Earnings Call Transcript - NNN Q2 2025

Operator, Operator

Good day, everyone, and welcome to the NNN REIT, Inc. Second Quarter 2025 Earnings. It is now my pleasure to turn the floor over to your host, Steve Horn, Chief Executive Officer of NNN REIT, Inc. Sir, the floor is yours.

Stephen A. Horn, CEO

Thank you, Matthew. Good morning, and welcome to NNN Second Quarter 2025 Earnings Call. Joining me today on the call is Chief Financial Officer, Vin Chao. As outlined in the morning's press release, NNN continued to deliver strong performance in the first half of 2025. Notably, we've improved our balance sheet flexibility following capital markets activity with a sector-leading average debt maturity of 11 years, solid acquisitions driven by our tenant relationships and we published the third and annual Corporate Sustainability Report. These results and actions position us well to continue enhancing shareholder value as we enter the second half of the year and beyond. Also, as usual, we always have to mention the dividend. In July, we announced a 3.4% increase in our common stock dividend payable August 15. This marks our 36th consecutive year of annual dividend increases, a milestone that places us among very few, less than 80 U.S. public companies and only 2 other REITs have achieved such a track record. Before we get into the operational performance and market conditions, I'd like to touch on a few key recent events. First, I'm thrilled to welcome Mr. Josh Lewis to the executive leadership team as our new Chief Investment Officer. Josh has been with the company since 2008 and has played a pivotal role from day one. Known for his prolific deal-making ability and deep market relationships, Josh ensures that shareholder capital is deployed towards the most compelling risk-adjusted opportunities. I'm fully confident we have the right person focused every day on driving long-term value for our shareholders. On the capital markets front, we successfully completed a $500 million 5-year unsecured bond offering with a 4.6% coupon. And true to form, the execution and timing of the deal in today's market environment were exceptional. More importantly, the transaction positions us strongly to continue executing our strategy moving forward. Given our continued strong performance, we are also pleased to announce an increase in our 2025 guidance for core FFO per share now expecting to range between $3.34 and $3.39. This update reflects the consistency of our multi-year growth strategy and the discipline with which we pursue long-term shareholder value. Turning to the highlights of NNN's second quarter financial results. Our portfolio consists of approximately 3,663 freestanding single-tenant properties, including 410 tenants across all 50 states, and is performing well. Our leasing and asset management teams are operating at a high level. During the quarter, we renewed 17 out of 20 leases. Those renewals align with our long-term historical trend of about 85%, while achieving rental rates 108% above prior rent. Additionally, the team successfully leased 7 properties to new tenants at rates 105% above prior rents, reflecting strong execution and ongoing demand for our assets. As we sit here today, I feel good about the overall health of the portfolio. There isn't a single tenant that currently gives me concern for keeping me up at night. We've had ongoing discussions with analysts and investors over many quarters regarding At Home, which finally officially filed for bankruptcy this past June. Regarding our exposure, none of our 11 properties were included on the initial closure list. Additionally, At Home remains current on all rent for all 11 locations post-filing. We feel positive about the long-term prospects for these assets as the company works through the restructuring. Acquisitions during the quarter, we invested just over $230 million in 45 new properties achieving an initial cap rate of 7.4% and an average lease term of more than 17 years. Notably, 8 of the 11 closings this quarter were with existing relationships, partners with whom we do repeat business. For the first half of 2025, we invested $460 million across 127 properties, achieving an initial cap rate of 7.4% and an average lease term of over 18 years. Based on our strong transaction volume year-to-date, we have raised the midpoint for our full year acquisition volume to $650 million. As one of the original net lease companies in the public markets, we have successfully operated through a wide range of economic and competitive cycles. While private capital has increasingly entered the space, raising competition, particularly for large portfolio transactions, we have consistently demonstrated our ability to execute in a highly competitive environment. We remain committed to a disciplined and thoughtful underwriting approach while continuing to emphasize acquisition volume through sale-leaseback transactions with our long-standing relationships. During the second quarter, we sold 23 properties, generating over $50 million in proceeds to be redeployed into new acquisitions. Year-to-date dispositions have reached 33 properties, including 14 vacant assets, raising over $65 million in proceeds. Importantly, the income-producing properties sold were not considered the gems of our portfolio, and we sold at approximately 170 basis points below our investing cash cap rate of 7.4%. This reinforces the strength of our underwriting and our ability to extract value from underperforming holdings. While the primary focus remains on re-leasing vacancies, where our leasing team continues to deliver strong performance, we will continue to dispose of underperforming assets when there is no clear path to generating stable rental income within a reasonable time frame. This disciplined approach supports portfolio optimization and enhances long-term shareholder value. Our balance sheet remains one of the strongest in the sector, supported by the average debt maturity of over 11 years I mentioned earlier, with nearly $1.5 billion in available liquidity, we are well-positioned to fully fund our 2025 acquisition targets and maintain flexibility for additional opportunities. The financial strength provides us with a significant competitive advantage as we continue to execute our growth strategy without the immediate need for external capital. With that, I'll turn the call over to Vin to walk through our quarterly results and provide more detail on the updated guidance.

Vincent H. Chao, CFO

Thank you, Steve. 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 laws. 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 are made. Factors and risks 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. Now on to results. This morning, we reported core FFO of $0.84 per share and AFFO of $0.85 per share for the second quarter of 2025, each up 1.2% over the prior year period. Annualized base rent was $894 million at the end of the quarter, an increase of almost 7% year-over-year. Our NOI margin was 98% for the quarter, while G&A as a percentage of total revenues and as a percentage of NOI was about 5%. Cash G&A was 3.7% of total revenues. AFFO per share for the quarter was slightly ahead of our expectations, driven primarily by lower-than-planned bad debt. Free cash flow after the dividend was about $50 million in the second quarter. Lease termination fees, as footnoted on Page 8 of the release, totaled $2.2 million in the quarter, or about $0.01 per share. This quarter's fees were in line with our expectations and were primarily driven by the termination of an auto parts store and a full-service restaurant. The auto parts store is under contract for sale, and the restaurant has already been re-leased and rent commenced to another restaurant concept, highlighting our proactive portfolio management strategy. From a watch list perspective, At Home is the major news for the quarter. We have been flagging At Home as a risk for some time, as we discussed on last quarter's call, we believe we have appropriately accounted for them in our outlook and expect the final resolution to be within our budget for the year. To reiterate what Steve said, none of our 11 stores were on the initial store closure list and given the quality of our locations, we have already received inbound interest from high credit retailers. Outside of At Home, there have been no notable changes to the watch list. Turning to the balance sheet. Just after the quarter ended, we significantly bolstered our liquidity and derisked our capital requirements for the rest of the year by closing on NNN's inaugural 5-year $500 million unsecured notes offering at an attractive 4.6% coupon. While this offering was earlier and larger than we were originally planning, given the positive market backdrop and strong investor demand, we decided to move forward with the deal. Pro forma for the offering, which closed on July 1, we had close to $1.5 billion of liquidity, no floating rate debt, and no secured debt. Our debt duration remained a sector-leading 11 years even after accounting for the new issuance. Our balance sheet is a source of strength, and we will continue to look for ways to utilize this competitive advantage to support growth while protecting downside risk. Also, given the positive momentum in the stock that we experienced at the end of the quarter, we issued 254,000 shares at an average price of just over $43 per share, primarily through our ATM program, raising roughly $11 million in gross proceeds. We will remain opportunistic in the equity markets and issue if and when we believe we can achieve an appropriate cost of equity relative to our deployment opportunities. On July 15, we increased our quarterly dividend to $0.60 per share, up from $0.58 per share previously, which equates to an attractive 5.6% annualized dividend yield and a healthy 71% AFFO payout ratio. As Steve mentioned, NNN has now raised its annual dividend for 36 consecutive years. The ability to grow the dividend through various economic cycles and black swan events is a true testament to the strength of NNN's platform and its strategy. I will conclude my opening remarks with some additional comments regarding our updated outlook. We are raising core FFO per share guidance to a new range of $3.34 to $3.39 and AFFO per share to $3.40 to $3.45, each up $0.01 at the midpoint. This reflects our outperformance versus plan year-to-date as well as updated assumptions over the balance of the year. We now expect to complete $600 million to $700 million of acquisitions, up $100 million from our initial expectation. We are also increasing our disposition outlook by $35 million to a new range of $120 million to $150 million. And lastly, you will notice that we increased our net real estate expense forecast, which is a result of delays in the expected timing of the release of certain properties as we balance the impacts on near and long-term earnings. Despite this headwind, we are still in a position to raise overall earnings guidance for the year. From a bad debt perspective, we continue to embed 60 basis points of bad debt for the full year into our outlook, which includes about 15 basis points booked through the second quarter. As you update your models, there are a few other items to point out. As noted earlier, we booked $2.2 million of lease termination fees in the second quarter, which is well below the first quarter level of $8.2 million, but still above what I would consider a typical quarterly amount. Also this quarter, we took some non-cash write-offs of accrued rent and below-market rent related to At Home that in total added about $660,000 of income to core FFO, which should be excluded from the forward run rate. These non-cash items had no impact on reported AFFO. With that, I'll turn the call back over to Matthew for questions.

Operator, Operator

Your first question is coming from Jeff Spector from Bank of America.

Jeffrey Alan Spector, Analyst

Great. Regarding the investment guidance, I see that you raised it, which suggests a slower pace in the second half. I wanted to confirm what is driving that implied deceleration. Is it due to market opportunities, which appear to be strong? You mentioned increased competition and capital allocation, or is it just a reflection of cautious outlook?

Stephen A. Horn, CEO

Yes. I mean given what we did in the first half, yes, I see it suggests slower activity. We don't have any visibility to the fourth quarter. So we don't want to get over our skis. Third quarter is feeling pretty good right now. But everything you mentioned, the heightened competition overall, the market seems fairly robust, but it's more probably being conservative.

Jeffrey Alan Spector, Analyst

It seems that 8 out of the 11 acquisitions were previously established relationships. Could you discuss the new relationships and the potential opportunities they present?

Stephen A. Horn, CEO

Yes, we won't disclose the few cases that did not involve relationships. Our acquisition team has had ongoing efforts for many years, and that has led to opportunities. These cases were in the auto service sector. We define a relationship as consisting of repeat business, so we need to complete one or two transactions before considering it a relationship.

Vincent H. Chao, CFO

But Jeff, just to add to that, Steve, to your point, I mean, I think in any business, you want to have a good mix of existing deal volume as well as new volume. And so the new relationships do open up additional opportunities in the future. So we're hopeful that, that can continue.

Operator, Operator

Your next question is coming from Spenser Glimcher from Green Street.

Spenser Bowes Glimcher, Analyst

I'm just curious if you could provide an update on the available assets, either being marketed for sale or trying to re-tenant. I know last quarter, you mentioned there was significant interest for these properties from strong national and regional tenants. So just curious how that process has been going.

Stephen A. Horn, CEO

Yes, as you might expect, the main contributors were the former Badcock furniture store and a significant number of restaurants from the Frisch's assets. Frisch's operated for over 60 years, resulting in numerous infill locations, which is where the strong demand is coming from, including convenience stores, car washes, and collision repair services. There remains a high demand for these assets. Initially, there were 64 assets, with 28 of them being actively worked on for re-leasing. Out of the remaining 36, 4 have been sold or leased, 24 are in active negotiations at various stages, and 8 have seen limited activity. We are observing positive signs with these assets, particularly the 36. We anticipate that rent recovery will surpass historical averages, which would be around 70%. Regarding the Badcock furniture assets, we are exceeding our expectations. There were 35 of those assets, 19 have achieved over 100% rent recovery, 12 are pending and are tracking for more than 100% recovery, and 4 still require additional work. However, even considering a conservative outlook for those 4, we expect the total recovery for the furniture assets to exceed 100%.

Spenser Bowes Glimcher, Analyst

That's very helpful. And then just last one. Cap rates are in line with 1Q. Can you just talk about what you're seeing thus far in 3Q?

Stephen A. Horn, CEO

Yes. In the 1Q call, like I said, second Q was going to be pretty flat, and we are right there. Third quarter, I'm really not seeing any movement either way. It depends on the mix of closings in the quarter. However, I think, give or take, 5, 10 basis points either side could happen.

Operator, Operator

Your next question is coming from Ronald Kamdem from Morgan Stanley.

Unidentified Analyst, Analyst

This is Jenny on for Ron. First is regarding your November 2025 debt maturity approaching like can you talk a little bit more about your specific refinancing strategies and so forth?

Vincent H. Chao, CFO

Jenny, this is Vin. Yes, so we looked at that. And really, we did the $500 million deal on July 1, and that kind of prefunded that refinancing. And so we are sitting on a bit of cash right now as we work through acquisitions. But ultimately, those funds will partially be used to repay the $400 million of financing. And then we may be back in the market later in the year if you just think about our normal cadence of acquisitions based on the new $650 million of acquisition volume at the midpoint, at 40% debt that's, call it, $250-ish million of net new debt that we would need. So we funded some of that with the $500 million. So we may be back in the market for a smaller amount later this fall.

Unidentified Analyst, Analyst

Perfect. Second one regarding the average time from like a vacant property to be released, like maybe talk a little bit more about how does this like timeline compare with your historical average of 9 to 12 months.

Stephen A. Horn, CEO

Yes, the 9 to 12 months is when we typically start seeing rent payments, although we will initiate activity within about 30 to 40 days of marketing the property. However, when it comes to selling or re-leasing, there are often contingencies in the contracts that must be resolved before rent payments begin. If the property requires redevelopment, that’s when the 9 to 12 month timeframe becomes particularly relevant. We are currently exceeding our expectations with the furniture assets, as they have been moving much faster than our historical averages. The locations for the restaurants are also very promising, so the 9 to 12 month timeline remains relevant due to the redevelopment efforts with major regional operators.

Operator, Operator

Your next question is coming from Smedes Rose from Citi.

Nicholas Gregory Joseph, Analyst

It's Nick Joseph here with Smedes. Maybe just starting on the bad debt. You talked about 60 basis points bad debt embedded in guidance still with only 15 basis points booked thus far. And you also mentioned that there's no tenants keeping you up at night. So just trying to kind of understand the kind of keeping the 60 basis points for now.

Vincent H. Chao, CFO

Yes. Nick, it's Vin. I'll start, and I'll let Steve jump in if he has anything to add. But really, as we think about the bad debt, we booked 15, so we've got 45 basis points to kind of play with, if you will. We are still dealing with At Home. It's in bankruptcy. So we don't exactly know where that's all going to shake out. We're pretty happy with the progress so far. We don't have anything on the initial closure list. And as we've talked on past calls, we feel pretty good about the real estate and the rents that are embedded there, which are only $6.50 per square foot. So we feel good about our position, but they are in bankruptcies, and we have to keep some dry powder in case something goes wrong on that front. I think typically, we do have between 30 and 40 basis points of bad debt in any given year. And so we still have 2 quarters left to go, and so we just don't want to, again, just similar to our investment thesis, we're not trying to get ahead of ourselves in terms of bad debt just knowing that there's At Home out there, plus there's always normal turnover.

Stephen A. Horn, CEO

None of the tenants are keeping me up at night, meaning any substantial tenants, but just to reiterate what Vin said. We do deal with retailers and 60 days from now, something might shift. So it's prudent to leave some of the bad debt in there.

Nicholas Gregory Joseph, Analyst

That's very helpful. And then maybe just back to cap rates. I mean, you mentioned kind of capital coming in, chasing larger volumes. How is portfolio pricing relative to individual assets right now? Are you seeing that spread widen a bit?

Stephen A. Horn, CEO

I would say, I've seen the spread widen. I think with the new money coming into the sector, again, we've been doing this a long time, and we've seen competitors come and go, that I still think there's a pretty good portfolio premium on certain deals in that kind of $100 million to $200 million range, which is a nice bite, but there's a lot of capital chasing that we saw a handful of portfolios go off in the 6.5%, 6.75% range. And that's trying to retail levels on the individual assets.

Operator, Operator

Your next question is coming from John Kilichowski from Wells Fargo.

William John Kilichowski, Analyst

Maybe just on the composition of the guidance raise, how much of that was driven by the actual increase in acquisitions versus then you noted that termination fees kind of came back slightly more normalized but still above what you all were expecting. I know you haven't given a specific number, but maybe if you could size that for us?

Vincent H. Chao, CFO

Yes, John, it's Vin. To clarify my earlier remarks, the $2.2 million we recorded this quarter was anticipated and included in our guidance from last quarter. While that figure is above historical levels, it has decreased from the first quarter. Regarding the upward revision to guidance, there are several factors at play. We see an uptick of around $0.005 in AFFO, slightly less than that for the first half, but we also faced an increase in net expenses of just over $0.01, which is a challenge for our guidance. Additionally, we are experiencing a small downside of about $0.005 from the bond offering compared to our original guidance. Currently, we have some cash on hand, which is earning a decent rate, though not as favorable as our interest payments. This creates a bit of a headwind for us. On the acquisition front, we've been ahead of schedule regarding timing. Conversely, in our disposition guidance, we've typically assumed income-generating assets, but this year, about half of our dispositions have been vacant, which contributes to our overall performance as well.

William John Kilichowski, Analyst

Got it. That's helpful. And then maybe just from a composition standpoint, can you talk about the sectors that you're targeting on both the acquisition and the disposition side?

Stephen A. Horn, CEO

Yes. I mean the disposition side, it's more communicating with individual tenants. Just, for example, you saw that our Camping World exposure dropped by a couple because those are some assets that weren't performing for Camping World. They weren't in the long-term plan. So we sold some assets back to them. So that's good for NNN and good for the tenant relationship. As far as acquisitions, I think going forward, the auto service sector still seems to be the most robust activity if it's M&A or growth. And I think also we're starting to see some activity in the QSR restaurants.

Operator, Operator

Your next question is coming from Michael Goldsmith from UBS.

Michael Goldsmith, Analyst

The leverage ratio increased slightly during the quarter. Is this due to a temporary pay down of the line of credit, or is it something else? As you take on the role of CFO, how are you approaching the target leverage ratio or the desired leverage level for the business?

Vincent H. Chao, CFO

Michael, thanks for the question. Yes, I think from a quarterly leverage level of 5.7%, so it ticked up a little bit from the first quarter. That really has more to do with timing of acquisitions and dispositions. We did a little bit of equity in the quarter, but it's really the earlier acquisition timing. And so part of our initial plan obviously includes the benefits of the free cash flow. But because we're buying ahead of plan, that's causing us to have a little bit of a bump-up in leverage here in the near term. In terms of longer term, how do I think about leverage? I mean, lower is better, obviously. We'd love to be operating, I would say targeting less than 5.5x, to put an exact range, it's hard to say. But certainly, if we're in the 5-ish range, that would give us a little bit more capacity to kind of lean in when opportunities arise. And so I'd love to get it down below 5.5x here shortly.

Michael Goldsmith, Analyst

Got it. And just while I ask you then, you have done a 5-year bond issuance here, so a little bit more shorter term than you've done in the past. Can you just talk a little bit about the benefits of that and how you plan to use that kind of shorter-term debt going forward?

Vincent H. Chao, CFO

Yes. I believe it primarily comes down to managing our assets and liabilities. Our debt duration is approximately 11 years, down from 11.6 years last quarter. Our average lease duration is just under 10 years, around 9.8 years. This indicates that we have some flexibility to take on short-term debt to align our asset and liability profiles. Additionally, we analyze our maturity ladder to identify gaps. We did notice a gap in the 5 to 5.5-year range. Therefore, our strategy focuses on addressing this gap while effectively managing our assets and liabilities.

Operator, Operator

Your next question is coming from Rich Hightower from Barclays.

Richard Allen Hightower, Analyst

Just a quick one for me. We just noticed, I think, quarter-over-quarter, the ABR that's on sort of a cash basis payment ticked up from the first quarter, not so much year-over-year, but quite a sequential jump, and then likewise, kind of a big jump in terms of the GLA on cash. And so my question there is, is that just related to At Home? Or is there anything else kind of in the moving parts that we should be aware of?

Vincent H. Chao, CFO

Yes, Vin here. Almost all of that is At Home. If you remember, we are up a little over 1% quarter-over-quarter on cash basis ABR. At Home represents a larger share of our ABR and, naturally, a bigger percentage of our GLA due to the size of the boxes.

Operator, Operator

Your next question is coming from Wes Golladay from Baird.

Wesley Keith Golladay, Analyst

Just a quick question on the deal flow. Are you starting to see your partners get more active on their business now that they have visibility on taxes and potentially more visibility on tariffs?

Stephen A. Horn, CEO

Yes. I think it's a good question. I think there's better visibility on the tariffs and the conversations that we have with our tenants. But I don't think they're quite there yet that they're ready to ramp up the pre-levels going back to 2018, 2019. But we are starting to see inquiries come in about funding new builds, kind of a one-off here and there. However, we do see some M&A activity picking up where buyers are able to underwrite the cash flow and the quality of earnings.

Vincent H. Chao, CFO

Sorry just to add to that. I mean, Steve mentioned earlier that auto services is pretty robust right now. And I can't say with certainty that, that's because of tariffs, but to the extent that it costs a lot more to buy a new car, we should think it's logical to assume that that's going to help our auto services business on the repair side as well as auto parts, which was more of a self-help, kind of DIY.

Wesley Keith Golladay, Analyst

Yes. That makes sense, even why I got you. When we look at your, call it, nearly $900 million of ABR some of the Badcock and the Frisch that you resolved. How should we think about the timing of commencement for some of that, I guess, we call it sign-out open pipeline?

Vincent H. Chao, CFO

That's a good question. It's definitely not something that we track as closely as we did in the shopping center space. But for the most part, most of the ABR is commenced. We don't have a ton of sign that open per se, as on top of my head, I can't think of any major tenants that have not commenced that are not in that ABR number we gave you.

Operator, Operator

Your next question is coming from Omotayo Okusanya from Deutsche Bank.

Omotayo Tejumade Okusanya, Analyst

Steve, I was hoping you could just kind of walk us through, again, I know you kind of mentioned new tenants are kind of 'keeping you up at night.' But I was hoping if you could kind of talk through getting some of the retail categories that are still kind of seeing pressure whether it is competition, whether it's just concepts time, whether it's tariffs, what have you. But just again, a couple of thoughts around restaurants and drug stores and even furniture and consumer electronics and we get hit by tariffs. How are you thinking about that? How do you kind of think about 60 basis points debt may be covering any of that risk?

Vincent H. Chao, CFO

Tayo, it's Vin. Good to hear from you. I'll start with some comments specific to different lots, as it's easier than evaluating each one extensively. Some areas are likely more affected by tariffs and related uncertainties than others. Fortunately, about 85% of our tenant base consists of necessity and service-based businesses, which may lead to a less direct impact from tariffs, resulting in more of an indirect economic effect if any exists. Regarding restaurants, there are always varying performances within the sector. For instance, Chili's is currently doing exceptionally well, while other chains like Texas Roadhouse are not performing as strongly. The key factor is whether a restaurant offers a compelling product that brings customers in. This pattern of winners and losers exists not only among restaurants but across various sectors. As pressure mounts on weaker businesses, there's an opportunity for stronger ones to gain market share, and we are witnessing this. For example, Camping World, one of our significant tenants, faced reduced exposure this quarter. Their earnings reports indicate they are under pressure regarding average selling prices and specific parts of their business, especially new sales. However, they command a strong used business and are focusing on active segments of their customer base. Consequently, they continue to generate EBITDA and top-line growth. The question is whether they can adapt to changing market conditions. It's not as straightforward as stating that tariffs will always negatively affect tenants, making a comprehensive assessment of an entire trade line good or bad. Moreover, gaining clarity on economic conditions, tariffs, job growth, and overall confidence in decision-making would benefit all trade lines.

Operator, Operator

Your next question is come from John Massocca from B. Riley.

John James Massocca, Analyst

Apologies if this was already kind of addressed. But was there something specific that drove the increase in non-reimbursed real estate expenses? And is that tied to maybe some of the former Frisch's properties and the timing you're thinking about with resolving those vacancies or even just baking in some conservatism given At Home situation? Just kind of curious why that ticked up related to a specific tenant? I know you kind of called it out a little bit in the prepared remarks.

Vincent H. Chao, CFO

John, I think without calling out specific tenants, I think you're spot on. I mean, definitely a little bit slower resolution of certain vacant properties that we are dealing with. And I think part of it is we are seeing a lot of good demand. And so we have some options and deciding, hey, do we want to re-lease it immediately? Or is there maybe a higher credit or a better long-term value play that we can take that maybe takes a little longer to lease up, but ultimately ends up better for us and for shareholders. And so we've made some decisions to delay certain openings to, again, try to come up with a better long-term solution.

John James Massocca, Analyst

Okay. Does that indicate maybe in terms of resolving some of these vacancies, there's more of a leasing angle you're taking or vice versa, maybe more of a disposition angle, and that's kind of what's driving the differentiated timing versus what you were expecting at 1Q?

Stephen A. Horn, CEO

Yes. I mean I think things are moving a little slower on a handful of the assets than you would like. That's just real estate, if it's the permitting process. But yes, I think you're probably right as far as the timing leasing route on some of the assets that is creating a little bit more carry cost than they originally thought. But again, in the big picture, it's in a pretty small number as far as the impact on our financials. But in the long run, it will create the most shareholder value.

John James Massocca, Analyst

Okay. And then you addressed a little bit earlier in the call with regards to kind of your philosophy. But when you think about maybe issuing debt on a 5-year basis versus 10-year, is that something you're comfortable doing again, given what you're seeing today in the maturity window? Obviously, it's pretty attractive from a pricing perspective. So just curious, given there's potentially some additional financing needed if not later this year than next year.

Vincent H. Chao, CFO

Yes. Look, I think the guidepost here is not necessarily, hey, we want to have short-term debt or we're trying to get the lowest cost of debt. I mean, obviously, it is cheaper on the shorter end of the scale, so that's a benefit. But I go back to just trying to balance our assets and liabilities. So we've got 11 years of duration on the debt, and we've got under 10 years of duration on the leases. There is a bit of a mismatch there. And so to some degree, I think that gives us flexibility to opt for shorter-term debt if it makes sense with regard to all the other decisions we have to make and all the other factors we have to consider. But ideally, I'd love to be issuing longer-term debt on a consistent basis, but we do have a bit of a mismatch between assets and liabilities. And so again, that gives me some opportunity to do some short-term debt here.

Operator, Operator

Your next question is coming from Linda Tsai from Jefferies.

Linda Tsai, Analyst

Sorry. Maybe you alluded to this somewhat in your response to the earlier question. In terms of line items running slightly above the historical average lease term fees and net real estate expenses, is your expecting these trends conclude by year-end? Or could it continue potentially next year?

Vincent H. Chao, CFO

Yes. On the lease termination fees, Linda, I mean, I think historically, we talked about $2 million to $3 million, but it's certainly been higher than that over the last, call it, 2 years or so. Part of that is we have been actively managing the portfolio and trying to look for opportunities to address problems before they come to a head. And so the dark paying and sublease tenant list, those are the ones that we kind of fish around for these lease terminations to try to address them. And as we talked about on this call, the 2 biggest deals that we did this quarter, we had resolution for both of them by the time we did the lease termination fee, and that's the kind of outcome that we're looking for. So it might be elevated for the next year or so. But I don't think it will be the same as the last 2 years, but it could be higher than the $2 million to $3 million in the next year or so. And then in terms of the net real estate expenses, yes, I think we'd hope to by the end of the year, be back to a bit more of a normal level of real estate expense net, which is, call it, $13 million to $14 million on an average year. And then obviously, that grows every year just from an inflationary perspective, but that is our hope.

Stephen A. Horn, CEO

Yes, exactly. It's just with the tenants that we're working with, just holding the assets a little bit longer trying to maximize value of rent.

Linda Tsai, Analyst

Makes sense. And in terms of your ability to extract value from underperforming holdings, could you just give us some more color on how you achieve this?

Stephen A. Horn, CEO

I believe it's important to have discussions with our tenants, particularly as lease terms are nearing their end, since they may choose not to renew. Our strategy is to sell properties that still have lease terms attached, which are more appealing to potential investors, instead of allowing them to remain vacant, where we would only recover a small percentage. If there’s still some lease term left, it’s beneficial to sell these income-producing assets in the 1031 market, while also focusing on actively managing our portfolio to strengthen it over time.

Operator, Operator

Thank you. That does conclude our Q&A session. I will now hand the conference back to Steve Horn, Chief Executive Officer, for closing remarks. Please go ahead.

Stephen A. Horn, CEO

Thanks for joining us this morning. NNN, we're in great shape for the remainder of the year, opportunistic, hopefully. And we look forward to seeing many of you in person in the fall conference season. Take care. Talk to you.

Operator, Operator

Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.