NNN REIT, Inc. Q1 FY2025 earnings call

• Progress on vacancies: Making good progress resolving vacancies, with 15 of 35 furniture stores resolved/with significant interest and 38 of 69 restaurant assets leased/sold. - Financial performance: Portfolio stability with high occupancy, minimal credit losses, strong leasing activity with 25 renewals and 8 new leases, blended rent recapture rate 98%. - Acquisitions: Acquired 82 new properties for ~$232 million, all sale-leaseback transactions, with attractive initial cap rate and long-term leases. - Dispositions: Sold 10 properties for $16 million, funds earmarked for reinvestment. - Balance sheet: Strong balance sheet with ~$1.1 billion availability on $1.2 billion line of credit, manageable debt maturity, and strong liquidity.

The portfolio of 3,641 freestanding single-tenant properties had an occupancy rate of 97.7% at quarter end, a slight dip from the long-term average. The company acquired 82 new properties during the quarter for approximately $232 million, with an attractive initial cap rate of 7.4% and long-term leases over 18 years. It sold 10 properties for $16 million in the first quarter. Core FFO per share was $0.86, up 3.6% year-over-year, and AFFO per share was $0.87, also up 3.6% year-over-year. Annualized base rent was up over 5% year-over-year. NOI margin was 95.9% for the quarter, with G&A at 5.6% of total revenues and 5.9% of NOI. Free cash flow after dividend was about $55 million in the quarter, with $8.2 million from lease termination fees.

• Core FFO per share guidance: $3.33 to $3.38. - AFFO per share guidance: $3.39 to $3.44. - Acquisition guidance: Maintains $500 million to $600 million acquisition guidance, with ~40% of volume completed in Q1. - Credit loss reserve: Embedded 60 basis points credit loss reserve, comfortable with it given year-to-date no notable credit losses.

• Macro-economic uncertainty: Impact on tenant growth plans and potential deal flow. - Cap rate pressure: Anticipated cap rate pressure in 2025 compared to previous year. - Lease termination fees: Unpredictable timing and amount, with the $8.2 million in Q1 being unusually high. - Tenant risks: Concerns around specific tenants on the watch list like at home, with potential impact on performance.

Q: 1Q acquisition pace was much higher-than-expected. Could you expand on that? Do you see less competition in the transaction markets?

A: Transactions were sale-leaseback primarily through relationships, within guidance range for full year, auto services sector had consolidation.

Q: Acquisition cap rates ticked down about 10 basis points in the quarter. So in terms of what you're seeing in the pipeline, are you expecting that trend to kind of continue to tick down or maybe just kind of flatline from there?

A: Second quarter pricing is pretty much in line with first quarter, third quarter too far out to speculate, 740 cap rate for second quarter.

Q: Less-than-expected bad debt contribute to 1Q? And of your 50 bps embedded reserves, how much of that is like known versus unknown?

A: No significant bad debt in first quarter, 10 basis points of credit loss about $0.05 per share, at home is main watch list item with no current credit loss.