NNN REIT Q2 2025 Earnings Report

NNN REIT EPS Results

• Actual EPS: $0.85
• Consensus EPS: $0.84
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $0.84

NNN REIT Revenue Results

• Actual Revenue: $226.80 million
• Expected Revenue: $224.26 million
• Beat/Miss: Beat by +$2.54 million
• YoY Revenue Growth: +4.60%

NNN REIT Announcement Details

• Quarter: Q2 2025
• Date: 8/5/2025
• Time: Before Market Opens
• Conference Call Date: Tuesday, August 5, 2025
• Conference Call Time: 10:30AM ET

NNN REIT (NYSE:NNN) invests primarily in high-quality retail properties subject generally to long-term, net leases. As of December 31, 2023, the company owned 3,532 properties in 49 states with a gross leasable area of approximately 36.0 million square feet and a weighted average remaining lease term of 10.1 years. NNN is one of only three publicly traded REITs to have increased annual dividends for 34 or more consecutive years.

NNN REIT Q2 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: NNN strengthened its balance sheet with a $500 million five-year unsecured bond at 4.6% coupon, achieving a sector-leading average debt maturity of 11 years and boosting available liquidity to $1.5 billion.
• Positive Sentiment: The company raised its full-year 2025 guidance, now expecting core FFO per share of $3.34–$3.39 and AFFO per share of $3.40–$3.45, and increased midpoint acquisition targets to $650 million.
• Positive Sentiment: In Q2, NNN achieved lease renewals at 108% of prior rents and new leases at 105% above prior rates across its 3,663-property portfolio, with no At Home stores on the closure list and all rent current.
• Positive Sentiment: The REIT invested $230 million in 45 new properties at an initial cap rate of 7.4% and an average lease term of over 17 years, supporting record acquisition volume.
• Neutral Sentiment: NNN sold 23 non-core properties in Q2 for over $50 million, deploying proceeds into higher-value deals while exiting underperforming assets below the 7.4% cash cap rate.

Presentation

[Operator]

Good day, everyone, and welcome to the NNN REIT, Inc. Second Quarter twenty twenty '5 Earnings. At this time, all participants are in a listen only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Steve Horn, Chief Executive Officer of NNN REIT, Inc. Sir, the floor is yours.

[Stephen Horn, President, CEO & Director at NNN REIT]

Thank you, Matthew. Good morning, and welcome to NNN's second quarter twenty twenty five earnings call. Joining me today on the call, Chief Financial Officer, Min Chao. As outlined in the morning's press release, NNN continued to deliver strong performance in the 2025. Notably, we've improved our balance sheet flexibility following capital markets activity with a sector leading average debt maturity of eleven years, solid acquisitions driven by our tenant relationships and we published the third annual corporate sustainability report.

[Stephen Horn, President, CEO & Director at NNN REIT]

These results and actions position us well to continue enhancing shareholder value as we enter the second half of the year and beyond. Also, as usual, we always have to mention the dividend. In July, we announced a 3.4% increase in our common stock dividend payable August 15. This marks our thirty sixth consecutive year of annual dividend increases, a milestone that places us among very few, less than 80 U. S.

[Stephen Horn, President, CEO & Director at NNN REIT]

Public companies and only two other REITs to have achieved such a track record. Before we get into the operational performance and market conditions, I'd like to touch on a few key recent events. First, I'm thrilled to welcome Mr. Josh Lewis to the executive leadership team as our new Chief Investment Officer. Josh has been with the company since 2008 and has played a pivotal role from day one.

[Stephen Horn, President, CEO & Director at NNN REIT]

Known for his prolific deal making ability and deep market relationships, Josh ensures that shareholder capital is deployed towards the most compelling risk adjusted opportunities. I'm fully confident we have the right person focused every day on driving long term value for our shareholders. On the capital markets front, we successfully completed $500,000,000 five year unsecured bond offerings with a 4.6 coupon. In true in an end fashion, the execution and timing of the deal in today's market environment were exceptional. More importantly, the transaction positions us strongly to continue executing our strategy moving forward.

[Stephen Horn, President, CEO & Director at NNN REIT]

Given our continued strong performance, we are also pleased to announce an increase in our 2025 guidance for core FFO per share, now expecting a range between $3.34 and $3.39 This update reflects the consistency of our multiyear growth strategy and the discipline with which we pursue long term shareholder value. Turning to the highlights of N and N's second quarter financial results. Our portfolio consisting of approximately 3,663 freestanding single tenant properties, including four ten tenants across all 50 states, is performing well. Our leasing and asset management teams are operating at a high level. During the quarter, we renewed 17 to 20 leases.

[Stephen Horn, President, CEO & Director at NNN REIT]

Those renewals align with our long term historical trend of 85%, give or take, while achieving rental rates 108 above prior rent. Additionally, the team successfully leased seven properties to new tenants at rates 105% above prior rents, reflecting strong execution and ongoing demand for our assets. As we sit here today, I feel good about the overall health of the portfolio. There isn't a single 10 that currently gives me concerns keeping me up at night. We've had ongoing discussions with analysts and investors over many quarters regarding At Home, which finally officially filed for bankruptcy this past June.

[Stephen Horn, President, CEO & Director at NNN REIT]

Regarding our exposure, none of our 11 properties were included on the initial closure list. Additionally, At Home remains current on all rent for all 11 locations post filing. We feel positive about the long term prospects for these assets as the company works through the restructuring. Acquisitions during the quarter, we invested just over $230,000,000 in 45 new properties, achieving an initial cap rate of 7.4 and an average lease term of more than seventeen years. Notably, eight of the 11 closings this quarter were with existing relationships, partners whom we do repeat business.

[Stephen Horn, President, CEO & Director at NNN REIT]

For the 2025, we invested $460,000,000 across 127 properties, achieving an initial cap rate of 7.4 and an average lease term of over eighteen years. Based on our strong transaction volume year to date, the robust pipeline of assets currently under LOI or in contract, the high level of activity across our acquisition team, we have raised the midpoint for our full year acquisition volume to $650,000,000 As one of the original net lease companies in the public markets, we have successfully operated through a wide range of economic and competitive cycles. While private capital has increasingly entered the space, raising competition, particularly for large portfolio transactions, we have consistently demonstrated our ability to execute in a highly competitive environment. We remain committed to a disciplined and thoughtful underwriting approach while continuing to emphasize acquisition volume through sale leaseback transactions with our long standing relationships. During the second quarter, we sold 23 properties generating over $50,000,000 in proceeds to be redeployed into new acquisitions.

[Stephen Horn, President, CEO & Director at NNN REIT]

Year to date dispositions have reached 33 properties including 14 vacant assets raising over $65,000,000 in proceeds. Importantly, the income producing properties sold were not considered the gems of our portfolio and we sold approximately 170 basis points below our investing cash cap rate of 7.4. This reinforces the strength of our underwriting and our ability to extract value from the underperforming holdings. Well, the primary focus remains on releasing vacancies where our leasing team continues to deliver strong performance. We'll continue to dispose underperforming assets when there's no clear path to generating stable rental income within a reasonable timeframe.

[Stephen Horn, President, CEO & Director at NNN REIT]

This disciplined approach supports portfolio optimization and enhances long term shareholder value. Our balance sheet remains one of the strongest in the sector supported by the average debt maturity of over eleven years I mentioned earlier. With nearly $1,500,000,000 in available liquidity, we are well positioned to fully fund our twenty twenty five acquisition targets and maintain flexibility for additional opportunities. The financial strength provides us with a significant competitive advantage as we continue to execute our growth strategy without the immediate need for external capital. With that, I'll turn the call over to Vin.

[Stephen Horn, President, CEO & Director at NNN REIT]

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

[Vincent Chao, EVP & CFO at NNN REIT]

Thank you, Steve. Let's start with our customary cautionary statements. During this call, we will make certain statements that may be considered forward looking statements under federal securities laws. The company's actual or future results may differ significantly from the matters discussed in these forward looking statements, and we may not release revisions to these forward looking statements to reflect changes after the statements are made.

[Vincent Chao, EVP & CFO at NNN REIT]

Factors and risks that could cause actual results to differ from expectations are disclosed in greater detail in the company's filings with the SEC and in this morning's press release. Now on to results. This morning, we reported core FFO of $0.84 per share and AFFO of $0.85 per share for the 2025, each up 1.2% over the prior year period. Annualized base rent was $894,000,000 at the end of the quarter, an increase of almost 7% year over year. Our NOI margin was 98% for the quarter, while G and A as a percentage of total revenues and as a percentage of NOI was about 5%.

[Vincent Chao, EVP & CFO at NNN REIT]

Cash G and A was 3.7% of total revenues. AFFO per share for the quarter was slightly ahead of our expectations driven primarily by lower than planned bad debt. Free cash flow after dividend was about $50,000,000 in the second quarter. Lease termination fees as footnoted on Page eight of the release totaled $2,200,000 in the quarter or about $01 per share. This quarter's fees were in line with our expectations and were primarily driven by the termination of an auto parts store and a full service restaurant.

[Vincent Chao, EVP & CFO at NNN REIT]

The auto parts store is under contract for sale and the restaurant has already been re leased and rent commenced to another rent restaurant concept highlighting our proactive portfolio management strategy. From a watch list perspective, at home is the major news for the quarter. We have been flagging at home as a risk for some time and as we discussed on last quarter's call, we believe we have appropriately accounted for them in our outlook and expect the final resolution to be within our budget for the year. To reiterate what Steve said, none of our 11 stores were on the initial store closure list and given the quality of our locations, we've already received inbound interest from high credit retailers. Outside of At Home, there have been no notable changes to the watch list.

[Vincent Chao, EVP & CFO at NNN REIT]

Turning to the balance sheet. Just after the quarter end, we significantly bolstered our liquidity and de risked our capital requirements for the rest of the year by closing on NNN's inaugural five year $500,000,000 unsecured notes offering at an attractive 4.6% coupon. While this offering was earlier and larger than we were originally planning, given the positive market backdrop and strong investor demand, we decided to move forward with the deal. Pro form a for the offering, which closed on July 1, we had close to $1,500,000,000 of liquidity, no floating rate debt and no secured debt. Our debt duration remained a sector leading eleven years even after accounting for the new issuance.

[Vincent Chao, EVP & CFO at NNN REIT]

Our balance sheet is a source of strength and we will continue to look for ways to utilize this competitive advantage to support growth while protecting downside risk. Also given the positive momentum in the stock that we experienced at the end of the quarter, we issued 254,000 shares at an average price of just over $43 per share, primarily through our ATM program raising roughly $11,000,000 in gross proceeds. We will remain opportunistic in the equity markets and issue if and when we believe we can achieve an appropriate cost of equity relative to our deployment opportunities. On July 15, we increased our quarterly dividend to $0.60 per share up from $0.58 per share previously, which equates to an attractive 5.6% annualized dividend yield and a healthy 71% AFFO payout ratio. As Steve mentioned, NNN has now raised its annual dividend for thirty six consecutive years.

[Vincent Chao, EVP & CFO at NNN REIT]

The ability to grow the dividend through various economic cycles and black swan events is a true testament to the strength of NNN's platform and its strategy. I will conclude my opening remarks with some additional comments regarding our updated outlook. We are raising core FFO per share guidance to a new range of $3.34 to $3.39 and AFFO per share to $3.4 to $3.45 each up $01 at the midpoint. This reflects our outperformance versus plan year to date as well as updated assumptions over the balance of the year. We now expect to complete 600,000,000 to $700,000,000 of acquisitions, up $100,000,000 from our initial expectation.

[Vincent Chao, EVP & CFO at NNN REIT]

We are also increasing our disposition outlook by 35,000,000 to a new range of 120,000,000 to $150,000,000 And lastly, will notice that we increased our net real estate expense forecast, which is the result of delays in the expected timing of the release of certain properties as we balance the impacts on near and long term earnings. Despite this headwind, we are still in a position to raise overall earnings guidance for the year. From a bad debt perspective, we continue to embed 60 basis points of bad debt for the full year into our outlook, which includes about 15 basis points booked through the second quarter. As you update your models, there are a few other items to point out. As noted earlier, we booked $2,200,000 of lease termination fees in the second quarter, which is well below the first quarter level of $8,200,000 but still above what I would consider a typical quarterly amount.

[Vincent Chao, EVP & CFO at NNN REIT]

Also this quarter, we took some non cash write offs of accrued rent and below market rent related to At Home that in total added about $660,000 of income to core FFO, which should be excluded from the forward run rates. These non cash items had no impact on reported AFFO. With that, I'll turn the call back over to Matthew for questions.

[Operator]

Certainly. Everyone at this time will be conducting a question and answer session. If you have any questions or comments, please press star one on your phone at this time. We do ask that while posing your question, Your first question is coming from Jeff Spector from Bank of America. Your line is live.

[Jeffrey Spector, Managing Director at Bank of America]

Great. Thank you. Just first on the investment guidance. I know you raised it. It does suggest a slower pace in the second half.

[Jeffrey Spector, Managing Director at Bank of America]

So I just wanted to confirm what's driving that implied deceleration, whether it's market opportunities, which it sounds like are robust. There is you mentioned increased competition, capital allocation, or is it just some conservatism in the outlook? Thank you.

[Stephen Horn, President, CEO & Director at NNN REIT]

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

[Jeffrey Spector, Managing Director at Bank of America]

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

[Stephen Horn, President, CEO & Director at NNN REIT]

Yeah. We're not going to disclose the few that we didn't that weren't relationships. Relationships, but they were just our acquisition guys have calling efforts that have been going on for many years and deal flow happened. They were in the auto service sector. And we only consider relationship as a repeat business.

[Stephen Horn, President, CEO & Director at NNN REIT]

So we have to close one or two transactions with you before you become a relationship.

[Vincent Chao, EVP & CFO at NNN REIT]

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

[Stephen Horn, President, CEO & Director at NNN REIT]

Great. Thank you.

[Operator]

Thank you. Your next question is coming from Spencer Glenshier from Green Street. Your line is live.

[Spenser Glimcher, Managing Director at Green Street Advisors, LLC]

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

[Stephen Horn, President, CEO & Director at NNN REIT]

Yes. I mean, as you could guess, Spencer, primarily it was the former furniture store, Badcock's, and a fair amount of restaurants from the Frisch's assets. And Frisch's was in business for sixty plus years. So they had a lot of infill locations. And that's where the strong demand is coming from.

[Stephen Horn, President, CEO & Director at NNN REIT]

As a result, kind of convenience stores, car washes, collision repair. So there's still a lot of demand for those assets. And just to kind of give you an ideal, call it, 64 assets at the beginning, 28 of them we're working with a tenant on releasing. And then the remaining 36, four of them have been sold and or leased. 24 of those assets we are in active negotiations.

[Stephen Horn, President, CEO & Director at NNN REIT]

And there's different levels or stages of those negotiations. And then eight of the 36 is just limited activity. So we're seeing encouraging signs across those assets, specifically at the 36. And we're kind of expecting the rent recovery to eclipse historical averages, which would be 70%. Then as far as the Badcock furniture assets, we're outperforming our expectations on those. Just to recall for everybody, there was 35 of those assets. 19 of them have been resolved at greater than 100% rent recovery. 12 are currently pending and is tracking to greater than 100% recovery. And then there's four that there's work to be done.

[Stephen Horn, President, CEO & Director at NNN REIT]

But the reality is, if you took a downside scenario of just the four, our total recovery for the furniture is expected to be greater than 100%.

[Spenser Glimcher, Managing Director at Green Street Advisors, LLC]

Thank you. That's very helpful. And then just last one, cap rates were in line with 1Q. Can you just talk about what you're seeing thus far into 3Q?

[Stephen Horn, President, CEO & Director at NNN REIT]

Yes. Kind of in the 1Q call, I kind of said second Q was going be pretty flat. And we were right there. Third quarter, I'm really not seeing any movement either way. It depends on the mix of closings in the quarter.

[Stephen Horn, President, CEO & Director at NNN REIT]

However, I think give or take five, ten basis points either side could happen.

[Spenser Glimcher, Managing Director at Green Street Advisors, LLC]

Great. Thank you.

[Operator]

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

[Ronald Kamdem, MD & Head - US REITs and CRE Research at Morgan Stanley]

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

[Vincent Chao, EVP & CFO at NNN REIT]

Hey, Jenny, this is Vin. Yes, so we looked at that and really we did the $500,000,000 deal on July 1 and that kind of prefunded that refinancing. And so we are sitting on a bit of cash right now as we work through acquisitions, but ultimately those funds will partially be used to repay the $400,000,000 financing. And then we may be back in the market later in the year. If you just think about our normal cadence of acquisitions based on the new six fifty of acquisition volume at the midpoint at 40% debt, let's call it two fifty ish of net new debt that we would need.

[Vincent Chao, EVP & CFO at NNN REIT]

We funded some of that with the $500,000,000 so we may be back in the market for a smaller amount later this fall.

[Ronald Kamdem, MD & Head - US REITs and CRE Research at Morgan Stanley]

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

[Stephen Horn, President, CEO & Director at NNN REIT]

Yes. I mean, the nine to twelve months is when rent starts coming in, But we'll have activity within kind of thirty, forty days of marketing that asset. But to sell it or release it, there's usually contingencies in the contract before they start paying rent. If And it's a redevelopment, that's really when the nine to twelve months comes into play. But we are seeing kind of why I said we were outperforming our expectations with the furniture assets because it all moved pretty quick compared to historical averages.

[Stephen Horn, President, CEO & Director at NNN REIT]

And the restaurants are good locations, really good dirt. That nine to twelve months is still going to be the majority because there is redevelopment with the large regional operators.

[Ronald Kamdem, MD & Head - US REITs and CRE Research at Morgan Stanley]

Okay, perfect. Thanks so much.

[Operator]

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

[Nick Joseph, Head - US Real Estate & Lodging Research Team at Citigroup]

Thanks. It's Nick Joseph here with Smedes. Maybe just starting on the bad debt. You talked about 60 basis points bad debt embedded in guidance still, but only 15 basis points booked thus far. And you also mentioned that there are no tenants keeping you up at night.

[Nick Joseph, Head - US Real Estate & Lodging Research Team at Citigroup]

Just trying to kind of understand the kind of keeping the 60 basis points for now.

[Vincent Chao, EVP & CFO at NNN REIT]

Hey, Nick, it's Vin. I'll start and let Steve jump in if he has anything to add. But really as we think about the bad debt, we booked 15, so we've got 45 basis points to kind of play with if you will. We are still dealing with At Home. It's in bankruptcy.

[Vincent Chao, EVP & CFO at NNN REIT]

We don't exactly know where that's all going to shake out. We're pretty happy with the progress so far. We don't have anything on the initial closure list. And as we've talked on past calls, we feel pretty good about the real estate and the rents that are embedded there, which are only $6.5 per square foot. So we feel good about our position, they are in bankruptcy.

[Vincent Chao, EVP & CFO at NNN REIT]

So we have to keep some dry powder in case something goes against us on that front. I think typically we do have between thirty and forty basis points of bad debt in any given year. And so we've still got two quarters left to go and so we just don't want to again just similar to our investment thesis, we're not trying to get ahead of ourselves in terms of bad debt, just knowing that there's at home out there plus there's always normal turnover.

[Stephen Horn, President, CEO & Director at NNN REIT]

Yes. None of the tenants are keeping me up at night, meaning any substantial tenants. But just to reiterate what Vince said, we do deal with retailers and sixty days from now something might shift. So it's prudent to leave some of the bad debt in there.

[Nick Joseph, Head - US Real Estate & Lodging Research Team at Citigroup]

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

[Stephen Horn, President, CEO & Director at NNN REIT]

I would say I've seen the spread widen. I think with the new money coming into the sector, again, we've been doing this a long time and we've seen competitors come and go, that I still think there's a pretty good portfolio premium on certain deals in that kind of that 100,000,000 to $200,000,000 range, which is a nice bite, but there's a lot of capital chasing it. We saw a handful of portfolios go off in the 6.5, 6.75 range and that's probably the retail levels on the individual assets.

[Nick Joseph, Head - US Real Estate & Lodging Research Team at Citigroup]

Thank you very much.

[Operator]

Thank you. Your next question is coming from John Kilachowski from Wells Fargo. Your line is live.

[John Kilichowski, VP - Equity Research at Wells Fargo]

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

[Vincent Chao, EVP & CFO at NNN REIT]

Yes, sure. Hey, John, it's Vin. Yes, just to clarify in my prepared remarks, the $2,200,000 that we booked in the quarter, we were expecting that. That was part So it was embedded in our guidance last quarter.

[Vincent Chao, EVP & CFO at NNN REIT]

My comment about 2,200,000,000.0 being above historical levels, so but down from the first quarter. So that was the point I was trying to make on the 2.2 But as far as the upside in the guidance, there's a couple of moving parts there. You've got about $05 of upside on AFFO, just a little less than that through the first half. But then you do have net expenses going up by about just over a penny. So that's a headwind to the guidance.

[Vincent Chao, EVP & CFO at NNN REIT]

And then I think the balance of it really is investment related and as well as the bond offering that we did. So we're seeing a little bit of downside call it a zero five zero or so from the bond offering relative to our initial guidance. And so we're sitting on a bit of cash right now. We're earning pretty good rate on it, but not the same as what we're paying on the interest side of things. So there's a little bit of headwind there and then offsetting all that is acquisitions, which one is timing of acquisition.

[Vincent Chao, EVP & CFO at NNN REIT]

So we've definitely been a bit ahead of our plan in terms of timing. And then on the flip side, on the disposition side, we typically when we give guidance on dispositions, we're assuming income producing. And if you look at it year to date, we've got about half of our dispositions that have been vacant and so we're picking up a little bit from that as well.

[John Kilichowski, VP - Equity Research at Wells Fargo]

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

[Stephen Horn, President, CEO & Director at NNN REIT]

Yes. The disposition side is more communicating with individual tenants. Just for example, you saw that our Camping World exposure dropped by a couple because that's some assets that weren't performing for Camping World, they weren't in the long term plan. So we sold some assets back to them. So that's good for N and N and good for the tenant relationship.

[Stephen Horn, President, CEO & Director at NNN REIT]

As far as acquisitions, I think going forward, the auto service sector still seems to be the most robust activity if it's M and A or growth. And I think also we're starting to see some activity in the QSR restaurants.

[John Kilichowski, VP - Equity Research at Wells Fargo]

Very helpful. Thank you.

[Operator]

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

[Michael Goldsmith, US REITs Analyst at UBS Group]

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

[Vincent Chao, EVP & CFO at NNN REIT]

Yeah. Hey, Michael. Thanks for the question. Yeah, I think from quarterly leverage level of 5.7%, so ticked up a little bit from the first quarter. That really has to do more with timing of acquisitions, dispositions.

[Vincent Chao, EVP & CFO at NNN REIT]

We did a little bit of equity in the quarter, but it's really the earlier acquisition timing. And so part of our initial plan obviously includes the benefits of free cash flow, but because we're buying ahead of plan that's causing us to have a little bit of bump up in leverage here in the near term. In terms of longer term, how do I think about leverage? I mean lower is better. Obviously, we'd love to be operating.

[Vincent Chao, EVP & CFO at NNN REIT]

I would say targeting less than 5.5 times. To put exact range, it's hard to say, but certainly we're in the five ish range that would give us a little bit more capacity kind of lean in when opportunities arise. And so I'd love to get it down below 5.5 here shortly.

[Michael Goldsmith, US REITs Analyst at UBS Group]

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

[Vincent Chao, EVP & CFO at NNN REIT]

Yes, I think it really goes down to asset and liability management. So if you look at our debt duration, it's around eleven years prior to this deal last quarter was eleven point six years. If you look at our average lease duration, it's just under ten, so like nine point eight years. And so from my perspective that means we have a little bit of flexibility on doing a little bit of short term debt in the near term just to balance out those assets and liabilities. And I think the other part of it is we look at our maturity ladder, we look at where we have holes.

[Vincent Chao, EVP & CFO at NNN REIT]

And so we did have a hole in that five, call it five point five year period really. And so it's a combination of where do we have holes in the maturity ladder and how are we managing our assets and liabilities.

[Michael Goldsmith, US REITs Analyst at UBS Group]

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

[Vincent Chao, EVP & CFO at NNN REIT]

Thank you.

[Operator]

Thank you. Your next question is coming from Rich Hightower from Barclays. Your line is live.

[Rich Hightower, MD - U.S. REIT Research at Barclays]

Hey. Good morning, guys. Just a quick one from me. We just noticed, I think, quarter over quarter, the ABR that's on sort of a cash basis payment ticked up from the first quarter. Not so much year over year, but quite a sequential jump.

[Rich Hightower, MD - U.S. REIT Research at Barclays]

And then likewise, kind of a big jump in terms of the GLA on cash. And so my question there is, is that just related to at home or is there anything else kind of in the moving parts there that we should be aware of?

[Vincent Chao, EVP & CFO at NNN REIT]

Yeah, hey Rich, and yeah, almost all of that is at home. Okay. If you recall that we're up about a little over a percent quarter over quarter and cash basis ABR and at homes percent of our ABR and then obviously a bigger percentage of our GLA given the size of the box.

[Rich Hightower, MD - U.S. REIT Research at Barclays]

Exactly. And that's a difference from the first quarter just to be clear. Is that just based on timing around the bankruptcy filing?

[Vincent Chao, EVP & CFO at NNN REIT]

Correct. Correct.

[Operator]

Your next question is coming from Wes Golladay from Baird.

[Wesley Golladay, Senior Research Analyst at Robert W. Baird & Co]

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

[Stephen Horn, President, CEO & Director at NNN REIT]

Yes. Think it's a good question. I think there's better visibility on the tariffs in the conversations that we have with our tenants. But I don't think they're quite there yet that they're ready to ramp up the pre levels going back to 2018, 2019. But we are starting to see inquiries come in about funding new builds, kind of a one off here and there.

[Stephen Horn, President, CEO & Director at NNN REIT]

However, we do see some M and A activity picking up where buyers are able to underwrite the cash flow, the quality of earnings.

[Wesley Golladay, Senior Research Analyst at Robert W. Baird & Co]

Okay. Yeah.

[Vincent Chao, EVP & CFO at NNN REIT]

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

[Wesley Golladay, Senior Research Analyst at Robert W. Baird & Co]

Yeah. That makes sense. And even why I got you. When we look at your, call it, nearly $900,000,000 of

[Wesley Golladay, Senior Research Analyst at Robert W. Baird & Co]

ABR, of the bad cocks and the frictions that you resolved, how should we think about timing of commencement for some of that? I guess we call it sign out open pipeline.

[Vincent Chao, EVP & CFO at NNN REIT]

That's a good question. It's definitely not something that we track as closely as we did in the shopping center space. But for the most part, most of the ABR is commenced. We don't have a ton of sign that open per se. Thought on top of my head, I can't think of any major tenants that have not yet commenced that are not in that ABR number we gave you.

[Wesley Golladay, Senior Research Analyst at Robert W. Baird & Co]

Great. Thank you.

[Operator]

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

[Omotayo Okusanya, Managing Director - Head of US REIT Research at Deutsche Bank]

Yes. Good morning, everyone. Steve, I was hoping you could just kinda walk us through again. I know you kind of mentioned new tenants are kind of keeping you up at night, quote, unquote. But I was hoping you could kinda talk to, again, some of the retail categories that, you know, are still kind of seeing pressure, whether it is, you know, competition, whether it's just, you know, concepts dying, whether it's tariffs, what have you.

[Omotayo Okusanya, Managing Director - Head of US REIT Research at Deutsche Bank]

But just to get a couple of thoughts around restaurants and drugstores and even furniture and consumer electronics, some may get hit by tariffs. Just how are you thinking about that? How do you kind of think about 60 basis points of debt maybe covering any of that risk?

[Vincent Chao, EVP & CFO at NNN REIT]

Hey, Theo, it's Vin. Good to hear from you. I'll start maybe just with lots specific type of commentary. It's a little bit easier than to talk a lot by lot. But I mean, there are some areas that are probably more impacted by say tariffs and some of that uncertainty than others.

[Vincent Chao, EVP & CFO at NNN REIT]

I mean thankfully most of our tenant base is either necessity or service based. It's about 85% of our ABR. So maybe a little bit less direct impact on tariffs and more of an indirect economic impact if there is any. But as far as restaurants go, I mean, just like most retail, there's winners and losers all the time. And so you look at the Chili's that's just absolutely crushing it right now.

[Vincent Chao, EVP & CFO at NNN REIT]

And then you have others, Texas Roadhouse others that are not doing quite as well. But I think it really is, do you have a compelling product offering that gets people back in the door and that's across not just restaurants, but there's definitely winners and losers throughout. And I think as pressure builds on some of the weaker players that does open up an opportunity for the better players to take share. And so we are seeing that. And I'll give you another example, Camping World is one that obviously it's a big tenant of ours.

[Vincent Chao, EVP & CFO at NNN REIT]

We did reduce exposure this quarter. But if you look at their earnings releases and calls, I mean, they are seeing pressure on their ASPs. Are seeing pressure on certain parts of their business, particularly new business, but they have a very strong used business, right? So they're leaning into the parts of the investor or the customer base that are active and so on net, they're still able to drive EBITDA and top line growth. And so it's just can you adjust to the changing market conditions or not.

[Vincent Chao, EVP & CFO at NNN REIT]

So I think it's not as simple as just saying, tariffs are going to impact tenants negatively until on net, an entire line of trade is good or bad. Having said that, if we can get some more clarity on the economy and tariffs, job growth, etcetera, and people can feel more confident in making decisions, and then I think that's just a net good for all lines of trade.

[Omotayo Okusanya, Managing Director - Head of US REIT Research at Deutsche Bank]

Thank you.

[Operator]

Thank you. Your next question is coming from John Massocca from B. Riley. Your line is live.

[John Massocca, Senior Research Analyst at B Riley Financial]

Good morning. Good morning. Apologies this is already kind of addressed, but was there something specific that drove the increase in non reimbursed real estate expenses? And was that tied to maybe some of the former Fritz's properties and the timing you're thinking about with resolving those vacancies or even just baking in some conservatism given at homes situation? Just kind of curious why that ticked up related to specific tenant and they kind called out a little bit in the prepared remarks.

[Vincent Chao, EVP & CFO at NNN REIT]

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

[Vincent Chao, EVP & CFO at NNN REIT]

And so we've made some decisions to delay certain openings to again try to come up with a better long term solution.

[John Massocca, Senior Research Analyst at B Riley Financial]

Does that indicate maybe in terms of resolving some of these vacancies there's more of a leasing kind of angle you're taking or vice versa, maybe more of a disposition angle and that's kind of what's driving the differentiated timing versus what you were expecting at 1Q?

[Stephen Horn, President, CEO & Director at NNN REIT]

Yes. I mean, think things are moving a little slower on a handful of the assets than you would like. That's just real estate if it's permitting process. But yes, I think you're probably right as far as timing. Leasing route on some of the assets that is creating a little bit more carry cost than they originally thought.

[Stephen Horn, President, CEO & Director at NNN REIT]

But again, in the big picture, it's a pretty small number as far as the impact on our financials. But in the long run, it will create the most shareholder value.

[John Massocca, Senior Research Analyst at B Riley Financial]

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

[Vincent Chao, EVP & CFO at NNN REIT]

Yes. Look, I think the guidepost here is not necessarily, hey, we want to have short term debt or we're trying to get the lowest cost of debt. I mean, it is cheaper on the shorter end of the scale. So that's a benefit. But I go back to just trying to balance our assets and liabilities.

[Vincent Chao, EVP & CFO at NNN REIT]

So if we've got eleven years of duration on the debt and we've got under ten years of duration on the leases, there is a bit of a mismatch there. And so to some degree, think that gives us flexibility to opt for shorter term debt if it makes sense. What's regard to all the other decisions we have to make and all the other factors we have to consider. But ideally, I'd love to be issuing longer term debt on a consistent basis, but we do have a bit of a mismatch between assets and liabilities. And so again, that gives me some opportunity to do some short term debt here.

[Operator]

Your next question is coming from Linda Tsai from Jefferies. Your line is live.

[Linda Tsai, Senior Analyst at Jefferies]

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

[Vincent Chao, EVP & CFO at NNN REIT]

Yes. On lease termination fees, Linda, I mean, I think historically we've talked about 2,000,000 to $3,000,000 but it's certainly been higher than that over the last call it two years or so. Part of that is, have been actively managing the portfolio and trying to look for opportunities to address problems before they come to a head. And so the dark paying and sublease tenant lists, those are the ones that we kind of fish around for these lease terminations to try to address them. And as we talked about on this call, the two biggest deals that we did this quarter, we had resolution for both of them by the time we did the lease termination fee and that's the kind of outcome that we're looking for.

[Vincent Chao, EVP & CFO at NNN REIT]

So it might be elevated for the next year or so. But I don't think it'll be the same as last two years, but it could be higher than the 2,000,000 to $3,000,000 in the next year or so. And then in terms of the net real estate expenses, yes, I think we'd hope to by the end of the year be back to a bit more of a normal level of real estate expense net, which is call it 13,000,000 to $14,000,000 on an average year and then obviously that grows every year just from an inflationary perspective, but that is our hope.

[Linda Tsai, Senior Analyst at Jefferies]

And that's related to releasing some boxes?

[Stephen Horn, President, CEO & Director at NNN REIT]

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

[Linda Tsai, Senior Analyst at Jefferies]

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

[Stephen Horn, President, CEO & Director at NNN REIT]

I think it's discussions with our tenants understanding as lease term is burning off that they may not renew that lease in the at the end of the term. So sell where there is some term in value to a potential investor opposed to letting it go vacant where you're getting a percentage of a recovery. But if there's some lease term, the income producing asset, you can maximize value by selling it into the ten thirty one market. And at the same time, actively manage our portfolio, strengthening it in the long run.

[Linda Tsai, Senior Analyst at Jefferies]

Thank you.

[Operator]

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

[Stephen Horn, President, CEO & Director at NNN REIT]

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

[Operator]

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

Participants

Executives

• Stephen Horn, President, CEO & Director
• Vincent Chao, EVP & CFO

Analysts

• Jeffrey Spector, Managing Director at Bank of America
• Spenser Glimcher, Managing Director at Green Street Advisors, LLC
• Ronald Kamdem, MD & Head - US REITs and CRE Research at Morgan Stanley
• Nick Joseph, Head - US Real Estate & Lodging Research Team at Citigroup
• John Kilichowski, VP - Equity Research at Wells Fargo
• Michael Goldsmith, US REITs Analyst at UBS Group
• Rich Hightower, MD - U.S. REIT Research at Barclays
• Wesley Golladay, Senior Research Analyst at Robert W. Baird & Co
• Omotayo Okusanya, Managing Director - Head of US REIT Research at Deutsche Bank
• John Massocca, Senior Research Analyst at B Riley Financial
• Linda Tsai, Senior Analyst at Jefferies