NNN REIT, Inc. Q3 FY2025 earnings call

• NNN's disciplined growth strategy continued with closing 20 deals for $283 million, maintaining $1.4 billion total availability and an average debt maturity of nearly 11 years. Core FFO per share guidance was raised to $3.36-$3.40, and acquisition value midpoint was increased to $900 million.
• At Home emerged from bankruptcy with 100% leases affirmed. 23 of 35 furniture assets were resolved, with 2 expected to be worked out by year-end. 64 assets previously leased to a restaurant operator were proactively taken back, with 15 sold/re-leased, 12 to be resolved by year-end, and 14 expected to be sold in Q1 2026.
• Portfolio renewals were strong: 92 out of 100 renewals ahead of historical rate, rental rates 108% above prior rents; 7 new properties leased at 124% of previous rents.

The portfolio of 3,697 freestanding single-tenant properties across all 50 states performed well. 92 out of 100 renewals were ahead of the historical renewal rate of 85%, with rental rates 108% above prior rents. Seven new properties were leased to new tenants at rates 124% of previous rents. During the quarter, $283 million was invested in 57 new assets with an initial cap rate of 7.3% and an average lease duration of nearly 18 years. $41 million was generated from selling 23 properties, 11 of which were vacant.

• Core FFO per share guidance raised to $3.36-$3.40, AFFO per share to $3.41-$3.45.
• Acquisition value increased to a midpoint of $900 million, representing a record level of annual investment volume.
• Disposition outlook increased to $170 million-$200 million.
• Bad debt assumption reduced to 25 basis points from 60 basis points.

• Legal dispute between new and former tenant affecting 64 assets, temporarily reducing occupancy to 97.5% as of Sept 30.
• Potential challenges with remaining furniture and restaurant operator assets if legal issues persist.

Q: Could we get a little bit more color around the outsized interest income as well as just what caused the increase at the low end of the range?

A: For interest income, debt offering in July led to high cash balance, rates better than projected. AFFO low end due to higher G&A in fourth quarter and interest income coming down as cash is deployed into acquisitions.

Q: Maybe as a follow-on to that last question. I mean, NNN has never really been a volume story historically, and it doesn't seem like spreads are uniquely attractive right now. So I guess I'm just wondering why we're seeing record volumes.

A: Relationships in the market, tenants pushing for deals, still accretive even if not historically as accretive.

Q: Maybe as a follow-on to that last question. I mean, NNN has never really been a volume story historically, and it doesn't seem like spreads are uniquely attractive right now. So I guess I'm just wondering why we're seeing record volumes.

A: Relationships in the market, tenants pushing for deals, still accretive even if not historically as accretive.

Q: You provided an update on At Home, and it seems like the Frisch's and Dolly situation. But are you seeing any other credit issues within your portfolio? And what are your bad debt assumptions now maybe compared to where they were earlier in the year?

A: Overall portfolio bad debt is in good shape. Bad debt assumption reduced to 25 basis points from 60 basis points, due to limited losses, At Home bankruptcy resolution, and collection of pre-petition rent from At Home.

Q: In regards to the higher acquisition volume, despite the lower spreads you're seeing today, do you think that the increased competition is impeding your ability to push cap rates with existing tenants?

A: Relationship tenants are sophisticated and understand the market; not stealing properties, but may get 5-10 basis points for certainty of closing.

Q: Just want to look at the acquisition guidance. It looks like it's implying about $100 million to $200 million for the fourth quarter, which is typically a big quarter for you guys. So just curious if you pulled any deals forward into 3Q? Or are you just being conservative here?

A: A combination of pulling some deal volume into 3Q and having deals slated to close back half of 4Q, so being a bit conservative in guidance.