NNN REIT, Inc.

Greetings. Welcome to the NNNRE third quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Steve Horn, Chief Executive Officer. You may begin.

Hey, thanks, Holly. Good morning, everyone. Welcome to NNN's third quarter 2024 earnings call. I'm joined today by our Chief Financial Officer, Kevin Havik. This year, NNN has delivered consistent performance, driven by active portfolio management and strategic acquisitions with our relationships, what we call our NNN mode that sets us apart and delivers our external growth. Given our year-to-date results, we are tightening our 2024 core FFO per share guidance to a range of 328 to 332. Additionally, we are now in position to exceed our original acquisition volume guidance, so we are raising the midpoint by 22% to 550 million. This increase showcases the strength of our pipeline and our execution ability. On the capital markets front, we raised approximately 175 million through the ATM program this quarter. actually our largest quarter since the fall of 2019. The discipline of being selective while deploying capital and opportunistic raising capital over the long duration has NNN in great shape through volatile economic periods. In times like today's macroeconomic conditions, NNN's discipline of maintaining a solid balance sheet, reasonable acquisition volume does put NNN in a place to execute the remaining deal flow of 2024 but more importantly, to execute 2025 with limited, if any, needs to access to capital markets. At the end of the quarter, we had nothing drawn on our $1.2 billion line of credit and nearly $175 million of cash after completing $350 million of volume through the first nine months. Add in NNN's industry-leading free cash flow as a percentage of acquisition volume to the already high liquidity position we are ready to capitalize on deals when the right opportunities present. Shifting the highlights to the third quarter financial results, our portfolio of 3,549 freestanding single tenant properties continue to perform well with 10 years of term. Maintain high occupancy levels of 99.3, which remains above our long-term average of 98% plus or minus a fraction, and only 24 vacant assets. A few tenants have been in the press recently, and it's the same ones we've been having to mention time and time again. Big Lots, Cons Home Plus, and Frisch's Big Boy. M&M is working diligently to resolve the challenges, but with regard to Frisch's and Cons, I feel good about the real estate because of the upfront underwriting and small fungible boxes with reasonable rents, specifically the restaurants with drive-thru windows. We have received a fair amount of inbound calls inquiring about the real estate. And at this time, it appears Big Lots will continue to operate all three we own. Kevin will provide more detail about the watch list later. Turning to acquisitions, during the quarter, we invested $113 million in eight new properties at an initial cash cap rate of 7.6. If we actually included the rent increases over the term of the lease, it would result in a 9.27 long-term projected yield. And with an average lease duration of 18.4, and that's the result of the sale-leaseback transactions. The first nine months, we have invested roughly $350 million in 44 properties at a cash cap rate of 7.8, which is about 60 basis points wider than the comparable period of 2023. And 16 of the 28 closings were under $5 million, which proves NNN's belief that smaller deals still move the needle for NNN shareholders. As we move through the year, cap rates seem, for the most part, to be stabilizing. I don't see any material move either way as we head into the fourth quarter, and as well as the deals we're pricing for the first quarter of 2025. I'm expecting deal volume to tick up for the fourth quarter, and it does feel like the market opportunities are better today than they were six months ago. During the quarter, we also sold nine properties, which included five vacant, raising 20 million in proceeds at a 4.4 cap rate, and we've been reinvesting at 7.6, so it's a good spread. Year to date, we've now raised approximately $105 million in proceeds from the sale of 29, which included eight vacants and an overall blended 7.0 cap rate. The mission is always to release the vacancy, but we'll continue to sell non-performing assets if we don't see a clear path to generate rental income in a reasonable timeframe. Our balance sheet is still one of the strongest in the sector. Our credit facility has plenty of capacity, as I mentioned earlier, with no balance outstanding. More importantly, our next debt maturity isn't until the fourth quarter of 2025, and we maintain an industry-best 12.3-year weighted debt maturity. NNN is well positioned to fund our remaining 2024 acquisition guidance and beyond. With that, let me turn the call over to Kevin for more color and detail on the quarterly numbers and updated guidance.

Thanks, Steve. As usual, I'll begin with the note 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 in the company's filings with the SEC and in this morning's press release. Okay, with that, headlines from this morning's press release report quarterly core FFO results of 84 cents per share for the third quarter of 2024. That is up three cents, or 3.7% over a year ago, results of 81 cents per share. The AFFO results were 84 cents per share for the third quarter, which is 2 cents or 2.4% higher than year-ago results. Third quarter results did include $3.9 million of lease termination fee income, which is relatively high for us, and that compares with $385,000 for the third quarter of 2023. And as you may recall, we reported a above average lease termination fee income in the first two quarters of this year as well. So, we were reporting $10.2 million of lease termination fee income for the first nine months of 2024, and that compares with $2.4 million for the first nine months of 2023. If you look back over the last five years, we've averaged annual lease termination fee income of about $3 million. So this year is running well above normal. But even without that incremental income, overall a good quarter and in line with our expectations. Occupancy was 99.3% at quarter end. That was flat with the prior quarter. G&A expense was $11.2 million for the quarter and represents 5.1% of revenues for the quarter and 5.5% of revenues for the first nine months. Again, which is in line with our expectations and guidance. As a percentage of NOI, net operating income, G&A was 5.3% and 5.7% for the quarter and nine months respectively. As I noted on our last call, I think this is a valuable metric as you think about a net lease company versus all the other REITs across the other property sectors. It puts us all on a level playing field and it highlights the efficiency of the net lease format, which accrues to the benefit of net lease shareholder returns. Our AFFO dividend payout ratio for the first nine months of 2024 was 67.4%. And that resulted in approximately $151 million of free cash flow for the nine months, and that's after the payment of all expenses and all dividends. And incorporating the increased third quarter dividend rate, we currently anticipate this free cash flow amount coming in at approximately $193 million for the full year of 2024. We ended the quarter with $851 million of annual base rent in place for all leases as of September 30, 2024, and so that would take into account all acquisitions and dispositions completed during the quarter. We did affirm our 2024 guidance, but did tighten the top and bottom of the range by one penny, leaving the midpoint unchanged. So the new core FFO guidance is now $3.28 to $3.32 per share, and a similar revision was made to AFFO guidance, which now stands at $3.31 to $3.35 per share. As Steve mentioned, yeah, a quick update on a couple of tenants that are having credit challenges, both of which we've talked about for a few quarters now. Badcock Furniture was previously owned by a company named FRG, and Badcock was sold with the FRG guarantee in place to Kahn's Home Plus, who filed for bankruptcy in July. We own 32 Badcock Furniture stores, representing 0.6% of our annual base rent, which translates to about $5.2 million in annual base rent. We are operating on the assumption that we'll get these properties back, but precisely when is unknown as it's still working its way through the bankruptcy process. We will pursue the FRG guarantee of these leases, but we do recognize FRG may have its own credit challenges. The second tenet of note is Frisch's, and Frisch's is a Midwest big boy hamburger concept that has been around for several decades. They only paid us half rent owed in the third quarter, half the rent owed in the third quarter. So we own 64 Frisch's properties at quarter end, representing 1.5% of annual base rent, and that translates to $12.6 million. While I don't want to get too detailed in the plans here due to various claims we're pursuing to protect our interests in this regard, we did want to provide some information on these situations. Both of these tenants are on cash basis accounting, so we are only recording what we actually collect. Over the years, our guidance has generally assumed 100 basis points of rent loss in any given period, but these two tenant issues could push us over that level, obviously, in the fourth quarter. We should get some incremental clarity on these two situations in the fourth quarter, which we think will allow us to better estimate the outcomes when we provide our 2025 guidance in February. These kinds of tenant credit events are historically a normal part of our business. The way we think about it is as long as our rents are not too far from market rent, we don't lose too much sleep. If we get properties back, there may be some timing gap in the income production, whether we decide to sell, release, or redevelop the properties. But in the long run, which is our perspective, our experience suggests that any lost rent will likely be a manageable headwind. Long-time followers of NNN know our position. Real estate leased at reasonable rents win the race, in our opinion, which allows us to deal with whatever tenant credit problems might come our way. Despite these challenges, like I said, we were able to affirm the earnings guidance that we increased in the second quarter. With that, I'll switch over to the balance sheet. So yeah, as Steve alluded to, after 18 months of very little equity issuance, when our stock was in the high 30s, low 40s, we did sell some equity in the third quarter. at an average price a touch over $47 per share, generating net proceeds of $178.9 million. Coincidentally, we ended the quarter with that amount of cash on our balance sheet and no amount outstanding on our $1.2 billion bank line. So we're in very good leverage and liquidity position as we finish 2024 and roll into 2025. We don't have any debt due until November 2025, and our weighted average debt maturity stands at 12.3 years at quarter end. Maintaining our light capital market footprint, we funded 74% of our $350 million of year-to-date acquisitions with free cash flow of $151 million and $106 million of property disposition proceeds. For the full year, based on the midpoint of our acquisition and disposition guidance, we should fund approximately 57% of 2024 acquisitions with free cash flow and property disposition proceeds. A couple of leverage metrics. Net debt to gross book assets at quarter end was 39.6%. Net debt to EBITDA was 5.2 times, 5.2 at September 30th. Interest coverage and fixed charge coverage was 4.2 times for the third quarter. As a reminder, none of our properties are encumbered by mortgages. In closing, 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 the risk through property underwriting and maintaining a sound balance sheet. In our mind, 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, Holly, with that, we will open it up to any questions.