Earnings Call Transcript - NNN Q3 2024

Operator, Operator

Greetings. Welcome to the NNN REIT Third Quarter 2024 Earnings Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Steve Horn, Chief Executive Officer. You may begin.

Steve Horn, CEO

Hey, thanks, Holly. Good morning, everyone. Welcome to NNN's Third Quarter 2024 Earnings Call. I'm joined today by our Chief Financial Officer, Kevin Habicht. This year, NNN has delivered consistent performance, driven by active portfolio management and strategic acquisitions with our relationships, what we call our NNN mode, that sets us apart and delivers our external growth. Given our year-to-date results, we are tightening our 2024 core FFO per share guidance to a range of $3.28 to $3.32. Additionally, we are now in a position to exceed our original acquisition buying guidance, so we are raising the midpoint by 22% to $550 million. This increase showcases the strength of our pipeline and our execution ability. On the capital markets front, we raised approximately $175 million through the ATM program this quarter. It's actually our largest quarter since the fall of 2019. The discipline of being selective while deploying capital and opportunistically raising capital over the long duration has NNN in great shape through volatile economic periods. In times like today's macroeconomic conditions, NNN's discipline of maintaining a solid balance sheet and reasonable acquisition buying does put NNN in a place to execute the remaining deal flow of 2024 but more importantly, to execute 2025 with limited, if any, needs to access capital markets. At the end of the quarter, we had nothing drawn on our $1.2 billion line of credit and nearly $175 million of cash after completing $350 million of volume through the first 9 months. Add in NNN's industry-leading free cash flow as a percentage of acquisition volume to the already high liquidity position, we are ready to capitalize on deals when the right opportunities present. Shifting the highlights to the third quarter financial results. Our portfolio of 3,549 freestanding single-tenant properties continues to perform well with 10 years of term, maintaining high occupancy levels of 99.3%, which remains above our long-term average of 98% plus or minus a fraction and only 24 vacant assets. A few tenants have been in the press recently, and it’s the same ones we've been having to mention time and time again: Big Lots, Conn's HomePlus, and Frisch's Big Boy. NNN is working diligently to resolve the challenges. But with regard to Frisch's and Conn's, I feel good about the real estate because of the upfront underwriting and small fungible boxes with reasonable rents, specifically the restaurants with drive-through windows. We have received a fair amount of inbound calls inquiring about the real estate. And at this time, it appears Big Lots will continue to operate all 3 we own. Kevin will provide more detail about the watch list later. Turning to acquisitions. During the quarter, we invested $113 million in 8 new properties at an initial cash cap rate of 7.6%. If we actually included the rent increases over the term of the lease, it would result in a 9.27% long-term projected yield, and with an average lease duration of 18.4 years, and that's the result of the sale-leaseback transactions. For the first 9 months, we have invested roughly $350 million in 44 properties at a cash cap rate of 7.8%, which is about 60 basis points wider than the comparable period of 2023. And 16 of the 28 closings were under $5 million, which proves NNN's belief that smaller deals still move the needle for NNN shareholders. As we move through the year, cap rates seemed, for the most part, to be stabilizing. I don't see any material move either way as we head into the fourth quarter and as well as the deals we're pricing for the first quarter of 2025. I'm expecting deal volume to tick up for the fourth quarter, and it does feel like the market opportunities are better today than they were 6 months ago. During the quarter, we also sold 9 properties, which included 5 vacant, raising $20 million of proceeds at a 4.4% cap rate, and we've been reinvesting at 7.6%. So it's a good spread. Year-to-date, we've now raised approximately $105 million of proceeds from the sale of 29, which included 8 vacants at an overall blended 7.0% cap rate. The mission is always to re-lease the vacancy, but we'll continue to sell nonperforming assets if we don't see a clear path to generate rental income in a reasonable timeframe. Our balance sheet is still one of the strongest in the sector. Our credit facility has plenty of capacity, as I mentioned earlier with no balance outstanding. More importantly, our next debt maturity isn't until the fourth quarter of 2025, and we maintain an industry-best 12.3-year weighted debt maturity. NNN is well-positioned to fund our remaining 2024 acquisition guidance and beyond. With that, let me turn the call over to Kevin for more color and detail on the quarterly numbers and updated guidance.

Kevin Habicht, CFO

Thanks, Steve. I want to start by mentioning that we will make certain statements that may be seen as forward-looking under federal securities law. The company's actual future results might vary significantly from those discussed in these forward-looking statements, and we may not update these statements to reflect changes after they are made. Factors and risks that could cause actual results to differ significantly from our expectations are disclosed periodically in greater detail in our SEC filings and in this morning's press release. This morning's press release highlights that our quarterly core funds from operations results were $0.84 per share for the third quarter of 2024, which reflects an increase of $0.03 or 3.7% compared to last year's results of $0.81 per share. Our adjusted funds from operations were also $0.84 per share for the third quarter, up $0.02 or 2.4% from the same period last year. The third-quarter results included $3.9 million in lease termination fee income, which is relatively high for us, compared to $385,000 in the third quarter of 2023. Additionally, we've seen above-average lease termination fee income in the first two quarters of this year. For the first nine months of 2024, we reported $10.2 million in lease termination fee income, compared to $2.4 million for the same period in 2023. Historically, over the last five years, our average annual lease termination fee income has been around $3 million, so this year is significantly above that average. However, even without this extra income, it was a solid quarter that met our expectations. Occupancy at the end of the quarter was 99.3%, unchanged from the previous quarter. General and administrative expenses were $11.2 million for the quarter, making up 5.1% of revenues for that period and 5.5% of revenues for the first nine months, which aligns with our expectations and guidance. As a percentage of net operating income, general and administrative expenses were 5.3% and 5.7% for the quarter and nine months, respectively. This metric is valuable for considering a net lease company compared to other REITs across different property sectors, as it emphasizes the efficiency of the net lease format, ultimately benefiting shareholder returns. Our adjusted funds from operations dividend payout ratio for the first nine months of 2024 was 67.4%, leading to approximately $151 million in free cash flow during that period after all expenses and dividends. With the increased third-quarter dividend rate, we now expect this free cash flow to reach around $193 million for the entire year of 2024. We ended the quarter with $851 million in annual base rent for all leases as of September 30, 2024, factoring in all acquisitions and dispositions completed during the quarter. We have reaffirmed our 2024 guidance but narrowed the range slightly by $0.01 while keeping the midpoint unchanged. Our new core funds from operations guidance is now $3.28 to $3.32 per share. A similar adjustment has been made to the adjusted funds from operations guidance, which now stands at $3.31 to $3.35 per share. Regarding tenants facing credit challenges, we've discussed two ongoing situations for a few quarters. Badcock Furniture, previously owned by FRG, has been sold to Conn's HomePlus, which filed for bankruptcy in July. We own 32 Badcock Furniture stores, representing 0.6% of our annual base rent, equating to about $5.2 million annually. We assume we will eventually regain these properties, but the timing remains uncertain due to the ongoing bankruptcy process. We will pursue the FRG guarantee for these leases, although we recognize that FRG may also have its own credit challenges. The second tenant is Frisch's, a longstanding Midwest Big Boy hamburger chain, which only paid half of the rent owed in the third quarter. We own 64 Frisch's properties, making up 1.5% of our annual base rent, translating to $12.6 million. While I won’t dive too deep into our plans due to various claims we're pursuing to protect our interests, we wanted to provide some context regarding these situations. Both tenants are on a cash basis accounting approach, meaning we only record what we collect. Historically, our guidance has anticipated a 100 basis points rent loss during any period, but these two issues might exceed that threshold in the fourth quarter. We expect to gain clarity on these situations in the fourth quarter, which will help us provide better estimates for our 2025 guidance in February. Tenant credit events like these are typically a normal part of our business. We believe that as long as our rents are close to market rates, we remain in a good position. If we reclaim these properties, there may be some delay in income production, whether we choose to sell, re-lease, or redevelop them. However, over the long term, our experience suggests that any lost rent can be managed effectively. Long-term followers of NNN understand that real estate leased at reasonable rents tends to succeed, which helps us address potential tenant credit issues. Despite these challenges, we have affirmed our earnings guidance, which we increased in the second quarter. Now, transitioning to the balance sheet, as Steve mentioned, after 18 months of minimal equity issuance when our stock price was between the high 30s and low 40s, we sold some equity in the third quarter at an average price slightly over $47 per share, generating net proceeds of $178.9 million. We ended the quarter with that same amount of cash on our balance sheet and no outstanding balances on our $1.2 billion bank line, positioning us well in terms of leverage and liquidity as we conclude 2024 and head into 2025. We don’t have any debt due until November 2025, and our average debt maturity is 12.3 years at the end of the quarter. Maintaining a light capital market footprint, we funded 74% of our $350 million in acquisitions year-to-date using free cash flow of $151 million and $106 million from property dispositions. For the entire year, based on our acquisition and disposition guidance midpoint, we anticipate funding approximately 57% of our 2024 acquisitions through free cash flow and property sales. A few leverage metrics: our net debt to gross book assets at quarter end was 39.6%. Our net debt to EBITDA was 5.2 times as of September 30. Interest coverage and fixed charge coverage stood at 4.2 times for the third quarter. Importantly, none of our properties have mortgages encumbering them. In closing, we remain committed to appropriately allocating capital, ensuring we achieve sufficient returns on equity while managing risk through property underwriting and maintaining a strong balance sheet. Valuing equity properly, whether from free cash flow, asset sales, or new equity issuance, is pivotal for enhancing per-share results over the long term. Now, we'll open the floor to any questions.

Operator, Operator

Your first question for today is from the operator.

Unidentified Analyst, Analyst

Can you just talk about the transaction market? Do you, just thus far, into 4Q, how do the level of deals being sourced compare to historic norms? And can you just talk about competition in the market for deals that aren't coming from relationship tenants?

Steve Horn, CEO

Absolutely. So the overall market, as I kind of mentioned in the opening remarks, it definitely feels like sellers are coming back to the market. Our acquisition team is sorting through a lot of opportunities, whether it's current relationships and/or advisers/brokers bringing deals to the market. It just feels like M&A has picked up a little bit. So the average transaction in the market is definitely larger today than it was 6 months ago. And our current relationships are starting to do some growth. And it's really kind of second-gen space and redeveloping assets, we're seeing good opportunities. As far as competition in the market, it's a very highly competitive market. It has been for the 20-plus years I've been working in it, and the participants come and go. It does feel like maybe a little bit of the private money is starting to come into it. But at the end of the day, they don't really affect NNN so much when I mentioned the amount of smaller deals that we did. The private money isn't looking for those deals. But again, overall, it's highly competitive, and that's why I think we felt cap rates decrease a little bit in the third quarter. In the fourth quarter, it's decreasing a little bit more, but for the most part, flat.

Unidentified Analyst, Analyst

And then I know the dispositions are obviously very marginal in the scheme of your portfolio. But can you just provide some detail on the 9 assets that were sold during the quarter just in terms of industry and then the cap rate on the occupied assets?

Steve Horn, CEO

Yes. So the cap rate on the occupied assets was 4.4%. Out of the 9 assets, 5 of them were vacant. And I would say, this past quarter, it was kind of cleaned up the portfolio a little bit, solving future potential issues. We sold some urgent care assets and then we sold an auto auction part that was not being used.

Operator, Operator

Your next question is from Joshua Dennerlein with Bank of America Merrill Lynch.

Joshua Dennerlein, Analyst

I appreciate the update on tenants like Frisch's and Badcock. What are your current assumptions for bad debt in the fourth quarter? I know you typically assume 100 basis points, but it seems like both of these tenants might exceed that.

Kevin Habicht, CFO

Yes, that's a fair question. This is Kevin. Regarding the rent loss we are anticipating in the fourth quarter, we usually factor in 100 basis points in our guidance. It's worth mentioning that Frisch's and Badcock together represent 2.1% of our ABR. Even in a worst-case scenario where we assume a total of 200 basis points of rent loss, we would still be within the middle of our guidance range. However, we can't really predict who will pay how much and when since we currently lack visibility on that. Frisch's is not in bankruptcy, whereas Badcock is, which adds some complexity to the situation. Nonetheless, even with the assumption of 200 basis points of total rent loss, we believe we could still reach the midpoint of our guidance range in a worst-case scenario. Those who have followed us for a while know that we tend to be somewhat conservative with our guidance. Perhaps that’s an understatement. There may still be a possibility to achieve the top half of our guidance range despite these tenant credit challenges.

Joshua Dennerlein, Analyst

I appreciate that. I have a couple of follow-up questions. Are there any other one-time events we should consider when evaluating the run rate for the fourth quarter or any adjustments we need to make? Additionally, could you clarify how we should view potential downtime if these tenants return the properties?

Kevin Habicht, CFO

Yes. So yes, no, we're not really pointing folks to any others that we feel like have the kind of level of concern that Frisch's and Badcock currently have. I mean, Steve did mention Big Lots, which is a tenant in bankruptcy. But like he said, we think there's a pathway for getting all 3 of those stores to remain open and leased to Big Lots. We've talked about other tenants in recent quarters that are challenged. I mean, at home still, we'll see where all that goes. But nobody feels like that we're particularly worried about in the near term that I would point you towards, I guess.

Steve Horn, CEO

Downtime.

Kevin Habicht, CFO

Yes. So yes, and as I alluded to that in my comments, that kind of timing of the gap. If and when we get properties back, it takes several months to kind of get them re-leased and/or sold. And so that's really kind of the issue that kind of – that period. Having said that, we are seeing very robust, as I’ll use that word, interest in a good number of our Badcock and Frisch’s properties from other retailers and very credible retailers. And so that’s encouraging. So maybe that whittled down a bit of the time gap from a prior tenant to new tenant, but it’s going to be 6, 9, 12 months kind of process to work through that. And at the end of the day, if we can recapture a very large portion of our prior rent, then again, in the long run, we don’t feel like there’s any really a headwind of note that we have to deal with. So we feel pretty good about where we are today despite what seems to have some pending vacancies coming our way. We like our existing rents on the properties. We like the locations. And like I say, there’s strong interest from other retailers. And I think that’s consistent, frankly, probably with what you’re hearing from the shopping center REITs, who I think are all experiencing pretty strong demand for existing retail space.

Operator, Operator

Your next question for today is from Michael Goldsmith with UBS.

Michael Goldsmith, Analyst

You provided a lot of good detail on credit and your thoughts on it. Traditionally, you've discussed it in terms of 100 basis points. As we consider 2025, will your approach to bad debt assumptions differ from how you might have handled it in what would typically be a more normal year?

Kevin Habicht, CFO

Yes. I mean, we might. Yes, is the answer. We haven't put out 2025 guidance, so I'm a little reluctant to get too particular on that at this point. I do think we will learn a lot in this fourth quarter as to how both Badcock and Frisch's is going to play out in terms of timing, et cetera, as well as being able to better gauge kind of maybe re-leasing assumptions around any properties we're getting back. So I'm reluctant to put out a number there. But yes, in my mind is that will we likely assume more than 100 basis points for 2025? I would say probably. But the question is what's the number? And we still think we're well positioned to grow per-share results next year. So that's probably all I want to go into at this point. We'll be obviously more definitive when we release in February.

Michael Goldsmith, Analyst

No, that's totally fair. I understand that. And just on the acquisition guidance, right, like clearly, you have some better visibility into the pipeline. Can you talk about the opportunities you saw in the third quarter; how do they compare to the first half? What you're expecting for the fourth quarter? And then just also within that, acquisition cap rates came down by 30 basis points sequentially. So are you seeing or expecting any further compression there?

Steve Horn, CEO

Regarding the cap rate, we expect the fourth quarter to align closely with the third quarter. While some deals may vary in pricing, it will generally be consistent. In terms of opportunities, nearly all of our deals have originated from our relationships, and we have engaged in a number of smaller transactions to reach the $350 million mark. As I mentioned in response to Spenser’s question, the average deal size appears to be increasing as we approach the fourth and first quarters, largely due to M&A activity as private equity groups pursue sale-leasebacks. Consequently, we have been receiving a significant number of advisory inquiries related to deals.

Operator, Operator

Your next question is from Smedes Rose with Citi.

Maddie Fargis, Analyst

This is Maddie Fargis on for Smedes. I just wanted to ask about the updated guidance ranges. Could you maybe walk us through some of the moving pieces behind the $0.01 AFFO decline at the midpoint despite lowered SG&A and higher acquisitions?

Kevin Habicht, CFO

Yes. On that, yes, I wouldn't read too much into that. Frankly, there's a little bit of per-share rounding to kind of make that tweak as well as just getting the range on the core FFO and the range on the AFFO, both the same, which is $0.04 from top to bottom. And so yes, I wouldn't read too much of that tweak in terms of the guidance.

Maddie Fargis, Analyst

And just circling back on to credit loss assumptions, do you have any plans to increase the amount that you're baking into guidance from 100 basis points as you think ahead to 2025?

Kevin Habicht, CFO

Yes. Yes. Like I said, we’re not putting out 2025 guidance at this point. As I alluded to or mentioned, 100 basis points might be a little light as we enter 2025. But we're going to know a whole lot more in the next 3 months in terms of how Frisch’s and Badcock’s are going to play out. And so that will inform our decision around that. And so as I said, I think we'll be consistent as we have in prior years that whatever we assume, it will be a conservative assumption. And so we have a long history of not only meeting guidance but hopefully slightly exceeding guidance and so – and/or raising it. And so whatever we come out with, I think that philosophy will still prevail.

Operator, Operator

Your next question for today is from Linda Tsai with Jefferies.

Linda Tsai, Analyst

Regarding Badcock, does the Franchise Group guarantee help offset any rent losses?

Kevin Habicht, CFO

Yes, any collections from FRG would reduce our rent loss. We intend to pursue that guarantee. Badcock is still in bankruptcy, and typically, they pay rent during bankruptcy. However, to the extent that we are losing rent related to Badcock, we will pursue the FRG guarantee.

Linda Tsai, Analyst

And then any color on Big Boy? We read that there isn't clear leadership. Is it a going concern? And then to re-tenant, how much time would that take? And would there be like TI dollars spent?

Steve Horn, CEO

As far as Frisch's, as Kevin mentioned, they're not in bankruptcy right now. I'd probably echo your sentiment, we are where we're at now, the management team. They are a going concern currently, but we are over several quarters trying to work with management and resolve some issues. 2 of the assets we sold in the third quarter were Frisch's. So we're actively managing the portfolio. But with regard to going forward, we kind of hit a stalemate with them. So we're exercising our legal rights and pursuing eviction.

Kevin Habicht, CFO

And a follow-up on the second part of that question as it relates to TI, our predisposition is to take lower rent in lieu of trying to buy rent higher, if you will, and giving a tenant a bunch of money in order to get that higher end. It's been our observation over the years is that frequently, tenant improvement dollars have little to no economic value at the end of the lease term. And therefore, to the extent you're going to provide them, you almost need to get a return on those TI dollars as well as the return of those TI dollars, which recently is not what the tenant wants to hear. And therefore, we've been generally inclined to put much fewer dollars to no dollars and take lower rent in exchange for that trade-off. And we think we end up with a safer rent and one that the tenant can more likely afford and operate a profitable store at. So while there obviously could be some TI dollars related to all of these, our inclination is to limit that materially.

Linda Tsai, Analyst

And then you spent some time discussing how lease term fee income has been a bit higher year-to-date. Is the current expectation this elevated level continues in 2025?

Kevin Habicht, CFO

Yes. That, we don’t give any guidance on in part because it’s hard for us to know when that’s going to happen. And the process by which most of those deals come about typically involve at least 3 parties, and each of them have competing priorities, to be honest. And so it’s not prone to a degree of predictability that would make us feel comfortable giving guidance. We do think it’s generally an outcome of active portfolio management. So if you’re working your portfolio and you’ve got a dark asset and we look for a way to help our tenant with that dark asset or even an underperforming asset. They might be open and paying rent and all those good things but we know it’s underperforming based on store level results. And so we generally will look for a solution that – and it then comes on ahead, the tenant feels good about it. And whoever the third party is, whether it’s a new tenant or a buyer, that property thinks they’re getting something of value. But getting those 3 parties on the same page at the same time is always a challenge, but we think it’s a good thing to do. It’s lumpy income. We fully recognize it’s not annuities. It’s a different quality than rent to be clear. However, we don’t want to not do it because of those attributes. It is good – it’s money and it’s income, and we think it’s a good economic decision to make. And so we’ll keep pursuing it as we work our portfolio, but it’s – we won’t be giving guidance related to that going forward just because it’s so hard to predict.

Operator, Operator

Your next question is from Ronald Kamdem with Morgan Stanley.

Ronald Kamdem, Analyst

Two quick ones. Sorry to go back to sort of the bad debt conversation. But I guess I'm just wondering, after sort of the experience with sort of the Badcock and the furniture, does this sort of impact like how you're thinking about the watch list? Or have any other tenants been put on the sort of cash basis accounting? Just trying to figure out what sort of the implications are of this announcement to the rest of the portfolio and how you're thinking about sort of Badcock.

Kevin Habicht, CFO

Yes. Aside from the discussions regarding Frisch's and Badcock, we don’t believe there’s any direct impact on our other tenants. Our cash basis tenant list accounts for 5.6% of our rent, and it has included AMC and Frisch's since the COVID pandemic. Badcock is included because it is in bankruptcy. This group represents 85% of our cash basis listing, which is quite concentrated. Big Lots is also on the list, but only makes up 0.1% of our rent. Therefore, we are not seeing any significant implications from the credit issues of these two tenants affecting any of our other tenants at this time.

Ronald Kamdem, Analyst

Got it. Makes sense. And then just switching gears a little bit on the sort of on the transaction side. Yes, I guess I'm just wondering, obviously, we've seen rates back up. You still took up the acquisition guidance and so forth. So I guess you're not really seeing any impact. Just any sort of commentary on how the pipeline is building as you get into next year and cap rate commentary.

Steve Horn, CEO

The pipeline, yes, you alluded to it. We increased the acquisition midpoint. So yes, the fourth quarter, there should be an uptick. I feel confident we’ll hit that range. And remember, Ron, when we – deal volume comes to market, it might take 60 to 90 days to get the deal under contract and to closing and the kind of the backup in rates has been more – a little bit more recent. But all that being said, I think it’s pretty typical in our industry, you kind of get near year-end and sellers start coming to market. It’s kind of that post-Labor Day push to get deals done by year-end, especially in a Presidential election year when there’s the unknown certainty of change in tax rates or tax codes. So the pipeline, our deal guys, as I mentioned, are very active looking at a lot of deals. I’ve definitely noticed the pickup down the hall from me. And secondly, as far as cap rates, the deals we’re pricing for the fourth quarter currently are fairly in line with the third quarter. And we’re starting to price select a few deals in the first quarter, and they’re the same as far as either way, not much of a difference.

Operator, Operator

Your next question is from Rob Stevenson with Janney.

Steve Horn, CEO

All right, Holly, I think we can move on. I don’t think Rob can hear us.

Operator, Operator

Your next question is from R.J. Milligan with Raymond James.

R.J. Milligan, Analyst

It's a busy earnings day. So Rob's probably on some other calls. Just curious, what's driving the lower G&A expense guide for the year? And is that going to continue into 2025?

Kevin Habicht, CFO

Yes, there are some quarterly variations, but we slightly reduced the range by about $1.5 million at the midpoint for 2024, which represents a couple of percent. This adjustment seems to be due to some lower accruals. Looking ahead to 2025, we will release guidance soon, and it is likely to include some inflationary increases from our current position, though I don't anticipate significant changes beyond that. We still need to work through those figures.

R.J. Milligan, Analyst

Got it. And so a bigger picture, and I know this is alluded to 2025, but with the elevated term fees this year, pretty outsized number, that sort of timing gap with some of the potential credit issues or the current credit issues, what's the offset to drive per-share growth next year? Is that just acquisitions?

Kevin Habicht, CFO

Yes, that’s the primary driver. Obviously, then you’ve got the rest of the portfolio that has rent growth embedded, obviously, in it that helps offset some of that loss. And then we’ll see if there’s any other income opportunities. I don’t know if lease term income will go to 0. Like I say, our normal is about $3 million, but – per year. So yes, but those – those are clearly headwinds. The term fees and the Badcock and Frisch’s are headwinds that will need to get offset by rent growth from the existing portfolio and acquisitions. The good news is the acquisition pipeline, as Steve has alluded to, looks pretty solid, and I think our implied volume in the fourth quarter looks pretty good relative to our total for the year. And so far, first quarter feels like it’s shaping up pretty well – pretty good as well. So yes, those are the main drivers. Yes. We don’t have too many levers here, as you know.

Operator, Operator

Your next question for today is from John Massocca with B. Riley Securities.

John Massocca, Analyst

Maybe just touching on Frisch's for a second. The 50% rent payment that occurred in 3Q, was that also the case in some past quarters?

Kevin Habicht, CFO

No, second quarter as we reported, reported full rent. So that was a delta between 2Q and 3Q. So that's, call it, $1.6 million is half rent from them. And so that's about $0.01 in the third quarter kind of headwind.

John Massocca, Analyst

Okay. And then maybe looking a little bit kind of on the same vein. The real estate expenses, net of tenant reimbursements, ticked up a little bit in this guidance versus your 2Q guidance. Is that tied to maybe a worsening outlook for the 2 kind of troubled tenants you previously mentioned? Or is there something else kind of driving that?

Kevin Habicht, CFO

Yes. Nothing else is driving that. Historically, we consider the typical rent loss to be around 100 basis points. We usually assume that about 15 basis points, or 15%, of that rent loss will result in additional property expenses. When a property is returned to us, we incur expenses such as property taxes, insurance, and utilities. This is our approach. Therefore, if rent loss increases, property expenses typically rise as well, although the latter is a smaller amount. But yes, they are indeed connected.

John Massocca, Analyst

Understood. And then kind of thinking about the lease termination income, multiples higher than kind of in past years. I mean what's driving that? Is it some of the same kind of PE, M&A and retailer expansion you're talking about in the acquisition side? Or is there something else kind of notable there?

Steve Horn, CEO

It's primarily influenced by our ongoing conversations with current tenants who wish to exit their leases. This is a key aspect of active portfolio management. When we terminate a lease, we typically have a prospective tenant lined up to occupy the space or have plans to sell it. Ultimately, it boils down to managing our portfolio and engaging with retailers looking to depart from underperforming assets, even if there are 10 or 11 years remaining on their lease. The fee for lease termination generally corresponds directly to the remaining lease term and/or the rental rate of the asset, where they will pay a multiple of years to exit the lease.

John Massocca, Analyst

Is there something notable on the macro side or something else that's making tenants more receptive to that conversation?

Steve Horn, CEO

I think what makes NNN unique in the situation that we carry conversations on with our tenant base on a routine basis. So they know that we’ll work with them where you have a lot of landlords that just say, no, pay the rent, and it will be a future problem. So it’s really making the portfolio stronger at the end of the day.

Operator, Operator

We have reached the end of the question-and-answer session, and I will now turn the call over to Steve for closing remarks.

Steve Horn, CEO

Thanks for joining us this morning, and I’m sure we’ll have a lot more dialogue in the upcoming weeks at NAREIT. Thank you.

Operator, Operator

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