NNN REIT(NNN) - 2024 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported quarterly core FFO results of $0.83 per share for Q2 2024, which is an increase of$ 0.03 or 3.8% compared to $0.80 per share a year ago [9] - AFFO results were$ 0.84 per share for the second quarter, representing a $0.04 or 5% increase from the previous year [9] - Occupancy levels remained high at 99.3%, above the long-term average of approximately 98% [2][9] - The company increased the midpoint of core FFO per share guidance by$ 0.02 to $3.30 [3] Business Line Data and Key Metrics Changes - The leasing department achieved a 158% recapture rate from prior rent during the quarter, with a year-to-date recapture of 102%, significantly above the historical average of approximately 70% [3] - The company sold 14 properties during the quarter, raising$ 67 million in proceeds for reinvestment into new acquisitions [4] - Year-to-date, the company has sold $85 million of assets, leading to an increase in the disposition guidance lower end to$ 100 million from $80 million [4] Market Data and Key Metrics Changes - The acquisition pricing environment showed that the initial acquisition cap rate was approximately 10 basis points tighter than Q1 2024 and 70 basis points wider than Q2 2023 [6] - The company invested$ 110 million in 16 new properties at an initial cash cap rate of 7.9% during the quarter [5] Company Strategy and Development Direction - The company is focused on enhancing shareholder value and is well-positioned to meet its 2024 acquisition guidance of $400 million to$ 500 million [6] - The strategy includes a focus on direct sale leaseback transactions, which are more landlord-friendly compared to 1031 market deals [6] - The company aims to maintain a strong balance sheet with a leading average debt maturity of 12.6 years [7] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ability to navigate uncertainties and continue growing per share results [14] - The company noted that the overall market opportunity set is larger than it was 60 days ago, with deal volume starting to pick up [15] - Management indicated that the low-end and mid-range consumers have held up well within the portfolio, with stable rent coverage ratios [28] Other Important Information - The company ended the quarter with $837.6 million of annual base rent in place for all leases as of June 30, 2024 [11] - The AFFO dividend payout ratio for the first half of 2024 was 67.1%, resulting in approximately$ 101 million of free cash flow [11] Q&A Session Summary Question: Can you provide updated color on the transaction market and cap rates? - Management noted that the overall market opportunity set is larger today than it was 60 days ago, with cap rates in line with Q2 [15][16] Question: Can you share more about the dispositions made in the quarter? - The company sold 14 assets, with 11 being income-producing, primarily for defensive reasons and to redeploy into accretive acquisitions [18] Question: Are you seeing any trends in lease termination fees? - Management indicated that lease termination fee income has been episodic and difficult to predict, with no significant trends observed [20][21] Question: How is the company monitoring tenant performance? - The company continuously monitors tenant performance, with specific attention to those on the watch list [23] Question: What is the outlook for bad debt? - The company maintains a 100 basis points assumption for rent loss, with actual historical losses closer to 30-50 basis points [31] Question: How is the company thinking about share issuances going forward? - Management stated there is no immediate need for equity issuance, as over two-thirds of acquisitions can be funded through free cash flow and dispositions [35] Question: What sectors are showing the most opportunities? - Management highlighted the convenience store sector and auto service as areas with increasing activity [36]