Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- NNN REIT Inc (NNN, Financial) maintained high occupancy levels of 99.3%, above their long-term average of roughly 98%.
- The company increased the midpoint of core FFO per share guidance by $0.02 to $3.30.
- NNN REIT Inc (NNN) achieved a 158% recapture rate from prior rent during the quarter, bringing the year-to-date recapture to 102%, above historical levels of approximately 70%.
- The company sold 14 properties, raising $67 million of proceeds to be reinvested into new acquisitions.
- NNN REIT Inc (NNN) has a strong balance sheet with a leading 12.6-year average debt maturity and no debt maturing until the fourth quarter of 2025.
Negative Points
- NNN REIT Inc (NNN) reported $2.1 million of lease termination fee income, which is relatively high and may not be sustainable.
- The company has two tenants in bankruptcy, Badcock Furniture (0.7% of rent) and Rite Aid, which could pose risks.
- Real estate expenses net of tenant reimbursements have been running higher than expected, leading to an increase in guidance for these expenses.
- The company faces competition in the acquisition market, which could impact future acquisition opportunities.
- NNN REIT Inc (NNN) has exposure to sectors like furniture and home furnishings, which are currently struggling.
Q & A Highlights
Highlights of NNN REIT Inc (NNN)'s Q2 2024 Earnings Call
Q: Can you provide some updated color on the transaction market and where cap rates have been trending thus far in the 3Q?
A: Stephen Horn, CEO: The overall market is seeing an increase in deal volume and larger portfolios hitting the market. Cap rates for the third quarter are expected to be in line with the second quarter, with slight variations of 5-10 basis points.
Q: Can you share more color on the dispositions made in the quarter, particularly the rationale for divestments and the depth of the buyer pool?
A: Stephen Horn, CEO: We sold 14 assets, 11 of which were income-producing. The sales were a mix of defensive and opportunistic moves, including exiting non-core multi-tenant assets and selling properties at accretive cap rates.
Q: Are you seeing any trends in lease termination fees, and are there specific categories these are falling under?
A: Kevin Habicht, CFO: Lease termination fees are episodic and difficult to predict. The recent increase is not indicative of a trend but rather specific situations, such as properties with condemnation proceeds or underperforming stores.
Q: Are there any tenants in your top 20 list on your watch list, and how are you monitoring their performance?
A: Kevin Habicht, CFO: We are closely monitoring tenants like Fishes and AMC Moly theaters. While AMC's situation has improved, other tenants like At Home and Big Lots are also on our watch list due to industry struggles.
Q: How are consumer trends, particularly strain on the low-end consumer, impacting your tenants?
A: Stephen Horn, CEO: Our rent coverage ratios have been stable across industries. While we account for potential consumer softness in underwriting, our portfolio's performance remains strong due to our business model of selecting above-average properties for sale leasebacks.
Q: Are you seeing increased competition in the transaction market, particularly from private equity buyers?
A: Stephen Horn, CEO: The market remains highly competitive, but we haven't seen new entrants due to the banking market's current state. Our business model of repeat deals with current tenants provides ample opportunities to meet acquisition targets.
Q: What does bad debt look like this year, especially with Conn's bankruptcy and Walgreens store closures?
A: Kevin Habicht, CFO: We assume about 100 basis points of rent loss annually, but actual losses have historically been closer to 30-50 basis points. We don't see a need to change this assumption for this year.
Q: Are you hearing concerns from tenants in the QSR sector given the sector's weakness?
A: Stephen Horn, CEO: No, we haven't received any cautionary signals from our QSR tenants. Our QSR portfolio's rent coverage remains solid.
Q: How are you thinking about share issuances going forward to build dry powder for 2025?
A: Kevin Habicht, CFO: We don't need to issue equity as over two-thirds of our acquisitions can be funded with free cash flow and dispositions. We'll issue equity only when it's well-priced.
Q: Are there particular areas or sectors where you're seeing the most opportunities for the remainder of the year?
A: Stephen Horn, CEO: We're seeing increased activity in the convenience store and auto service sectors. Family entertainment is also showing promise, while carwash and QSR activities have been less frequent recently.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
