NNN REIT, Inc.

And welcome to NNNREIT's incorporated second quarter 2024 earnings call. At this time, all participants are on a listen-only mode, and 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, Mr. Steve Horn, Chief Executive Officer of NNN REIT. Sir, you may begin.

Hey, thanks, Ali. Hey, good morning, and welcome to NNN REIT's second quarter 2024 earnings call. As usual, joining me on the call is Chief Financial Officer Kevin Hobbick. As the press release reflects, the company's consistent performance carried through the second quarter and produced strong results, including high occupancy, and inline acquisitions volume driven by our proprietary tenant relationships. We are in a position to continue enhancing shareholder value as we move deeper into 2024 and start setting up for 2025. Highlights of the second quarter financial results emphasize our continuous effort, actively managing the portfolio with data analytics and experience. The portfolio of 3,548 freestanding single-tenant properties continue to perform exceedingly well, maintain high occupancy levels of 99.3, which remains above our long-term average of roughly 98%. Knowing the acquisition pipeline, market conditions, and portfolio performance, M&M feels comfortable about increasing the midpoint of core FFO per share guidance by 2 cents to $3.30. The leasing department continued the strong start of the year by identifying and executing with QSR tenants, having 158% recapture rate from the prior rent during the quarter, which brings year-to-date recapture of 102%. This recapture is above historical levels of approximately 70%. Just want to be clear and remember that NNN tries hard not to give TI dollars to quote buy-up rent. Currently, NNN only has 26 vacant assets in the portfolio, which is a testament to working with relationship tenants to maximize value for shareholders. During the quarter, we also sold 14 properties, which 11 were income producing, raising $67 million of proceeds to be reinvested in new acquisitions. Over the course of the year, NNN sells assets defensively and proactively. But overall, we target a blended disposition cap rate to be about 100 basis points lower than the deployment of capital pricing. Year-to-date, NNN has sold 85 million of assets, which has resulted in the lift of the disposition guidance lower end to 100 million from 80 million. Staying on the portfolio, I'd like to mention with regard to 2024 lease expirations, which we originally had about 90 headed into the year, is all but wrapped up. and we landed right near our historical average of 85% for renewals. Now the asset management department is kind of turning its attention to 2025 renewals, which I see no cause for concern based on the makeup of assets and tenants. On the acquisitions, during the quarter, we invested $110 million in 16 new properties at an initial cash cap rate of 7.9. The potential yield, or if we were required to straight line it, would be about 8.9%. with an average lease duration of over 16 years. 100% of the deals were from relationship tenants, which we do repeat business, creating a barrier to the competition to solidify head and ends deal form. As far as the acquisition pricing environment, last quarter, our initial acquisition cap rate was approximately 10 basis points tighter than the first quarter of 2024 and 70 basis points wider than the second quarter of 2023. My expectations for NNN's cap rates on the target acquisitions will remain kind of in the mid to high sevens for the remainder of the year. This assumption is a result of one, you know, kind of the third quarter transaction pricing for the most part is locked in. Two, the run up in equity prices in the sector create marginally better cost of equity. And lastly, the market's starting to price in the short term rate cuts. Knowing our current pipeline and dialogue with our partners, we remain comfortable with our ability to meet and hopefully exceed our 2024 acquisition guidance of 400 to 500 million, primarily via the direct sale lease back on our long duration triple net lease form, which is a lot more landlord friendly than the 1031 market deals. Our balance sheet remains one of the strongest in the sector with a leading 12.6 year average debt maturity. And our next debt maturity isn't until the fourth quarter of 2025. The credit facility has plenty of drive power with a quarter end balance of approximately $12 million down from $132 million at year end. We just increased the capacity to $1.2 billion. MNN is well positioned to fund our 2024 acquisition guidance and beyond. With that, let me turn the call over to Kevin for more color detail and the quarterly numbers and updated guidance.

Thanks, Steve. As usual, I'll start with our Typical cautionary statement that we will make certain statements that may be considered to be forward-looking statements under federal securities law. 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. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail the company's filings with the SEC and in this morning's press release. Okay, with that out of the way, yeah, so headlines from this morning's press release report, quarterly core FFO results of 83 cents per share for the second quarter of 2024, and that's up 3 cents or 3.8% over a year ago results of 80 cents per share. AFFO results were $0.84 per share for the second quarter, which is $0.04 or 5% higher than year-ago results. Second quarter results did include $2.1 million of lease termination fee income, which is relatively high for us, and that compares with $300,000 in the second quarter of 2023. And as you might recall, we reported $4.2 million of lease termination fee income in the first quarter of this year. So for the first half, we're reporting $6.3 million of lease termination fee income first half of 2024 versus $2 million for the first half of 2023. If you look back over the last five years, we have averaged $3 million of annual lease termination fee income. So all that to say this year is running well above normal. But even without that incremental income, overall it was a good quarter and in line with our expectations. As Steve mentioned, occupancy was 99.3% at quarter end. G&A expense was $11.8 million for the quarter, and that represents 5.4% of revenues for the quarter and 5.6% of revenues for the first half, which is in line with our guidance. And I'll begin my push here for folks to also think about G&A as a percentage of NOI, which for us was 5.6% in the second quarter. And I'll talk more about this in due course, but I think it highlights one of the advantages net lease companies enjoy versus what I'll call gross lease companies, in that more of our revenue drops to the bottom line, which obviously supports total shareholder returns. Our AFFO dividend payout ratio for the first half of 2024 was 67.1%. which resulted in approximately $101 million of free cash flow for the six months after the payment of all expenses and dividends. Incorporating the increased dividend we recently announced, we currently anticipate this free cash flow amount coming in at approximately $195 million for the full year 2024, which is about a 68% payout ratio for the year. We ended the quarter with $837.6 million of annual base rent in place for all leases as of June 30, 2024, which would take into account all acquisitions and dispositions completed during the quarter. As Steve mentioned, we did increase our 2024 guidance by the bottom end and the top end by two cents a share. with a new range for core FFO per share of $3.27 to $3.33 per share. The underlying assumptions really did not change. Notably, G&A acquisition volume all staying the same. As Steve mentioned, a small increase in the disposition volume expectations to a new guidance of $100 to $120 million for the year. Switching over to the balance sheet, there was a very small amount of equity issuance in the second quarter at a little over $42 per share, generating $13 million in net proceeds. With a big thanks to our supportive bank group, in April we completed a recast of our bank credit facility, increasing the capacity by $100 million to $1.2 billion and extending the term to 2028. There were not any other material changes to the terms of that bank line. In May, we issued $500 million of 5.5% notes due in 10 years. And in June, we paid off $350 million of 3.9% notes that came due on June 15. So with this debt refinance activity, our weighted average debt maturity ticked up to 12.6 years at quarter end. which will help us slow the refinance headwind that all companies are facing in the coming years. We maintain good leverage and we have kept the balance sheet in strong liquidity position with $1.2 billion of available liquidity at quarter end. Maintaining our light capital market footprint, we funded nearly 79% of our $235 million of year-to-date acquisitions with free cash flow of $101 million and $86 million of disposition proceeds. For the full year 2024, based on our midpoint of our acquisition and disposition guidance, we should fund close to 68% of 2024 acquisitions with free cash flow and disposition proceeds. A couple of stats, balance sheets. Net debt to gross book assets was 41.6%. Net debt to EBITDA was 5.5 times at June 30. Interest and fixed charge coverage was 4.2 times for the second quarter. 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 are 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 helps us not to confuse activity with achievement. In closing, 2024 is tracking largely as expected for us, and we believe we're in relatively good position to navigate any of the uncertainties that are out there as we continue to focus on growing per share results. And we are mindful this is a long-term, multi-year endeavor. So with that, we will open it up to any questions.