Earnings call: NNN REIT reports strong Q3 performance, raises guidance

NNN REIT (ticker: NNN) has reported a solid performance in the third quarter of 2024, with CEO Steve Horn announcing an increase in acquisition guidance and a tightened core FFO per share outlook. The company’s strategic portfolio management and robust acquisition activity have contributed to this uptick, despite challenges with certain tenants. NNN’s financial position remains strong, with a significant cash balance and no debt maturing until late 2025.

Key Takeaways

• NNN raised its acquisition guidance midpoint by 22% to $550 million.
• Core FFO per share guidance for 2024 tightened to $3.28 to $3.32.
• The company raised $175 million through its ATM program and ended the quarter with $175 million in cash.
• NNN has a high occupancy rate of 99.3% across its 3,549 properties.
• The third quarter saw an investment of $113 million in eight new properties and the sale of nine properties for $20 million.
• Core FFO for Q3 was $0.84 per share, a 3.7% increase year-over-year.
• Lease termination fee income was $3.9 million, substantially higher than the previous year’s $385,000.
• NNN faces credit issues with tenants Badcock Furniture and Frisch’s but remains optimistic about its business model.
• The company expects a free cash flow of approximately $193 million for the full year of 2024.
• Net debt to gross book assets was 39.6%, and net debt to EBITDA was 5.2x as of September 30.

Company Outlook

• NNN anticipates free cash flow to fund 57% of acquisitions through property dispositions.
• The company may adjust bad debt assumptions for 2025 due to specific tenant challenges.
• NNN remains optimistic about per-share growth driven by acquisitions and existing rent growth.

Bearish Highlights

• Tenant credit issues with Badcock Furniture and Frisch’s present challenges.
• Frisch’s made only half rent payments in Q3, affecting overall rent collection.

Bullish Highlights

• Strong market interest in retail space noted despite competition.
• Solid acquisition pipeline expected for Q4 and Q1.
• Lease termination fee income could continue to be elevated into 2025.

Misses

• A slight decline in the midpoint of AFFO guidance due to rounding and minor adjustments.

Q&A Highlights

• Franchise Group (NASDAQ:FRG)’s guarantee may mitigate some rent losses from Badcock’s bankruptcy.
• The company plans to minimize tenant improvement expenditures.
• G&A expense guidance reduced due to lower accruals, with a slight inflationary increase expected in 2025.

NNN REIT’s third-quarter performance reflects a resilient and strategic approach to portfolio management amidst a challenging tenant landscape. The company’s disciplined capital allocation and proactive management have allowed it to navigate tenant credit issues while maintaining strong occupancy rates and financial health. With no debt maturing until the fourth quarter of 2025 and a weighted average debt maturity of over 12 years, NNN is well-positioned for continued growth and stability. The company’s focus on prudent risk management and capital allocation, combined with its optimistic outlook for acquisition activity and rent growth, suggest a robust strategy for enhancing shareholder value.

InvestingPro Insights

NNN REIT’s solid performance in Q3 2024 is further supported by data from InvestingPro. The company’s market capitalization stands at $7.99 billion, reflecting its significant presence in the real estate investment trust sector. NNN’s revenue growth of 6.87% over the last twelve months aligns with the company’s reported increase in acquisition guidance and tightened core FFO per share outlook.

One of the most striking metrics is NNN’s impressive gross profit margin of 96.65% for the last twelve months, which underscores the company’s efficient property management and ability to generate substantial returns from its real estate portfolio. This high margin supports NNN’s strong financial position and its capacity to navigate challenges with certain tenants, as mentioned in the earnings report.

InvestingPro Tips highlight that NNN has raised its dividend for 35 consecutive years, a testament to the company’s consistent financial performance and commitment to shareholder returns. This aligns with the company’s reported strong cash position and positive outlook on free cash flow. Additionally, the stock’s dividend yield of 5.34% is particularly attractive in the current market environment, especially considering the company’s history of dividend growth.

Another relevant InvestingPro Tip notes that NNN’s stock generally trades with low price volatility. This characteristic may appeal to investors seeking stability, particularly in light of the company’s robust occupancy rates and strategic portfolio management discussed in the earnings report.

For investors interested in a deeper analysis, InvestingPro offers 8 additional tips for NNN REIT, providing a more comprehensive view of the company’s financial health and market position.

Full transcript – NNN REIT Inc (NNN) Q3 2024:

Operator: Greetings. Welcome to the NNN REIT Third Quarter 2024 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Steve Horn, Chief Executive Officer. You may begin.

Steve Horn: Hey, thanks, Holly. Good morning, everyone. Welcome to NNN’s Third Quarter 2024 Earnings Call. I’m joined today by our Chief Financial Officer, Kevin Habicht. This year, NNN has delivered consistent performance, driven by active portfolio management and strategic acquisitions with our relationships, what we call our NNN mode, that sets us apart and delivers our external growth. Given our year-to-date results, we are tightening our 2024 core FFO per share guidance to a range of $3.28 to $3.32. Additionally, we are now in position to exceed our original acquisition buying guidance, so we are raising the midpoint by 22% to $550 million. This increase showcases the strength of our pipeline and our execution ability. On the capital markets front, we raised approximately $175 million through the ATM program this quarter. It’s actually our largest quarter since the fall of 2019. The discipline of being selective while deploying capital and opportunistic raising capital over the long duration has NNN in great shape through a volatile economic periods. In times like today’s macroeconomic conditions, NNN’s discipline of maintaining a solid balance sheet, reasonable acquisition buying does put NNN in a place to execute the remaining deal flow of 2024 but more importantly, to execute 2025 with limited, if any, needs to access to capital markets. At the end of the quarter, we had nothing drawn on our $1.2 billion line of credit and nearly $175 million of cash after completing $350 million of volume through the first 9 months. Add in NNN’s industry-leading free cash flow as a percentage of acquisition volume to the already high liquidity position, we are ready to capitalize on deals when the right opportunities present. Shifting the highlights to the third quarter financial results. Our portfolio of 3,549 freestanding single-tenant properties continue to perform well with 10 years of term, maintained high occupancy levels of 99.3%, which remains above our long-term average of 98% plus or minus a fraction and only 24 vacant assets. A few tenants have been in the press recently, and it’s the same ones we’ve been having to mention time and time again: Big Lots (NYSE:BIG), Conn’s (OTC:CONNQ) HomePlus and Frisch’s Big Boy. NNN is working diligently to resolve the challenges. But with regard to Frisch’s and Conn’s, I feel good about the real estate because of the upfront underwriting and small fungible boxes with reasonable rents, specifically the restaurants with drive-through windows. We have received a fair amount of inbound calls inquiring about the real estate. And at this time, it appears Big Lots will continue to operate all 3 we own. Kevin will provide more detail about the watch list later. Turning to acquisitions. During the quarter, we invested $113 million in 8 new properties at an initial cash cap rate of 7.6%. If we actually included the rent increases over the term of the lease, it would result in a 9.27% long-term projected yield and with an average lease duration of 18.4 years, and that’s the result of the sale-leaseback transactions. The first 9 months, we have invested roughly $350 million in 44 properties at a cash cap rate of 7.8%, which is about 60 basis points wider than the comparable period of 2023. And 16 of the 28 closings were under $5 million, which proves NNN’s belief that smaller deals still move the needle for NNN shareholders. As we move through the year, cap rates seemed, for the most part, to be stabilizing. I don’t see any material move either way as we head into the fourth quarter and as well as the deals we’re pricing for the first quarter of 2025. I’m expecting deal volume to tick up for the fourth quarter, and it does feel like the market opportunities are better today than they were 6 months ago. During the quarter, we also sold 9 properties, which included 5 vacant, raising $20 million of proceeds at a 4.4% cap rate, and we’ve been reinvesting at 7.6%. So it’s a good spread. Year-to-date, we’ve now raised approximately $105 million of proceeds from the sale of 29, which included 8 vacants at an overall blended 7.0% cap rate. The mission is always to re-lease the vacancy, but we’ll continue to sell nonperforming assets if we don’t see a clear path to generate rental income in a reasonable time frame. Our balance sheet is still one of the strongest in the sector. Our credit facility has plenty of capacity, as I mentioned earlier with no balance outstanding. More importantly, our next debt maturity isn’t until the fourth quarter of 2025, and we maintain an industry-best 12.3 year weighted debt maturity. NNN is well positioned to fund our remaining 2024 acquisition guidance and beyond. With that, let me turn the call over to Kevin for more color and detail on the quarterly numbers and updated guidance.

Kevin Habicht: Thanks, Steve. As usual, I’ll begin with a note 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 $0.84 per share for the third quarter of 2024. That is up $0.03 or 3.7% over year-ago results of $0.81 per share. The AFFO results were $0.84 per share for the third quarter, which is $0.02 or 2.4% higher than year-ago results. Third quarter results did include $3.9 million of lease termination fee income, which is relatively high for us, and that compares with $385,000 for the third quarter of 2023. And as you may recall, we reported above-average lease termination fee income in the first 2 quarters of this year as well. So we are reporting $10.2 million of lease termination fee income for the first 9 months of 2024, and that compares with $2.4 million for the first 9 months of 2023. If you look back over the last 5 years, we’ve averaged annual lease termination fee income of about $3 million. So this year is running well above normal. But even without that incremental income overall, a good quarter and in line with our expectations. Occupancy was 99.3% at quarter end, that was flat with the prior quarter. G&A expense was $11.2 million for the quarter and represents 5.1% of revenues for the quarter and 5.5% of revenues for the first 9 months, again, which is in line with our expectations and guidance. As a percentage of NOI, net operating income, G&A was 5.3% and 5.7% for the quarter and 9 months, respectively. As I noted on our last call, I think this is a valuable metric as you think about a net lease company versus all the other REITs across the other property sectors. It puts us all on a level playing field and then highlights the efficiency of the net lease format, which accrues to the benefit of share — net lease shareholder returns. Our AFFO dividend payout ratio for the first 9 months of 2024 was 67.4%, and that resulted in approximately $151 million of free cash flow for the 9 months, and that’s after the payment of all expenses and all dividends. And incorporating the increased third quarter dividend rate, we currently anticipate this free cash flow amount coming in at approximately $193 million for the full year of 2024. We ended the quarter with $851 million of annual base rent in place for all leases as of September 30, 2024. And so that would take into account all acquisitions and dispositions completed during the quarter. We did affirm our 2024 guidance but did tighten the top and bottom of the range by $0.01, leaving the midpoint unchanged. So the new core FFO guidance is now $3.28 to $3.32 per share. And a similar revision was made to AFFO guidance, which now stands at $3.31 to $3.35 per share. As Steve mentioned, yes, a quick update on a couple of tenants that are having credit challenges, both of which we’ve talked about for a few quarters now. Badcock Furniture was previously owned by a company named FRG and Badcock was sold with the FRG guarantee in place to Conn’s HomePlus who filed for bankruptcy in July. So we own 32 Badcock Furniture stores, representing 0.6% of our annual base rent, which translates to about $5.2 million in annual base rent. We are operating in an assumption that we’ll get these properties back. But precisely when is unknown as it’s still working its way through the bankruptcy process. We will pursue the FRG guarantee of these leases, but we do recognize FRG may have its own credit challenges. The second tenant of note is Frisch’s, and Frisch’s is a Midwest Big boy hamburger concept that has been around for several decades. They only paid us half rent owed in the third quarter; half the rent owed in the third quarter. So we own 64 Frisch’s properties at quarter end, representing 1.5% of annual base rent, and that translates to $12.6 million. While I don’t want to get too detailed in the plans here due to various claims we’re pursuing to protect our interest in this regard, we did want to provide some information on these situations. Both of these tenants are on cash basis accounting, so we are only recording what we actually collect. Over the years, our guidance has generally assumed 100 basis points of rent loss in any given period but these 2 tenant issues could push us over that level, obviously, in the fourth quarter. We should get some incremental clarity on these 2 situations in the fourth quarter, which we think will allow us to better estimate the outcomes when we provide our 2025 guidance in February. These kinds of tenant credit events are historically a normal part of our business. The way we think about it as, as long as our rents are not too far from market rent, we don’t lose too much sleep. If we get properties back, there may be some timing gap in the income production, whether we decide to sell, re-lease or redevelop the properties. But in the long run, which is our perspective, our experience suggests that any loss rent will likely be a manageable headwind. Long time followers of NNN know our position. Real estate leased at reasonable rents win the race in our opinion, and that — which allows us to deal with whatever tenant credit problems might come our way. Despite these challenges, like I said, we were able to affirm the earnings guidance that we increased in the second quarter. With that, I’ll switch over to the balance sheet. So yes, as Steve alluded to, after 18 months of very little equity issuance when our stock was in the high 30s, low 40s, we did sell some equity in the third quarter at an average price, a touch over $47 per share, generating net proceeds of $178.9 million. Coincidentally, we ended the quarter with that amount of cash on our balance sheet and no amounts outstanding on our $1.2 million — $1.2 billion bank line. So we’re in very good leverage and liquidity position as we finish 2024 and roll into 2025. We don’t have any debt due until November 2025 and our weighted average debt maturity stands at 12.3 years at quarter end. Maintaining our light capital market footprint, we funded 74% of our $350 million of year-to-date acquisitions with free cash flow of $151 million and $106 million of property disposition proceeds. For the full year, based on the midpoint of our acquisition and disposition guidance, we should fund approximately 57% of 2024 acquisitions with free cash flow and property disposition proceeds. A couple of leverage metrics. Net debt to gross book assets at quarter end was 39.6%. Net debt to EBITDA was 5.2x, 5.2, at September 30. Interest coverage and fixed charge coverage was 4.2x for the third quarter. And as a reminder, yes, none of our properties are encumbered by mortgages. So in closing, I — we remain focused on working to appropriately allocate capital, which us means ensuring we’re getting what we believe are sufficient returns on equity while controlling the risk through property underwriting and maintaining a sound balance sheet. In our mind, 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 Holly, with that, we will open it up to any questions.

Operator: [Operator Instructions] Your first question for today is from [Operator Instructions].

Unidentified Analyst: Can you just talk about the transaction market? Do you, just thus far, into 4Q, how do the level of deals being sourced compared to historic norms? And can you just talk about competition in the market for deals that aren’t coming from relationship tenants?

Steve Horn: Absolutely. So the overall market, as I kind of mentioned in the opening remarks, it definitely feels like sellers are coming back to the market. Our acquisition team is sorting through a lot of opportunities if it’s current relationships and/or advisers/brokers bringing deals to the market. It just feels like M&A has picked up a little bit. So the average transaction in the market is definitely larger today than it was 6 months ago. And our current relationships are starting to do some growth. And it’s really kind of second-gen space and redeveloping assets, we’re seeing good opportunities. As far as competition in the market, it’s a very highly competitive market. It has been for the 20-plus years I’ve been working in it, and the participants come and go. It does feel like maybe a little bit of the private money starting to come into it. But at the end of the day, they don’t really affect NNN so much when I mentioned the amount of smaller deals that we did. The private money isn’t looking for those deals. But again, overall, it’s highly competitive, and that’s why I think we felt cap rates decreased a little bit in the third quarter. In the fourth quarter, it’s decreasing a little bit more, but for the most part, flat.

Unidentified Analyst: And then I know the dispositions are obviously very marginal in the scheme of your portfolio. But can you just provide some detail on the 9 assets that were sold during the quarter just in terms of industry and then cap rate on the occupied assets?

Steve Horn: Yes. So the cap rate on the occupied assets was 4.4%. Out of the 9 assets, 5 of them were baked in. And I would say, this past quarter, it was kind of cleaned up the portfolio a little bit, solving future potential issues. We sold some urgent care assets and then we sold an auto auction part that was not being used.

Operator: Your next question is from Joshua Dennerlein with Bank of America Merrill Lynch (NYSE:BAC).

Joshua Dennerlein: Appreciate all the color and update on the — like Frisch’s, Badcock. I guess what are you guys assuming now in 4Q as far as bad debt? I know you mentioned you typically assume 100 bps, but both these tenants would go higher.

Kevin Habicht: Yes. Yes, fair question. This is Kevin. So yes, how much rent loss are we assuming in the fourth quarter? As I mentioned, we typically have always assumed 100 basis points in our guidance. I would note that Frisch’s plus Badcock is 2.1% of our ABR. And that also, assuming roughly — let’s say, the worst case, assuming, virtually all of that 200 basis points of rent loss would still put us in the middle of our guidance range. So beyond that — I mean, we’re not going to really speculate on who, in particular, will pay how much and when, in part because we don’t have good visibility on that at this point. Frisch’s is not in bankruptcy. Badcock is. And so that adds a little bit to the challenge. But like I said, even assuming 200 basis points of total rent loss, I think you still can get us to the middle — midpoint of our guidance range, which is a worst case. And as folks who have followed us for a long time know, we tend to be a little bit on the conservative side in terms of guidance. Maybe that’s an understatement, I don’t know. So maybe we still have a shot to get in the top half of our guidance range even with these tenant credit challenges.

Joshua Dennerlein: Okay. I appreciate that. And maybe just 2 follow-ups. Are there any other one-timers like that we — like should strip out to think about like the run rate going into 4Q or any kind of adjustments there? And then just maybe a follow-up on your answer, how do we think about like kind of the downtime if these tenants kind of like give back the properties?

Kevin Habicht: Yes. So yes, no, we’re not really pointing folks to any others that we feel like have the kind of level of concern that Frisch’s and Badcock currently has. I mean, Steve did mentioned Big Lots, which is a tenant in bankruptcy. But like he said, we think there’s a pathway for getting all 3 of those stores to remain open and leased to Big Lots. We’ve talked about other tenants in recent quarters that are challenged. I mean, at home still, we’ll see where all that goes. But nobody feels like that we’re particularly worried about in the near term that I would point you towards, I guess.

Steve Horn: Downtime.

Kevin Habicht: Yes. So yes, and as I alluded to that in my comments, that kind of timing of the gap. If and when we get properties back, it takes several months to kind of get them re-leased and/or sold. And so that’s really kind of the issue that kind of – that period. Having said that, we are seeing very robust, as I’ll use that word, interest in a good number of our Badcock and Frisch’s properties from other retailers and very credible retailers. And so that’s encouraging. So maybe that whittled down a bit of the time gap from a prior tenant to new tenant, but it’s going to be 6, 9, 12 months kind of process to kind of work through that. And at the end of the day, if we can recapture a very large portion of our prior rent, then again, in the long run, we don’t feel like there’s any really a headwind of note that we have to deal with. So we feel pretty good about where we are today despite what seems to have some pending vacancies coming our way. We like our rents – existing rents on the properties. We like the locations. And like I say, there’s strong interest from other retailers. And I think that’s consistent, frankly, probably with what you’re hearing from the shopping center REITs, I think, are all experiencing pretty strong demand for existing retail space.

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

Michael Goldsmith: A lot of good detail on the credit and how you’re thinking about it. Just like, I guess, traditionally, you’ve talked about 100 basis points. But just maybe like as we think about the 2025, would you approach the bad debt assumption to be any differently than you would have like in a — what would be maybe a more normal year?

Kevin Habicht: Yes. I mean, we might. Yes, is the answer. We haven’t put out 2025 guidance, so I’m a little reluctant to get too particular on that at this point. I do think we will learn a lot in this fourth quarter as to how both Badcock and Frisch’s is going to play out in terms of timing, et cetera, as well as being able to better gauge kind of maybe re-leasing assumptions around any properties we’re getting back. So I’m reluctant to put out a number there. But yes, in my mind is that will we likely assume more than 100 basis points for 2025? I would say probably. But the question is what’s the number? And we still think we’re well positioned to grow per share results next year. So that’s probably all I want to go into at this point. We’ll be obviously more definitive when we release in February.

Michael Goldsmith: No, that’s totally fair. I understand that. And just on the acquisition guidance, right, like clearly, you have some better visibility into the pipeline. Can you talk about the opportunities you saw in the third quarter; how do they compare to the first half? What you’re expecting for the fourth quarter? And then just also within that, acquisition cap rates came down by 30 basis points sequentially. So are you seeing or expecting any further compression there?

Steve Horn: So as far as the cap rate, the fourth quarter will be pretty much in line with the third quarter is what we’re seeing. Now there – some deals might price a little bit different, and it might go either way, but pretty much in line. As far as the opportunities, the vast majority, close to 100% of our deals have been through our relationships, and there’s been a fair amount of smaller deals to get to the $350 million. But as I mentioned, I think in Spenser’s question, that the overall average deal size seems to be increasing as we move to the fourth and first quarter, and that’s a result of M&A activity that the private equity groups are looking to do sale leasebacks. So we’re seeing a fair amount of advisory calls to us on the deal front.

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

Maddie Fargis: This is Maddie Fargis on for Smedes. I just wanted to ask about the updated guidance ranges. Could you maybe walk us through some of the moving pieces behind the $0.01 AFFO decline at the midpoint despite lowered SG&A and higher acquisitions?

Kevin Habicht: Yes. On that, yes, I wouldn’t read too much into that. Frankly, there’s a little bit of per share rounding to kind of make that tweak as well as just getting the range on the core FFO and the range on the AFFO both the same, which is $0.04 from top to bottom. And so yes, I wouldn’t read too much of that tweak in terms of the guidance. Yes.

Maddie Fargis: And just circling back on to credit loss assumptions, do you have any plans to increase the amount that you’re baking into guidance from 100 basis points as you think ahead to 2025?

Kevin Habicht: Yes. Yes. Like I said, we’re not putting out 2025 guidance at this point. As I alluded to or mentioned is 100 basis points might be a little light as we enter 2025. But we’re going to know a whole lot more in the next 3 months in terms of how Frisch’s and Badcock’s going to play out. And so that will inform our decision around that. And so as I said, I think we’ll be consistent as we have in prior years that whatever we assume, it will be a conservative assumption. And so we will – we have a long history of not only meeting guidance, but hopefully slightly exceeding guidance and so – and/or raising it. And so whatever we come out with, I think that philosophy will still prevail.

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

Linda Tsai: Regarding Badcock, does the Franchise Group guarantee help offset any rent losses?

Kevin Habicht: Yes. Any collections, obviously, from FRG would obviously, yes, reduce our rent loss. And so we, as I say, intend to pursue that guarantee. Badcock still in bankruptcy and in bankruptcy as typical, they pay rent typically in bankruptcy. So — but we will — to the extent we are losing rent related to Badcock, we will pursue FRG guarantee.

Linda Tsai: And then any color on Big Boy? We read that there isn’t clear leadership. Is it a going concern? And then to re-tenant, how much time would that take? And would there be like TI dollars spent?

Steve Horn: As far as Frisch’s, as Kevin mentioned, they’re not in bankruptcy right now. I’d probably echo your sentiment, we are where we’re at now, the management team. They are a going concern currently, but we are over several quarters tried to work with management and resolve some issues. 2 of the assets we sold in the third quarter were Frisch’s. So we’re actively managing the portfolio. But with regard to going forward, we kind of hit a stalemate with them. So we’re exercising our legal rights and pursued eviction.

Kevin Habicht: And a follow-up on the second part of that question as it relates to TI, our predisposition is to take lower rent in lieu of trying to buy rent higher, if you will, and giving a tenant a bunch of money in order to get that higher end. It’s been our observation over the years is that frequently, tenant improvement dollars have little to no economic value at the end of the lease term. And therefore, to the extent you’re going to provide them, you all — from an investment standpoint, you almost need to get a return on those TI dollars as well as the return of those TI dollars, which recently is not what the tenant wants to hear. And therefore, we’ve been generally inclined to put much fewer dollars to no dollars and take lower rent in exchange for that trade-off. And we think we end up with a safer rent and one that the tenant can more likely afford and operate a profitable store at. So while there obviously could be some TI dollars related to all of these, it’s — our inclination is to limit that materially.

Linda Tsai: And then you spent some time discussing how lease term fee income has been a bit higher year-to-date. Is the current expectation this elevated level continues in 2025?

Kevin Habicht: Yes. That, we don’t give any guidance on in part because it’s hard for us to know when that’s going to happen. And the process by which most of those deals come about, typically involve at least 3 parties, and each of them have competing priorities, to be honest. And so it’s not prone to a degree of predictability that would make us feel comfortable giving guidance. We do think it’s generally an outcome of active portfolio management. So if you’re working your portfolio and you’ve got a dark asset and we look for a way to help our tenant with that dark asset or even an underperforming asset. They might be open and paying rent and all those good things but we know it’s underperforming based on store level results. And so we generally will look for a solution that – and it then comes on ahead, the tenant feels good about it. And whoever the third party is, whether it’s a new tenant or a buyer, that property thinks they’re getting something of value. But getting those 3 parties on the same page at the same time is always a challenge, but we think it’s a good thing to do. It’s lumpy income. We fully recognize it’s not annuities. It’s a different quality than rent to be clear. However, we don’t want to not do it because of those attributes. It is good – it’s money and it’s income, and we think it’s a good economic decision to make. And so we’ll keep pursuing it as we work our portfolio, but it’s – we won’t be giving guidance related to that going forward just because it’s so hard to predict.

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

Ronald Kamdem: Two quick ones. Sorry to go back to sort of the bad debt conversation. But I guess I’m just wondering, after sort of the experience with sort of the Badcock and the furniture, does this sort of impact like how you’re thinking about the watch list? Or have any other tenants been put on the sort of cash basis accounting? Just trying to figure out what sort of the implications are of this announcement to the rest of the portfolio and how you’re thinking about sort of Badcock.

Kevin Habicht: Yes. I don’t think — outside of the Frisch’s, Badcock discussions we’ve had today, I don’t — we don’t think there’s any overlay or read-through to any of our other particular tenants directly. Our cash basis tenant list is 5.6% of our rent, and it’s still — AMC — Frisch’s has been on that list since COVID, to be honest. Badcock obviously is since it’s in bankruptcy. And so that’s 85% of our cash base is list. And so it’s fairly concentrated with that handful of tenants. Big Lots is obviously on there, too, but it’s only 0.1% of our rent. But — so yes, we’re not reading through these 2 tenant credit issues in any material way to any of our other tenants at this point.

Ronald Kamdem: Got it. Makes sense. And then just switching gears a little bit on the sort of on the transaction side. Yes, I guess I’m just wondering, obviously, we’ve seen rates back up. You still took up the acquisition guidance and so forth. So I guess you’re not really seeing any impact. Just any sort of commentary on how the pipeline is building as you get into next year and cap rate commentary.

Steve Horn: The pipeline, yes, you alluded to it. We increased the acquisition midpoint. So yes, the fourth quarter, there should be an uptick. I feel confident we’ll hit that range. And remember, Ron, when we – deal volume comes to market, it might take 60 to 90 days to get the deal under contract and to closing and the kind of the backup in rates has been more – a little bit more recent. But all that being said, I think it’s pretty typical in our industry, you kind of get near year-end and sellers start coming to market. It’s kind of that post Labor Day push to get deals done by year-end, especially in a Presidential election year when there’s the unknown certainty of change in tax rates or tax codes. So the pipeline, our deal guys, as I mentioned, are very active looking at a lot of deals. I’ve definitely noticed the pickup down the hall from me. And secondly, as far as cap rates, the deals we’re pricing for the fourth quarter currently are fairly in line with the third quarter. And we’re starting to price select a few deals in the first quarter, and they’re the same as far as either way, not much of a difference.

Operator: [Operator Instructions]. Your next question is from Rob Stevenson with Janney.

Steve Horn: All right, Holly, I think we can move on. I don’t think Rob can hear us.

Operator: Your next question is from R.J. Milligan with Raymond James.

R.J. Milligan: It’s a busy earnings day. So Rob’s probably on some other calls. Just curious, what’s driving the lower G&A expense guide for the year? And is that going to continue into 2025?

Kevin Habicht: Yes. I mean there’s some quarterly variations, but we dropped the range a touch, about $1.5 million at the midpoint, I guess it is, for 2024, which is a couple of percent. So just — I would think just kind of some lower accruals. I think going — as you look at 2025, we’ll put out guidance soon, but it will have some sort of inflationary increase from kind of where we are at this point. But I don’t think it will move much more than that. I mean we have to work through those numbers yet.

R.J. Milligan: Got it. And so a bigger picture, and I know this is alluded to 2025, but with the elevated term fees this year, pretty outsized number, that sort of timing gap with some of the potential credit issues or the current credit issues, what’s the offset to drive per share growth next year? Is that just acquisitions?

Kevin Habicht: Yes, that’s the primary driver. Obviously, then you’ve got the rest of the portfolio that has rent growth embedded, obviously, in it that helps offset some of that loss. And then we’ll see if there’s any other income opportunities. I don’t know if lease term income will go to 0. Like I say, our normal is about $3 million, but – per year. So yes, but those – that’s clearly a headwind. The term fees and the Badcock and Frisch’s are headwinds that will need to get offset by rent growth from the existing portfolio and acquisitions. The good news is the acquisition pipeline, as Steve has alluded to, it looks pretty solid, and I think our implied volume in the fourth quarter looks pretty good relative to our total for the year. And so far, first quarter feels like it’s shaping up pretty well – pretty good as well. So yes, those are the main drivers. Yes. We don’t have too many levers here, as you know.

Operator: [Operator Instructions] Your next question for today is from John Massocca with B. Riley Securities.

John Massocca: Maybe just touching on Frisch’s for a second. The 50% rent payment that occurred in 3Q, was that also the case in some past quarters?

Kevin Habicht: No, second quarter as we reported, reported full rent. So that was a delta between 2Q and 3Q. So that’s, call it, $1.6 million is half rent from them. And so that’s about $0.01 in the third quarter kind of headwind.

John Massocca: Okay. And then maybe looking a little bit kind of on the same vein. The real estate expenses, net of tenant reimbursements, ticked up a little bit in this guidance versus your 2Q guidance. Is that tied to maybe a worsening outlook for the 2 kind of troubled tenants you previously mentioned? Or is there something else kind of driving that?

Kevin Habicht: Yes. No, nothing else driving that. Historically, the way we think about generally rent loss. So if we’re assuming, call it, our 100 — normal 100 basis points of rent loss, we typically also assume that we’ll have about 15 basis points of — or 15% of the rent loss will show up in incremental property expenses. So when you get a property back, you obviously have to pick up property taxes and insurance, utilities, all those things. And so in our minds, that’s what we do. So yes, to the extent that rent loss drifts higher, typically, property expenses goes along with that. It’s obviously a much smaller amount. But yes, it is connected.

John Massocca: Understood. And then kind of thinking about the lease termination income, multiples higher than kind of in past years. I mean what’s driving that? Is it some of the same kind of PE, M&A and retailer expansion you’re talking about in the acquisition side? Or is there something else kind of notable there?

Steve Horn: It’s really driven by discussions with our current tenants that want to get out of a lease. And it’s really just active portfolio management. And when we do a lease termination, we usually have kind of a bird in hand that somebody’s going to backfill that asset or we’re going to sell it. So it’s really — it comes down to portfolio management and having conversations that a retailer is looking to get out of a poor performing asset, and there might be 10, 11 years left on the lease. So the lease term fee, usually a direct correlation of the remaining lease term and/or the rent on the asset where they’ll pay a multiple of years to get out of the lease.

John Massocca: Is there something notable on the macro side or something else that’s making tenants more receptive to that conversation?

Steve Horn: I think what makes NNN unique in the situation that we carry conversations on with our tenant base on a routine basis. So they know that we’ll work with them where you have a lot of landlords that just say, no, pay the rent, and it will be a future problem. So it’s really making the portfolio stronger at the end of the day.

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

Steve Horn: Thanks for joining us this morning, and I’m sure we’ll have a lot more dialogue in the upcoming weeks at NAREIT. Thank you.

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

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