Hello, everyone, and welcome to Broadstone Net Lease's Second Quarter 2025 Earnings Conference Call. My name is Elliot, and I'll be your operator today. Please note that today's call is being recorded. I'll now turn the call over to Brent Maedl, Director of Corporate Finance and Investor Relations at Broadstone. Please go ahead.

Thank you, everyone, for joining us today for Broadstone Net Lease's Second Quarter 2025 Earnings Call. On today's call, you will hear prepared remarks from Chief Executive Officer, John Moragne; President and Chief Operating Officer, Ryan Albano; and Chief Financial Officer, Kevin Fennell. All 3 will be available for the Q&A portion of this call. As a reminder, the following discussion and answers to your questions contain forward-looking statements, which are subject to risks and uncertainties that can cause actual results to differ materially due to a variety of factors. We caution you not to place undue reliance on these forward-looking statements and refer you to our SEC filings, including our Form 10-K for the year ended December 31, 2024, and our Form 10-Q for the quarter ended March 31, 2025, for a more detailed discussion of the risk factors that may cause such differences and note that such risk factors may be updated in our quarterly SEC filings. Any forward-looking statements provided during this conference call are only made as of the date of this call. With that, I'll turn the call over to John.

Thank you, Brent, and good afternoon, everyone. As we announced in our earnings release last night, we have raised our full year 2025 AFFO guidance to $1.48 to $1.50 per share or 4.2% growth at our midpoint with the $0.38 of AFFO per share for our second quarter, representing 5.6% growth compared to 2024. We are incredibly proud of another outstanding quarter, underscoring the strength of this portfolio and our differentiated growth strategy. Our team's disciplined execution was instrumental in driving meaningful progress on several key tenant matters and our investment activity. This upward revision reflects not only our confidence in the business, but also our steadfast commitment to delivering long-term sustainable growth and value creation for our shareholders. At this halfway point of the reporting calendar and as we work to continue increasing our momentum as we enter the second half of the year and head into 2026, I thought this would be an appropriate moment to reflect on the progress we have made as a company since this management team was put in place at the beginning of 2023. The past few years for BNL have been defined by a series of seemingly never-ending questions about our business, our strategy, our portfolio and this management team, and I believe we have answered every one of them with resounding success. As some of these questions continue to linger and weigh on our share price, I thought it would be useful to walk through them today and address them head on. To start, up until this year, the first question was usually some version of, can BNL successfully reposition its portfolio? The answer is, undoubtedly, yes. And as we heard from many investors, we did it better than they thought we could. We've reduced our clinical health care exposure to 2.4% of our ABR, and we have accomplished that while still growing, not shrinking AFFO per share. We successfully exited a noncore asset class at solid valuation levels to focus our attention on what we do best and where we see the greatest long-term opportunities for generating shareholder value while reducing our near-term property operating expenses and mitigating lease rollover risk within a pocket of the portfolio with the shortest WALT. We have shown that we know how to manage a strategic repositioning out of an asset class, which is why we have no intention of selling our remaining clinical assets or our office portfolio in a fire sale. We intend to take our time and maximize the value of those assets through disciplined execution, ensuring we continue growing AFFO per share each year. The next question is often then centered on whether we can address tenant credit events in our portfolio. Yes, with more than enough examples to prove the point. Net lease is not a 0 loss business. Tenant credit matters are bound to happen from time to time and reacting to any individual tenant credit event as though it has broader implications on our entire business is shortsighted and belies the strength of this company and the portfolio we have thoughtfully constructed since inception. We have proven time and again that we can manage through any tenant credit situation the market wants to throw at us. Not only is our underwriting sound, but we have a battle-tested team deep with operational expertise who can navigate difficult situations as well as anyone. From Art Van to Green Valley to Red Lobster to Zips to Stanislaus, we have shown that we can resolve and learn from credit events in our portfolio while ensuring we still grow AFFO per share. The natural follow-up question for this year then is, what about at-home and Claire's? It's no secret that the at-home and Claire situations have been weighing on our valuation this year. Let's take our 2 current headliners in turn. First, At Home, which represents approximately 95 basis points of our ABR at quarter end and includes 2 properties: At Home's primary distribution facility outside Dallas, Texas, which accounts for roughly 80% of our at- home exposure; and a retail store outside Raleigh, North Carolina, which accounts for the other 20%. As everyone knows, At Home filed for Chapter 11 bankruptcy in June. We believe we are well positioned here for a handful of reasons. First, year-to-date, we have received every dollar of rent that is owed to us from At Home. Second, our retail site is one of the top performing At Home locations in the country and also sits in a high-performing community shopping center. Third, we believe our distribution facility is critical to At Home's operations as it services the majority of At Home's retail footprint, and we estimate we are roughly 25% to 35% below market rent. With all indications pointing to At Home recapitalizing its debt structure, streamlining some operations and emerging from bankruptcy this year, we do not have any current material concerns about At Home's impact on our business. It's too early to know for certain what the final resolution of At Home's bankruptcy will be, but we are confident in our position and we'll be certain to keep investors apprised of our progress. Second, Claire's, which represents approximately 80 basis points of our ABR at quarter end. We own a single Claire's asset that serves as the company's primary distribution facility in the United States, which is located outside Chicago and Hoffman Estates, with the asset also serving as its corporate headquarters. Based on a handful of recent reports and rumors, Claire's is supposedly considering Chapter 11 bankruptcy as well as some strategic asset sales, potentially of its foreign operations. As with At Home, context here is important. First, year-to-date, we have received every dollar of rent that is owed to us by Claire's. Importantly, Claire's pays rent on a quarterly basis. So we have already received all of the rent owed to us by Claire's through the end of the third quarter. Second, as Claire's primary domestic distribution facility and corporate headquarters, we believe our asset is strategically important and will remain so. If, however, Claire's ultimately did vacate, we estimate that our rent is currently roughly 15% to 25% below market. Our asset is in a strong industrial market with access to heavy power, excellent access to I-90 and has already had interest from neighboring businesses looking to expand. As with each tenant credit matter we have faced in recent years, we are well positioned to deal with Claire's either as a continuing tenant in the portfolio or as a workout situation if that should come to pass. Taking all of this into account, we will work through the At Home and Claire's situations as we have any other portfolio matter, and I am confident that we will deliver attractive AFFO per share growth this year and next despite the noise surrounding these 2 discrete tenant credit events. In fact, as you will hear from Kevin during his remarks, given our progress so far this year on tenant matters, we have reduced the bad debt reserve in our guidance for the remainder of the year to 75 basis points as we have only incurred 45 basis points year-to-date. So with the existing portfolio questions addressed, the questions then have turned to our differentiated growth strategy. First, a common question has been, will you be able to grow your build-to-suit program in a meaningful way? Or was the UNFI deal a one-off? Our build-to-suit program provides us with long-term, high-quality derisked and value-creating growth that provides insight into our portfolio's embedded AFFO growth profile, not only in the current year, but for several years into the future. I'm quite proud of our committed build-to-suit pipeline and believe it stands on its own and answers to this question. We currently have 8 projects comprising more than $370 million of build-to-suit investments that will generate $28 million of new incremental ABR through the third quarter of 2026, representing growth of 6.9% off our current ABR. And we are hard at work on a robust and resilient pipeline of additional build-to-suit developments that we look forward to announcing in the coming months, which will provide added visibility into this powerful, compelling and differentiated investment strategy and our ABR growth into 2027. Continuing the growth strategy vein, the next question we get asks what role the regular way acquisitions will play in our future with some investors wondering whether we'll eventually stop pursuing them. Sourcing attractive current yielding acquisitions is one of our core building blocks and an integral part of our operating model. We continue to source and evaluate a high volume of traditional net lease deals and are focused on sourcing relationship-based investment opportunities where we are not required to rely on heavily marketed deals in an ever more competitive acquisitions environment. As you'll hear from Ryan in a bit, we've already closed on approximately $135 million in new property acquisitions this year and have another $234.6 million in acquisitions under control. The number of regular way acquisitions we close in any given year will vary, but being able to grow earnings accretively through traditional investment while helping our tenants and partners grow their businesses is core to who we are, and that's not going to change. But even with a successful growth strategy, that begs the question, how will you fund your investment activity without a supportive equity cost of capital? It's been almost 3 years since our last significant equity raise. Although we have a small amount of capital available from some forward ATM activity last summer, we have managed our growth these last few years without reliance on the public equity markets, and we'll continue to do so if need be for the future. In 2023, we executed on approximately $200 million of risk-mitigating sales at a 6% cap rate to fund our growth. In 2024, we had $346 million in sales, almost entirely of clinical health care assets that we recycled into industrial, retail and build-to-suit investments core to our strategy. And now we have a growing pipeline of high-quality build-to-suit assets that we believe will trade 100 basis points or better on a stabilized basis from the mid-7% development yields we are achieving today, creating significant value and optionality for us to continue funding our growth into the future. We would love to be back in the equity capital markets, but we won't do so until our stock price is at a level where those funds are as constructive for our planned growth as the funding that we can create for ourselves. While we could supercharge AFFO per share growth with a constructive cost of equity capital, which we hope to see in the near term given all that we have accomplished, we have positioned ourselves to continue to meaningfully grow AFFO per share for our shareholders through other avenues. Underneath many of these questions is an undercurrent about our credibility. Will this management team be able to do what they say they are going to do? Yes. And the evidence is in the answers to all these other questions. We have consistently been transparent, open and willing to answer any and all questions we've been asked. We've increased our disclosures to provide more and better information to investors to prove out what we say. We've told you what we're going to do, we tell you what we're doing, and then we tell you how we did. We have done what we said we were going to do, and we believe we've done it better than expected. And finally, the most important question of all, can BNL get back to growth? You bet we can. With this quarter's earnings guidance beat and raise, our midpoint now sits at 4.2% AFFO per share growth for the year, which is solidly in the top tier of net lease for 2025. We've been talking about attractive mid-single-digit AFFO per share growth with investors for the future, but we're already delivering that to you today. And with the strength of our in-place portfolio and the visibility we have to $28 million of new additional ABR to come online through the third quarter of 2026 from our committed pipeline of build-to-suit investments, we believe we are well positioned to deliver attractive mid-single-digit AFFO per share growth in 2026, 2027 and beyond. Given where those growth rates place us among our peers based on consensus estimates, I have to believe the growth question has been answered too. We have answered every question that has been asked of us since this management team assumed our roles at the beginning of 2023. We have worked tirelessly over that time to reinvent BNL by designing and implementing a differentiated growth strategy, repositioning our portfolio, reorganizing our internal personnel structures and procedures, reinvigorating and intensifying our Investor Relations efforts, prudently but aggressively resolving difficult tenant matters and managing our capital and balance sheet so that we continue to be in a place where we can make decisions we want to, not be forced to make those we have to. We have operated with unshakable confidence that we are creating real value for our shareholders by redefining what's possible as a net lease REIT. And having accomplished all of that, we now expect to see our success properly reflected in our share price and equity multiple. With top-tier growth, a differentiated strategy, a solid in-place portfolio and ability to create meaningful value and the capability to fund growth independently of the equity capital markets, we do not believe our current stock price and multiple make any rational sense. I have never been more confident that because we have executed on our strategy the way I knew we would over the last few years, relative equity multiple expansion and a meaningfully higher stock price should be a matter of when and not if. Since this team was put in place at the beginning of 2023, we have worked incredibly hard to get where we are today. We have executed well and delivered results, and I believe now is BNL's time to shine. Given all that we've accomplished and the success we expect to achieve in the coming years, we thought this would be a great time to host an Investor Day to take a deep dive into our differentiated strategy, preliminary guidance for 2026 and a view of our in-place run rate building blocks for 2027. The date will be Tuesday, December 2, at the New York Hilton Midtown. More details to come in the fall. We are very much looking forward to this event and hope to see many of you there. With that, I'll turn the call over to Ryan.

Thanks, John, and thank you all for joining us today. We had another strong quarter from both an investment activity and same-store portfolio perspective, demonstrating continued disciplined execution and the unique benefits of our differentiated strategy. Beginning with our investment activities so far in 2025, we have invested $262.2 million in new property acquisitions, build-to-suit developments, transitional capital and revenue-generating CapEx and have a robust pipeline of both traditional net lease acquisitions and build-to-suit developments underway. Starting with our build-to-suit projects, we have been successfully scaling our build-to-suit pipeline through both existing and new relationships. Since breaking ground on our first build-to-suit with UNFI in the second quarter of 2023, we have commenced 10 projects with 6 different developers and have an attractive pipeline of additional opportunities that we are working diligently to secure. In addition to the high-quality nature of the investment opportunities, build-to-suit developments are one of our core building blocks due to their ability to generate embedded revenue growth in future years long before we close the calendar on the current one. Most net lease REITs provide a forward 90- to 120-day view of their pipeline. Our strategy allows us to provide visibility into a consistent rolling, constantly refreshing pipeline of projects over a multi-year period. As for what is currently in process today, construction has commenced on 8 build-to-suit development projects totaling an estimated investment of $371.2 million. This pipeline of in-process build-to-suit developments is fully signed up and committed. We now own or control the land, construction is underway and on time. And as you heard from John earlier, we have locked in approximately $28 million of incremental ABR today that will begin coming online later this year and through the third quarter of 2026, representing approximately 6.9% growth in our current ABR. These committed build-to-suit developments represent long-term, high-quality, derisked and value-creating growth that is unique in the net lease space. Last week, we announced the addition of 3 new build-to-suit projects, adding $61.4 million to our committed pipeline. These projects include a new industrial distribution facility located in the Dallas MSA for Palmer Logistics, a new industrial distribution facility located in the California Central Valley for AGCO Corporation and a new grocery store in the Dallas MSA for Sprouts Farmers Market. With these projects, we are excited to add 2 new development partners to our relationship base and expect all 3 projects to deliver in the third quarter of 2026. Our in-process build-to-suit pipeline has a strong weighted average initial yield of 7.5% and a fantastic weighted average straight-line yield of 8.9%, which is driven by weighted average lease term and rent increases of approximately 13 years and 2.9%, respectively. And as you have heard us say repeatedly, these projects often come with stronger tenant credit profiles, higher quality and newly constructed buildings and better overall real estate fundamentals, which provide us a high degree of confidence in the long-term value these assets represent in addition to the added flexibility they provide. Not only do these developments provide consistent and sustainable earnings growth in the medium term, but they provide flexibility to either hold as traditional long-term net lease investments or monetize at attractive stabilized valuations once completed. We target a spread between our development yield and stabilized value in excess of 100 basis points, representing an additional layer of value creation, a rarity in the net lease world that we expect to recognize either in the form of NAV accretion or through positive capital recycling upon a sale of the asset. This past quarter, we also made a $22.3 million investment in the form of transitional capital through a preferred equity investment in a consolidated joint venture that has acquired fully entitled land designated for industrial development with several tenant negotiations underway. The land is located in Northeastern Pennsylvania and is part of a larger industrial development opportunity we are currently pursuing and hope to have exciting updates to share later this year. In a competitive and higher interest rate environment where cap rates are under pressure, we believe our build-to-suit strategy provides us a compelling competitive edge, access to high-quality tenant and developer relationships, superior yield generation, meaningful value creation and long-term income stability. I'll now turn to our regular way acquisition activity. Through the second quarter, we have closed $113.7 million in new property acquisitions and $2.8 million in revenue-generating CapEx, which together had a weighted average initial cash cap rate, lease term and annual rent increase of 7.2%, 12.4 years and 2.8%, respectively. And the completed acquisitions had an attractive weighted average straight-line yield of 8.3%. After quarter end, we continued our acquisitions momentum with an additional $21.3 million in new properties so far. As we head into the second half of the year, we have $234.6 million in new acquisitions under control and $4.5 million in commitments to fund revenue-generating CapEx with existing tenants. Of approximately $370 million in acquisitions we have already closed this year or have under control, more than 2/3 have been direct relationship-based deals. We've been able to accretively grow our earnings while helping our tenants fuel their growth objectives through strategic sale-leaseback transactions. And while our strategy will generally lean towards industrial investments, we've had success this year on the retail front as well, adding Hobby Lobby to our current tenant roster earlier this year and deepening our relationship with Academy Sports with 2 new acquisitions this year. Now shifting to our in-place portfolio. We were 99.1% leased at quarter end with only 2 of our 766 properties vacant and collected 99.6% of base rents due for the quarter for all properties under lease, representing a 60 basis point increase compared to Q2 2024. As for lease rollovers, we have already addressed most of the leases slated to mature in 2025. We achieved a better than 100% recapture rate on renewing leases and have successful resolutions in motion for the few remaining this year. With only 3% of our ABR rolling in 2026, we have minimal near-term rollover concerns and are actively evaluating and engaging with our tenants on leases scheduled to roll between now and 2028. A proactive approach to managing our lease maturity ladder allows us to mitigate overall rollover risk in any given year, provide clarity and confidence in the growth profile of our same-store portfolio in the coming years and gives us ample time to resolve any known vacancies long before lease maturity and subsequent NOI roll-off. With respect to our watch list, as John said earlier, we have proven time and again that we can manage through any tenant credit situations that may arise. We recently sold both our Stanislaus Surgical and our Room Place assets, resolving both situations and eliminating burdensome vacant carrying costs. Other than our 2 headline names that John covered earlier, our watch list has remained generally consistent with the home furnishing sector and consumer-centric tenants remaining in focus. We are also paying close attention to some of our remaining clinically oriented health care properties as well as businesses impacted by tariff or inflationary measures. We remain vigilant in our tenant monitoring efforts and maintain great confidence in our portfolio due to its diversified construction, which limits the impact of any potential individual credit event and our proven ability to manage through any such situation that may arise.

Thank you, Ryan. During the quarter, we generated adjusted funds from operations of $74.3 million or $0.38 per share, a 5.6% increase over both the first quarter and Q2 of last year. Results benefited from recent investments as well as recoveries of previously uncollected rents and reimbursable operating expenses. Core G&A totaled $6.9 million for the quarter and $14.3 million year-to-date, tracking in line with the low end of our full year expectations of $30 million to $31 million. Year-to-date, bad debt totaled 45 basis points, reflecting both the rental recoveries we achieved and limited bad debt incurrence during the second quarter. We have invested approximately $229 million through the second quarter, nearly 60% of which went into stabilized properties. These investments were funded by a combination of retained cash flow, disposition proceeds and our revolving credit facility. We ended the quarter with pro forma leverage of 5.2x net debt, approximately $38 million of unsettled equity and over $800 million available on our revolver, providing us with ample flexibility as we pursue incremental investment opportunities. Regarding our dividend, our Board of Directors declared a $0.29 dividend per share payable to holders of record as of September 30, 2025, on or before October 15, 2025. Finally, as John mentioned, we are increasing our 2025 per share guidance to a range of $1.48 to $1.50 with key assumptions that include: investment volume between $500 million and $700 million, an increase of $100 million; disposition volume between $50 million and $100 million; and finally, core G&A between $30 million and $31 million. Given successful resolution of a few tenant matters, notably including Zips Car Wash, we have reduced our bad debt reserve within our guidance for the remainder of the year from 125 basis points to 75 basis points. It's also worth reminding everyone that our per share results for the year are particularly sensitive to the timing, amount and mix of investment and disposition activity as well as any capital markets activities that may occur during the year. Please reference last night's earnings release for additional details, and we will now open the call up for questions.

First question comes from Eric Borden with BMO.

I appreciate your comments on the build-to-suit development pipeline. You've made solid progress year-to-date, adding 3 new projects in the quarter. I'm just curious, one, if you still plan to announce $500 million of incremental developments in 2025? And two, if you're seeing interest pick up as companies look to fortify their supply chains across the U.S. in an effort to minimize any tariff impacts.

Yes. Yes to all the above. So the $500 million goal is one that we still hold. That goal is one that's really focused on the future long-term growth. Anything that we're going to bring in now sort of the second half of the year, if you assume a 12- to 18-month potential build time frame is really going to come online at the end of 2026, early '27. So given how good we feel about our growth for 2025, the comfort that we have going for 2026 already, we're excited to be looking at deals that are really going to try to start to solidify our view of that run rate baseline growth for 2027 and $500 million is absolutely still in play. There's a handful of things that we're working on right now that are really exciting, and we hope to be able to talk more about into the future. And in terms of the demand, it's not only that there has been an additional increase in the build-to-suit activity that we're seeing generally across the country. There has been a response to the administration's efforts to try to force people to think more close and locally as folks are thinking about their logistics and supply chain and long-term strategic investments in their assets. But for us, personally, we're seeing an impact or an uptick in the amount of deals that we're seeing because our name is getting out there. Our team is really deep with experience having done build-to-suits over the last 10 to 15 years. So they know a lot of the players. So we've been able to reach out to more of them as we've been building out our roster of developer partners. But the industry talks. And so as we've done more deals and they see the things that we're doing, we're getting referrals. We're having people reaching out and saying like, hey, I saw you did this build-to-suit project over here. Would you be interested in doing this one with me here? So it's not only that the industry itself is starting to see some additional interest in investment from a long-term strategic standpoint. But we, as Broadstone Net Lease, are seeing some additional interest as our name is getting out there more and our relationships are starting to build on themselves.

Okay. That's helpful. And then on the regular way acquisition side of things, could you just provide some additional color on the $236 million of acquisitions under control? Any commentary on the cadence of the closing, size of asset types and the expected initial cap rate?

Yes. The generally speaking, on a cap rate basis, it's pretty consistent with what we've been doing this year, so thinking around that 7 cap range. It's a bunch of industrial deals primarily, and so they're a little bit larger in size, but that's pretty consistent with what we've been doing historically from an industrial investment standpoint over the last 5 or 6 years. And on a timing basis, those should all close this year for sure, with a big chunk of that closing in the third quarter.

We now turn to Anthony Paolone with JPMorgan.

First question is, is the allowability of accelerated depreciation helping drive folks to do deals and maybe help drive your pipeline or not at this point?

There's definitely been talk of that. A lot of the brokers were very excited about the administration's big beautiful bill because of the accelerated depreciation. And in particular asset classes like car washes, the car wash industry has been driven by the accelerated depreciation for a long time and the ability for folks to get in there and have some real tax benefits. So I would expect to see a little pickup in that industry. It's not necessarily something that we put a huge amount of attention to from an industrial focus, but there are definitely some pockets in the net lease world that are quite excited about that.

Okay. You mentioned that you are seeing more deal flow as you progress with your build-to-suit program. At this point, does that lead you to favor a specific tenant type or property type, or geography? Are you clarifying your criteria for what you want to pursue?

We want to be able to see as many deals as possible and then be able to pick and choose the ones that provide us with what we think are the best possible risk-adjusted returns. So we're not filtering things out from higher up in the funnel at this point. We're trying to get as much into the funnel as possible and then working with our developer partners to find the things that are the best fit for us in our long-term plans for growth.

We now turn to Ryan Caviola with Green Street Advisors.

Just being mindful that your relationship-driven build-to-suit pipeline mitigates some of that competition risk. We have seen some private transactions of industrial net lease portfolios this year. How has that increased interest affected pricing you've been seeing? And does it open opportunities for attractive dispositions on that front? What are you seeing on that side?

So both of those things. I would say on the build-to-suit, it's still heavily focused on relationship-based direct opportunities that we're seeing with our developer partners. We're not getting into massive bidding wars like you see in the routine sort of the regular traditional net lease acquisitions market. But on the traditional net lease acquisitions market, competition has been fierce. There's a lot of new entrants this year. There's a lot of folks with deep pockets of capital. and the competition is picking up for real basic ECON 101 supply-demand stuff. Supply is certainly getting a little bit better. It's increased this year. We're seeing more deals this year than we have over the last 2 years, but we're not back to where we were or even close to where we were in sort of that 2021, 2022 time frame. So supply/demand is going to put some pressure on those cap rates, particularly in industrial because they're big, they're chunky. The private buyers really like them from that standpoint because it's not having to do the small onesie-twosie type retail acquisitions. So we're seeing a lot more competition from that standpoint. But to the point of your question for the disposition side, that does make us feel really confident that to the extent that we need to continue funding our own growth, we have a ready supply of assets already in the portfolio or more attractively, assets that we are building right now in our build-to-suit development pipeline where we're building them at those mid-7 development yields, and we see a competitive, robust market that we could sell those into at 100 basis points or better. So that's very attractive to us to the extent that we need to do that to fund our growth.

Appreciate the color. And then for that $600 million investment guide midpoint, is there any chance you could give a rough breakout of how much you see falling into new acquisitions versus developments versus transitional capital going into the second half of the year?

So if you consider what we have already closed this year along with what we have under control, I would categorize it generally into regular deals and build-to-suits. This year, the division is approximately 60% regular deals and 40% build-to-suit fundings, which will include some transitional capital that we are currently working on. This division may change slightly as we move towards the end of the year if we begin to add more build-to-suits. However, I believe that a shift back towards a 50-50 split, or even an inversion, may be something we see more in 2026. So it's about 60% regular deals and 40% build-to-suit this year.

Our next question comes from Caitlin Burrows with Goldman Sachs.

Thanks for all the detail in the prepared remarks earlier. I guess maybe on the leverage side, I think you guys mentioned that you're at 5.2x now. I think you've talked in the past about being willing to go up to 6x. I was wondering, is that 6x something you would actually do? Or do you actually want to stay below 5.5? Or just what are you thinking about target leverage?

I think on the longer-run basis, staying comfortably inside 6x is definitely the goal. It is a flexible lever we have at our disposal, particularly as we're building up this ladder. So are we comfortable running up closer to it in the near term? I think the short answer there is yes. But you have got years of looking at how we operate the business here to know that that's not a place you would find us at on a sustained basis.

Got it. Okay. And then just bigger picture on the build-to-suit deals. I guess, what do you think these companies that are entering into these build-to-suit properties are electing to go that route rather than use existing buildings out there that are vacant?

So these are long-term strategic decisions that people are making about where they either want to locate and/or the type of facility that they need. So one of the things that we always have to balance is making sure that the specificity that they need relative to a particular geographic location or a particular build-out still works for us in terms of thinking longer term about re-tenanting or repurposing and what the residual value is in those. So it's a little bit of a give and take that we have to manage with folks. But being able to move into just sort of an empty box that's fungible and works for just any old thing doesn't necessarily satisfy the strategic needs of every business that's out there. It works for a lot of things, but not everything. And so the build-to-suit is far more of sort of a very specific focused strategy on behalf of the tenant to make sure that they're getting something that works really well for them. And as I said, then we then balance it against our views for longer-term residual work.

We now turn to Ronald Kamdem with Morgan Stanley.

I have a couple of quick questions regarding the build-to-suits. First, what are some lessons you've learned in the process, particularly regarding the biggest risks you face while executing these contracts and delivering the assets? What insights do you have now that you might not have had when you started the program? Secondly, can you provide some perspective on competition related to project size? Specifically, when dealing with projects over $100 million, do you find it more challenging to secure favorable terms? I'd appreciate your thoughts on how competition evolves as you move from projects in the $10 million range to those in the $20 million range.

Okay. So from lessons learned, I think the biggest one for us has been patience. The build-to-suit process takes a lot of time. I think the second part of that is you have to be willing to do the work. Build-to-suits are incredibly complex. The amount of time and effort that goes into negotiating all of these documents and working through all of the pieces that are involved takes a long time, and it takes a lot of expertise. A build-to-suit is not something that just anybody can pick up and start working on. You need to have experience in it. You need to have been taught how to do these things. And I'm lucky to have a team of people that have been doing this for a very long time and have a lot of expertise and know how to pursue these in the right way. So the patience and the willingness to roll your sleeves up and get dirty and start working on these projects, I think, is the biggest lesson. These take a lot. And as I said, it's not something that anybody can just get into. From a competition standpoint, it really varies. We're super pleased about our new Sprouts build-to-suit. We've got a little bit of retail build-to-suit work that we've been doing. We'd love to do more. They're small. You can sort of build them into a programmatic structure with developers as they're going around and building for their tenants and their clients that they're working with them. So it's something that we're excited to do more in. Our folks that are working on the retail build-to-suit have been very excited to go out and make new connections and find new developers. And the Sprouts deal is actually one of the new ones that we brought into our roster. So we're very excited about that. But the retail area for build-to-suit is incredibly competitive because it's an area that gets a lot of interest from net lease investors as well as local investors and others. When you get into the industrial space, it depends. On the ones that are a little bit smaller or maybe more bite-sized and depending on what the tenant credit is, you may have an opportunity where it's very light from a competition standpoint. And then when you get to the really large ones, sometimes the competition is as fierce because there's only a handful of developers and contractors and funders in the world that can handle the larger projects that we've been able to see. And so when I talk about competition, it's both in terms of if our developer partners are looking to other people as well as us, making sure that they see the balance and see the benefit of the relationship with us. But often, what we're coming up against is that we've partnered with one of our developers, and we've got a piece of land. And we as partners are competing against another developer and another funding source who have a different piece of land, a different design build. And that's where it starts to get really interesting in terms of working with the tenant to help them appreciate why we believe that our piece of dirt and our design and our ability to execute should win out over the folks that we're competing against.

We now turn to Upal Rana with KeyBanc.

As it pertains to the bad debt, was the 50 basis points reduction in your guidance all related to the Zips, At Home and Claire's? What else are you baking into the remaining 35 basis points of bad debt for the year? I just want to get some color there.

So as I said at the beginning of the year, we try to be really transparent around our bad debt. Our goal is always to have our bad debt equal both what we know and have some visibility into, plus what we are putting in there just from a prudence standpoint of unknown things could happen. So that way A plus B equals C. Here, we are both in a spot where we've got clear visibility now to a positive resolution on Zips, clear visibility into sort of the risk that we saw at the beginning of the year relative to At Home. And as I mentioned, we've received every dollar of rent that At Home has owed us this year so far. So that risk has dropped dramatically over the course of the year. Same for Claire's. We were paid up on Claire's all the way through the end of September. So that puts us in a great spot to have good visibility into the things that we didn't know about and then also reducing because of the back half of the year. And the rest of the portfolio is performing really well in terms of what we are putting in from a prudent sort of unknown standpoint. So it's a combination of all those things.

Okay. Great. That was helpful. And then I appreciate all the color on your prepared remarks on the funding comments. Could you talk through where your weighted average cost of capital is today and what kind of investment spreads you are achieving on your traditional acquisitions and your built-to-suit projects?

Yes, we'll take it in 2 parts. I mean we're really working off of existing leverage capacity. So your marginal dollar is in that high 4, low 5 context from a spread perspective. On the marginal new dollar, obviously not particularly attractive. You heard all of John's comments on our view on our cost of equity today, and we're comfortably into the high 8% using our AFFO yield, so not a particularly interesting dollar to use. And then from the debt piece, we've got 5-year interest, I'd say, that's a little bit more compelling this time of year in the T plus 110 to 135 range versus a 10-year that's probably T plus 135 to 140. So you've got 50, 70 basis points of spread compression as you look shorter on the curve. And so you can put that together and say like, could it work on the margin in terms of a neutral or maybe you can squeeze out a little bit of investment spread when you consider retained cash flow? Sure. But again, I'll start at the beginning of my answer where the real marginal cost is our dollar that we use, which is off the revolver.

We now turn to Ki Bin Kim with Truist.

In regards to your build-to-suit and maybe more so for your manufacturing facilities, are you trying to develop any kind of industry expertise for some of these development deals that are in the higher end dollar size? Or as you said earlier, just the funnel being right open?

Funnel is wide open in terms of the deals that we'll look at. There are places, though, where we have seen that people are more willing to reach out to us, certainly in the manufacturing space, not just sort of your empty box fungible DC warehouse. And then, of course, also with our airplane hangers that we're building. Not everybody does that type of construction, not everybody has experience with it. And we have a couple that were already in the portfolio, and now we've got 2 more that we're building for Sierra Nevada for that doomsday fleet out in Dayton. So we're building a reputation, and it's a good one, and it's continuing to push additional deal flow into the top of our funnel, which we're really excited about.

Okay. And can you just help illustrate the number of developer relationships that you're working on? Where was that at the beginning of this year? And I guess, how much has that grown?

Yes. So when we started this back in the first quarter, early second quarter of 2023, it was us in isolation. We've now built that to where the project list that's included in our public filings. There's now 6 different developers that are represented in there. And we've got a handful of ones that we're in advanced discussions with now for new projects. And there's even more further up in the funnel of folks that we're talking to. And as I mentioned, as we continue to build our reputation, we're not only getting referrals from other developers that are saying, 'Hey, we've done a project with these guys, and it's not competitive, so you should give them a call.' And then also other developers that are just hearing about us as our projects get announced that are starting to reach out. So I expect that, that's going to continue to increase. And as you've heard us say repeatedly, the goal here is a robust and resilient pipeline of build-to-suit opportunities, and that necessitates a robust and resilient pipeline and set of relationships with our developer partners too.

We now turn to Kathryn Graves with UBS.

My first, we've seen some pretty softness in the cold storage subsector this first half of 2025. And I'm just wondering if you're seeing any impacts to your food production and processing tenant base as far as any is the shipments or generally expenses pertaining to tariffs being higher? Just any read-through there on your tenant base?

There are certainly impacts that we've heard from our tenants in terms of the tariff cost overlays and things that they've been having to address. And I think the distinction that I always try to make when folks talk about cold storage is you should think of our cold storage as owner-operator. These are boxes and boxes. We don't have any exposure to how much product they have in their facilities or how much they're moving in and out in terms of what their operations are. We get one run check a month from these folks, and that's how they continue to pay us. So we're not taking any additional risk with our cold storage facilities than we are anywhere else. So we're paying attention to it in terms of tenant credit and how we're thinking about them from a performance standpoint, but it's not something that concerns us from our performance.

Got it. That's helpful. And then my second question, it looks like the distribution of retail versus industrial acquisitions this quarter was a bit more tilted industrial than the first quarter. And so I'm just wondering if this is more indicative of your general target exposure to each vertical? Or were you seeing fewer retail deals this quarter? I know you mentioned seeing more competition in industrial, particularly from private players. Some of your peers have also indicated an increasingly competitive U.S. retail transaction market. So just wondering how you're thinking about your retail segment.

Yes, the competition in retail is pretty fierce. A lot of the new private players that have come into net lease this year have been hyper focused on retail. So I'm grateful that that's not a huge portion of our strategy because if it was, I imagine that the pricing there is getting very difficult for folks that are spending a lot of time on heavily marketed broker-led deals. Our retail-industry mix is always going to move a little bit. Our historical average for the last 6 years or so is like 70-30 industrial retail. I think there's a bit of a shift that we'll see quarter-over-quarter. So I wouldn't read too much into one particular quarter over another. As we start to see the trend lines over the course of an entire year, we can start assessing a little bit. But our goal is to continue to have retail be a healthy part of our portfolio. It's a place where we see good opportunity. And a lot of the deals that we're doing right now, as you heard from Ryan between Hobby Lobby, Academy Sports, the Dollar General's and other things that we're looking at, Sprouts in the build-to-suit, 7 Brew in the build-to-suit. These are direct relationship-based deals that we're getting the opportunity to go after because we've performed in the past for those folks that are in those spaces, because we have a relationship with the developer on the deal, you name it. And so finding ways to add retail to the portfolio that's really attractive to us from both the asset type itself and the return profile. So it will ebb and flow, but I would use the 70-30 as more of a benchmark over a longer-term period of time than quarter-over-quarter.

We now turn to Michael Gorman with BTIG.

Just one quick one for me. John, just given kind of your robust comments to open up the call and thinking about the next 6 to 12 months, especially as the build-to-suit pipeline really gets up on the plane here. Can you just remind us or refresh us on your thoughts on stock repurchases given the cost of equity as a source of capital or as a use of capital and as an opportunity? Just how are you thinking about that given where BNL is trading today versus the execution that you highlighted at the top?

So I'm sure I made it very clear, I'm not pleased with where the stock price is. I haven't been for some time. And at this point, I'm struggling to understand why we are where we are, when we have done such a good job answering every question that's been asked of us. And I hope at this point, with a beat and raise this quarter, a large ample pipeline of build-to-suits and regular way deals pushing growth in this year and next, a portfolio that's performing incredibly well, a watch list that's in great shape, headlines in the watch list that are far more noise than actual pain that we'll start to see that change. We have a stock repurchase plan in place. It's a tool that I and the Board have always thought is important to have in our toolkit. It's not one that I hope I ever feel the need to use. But if our stock trends in a way that doesn't make a lot of sense relative to what we believe the value of this company is and what the relative value of our stock is, it's certainly something that we could. But again, I hope it's a tool that I never have to use and that we start heading in the right direction in terms of the stock price, getting into the flywheel effect because with that, we could really supercharge this growth and push this company into a fantastic spot for our shareholders.

We have a follow-up from Caitlin Burrows with Goldman Sachs.

Just a quick clarification or confirmation on the build-to-suit process. Is that something that you coordinate, negotiate, finalize with the tenant or with a third-party developer that has identified the development need? Or could it be either?

It can be either. We've got direct build-to-suit deals that we're doing in Sierra Nevada is a great example where we're directly working with that tenant on that project. Often, the tenant is brought by our developer partner, and so we're working with them hand-in-hand in negotiating the transaction.

We now turn to Unidentified Analyst with Citizens Capital.

I just wanted to hear your thoughts on why the escalators for recent build-to-suit projects are much higher? Is it more of a project-based thing or just maturity of BNL strategy here?

It's a little bit of both. We've been seeing higher escalators in industrial for a little while now. There was a very brief period of time where escalators in industrial really got compressed in that like 2021, early '22 time frame, but it's pushed out. So although the weighted average escalators across our portfolio is about 2% as you pointed out, you can see in our schedule and in terms of the deals that we've been doing, we're more consistently somewhere in between 2.5% and 3% on new deals that we're doing, both in terms of regular way acquisitions for industrial and then particularly in the build-to-suit.

We have no further questions. I'll now hand back to John Moragne for any final remarks.

Great. Thank you, Elliot, and thank you all for your time today. If you have any questions or would like to dig in deeper into what we're doing at BNL, we would love to have the opportunity to talk with you about this company, this management team and this differentiated strategy. We will be on the road with a handful of NDRs, investor meetings and conferences during August with more to come in September. If you'd like to meet with us, whether virtually or in person, please reach out, and we'll get something on the calendar. Have a great rest of the summer, everyone.

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.