Earnings Call Transcript - NNN Q2 2022

Operator, Operator

Good morning, everyone, and thank you for joining the National Retail Properties Second Quarter 2022 Earnings Call. I am pleased to introduce your host, Steve Horn, CEO. The floor is yours, Steve.

Steve Horn, CEO

Thank you, Ali. Good morning, and welcome to the National Retail Properties Second Quarter 2022 Earnings Call. Joining me on the call is Chief Financial Officer, Kevin Habicht. As this morning's press release reflects National Retail Properties performance in 2022 continues to produce strong results, including continued high occupancy, impressive recons, and solid acquisitions driven by our proprietary tenant relationships. We are in a position to continue enhancing shareholder value as we move into the second half of 2022 and beyond. In July, we announced roughly a 4% increase in our common stock dividend to be paid on 15 August, thus making 2022 our 33rd consecutive annual dividend increase. National Retail Properties is one of the select companies of under 90 U.S. public companies, including only two other REITs, which have achieved this impressive track record. Based on our continued consistent performance, we announced today a further increase in our 2022 guidance of core FFO per share to a range of $3.07 to $3.12 per share. Our long-standing strategy is designed to deliver consistent per share growth on a multiyear basis. This discipline of long growth is reflected in our second guidance increase this year. Turning to the highlights of National Retail Properties second quarter financial results. Our portfolio of 3,305 freestanding single-tenant retail properties continues to perform exceedingly well, maintaining a high occupancy level of 99.1%, which remains above our long-term average of 98% plus or minus a fraction. We also collected 99.7% of the rents due for the second quarter. Staying a little bit more on rent collections: the rent deferrals that we provided to select tenants during the early days of the pandemic continue to track as we expect. At the end of 2022, 87% or $49.5 million of the original $56.7 million deferred rent will have been paid back, which is 100% that is due at the time. While we continue on the topic of the portfolio, Dave & Buster’s moved into our top 10 tenants with the acquisition of one of our top 15 tenants' main event in June. With regard to acquisitions, during the quarter, we invested just north of $150 million in 43 new properties at an initial cap rate of 6.2%, with an average lease duration of over 19 years, with 14 of the 16 deals coming from relationship tenants with whom we do repeat programmatic business. In the first half of the year, we invested over $350 million in 102 new properties with the initial cap rate of 6.2%, with an average lease duration of 16.7 years. In an environment where cap rates are still near historic lows but showing signs of adjusting, we continue our thoughtful and disciplined underwriting approach. NNN will continue to emphasize acquisition volume through sale-leaseback transactions with our stable of relationship tenants. Based on our pipeline and dialogue with our partners, we remain comfortable with our ability to meet and hopefully exceed our '22 increased acquisition guidance of $600 million to $700 million, primarily via direct sale-leaseback deals with our company's long-duration, triple-net lease form, which is more landlord-friendly than a 1031 market deal. During the second quarter, we also sold 8 properties, raising almost $8 million in proceeds to be reinvested in new acquisitions. Year-to-date, we have now raised $28 million in proceeds from the sale of 18 properties, including 11 vacant. Although job one is always to release vacancies and our leasing team does an outstanding job of it, we will continue to sell nonperforming assets if we do not see a clear path to generating rental income within a reasonable timeframe. Our balance sheet remains one of the strongest in the sector. Our credit facility has plenty of capacity with only a balance outstanding of approximately $40 million, and we have no material debt maturities until mid-2024. NNN is well positioned to fund our 2022 acquisition guidance. In closing, I'd like to thank our associates for their dedication and hard work putting NNN back to pre-pandemic momentum as we look to finish 2022 strong and position NNN for success over multiple years in the future. With that, let me turn the call over to Kevin for more color and detail on our quarterly numbers and updated guidance.

Kevin Habicht, CFO

Thanks, Steve. As usual, I'll start with the cautionary note that we will make certain statements that may be considered to be forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not release provisions to these forward-looking statements to reflect changes after the statements were made. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in this morning's press release. With that, headlines from this morning's press release report quarterly core FFO results of $0.79 per share for the second quarter of 2022. That's up $0.09 or 12.9% over the second quarter of 2021, and that's up $0.02 or 2.6% from the immediately preceding first quarter of 2022. First half year-to-date core FFO results were up 11.4% to $1.56 per share. Today, we also reported that AFFO per share was $0.81 per share for the second quarter. That's up $0.02 from the immediately preceding first quarter's $0.79. We did footnote second quarter AFFO included $1.7 million of deferred rent repayments in our accrued rental income adjustment for the second quarter, without which that would have produced an AFFO of $0.80 per share for the quarter. And likewise, for the first half of 2022, AFFO included $3.5 million of deferred rent repayments in our accrued rental income adjustment for the first half, without which would have produced an AFFO of $1.58 per share for the first half of 2022, which on the same basis compares to $1.43 per share for the first half of 2021, and that represents a 10.5% increase year-over-year. As the scheduled deferred rent repayments continue to taper off from the peak levels in the first half of 2021, we are seeing improved results kicking in from 2021 and 2022 property acquisitions. I will also note that we took a $2.7 million charge in the second quarter in connection with the retirement of our CEO in April, and that was excluded from our core FFO and AFFO calculations. Excluding deferred rent repayments, our AFFO dividend payout ratio for the first half of 2022 was about 67%. And with the recent dividend increase, it should run approximately 68% for the full year 2022. All that suggests that we will create approximately $180 million of free cash flow after the payment of all expenses and dividends for 2022. And as we've discussed with investors, we burden this free cash flow at a cost of 8% for purposes of making capital allocation decisions and new properties. So there's nothing free about it in our mind, but it is a significant part of the equity need for, say, $600 million of acquisitions, especially if you couple it with $100 million of proceeds from dispositions. Occupancy was 99.1% at quarter end. That's been, as Steve mentioned, consistent with recent quarters. G&A expense was $9.7 million for the quarter. That is down from second quarter year-ago levels. Today, we did increase our 2022 core FFO per share guidance from a range of $3.01 to $3.08 per share to a new range of $3.07 to $3.12 per share. Similarly, we increased our AFFO guidance to a range of $3.14 to $3.19 per share, which reflects the scheduled slowdown in deferral repayments in 2022, as noted on Page 13 of the press release. The guidance midpoint for both core FFO and AFFO were increased by $0.05 compared to previous guidance. The supporting assumptions for our new 2022 guidance are on Page 7 of today's press release and are modestly fine-tuned from last quarter's guidance. We are, as I mentioned, excluding any executive retirement charges from our guidance, and 2022 acquisition volume was bumped up by $50 million. As usual, we don't give any guidance on our assumptions for capital markets activity, except for the general assumption that we intend to behave in a fairly leverage-neutral manner over the long term. The most important takeaway from all this is that we expect to grow core FFO per share results in 2022 by about 8% to the new guidance midpoint. Switching over to the balance sheet, the second quarter was quiet in terms of capital markets activity. We were very active in the debt markets in 2021 and are not unhappy to be on the sidelines at the moment. We did issue a modest amount of equity, $32 million during the second quarter, and ended the quarter with only $40 million outstanding on our $1.1 billion bank credit facility despite investing $365 million in the first half of the year. So our liquidity remains in excellent shape. Our weighted average debt maturity is now 14.2 years, which seems to be among the longest in the industry. Our next debt maturity is $350 million with a 3.9% coupon due in mid-2024. And all of our outstanding debt is fixed rate with the exception of that $40 million on our bank line. Net debt to gross book assets was 40.9% at quarter end. Net debt to EBITDA was 5.4x at June 30. Interest coverage and fixed charge coverage was 4.7x for the second quarter. So we're in very good shape to produce strong core FFO per share growth with our 2022 guidance suggesting about 8% growth to a midpoint, importantly, without any heroic assumptions. Our focus remains on growing per share results over the long term. We think the asset growth-focused acquisition volume contest in many sectors in recent quarters may be slowing a bit or at least getting a little more disciplined on price. If so, we think renewed investor focus on per share results and managing balance sheet will accrue to our benefit. But time will tell. While there is currently an increased level of economic and capital market uncertainty, we are well positioned for such. So I'll close it there. And Ali, with that, we'll open it up to any questions.

Operator, Operator

Your first question is coming from Brad Heffern.

Brad Heffern, Analyst

Bradley Heffern from RBC. Can you talk about how much cap rates have moved? And has there been much of a difference across the industry or across credit quality?

Steve Horn, CEO

We're beginning to notice shifts in cap rates, particularly in the latter part of the quarter. Movement has started to occur, especially since the rise in interest rates has led to a withdrawal of private equity funds from the market. As interest rates continue to climb, some institutions in the net lease sector are setting their thresholds around a 7 cap or the high 6s, which has resulted in reduced competition in our market. We're observing about a 20 to 25 basis point change in the asset quality we aim for, specifically in sale-leaseback transactions. More significantly, we maintained a long-term average of 19 years in our triple net lease arrangements for the quarter.

Brad Heffern, Analyst

Okay. And then any thoughts on the amount of exposure that you have in the tenant roster to variable rate debt and whether that represents a potential credit risk as that flows through?

Kevin Habicht, CFO

Yes. No, we don't feel like we have any notable exposure. It's really only the $40 million out of our $3.8 billion of debt. It's only $40 million related to our bank credit facility. So we don't feel like we have any real exposure at all to variable interest rate risk.

Brad Heffern, Analyst

Sorry, Kevin, I meant at the tenant level. So like tenants who have variable rate debt in their capital structure. And so perhaps at the store level, things look fine, but they might face issues with rising interest costs.

Kevin Habicht, CFO

Yes, thank you for that clarification. Some of our tenants definitely do have variable rate debt. I estimate that around one-third of our tenant roster is backed by private equity, and these tenants generally operate under variable rate debt terms. So far, we haven't observed significant stress at the property level or much at the corporate level. However, it could become more challenging if they have near-term debt maturities that require refinancing, as it is currently a tough market for refinancing sub-investment-grade debt. Nevertheless, it seems that our tenants are not encountering any credit challenges at the moment.

Operator, Operator

Our next question is coming from Spenser Allaway.

Spenser Allaway, Analyst

It's Green Street. I know you guys have had success on the deal front, as evidenced by your 2Q results and obviously guidance. But can you just talk a little bit about existing customer sentiment in regards to growth, just given the broader economic backdrop? Just curious how recent conversations have gone? And if there are any tenant industries that are perhaps a little bit more cautious at this point than others?

Steve Horn, CEO

The conversations, obviously, we enter into conversations on a daily, weekly basis with our tenant base and the relationships. What are we seeing? We've seen a lot of kind of organic growth increasing over the first 6 months of the year with our tenants where they're doing new store development, and NNN is participating on that deal front. And there's been a little bit less M&A in the second quarter that we found, and that was more of the tenants being a little bit cautious, more of the debt market than the consumer. The consumer has been pretty resilient in our tenant base. So they're not worried about the top line growth. And obviously, with inflation, margins are getting squeezed a little bit more on the profitability. But it's not stopping them from growing, but they're just going to be a little hesitant in finding the low price discovery.

Spenser Allaway, Analyst

Okay. That makes a lot of sense. And then just as you are executing some new lease agreements, whether that's with new tenants or with existing tenants, have there been any shifts or changes just in terms of what tenants are looking for regarding term or escalators being CPI-linked or whatnot?

Steve Horn, CEO

In my 19 years at NNN, I've consistently found that tenants prefer shorter lease terms and fewer rent escalators. This ongoing negotiation pushes us to advocate for higher rent escalators. However, we work with large, sophisticated regional tenants, and the current commercial standard in our market is a 2% increase annually and a 10% increase every five years. Currently, we're not seeing any increases. If the market changes and more institutions push for adjustments, it might change, but for the foreseeable future, it has remained stable over the past 20 years.

Operator, Operator

Our next question is coming from Nicholas Joseph.

Nicholas Joseph, Analyst

This is Nick from Citi. Maybe back to the transaction market. You touched on the cap rate movement in the broader market. But how does that play into the back half of the year guidance? Obviously, you raised acquisition guidance, but the second half does assume a deceleration from what you've accomplished year-to-date.

Steve Horn, CEO

Yes. The back half of the year, we're anticipating a little bit higher of a cap rate. A lot of the deals that closed in the second quarter reflected the 6.2% cap rate. We had a fair amount of April closings. So those cap rates were negotiated in February; call it, it's a 60 to 90-day window to get a deal closed. And we locked in the price, and that was the deal we cut. Now the second half of Q2 pricing for the third quarter, we're seeing that 20 to 25 basis point increase.

Nicholas Joseph, Analyst

And I guess just on the volume. Is that also kind of decision, either active decision by you? Or is it more just kind of the market is pausing a bit? Or is it just being a bit conservative in what you're assuming for volume in the back half of the year?

Steve Horn, CEO

Our main focus is growing the FFO per share, not looking for the headline of acquisition volume. And we're comfortable in the third quarter with the numbers we're going to hit. Obviously, we don't have visibility quite yet to the fourth quarter, but we're creeping towards that. But yes, we're not looking to blow out acquisitions at the expense of 2023.

Nicholas Joseph, Analyst

And then you touched a bit on how you think about cost of equity or at least internally. You issued a little equity in the quarter, and it came, I think, at $43 a share, which is a little below where the Street NAV is. So how do you think about equity issuance relative to NAV? And relative to that cost of capital, I think you mentioned around 8%, at least internally, how you think about it?

Kevin Habicht, CFO

Yes, Nick, it's Kevin. Yes, we put a modest amount out. So I wouldn't read too much into that. It was, I think, gross price a little over 44 and then at a little under 44. But yes, we're sensitive to that. We're not exclusively driven by NAV in our shop. As you and investors know, we're very focused on growing per-share results, which we think over a long time creates total returns that are attractive; and it's not at cross purposes with NAV with that approach either. So that's the good news. So time will tell. But you will note, we have not issued very much equity in the last, call it, 6 quarters, in large part for the very reason you're mentioning is we just didn't feel like it was appropriately priced. And so to the extent that changes, we may have more interest as the share price rises. And like I've mentioned before, it was a piece of the equation that we executed last year where we didn't really do much equity at all. But we did a lot of debt because debt was very attractive. And so we try to pivot to the piece of capital that's most attractive at the time while keeping our eye on managing the balance sheet and our leverage metrics and liquidity and all those things. And so it's a bit of an art and not a little bit of science, but we'll see where it goes from here in terms of our interest in issuing any equity.

Operator, Operator

Our next question is coming from Wes Golladay.

Wes Golladay, Analyst

Wesley Golladay. Just maybe sticking with that last question on cost of equity, maybe a little bit broader. Can you talk about how you want to fund the near-term pipeline when you look at it and you called out free cash flow, maybe a little bit of equity? It doesn't sound like maybe issuing debt would be high on the list, but maybe could you talk about your appetite for running a little bit higher line balance? You called out earlier that your weighted average return is 14 years. And typically, I don't think you carry a line, but in the context of where capital markets are and how you've positioned the balance sheet? How high would you want to take that line? Or could you take that line and be comfortable with?

Steve Horn, CEO

I don't want to take it too high. Regarding your question, we have been discussing this with investors recently. We have a 14-year weighted average debt maturity and minimal near-term debt maturities, giving us the advantage of being able to utilize our line more than we have in the past. Over the last six years, our average outstanding bank line usage has been around $55 million. People often wonder why that is, and it's because the long-term debt and equity markets were very favorable, so we raised a lot of capital without needing to use our line. Now that capital markets are more challenging, we can pivot and use our bank line more while still maintaining a strong balance sheet and ample liquidity. That's good news. As for how high we would feel uncomfortable, we intend to use significantly less than half of our bank line. If it reaches $300 million or $400 million, we may need to seriously consider terming out that capital with further debt or equity. However, as I mentioned earlier, with $180 million in annual cash flow plus about $100 million a year from property sales, we have an average of $280 million. That significantly contributes to funding $600 million to $700 million in acquisitions each year. Therefore, our need for additional equity or debt is quite low, and we have substantial availability on our bank line while remaining within conservative metrics.

Wes Golladay, Analyst

Got it. And then I saw that Ahern made it into the top 20 tenant list. Are you doing more business with them? Or is this just a function of combining your 2 tenants that you mentioned at the top of the call?

Kevin Habicht, CFO

It was mainly due to the fact that we had two tenants combined, which moved them from 21 to 20 on the list. We are confident in our property-level metrics and we believe the market is shifting in their favor regarding infrastructure. We expect them to be in a good position. They are dealing with a debt refinance challenge that seems to be affecting them somewhat at the corporate level, but we anticipate that this will be resolved satisfactorily in the upcoming quarters.

Wes Golladay, Analyst

Yes, and just one more question if I may. I understand there are some capital structure issues, like the one you mentioned with Ahern, but your coverage looks strong. Do you have a rough estimate of your typical recovery in cases where there are capital structure issues along with strong coverage? Historically, it seems that the recovery rates were quite high, but I'm not sure if you have a specific statistic for that.

Steve Horn, CEO

Yes, we don't have a specific number. However, our experience shows that when you have well-located properties with strong unit-level metrics, we tend to come through corporate balance sheet challenges quite well. The pandemic was an example of this, as was the situation in 2008 and '09. Our occupancy rates have remained very strong during both of those difficult periods, and that has been our experience.

Operator, Operator

Our next question is coming from Ronald Kamdem.

Ronald Kamdem, Analyst

This is Ron from Morgan Stanley. A couple of quick ones. Just one on the guidance. Can you remind us what you're assuming for bad debt reserves for this year?

Kevin Habicht, CFO

Yes. We have been consistent over the years in our projections. We have always anticipated a potential loss of about 100 basis points for rent, even though our actual experience has been better, at 50 basis points or less. We maintain this general assumption to be somewhat conservative.

Ronald Kamdem, Analyst

It makes sense. Continuing with tenant health, what insights do you have from the tenant perspective? I know others have covered this, but more generally, as you assess different industries, are there any changes in your approach or any sectors where you might focus more or reduce efforts as we anticipate a potential downturn?

Steve Horn, CEO

Going forward, our strategy will continue to focus on maintaining relationships within our current portfolio. The tenants have a deeper understanding of their consumers than we do, so when they feel ready to expand through mergers and acquisitions or new store openings, we will join in. It's important to note that when we engage in a sale-leaseback, the underwriting process is slightly different because we benefit from the tenant selling the asset to us, which tends to be of high quality given their willingness to enter into a 15- or 20-year lease. This leads to a self-selection element in our underwriting that often goes unnoticed, which is why we typically enjoy a high renewal rate of about 85% each year. We don't specifically target which sectors to invest in since we can only purchase properties that are currently available for sale. However, we take a bottoms-up approach; we aim to grow our funds from operations in the mid-single-digit range and then evaluate what acquisitions are necessary to achieve that growth. Our stance on movie theaters remains unchanged; we exited that space a few years prior to the pandemic and are not looking to reinvest in that industry. For other industries, if we prioritize real estate first, credit becomes less significant. Ultimately, we focus on underwriting the real estate and identifying well-located properties.

Ronald Kamdem, Analyst

Great. And then just my last question, if I may. When I think about the AFFO number, which is essentially $0.80 once we account for all the back deferred rent collections and other factors, as you look ahead and consider that run rate, it seems like the interest costs could rise, especially as we enter a higher rate environment. Is there anything else in that $0.80 figure that might be nonrecurring or one-time that we should be aware of?

Kevin Habicht, CFO

No. The second quarter was relatively straightforward. We didn't have much, if any, income from lease terminations, which we did see some of in the first quarter. The main variable that we don’t provide guidance on, which could significantly impact results, is capital markets activity. We make some assumptions about that, but we don't publish those to maintain maximum flexibility in our capital-raising strategies. Historically, I can reference what we assumed last year and what actually transpired. Initially, at the start of 2021, we forecasted issuing 5 million shares of equity and no debt. However, we ended up issuing no equity and $900 million in 30-year debt. At that time, we believed that the relative value of debt was a more advantageous route for raising capital, and looking back with 6 to 12 months of hindsight, we are satisfied with that decision. This illustrates part of the reason we do not fully disclose our thought process, as it continually evolves to take advantage of market conditions.

Operator, Operator

Our next question is coming from Tayo Okusanya.

Tayo Okusanya, Analyst

Gentlemen, just a quick question around the acquisition outlook and just again, the level of acquisitions currently happening. I mean I would have ventured when we were all talking at the end of first quarter earnings, concerns about rising rates. Everyone's stock price was down year-to-date. One would have ventured that everyone would kind of have slowed down on the acquisition front. But you guys, a lot of your peers kind of have a strong acquisition quarter or reading acquisition guidance. And I guess I'm curious, the backdrop doesn't seem to have changed that much, why there's still such an appetite or so much positivity on the acquisition front, just kind of still given some of these headwinds on the capital market side, some concern about credit, cap rates not moving and things of that ilk.

Steve Horn, CEO

I can address part of this, and Kevin can add his insights on the capital markets. At the start of the year, we guided expectations with a midpoint of 550 or 600, based on the first quarter pipeline. Having been in the business for quite some time, we've developed strong relationships and have a clear outlook for the year. Currently, cap rates are beginning to shift. We entered the year with a solid position of $173 million in cash at year-end, ensuring our acquisitions were well-funded. Now, as we discuss with our existing tenants who are interested in expanding, we anticipate cap rates will adjust accordingly. Therefore, we are optimistic about the latter half of the year and feel confident about our acquisition targets.

Kevin Habicht, CFO

I understand your question, but we may not be the best source for that. Over the past 18 months leading up to 2022, it surprised us that many chose to increase acquisition volumes at record low cap rates. We didn’t see that making sense given the pace and the cap rates in the market, which we felt weren't leading to enough growth in earnings per share, something we prioritize. I agree with your observation that there hasn't been a real pause. As I mentioned earlier, we think the trend of asset growth-focused acquisitions from recent quarters might be slowing down a bit, though we haven't seen much evidence of that yet. We're optimistic it will become more disciplined regarding pricing, and I completely understand where you're coming from with your question.

Operator, Operator

Our next question is coming from John Massocca.

John Massocca, Analyst

I'm with Ladenburg Thalmann. Can we revisit the balance sheet for a moment? Has there been any change in the outlook for long-term debt recently? Considering the current state of the yield curve, particularly its inversion and flattening, does that alter the outlook compared to our discussions last quarter or even at NAREIT?

Kevin Habicht, CFO

Yes, clearly the pricing and the shape of the curve may influence one's perspective on the type of debt to use at this time. As I mentioned earlier, we've issued a significant amount of long-duration debt in recent years, with three of our last four debt offerings being 30-year loans. While we could have secured cheaper rates with shorter-term debt, our goal was to lock in low rates for a longer duration. This strategy has allowed us to utilize our bank line more, which has mostly remained untouched this year. Pricing is definitely a consideration, which is likely contributing to some firming of cap rates since the debt pricing has changed significantly. I'm curious to see how debt issuance in the REIT sector evolves, whether it extends further out or becomes shorter-term. This could relate to views on the sustainability of current interest rates—will they remain at these levels for the next five years or just five quarters? I don't have a concrete answer for your question, but these are some of our reflections on the matter.

John Massocca, Analyst

Okay. And then maybe switching to kind of the disposition outlook. I know it's not markedly lower than 50% of the low end of guidance, but maybe kind of what gives you confidence in kind of getting to the guidance target on disposition front as we hit the back half of the year here?

Steve Horn, CEO

Yes, regarding dispositions, we feel comfortable being below the 50% mark. I am aware of the ongoing disposition activities our team is handling. The decrease in numbers is primarily due to timing issues related to rising interest rates. The 1031 market remains strong, but a few of the deals we are working on have been delayed. This is why we did not alter our guidance, which remains at $80 million to $100 million for the year.

Operator, Operator

Our next question is coming from Spenser Allaway.

Spenser Allaway, Analyst

I have two follow-up questions. First, regarding the inflationary pressure, have you had discussions with tenants about their ability to pass costs onto customers? Additionally, can you comment on the trend of rent coverage in light of this situation?

Steve Horn, CEO

Yes. The discussions we've been having with our tenants have largely remained consistent throughout the quarter. They have been able to pass through some sales, but not entirely at the inflation rate. It’s still early in the cycle, and they do not express significant concerns. They continue to be quite profitable. Interestingly, in this inflationary environment where rents are stable, coverage remains solid despite a slight decline in profitability. Over the long term, our coverage at the property level remains very healthy. Tenants are able to pass through some costs, but not all of them.

Spenser Allaway, Analyst

Okay. That's great color. And then maybe just one more going back to cap rates. It seems as though commentary from peers that they've been seeing cap rates rise slightly more thus far in the back half of '22 than maybe what you've cited. I know you obviously can't comment on where peers are executing deals or what they're sourcing, but any insight as to why perhaps cap rates have seemingly moved less on deals you've executed?

Steve Horn, CEO

I think it's a function of the market we play in. The sale-leaseback with the large regional operators. I think historically when you had the investment-grade tenants and the cap rates were trading at 5.5, 5.25 or ground leases that were in the floors, those ones have moved up 25 to 50 basis points. And I would expect that going forward. And then the cap rates that were north of 7, they haven't moved 50 basis points; they moved near the 20. But that area that we play in, the low 6 market, they've trended up a little bit but not to the degree of the investment-grade market we're finding. And the other thing you got to think of is our deals are long-term leases and triple net. So it's really tough to compare our peers to what we market because if we were buying 10-year leases, those have moved up as well to 25 to 50 basis points. But again, it's a function of our market, Spencer.

Kevin Habicht, CFO

Yes. And as Steve said, this is Kevin. I think you're getting more movement up where cap rates had compressed the most over the last year or two. And so to the extent that we were buying 5.5 cap rate deals, we might be talking about a larger increase in cap rates than where we've operated, as Steve mentioned, in the low 6s.

Operator, Operator

Our next question is coming from Linda Tsai.

Linda Tsai, Analyst

From Jefferies. In your investor deck on Page 14, you show the history of acquisition volume and how the relationship-based deals offer a 20 basis improvement over market auction deals. With interest rates higher now, does that delta shift for any reason?

Steve Horn, CEO

We haven't done much of the market auction deals. But I would expect right now, there's a little dislocation in the market where we've negotiated a lot of our relationship deals prior to the interest rates moving. But I would expect going forward, they would normalize to what historical levels were.

Linda Tsai, Analyst

And then at NAREIT, you discussed the opportunity to increase the tenant renewal rate of 85%. Could you just remind us again the factors driving that initiative?

Steve Horn, CEO

We are implementing a very experienced portfolio management team as we have been operating as an NNN REIT for a long time, more than many of our competitors. Many of our leases are reaching their initial term, and we want to get ahead of the curve for the future. In a few years, we anticipate seeing the benefits of these efforts.

Linda Tsai, Analyst

Just one last one. With real estate expense guidance down $1 million at the midpoint, what was driving that?

Kevin Habicht, CFO

We have significantly fewer vacancies. Our approach is to consider our property expense exposure as tenant reimbursement minus our property expenses, which was approximately $1.8 million for the second quarter, as detailed on Page 6 of the press release. Typically, net property expenses hover around a low $2 million, but this is notably influenced by the presence or absence of vacant properties. This figure can fluctuate somewhat, but it usually remains stable, generally ranging between $10 million to $12 million annually, and for this year, it stands at $9 million to $11 million.

Operator, Operator

Our next question is coming from Chris Lucas.

Chris Lucas, Analyst

Capital One Securities. Kevin, just a quick follow-up on a comment you made earlier related to the bad debt you typically assume in your guidance of 100 basis points. What's the first half number on that?

Kevin Habicht, CFO

We collected 99.7% in the first half, which is about 30 basis points. We're not ready to label the 30 basis point amount as bad debt since we plan to pursue collection, but that is what was collected and reported in relation to our revenues.

Chris Lucas, Analyst

Okay. And then, Steve, just taking a step back on the competitive or the competition, all the peers you guys have talked about the fact that private equity pullback when rates moved higher. Just curious as to whether or not you're hearing anything about their re-entry into the market, given a little bit of a pullback in rates, although again, the market is pretty unstable. Just curious as to what you're hearing from that competitive set?

Steve Horn, CEO

Yes. In the second quarter, I think we did 16 transactions, and 14 of them were through the relationship. So we didn't participate in a lot of the super large deals that might have been out there. But put it bluntly, I have not heard the private equity groups that came in the market second half of 2021, first quarter of 2022 back in the market at all.

Operator, Operator

There appear to be no further questions in the queue. Do you have any closing comments you would like to share?

Steve Horn, CEO

Yes. Thank you for joining us this morning, and we look forward to seeing many of you in person kind of as the fall conference season kicks off here, and we'll see you then. Thank you.

Operator, Operator

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.