National Retail Properties, Inc. (NYSE:NNN) Q4 2024 Earnings Call Transcript

National Retail Properties, Inc. (NYSE:NNN) Q4 2024 Earnings Call Transcript February 11, 2025

Operator: Greetings, welcome to the NNN REIT, Inc. Fourth 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. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Steve Horn, CEO. You may begin.

Steve Horn : Hey, thanks, Holly. Good morning, and welcome to NNR REIT’s fourth quarter 2024 earnings call. Joining me today is the current Chief Financial Officer, Kevin Habicht, and our incoming CFO, Vincent Chao. As outlined in this morning’s press release, NNN delivered 1.8% core FFO growth for 2024, alongside over $550 million in acquisition volume. The year concluded with a strong 98.5 occupancy rate, while our dispositions of income-producing assets were executed at a cap rate 40 basis points lower than our acquisition yield, including several strategic and defensive asset sales. These achievements reflect the dedication and the expertise of our best-in-class team at NNN, positioning us well for the near term. Key highlights I’m particularly proud of for the year, 35 consecutive years of annual dividend increases, maintaining a sector-leading 12.1-year weighted average of debt maturity, and strategically positioning our executive team for the future.

Despite the overall theme of maintaining a light capital markets footprint for 2024, our core philosophy remained unchanged, delivering long-term value with below-average risk for our shareholders. At its simplest, our strategy focuses on a bottom-up investment approach, continuing to increase the annual dividend while maintaining a top-tier payout ratio, FFO growth per share in the mid-single digits over multiple years. This disciplined approach drives our acquisition and disposition strategy, as well as our balance sheet management, ensuring we stay on track to achieve our objectives. Before diving into the market conditions and operational updates, I would like to formally welcome Vincent Chao to the executive team. Vincent joins NNN in early January and officially assumes the CFO role at the start of the second quarter.

He brings extensive public company and investment banking experience with an expertise in capital markets, corporate finance, investor relations. I look forward to our partnership as we continue to grow NNN. And now to Kevin. After over 30 years of dedicated service, including four CEOs and over $5 billion of cash dividends paid, Kevin’s commitment to excellence is an integral part of the fabric of NNN. His work ethic, leadership, and passion for doing the right thing has been consistently evident, leaving an indelible mark that is woven deeply into the very DNA of NNN. Through every challenge, he has not only contributed to our success, but has shaped the values of the culture that will continue to guide us long after his departure. His legacy is not just in the work completed, but in the principles and standards he’s instilled to those who had the privilege to work alongside him.

With that, Kevin, on behalf of the entire company, the board, the analysts, and the investor community, we want to express our heartfelt gratitude and knowledge that you will undoubtedly miss. As you move forward to the next chapter in your life, we wish you nothing but the best. This is when you kind of wish you’d record these phone calls. Hey, as we move forward to the first quarter of 2025, NNN maintains a robust position. We anticipate another strong quarter of acquisitions and are making significant progress with the assets related to Frisch’s and Badcock Home Furnitures. Kevin will provide a lot more detail on the activities concerning these tenants during the upcoming remarks. Regarding the fourth quarter financial highlights, our portfolio now comprises 3,568 freestanding single-tenant properties, and they continue to perform exceptionally well.

Occupancy decreased to 98.5 due to the challenges with two specific tenants. However, this rate remains above our long-term average of roughly 98%, plus or minus. And I anticipate the level increasing as the year progresses, because as we report today, I feel good about the remaining tenants in the portfolio and the activities the leasing team is generating currently. In terms of acquisitions, during the quarter, we invested $217 million in 31 new properties, achieving an initial cap rate of 7.6, average lease duration basically 20 years. Over 80% of the capital deployed this quarter was allocated to our business relationship partners. Additionally, the long-term projected yield on these acquisitions would be 8.8%, reflecting our preference for the sale-leaseback acquisition model, opposed to purchasing existing shorter-term leases, despite they may offer higher yields.

They don’t align with the assessment of our optimal risk-adjusted returns. Disposition activity was elevated this year, with nearly $150 million sold at a 7.3 cap. At the start of the year, as I mentioned earlier, the team identified several non-performing assets for strategic and defensive sales, leading to more of a compressed spread between disposition and acquisition cap rate compared to previous years. However, this proactive portfolio management enhances the overall strength of the portfolio as we move forward. We need to go back over a decade to find an acquisition year with an initial cap rate higher than our 2024 deal flow. The current pricing for the pipeline coming in this quarter will be slightly tighter than the fourth quarter of 7.6. As I look ahead in the next few quarters, I expect pricing to compress a little bit further at the margins due to the heightened competition as market players push to achieve high acquisition buy-ins.

That said, I’m confident in our team’s ability to identify and execute the right risk-adjusted deals to meet our 2025 annual objective. With that, let me turn the call over to Kevin for the final time to provide more color and detail on our quarterly numbers and 2025 guidance.

Kevin Habicht : Great, thanks. Thank you, Steve. As usual, I’m going to start with a 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 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 $0.82 per share for the fourth quarter of 2024. That’s flat with year-ago results once you adjust 2023 results for the incremental accrued rental income that we noted in footnote one on the press release. AFFO results were $0.82 per share for the fourth quarter, which was also flat compared to year-ago results. For the year, core FFO and AFFO were $3.32 per share and $3.35 per share, respectively, and that results in a 1.8% increase in core FFO per share results for 2024 and a 2.8% increase in AFFO per share. These results were generally in line with our expectations and put us at the top of our previous guidance range. Results in the fourth quarter did include $1.2 million of lease termination fee income and for the full year of 2024, $11.4 million, which as we noted throughout last year, is well above historical norms and was above our full year 2023’s $2.4 million of lease termination fee income.

Also in the fourth quarter, 2024 G&A expense included a state franchise tax refund due to our retroactive change in Tennessee tax law that reduced G&A by $1.7 million to $8.7 million for the fourth quarter and to $44.3 million for the full year, and that represents 5.1% of total revenues for the year and 5.2% of total NOI. Occupancy was 98.5% at quarter end, which, as anticipated, dipped 80 basis points for the quarter due to two failing tenants we talked about on last quarter’s call, more about which in a moment. Our AFFO dividend payout ratio for the year 2024 was 68.2%. That resulted in approximately $196 million of free cash flow, and that’s after the payment of all expenses and dividends. We ended the quarter with $860.6 million of annual base rent in place for all leases as of December 31, 2024, which that would take into account all the acquisitions and dispositions completed through year end.

So first, yeah, a quick update on our two troubled tenants, which we discussed last quarter. First, Badcock Furniture, which was in liquidation. They completed their going-out-of-business sales, and in the fourth quarter rejected the leases on all 32 properties we had leased to them. Prior to the fourth quarter, those leases produced $5.2 million of annual base rent, and that was 0.6% of our ABR at the beginning of the fourth quarter. Prior to rejecting the leases, Badcock paid us roughly half of what they would normally would have paid us during the fourth quarter. We’ve been working on plans to lease or sell these properties, and we’ve had a good start in that effort given we just got possession of the stores mid-fourth quarter. So by year end, we were able to release five of those properties at roughly our long-term average of 70% rent recovery, again, with no TIs for our vacancy releasing.

Additionally, we were able to sell six properties, generating net proceeds of $21.8 million, which using prior Badcock rent on these properties would produce a 5.1% cap rate on those dispositions. So assuming we invested these sale proceeds at the fourth quarter’s 7.6% acquisition cap rate, this would result in generating 49% more rent on those stores than Badcock was previously paying us. If you combine the outcome of the five released properties and the six sold properties, the rent recovery on those 11 stores is approximately 113% of prior rent. Now, while these averages may not hold up for all Badcocks, we are off to a very good start in terms of economic outcome as well as minimizing the downtime for this first batch or call it 35% of our former Badcock stores.

Next, second tenant of note is Frisch’s. That’s a Midwest Big boy hamburger concept that’s been around for several decades. They only paid us half the rent owed us in the third quarter last year, and they paid us no rent in the fourth quarter. We owned 64 Frisch’s properties at the beginning of the fourth quarter, which represented 1.5% of our annual base rent, or $12.6 million. As you may recall, in this case, the tenant did not file for bankruptcy, so we had to go through the time-intensive process of getting back possession of the stores through evictions. We’ve initiated that eviction process for all 64 stores and, as of year-end, had possession of 33 stores. Of those 33 stores, we’ve released 28 of those stores to another restaurant operator.

Because we had a read on prior store sales for these properties and also in order to speed up the leasing process on a large group of properties, we were willing to trade off some base rent for more potential percentage rent. So these 28 stores will produce approximately $2.8 million of annual base rent, but we will also get 7% of store sales above a fixed breakpoint. That rent commences May 1 of 2025. At this time, we’re not looking to articulate other lease terms as we have a number of other Frisch’s to release. We will soon have possession of all the former Frisch’s properties and are in full releasing mode on that batch of stores. Bigger picture and really the key point of the combined Badcock-Frisch’s vacancy, consistent with these early resolutions I just reviewed, we remain optimistic to, a, get them leased or sold more quickly than usual and, b, hopefully improve upon our typical vacant property rent recovery of 70% versus prior rent with no TIs. We will provide further updates with first quarter results, but most importantly, when the dust settles on all this in say 2026, we believe per share results should be impacted by less than 1% versus the prior rents we were getting from the original tenant.

So a very modest impact on bottom line results when the dust settles. Okay, with that, switching gears, today we initiated our 2025 core FFO guidance at a range of $3.33 to $3.38 per share and 2025 AFFO guidance with a range of $3.39 to $3.44 per share. Page 8 of the press release gives you some details on the key assumptions underlying that guidance, and it includes $500 million to $600 million of acquisitions, $80 million to $120 million of dispositions, G&A expense of $47 million to $48 million, and property expenses net of reimbursement of $15 million to $16 million, which is higher than usual due to the Badcock and Frisch’s vacancies. Hopefully we will have the opportunity to drift FFO guidance higher as the year progresses as we have done in the past.

Moving to the balance sheet, we ended the year with no amounts outstanding on our $1.2 billion bank line, so we’re in very good leverage and liquidity position as we roll into 2025. Our next debt maturity is November 2025, and our weighted average debt maturity stands at 12.1 years at year end. Maintaining our light capital market footprint, we funded 61% of our $565 million of 2024 acquisitions with free cash flow of $196 million plus $149 million of dispositions proceeds. Net debt to gross book assets was 40.5% at year end. That’s down about 150 basis points from the year before. Net debt to EBITDA was 5.5 times at December 31st. Interest coverage and fixed charge coverage was 4.2 times for 2024. 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’re 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 it helps us not to confuse activity with achievement. Steve, thanks for your kind words earlier. In closing, I will say it’s very bittersweet for me to be on my last quarterly earnings call. I think I’ve been on well over 100 of them. NNN is in very good shape, and its approach to navigating investment opportunities and capital markets is well ingrained in this institution.

So I leave you in the very capable hands of Steve and Vin and the rest of the team here at NNN. Thanks to so many of you on this call whom I’ve known and worked with for many years and who have been gracious to tolerate my many issues. These long-term relationships have made the journey for me much more enjoyable and satisfying, and as I’ve said a number of times this past month, the boundary lines of my life have fallen in pleasant places, and that has included my time and relationships in REIT world. It’s been a great ride, and I can be nothing but thankful to the investor and capital markets community and especially my colleagues here at NNN. I will cherish the memories and welcome the opportunity to stay in touch. With that, Holly, we will open it up to any questions.

Operator: Certainly. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Your first question for today is from Brad Heffern with RBC.

Q&A Session

Brad Heffern: Hey. Good morning, everyone. Congratulations, Kevin. Hope you have a great retirement. Knowing you, I suspect you’ve been saving up for it, and welcome to Vincent as well. For the AFFO guidance, I’m a little surprised that you’re able to deliver this 2% growth just given the elevated lease termination from last year, the impact of Badcock and Frisch’s. There’s also this 4Q tax benefit. Is there some sort of offset to that that I’m not thinking of, or just any color you can give on the bridge that would sort of preserve that growth number?

Kevin Habicht: Yeah, not in particular. We are having I would say somewhat better than expected kind of releasing outcomes or resolving our Frisch’s and Badcock. That’s all happening more quickly, particularly timing is of great value, as you know in that process. And so that’s been very helpful. But, yeah, there’s no other big major items to speak of. Lease termination fees are always, we don’t get guidance, and they’re always — they’re so difficult to get guidance on. And so that’ll play out the way that plays out during the year. But, yeah, nothing else to speak to of note. Timing is really critical. And we had a solid fourth quarter acquisitions, a solid second half of ‘24 acquisitions. And that really accrues to the benefit primarily of 2025. And so all those things kind of add up to help push results along a little bit.

Brad Heffern: Okay, got it. And then maybe you didn’t give this on purpose, but the $2.8 million for the released Frisch’s, how does that compare to the prior rent on those stores? And then for the percentage rent, is that set at a level where you would expect to regularly realize that right away, or is that something that requires upside?

Kevin Habicht: Yeah, yeah, so fair question. Yeah, the $2.8 million, I would call it roughly 50% of prior rent. And like I said, we were willing to take that kind of pain, if you will, on the annual base rent to get the benefit of what we think will produce notable potential percentage rent on those stores. We had the prior store sale, and this was a way again for us to speed up the process. We just got these 33 stores back in the fourth quarter, and we had them released in the fourth quarter. So it’s very quick again with no TI. We saw material value in that part of the equation, and so because we had prior store sales, we’re optimistic that we’ll be able to achieve something north of our normal 70% rent recovery on releasing vacant spaces. And we’ll see how much better we can do than that, but we think there is upside there.

Brad Heffern: Okay, thank you.

Operator: Your next question is from Spenser Glimcher with Green Street.

Spenser Glimcher: Thank you. I’m just curious on the transaction front, what you guys have been seeing in terms of 4Q activity and then 1Q, just as it relates to the mix of portfolio deals versus one-off or anything that you’re doing outside of relationship deals.

Steve Horn: Yeah, I mean, outside the relationship deals, there has been much large-scale portfolios for our market. It’s been a little bit slow. That’s why we’ve been mining 80% of our deal flow in the fourth quarter was through the relationships, which one of the transactions was pretty notable, which did not get marketed just as a direct deal. First quarter is looking pretty good right now, but it’s a lot of what I would call doubles kind of that $20 million to $30 million deal range. We’re not seeing the $150 million-$200 million deal. Now, there is one potential large portfolio coming out, kind of in the family entertainment space that we’re aware of, but it’s a little early to say the pricing on that right now.

Spenser Glimcher: Okay, and then, Kevin, yes, congratulations. We will miss you. One, just last one for you. Has anything changed since last quarter just in terms of the amount of credit losses being underwritten for ‘25?

Kevin Habicht: Yeah, not materially. So in our guidance, and I might have should have added this into the comments on the last question from Brad, was for this year, we’ve assumed 60 basis points of rent loss. Historically, we’ve been more in the closer to 100 category. We typically don’t experience that level, so we think we’ve got enough baked in for credit loss for this year. We don’t really have any other tenants in the immediate horizon that it feels like we have real exposure to in terms of credit loss. A, and B, that 60 basis points obviously any pain from Badcock and Frisch’s is above and beyond that 60 basis points. Let’s put it that way if folks are wondering. So, yeah, we think we’re in good shape on that front, and like I say, we are not pointing investors to any other notable concerns at the moment for tenant credit.

Spenser Glimcher: Okay. Great. Thank you.

Operator: Your next question for today is from Michael Goldsmith with UBS.

Michael Goldsmith: Good morning. Thanks a lot for taking my questions, and congratulations, Kevin, on a wonderful career. And as a going-away president, I’ll ask you to walk us through kind of what you’ve baked into your guidance for Frisch’s and Badcock related to the timing of the leasing and recovery rate for 2025. Thanks.

Kevin Habicht: Yeah, and I’ll — in my usual way, I’ll be sufficiently elusive because it’s a work in process and progress, I should say. And so it’s unfolding as we speak. The only thing I can say is we remain historically over the years releasing something in 9 or 12 months was kind of normal and typical. It’s going along more quickly than that on both Badcock and Frisch’s as evidenced in the fourth quarter, and that continues into the first quarter. I mean, I don’t have a lot of details to kind of give you on that releasing effort. Like I say, it’s very current, and it’s just tough for us to put a hard stake in the ground on that as we speak. But it’s only to say it’s going better than normal in terms of timing as well as economic outcome.

Michael Goldsmith: Just to clarify that, right, like so we should assume that you’re baking in something better than historical of the 9 to 12 months and the 70% recovery rate. But the rest is, I guess kind of, you’re not giving anything else beyond that.

Kevin Habicht: Yeah, no, we’re in a state of flux until we get some of these pinned down. But we’ve got a number of deals in the hopper working, and we’ll see how that all shakes out. But the process and our guidance has the opportunity to drift higher, hopefully throughout the year if we can improve upon things.

Michael Goldsmith: Got it. And then on the 60 basis points of credit reserve for 2025, right like lower than what you’ve seen historically or what you typically bake in 100 basis points, maybe you can just provide some context in terms of what’s the long-term average for that and how that 60 basis points compares to it just to put some perspective because you just went through two large events and now you’re reducing what you’re baking in for the year. So just trying to understand.

Kevin Habicht: Yeah, fair question, yeah. Absent, which was highly unusual, two tenants simultaneously going away, which that was 200 basis points. And so historically our credit loss typically runs in the kind of the 30 to 50 basis points kind of range. And so there is some assumption on our part that, that we’ve got two of our biggest credit concerns out of the way in some respects and resolved outside of that 60 basis points that we really don’t need 100 in our guidance. And so we frankly, hope that there’s maybe a degree of conservatism in the 60 basis points given our historical averages. And like I say, having cleared out two of the weaker links if you will in our tenant credit.

Michael Goldsmith: Congrats again.

Kevin Habicht: Thank you.

Operator: Your next question for today is from John Kilichowski with Wells Fargo.

John Kilichowski: Good morning, and congrats again, Kevin. Maybe if we could start, just kind of go back to the transaction market here and just talk about how deal flow looks at this point versus maybe this time last year. I know you talked about it sounded like elevated deal flow, but also elevated competition. Maybe how do you think that that could manifest in changes to your acquisition guide near the lower high end or if there’s room to maybe push above the high end? And then when you talk about that elevated competition, who is that and what are the returns that they’re looking for?

Steve Horn: Yeah, that’s a good question, John. As far as our guide for the year, historically we’ve beaten our guide over many years. Just the visibility is only 90 days from the transaction market. So we’re conservative, so we usually start on the lower end. What I know is pricing in the first quarter. I’m confident we have a good start to that guide for the year. The market is elevated as far as deal flow compared to last year. Last year when we came into the year, it was more of a capital markets issue that we didn’t want to access the equity market, so we set our expectations for the year on the lower end to primarily use the free cash flow to fund acquisitions. As far as competition, I’ve been doing this 20-plus years.

Kevin’s been doing it 30-plus years. It’s always a competitive market. It’s just the names have changed. There’s only a few of us that have been around that long. Now, as far as there’s some private money coming back into the market a little bit, but their return expectations are a little bit higher. But more importantly, the amount of money they have to deploy into acquisitions is significantly higher than ours. So they are going to go after what we would call the elephant deal flow, not the antelope deal flow or base hits. So they really don’t play in our world. And again, 80% of our deal flow came from relationships, which we have a pretty good moat around that to avoid competition playing in our field. But no, overall, I feel good sitting here today on the call as far as the activity, what’s in the pipeline, what our team is evaluating.

And there’s no deals our competitors have done that we did not see. So until then, I know our acquisition guys are doing the right thing.

John Kilichowski: Great, and appreciate the analogy. And maybe if we could jump to rent coverage levels. I know they’re not provided, but if you can kind of give any color on how those are trending within the portfolio, maybe particularly in the car wash and QSR space where we’ve heard of some pressure anecdotally.

Steve Horn: Yeah, I mean, let’s just address the car wash space. NNN does a fabulous job meeting with management teams. We view ourselves indirectly as an investor in the company. So we meet with all the management teams, hear their game plan. I could argue that we institutionalized the car wash business doing sale leasebacks back in 2005 when we initially started with Mister Car Wash, our number two tenant. So we have a fair amount of experience, and we have zero zips. And that’s kind of the recent headline in the car wash industry. Our car wash is just — Mister Car Wash, year over year rent coverage went up. It’s north of 4. And the other car washes that we’ve been doing kind of the 2.5 to 3.5 range, and they’re performing well.

We’re highly selective when we do car washes that we actually for the most part shut it down in the fourth quarter and let things kind of stabilize. QSR we’re kind of seeing sales flat for the most part. They’re still trying to absorb the labor issues where their margins got compressed. But overall, I’m comfortable with our QSR exposure, and there’s no tenants that we’re concerned with on the QSR or car wash side of things currently.

John Kilichowski: Great. Thank you.

Operator: Your next question is from Farrell Granath with Bank of America.

Farrell Granath: Hi. Good morning. This is Farrell Granath. I want to say congratulations to both Kevin and Vincent for your next chapters in your life. But I also wanted to ask about the type of demand that you’re seeing for both the Badcock and Frisch’s assets. Are you receiving a lot of inbounds, and are they within the same industry verticals?

Steve Horn: We’re seeing a ton of interest on the Frisch’s and a fair amount on the Badcock, as Kevin addressed in his remarks. We’re doing really well with the Badcock, but it’s a portfolio, and the easier assets to sell are the good ones, and they go first. So our team has some work to do as we move through the process. As far as industries, yeah, you’re getting a lot of restaurant interest, and it’s not only casual dining. There’s QSR. Again, back to car washes, there’s a fair amount of car wash interest and auto service. So it’s across a wide range, because the reality is there are 5,000, 6,000 square foot boxes on an acre and a half. There’s a lot of tenants that like that use. I would be concerned if they were 20,000, 30,000 foot boxes. That makes it a little more challenging to release, but a small restaurant on an acre and a half, well-located, hard corner, there’s a lot of users for those.

Farrell Granath: Okay, thank you. And I also wanted to comment on the 50 basis points. I know we’ve been harping on it a little bit of the credit loss assumed in guidance. I know you made some commentary about there’s no near-term tenants that are raising a concern, and that was also a factor in the reduction, but do you still maintain a credit watch list, and is there a certain percentage of ABR that’s associated with that?

Steve Horn: Yeah, yeah. Those who know me well, I’m perpetually worried about a lot of tenants always, but none rise to the level that influence our thoughts around what credit loss might be for this year. And so, yeah, we’ve talked about names over the years. We don’t need to really talk as much about Frisch’s and Bedcock anymore, but At Home has been one that we’ve thought about and still watching, very leveraged. AMC of course has been on the list, but to be quite candid. We’ve passed the point that they seem to have found, a, their business is getting better, and so the fundamentals are better. And b, their perpetual issuers of capital that has kept landlords very happy. And I have really no near-term concerns about their ability to pay us rent in 2025.

And so the ones that remain on the list and there’s a number of them, a, they generally are not larger exposures, and b, I don’t feel like they’re imminent kind of at risk of not paying rent. But we think the 60 basis points should comfortably handle whatever exposure we have on that list.

Farrell Granath: Thank you so much.

Steve Horn: Yeah, thank you.

Operator: Your next question for today is from Smedes Rose with Citi.

Smedes Rose: Hi, thanks. I just wanted to follow up. You mentioned that you might see or there might be a larger portfolio of family entertainment assets coming. Is that something that you, I mean, I guess price depending, but is that an area that you would be interested in increasing your exposure to if it were to come to market? At a price that is reasonable to you?

Steve Horn: Yeah, making sure everything fits in our underwriting philosophy, price being important. Yeah, it’s something, if the economics make sense, but more importantly the real estate fundamentals make sense it’s something we would look at and do it. Now, the question is at the start of the year, as you know Smedes people are coming out with guidance and get overly aggressive on acquisitions. If I had to do $1.5 billion, I’d probably have this answer a little more confident, yeah, absolutely we would do it. But with the guy trying to do kind of that $500 million-$600 million we get a little bit more conservative on the underwriting and our box gets a little bit tighter. And I think that’s kind of proven out with the Badcock and the Frisch’s on our releasing efforts.

Smedes Rose: Right, I just wanted to ask you kind of big picture too. It sounds like you expect kind of a slight sort of maybe downward bias in cap rates over the course of the year, given some of the things you’ve talked about. I mean, so does this sort of imply, I guess that the spread for you are compressing a little bit or how and given elevated debt costs or how are you kind of thinking about your investing spreads at this point?

Steve Horn: As far as the cap rates, yeah, I mean, at the margin, I’m seeing them go down as a 10-15 basis points, but that’s just the result of having to win deals and our competition is going to drive them down. But as far as looking at spreads, Kevin, do you want to answer it?

Kevin Habicht: Yeah, I mean, it’s our typical 60-40 roughly equity and debt and the way we think our debt long-term 10-year debt today for us is around 5.5%, so that’s called 40% of the equation. And then the way we think about equity when we’re making these kind of capital allocation and investment decisions that we’ve historically, we’ve burdened our equity internally at about 8.5%. So that creates a weighted average cost of capital hurdle, but we don’t need a spread above a hurdle, in the low 7. And so as long as we’re kind of operating in that low to mid-7 range, we feel like we’re producing sufficient returns to shareholders and returns on equity to allow — to consider making capital allocation or investment.

Smedes Rose: Okay, I appreciate it. And just, I wanted to ask you just one quick one. We’ve just seen some negative headlines around Denny’s, and I’m just wondering is that sort of showing up on your screen at all? Sorry for asking which ones you own and which ones they’re talking about, or is that on your watch list?

Kevin Habicht: Yeah, we own some Denny’s. I will say again which is critical for us is the price per pound that we own those stores at, and therefore the rents on those stores are very attractive. And some of them are operated by franchisees of Denny’s. And so sometimes it’s hard to, when you’re looking at headlines to appreciate kind of the whether that’s particularly applicable to us or not, but the chain, Denny’s, has been struggling for a while, don’t get me wrong. We’ve been watching that for a while. But we feel like our location, and particularly the rents on our locations are at levels that we’re not too anxious about.

Smedes Rose: Okay, thank you very much.

Steve Horn: Yeah, real quick speech. Our Denny’s for the most part, were bought in 2006.

Smedes Rose: Got it. Okay, thank you.

Operator: Your next question is from Ronald Kamdem with Morgan Stanley.

Ronald Kamdem: Hey, congrats, Kevin and Vince. Just two quick ones. One, obviously, is just on the bad debt, and I’m sure, as you guys sort of thought about the guidance for this year, you debated whether it was 100 basis points like historical or going with 60. I’m just wondering what sort of got you comfortable to be able to put this number out. The CFO transition’s happening, it’s still early in the year. Is it literally just because the two bankruptcies went through, or is it because January’s going better? Just try to give us a sense of what got you the comfort to go out with the 60 basis points here versus 100 basis points historical. Thanks.

Kevin Habicht: Yeah, well, a, historically, we’ve not ever really used 100 basis points. It’s more been kind of that 30 to 50 kind of range, and so that’s part of it. But two, to your point, yeah, some of the deadwood is cleared out already and the near-term, most acute credit concerns are accounted for elsewhere if you will outside of that 60 basis points. And then, lastly, then layered on top of that, we just don’t have any particular tenants that were — have immediate concerns about. And so all those things made us comfortable to do that and so that’s how we got there.

Ronald Kamdem: Great. And then my follow-up question, which is a quick two-parter. One is just, I think you talked about releasing the boxes are probably happening faster than you expected. Can you talk about sort of the market-to-market on rents is number one? And then number two is just on the debt coming due this year. What are the plans for that, and where do you think you could issue? Thanks.

Kevin Habicht: Yeah, on terms of, I’ll speak to the debt first. Just, yeah, we think 10-year debt for us today is around 5.5%. That debt maturity is not until November, and so we have a good bit of flexibility in deciding where to actually execute a transaction to refinance that debt. And obviously, along the way, we could always hedge some of that or lock in some of that interest rate risk ahead of time if we wanted to. Historically, we’ve not given guidance on capital markets activity. So I don’t have much more specific than that. As it relates to releasing spread on the Frisch’s and Badcock, I mean, the initial round of Badcock, if you look at the releasing which the lease portion was close to our typical 70% kind of number, but if you layer in the dispositions on Badcock, that was at well above and you reinvest those sale proceeds at kind of our mid-7 kind of acquisition cap rate, you end up with, rent well above 113% combined for the release and the disposition sold Badcocks, and so that’s going very, very well.

As I said, we don’t expect that likely to hold up at those levels, but the early indication for the first 35% of our Badcock exposure is going very well, and so we’re encouraged about that. On the Frisch’s, I think it’ll be more of the same. In the first big batch, we took we’re willing to take a little bit of pain on annual base rent, and we’ll capture more potential rent from percentage rent upside there. And so we think we can get back to equal to or better than our historical 70% kind of number. We know what the store sales were at those locations previously. And we know that given that the company went out of business, maybe they weren’t run the best that they could have been. And so we’re optimistic about that, but we think timing will go faster than typical for us.

And we remain optimistic that at the end of the day, we can improve upon our 70% recovery.

Ronald Kamdem: Great. Thanks so much.

Operator: Your next question for today is from Rich Hightower at Barclays.

Rich Hightower: Hi, good morning, guys. And again, congrats to Kevin, on a great career in REITs and congrats to Vin on the incoming into that set. Obviously covered a lot of ground on the call this morning, but I want to go back and I must have missed this, but on the re-leasing of the bad cock space in particular, did you guys mention the — maybe the retailer tenant mix that is occupying that space or what that looks like? And then I’ve got one follow-up after that.

Steve Horn: Yeah. No, we didn’t mention the retailer mix. There’s actually a couple of them on the re-leasing, we’re home furniture tenants. And then the other re-leasing aspect Kevin is making the assumption, we sold those assets and then redeploying the sales proceeds at a 7.6% as far as the recapture rate.

Kevin Habicht: But yes, it’s coming from a variety — on the Banco, it’s a variety of uses. We’ve seen interest from kind of medical kind of space. And so it’s a popery [ph] yes, some hardware. It’s a real mixture of uses for that box is 17,000 square feet. Our rent was $9 a square foot from Badcock. And so it’s sufficiently fungible, and we think we can end up with a reasonable outcome there on the re-leasing efforts.

Rich Hightower: Okay. Great. I’m going to make sure to put popery in my notes here. And then just a quick follow-up as I kind of scroll through the top tenant list. And I appreciate the fact that maybe no immediate watch list worries as you guys have articulated on the call so far. But if I think about Mister Car Wash, Dave & Buster’s Camping World, and I just look at the equity values of all of those companies some of which are coming off of maybe a post-COVID high in the car wash business is kind of its own separate category. But is there anything differentiating about your locations in particular that makes you less worried than perhaps the average location in the portfolios generally for those companies.

Steve Horn: Well, Mister Car Wash, we primarily did in 2005, 2006 time frame, a long time ago. And our cost basis in those assets, and as I’ve mentioned earlier in the call, is extremely low, but the rent coverage on the property level is north of 4 at the Mister Car Wash exposure. So very comfortable with those assets because Mister Car Wash is a true operator of car washes. Unlike there’s a lot of entrants in the car wash where private equity money followed. So they were maximizing proceeds, so they didn’t have to put any equity in the deals. Camping World, I would say, over the years, we’ve done business with them for a long time. And we’ve culled the portfolio with management of substitution or dispositions to ensure that we have the assets that they want to operate in the long run.

So — and it’s kind of same full with Dave & Buster’s. We’ve been doing business with them for a long time. And that business is at the asset level. So our cost base has been holding up.

Rich Hightower: Okay, great. Thank you. Operator

Operator: Your next question is from Rob Stevenson from Janney.

Rob Stevenson : Good morning, guys. Kevin, you talked about the revenue from Babcock and Frisch’s, but can you talk a little bit about any material elevation of expenses that you guys are getting hit with today that might burn off over the course of ’25?

Kevin Habicht: Yeah, yeah, fair question. Yes. So you noticed in our 2025 guidance, the net property expense number of $15 million to $16 million is probably $4 million to $5 million higher than what I would think of as kind of normal for triple end in most years. And so you can attribute pretty much all of that related to Badcock and Frisch’s. So as you roll into 2026, yes, that should fade away. Yeah.

Rob Stevenson : Okay. That’s helpful. And then are you guys expecting to put — you talked about the Frisch’s without any CapEx. Are you expecting to put any material amount of money in the Badcock assets or anything else in the portfolio in 2025 from a leasing or from a development redevelopment standpoint?

Kevin Habicht: We always consider it, but you know our predisposition is we’ll trade off lower rent for OTIs generally. That’s not an absolute rule. It will there be some property or two or three that we make the decision. That’s the best economic decision to make. So we may put some in, but it shouldn’t be a large number in the scheme of NNN size. And so — yes, I don’t think we’re going to waver too much from that. But there might be a little bit more repairs and maintenance a little bit. Some of that will flow through property expenses rather than TI CapEx. But yeah, we’re inclined to not think there’s a whole lot of value in TIs. But from time to time, we’ll consider it. And if it fits in the equation, if you will, in terms of what we’re going to get in rent and what the alternatives are, we may pull the trigger on some of that.

Steve Horn: But as we sit here right now, there’s no deals in the pipeline that require any significant TI.

Rob Stevenson : Okay. And then Steve, other than the convenience stores, any major concentrations in the fourth quarter acquisitions that you guys did?

Steve Horn: It was quick, was the primary one. Just kind of give you a little bit of color. That relationship goes back as far as the first deal we closed was 2019, and we did a little bit in 2019, 2020 or 2020. And then few years later, we did — they did an M&A opportunity in Florida, which we have financed that. And then we did a fairly substantial sale-leaseback in the fourth quarter with them. So it’s just a relationship that we’ve maintained for a long time. And then the other one was super starter car wash that rolled into our top 20. That was just some first build-to-suit stuff we had in the pipeline over the year that completed in the fourth quarter.

Rob Stevenson : Okay. And then Kevin is my going away present for you, one last one here. You talked about the lumpiness of term fees. Anything known in 2025 thus far, either received or known of any materiality?

Kevin Habicht: Yeah. I mean, not that we are giving any kind of guidance on. And so that’s — which we don’t. We’ve historically not. Historically, so the answer is we’re not putting out any guidance on that front. But historically for us, we generate about $3 million a year historically of lease termination fee income. So I expect there to be some. It’s just — it’s a bit of a wildcard as the amount and the timing for that over the course of the year, which is why we don’t give guidance.

Rob Stevenson : Okay thanks, guys. Have a good day.

Operator: Your next question is from Alec Feygin with Baird.

Alec Feygin : Hi. Congrats Kevin. It was a pleasure to work with you and also congrats to excited to work with you. Kind to go off the last question on the termination income, is there anything assumed in guidance on that front?

Kevin Habicht: Yeah. We always have a general assumption in there for lease term, like I say, is normal for us is $3 million a year. And we’ve made some assumptions for that in guidance. But like I say, we don’t publish that because to be candid, we never know precisely where that’s going to end up ourselves. And so reluctant to kind of go out and public and put a stake in the ground on that number.

Alec Feygin : Fair. And then does the non-reimbursed expense guide assume additional leasing of the recently vacated assets?

Kevin Habicht: Yeah. I had some in there, but the expenses will hit — as you’re talking about the non-reimbursed property expenses the guidance of $15 million to $16 million. That, that should be fairly steady throughout the year. I mean, I think it’s probably a little bit more front half loaded and a little less second half loaded going from memory. But just as we get things leased up, then some of those property expenses become the tenant’s obligation. So — but that — that’s all loaded into our thoughts around getting these properties resolved, sold or re-leased.

Alec Feygin : Got it. Thank you.

Operator: Your next question is from Linda Tsai with Jefferies.

Linda Tsai : Hi, thanks for taking my question. Congratulations, Kevin, you have a lot of fans and will be missed and congrats to Vince, too. The increase in G&A guidance, you highlighted a onetime benefit from last year. But you’re also going to cost control. Do you think there’s some room on that G&A guidance to come in lower? And then, Kevin, is there a charge for your retirement embedded in that range?

Steve Horn: Yeah. So the way we’ve handled executive retirements, we have a separate line item for that. And so whatever cost involved with Kevin is — will be in that line item. So to answer your question, it’s not in G&A. I guess the one thing to keep in mind on G&A is 2024 actual number came in at where we up $44.3 million. And so to normalize that, you really need to add, if you will, that $1.7 million that would take it up to $46 million. And so compared to $46 million to our next year guide — 2025 guide, $47 million to $48 million, the way I would kind of think about it. So there’s a kind of a general inflationary increase in that number. But again, as a percent of revenue, it’s not moving materially.

Linda Tsai : Thanks. And then just one other one. Any thoughts on how dollar stores are thinking about their store expansion plans these days?

Steve Horn: Linda, it’s Steve. We don’t do much with the dollar stores, and it has nothing to do with the business model. It was just always primarily the real estate. But over the years, they’ve been one of the big expansion groups for the net lease business. But yes, we don’t regularly call on the Dollar store corporate and or developers. So I don’t have much insight for you there.

Linda Tsai : Thanks.

Operator: Your next question for today is from John Massocca with B. Riley.

John Massocca : Thanks for taking my question s. Kevin, thank you for taking all of our questions over the many, many years. Just kind of looking for a little color maybe on the outlook for 2025 lease expirations. Anything notable that stands out? And I guess you’re kind of expecting the typical recovery rate on rents expiring?

Kevin Habicht: Yeah. I think to play out typically. I think we’re a little bit heavy in convenience stores in terms of lease expirations this year, and they’re pretty solid performers. So we’re not expecting adverse outcome relative to historical norms. So — but yeah, nothing of note in my mind.

John Massocca : Okay. And then maybe bigger picture, given transaction volumes have typically been focused on relationship tenants. How much of the investment outlook beyond maybe the LOI and PSA portion of the pipeline is contingent on those tenant partners being kind of active in the M&A space, and I guess the M&A space being kind of robust more broadly?

Steve Horn: Outside of — kind of let’s go back pre-2020, I would say a lot of our relationship business was driven by the M&A market side of things. And then kind of post-COVID when the M&A market was slowing down, but yet our large sophisticated tenants still felt the need to grow. So they did a lot of kind of development from self. So we were kind of leaning in. If you recall, a couple of years ago, where our build to suit our split-funded deal ramped up to $300 million, where historically, it was kind of $100 million. But what I’m seeing in 2025 is the M&A market is picking up a little bit in the auto services, convenience store that part of our guide does include a little bit of the M&A, but it’s definitely not dependent on the M&A side of things and the relationships.

John Massocca : Okay. And then, you touched on it a little bit, but in terms of the released Frisch’s assets or former Frisch’s assets, is there any reason the percentage rent would be a 2026 event versus 2025? Or should we kind of think about that as something that potentially impacts your 2025 earnings leases get started?

Kevin Habicht: Well, beyond the fact that the rent on those — that first batch doesn’t start until May 1, so there’s that. So in the first half, call it zero, close to zero. And so — but yeah, starting in the second half of this year, you should get some ramp-up in percentage rents related to that batch of stores. And obviously, for full year next year as new restaurant operators get things up and running.

John Massocca : That’s it for me. And Kevin [indiscernible] peers and wishing you the best going forward.

Kevin Habicht: John, thanks very much. It’s been fun.

Steve Horn: We’ll miss him at breakfast.

Kevin Habicht: Exactly. You know what I was going to order, oatmeal.

Operator: [Operator Instructions] Your final question for today is from Omotayo Okusanya with Deutsche Bank.

Omotayo Okusanya : Also a member of the Kevin fan club, you will be missed. Best of luck in retirement and also a member of the Vince fan club. So Vin, welcome aboard at NNN. My question is around acquisitions. Again, the $500 million to $600 million outlook for the year and also the disposition outlook. Just kind of curious from an acquisition perspective, retail categories that maybe you’re looking to get a little bit more invested in versus that on the sales side categories that you’re looking to lighten up on? And also if the world of tariffs kind of impact any of that in terms of industries you suddenly become more attractive or less attracted to?

Steve Horn: Yes, you know our philosophy. We look at the real estate more than the category, who’s operating the site isn’t as important as long as the real estate fundamentals are in line with market. Because at the end of the day, if that tenant goes away, we get market rent back. So — but because we are so relationship focused, I see 2025 being very similar to our current portfolio, where we will dig up our convenience stores and auto service sectors. And we’re starting to see a little bit more activity in the QSR side of things, which I really like the QSR because that one and half acres, 3,000 square foot box is very fungible on the real estate side. So I’m looking more for QSRs, [Indiscernible] and auto services percolating up in 2025.

As far as dispositions, that’s more — even if it’s a good industry, these retailers don’t always pick performing assets over a 15-20 year lease. Markets change, consumer behavior changes, so we work really hard with the retailer, and that’s where the relationship value is. And I think that’s why 85% of our leases renew at the end of terms. As we look to kind of prune the portfolio each year a little bit, that $100 million range and start weeding out the underperforming assets where the retailer assists us in determining which ones to sell. So it’s not a particular category. I would say last year, medical kind of urgent care was a targeted sector we disposed of. And we kind of took advantage of the COVID bumped on their sales and sold those into the 1031 market.

But this year, there’s not a particular sector. I’m looking to get out of this more individual assets that aren’t performing up to the levels of the tenant would like.

Omotayo Okusanya : Thank you very much.

Operator: We have reached the end of the question-and-answer session, and I will now turn the call over to Steve Horn, CEO, for closing remarks.

Steve Horn : Yeah, I appreciate you taking the time today. Thanks for joining us, and we’ll see you guys in person in the upcoming conference season. Kevin, one last good bye.

Kevin Habicht: Thank you. All right. Thank you. Good time.

Operator: Thank you all. This concludes today’s conference. And you may disconnect your lines at this time. Thank you for your participation.