Nnn REIT, Inc. (NNN) Q2 2026 Earnings Call Transcript

Greetings. Welcome to the NNN REIT, Inc. Second Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Steve Horn, CEO at NNN Re-Inc. You may begin.

Thanks, Molly. Good morning, and welcome to NNN. It continues to produce strong results, including high occupancy, impressive rent collections with under five basis points. We're well-positioned to continue enhancing shareholder value as we move into the second half of the year and beyond. Marking 2026 is our 37th consecutive year of annual dividend increase. 70 U.S. public companies, consistent performance in 2026, about $3.55, second guidance increase, ending multi-year. As far as the portfolio performance, at 99.1, we see positive momentum across in mid-July. Acquire Pet Boys for approximately $700 million of cash, and it's one of the nation's leading automotive services. Acquire Bell Tire. More importantly, an average of leased three new properties, and a new son originating direct sale leaseback, future investments utilizing our landlord-friendly, long-term duration, risk-adjusted opportunities. As far as dispositions, during the quarter, we sold 26 properties, including 19 vacant assets, generating approximately $37 million in proceeds. The income-producing assets were primarily non-core properties that were sold at cap rates approximately 170 basis points below our acquisition. Income-producing real estate, we're lifting disposition range by a quality portfolio that is positioned to generate stable and growing capital. recycling capital from non-core assets, investment opportunities, long-term earnings. I don't want to take all of Vince's thunder, but the balance sheet remains among the strongest in the net lease sector and continues to provide significant financial flexibility. We're focused on finishing 2026 strong and positioning head and end for continued success over years ahead. With that, I'll pass it over to Vin. He can go through our quarterly numbers in detail.

Let's start with our customary cautionary statements. During this call, we will make certain statements that may be considered forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed that could cause actual results to differ from expectations are disclosed in greater detail in the company's filings with the SEC and in this morning's press release. FFO of 90 cents per share and core FFO of 89 cents per share, up 5.9% and 6.0% respectively over the prior year. Results were ahead of our internal projections, with upside driven primarily by lower-than-expected bad debt, which totaled about two basis points of quarterly ABR, reducing net real estate expenses, 5.8%, while our cash G&A margin was $459 million on the back of our strong acquisition volumes. The better-than-budgeted credit loss year-to-date has been swapped to an attractive on the ATM in the second quarter, proceeds of about $73 million from a modeling perspective, which combines with our $215 million of it. Regarding the balance sheet, we had no income, 2.5% of our annual dividend, healthy 69%, And a half a million dollar decrease in expected net real estate expenses, resulting from a faster than planned reduction and half assumptions unchanged.

This time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star one to ask a question.

One moment, please, while we poll for questions. Your first question for today is from Ronald Camden with Morgan Stanley.

Great. Maybe we could start with the acquisitions. Obviously, the guide raise in the quarter. If you could talk a little bit about just what kind of activity that you're seeing. We did see sort of cap rates, you know, I think down 20 basis points from the cap rates in the first quarter. So we'd love to hear some what you're seeing on the trend and the competition as well, in addition to the volumes.

I mean, just us listing the acquisition volume from the original, not much of the price.

That's helpful. My second question is just on the portfolio health and sort of asset management. It seems like the bad death has been trending well below your expectations or even historical this year. So at this sort of juncture, what other sort of industries, what are you guys sort of watching out for? And is it fair to say at 99-plus percent occupancy, this is the best shape the portfolio has been in?

Historical perspective, because he has more of it than I do. But from my perspective, yes, it's the best shape that the portfolio has been since I've been here. But as far as watch list tenants, as I mentioned on my preparator march, we don't really have any material tenants that are on the watch list from a near-term perspective. We do talk about some tenants that have historically had some – they've been on the watch list for a long time, like AMC. Again, that's more of a movie theater thing. And quite honestly, the movie theater business has been doing quite well this year. Their box office is up pretty strongly and credit upgrade from S&P. So, you know, at least in the near term, things are fairly calm on that front. From a line of trade perspective, there's really, you know, we've never really had.

From Jana Gallen with Bank of America.

Thank you. Good morning and congrats on the quarter. Can you walk us through how you're thinking about your marginal cost of capital as you accelerate acquisitions? and then following up on the higher dispositions, are those mostly vacant or opportunistically low cap rates or kind of what is targeted for disposition?

We have seen an improvement on our cost of equity, which was nice to see, and so we were active on the ATM during the quarter. And so I think we're in good shape from a liquidity perspective. From a cost of capital, you know, our debt cost of capital is, one, we always think about things on a long-term basis. So, you know, thinking a 10-year debt, absolute hurdle that we think about. sort of in the 8-plus percent range, which is sort of a long-term view. And then, you know, from an earnings accretion, 40, you know, plus or minus. ...that we sold.

That was stronger, and it was primarily income-producing and the remainder.

Thank you.

Your next question for today is from Brad Heffern with RBC Capital Markets.

Thanks for the questions. Just following up on AMC, you know, the yields on the debt have improved a lot. As you said, it was upgraded by S&P. Do you see feeders trade at all right now, and might there be an opportunity to reduce exposure there just given, you know, it seems like the credit profile's improved?

Yeah, we sold, if you recall, we sold one actually in the first quarter. So we're always looking to reduce our exposure and looking at our exposure and the real estate risk.

And then on the guidance, the FFO guidance, all the underlying assumptions look like they moved in a positive direction, you know, from acquisition volumes to, you know, taxes to, well, everything. So what was the offset that kept the high end of the guidance from increasing along with the low end?

To narrow the range was appropriate.

The question is from Smeeds Rose with Citi.

Hi, thanks. You mentioned M&A activity that took place across the quarter. And I was just wondering, you know, when you've seen this in the past, do you have any sort of concerns around potential closings just as maybe, you know, competing stores overlap? And just sort of on that, there was some headline news, you know, earlier in the year around 7-Eleven looking to close some stores and leaning into a slightly different format. I'm just wondering if you've heard anything relative to your portfolio on that front.

No, as far as 7-Eleven, in 2025 we did a...

Very good. I appreciate it. Your next question is from Michael Goldsmith with UBS.

Good morning. Thanks all for taking my question. Just on the dispositions, I know you touched on a little bit on some were vacant, some was active portfolio management. Can you talk a little bit about, you know, more specifically what restaurants you were selling? And then also, are there more dispositions to be coming in the future quarters?

Yeah, good question. We have more dispositions. As far as the...

As a follow-up, you can increase your exposure to early childhood education. That's a category that some of the other children that Lisa have played in. So can you give a little bit more color on those acquisitions? And maybe the opportunity set that you're seeing and then any sort of, you know, has there been any cap rate compression in that space specifically?

As far as we've, last 15 years, we've seen our fair share of volume opportunities in the. Thank you very much.

Good luck in the back half.

Your next question for today is from Spencer Glimcher with Green Street.

Thank you. Sorry if I missed this, but just going back to the acquisition pipeline, You mentioned a few portfolios out in the market. Just curious if these would be new tenants, assuming you would land one or two of these bigger deals.

Yeah.

Great. And then just on the relationship-driven deals, which of your tenant segments are looking to grow the most aggressively right now? Is it still largely in the auto space, or is there any update there?

Yeah, it's primarily the auto space, convenience stores. you know where we're not seeing opportunity to be and then also you know the early challenge.

Thanks, that's all for me. Next question is from Rob Stevenson with Huntington.

Good morning, Vin. Back to the sort of guidance question, any other major levers other than transaction buying that pushes you to the bottom of the range versus the top of the range at this point of the year?

Welcome back. You know biggest drivers really bad debt is a big swing factor, and so things are pretty calm right now, but if that ticked higher, it's a little lower, although I think we have a pretty healthy cushion in our back half assumptions. Timing and volume of acquisitions is definitely a big driver, and then I guess to some degree timing and maturity in December of this year, and so how we deal with that and timing of when we deal with that could influence the numbers a bit. what's the best source of debt for you today and where's pricing if you wanted to do something to fix that yeah look I think we look at all opportunities and we're valuing a lot of different options and we do have plenty of liquidity to deal with it on the line of credit we have the two hundred seventy million of forward equity that we could but you know in all likelihood we are thinking about, you know, some kind of debt offering later in the year, 10-year debt today, way more rapidly than ever before, but I'd say we're probably in the mid-5 to 10-year debt.

Okay, that's helpful. And then last one for me, Steve, you guys have sold 35 vacant assets year-to-date, you know, in terms of what's still vacant in the portfolio, is the majority of that likely to be sales going forward, or is there a significant retenanting operation that's happening and that'll start to, you know, modestly impact earnings going forward? How should we be thinking about the remaining vacancy in the portfolio and how you guys are sort of addressing that in the near term?

Yeah, good question. Yeah, we, for the most part, have gone through what the – Thanks, guys.

I appreciate the time.

Your next question for today is from Wes Galladay with Baird.

Good morning, everyone. I just want to go back to the comment about cap rate compression. Is that primarily due to mix or competition? And then you did mention a few new tenants that you're looking at, and I know that's a big part of the growth engine for the out years. Are you finding a lot more tenants this year relative to last year?

A lot more, but as we give our acquisition, we'll go find a half.

And just one last one. apologize for this, but when a company is acquired, is there any chance you can maintain a relationship, or they just typically go find another source going forward?

Yeah, we do everything we can to maintain that relationship. It gives good works for NNN that we've done business with, but a lot of times we're the consolidator.

This is from Amateo Sanya with Deutsche Bank.

Yes, good morning, everyone. Congrats on the quarter and the solid outlook. I wanted to focus a little bit more on the dispositions and the guidance raised on that front. Obviously, you're getting great cap rates on this stuff, you know, well inside where you're acquiring assets. And, you know, clearly a win for you, but I'm still trying to understand how that pricing is coming about and why the buyer is kind of comfortable paying those prices, especially when you were talking about, again, some of you that's being underperformers, some of them being non-strategic, just trying to understand how that pipeline is existing against that kind of backdrop.

Yeah, that's a good question. One is our defensive opportunity where there's lease term or we can maximize the proceeds. There's sometimes that we do or they have other opportunities that we don't know or can't do, so they overpay for what we're getting. is the vacant asset, a little bit lower, but we've had a good recovery rate recently because of the inflation for a long time.

That's helpful. And then for the increasing acquisition guidance, could you kind of help us in regards to back half of 26 and kind of weighted average when you kind of think some of those deals could happen just to help us on modeling purposes?

Hey, I mean, we typically, you know, our live deals, Beyond that, we tend to be a little bit more conservative on the tail end of the quarter or mid-half.

All right. We look forward to you guys raising the high end of guidance and getting the stock back to $50.

As a reminder, if you would like to ask a question, please press star 1. Your next question is from John Masaka with D. Riley.

Good morning. Kind of a blue sky one, even more kind of in the back half of the call here. How are you kind of thinking about leverage, given it's not just unique to NNN, but kind of in an environment where your cost of equity capital has become a little bit decoupled from your cost of debt capital? So, like, does that create an opportunity to maybe, you know, lean more on that equity capital rather than going to debt markets, especially given you have kind of a successive series of maturities here over the next couple of years? Just kind of curious your philosophy on that, maybe where we are in the interest rate cycle and kind of the decoupling of not just you, but kind of a lot of re-equity valuations from interest rates.

I mean, I think that overall leverage, and we try to balance that. We are, you know, shooting for something plus or minus five and a half times is what we're shooting for, and we're comfortable going a little bit higher than that for a temporary period of time. but generally speaking, we try to manage right around five and a half. And so, you know, that's going to kind of dictate the mix between equity and debt more so than the cost of equity and debt. But, you know, because we can do things on a forward basis, you know, that gives us a really powerful tool to be able to issue equity, you know, when the price is right and, you know, draw it down. Sit here and say, well, you know, the cost of equity is much better. I think the cost of equity is not to deliver, but, you know, we're at roughly 13, 8 times.

Maybe kind of also within that, what's your kind of view on a little bit more floating rate debt?

On that last piece, isn't going to really move the needle on the total. I think our decision to leave the last $100 million floating was more driven by the fact that there's been so much volatility. A lot of the macro and geopolitical news that's been out there. And so we're just waiting for things to settle down a bit before we lock in that last piece. And I think the same goes for how we're thinking about a potential offering in the back half of the year on the debt side. You know, we are actively looking at, you know, hedging opportunities. And so, again, it's a little volatile right now, but as things settle down, you know, we are looking for opportunities.

I appreciate that, Collin. That's it for me. Thank you.

We've reached the end of the question and answer session, and I will now turn Nicole over to Steve for closing remarks.

Thanks for taking the time, and it ends in really good shape here, looking forward to closing out 2026 strong style of pipeline, and I look forward to running into you guys in the halls of the conference season coming up. Thank you.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.