NNN REIT, Inc.

Greetings. Welcome to the NNN REIT Inc. First Quarter 2025 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, CEO. You may begin.

Hey, thanks, John. Hey, good morning, and thank you for joining NNN REIT's first quarter 2025 earnings call. With me today is Vin Chow, our Chief Financial Officer. I'd like to start with a high-level update on our vacant furniture and restaurant assets before we delve into the first quarter results. We're making excellent progress resolving these vacancies, and I'm confident that we will be in a solid position to have the vast majority resolved by year-end. On a post-quarter update, in terms of our 35 furniture stores, 15 are resolved through leasing or sale and 15 have significant interest and we anticipate nearly all be handled by the end of the third quarter. For the restaurant assets, we gained full possession this quarter following the conclusion of the eviction process. We've leased or sold 38 and have strong interest in the other 31. Looking ahead as we fully put to bed the two tenant defaults from the fourth quarter of 2024, We anticipate a total impact of only 1.5 to 2.5 cents on our stabilized core FFO per share for the year. That's less than 1%. This minimal effect serves to highlight the lasting significance of robust real estate fundamentals throughout the duration of a 20-year lease. Let's go to the highlights of our first quarter financial performance. Our portfolio of 3,641 freestanding single-tenant properties continue its strong track record. Occupancy at the end of the quarter was 97.7, a slight dip from our long-term average of approximately 98 plus or minus, due to the finalization of the eviction process. We are encouraged by the significant interest in our available properties from numerous strong national and regional tenants, and I expect our occupancy rate to trend upwards as the year progresses. Notably, we experienced limited to no credit losses within the portfolio during the first quarter. Given the current macroeconomic backdrop, I am confident in the portfolio's ability to deliver excellent performance over the long term. Our portfolio's stability through events like GFC and the pandemic, with minimal impact, underscore its strengths. We prioritize relationships with sophisticated tenants and actively manage our assets to prepare for future uncertainties. While maintaining our discipline underwriting approach, we successfully acquired 82 new properties during the quarter for approximately $232 million. These acquisitions featured an attractive initial cap rate of 7.4 and a long-term lease duration of over 18 years. Significantly, all of our acquisitions this past quarter were sale-leaseback transactions, a testament to the effectiveness of NNN's acquisition team and relationship-focused efforts. NNN takes pride in its relationship-driven business model, which facilitates consistent repeat business. Not only in the current environment, but every transaction, we remain highly selective in our underwriting and will continue to prioritize sale-leaseback transactions with our established tenant relationships and not operators or developers that are financial engineers. Regarding the current acquisition pricing market trends, we begin the year with the first quarter initial cash cap rate of 7.4%, This compression was in line with the February discussion. We anticipate some cap rate pressure in 2025 compared to the previous year. Now at the start of May, second quarter cap rates are mostly holding steady with the first quarter. However, we are seeing significant compression in the larger portfolio deals, causing us to forego those opportunities. In the first quarter, we executed strategic dispositions. We sold 10 properties and generated $16 million in proceeds, and only one of those assets was vacant. These funds are earmarked for reinvestment in new acquisitions, and this activity aligns with our full year disposition guidance. Continuing our history of sound financial management, Vin and the team have ensured a robust balance sheet. We finished the first quarter with nearly $1.1 billion availability on our $1.2 billion line of credit, and $400 million debt maturity in the fourth quarter is manageable. This reinforces the effectiveness of our self-funding model. The strong financial footing provides the company with the necessary flexibility to execute our 2025 acquisition guidance of $500 to $600 million. To summarize, our first quarter performance in occupancy, leasing, and rent collection further validates our consistent long-term strategy. This involves acquiring well-located properties with strong regional national tenants at appropriate rents, supported by strong and flexible balance sheet. With that, I'll turn the call over to Vin for more detail to review our quarterly numbers and updated guidance.

Thank you, Steve. Let me start by letting you know that during this call, we will make certain statements that may be considered forward-looking statements under federal securities laws. 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 are made. 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. With that out of the way, before I get into the quarterly review, I wanted to start with some broader commentary and initial observations. Although today's elevated level of uncertainty has created volatility in the capital markets, our fortress balance sheet, combined with our deeply experienced team and battle-tested portfolio, is well-positioned for long-term success in almost any environment. We know this because we've been there. In addition to the weathering of GFC and COVID-19 that Steve mentioned, we are also the only public net lease REIT to have experienced Black Monday, the bursting of the dot-com bubble, and the attacks on September 11th, all while delivering 35 years of consecutive dividend growth. While our long and successful track record gives me comfort that we can manage today's economic environment, it's the strength of the NNN platform and its people that give me the confidence that we will continue to create shareholder value in the years ahead and through economic cycles. The depth of talent, the strength of the processes and systems, and the experience of the team are true differentiators within the REIT universe. I'm not sure if everyone knows this, but the average associate has been with NNN for over 10 years, and the senior leadership team has been here for over 20. This deep institutional knowledge is a key competitive advantage, particularly in times like these. NNN truly is a well-oiled machine. With that, I'll get off my soapbox and get into the quarter. This morning, we reported core FFO of 86 cents per share and AFFO of 87 cents per share for the first quarter of 2025. each up 3.6% over the prior year period, while annualized base rent was up over 5% year-over-year. Results were slightly ahead of our internal plan, driven primarily by lower-than-plan bad debt and net real estate expenses. Our NOI margin was 95.9% for the quarter, while G&A as a percentage of total revenues was 5.6%, and 5.9% as a percentage of NOI. Free cash flow after dividend was about $55 million in the quarter. This quarter benefited from $8.2 million of lease termination fees or about $0.04 per share. This fee was expected and largely driven by one lease that was dark but paying for some time. We were able to negotiate a deal to recapture the PV of the remaining rent and are now looking to sell the property. Turning to operating results. Overall leasing activity for the quarter was strong with 25 renewals and 8 new leases completed in the quarter for a blended rent recapture rate of 98%, reflecting the high quality of the portfolio. Occupancy remained high at 97.7% despite the fallout from Badcock & Frisch's and has never dipped below 96.4% over the past 20 years, reflecting the stability of the portfolio and its cash flows. As Steve mentioned, we are making good progress in addressing our vacancies and have now released or sold almost 50% of our former Badcock & Frisch's stores in only about two quarters, and we have good visibility or good activity on the vast majority of the remaining stores, a testament to the strength of the underlying real estate. Although these two tenants have created some near-term noise, the reality is that our experienced operations teams are well-equipped to effectively handle these situations as they have over the last 40-plus years. As Steve noted, when all is said and done, we expect less than a 1% impact to annual FFO per share, and importantly, we expect to achieve this outcome with minimal tenant capex. From a watch list perspective, things have not changed much since last quarter. No new tenants were added, and our primary concern remains at home, which we have been flagging for some time. As a reminder, we have 11 at-homes that account for about 1% of ABR. In-place rents are low at just over $6.50 per square foot, and our stores are well-established with average tenure of about 12 years. Turning to the balance sheet, our BBB Plus balance sheet remains in great shape, and it's what left me sleep well at night, despite what's going on in the world. We ended the first quarter with a sector-leading 11.6 years of term remaining on our debt maturities and just 2.5% of our total debt tied to floating rates. This gives us strong visibility. Liquidity stood at $1.1 billion, net debt to EBITDA was 5.5 times, and 100% of our assets are unencumbered, giving us great flexibility to execute our business plans. On April 15th, we announced a $0.58 quarterly dividend per share, which equates to an attractive 5.4% annual dividend yield at a conservative 66% AFFO payout ratio. Lastly, I'd like to provide some color on our outlook for the balance of the year. As we discussed last quarter, we signed leases on former first-year locations that will add the greater of $2.8 million annually or 7% of sales when rent commences on May 1st. Also, as discussed last quarter, we embedded a credit loss reserve of 60 basis points into the 2025 outlook. Given that we've had no notable credit loss year-to-date, and in light of our outlook for the balance of the year, we feel comfortable with the 60 basis points for the full year. Finally, we have a $400 million 4% on maturing in November. For perspective, we believe current pricing on a new 10-year issuance would be about 5.6%. We also have capacity on our revolver, which is priced so far plus 87.5 basis points and had an effective rate of 5.2% in the first quarter. As always, we'll be opportunistic and look for ways to capitalize on the current market volatility as we manage our financing needs. Also, while we do not provide guidance on termination fees given their inherently unpredictable timing, as you are updating your models, please keep in mind that the $8.2 million booked in the first quarter was unusually high and not reflective of a normalized run rate. All that said, given our strong start to the year, our internally funded investment plan, and with over 40% of our acquisition volume already completed, we are comfortable maintaining our 2025 outlook for core FFO per share of $3.33 to $3.38, and AFO per share of $3.39 to $3.44. Details regarding the underlying assumptions supporting our guidance also remain unchanged and can be found on page 3 of this morning's press release. Lastly, you may have noticed some changes to the earnings release presentation. We take pride in the transparency of our disclosures and are committed to providing investors and analysts with the information they need to efficiently and effectively underwrite the long-term value of our company. We hope you find the changes we made helpful in your analysis, and I'm always available to discuss ideas on how we can improve our reporting. Before I turn the call back to the operator for Q&A, I want to thank the executive team and the board of directors for entrusting me as only the second CFO in NNN's history. There's a long tradition of success here that I, along with the rest of the team, will work tirelessly to continue. I also want to thank the entire organization for their warm welcome to the company and for their help in making this a seamless transition. With that, John, please open up the lines for questions.