Q2 2024 NNN REIT Inc Earnings Call

Greetings and welcome to NNNREITS Incorporated's second quarter 2024 earnings call.

Unknown Executive: on the Quarter 2024 earnings call. At this time, all participants are in 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.

Speaker Change: 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.

Unknown Executive: I'm a now-turned-of-conference over to your host, Mr. Steve Horn, Chief Executive Officer of NNN Rees. Sir, you may begin.

Operator: 2020 for earnings, and a question and answer session will follow the formal presentation. I will now turn the conference over to your host, Mr. Steve Horn, Chief Executive Officer of NNNREES.

Please note, this conference is being recorded.

Steve Horn: I will now turn the conference over to your host, Mr. Steve Horn, Chief Executive Officer of NNNREES. Sir, you may begin.

Stephen Horn: Hey, thanks, Alec. 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 Habicht. As the press release reflects, the company's consistent performance carried through the second quarter and produced strong results, including high occupancy and in-line acquisition volume driven by our proprietary tenant relationship. We are in a position to continue enhancing shareholder value as we move deeper into 2024 and start setting up for 2025, highlights the second quarter financial results emphasize our continuous effort to actively manage the portfolio with data analytics and Knowing the Acquisition Pipeline, Market Conditions, and Portfolio Performance.

Stephen Horn: Hey, thanks, Oli. Hey, good morning.

Stephen Horn: Welcome to NNN Rees 2nd quarter of 2024 earnings call. As usual, joining me on the call is Chief Financial Officer, Kevin Habicht. As the press release reflects, the company's consistent performance carried through the 2nd quarter and produced strong results, including high occupancy and inline acquisitions, volume driven by our proprietary tenant relationships.

Steve Horn: Hey, thanks, Alec. Hey, good morning, and welcome to NNN REIT's second quarter of 2024 earnings call. As usual, joining me on the call is Chief Financial Officer Kevin Habicht.

Speaker Change: As the press release reflects, the company's consistent performance carried through the second quarter and produced strong results, including high occupancy and in-line acquisitions volume driven by our proprietary tenant relationships.

Stephen Horn: We are in position to continue enhancing shareholder value as we move deeper into 2024 and start setting up for 2025. Highlights of the 2nd quarter financial results emphasize our continuous effort actively managing the portfolio with data analytics and experience. The portfolio of 3,548 free-standing single tenant properties continues to perform exceedingly well, maintained high-oxicity levels of 99.3, which remains above our long-term average of roughly 98%. Knowing the acquisition pipeline, market conditions, and portfolio performance, NNNN 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 frames year-to-date recapture of 102%.

Steve Horn: We are in position to continue enhancing shareholder value as we move deeper into 2024 and start setting up for 2025.

Steve Horn: Highlights of the second quarter financial results emphasize our continuous effort actively managing the portfolio with data analytics and experience.

Steve Horn: The portfolio of 3,548 freestanding single-tenant properties continue to perform exceedingly well. Maintained high occupancy levels of 99.3, which remains above our long-term average of roughly 98%.

M&M: 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.

Stephen Horn: The leasing department continued the strong start of the year by identifying and executing with QSR 10, having a 158% recapture rate from the prior rant during the quarter, which brings year-to-date recapture of 102%. Just want to be clear and remember that NNN tries hard not to give TI dollars to quote buy up rent.

Steve Horn: The Leasing Department continued the strong start of the year by identifying and executing with QSR tenants.

Speaker Change: having a 158% recapture rate from the prior rant during the quarter, which brings a year-to-date recapture of 102%.

Stephen Horn: This recapture is above historical levels of approximately 70%.

Stephen Horn: 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, of which 11 were income producing, raising 67 million of proceeds to be reinvested into 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.

Speaker Change: This recapture is above historical levels of approximately 70%.

Speaker Change: Just want to be clear and remember that NNN does not, 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.

Speaker Change: During the quarter, we also sold 14 properties, which 11 were income producing, raising $67 million of proceeds to be reinvested into new acquisitions.

Stephen Horn: 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 prices. Year-to-date, NNN has sold $85 million of assets, which has resulted in a 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 the 2024 lease expirations, which we originally had about 90 headed into the year, are all but wrapped up, and we landed right near our historical average of 85% for renewables, with an average lease duration of over 16 years.

Speaker Change: 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.

Stephen Horn: 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.

Speaker Change: 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.

Stephen Horn: Staying on the portfolio, I like to mention, with regard to 2024 lease expirations, which we originally had about 90 heads 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's 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 acquisition, during the quarter, we invested 110 million and 16 new properties at an initial cash cap rate of 7.9. The potential yields, or if we required a straight line, it would be about 8.9.

Speaker Change: Staying on the portfolio, I'd like to mention with regard to the 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.

Speaker Change: 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.

Speaker Change: On to 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%.

Stephen Horn: with an average of least duration of over 16 years. 100% of the deals were from relationship tenants, which we do repeat business, creating the barriers to the competition to solidify at an end deal for. As far as the acquisition price and environment, less 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 end-and-end cap rates on the target acquisitions will remain kind of 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.

Speaker Change: 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 NNN's deal form.

Stephen Horn: As far as the acquisition pricing environment is concerned, 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, primarily via the direct sale leaseback on our long duration triple net lease form, which is a lot more landlord-friendly than the 1031 market. 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.

Speaker Change: 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.

Stephen Horn: Two, the run-up and equity prices in the sector trade marginally better cost of equity, and lastly, the market started 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.

Stephen Horn: Primarily via the direct sale leaseback at 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 current facility has plenty of dry power with a quarter-end balance of approximately 12 million, down from 132 million a year in. We just increased the capacity to 1.2 billion. NNN is positioned well positioned to fund our 2024 acquisition guidance and beyond.

Speaker Change: 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.

Speaker Change: 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. M&N is well-positioned to fund our 2024 acquisition guidance and beyond.

Kevin Habicht: With that, let me turn the call over to Kevin for more color, detail, and the quarterly numbers and updating guidance. Thanks, Steve. As usual, I'll start with our typical cautionary statements that we will make certain statements that may be considered to be forward-looking statements under federal security 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 of the SXC and in this morning's press release.

Speaker Change: With that, let me turn the call over to Kevin for more color, detail, and the quarterly numbers and updated guidance.

Kevin: Thanks Steve. As usual, I'll start with our typical cautionary statement that we will make certain statements that

Kevin: 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

Speaker Change: 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.

Kevin Habicht: 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 a 3 cents or 3.8 percent over a year ago results of 80 cents per share. A FFO results for 84 cents per share for the second quarter, which is 4 cents or 5 percent higher than year-ago results. Second quarter results did include 2.1 million dollars of lease termination fee income, which is relatively high for us, and that compares with $300,000 in the second quarter of 2023.

Speaker Change: Okay with that out of the way yeah so headlines from this morning's press release report quarterly core FFO results with 83 cents per share for the second quarter of 2024 and that's up

Kevin Habicht: AFFO results for $0.84 per share for the second quarter, which is $0.04 or 5% higher than year-ago results. Looking 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. Steve mentioned that occupancy was 99.3% at quarter end.

Speaker Change: $0.03 or 3.8% over a year ago, results of $0.80 per share. AFFO results for $0.84 per share for the second quarter, which is $0.04 or 5% higher than year ago results.

Kevin: 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.

Kevin Habicht: And as you may 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 affording $6.23 million of lease termination fee income, first half of 2024 versus $2 million for the first half of 2023. He looked 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. Steve mentioned occupancy is 99.3% of quarter, and GNA 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.

Kevin: And as you may or 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 this year.

Speaker Change: 2024 versus $2 million for the first half of 2023.

Speaker Change: 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.

Speaker Change: But even without that incremental income, overall it was a good quarter and in line with our expectations.

Kevin Habicht: 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 guide. 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 and that more of our revenue drops to the bottom line, which obviously supports total shareholder retention.

Speaker Change: 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.

Kevin Habicht: And I'll begin my push here for folks to also think about GNA as a percentage of NLI, which were also as 5.6% of 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 bros lease companies, and 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.

Speaker Change: And I'll begin my push here for folks to also think about DNA as a percentage of NOI.

Speaker Change: 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.

Speaker Change: and that more of our revenue drops to the bottom line, which obviously supports total shareholder returns.

Speaker Change: 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

Kevin Habicht: 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 two, the bottom end and the top end by two cents a share, with a new range for four FFO per share of $3.27, the $3.33 per share.

Kevin Habicht: 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. 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 of available liquidity at quarter end. 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, valuing equity adequately, whether that equity is produced by free cash flow disposition for free proceeds or new equity issues. Closing 2024 is tracking largely as expected for us. And we believe we're in a relatively good position to navigate any of the uncertainties that are out there as we continue to focus on growing our per share results.

Speaker Change: expenses and dividends.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: As Steve mentioned, we did increase our...

Steve Horn: 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.

Kevin Habicht: The underlying assumptions really did not change notably. GNA 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 that proceeds. With a big thanks to our supported bank group in April, we completed a recap of our bank credit facility, increasing the capacity by $100 million to $1.2 billion and extending the term to 2028.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: With a big thanks to our supported 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.

Kevin Habicht: 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 30.

Steve Horn: There were not any other material changes to the terms of that bank line.

Speaker Change: 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.

Kevin Habicht: 2017. 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 markets footprint, we funded nearly 79% of our 235 million a 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.

Speaker Change: 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.

Steve Horn: We maintain good leverage and we have kept the balance sheet in a strong liquidity position with 1.2 billion dollars.

Speaker Change: of Available Liquidity at Quarter End.

Speaker Change: 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.

Speaker Change: 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.

Kevin Habicht: A couple of stats, balance sheets, net debt to growth 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 us means ensuring we are getting what we believe are sufficient returns of equity while controlling risk through property underwriting and maintaining a sound balance sheet. Valuing equity adequately, whether that equity is used by free cash flow, disposition proceeds, or new equity issuance, is that the heart of growing per share results over the long term and helps us not to confuse activity with achievement.

Speaker Change: A couple stats, balance sheet, net debt to gross book assets was 41.6 percent.

Speaker Change: that the 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.

Steve Horn: 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.

Steve Horn: 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.

Kevin Habicht: In closing, 2024 is tracking largely as expected for us, and we believe we are in relatively good positions 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.

Steve Horn: 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.

Unknown Executive: So, with that, we will open it up to any questions. Thank you. At this time, we will be conducting our question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question key. You may press star 2 if you would like to remove your question from the key. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please. What we pull for questions. Thank you.

Steve Horn: And we are mindful this is a long-term, multi-year endeavor.

Steve Horn: So with that, we will open it up to any questions.

Operator: Thank you. At this time, we will be conducting our question and answer session. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start button. One moment, please, while we poll for questions.

Speaker Change: Thank you. At this time we will be conducting our question and answer session.

Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad.

Speaker Change: The confirmation tone will indicate your line is in the question key.

Speaker Change: You may press star 2 if you would like to remove your question from the queue.

Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Speaker Change: One moment, please, while we poll for questions.

Spencer Alloway: Our first question is coming from Spencer Alloway with Green Street. Your line is live.

Steve Horn: Thank you. Our first question is coming from Spencer Allaway with Green Street. Your line is live.

Spencer Alloway: Thank you. Can you guys just provide some updated color on the transaction market and kind of work cap rates have been trending this far into 3Q?

Spencer Allaway: Thank you. Can you guys just provide some updated color on the transaction market and kind of where cap rates have been trending thus far in the 3Q?

Stephen Horn: Yeah, how are you doing Spenser? So the overall market, you know, my expectations, you know, talking to the acquisition guys, our current tenants, deal volume is starting to pick up a little bit, you know, the overall opportunity set is larger today than it was 60 days ago. So that's a good feeling. There are a couple larger portfolios starting to hit the market. As far as cap rates go, kind of what I mentioned in the opening statement.

Stephen Horn: Yeah, how are you doing, Spencer? So the overall market, my expectations, talking to the acquisition guys are current tenants. Deal buying, starting to pick up a little bit; the overall opportunity set had it larger today than it was 60 days ago. So that's a good deal.

Speaker Change: Yeah, how you doing Spencer? So the overall market, you know, my expectations, you know, talking to the acquisition guys, our current tenants.

Speaker Change: You know, deal volume is starting to pick up a little bit, you know, the overall opportunity set is larger today than it was 60 days ago, so that's a good feeling. There's a couple larger portfolios starting to hit the market. As far as cap rates, kind of, you know, what I mentioned in the opening statement,

Stephen Horn: And there's a couple larger portfolios starting to hit the market. As far as cap rates, kind of what I mentioned in the opening state. 3rd quarter, starting to get baked, and I'm seeing the cap rates in line with our second quarter, timing of deals, give or take 5-10 basis points, but pretty much in line with our second quarter, not as wide as our first quarter. For the remainder of the year, that being said, I'm kind of what our second quarter was in my head. I'm projecting that out for the second half of the year.

Stephen Horn: The third quarter is starting to get baked, and I'm seeing cap rates in line with our second quarter. Timing of deals might give or take five, ten basis points, but pretty much in line with our second quarter, not as wide as our first quarter. For the remainder of the year, that being said, I'm kind of projecting what our second quarter was in my head, and I'm projecting that out for the second half of the year.

Speaker Change: Third quarter's starting to get baked, and I'm seeing the cap rates in line with our second quarter. You know, timing of deals might, you know, give or take five, ten basis points, but pretty much in line with our second quarter, not as wide as our first quarter. For the remainder of the year, that being said, I'm kind of – what our second quarter was, in my head I'm projecting that out for the second half of the year.

Stephen Horn: Okay, great. And then you just hear a little bit more color on the dissisitions made in the quarter.

Stephen Horn: I think you mentioned there were 11 income-producing assets, so perhaps just the rationale for the divestments, and then if you could just talk about the depth of the buyer pool as well, that would be great. Yeah, so yeah, we saw 14 assets; 11 were income-producing, so we had a couple of vacancies that, over time, we decided it was better use to sell the vacant and redeploy into a creative acquisition. But it was pretty much a mixture, leaning more to defensive sales. We sold a couple multi-tenant assets in there that are not core assets to the portfolio over a decade or so. We picked up one or two.

Speaker Change: Okay, great. And then you just share a little bit more color on the dispositions made in the quarter. I think you mentioned there were 11 income-producing assets, so perhaps just the rationale for the divestments. And then if you could just talk about the depth of the buyer pool as well, that would be great.

Stephen Horn: Yeah, so yeah, we sold 14 assets; 11 were income-producing. So we had a couple vacancies that, you know, over time, we decided it was a better use of to sell the vacant properties and redeploy them into accretive acquisitions. But it was pretty much a mixture, leaning more to defensive sales.

Speaker Change: Yeah, so yeah, we sold 14 assets, 11 were income-producing, so we had a couple vacancies that, you know, over time we decided it was better to sell the vacant and redeploy into a creative acquisition.

Speaker Change: but it was a pretty much a mixture leaning more to defensive sales.

Stephen Horn: We sold a couple multi-tenant assets in there that are not core assets to the portfolio. Over, you know, a decade or so, we picked up one or two. We don't think owning shopping centers is a good investment for a net lease company. So we decided to exit those assets. And then we had a few, you know, the kind of people who loved the real estate a lot more than we did. And they were sold, you know; it's a really accretive cap rate.

Speaker Change: We sold a couple multi-tenant assets in there that are not core assets to the portfolio. Over a decade or so, we picked up one or two. We don't think owning shopping centers is a good investment for a net lease company.

Stephen Horn: So we don't think owning shopping centers is a good investment for a net lease company, so we decided to exit those assets. And then we had a few people love the real estate a lot more than we did, and they were sold. It's really a creative capric.

Speaker Change: So we decided to exit those assets, and then we had a few, you know, kind of people love the real estate a lot more than we did, and they were sold, you know, at some really creative cap rates.

Joshua Dennerlein: Our next question is coming from Joshua Dennerline with Bank of America. Your line is nice.

Speaker Change: Thank you.

Speaker Change: Thank you. Our next question is coming from Joshua Dennerlein with Bank of America. Your line is live.

Farrell Granath: Hi, good morning. This is Farrell Granith on behalf of Josh. I just wanted to follow up on your comments on the term seeds that have been coming in, and now the second quarter being also elevated over historic levels.

Speaker Change: Hi, good morning, this is Farrell Granth on behalf of Josh.

Farrell Granth: I just wanted to follow up on your comments on the term fees that have been coming in and now the second quarter being also elevated over historic levels. Are you seeing any trend or in these situations are they coming to you earlier and is there any specific category that these are falling under?

Farrell Granath: Are you seeing any trend or in these situations? Are they coming to you earlier? And is there any specific category that these are falling under?

Kevin Habicht: Hey, Farrell, Kevin. No real trends. I will say, and this is totally anecdotal because I don't pay much attention to what other companies are kind of going into. I've seen more lease termination fee income discussions of late, just in various notes and comments out there by various briefs, so I don't know if there's a trend or not. For us, it's very kind of episodic, and it's difficult to, frankly, even for us to kind of predict if and when any of that might come together, because typically the process involves at least three parties, and each of them have competing priorities.

Kevin Habicht: Hey there, it's Kevin. No real trends. I will say, and this is totally anecdotal because I don't pay much attention to what other companies are kind of doing, I've seen more lease termination fee income discussions of late just in various notes.

Kevin: Hey Farrell, it's Kevin. Not, no, no real trends. I will say, and this is totally anecdotal because I don't pay much attention to what other companies are kind of doing. I've seen more lease termination fee income discussions of late just in various notes.

Kevin: and comments out there by various reads, so I don't know if there's a trend or not. For us, it's very kind of episodic and it's...

Kevin: difficult to frankly even for us to kind of predict if and if and when any of that might come together because typically the process involves at least three parties and each of them have competing priorities.

Kevin Habicht: So it's not really prone to a real degree of predictability, but I think it comes from just working the portfolio, staying in contact with our customer, the tenant, and then trying to maximize our terms while helping the tenant. Because usually there's something going on with that property. And so in the most recent quarter case, the biggest chunk of the lease termination fee income related to a property that had some condemnation proceeds involved, a store that was under performing. And so we had an opportunity to take condemnation proceeds, a lease term fee, and a buyer to buy the property, and all those things had to kind of line up; those planets had to line up to make sense for us to kind of pull the trigger.

Speaker Change: So it's not really prone to a real degree of predictability. But I think it comes from just, you know, working the portfolio, staying in contact with our customer, the tenant, and then trying to maximize, you know, our returns while helping the tenant.

Speaker Change: because usually there's something going on with that property. And so in the most recent quarter case, the biggest chunk of the lease termination fee income related to a property that had...

Speaker Change: Some condemnation proceeds involved, a store that was underperforming, and so we had an opportunity to take condemnation proceeds, a lease term fee, and a buyer to buy the property, and all those things had to kind of line up, those plans had to line up.

Farrell Granath: And so I'm not trying to be elusive, but it's hard to predict. And I encourage folks to think more about our five-year average of $3 million a year of lease termination fee income rather than getting to trying to project the high levels of the first half into the index. of the future.

Farrell Granth: to make sense for us to kind of pull the trigger. So, I'm not trying to be elusive, but it's...

Kevin Habicht: You know, it's hard to predict, and, you know, I encourage folks to think more about our five-year average of $3 million a year of lease termination fee income rather than getting too excited about trying to project the high levels of the first...

Farrell Granth: It's hard to predict. And I encourage folks to think more about our five-year average of $3 million a year of lease termination fee income rather than getting too, trying to project the...

Speaker Change: The High Levels of the First Half into the Indefinite Future.

Farrell Granath: Okay, thank you.

Kevin Habicht: And also I'm curious, are any of your top 20 tenant lists, are any of those on your watch list, and those not on the top 10, or excuse me, top 20 list, are you also increasing any monitoring when it comes to performance levels? Yeah, I mean we're always monitoring, so it doesn't really increase notably. Obviously, those on the watch list get a little more attention, but it's a part of what we do.

Speaker Change: Okay, thank you. And also, I was curious, are anyone in your top 20 tenant list, or any of those on your watch list, and those not on the top 10, or excuse me, top 20 list, are you also increasing any monitoring when it comes to performance level?

Stephen Horn: Yeah, I mean, we're always monitoring so it doesn't really include at home, which we have a dozen stores, it's 1.1% of our rent, watching that one, home furnishings, struggling a bit, as well as connected to big lots, we have three of those stores, which is 0.1% of our rent. The only other one I'd mention, again, not in our top 20, but we have two tenants that are in bankruptcy. One is called Badcock Furniture, and within that we have 0.7% of our rent, 0.7, and then we have two right aids left over from that bankruptcy, a company called Kahn's, which is a retailer that's been around for a long time. We own no Kahn's stores, but the Badcock became a part of Kahn's about a year ago. The company that sold them

Speaker Change: Yeah, I mean, we're always monitoring, so it doesn't really...

Speaker Change: increase notably. Obviously, those on the watch list get a little more attention, but it's a part of what we do. You know, the one we've talked about...

Kevin Habicht: You know, the one we've talked about, with some regularity on our top 10 list, is a restaurant concept called Frish's. And so that's been one that we've talked about a good bit. And they continue to pay rent, but just kind of struggling, never really quite came out of what I call a pandemic fog, if you will. And so I'd say that's it. And then others, you know, that aren't on our top tenant list.

Speaker Change: With some regularity, on our top tenant list is a restaurant concept called Frisch's, and so that's been one that we've talked about a good bit.

Speaker Change: continue to pay rent and but you know just kind of struggling never really quite came out of the what I call the pandemic fog if you will and so I'd say that's it and then others you know that you know aren't on our on our top

Kevin Habicht: I mean AMC movie theaters; that's been out there well discussed. I wasn't really going to go back into that. Frankly, we feel much better about them today than we did 12 and 18 months ago, given the flight of movies and the box office results of late. And, as well as that company's AMCs, you know, refinancing and equity issuance over recent quarters has been very productive. And so feeling better about that one. So those are the two in the top 20.

Speaker Change: I mean, AMC movie theaters, that's been out there, well discussed. I wasn't really going to go back into that. Frankly, we feel much better about them today than we did 12 and 18 months ago, given the inflate of movies and the box office.

Speaker Change: results of late and as well as that company's AMC, you know, refinancing and equity issuance over recent quarters has been very productive. And so

Kevin Habicht: You know, others, you know, that we've talked about on our list and include at home, which we have a dozen stores. It's 1.1% of our rent, watching that one home furnishings struggling a bit, as well as connected to that big lot. We have three of those stores, which is 0.1% of our rent.

Speaker Change: Feeling better about that one. So those are the two in the top 20, you know others, you know that we've talked about on our list

Speaker Change: include At Home, which we have a dozen stores, it's 1.1% of our rent. Watching that one, Home Furnishings, struggling a bit, as well as connected to that, Big Lots, we have three of those stores, which is 0.1% of our rent.

Kevin Habicht: The only other one I'd mention again, not in our top 20, but we have two tenants that are in bankruptcy. One's called Bad Cop Furniture and within which we have 0.7% of our rent 0.7. And then we have two right aids left over from that bankruptcy. And we'll see where that goes. But that's a very small percentage. The bad cop, you know, is early; they just recently filed. And we do have that company. Bad Cop got bought by a company called Conz, which is a retailer that's been around for a long time. We own no cons stores.

Speaker Change: The only other one I'd mention, again, not in our top 20, but we have two tenants that are in bankruptcy. One is called Badcock Furniture, and within which we have 0.7% of our rent, 0.7.

Speaker Change: And then we have two right aids left over from that bankruptcy.

Speaker Change: And we'll see where that goes, but that's a very small percentage. The Badcock, you know, is early. They just recently filed. And we do have that company, Badcock, that bought by...

Speaker Change: a company called Kahn's, which is a retailer that's been around for a long time. We own no Kahn's stores, but the Badcock became a part of Kahn's about a year ago. The company that sold

Kevin Habicht: But the bad cop became a part of Conz about a year ago. The company that sold bad cop to Conz remains a guarantor on our week. And so hopefully, at the end of the day, that may provide some incremental support to us. But it's early in the process with Bad Cop. We'll see where it goes. And at the moment, they're currently on rent. Thank you.

Speaker Change: And at the moment, they're current on rent, so...

Michael Goldsmith: Our next question is coming from Michael Goldsmith with UBS. Your line is live.

Operator: Our next question is coming from Michael Goldsmith with UBS. Your line is live.

Speaker Change: Thank you.

Speaker Change: Thank you. Our next question is coming from Michael Goldsmith with UBS. Your line is live.

Katherine Grabson: Hi, good morning. This is Katherine Grabson from Michael. Thank you for taking my question.

Catherine Graves: Hi, good morning. This is Catherine Graves on for Michael. Thank you for taking my question. I just wanted to ask, just generally, consumer trends and, particularly, strain on the low-end consumer, how that might be impacting your tenants and how you're thinking about tenant health in the context of the consumer.

Katherine Grabson: I just wanted to ask, just generally consumer trends and particularly strain on the low-end consumer, how that might be impacting your tenants and how you're thinking about tenant health in the context of the consumer.

Catherine Graves: Hi, good morning. This is Catherine Graves on for Michael. Thank you for taking my question. I just wanted to ask, just generally consumer trends and particularly strain on the low-end consumer, how that might be impacting your tenants and how you're thinking about tenant health in the context of the consumer?

Kevin Habicht: Good question, Kevin. So we do our, you know, we look at our property level across all industries. And now our data, you know, we have lately was through March. So it's a little bit stale, you know, it's not a, you know, real time. It just takes time to get the data and then process the data. And we have seen, for the most part, our rent covers ratios throughout the portfolio across all industries. And for the most part of it's stable. Now, when you go from a, you know, a 3.5 car, we should have three and a quarter covers.

Kevin Habicht: A good question, Kevin. So, you know, we do our, you know, we look at our property levels across all industries. And now, our data, you know, we have recently was through March. So it's a little bit stale, you know, it's not, you know, real time, because it just takes time to get the data and then process the data.

Speaker Change: A good question, Kevin. So, you know, we do our, you know, we look at our property level across all industries.

Speaker Change: And now our data, you know, we have lately was through March, so it's a little bit stale. You know, it's not, you know, real time, but it just takes time to get the data and then process the data.

Speaker Change: And we have seen, for the most part, our rent coverage ratios throughout the portfolio across all industries.

Kevin Habicht: And we have seen, for the most part, our rent coverage ratios throughout the portfolio across all industries have been stable. Now, when you go from, you know, 3.5 coverage to three and a quarter coverage, yeah, it's a trending down, but not a cause for concern. But yeah, when we're underwriting assets in certain industries, we do kind of put a little, you know, discount on the EBITDA for future softness of the consumer.

Speaker Change: For the most part, it's been stable. Now when you go from a 3.5 coverage to a 3.25 coverage, yeah, it's a trending down, but not a cause for concern.

Kevin Habicht: Yeah, it's trending down, but not a cause for concern. But yeah, when we're underwriting assets in certain industries, we do kind of put a little, you know, discount on the EBITDA for future softness of the consumer. But for the most part, the low-end consumer and the mid-range consumers held up within our portfolio. But that's a result of our business model. When we do sale-leaseback financing, the tenant does a self-selection of an asset. So they actually picked the better assets to sell us opposed to what we would call the dogs because they're signing that, you know, 15 or 20-year lease.

Speaker Change: But, yeah, when we're underwriting assets in certain industries...

Speaker Change: We do kind of put a little, you know, discount on the Evada for future softness of the consumer. But for the most part, the low-end consumer and the mid-range consumers held up within our portfolio.

Kevin Habicht: But for the most part, the low end consumer and the mid-range consumer held up within our portfolio. But that's a result of our business model. When we do sale leaseback financing, the tenant does a self-selection of an asset, so they actually pick the better assets to sell us, opposed to what we would call the dogs, because they're signing that 15 or 20-year lease, so they're committing to a long-term relationship with us, so they send us the above-average property.

Speaker Change: But that's a result of our business model.

Speaker Change: When we do sale leaseback financing, the...

Speaker Change: Tenant does a self-selection of an asset.

Speaker Change: So they actually pick the better assets to sell us, opposed to what we would call the dogs. Because they're signing that, you know, 15 or 20 year lease. So they're committing to a long term relationship with us. So they send us the above average properties.

Kevin Habicht: So they're committing to a long-term relationship with us. So they send us the above average properties.

Katherine Grabson: Got it.

Katherine Grabson: Thank you. And then my second question.

Kevin Habicht: Are you seeing any increased competition going into the second half of 2024, particularly any competition from private equity buyers, buyers you may have been seeing on the sidelines coming off of them now? Yeah, we've always been in a highly competitive market. Yes, since I've been doing this for, you know, 20 plus years, Kevin 30 plus years, just the names that's come and gone. But with the banking market for the most part, you know, not as active as they were three years ago. We haven't seen really a new entrance into it. The private money is still on the sidelines as far as our target acquisitions.

Speaker Change: Got it. Thank you. And then my second question, are you seeing any increased competition going into the second half of 2024, particularly any competition from private equity buyers, buyers who may have been sitting on the sidelines coming off of them now?

Speaker Change: We've always been in a highly competitive market, since I've been doing this for 20 plus years, Kevin 30 plus years.

Kevin Habicht: Just the names have come and gone, but with the banking market, for the most part, you know, not as active as they were three years ago, we haven't seen really a new entrance into it. The private money is still on the sidelines as far as our target acquisitions.

Kevin Habicht: But again, we're always in a highly competitive market. But because of our business model of doing repeat deals with our current tenant base, we have plenty of opportunity to hit our acquisition targets. Got it.

Speaker Change: But again, we're always in a highly competitive market, but because of our business model of doing repeat deals with our current tenant base, we have plenty of opportunity to hit our acquisition targets.

Unknown Executive: Thanks very much. Thank you.

John Kilachewski: Our next question is coming from John Kilachewski with Wells Fargo.

Speaker Change: Got it. Thanks very much.

Speaker Change: Thank you. Our next question is coming from John Kilichowski with Wells Fargo. Your line is live.

Cheryl: Your line is nice. Hi, this is Cheryl on for John Kilachewski. Thank you for taking my question.

Speaker Change: Hi, this is Cheryl Ahn for John Galachowski. Thank you for taking my question.

Cheryl: I was wondering what does bad debt look like? I know you have 100 basis points in your guide, and it's typically been 30 to face 50 basis points on average. Curious to know if it will be any different this year with cons, bankruptcy, and Walgreens store closure announcement.

Speaker Change: I was wondering what does bad debt look like? I know you have 100 basis points in your guide and it's typically been 30 to 50 basis points on average. Curious to know if it'll be any different this year with Gantt's bankruptcy and Walgreens' store closure announcement.

Unknown Executive: Yeah, and I appreciate you asking that question because I should have mentioned in my earlier discussion about the, you know, kind of credit watch list. Yeah, an important note, yeah, we always assume...

Kevin Habicht: Yeah, and I appreciate you asking that question because I should have mentioned my earlier discussion about the credit watch list. Yeah, important. No, yeah, we always assume about a hundred basis points of rent loss in any given year. We have not changed that in our projections, which is maybe a way of telling you all that at the moment we don't see anything outside of what we would consider. There's a normal wear and tear on retail tenants at the moment in terms of impact on our portfolio and our cash flow. But yeah, they answer your question.

Unknown Executive: Yeah, and I appreciate you asking that question because I should have mentioned in my earlier discussion about the, you know, kind of the credit watch list. Yeah, important note, yeah, we always assume...

Speaker Change: about 100 basis points of rent loss in any given year. We have not changed that in our projections, which is maybe a way of telling you all that, you know, at the moment, we don't see anything outside of what.

Speaker Change: We would consider kind of normal wear and tear on retail tenants at the moment, in terms of impact on our portfolio and our cash flow and so, but yeah, to answer your question, we, we don't.

Kevin Habicht: We don't see any real need to change that at this point for this year, and as we think about even next year, we think it will operate within those levels. Historically, we've been more, you know, while we assume a hundred basis points of rent loss in our guidance, the actual closer to 30 to 50 basis points, where this year will end up not exactly short. It's probably a 50 basis points, might be a touch higher, but it's well under a hundred, I believe at the moment it feels that way anyway. So we think we're in good shape in that regard.

Speaker Change: I don't see any real need to change that at this point for this year and as we think about even next year, we think it will operate within those levels. Historically, we've...

Unknown Executive: been more, you know, while we assume 100 basis points of rent loss in our guidance, the actual is closer to 30 to 50 basis points. Where this year will end up, I'm not exactly sure, but it's probably 50 basis points.

Speaker Change: It's been more, you know, while we assume 100 basis points of rent loss in our guidance, the actual is closer to 30 to 50 basis points, where this year we'll end up, I'm not exactly sure, but it's probably 50 basis points.

Unknown Executive: It might be a touch higher, but it's well under 100, I believe, at the moment. It feels that way, anyway. So we think we're in good shape in that regard.

Kevin Habicht: Okay, thank you, and just to follow up with the weakness in the QSR sector, are you hearing concerns from tenants in the QSR portfolio? No, nobody's throwing up the cautionary flag to us in our QSR portfolio. And again, at the property level, the rent coverage on our QSR portfolio is very solid. But no, we're not hearing anybody calling us up asking for rent reductions because their sales are softening.

Speaker Change: Okay, thank you. And just to follow up, with the weakness in QSR sector, are you hearing concerns from tenants in the QSR portfolio?

Unknown Executive: No, nobody's throwing up the cautionary flag to us in our QSR.

Unknown Executive: No, nobody's throwing up the cautionary flag to us in our QSR portfolio, and again, at the property level, the rent coverage on our QSR portfolio is very solid, but no, we're not hearing anybody calling us up asking for rent reductions because their sales are softening.

Unknown Executive: And again, at the property level, the rent coverage on our QSR portfolio is very solid. But no, we're not hearing anybody calling us up asking for rent reductions because their sales are soft.

Cheryl: Awesome. Thank you.

Cheryl: Have a nice day.

Unknown Executive: Thank you.

Speaker Change: Awesome. Thank you. Have a nice day.

Maddie Farges: Our next question is coming from Smead's Rules with City. Your line is nice.

Unknown Executive: Thank you. Our next question is coming from Smead's Rose with City. Your line is live.

Maddie Farges: Hi, good morning. This is Maddie Farges on Smead. Given the shares issue during the quarter, how are you thinking about share and issuances going forward to build drive powder going into 2025? Yeah, not to be overly elusive. I mean, we'll see where that goes. You know, we don't, the key point I guess is that we don't need to issue any, as I mentioned in my comments. You know, over two thirds of our acquisitions for this year can get funded just with free cash flow and dispositions. And so we really have no need for equity. So we can pick our points as to when we think it's appropriate to issue some equity or not.

Maddie Pargis: Hi, good morning. This is Maddie Pargis on First Needs.

Maddie Pargis: Hi, good morning. This is Maddie Pargis on First Needs. Given the shares issue during the quarter, how are you thinking about share issuances going forward to build dry powder going into 2025?

Speaker Change: Yeah, um...

Speaker Change: Not to be overly elusive, I mean, we'll see where that goes, you know, we don't, the key point I guess is that we don't need to issue any, as I mentioned in my comments, you know, over two-thirds of our acquisitions for this year.

Speaker Change: can get funded just with free cash flow and dispositions. And so we really have no need for equity. So we can pick our points as to when we think it's appropriate to issue some equity or not.

Stephen Horn: As you look back at our history and recent years and our institutional investor deck online, you know, you can see that we've, over the last 18 months, only issued about $60 million worth of equity. So we're very share price dependent, and our thoughts around that will source it when it's available and well priced. But most importantly, we'll look to not source it when it's not well priced, in our opinion. We understand that for the thinking that others may differ on. And so no real need to raise any equity at this point. as we see things playing out.

Speaker Change: As you look back at our history in recent years and our institutional investor deck online, you know, you can see that we've...

Speaker Change: Over the last 18 months, we've only issued about $60 million worth of equity, so we're very share price dependent, and our thoughts around that.

Speaker Change: We'll source it when it's available and well priced.

Speaker Change: But most importantly, we'll look to not source it when it's not well-priced, in our opinion. And we understand that's an opinion that others have.

Speaker Change: May differ on, so no real need to raise any equity at this point as we see things playing out.

Maddie Farges: Got it.

Maddie Farges: Thank you.

Stephen Horn: I'm just circling back on the transaction market. Are there any particular areas, sectors, or tenants where you're seeing the most opportunity through the balance of the year? Yeah, it's a kind of look at our opportunity set as far as outside or portfolio.

Maddie Pargis: Got it, thank you. I'm just circling back on the transaction market. Are there any particular areas, sectors, or tenants where you're seeing the most opportunity through the balance of the year?

Stephen Horn: It seems like the convenience store sector is starting to pick up some activity, and the auto service has been pretty fraught recently. As far as our current portfolio, I would probably lean to maybe a little family entertainment side of things, less car wash activity. And there hasn't been too much QSR activity of recent time. Great.

Speaker Change: As I kind of look at our opportunity set as far as outsider portfolio, it seems like you know the convenience store sector is starting to pick up some activity and the auto services.

Speaker Change: been pretty frothy recently.

Maddie Pargis: as far as our current portfolio.

Speaker Change: I would probably lean to, you know, maybe a little family entertainment.

John Mascota: Our final question is coming from John Mascota with Be Riding. Your line is nice. Good morning.

John Mascota: So, um, maybe just thinking about guidance a little bit, um, what were some of the kind of pushes and pull? There obviously slight increase to disposition volume expectations, but just, you know, was the least termination fee income received in the quarter or something you were anticipating when you put the guidance out in one to end. Also, I mean, you know, is there any kind of change or, I guess, was the debt issuance kind of in line with your expectations as well. Yeah, I mean, fair question. There weren't a lot of variables, to be quite honest.

Kevin Habicht: Given the shares issued during the quarter, how are you thinking about share issuances going forward to build dry powder going into 2025?

Stephen Horn: Yeah, as I kind of look at our opportunity set, as far as outside our portfolio, it seems like, you know, the convenience store sector is starting to pick up some activity, and the auto service sector has been pretty frothy recently. As far as our current portfolio, I would probably lean toward, you know, maybe a little family entertainment side of things, less car wash activity. And there hasn't been too much QSR activity in recent times.

Kevin Habicht: Yeah, I mean, fair question. There weren't a lot of variables, to be quite honest. You know, A, we tend to start the year a little, some would say, conservative in guidance, and so that creates an opportunity for some upside. As the year progresses, we can increase guidance, so that's kind of the base we start with. Yes, there is, as we mentioned, more lease termination fee income than... We might have thought And that like I say it's kind of episodic I won't say it's a lightning strike because a lot of pieces involved but the timing of that if the if and the when that may happen is it is not very predictable and so we, Generally, and then like I said, we, there's, you know, a little bit of room and, you know, to the extent we haven't fully utilized this 100 basis points of rent loss assumption, you know, in the first half, then that helps numbers at the at the margin.

Kevin Habicht: You know, we tend to start the year a little, some would say, conservative and guidance, and so that creates an opportunity for some upside. And hopefully, you know, as the year progresses, we can increase guidance. So that's the kind of the base we start with. Yes, there is, as we mentioned, more least termination fee income than we might have thought. And that, like I say, is kind of episodic. I won't say it's a lightning strike because a lot of pieces are involved, but the timing of that, if the if and the when that may happen, is not very predictable.

Kevin Habicht: And so we tend not to base too much into that into our forward looking thoughts generally. And then, like I said, there's a little bit of room, and to the extent we haven't fully utilized this 100 basis points of rent loss assumption. You know, in the first half, and that helps numbers at the margin. I mean, these are all things that are pretty small. The margin that allows us to increase guidance by two cents for the, you know, based on the first half results. And so, yeah, that's kind of the way we think about that.

Kevin Habicht: I mean, these are all things that are pretty small at the margin that allows us to increase guidance by two cents for the, you know, based on the first half results, and so. So yeah, that's kind of the way we think about it.

Kevin Habicht: Based on our first half results and so.

Kevin Habicht: So yes.

Kevin Habicht: The way, we think about that.

Unknown Executive: Okay, and within the margin, or at the margin in mind, you know, the real estate expense, the bottom end of that came up a little bit. I mean, is that just reflecting some of the credit events?

Kevin Habicht: Okay, and within the margin or at the margin in mind, you know, the real estate expense in the bottom end of that came up a little bit. I mean, is that just reflecting some of the credit event. You know that you talked about earlier on the call. I mean, are some of those things a little bit more recent, kind of baked into that guidance expectation at this point? Yeah, I guess that's the case. I mean, you can see at the bottom of page six of our press release or near the bottom, you know, we highlight what our real estate expense is, net of tenant reimbursements.

Kevin Habicht: Okay.

Speaker Change: Within the margin at the margin in mind, the other real estate expense. The bottom end of that came up a little bit I mean is that just reflecting some of the credit.

Unknown Executive: Events.

Unknown Executive: That you talked about earlier on the call.

Unknown Executive: Those things are a little bit more recent kind of baked into that guidance expectation at this point.

Unknown Executive: Yeah, I guess that's the case. You can see at the bottom of the page Real Estate Expenses Net of Tenant Reimbursements. And you can see they've been kind of running, you know, two and a half, 2.5, 2.6 million dollars in recent quarters. And so, yeah, we increased the guidance range on that for the year from nine to 11 million dollars to 10 to 11 million dollars. So at the margin of, call it,

Unknown Executive: Yes.

Unknown Executive: Yes, that's the case I mean, you can see at the bottom of page.

Speaker Change: Six of our press release and near the bottom we highlight what are.

Unknown Executive: Real estate expenses net of tenant reimbursements and you can see they've been kind of running.

Kevin Habicht: And you can see they've been kind of running, you know, two and a half, 2.5, 2.6. $6 million and recent quarters. And so, yeah, we increase the guidance range on that for the year, from $9 to $11 million to $10 to $11 million. So at the margin of, you know, $500,000 increase in that line item in terms of midpoint of the guidance. And that's, you know, about where we see it. So we don't, we're not seeing any material change in that. But at the margin. It's a little bit. Anyway, essentially it reflects all the stuff you kind of talk about earlier in the call already.

Unknown Executive: Two and a half two $5 million to $6 million in recent quarters, and so we increase the guidance range on that for the year, two from 9% to $11 million to $10 million to $11 million. So at the margin.

Unknown Executive: Paul.

Unknown Executive: Sure.

Unknown Executive: $500000 increase in that line item in terms of the midpoint of the guidance.

Unknown Executive: That's.

Unknown Executive: About where we see it so we don't we're not seeing any material change in that but at the margin.

Unknown Executive: A little bit.

Speaker Change: Essentially it reflects all the stuff you kind of talked about earlier on the call already yes, yes, yes.

Kevin Habicht: Yes, yes, yes.

Kevin Habicht: And then maybe kind of bigger picture, you know, we kind of think about investment activity for the remainder of the year and kind of maybe tenant partner psychology. How are they broadly responding to the fairly rapid decline in interest rates? I mean, essentially, has that helped close the bid-ass red in the net least marketplace, or are, you know, tenants and potential tenants holding out for even lower cap rates, given just the trajectory of where interest rates are moving. And the whole is probably tightened at the margin a little bit, but, you know, combination, you know, the sector's equity run really started early July.

Unknown Executive: Okay.

Speaker Change: And then maybe kind of bigger picture as we can.

Unknown Executive: Think about.

Unknown Executive: Investment activity for the remainder of the year and kind of maybe tenant partner psychology.

Unknown Executive: How are they broadly responding to the fairly rapid decline in interest rates? Essentially, has that helped close the bid-ask spread in the net lease marketplace? Or are tenants and potential tenants holding out for even lower cap rates given just the trajectory of where interest rates are moving?

Speaker Change: How are they broadly responding to the fairly rapid decline in interest rates. You can essentially has that helped close the bid ask spread in the net lease marketplace or.

Unknown Executive: Our tenants and potential tenants holding out for even lower cap rates, given just the trajectory of where interest rates are moving.

Unknown Executive: Yes.

Speaker Change: Paul its probably tightened at the margin a little bit but.

Speaker Change: Combination the sector's equity run really started early July.

Kevin Habicht: So nobody's really price deals all that or close deals, I should say, off the new equity price. But sellers, I think with the expectation of the rate cut, but it's more of a result of the lack of activity for nine, 12 months that human nature is people want to transact. So they're coming back to the market, realizing that a higher cap rate is in order, not quite as high as the sector would probably like, but it's definitely tightened a little bit. But the overall activity of deals coming to market has picked up. Okay, that's helpful.

Speaker Change: So nobody's really priced deals all sat or closed deals I should say after the new equity price.

Speaker Change: But sellers and I think with the expectation of the rate cut but it's more of a result of the lack of activity for 912 months that human nature is people want to transact. So they are coming back to the market realizing that a higher cap rate is in order not quite as high as the sector with <unk>.

Unknown Executive: Like.

Unknown Executive: But it's definitely tightened a little bit, but the overall activity of deals coming to market has picked up.

Unknown Executive: Okay.

John Mascota: That's it for me. Thank you very much. Thanks, John.

Speaker Change: That's helpful. That's it for me. Thank you very much thanks John.

Unknown Executive: Thank you.

Speaker Change: Thank you we do have a final question from Ronald Camden with Morgan Stanley. Your line is like yes.

Ronald Candon: We do have a final question from Ronald Candon with Morgan Stanley. Your line is live. Yeah, Paul, you jumped on late, but just going, I wanted to touch on, if you could remind us on the bad, that on the guidance. And obviously there's been a lot of news on the furniture sector. Maybe touch on your exposure there and how you're thinking about some of the tenants. Yeah, so our primary exposure in the furniture category is a company called Badcock, which is 0.7% of our rent. If they recently just entered in the bankruptcy, as I mentioned, that company was bought by a company called Cons, which is a retailer that we did not have any business with, but they bought Badcock about a year ago.

Unknown Executive: Yeah, apologies, I jumped on late, but just go, I wanted to touch on, if you could remind us of the BAD, that on the guidance, and obviously.

Speaker Change: Yes, apologies jumped on late but just I.

Speaker Change: I wanted to touch on if you could remind us on the bad debt on the guidance and obviously theres been a lot of news on the furniture sector, maybe touch on your exposure, there and how youre thinking about some of the tenants.

Unknown Executive: Yes.

Unknown Executive: Yes.

Speaker Change: Primary exposure in that in the furniture category as it comes.

Speaker Change: <unk> called Babcock wishes.

Speaker Change: 0.7% of our rent.

Speaker Change: As a recently just entered into bankruptcy and as I mentioned.

Speaker Change: That company was bought by a company called <unk>, which is a retailer that we did not have any business with.

Speaker Change: But they bought back talk about a year ago. The company that did sell bad cop to cause.

Kevin Habicht: The company that did sell Badcock to Cons remains a guarantor on our lease, and so we'll see if that comes into play here in the coming months and quarters. But at the moment, we don't have a whole lot of news as it relates to that. Our rents on those properties are reasonable, and the worst case we think we have the opportunity to replace that tenant without too much economic harm. But it's very early, and so we'll see how that all plays out, but at 0.7% of our rent and the rent and a guarantor in place for the lease and our rent.

Speaker Change: Remains a guarantor on our lease and so we'll see if that comes into play here in the coming months and quarters, but at the moment, we don't have a whole lot of news as it relates to that our rents on those properties are reasonable.

Speaker Change: And kind of the worst case, we think.

Speaker Change: We have the opportunity to replace that tenant.

Speaker Change: Without too much economic harm and so but it's very early and so we'll see how that all plays out, but 0.7% of our rent and rent.

Speaker Change: And a guarantor in place for the lease and our rents being very moderate we don't feel like there.

Kevin Habicht: Being a very moderate, we don't feel like there's material risk in the near and immediate term.

Speaker Change: <unk> risk.

Speaker Change: Near intermediate term.

Kevin Habicht: Great, and then my second one is just of the $1.68 AFFO in the first half of the year. Can you just remind me how much of that is sort of one-timey? Because trying to think about the full of your guidance and what the second half implies, the guidance seems a little conservative. So maybe the $1.68, how much is sort of non-recurring that we shouldn't be annualizing, thanks. Yeah, so I'd say the primary non-annuitous income in our first half numbers was $6.2 million of lease termination fees. And so that's called $3.4 cents a share for this year's result.

Speaker Change: Great and then my second one is just the $1 68 <unk>.

Speaker Change: In the first half of the year can you just remind me how much of that is sort of one timey because I'm trying to think about the full year guidance on what the second half implies.

Speaker Change: The guidance seems a little conservative so maybe the $1 68, how much is sort of nonrecurring that we should be annualizing.

Kevin Habicht: Yeah, so I'd say the primary non-annuitus income in our first half numbers was $6.2 million in lease termination fees. And so that's, I'll call it 3-4 cents a share for this year's results. Now we normally have some level of lease termination fees. It might be, you know, for a half of a year, it might be $1.5 million, so maybe there's, call it 4 million plus in

Speaker Change: Yes, so so I would say the primary non annuity as income in our first half.

Kevin Habicht: Numbers was $6 $2 million of lease termination fees, and so thats call it three or four a share.

Kevin Habicht: For this year as a result, now we normally have some level of lease termination fees that might be for a half of a year it might be one $5 million. So maybe there's call it 4 million plus.

Kevin Habicht: Now we normally have some level of lease termination fees. It might be, you know, for a half of a year, it might be $1.5 million. So maybe there's, call it, $4 million plus of maybe $4.5 million, unusually high lease termination fee income might be the way to think about it. So, you know, so I'd say in the quarter there's a penny, and in the half there's at least two pennies of incremental lease termination fee above what I would might consider normal levels for us. So that's the way I think about it. That's helpful.

Kevin Habicht: Maybe $4 million to $5 million.

Kevin Habicht: Unusually high lease termination fee income might be the way to think about it so.

Speaker Change: So I would say in the quarter Theres, a penny and half Theres at least Theres two pennies.

Kevin Habicht: Incremental.

Kevin Habicht: Lease termination fee above what I would consider normal levels for us so.

Kevin Habicht: What I would think about it.

Unknown Executive: helpful. Thanks, as always.

Speaker Change: Helpful. Thanks as always.

Kevin Habicht: Thanks, as always.

Kevin Habicht: Yeah, thank you. Thank you.

Sean: Thanks, Sean.

Unknown Executive: Thank you as we have no further questions in queue I will hand, it back over to Mr. Horn for any closing comments.

Stephen Horn: As we have no further questions in queue, I will hand it back over to Mr. Horn for any closing comments. I appreciate you guys taking the time and interest in the NNN. We're positioned well for the remainder of the year and enjoy the rest of your summer, and we'll see you guys when conference season kicks off. Thanks. Thank you.

Speaker Change: I appreciate you guys, taking the time and interest in and then.

Speaker Change: We're positioned well for the remainder of the year and joined the rest of your summer and we'll see you guys in conference season kicks off thanks.

Unknown Executive: Okay.

Unknown Executive: Okay.

Speaker Change: Thank you. This does conclude today's call and you may disconnect. Your lines at this time and we thank you for your participation.

Unknown Executive: This does conclude today's call, and you may disconnect your lines at this time. We thank you for your participation.