NNN REIT, Inc. (NNN) Earnings Call Transcript & Summary

Greetings. Welcome to the NNN REIT Inc. Fourth Quarter 2024 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Steve Horn, CEO. You may begin.

Thanks, Holly. Good morning, and welcome to NNN REIT's Fourth Quarter 2024 Earnings Call. Joining me today is the current Chief Financial Officer, Kevin Habicht; and our incoming CFO, Vincent Chao. As outlined in this morning's press release NNN delivered 28% core FFO growth for 2024, alongside over $550 million in acquisition volume. The year concluded with a strong 98.5% occupancy rate while dispositions of income-producing assets were executed at a cap rate 40 basis points lower than our acquisition yield, including several strategic and defensive asset sales. These achievements reflect the dedication and the expertise of our best-in-class team at NNN, position us well for the near term. Key highlights, I'm particularly proud of for the year, 35 consecutive years of annual dividend increases, maintaining a sector-leading 12.1 year weighted average debt maturity and strategically positioning our executive team for the future. Despite the overall theme of maintaining a light capital markets footprint for 2024, our core philosophy remained unchanged, delivering long-term value with below average risk for our shareholders. At its simplest, our strategy focuses bottom-up investment approach, continuing to increase the annual dividend while maintaining a top-tier payout ratio. FFO growth per share in the mid-single digits over multiple years. This disciplined approach drives our acquisition and disposition strategy as well as our balance sheet management, ensuring we stay on track to achieve our objectives. Before diving into the market conditions and operational updates, I would like to formally welcome Vincent Chao to the executive team. Vincent joins NNN in early January and officially assumes the CFO role at the start of the second quarter. He brings extensive public company and investment banking experience with an expertise in Capital Markets, Corporate Finance, Investor Relations. I look forward to our partnership as we continue to grow NNN. And now to Kevin. After over 30 years of dedicated service, including 4 CEOs and over $5 billion of cash dividends paid, Kevin's commitment to excellence is an integral part of the fabric of NNN. His work ethic, leadership and passion for doing the right thing has been consistently evident, leaving an indelible mark that is woven deeply into the very DNA of NNN. Through every challenge, it has not only contributed to our success but has shaped the values of the culture that will continue to guide us long after his departure. His legacy is not just in the work completed, but in the principles and standards he has instilled to those who had the privilege to work alongside him. With that, Kevin, on behalf of the entire company, the Board, the analysts and the investor community, we want to express our heartfelt gratitude and acknowledge that you will be undoubtedly missed. As we move forward -- as we move forward to the next chapter of life, we wish you nothing but the best. This is when you kind of wish you record these phone calls. As we move forward to the first quarter of 2025. NNN maintains a robust position. We anticipate another strong quarter of acquisitions and are making significant progress with the assets related to Frisch's and Badcock home furnitures. Kevin will provide a lot more detail on the activities concerning these tenants during the upcoming remarks. Regarding the fourth quarter financial highlights. Our portfolio now comprises 3,568 freestanding single-tenant properties and they continue to perform exceptionally well. Occupancy decreased to 98.5% due to the challenges with 2 specific tenants. However, this rate remains above our long-term average of roughly 98% plus minus. And I anticipate the level increasing as the year progresses because as we report today, I feel good about the remaining tenants in the portfolio and the activities the leasing team is generating currently. In terms of acquisitions, during the quarter, we invested $217 million in 31 new properties, achieved an initial cap rate of 7.6%, average lease duration basically 20 years. Over 80% of the capital deployed this quarter was allocated to our business relationship partners. Additionally, the long-term projected deal on these acquisitions would be 8.8%, reflecting our preference for the sale-leaseback acquisition model opposed to purchasing existing shorter-term leases despite they may offer higher yields. They don't align with the assessment of our optimal risk-adjusted returns. Disposition activity was elevated this year with nearly $150 million sold at a 7.3% cap. At the start of the year, as I mentioned earlier, the team identified several nonperforming assets for strategic and defensive sales. leading to more of a compressed spread between disposition and acquisition cap rate compared to previous years. However, this proactive portfolio management enhances the overall strength of the portfolio as we move forward. You need to go back over a decade to find an acquisition year with an initial cap rate higher than our 2024 deal flow. The current pricing for the pipeline coming in this quarter will be slightly tighter than the fourth quarter of 7.6%. And as I look ahead in the next few quarters, I expect pricing to compress a little bit further in the margins due to the heightened competition as market players push to achieve high acquisition volumes. That said, I'm confident in our team's ability to identify and execute the right risk-adjusted deals to meet our 2025 annual objective. With that, let me turn the call over to Kevin for the final time to provide more color and detail on our quarterly numbers and 2025 guidance.

Great. Thanks. Thank you, Steve. As usual, I'm going to start with a cautionary statement that we will make certain statements that may be considered to be 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 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. Okay. With that, headlines from this morning's press release report quarterly core FFO results of $0.82 per share for the fourth quarter of 2024, that's flat with year-ago results once you adjust 2023 results for the incremental accrued rental income that we noted in footnote 1 on the press release. AFFO results were $0.82 per share for the fourth quarter, which was also flat compared to the year ago results. For the year, core FFO and AFFO were $3.32 per share and $3.35 per share, respectively, and that results in a 1.8% increase core FFO per share results for 2024 and a 2.8% increase in AFFO per share. These results were generally in line with our expectations and put us at the top of our previous guidance range. Results in the fourth quarter did include $1.2 million of lease termination fee income and for the full year of 2024, $11.4 million, which as we noted throughout last year, is well above historical norms and was above our full year 2023 $2.4 million of lease termination fee income. Also, in the fourth quarter, 2024 G&A expense included a state franchise tax refund due to a retroactive change in Tennessee tax law that reduced G&A by $1.7 million to $8.7 million for the fourth quarter and to were $44.3 million for the full year, and that represents 5.1% of total revenues for the year and 5.2% of total NOI. Occupancy was 98.5% at quarter end, which, as anticipated, 80 basis points for the quarter due to 2 failing tenants we talked about on last quarter's call. more about which in a moment. Our AFFO dividend payout ratio for the year 2024 was 68.2%. That resulted in approximately $196 million of free cash flow, and that's after the payment of all expenses and dividends. We ended the quarter with $860.6 million of annual base rent in place for all leases as of December 31, 2024, which would -- that would take into account all the acquisitions and dispositions completed through year-end. So first, yes, a quick update on our 2 troubled tenants, which we discussed last quarter. First, Badcock Furniture, which was in liquidation. They completed their going out of business sales. And in the fourth quarter, rejected the leases on all 32 properties we had leased to them. Prior to the fourth quarter, those leases produced $5.2 million of annual base rent, and that was 0.6% of our ABR at the beginning of the fourth quarter. Prior to rejecting the leases, Badcock paid us roughly half of what they would normally -- would have paid us during the fourth quarter. We've been working on plans to lease or sell these properties, and we've had a good start in that effort given we've just got possession of the stores mid-fourth quarter. So by year-end, we were able to release 5 of those properties at roughly our long-term average of 70% rent recovery, again, with no TIs for our vacancy releasing. Additionally, we were able to sell 6 properties, generating net proceeds of $21.8 million, which using prior Badcock rent on these properties would produce a 5.1% cap rate on those dispositions. So assuming we invested these sale proceeds at the fourth quarter's 7.6% acquisition cap rate. This would result in generating 49% more rent on those stores than Badcock was previously paying up. If you combine the outcome of the 5 re-leased properties and the 6 sold properties, the rent recovery on those 11 stores is approximately 113% of prior rent. Now while these averages may not hold up for all Badcocks, we are off to a very good start terms of economic outcome as well as minimizing the downtime for this first batch of or call it, 35% of our former Badcock stores. Next. Second tenant on, Frisch's, a Midwest big boy hamburger concept that's been around for several decades. They only paid us half the rent onus in the third quarter last year and they paid us no rent in the fourth quarter. We owned 64 Frisch's properties at the beginning of the fourth quarter which represented 1.5% of our annual base rent or $12.6 million. As you may recall, in this case, the tenant did not file for bankruptcy. So we had to go through the time-intensive process of getting back possession of the stores through evictions. We've initiated that eviction process for all 64 stores, and as of year-end, had possession of 33 stores. Of those 33 stores, we've re-leased 28 of those stores to another restaurant operator. Because we had a read on prior store sales for these properties and also in order to speed up the leasing process on a large group of properties, we were willing to trade off some base rent for more potential percentage rent. So these 28 stores will produce approximately $2.8 million of annual base rent, but we will also get 7% of store sales above a fixed break point. That rent commences May 1, 2025. We're not -- at this time, we're not looking to articulate other lease terms and as we have a number of other Frisch's to re-lease. We will soon have possession of all the former Frisch's properties and are in full re-leasing mode on that batch of stores. Bigger picture and really the key point of the combined Badcock, Frisch's vacancy, consistent with these early resolutions I just reviewed, we remain optimistic to, a, get them leased or sold more quickly than usual; and b, hopefully improve upon our typical vacant property rent recovery of 70% versus prior rent with no TIs. We will provide further updates with first quarter results. But most importantly, when the dust settles on all this in say, 2026, we believe per share results should be impacted by less than 1% and versus the prior rents we were getting from the original tenant. So a very modest impact on bottom line results when the dust settles. Okay. With that, switching gears. Today, we initiated our 2025 core FFO guidance at a range of $3.33 to $3.38 per share and 2025 AFFO guidance with a range of $3.39 to $3.44 per share. Page 8 of the press release gives you some details on the key assumptions underlying that guidance and it includes $500 million to $600 million of acquisitions, $80 million to $120 million of dispositions. G&A expense of $47 million to $48 million, and property expenses net of reimbursement of $15 million to $16 million, which is higher than usual due to the Badcock and Frisch's vacancy. Hopefully, we will have the opportunity to drift FFO guidance higher as the year progresses as we have done in the past. Moving to the balance sheet. We ended the year with no amounts outstanding on our $1.2 billion bank line, so we're in very good leverage and liquidity position as we roll into 2025. Our next debt maturity is November 2025 and our weighted average debt maturity stands at 12.1 years at year-end. Maintaining our Life Capital market footprint, we funded 61% of our $565 million 2024 acquisitions with free cash flow of $196 million, plus $149 million of disposition proceeds. Net debt to gross book assets was 40.5% at year-end, that's down about 150 basis points from the year before. Net debt-to-EBITDA was 5.5x at December 31. Interest coverage and fixed charge coverage was 4.2x for 2024. And as a reminder, none of our properties are encumbered by mortgages. So we remain focused on working to appropriately allocate capital, which to us means ensuring we're getting what we believe are sufficient returns on equity while controlling risk through property underwriting and maintaining a sound balance sheet. Valuing equity adequately, whether that equity is produced by free cash flow, disposition proceeds or new equity issuance is at the heart of growing per share results over the long term, and it helps us not to confuse activity with achievement. And Steve, thanks for your kind words earlier. In closing, I will say it's very bittersweet for me to be on my last quarterly earnings call. I think I've been on well over 100 of them. NNN is in very good shape and its approach to navigating investment opportunities and capital markets is well grained in this institution. So I leave you in the capable -- very capable hands of Steve and then -- and the rest of the team here at NNN. Thanks to so many of you on this call who I've known and worked with for many years and we've been gracious to tolerate my many issues. These long-term relationships have made the journey for being much more enjoyable in satisfying. And as I've said a number of times this past month, the boundary lines of my life have fallen in pleasant places and that has included my time and relationships in REIT world. It's been a great ride, and I can be nothing but thankful to the investor and capital markets community and especially my colleagues here at NNN. I will cherish some memories and welcome the opportunity to stay in touch. With that, Holly, we will open it up to any questions.

[Operator Instructions] Your first question for today is from Brad Heffern with RBC.

Congratulations, Kevin. Hope you have a great retirement. Knowing you, I suspect you've been saving up for it, and welcome to Vincent as well. For the AFFO guidance, I'm a little surprised that you're able to deliver this 2% growth just given the elevated lease termination from last year, the impact of Badcock and Frisch's, is there's also this 4Q tax benefit? Is there some sort of offset to that, that I'm not thinking of? Or just any color you can give on the bridge that would sort of preserve that growth number?

Yes, not in particular. We are having, I would say, somewhat better-than-expected kind of re-leasing outcomes or resolving our Frisch's and Badcock. That's all happening more quickly, particularly timing is of great value, as you know, in that process. And so that's been very helpful. And -- but yes, there's no other big major items to speak of. A lease termination fees are always -- we don't give guidance and they're always -- they're so difficult to give guidance on. And so that's -- that will play out the way that plays out during the year. But yes, nothing else to speak to of note. Timing is really critical. And we had a solid fourth quarter acquisitions, solid second half of '24 acquisitions. And that really accrues to the benefit primarily of 2025. And so all those things kind of add up to help push results along a little bit.

Okay. Got it. And then maybe you didn't give this on purpose, but the $2.8 million for the released Frisch's, how does that compare to the prior rent on those stores? And then for the percentage rent, is that set at a level where you would expect to regularly realize that right away? Or is that something that requires upside?

Yes. Yes. So a fair question. Yes, the $2.8 million, I would call it, roughly 50% of prior rent. And we -- like I said, we were willing to take that kind of pain, if you will, on the annual base rent to get the benefit of what we think will produce notable potential percentage rent on those stores. We had the prior store sales, and this was a way, again, for us to speed up the process. We just got these 33 stores back in the fourth quarter, and we hadn't re-leased in the fourth quarter. So it's very quick again with no TI. And so that -- we saw material value in that part of the equation. And so because we had prior store sales, we're optimistic that we'll be able to achieve something north of our normal 70% rent recovery on re-leasing vacant spaces. And we'll see how much better we can do than that. But we think there is upside there.

Your next question is from Spenser [ Ginter ] with Green Street.

I'm just curious on the transaction from what you guys have been seeing being in terms of 4Q activity and then 1Q, just as it relates to the mix of portfolio deals versus one-off or anything that you're doing outside of relationship deals.

Yes. I mean outside the relationship deals, there has been much large-scale portfolios for our market. It's been a little bit slow, that's why we've been mining. 80% of our deal flow in the fourth quarter was through the relationships, which -- one of the transactions was pretty notable, which did not get marketed just as a direct deal. First quarter is looking pretty good right now. But it's what I would call doubles kind of that $20 million to $30 million deal range. We're not seeing the $150 million, $200 million deal. Now there is 1 potential large portfolio coming out kind of in the family entertainment space that we're aware of, but it's a little early to say the pricing on that right now.

Okay. And then Kevin, yes, congratulations. We will miss you. One just last one for you. Has anything changed since last quarter just in terms of the amount of credit losses being underwritten for '25.

Yes, not materially. So in our guidance, and I might have sort of added this into the comments on the last question from Brad, was for this year, we've assumed 60 basis points of rent loss. Historically, we've been more in the closer to 100 category. We typically don't experience that level. So we think we've got enough baked in for credit loss for this year. We don't really have any other tenants in the immediate horizon that it feels like we have real exposure to in terms of credit loss. A and B, that 60 basis points obviously does any pain from Badcock and Frisch's is above and beyond that 60 basis points. Let's put it that way. If folks are one reason. So yes, we think we're in good shape on that front. And like I say, are not pointing investors to any other notable concerns at the moment for tenant credit.

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

Congratulations, Kevin, on a wonderful career. And as a going away President, I'll ask you to walk us through kind of what you've baked into your guidance for Frisch's and Badcocks related to the timing of the leasing and recovery rate for 2025?

Yes. And in my usual way, I'll be sufficiently elusive because it's a work in process -- in progress, I should say. And so it's unfolding as we speak. The only thing I can say is we remain -- historically, over the years, releasing something in 9 or 12 months, it was kind of normal and typical it's going along more quickly than that on both Badcock and Frisch's as evidenced in the fourth quarter, and that continues into the first quarter. I mean I don't have a lot of details that kind of give you on that re-leasing effort. Like I said, it's very current and it's just tough for us to put a hard stake in the ground on that as we speak. But only to say it's going better than normal in terms of timing as well as economic outcomes.

Just to clarify that, right, so we should assume that you're baking in -- you're baking in something better than historical of the 9 to 12 months and the 70% recovery rate. But the rest is, I guess, kind of -- you're not giving anything else on beyond that.

Yes. No, we're in a state of flux until we get some of these pinned down. But we've got a number of deals in the hopper working, and we'll see how that all shakes out. But there's the process and our guidance has the opportunity to drift higher, hopefully, throughout the year if we can improve upon things.

Got it. And then on the 60 basis points of credit reserve for 2025, but like lower than what you've seen historically, or what you typically bake 100 basis points. Maybe you could just provide some context in terms of what you -- what's the long-term average for that on that 60 basis points compares to it, just to put some perspective because you just went through 2 large events and now you're reducing what you're baking in for the year. So I'm just trying to understand...

Yes, a fair question. Yes, absent which was a highly unusual 2 tenants simultaneously going away, which -- that was 200 basis points. And so historically, our credit loss typically runs in the kind of the 30 to 50 basis points kind of range. And so there is some assumption on our part that we've got 2 of our biggest credit concern down of the way in some respects and resolved outside of that 60 basis points that we really don't need 100 in our guidance. And so we frankly hope that there's maybe a degree of conservatism in the 60 basis points, given our historical averages. And like I said, having cleared out to over the weaker lengths, if you will, in our tenant credit.

Congrats again.

Your next question for today is from John Kilichowski with Wells Fargo.

Congrats again, Kevin. Maybe if we could start, just kind of go back to the transaction market here and just talk about how deal flow looks at this point versus maybe this time last year? I know you talked about it sounds like elevated deal flow, but also elevated competition. Maybe how do you think that, that could manifest in changes to your acquisition guide near the low or high end or if there's room to maybe push above the high end? And then when you talk about that elevated competition, who is that? What are the returns that they're looking for?

Yes, that's a good question, John. As far as our guide for the year, historically, we've beaten our guide over many years, just the visibility is only 90 days. from the transaction market. So we're conservative, so we usually start on the lower end. What I know is pricing in the first quarter I'm confident we have a good start to that guide for the year. The market is elevated as far as deal flow compared to last year. Last year, when we came into the year, it was more of a capital markets issue, that we didn't want to access the equity market. So we set our expectations for the year on the lower end to primarily use the free cash flow to fund acquisitions. As far as competition, I've been doing this 20-plus years. Kevin has been doing it at 30-plus years. It's always a competitive market. It's just the names have changed. There's only a few of us that have been around that long. Now as far as there's some private money coming back into the market a little bit, but their return expectations are a little bit higher. But more importantly, the amount of money they have to deployed into acquisitions is significantly higher than ours. So they are going to go after what we would call the elephant deals on deal flow of base hits. So they really don't play in our world. And again, 80% of our deal flow came from relationship we have a really good moat around that to avoid competition playing in our field. But no, overall, I feel good sitting here today on the call as far as the activity, what's in the pipeline, what our team is evaluating. And there's no deals our competitors have done that we did not see. So until then, I know our acquisition guys are doing the right thing.

Great. I appreciate the analogy. And maybe if we could jump to rent coverage levels. I know they're not provided. But if you can kind of give any color on how those are trending within the portfolio, maybe particularly in the car wash and QSR space where we've heard of some pressure anecdotally?

Yes. I mean let's just address the carwash space. NNN does a fabulous job meeting with management teams. We view ourselves indirectly as an investor in the company. So we meet with all the management teams here their game plan. I could argue that we institutionalize the carwash business doing sale leasebacks back in 2005 when we initially started with Mr. Carwash, our #2 tenant. So we have a fair amount of experience, and we have 0 zips, and that's kind of the recent headline in the carwash industry. Our car wash is just Mr. Carwash year-over-year rent coverage went up. It's north of 4. And the other car washes that we've been doing kind of in the 2.5% to 3.5% range, and they're performing well. We're highly selective when we do car washes that we actually, for the most part, shut it down in the fourth quarter. But things kind of stabilized. QSR, we're kind of seeing sales flat for the most part. They're still trying to absorb the labor issues where their margins got compressed. But overall, I'm comfortable with our QSR exposure, and there's no tenants that we're concerned with on the QSR or car wash side of things currently.

Your next question is from Farrell Granath with Bank of America.

This is Farrell Granath. I want to say congratulations to both Kevin and Vincent, for your next chapters in your life. But I also wanted to ask about the type of demand that you're seeing for both the Badcock and Frisch's assets. Are you receiving a lot of inbounds, and are they within seeing industry verticals?

We're seeing a ton of interest on the Frisch's and a fair amount on the Badcock. As Kevin addressed some in his remarks, we're doing really well with Badcock, but it's a portfolio and the easier assets to sell in the good ones and they go first. So our team has some work to do as we move through the process. As far as industries, yes, you're getting a lot of restaurant interest. And it's not only casual dining, there's QSR. Again, back to car washes. There's a fair amount of car wash interest and auto service. So it's across a wide range because the reality is the 5,000, 6,000 square foot boxes on 1.8. There's a lot of tenants that like that use. I would be concerned if they were 20,000, 30,000 foot boxes that makes it a little more challenging to re-lease. But a small restaurant, 1.8 well-located, hard corner. There's a lot of users for those.

Okay. And I also wanted to comment on the 50 basis points, I know we've been harping on it a little bit of the credit loss assumed in guidance. I know you made some commentary about there's no near-term tenants that are raising concern and that was also a factor in the reduction. But do you still maintain a credit watch list? And is there a certain percentage of ABR that's associated with that?

Yes. Those who know me well, I'm perpetually worried about a lot of tenants always, but none rise to the level that influence our thoughts around what credit loss might be for this year. And so -- but yes, we've talked about names over the years. We don't need to really talk as much about Frisch's and Badcock anymore, but at home has been one that we've thought about and still watching very leveraged. AMC, of course, has been on the list, but to be quite candid, we are past the point that they seem to have found, a, their business is getting better, and so the fundamentals are better; and b, they're perpetual issuers of capital that has kept landlords very happy. And I have really no near-term concerns about their ability to pay us rent in 2025. And so -- so the ones that remain on the list, and there's a number of them. A, they generally are not larger exposures; and b, I don't feel like they're imminent kind of at risk of not paying rent. But we think the 60 basis points should comfortably handle whatever exposure we have on that list.

Your next question for today is from Smedes Rose with Citi.

I just wanted to follow up. You mentioned that you might see or there might be a larger portfolio of family entertainment assets coming. Is that something that you -- I mean, I guess, price depending, but is that an area that you would be interested in increasing your exposure to if it were to come to market at a reasonable -- at a price that is reasonable to you?

Yes, making sure everything fits in our underwriting philosophy, price being important. Yes, it's something if the economics make sense, but more importantly, the real estate fundamentals make sense, it's something we would look at and do it. Now the question is, at the start of the year, as you know, speed, there's -- people are coming out with guidance and get overly aggressive on acquisitions. If I had to do $1.5 billion, I'd probably have this answer a little more confident like, yes, actually, we would do it. But with the guide trying to do kind of that $500 million, $600 million, we get a little bit more conservative on the underwriting and our box gets a little bit tighter. And I think that's kind of proven out with the Badcock and the Frisch's on our releasing efforts.

Right. I just wanted to ask you kind of big picture, too. It sounds like you expect kind of a slight sort of maybe downward bias in cap rates over the course of the year, given some of the things you've talked about. I mean, so does this sort of imply, I guess, that the spreads for you are compressing a little bit or how -- and given elevated debt costs? Or how are you kind of thinking about your investing spread at this point?

So as far as the cap rates, yes, at the margin, I'm seeing them go down, is a 10, 15 basis points. But that's just a result of having to win deals and our competition is going to drive them down. But as far as looking at spreads, Kevin, do you want to answer it?

Yes. I mean our typical 60-40 roughly equity and debt. And the way we think our debt -- long-term 10-year debt today for us is around 5.5%. So that's, call it, 40% of the equation. And then the way we think about equities, when we're making these kinds of capital allocation investment decisions that we've historically -- we've burdened our equity internally at about 8.5%. So that creates a weighted average cost of capital hurdle, but we don't need to spread above our hurdle in the low 7s. And so as long as we're kind of operating in that low to mid-7% range, we feel like we're producing sufficient returns to shareholders and returns on equity to allow to consider making capital allocation or investment.

Okay. I appreciate it. And I just -- I wanted to ask you just one quick one. We've just seen some negative headlines around Denny's. And I was just wondering, is that sort of showing up on your screen at all -- sorry, for so, which ones you own and which ones they're talking about? And is that on your watch list or...

Yes. We own some Denny's. I will say, again, which is critical for us is the price per pound that we own those stores at, and therefore, the rents on those stores are very attractive. And so -- and some of them are operated by franchisees of Denny's. And so yes, sometimes it's hard to -- when you're looking at headlines to appreciate kind of the -- whether that's particularly applicable to us or not. But yes, the chain Denny's has been struggling for a while. Don't get me wrong. We've been watching that for a while, but we feel like our locations and particularly the rents on our locations are at levels that we're not too anxious about.

Yes, real quick speed. Our Denny's for the most part, were bought in 2006.

Your next question is from Ronald Kamdem with Morgan Stanley.

Congrats, Kevin and Vin. Just two quick ones. One, obviously, is just on the bad debt. And I'm thought about the guidance for this year, you debated whether it was 100 basis points like historical or going with 60%. I'm just wondering like what sort of got you comfortable to be able to put this number out CFO transition is happening. It's still early in the year. Is it literally just because the 2 bankruptcies went through? Or are you -- is it because January is going better? Just trying to give us a sense of what got you the comfort to go out with the 60 basis points here versus 100 basis points historical.

Yes. Well, historically, we've not ever really used 100 basis points. It's more than kind of that 30% to 50% kind of range. And so that's part of it. But to, to your point, yes, some of the deadwood is cleared out already. In the near term, most acute credit concerns are accounted for elsewhere, if you will, outside of that 60 basis points. And then lastly and layered on top of that, we just don't have any particular tenants that were -- have immediate concerns about. And so all of those things made us comfortable to do that. And so that's how we got there.

Great. And then my follow-up question, which is a quick 2-parter. One is just -- I think you talked about releasing the boxes or probably happening faster than you expected. Can you talk about sort of the mark-to-market on rents is the number one? And then number 2 is just on the debt coming due this year. What are the plans for that? And where do you think you could issue?

Yes. In terms of -- I'll speak with the debt first, just we think 10-year debt for us today is around 5.5%. Debt maturity is not until November. And so we have a good bit of flexibility in deciding where to actually execute a transaction to refinance that debt. And obviously, along the way, we could always hedge some of that or lock in some of that interest rate risk ahead of time if we wanted to. But historically, we've not given guidance on capital markets activity. So I don't have much more specific than that. As it relates to re-leasing spreads on the Frisch's and Badcock, I mean the initial round of Badcock is if you look at the re-leasing, which the lease portion was close to our typical 70% kind of number. But if you layer in the disposition Badcock, that was at well above and you reinvest those sale proceeds at kind of our mid-7% kind of acquisition cap rate. You end up with rent well above 113% combined for the release and the disposition sold Badcock. And so that's going very, very well. As I said, we don't expect that likely to hold up at those levels, but the early indication for the first 35% of our Badcock exposure is going very well. And so we're encouraged about that. On the Frisch's, I think it will be more of the same. We -- in the first big batch, we took -- we're willing to take a little bit of pain on annual base rent, and we'll capture more potential rent from percentage rent upside there. And so we think we'll -- we can get back to equal to or better than our historical 70% kind of number. We know what the store sales were at those locations previously, and we know that given that the company went out of business, maybe they weren't run the best that they could have been. And so we're optimistic about that. But we think timing will go faster than typical for us, and we remain optimistic that at the end of the day, we can improve upon our 70% recovery.

Your next question for today is from Rich Hightower at Barclays.

And again, congrats to Kevin, on a great career in REITs and congrats to Vin on the incoming into that set. Obviously covered a lot of ground on the call this morning, but I want to go back and I must have missed this, but on the re-leasing of the Badcock space in particular, did you guys mention the -- maybe the retailer tenant mix that is occupying that space or what that looks like? And then I've got one follow-up after that.

Yes. No, we didn't mention the retailer mix. There's actually a couple of them on the re-leasing, we're home furniture tenants. And then the other re-leasing aspect Kevin is making the assumption, we sold those assets and then redeploying the sales proceeds at a 7.6% as far as the recapture rate.

But yes, it's coming from a variety -- on the Badcock, it's a variety of uses. We've seen interest from kind of medical kind of space. And so it's a [ pulpery ] yes, some hardware. It's a real mixture of uses for it. That box is 17,000 square feet. Our rent was $9 a square foot from Badcock. And so it's sufficiently fungible, and we think we can end up with a reasonable outcome there on the re-leasing efforts.

Okay. Great. I'm going to make sure to put [ pulpery ] in my notes here.

[ Pulpery ] It's a big seller. Yes.

And then just a quick follow-up as I kind of scroll through the top tenant list. And I appreciate the fact that maybe no immediate watch list worries as you guys have articulated on the call so far. But if I think about Mister Car Wash, Dave & Buster's Camping World, and I just look at the equity values of all of those companies some of which are coming off of maybe a post-COVID high in the Carwash business is kind of its own separate category. But is there anything differentiating about your locations in particular that makes you less worried than perhaps the average location in the portfolios generally for those companies.

Well, Mister Car Wash, we primarily did in 2005, 2006 time frame, a long time ago. And our cost basis in those assets, and as I've mentioned earlier in the call, is extremely low, but the rent coverage on the property level is north of 4 at the Mister Car Wash exposure. So very comfortable with those assets because Mister Car Wash is a true operator of car washes Unlike there's a lot of entrants in the car wash where private equity money followed. So they were maximizing proceeds, so they didn't have to put any equity in the deals. Camping World, I would say, over the years, we've done business with them for a long time, and we've culled the portfolio with management of substitution or dispositions to ensure that we have the assets that they want to operate in the long run. So -- and it's kind of same full with Dave & Buster's. We've been doing business with them for a long time. And that business is at the asset level. So our cost base has been holding up.

Your next question is from Rob Stevenson from Janney.

Kevin, you talked about the revenue from Badcock and Frisch's, but can you talk a little bit about any material elevation of expenses that you guys are getting hit with today that might burn off over the course of '25?

Yes, yes, fair question. Yes. So you noticed in our 2025 guidance, the net property expense number of $15 million to $16 million is probably $4 million to $5 million higher than what I would think of as kind of normal for triple end in most years. And so you can attribute pretty much all of that related to Badcock and Frisch's. So as you roll into 2026, yes, that should fade away. Yes.

Okay. That's helpful. And then are you guys expecting to put -- you talked about the Frisch's without any CapEx. Are you expecting to put any material amount of money in the Badcock assets or anything else in the portfolio in 2025 from a leasing or from a development redevelopment standpoint?

We always consider it, but you know our predisposition is we'll trade off lower rent for OTIs generally. That's not an absolute rule. It will there be some property or 2 or 3 that we make the decision. That's the best economic decision to make. So we may put some in, but it shouldn't be a large number in the scheme of NNN size. And so -- yes, I don't think we're going to waver too much from that. But the -- there might be a little bit more repairs and maintenance a little bit. Some of that will flow through property expenses rather than TI CapEx. But yes, we're inclined to not think there's a whole lot of value in TIs. But from time to time, we'll consider it. And if it fits in the equation, if you will, in terms of what we're going to get in rent and what the alternatives are, we may pull the trigger on some of that.

But as we sit here right now, there's no deals in the pipeline that require any significant.

Okay. And then Steve, other than the Kent Convenience stores, any major concentrations in the fourth quarter acquisitions that you guys did?

It was Kent Kwik was the primary one. just kind of give you a little bit of color. That relationship goes back as far as the first deal we closed was 2019, and we did a little bit in 2019, 2020 or 2020. And then Few years later, we did -- they did an M&A opportunity in Florida, which we have financed that. And then we did a fairly substantial sale-leaseback in the fourth quarter with them. So it's just a relationship that we've maintained for a long time. And then the other one was Super Start Car Wash that rolled into our top 20. That was just some first build-to-suit stuff we had in the pipeline over the year that completed in the fourth quarter.

Okay. And then Kevin is my going away present for you, one last one here. You talked about the lumpiness of term fees. Anything known in 2025 thus far, either received or known of any materiality?

Yes. I mean, not that we are giving any kind of guidance on. And so that's -- which we don't. We've historically not. Historically, so the answer is we're not putting out any guidance on that front. But historically for us, we generate about $3 million a year historically of lease termination fee income. So I expect there to be some. It's just -- it's a bit of a wildcard as the amount and the timing for that over the course of the year, which is why we don't give guidance.

Your next question is from Alec Feygin with Baird.

Congrats Kevin. Congrats, Vin. It was a pleasure to work with you and also congrats to excited to work with you. Kind to go off the last question on the termination income, is there anything assumed in guidance on that front?

Yes. We always have a general assumption in there for lease term, like I say, is normal for us is $3 million a year. and we've made some assumptions for that in guidance. But like I say, we don't publish that because, to be candid, we never know precisely where that's going to end up ourselves. And so reluctant to kind of go out and public and put a stake in the ground on that number.

Fair. And then does the nonreimbursed expense guide assume additional leasing of the recently vacated assets?

Yes. Yes. I had some in there, but the expenses will hit -- as you're talking about the nonreimbursed property expenses the guidance of $15 million to $16 million. That, that should be fairly steady throughout the year. I mean, I think it's probably a little bit more front half loaded and a little less second half loaded going from memory. But just as we get things leased up, then some of those property expenses become the tenant's obligation. So -- but that -- that's all loaded into our thoughts around getting these properties resolved, sold or re-leased.

Your next question is from Linda Tsai with Jefferies.

Congratulations, Kevin, you have a lot of fans and will be missed and congrats to Vin, too. The increase in G&A guidance, you highlighted a onetime benefit from last year. but you're also going to cost control. Do you think there's some room on that G&A guidance to come in lower? And then, Kevin, is there a charge for your retirement embedded in that range?

Yes. So the way we've handled executive retirements, we have a separate line item for that. And so whatever cost involved with Kevin is -- will be in that line item. So to answer your question, it's not in G&A. I guess the one thing to keep in mind on G&A is 2024 actual number came in at where we up $44.3 million. And so to normalize that, you really need to add, if you will, that $1.7 million that would take it up to $46 million. And so compared to $46 million to our next year guide -- 2025 guide, $47 million to $48 million, the way I would kind of think about it. So there's a kind of a general inflationary increase in that number. But again, as a percent of revenue, it's not moving materially.

And then just one other one. Any thoughts on how dollar stores are thinking about their store expansion plans these days?

Linda, it's Steve. We don't do much with the dollar stores, and it has nothing to do with the business model. It was just always primarily the real estate. But over the years, they've been one of the big expansion groups for the net lease business. But yes, we don't regularly call on the Dollar store corporate and/or developers. So I don't have much insight for you there.

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

Kevin, thank you for taking all of our questions over the many, many years. Just kind of looking for a little color maybe on the outlook for 2025 lease expirations. Anything notable that stands out? And I guess you're kind of expecting the typical recovery rate on rents expiring?

Yes. I think to play out typically. I think we're a little bit heavy in convenience stores in terms of lease expirations this year, and they're pretty solid performers. So we're not expecting adverse outcome relative to historical norms. So -- but yes, nothing of note in my mind.

Okay. And then maybe bigger picture, given transaction volumes have typically been focused on relationship tenants. How much of the investment outlook beyond maybe the LOI and PSA portion of the pipeline is contingent on those tenant partners being kind of active in the M&A space, and I guess the M&A space being kind of robust more broadly?

Outside of -- kind of let's go back pre-2020, I would say a lot of our relationship business was driven by the M&A market side of things. And then kind of post-COVID when the M&A market was slowing down, but yet our large sophisticated tenants still felt the need to grow. So they did a lot of kind of development from self. So we were kind of leaning in. If you recall, a couple of years ago, where our build to see our split-funded deal ramped up to $300 million, where historically, it was kind of $100 million. But what I'm seeing in 2025 is the M&A market is picking up a little bit in the auto services, convenience store that part of our guide does include a little bit of the M&A, but it's definitely not dependent on the M&A side of things and the relationships.

Okay. And then, you touched on it a little bit, but in terms of the released Frisch's assets or former Frisch's assets, is there any reason the percentage rent would be a 2026 event versus 2025? Or should we kind of think about that as something that potentially impacts your 2025 earnings leases get started?

Well, beyond the fact that the rent on those -- that first batch doesn't start until May 1, so there's that. So in the first half, call it 0, close to 0. And so -- but yes, starting in the second half of this year, you should get some ramp-up in percentage rents related to that batch of stores. And obviously, for full year next year as new restaurant operators get things up and running.

[Operator Instructions] Your final question for today is from Omotayo Okusanya with Deutsche Bank.

Also a member of the Kevin Fan Club, you will be missed. Best of luck in retirement and also a member of the Vin fan club. So Vin, welcome aboard at NNN. My question is around acquisitions. Again, the $500 million to $600 million outlook for the year and also the disposition outlook. Just kind of curious from an acquisition perspective, retail categories that maybe you're looking to get a little bit more invested in versus that on the sales side, categories that you're looking to lighten up on? And also if the world of tariffs kind of impact any of that in terms of industries you suddenly become more attractive or less attracted to?

Yes, you know our philosophy. We look at the real estate more than the category, who's operating the site isn't as important as long as the real estate fundamentals are in line with market. Because at the end of the day, if that tenant goes away, we get market rent back. So -- but because we are so relationship focused, I see 2025 being very similar to our current portfolio, where we will dig up our convenience stores and auto service sectors. And we're starting to see a little bit more activity in the QSR side of things, which I really like the QSR because that 1.5 acres, 3,000 square foot box is very fungible on the real estate side. So I'm looking more for QSRs convenience stores and auto services percolating up in 2025. As far as dispositions, that's more -- even if it's a good industry, these retailers don't always pick performing assets over a 15-, 20-year lease. Markets change, consumer behavior changes, so we work really hard with the retailer, and that's where the relationship value is. And I think that's why 85% of our leases renew at the end of terms. As we look to kind of prune the portfolio each year a little bit, that $100 million range and start weeding out the underperforming assets where the retailer assists us in determining which ones to sell. So it's not a particular category. I would say last year, medical kind of urgent care was a targeted sector we disposed of, and we kind of took advantage of the COVID bumped on their sales and sold those into the [ 1031 ] market. But this year, there's not a particular sector. I'm looking to get out of this more individual assets that aren't performing up to the levels of the tenant would like.

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

Yes, I appreciate you taking the time today. Thanks for joining us, and we'll see you guys in person in the upcoming conference season. Kevin, one last, Good bye.

Thank you. All right. Thank you. Good time.

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