Research Analyst)
Okay, thanks for the time, everyone.
Mark Manheimer (CEO)
Thanks, Wes.
Dan Donlan (CFO)
Thanks, Wes.
Operator (participant)
The next question is from Greg McGinniss from Scotiabank. Please go ahead.
Elmer Chang (Equity Research Associate)
Hi, this is Elmer Chang. I'm with Greg. You mentioned seeing a major 10% cap rate to reverse and keep the best risk of loss of returns. Are you just facing pricing power challenges given investment grade sellers may have been aware that your high cost of equity at the start of the year was restricting when you probably had investment spreads? Are there any other trends driving costs?
Mark Manheimer (CEO)
Yeah, I would say unfortunately, we don't control what the market bears and what we can really buy properties for. We can negotiate our end, but you need to have a willing seller. What we've seen on the investment grade side is unless you're willing to take on co-tenancy and other types of risks that we're not willing to really put into the portfolio, the cap rates just haven't moved up enough for us to really feel like we're getting paid a strong enough risk-adjusted return on most investment grade opportunities, which is why you've seen other opportunities get through our filter where we've got larger operators, very good credits, and very strong unit-level coverage. Whereas the investment grade side, we're just not going to go out and pay, like I mentioned, we sold a CVS at a 5.5% cap.
We're not going to go buy CVSs anywhere around that type of cap rate nor are we buying pharmacies. I think it's really been the market has bared higher cap rates for non-investment grade tenants and getting better risk-adjusted returns than you are for the investment grade tenants in most cases. You are seeing a number of opportunities still get that we're able to source, and I think they're maybe not marketed quite as effectively. We get pretty good pricing on a nipple of those deals. To really be able to scale investment grade acquisitions at cap rates that make sense right now, I don't think is really suitable.
Elmer Chang (Equity Research Associate)
Okay. Thanks, Wes. Given you've had relatively very quiet events two days, what are the driving for that bad debt for the rest of the year? You know, why the increase in investment guidance and then the exposing? You know, you expect less reason to increase your comments for cap rates for the rest of the year.
Dan Donlan (CFO)
Hey, Elmer, it's Dan. I think I caught most of your question. You're breaking up a little bit. As we stated in the prepared remarks, we're assuming about 25 basis points of credit loss between year and year end at the midpoint of the range.
Elmer Chang (Equity Research Associate)
Got it. Okay. Thank you.
Operator (participant)
The next question is from Michael Goldsmith from UBS. Please go ahead.
Michael Goldsmith (US REITs Analyst)
Good morning. Thanks for offering my question. It's clear you're feeling more comfortable with issuing equity at the ATM. Is that contingent on you buying at the cap, you know, these elevated cap rates in the last couple of quarters in the 7.7%, 7.8% range? As you move into more investment grade stuff, presumably the cap rates will come down on a blended basis. Just trying to understand what spreads you're comfortable issuing and acquiring.
Dan Donlan (CFO)
Yeah. Hey, Michael, you know, we've always said that, you know, we would be comfortable issuing equity if we were north of 100 basis points of spread relative to our WAC. As you sit here today and you think about a 7.5% cap rate, in the back half of the year, maybe 7.4%. When you think about our AFFO yield using our run rate AFFO coming out of the second quarter, and then looking at five and a half year to seven-year term loans as the debt source there, we can source transactions about 150 basis point-160 basis points wide of what we think our WAC is at the current moment.
Michael Goldsmith (US REITs Analyst)
Got it. Thanks for that, Dan. My follow-up question is, it makes sense that guidance, obviously, you've been able to acquire more on a net basis, but are there any mitigating factors that are calculated within the guidance? You know, are you taking into account the treasury stock releasing given some of these issues? This is probably an unnecessary cost to move in futures within the outlook. Thanks.
Dan Donlan (CFO)
At the midpoint, that's the mitigating item that we mentioned. At the midpoint, we're assuming a little bit less than $0.01 of dilution from the treasury stock method. Obviously, we have no idea where the stock's going to go, but we assumed a pretty healthy movement even from current levels to justify our guidance range. We feel eminently comfortable we've been conservative on that front.
Michael Goldsmith (US REITs Analyst)
Thank you very much. Good luck in the back half.
Dan Donlan (CFO)
Thank you.
Operator (participant)
The next question is from Michael Gorman from BTIG. Please go ahead.
Michael Gorman (Managing Director)
Yeah, thanks. Good morning. I was wondering if you could just talk a little bit more about competition in the deal market. We've seen some new entrants, to say, from non-traditional net lease investors. I understand it's a deep, liquid market, but I'm curious if you started to bump into any of these new buyers in the marketplace or where you're seeing them show up as you look at the deal pipeline and future transactions.
Mark Manheimer (CEO)
Yeah, thanks, Michael. Yeah, I mean, it's a good question. We've certainly heard a lot about some new entrants or are aware of some capital that has been deployed by a number of them, but we just really have not run into them at all on the acquisition side. I think most of the deals that we're looking at are pretty small, bite-sized deals or they're relationship deals where really the only negotiating that we're doing is with the tenant and them, or the tenant and the seller trying to figure out where they're willing to part with their properties. Less so in getting ourselves in bidding wars anytime we see those opportunities. We'll come in and we'll bid, but we're not really interested in paying the top price for our deals. We want to get the best risk-adjusted returns.
From our perspective, the largely marketed deals typically don't really yield those opportunities too well. I'm pretty aware of a number of the new entrants, and I think their strategies don't really line up too much with ours. I'd be surprised if we run into them very frequently. I'm sure there will be a situation here or there where we see them, but I don't think it's going to have much impact on our capital deployment.
Michael Gorman (Managing Director)
That's helpful. Thanks. Maybe just one more on the competition side, maybe a little off the wall here, but given the supply-demand dynamics in retail kind of broadly, are you coming across more user bidders or owner occupants in the marketplace, either looking at properties previously sold, or is it more competition in terms of looking at the sale leasebacks that they want more control over their properties or to keep control of their properties in a supply-constrained environment?
Mark Manheimer (CEO)
We have not really seen that quite yet, but I think that's something to potentially keep an eye on.
Michael Gorman (Managing Director)
Okay. Great. Thanks for the time.
Mark Manheimer (CEO)
Thank you.
Operator (participant)
The next question is from Linda Tsai from Jefferies. Please go ahead.
Linda Tsai (Senior Analyst)
Hi. With your cost of capital having increased, what verticals or investments are you considering now that you couldn't have before, and how would investment spread trend evolve?
Mark Manheimer (CEO)
Yeah, Linda, I don't think really much is going to change at all in terms of what we're looking at. I think if we were to deploy a lot more capital than we are right now, which isn't necessarily the plan in the near term, if maybe the filter kind of opens up a little bit more, we're going to, you know, IQS a little bit more in pricing, which is why I think our 7.8% could come down to a 7.4%, 7.5% if we wanted to deploy more capital. I would expect for us to continue to buy similar types of products that we have over the past five years.
Linda Tsai (Senior Analyst)
Can you give us some general color on dynamics in the C-store space, and does your pipeline have more of these?
Mark Manheimer (CEO)
Yeah, I mean, the C-store space is an attractive industry for us. Obviously, you've got two large profit drivers coming from the gas pumps as well as the inside sales of the store. We've got really good relationships in that space. I know I've been doing convenience store deals for, I guess, going on 20 years. I'm pretty aware of who's in the space and who the operators are, as well as our team has done a great job of going out and finding some of these opportunities and building relationships with some operators. We'll continue to look for those. We did a few in this quarter. We may do one this quarter. I think it's less likely that we're going to do as many as we did in the second quarter as in the third.
Linda Tsai (Senior Analyst)
Just one last one for Dan. What do you expect G&A's percentage of revenues to be at the end of next year, similar to this year?
Dan Donlan (CFO)
No, I think it should continue to trend down. I don't have the model pulled up. I definitely think when you think about the year-over-year growth, it should slow dramatically next year versus this year, just given that we had a lot of hiring to do this year and into the back half of last year. That hiring pace should moderate considerably as we look out to 2026. I don't know what that would infuse necessarily on a % basis, but it's certainly going to be lower as a % of revenues next year. Again, the year-over-year growth rate should be down considerably versus what it was this year.
Linda Tsai (Senior Analyst)
Thank you.
Operator (participant)
The next question is from Smedes Rose from Citi. Please go ahead.
Smedes Rose (Director)
Hi, thanks. I just wanted to ask a quick question. You talked about 25 bps of rent loss embedded through the back half of the year. What is it now for the full year, I guess? I think you said last quarter was 75 bps based on the full year, or?
Dan Donlan (CFO)
Yeah, so last quarter we said our guidance is based on 75 basis points of credit loss, I guess, for the full year. I mean, this 25 basis points of credit loss is for the full year as well. It's just that half a year is over, so.
Smedes Rose (Director)
Okay. I just wanted to ask you, would it be your expectations to settle much of this forward equity by year-end, or are you in a position now where you can start to kind of get, I guess, get ready with dry powder for next year as well?
Dan Donlan (CFO)
Yeah, I mean, when we think about our leverage, we always incorporate the forward. At 4.6x today, we feel good about our leverage. We don't really have to, we don't have to do anything, you know, to hit the high end of guidance at $175 million. We'd still end the year about 4.9x. Obviously, we showed a propensity to raise ATM equity in and around current levels. As far as selling the forward, it just really depends on, you know, if we raise additional capital. The governor for us is kind of, we need to maintain our debt-to-gross assets below 35% to get the most attractive pricing off of our term loans and credit facilities. That's really what governs our decision to pull down the equities.
I think you'll probably see a little bit in the third, and you should see a healthy chunk into the fourth quarter as well.
Smedes Rose (Director)
Okay, great. I appreciate it. Thank you.
Operator (participant)
The next question is from Daniel Guglielmo from Capital One Securities. Please go ahead.
Daniel Guglielmo (Equity Research Analyst)
Hi everyone, thank you for taking my questions. I think it was in the fourth Q call where we had talked about increased population growth in the Sun Belt and elevated opportunities there, but that you all don't have a specific regional focus. Has there been any changes to that view or population trends you're watching? Are there regions that are more attractive in the second half?
Mark Manheimer (CEO)
Yeah, I would say it really hasn't changed very much at all. You're still kind of seeing population growth in the same areas, which is where retailers are going to continue to try to grow, so you're going to see more opportunities there on the development side as well as the sale respect side. I don't think that has really changed much since the fourth quarter of last year.
Daniel Guglielmo (Equity Research Analyst)
Okay, thank you. I appreciate that. Year-over-year average area earnings has continued to increase across the country. When you talk with tenants and then think about your investments, has the spending and revenue been able to keep pace with some of the labor and technology costs, or has it become an increased kind of topic of conversation when you're talking with them and thinking through the investment?
Mark Manheimer (CEO)
Yeah, I don't know if it's really been an increased topic of conversation with people. I mean, there are challenges in some industries as it relates to labor costs, more specifically, restaurants and some others where just the labor line item has become more expensive and has squeezed profitability a little bit. You've, of course, seen inflation last year kind of squeeze margins a little bit for some operators, so that's really moderated quite a bit. Most of the retailers that we're talking to maybe are kind of curious to see what happens with tariffs, but there really hasn't been much of an impact from that yet. Most retailers that we've spoken to are feeling pretty bullish and are really more in growth mode than they were maybe this time last quarter.
Daniel Guglielmo (Equity Research Analyst)
Great, thank you. Appreciate it.
Operator (participant)
The next question is from Upal Rana from KeyBanc Capital Markets. Please go ahead.
Upal Rana (Senior Equity Research Analyst)
Great, thanks for taking my question. With the net investment activity accelerating and that you expect cap rates to trend lower to the mid-7% range, are there any changes you would point out on lease economics in terms of wall escalators or rents that we should expect?
Mark Manheimer (CEO)
I mean, we had pretty attractive terms this quarter. With longer lease terms, I think you can expect something similar to that, maybe not quite as long in the third quarter. A lot of what we're looking to do in the third quarter is going to be on the sale respect side, and even on the non-sale respect side, still pretty long lease terms with attractive rent escalators. It's been a focus of ours over the past year, year and a half to really improve the internal growth in the portfolio, and that continues to be the case. I don't think you'll see much change as we kind of moderate closer to what we were doing previous to the second quarter of 7.4%, 7.5%. I feel pretty good about the opportunity set and what we're looking at right now.
Upal Rana (Senior Equity Research Analyst)
Okay, great. That was helpful. I want to get your sense on what the appetite is from buyers for Walgreens today. You mentioned you wanted to sell maybe one or two by year end to reach that 3% ABR, but has demand performance changed in any way in recent months? I know you did sell that one a year for 5.5% cap.
Mark Manheimer (CEO)
Yeah, sure. I mean, I think CVS and Walgreens may be a little bit different. Walgreens, there just isn't a lot of clarity to the buyer environment as to what the balance sheet is going to look like with Walgreens. I think these guys have insight there that it's not going to be a very leveraged balance sheet. I think once that information comes out, which, presumably the transaction should close in December, or at least that's the schedule today in the leases, it does provide for financial reporting. People will start to see that they didn't lever up the balance sheet. I think that's going to be a big positive, come early next year when people start to see that.
I think until that happens, it's a little bit more challenging to sell those assets, which is why we're pretty happy that we got out ahead of a lot of that and really pulled that exposure down to 3.5% as it sits today and only needing to sell one maybe to get below that 3%. I think we should be able to have little trouble finding a 1031 buyer for one or two of the assets that'll get comfortable that they're not closing the store and that it's a good location. Fortunately, our rent at $19 a foot, well inside the average of what you see with Walgreens and CVS for that matter. That allows other people to get comfortable that even if they ever do have to take the box back, they can replace for rent and there are other things that they can do with the assets.
There has been, we've had a lot of inbound demand from retailers and developers interested in our sites. The problem is we can't get Walgreens out. I guess maybe a good problem to have, but I think our downside protection on the Walgreens is actually pretty good with cheaper rents and really good real estate. Whether that be a convenience store operator or kind of the auto services hub stores, there's just a lot of different operators that are interested in those stores at or above the rents that we currently have. I think we're just likely going to only sell one or two more and likely just keep, continue collecting your money from Walgreens over the next 10+ years.
John Kilichowski (VP of Equity Research)
Okay, great. That was helpful. Thank you.
Operator (participant)
The next question is from Jana Galan from Bank of America. Please go ahead.
Jana Galan (Director)
Thank you. Good morning and congrats on a great quarter. Just a quick one. I'm looking to see 1.2% of ABR expiring in 2026, and granted it's very small, but can you remind us of how early renewal discussions start and when do you typically get notice of a tenant's decision?
Mark Manheimer (CEO)
Yeah, I mean, each lease is a little bit different, but typically it's about six months ahead of time that you'll have to tell you whether you're leaving or staying. We're somewhat proactive, especially if we have a reason to be talking to a tenant about other locations. We try to loop those conversations in. It's typically not a great idea to reach out to tenants a year or two out without having another reason to talk to them. Otherwise, basically, you kind of start to lose some leverage in that negotiation if there is one. Yeah, I mean, we feel very comfortable with what's expiring in 2026. We think we'll have very close to, if not all, of those renew at the rushing rate.
Jana Galan (Director)
Great, thank you.
Mark Manheimer (CEO)
Thank you.
Operator (participant)
There are no further questions at this time. I would like to turn the floor back over to Mark Manheimer for closing comments.
Mark Manheimer (CEO)
Thank you everybody for your interest on the call today and in the company, and we look forward to continuing the dialogue here in the near future.
Operator (participant)
This concludes today's teleconference. We may disconnect your lines at this time. Thank you for your participation.