NNN REIT, INC. (NNN) Q2 2026 Earnings Call Transcript

Greetings. Welcome to the NNN REIT Inc. Second Quarter 2026 Earnings Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Steve Horn, CEO at NNN REIT Inc. You may begin.

Thanks, Holly. Good morning, and welcome to NNN's Second Quarter 2026 Earnings Call. On the call today with me is Chief Financial Officer, Vin Chao. As this morning's press release reflects, NNN's performance in 2026 continues to produce strong results, including high occupancy, impressive rent collections with under 5 basis points of uncollected rent and solid acquisitions driven by our deep tenant relationships. We're well positioned to continue enhancing shareholder value as we move into the second half of the year and beyond. In July, we announced just over a 3% increase in our common stock dividend payable on August 14, marking 2026 as our 37th consecutive year of annual dividend increases. That places NNN among 70 U.S. public companies and just 3 REITs to achieve that track record. Given our continued consistent performance of the portfolio and the acquisition pipeline, we're updating our 2026 guidance for AFFO per share to a range of $3.55 to $3.59, our second guidance increase of the year. This reflects our discipline of long-standing multiyear strategy for consistent per share growth. As far as the portfolio performance, the 3,774 freestanding single-tenant properties continue to perform exceedingly well during the second quarter. Occupancy is up 50 basis points from the first quarter to 99.1%, which is an increase of 110 basis points from last year. We see positive momentum across our tenant base, highlighted by 2 significant M&A transactions announced in mid-July involving tenants in the portfolio. Mavis Tire announced an agreement to acquire Pep Boys for approximately $700 million of cash, further strengthening its position as one of the nation's leading automotive service providers. Additionally, Big Brand Tire announced an agreement to acquire Belle Tire. The combination creates a network of more than 530 stores with over $1.5 billion in annual revenue. Acquisitions for the quarter, we invested just north of $290 million in 89 new properties at an initial cash cap rate of 7.3%. More importantly, an average lease duration of just shy of 18 years. The product mix is primarily auto service, discount retail and early childhood education with a median purchase price of $2.1 million, an average of $3.2 million. During the first half of 2026, we invested $430 million in 130 new properties at an initial cash cap rate of 7.4%, average lease duration just over 18 years. Cap rates have been fairly stable over the past 6 quarters, reflecting a competitive investment environment. But looking ahead, we believe modest cap rate compression is possible during the second half of the year, supported by the composition of our active acquisition pipeline and the portfolios that are currently in the market today. Our investment approach remains unchanged. We continue to apply disciplined underwriting standards and focus on originating direct sale-leaseback transactions with relationship tenants, where we can negotiate favorable economics and structure investments utilizing our landlord-friendly long-term duration triple-net lease. This strategy continues to provide the most attractive risk-adjusted opportunities compared to broadly marketed assets, including 1031-driven transactions. Given the visibility provided by our pipeline and our ongoing discussions with transaction partners, we are increasing the midpoint of our 2026 acquisition guidance to $750 million from $600 million. We expect most of the acquisition volume to be sourced through direct original sale-leaseback transactions, reinforcing our emphasis on proprietary deal flow, disciplined capital deployment and long-term value creation. As far as dispositions, during the quarter, we sold 26 properties, including 19 vacant assets, generating approximately $37 million in proceeds for reinvestment. The income-producing assets were primarily noncore properties that were sold at cap rates approximately 170 basis points below our acquisition cap rate, demonstrating continued demand for well-located net lease assets. As we previously discussed, we expect to be more active on the disposition front throughout 2026 as we continue to optimize portfolio quality and enhance long-term shareholder value. While our strategy remains focused on acquiring durable, income-producing real estate, disciplined capital recycling is an important component of our investment process. And with that backdrop, we're lifting disposition range to a midpoint of $140 million. Active portfolio management is essential to maintain a high-quality portfolio that is positioned to generate stable and growing cash flows. We believe selectively recycling capital from noncore assets into higher conviction investment opportunities will strengthen the portfolio and improve its long-term earnings and cash flow profile. As far as the balance sheet, I don't want to take all of Vin's thunder, but the balance sheet remains among the strongest in the net lease sector and continues to provide significant financial flexibility. We ended the quarter with a weighted average debt maturity of approximately 10.1 years, which is nearly double the nearest net lease peer, and we also maintained $1.4 billion of liquidity. This conservative capital structure positions us well to fund the remainder of 2026 pipeline while maintaining ample capacity for future growth. Having a robust acquisition pipeline, a strong balance sheet and experienced management team, we remain confident in our outlook. We are committed to our self-funded growth strategy, disciplined capital allocation and maintaining the financial flexibility that has long differentiated our platform. We believe this approach will continue to support sustainable earnings growth and long-term value creation for our shareholders. We're focused on finishing 2026 strong and positioning NNN for continued success over the years ahead. With that, I'll pass it over to Vin. He can go through our quarterly numbers in detail and updated guidance.

Thanks, Steve. Let's start with our customary cautionary statements. During this call, we will make certain statements that may be considered forward-looking statements under federal securities law. 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 from expectations are disclosed in greater detail in the company's filings with the SEC and in this morning's press release. Turning to results. This morning, we reported AFFO of $0.90 per share and core FFO of $0.89 per share, up 5.9% and 6.0%, respectively, over the prior year. Results were ahead of our internal projections with upside driven primarily by lower-than-expected bad debt, which totaled about 2 basis points of quarterly ABR. Our NOI margin of 96.6% in the second quarter was up 70 basis points versus last quarter as we further drove portfolio occupancy above our long-run average, thereby reducing net real estate expenses. G&A as a percentage of total revenue was 5.8%, while our cash G&A margin was 4.4%. Annualized base rent grew by over 7% year-over-year to $959 million on the back of our strong acquisition volumes. Free cash flow after dividend was about $56 million in the second quarter. Turning to the tenant credit. Our watch list of near-term credit concerns remains immaterial at this time, which has led to better-than-budgeted credit loss year-to-date. That said, our portfolio management team remains focused on identifying and proactively mitigating potential future credit risks through asset sales, targeted lease terminations and leasing. From a capital markets perspective, during the quarter, we exercised the accordion option on our term loan, issuing an additional $200 million to bring the total term loan size to $500 million. Of this total, $400 million has been swapped to an attractive all-in fixed rate of 4.1%. In addition, we lowered the spread on our term loan and revolver by 5 basis points. In light of our improving cost of equity, we were active on the ATM in the second quarter, selling roughly 6 million common shares on a forward basis at just under $46 per share. We also settled 1.7 million forward shares, generating net proceeds of about $73 million, which were used to pay down our revolver. From a modeling perspective, these shares were settled on 6/30 and therefore, are not included in the reported weighted average share count. As of June 30, we had roughly $272 million of unsettled forward equity, which combined with our $215 million of expected free cash flow and $140 million of expected dispositions for the year provides us with ample liquidity with which to execute our strategic objectives for 2026 and beyond. Regarding the balance sheet. At the end of the quarter, we had no encumbered assets, $1.4 billion of available liquidity and just 2.5% of our debt tied to floating rates. Net debt-to-EBITDA of 5.7x was unchanged from last quarter, but including the impact of unsettled forward equity, pro forma net debt-to-EBITDA was 5.4x, down from 5.6x last quarter. Our sector-leading debt duration of 10.1 years was well matched with our lease duration also 10.1 years. On July 15, we announced a $0.62 quarterly dividend, which is a 3.3% increase in the quarterly rate and represented our 37th consecutive annual dividend increase, an achievement that we are extremely proud of and one that reflects the sustainability of our growth model. The new dividend rate equates to a 5.3% annualized dividend yield and a healthy 69% AFFO payout ratio. Lastly, I will end my comments with some additional color regarding our updated 2026 guidance. As disclosed in our earnings release, we are raising both core FFO and AFFO per share guidance for 2026 by $0.01 at the respective midpoints. Updated AFFO per share guidance of $3.55 to $3.59 implies about 3.8% year-over-year growth at the midpoint, an acceleration from 2.7% growth in 2025. The primary drivers of our improved earnings outlook are better-than-planned second quarter performance, a $150 million increase in expected acquisition volume and a $0.5 million decrease in expected net real estate expenses resulting from a faster-than-planned reduction in vacancies. We also raised the midpoint of our annual disposition guidance by $10 million. And from a credit loss perspective, we are leaving our second half assumptions unchanged, but given the year-to-date outperformance versus plan, we now expect full year bad debt to be about 40 basis points, down from 60 basis points as of last quarter. More details regarding line item guidance can be found on Page 3 of our earnings release. While our guidance reflects our near-term outlook, over the longer term we continue to target sustainable mid-single-digit growth driven by disciplined capital allocation, proactive portfolio management and a largely self-funded growth model, supported by our conservatively managed balance sheet. With that, I'll turn the call over to Holly for questions.

Your first question for today is from Ronald Kamdem with Morgan Stanley.

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

Yes. Lifting the acquisition volume from the original guide shows there's plenty of activity out there for us. We're seeing a lot of opportunities. The summertime things slow down a little bit, but going into the summer we had a great second quarter because we were able to stack the pipeline. For the remainder of the year, we have a good pipeline. There's a fair amount of activity. Hopefully, we can end up on the higher side of our guidance, but we don't want to count our chickens until they're hatched. We have a robust pipeline, and there are a few portfolios out in the market currently that could give us a good second half of the year. As far as competition, it's the usual suspects from the other public REITs. We're not running into much private money right now. That could change in the second half of the year, but competition is always robust in the net lease sector. I'm not seeing it go up or down significantly for the remainder of the year. That being said, knowing what's in my pipeline, that's why we're speculating that there will be a little cap rate compression in the second half of the year.

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

I'm going to let Steve handle the historical perspective because he has more of it than I do. From my perspective, yes, it's the best shape that the portfolio has been since I've been here. As far as watch list tenants, as I mentioned in my prepared remarks, we don't really have any material tenants that are on the watch list from a near-term perspective. We do talk about some tenants that have historically been on the watch list for a long time like AMC. That's more of a movie theater situation. Quite honestly, the movie theater business has been doing quite well this year. Box office is up pretty strongly, and I think AMC just recently got a credit upgrade from S&P. At least in the near term, things are fairly calm on that front. From a line-of-trade perspective, we've never really had a specific focus on lines of trade, movie theaters being maybe one exception. Overall, it's more idiosyncratic in terms of how we think about the watch list as opposed to specific lines of trade, because there are winners and losers in every line of trade.

As far as the portfolio health historically, our portfolio is in great shape. Given the size of the portfolio, we do deal with retailers, and retailers do come and go throughout the years. That's why we focus really hard on the asset level, financial performance and real estate quality. Overall, the portfolio today is as good as it's ever been. There are no major retailers in our top tenants giving us any heartburn. More importantly, the asset-level financial performance seems to be pretty robust in the last 18 months.

Your next question is from Jana Galan with Bank of America.

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

I'll let Vin talk about the weighted average cost of capital, and then I'll follow up and talk about the dispositions.

As far as the cost of capital, we have seen an improvement in our cost of equity, which was nice to see. We were active on the ATM during the quarter, and we are in good shape from a liquidity perspective. From a cost perspective, we always think about things on a long-term basis. Thinking across a 10-year debt and cost of equity, we have an absolute hurdle we think about in the 8% plus range on a long-term view. From an earnings accretion and dilution perspective, we look at the AFFO yield. If you take our typical 60-40 blend, we're probably around 6% to 7% today on a blended basis. So that's plus or minus.

As far as the dispositions, the majority of the dispositions this past quarter were the vacant assets—19 of them were vacant. The income-producing ones were from active portfolio management discussions with the retailer; they weren't stellar performers and the retailer was probably not going to renew the lease. That being said, the 5.6% cap rate at which we sold was a pretty tight bandwidth. The portfolio is stronger, and the income-producing dispositions were primarily restaurants, which accounted for more than 50% of the income-producing sales, and the remainder was primarily convenience stores.

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

Just following up on AMC. The yields on the debt have improved a lot. As you said, it was upgraded by S&P. Do you see theaters trading at all right now? And might there be an opportunity to reduce exposure there just given it seems like the credit profile has improved?

We sold one theater actually in the first quarter. We're always looking to reduce our exposure on the movie theaters that aren't performing as well. They haven't rebounded completely to pre-COVID numbers. We're not seeing many of them on the market personally. We are reviewing every industry, not just movie theaters, and looking at our exposure and the real estate risk associated with certain tenants. I am actively looking to reduce our movie theater exposure as we move forward.

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

The reality is we felt that given where we are in the year, we wanted to narrow the range, but we did feel a $0.01 increase at the midpoint was appropriate. That's how the numbers shake out. There's nothing preventing the high end from going up per se.

Your next question is from Smedes Rose with Citi.

You mentioned M&A activity that took place across the quarter. When you've seen this in the past, do you have any concerns around potential closings just as competing stores overlap? On that note, there were some headlines earlier in the year around 7-Eleven looking to close some stores and leaning into a slightly different format. Have you heard anything relative to your portfolio on that front?

As far as 7-Eleven, in 2025 we did a large renegotiation with 7-Eleven that renewed a lot of their leases. Yes, 7-Eleven is moving to close the larger format stores, but our 7-Elevens are very low cost basis. We're more in the $3 million to $4 million range, while they're building $10 million stores. I don't want to own a $10 million 7-Eleven; I want to maintain that $3 million to $5 million range. So I'm not concerned about our 7-Eleven portfolio. As for M&A, we have long-term leases, so they can't just close them without paying rent, and we'll manage the portfolio as we move forward during the lease terms.

One thing I'll add is that on the renegotiations with 7-Eleven, they could have just taken options, but we did renegotiate longer-term leases—15-year leases in many cases. So they wanted to stay in our portfolio.

Your next question is from Michael Goldsmith with UBS.

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

We did increase our midpoint a bit, signaling that we're going to be more active on dispositions. The restaurants disposed included, off the top of my head, one Ruby Tuesday and a Bob Evans, in particular, that were lower-performing assets. The management team worked with our portfolio manager to reach deals for those assets. Those sold in the high 5% cap rate range. So it was a good deal for the tenant and a good deal for us.

As a follow-up, it looks like you increased your exposure to early childhood education. That's a category some other triple-net lease REITs have played in. Can you give more color on those acquisitions, the opportunity set you're seeing, and whether there's been any cap rate compression in that space specifically?

Over the last 15 years we've seen a fair share of volume opportunities in the early childhood segment. This year we did a little bit more than historically. We have played in that space and are knowledgeable. When we see the right opportunity—initial cap rate, real estate metrics and the right management team—we lean in and do it. We feel good about the risk-adjusted returns from the tenants we're doing business with in that segment.

In this quarter we did a small portfolio deal with a new relationship tenant and a very strong management team. They have a low-levered balance sheet, attractive fungible real estate in that 1- to 2-acre land size, a nice-sized building and high rent coverage to start. We feel very good about that transaction.

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

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

Yes. The portfolios we're currently evaluating would be new tenants for us if we ended up being awarded the deals.

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

Yes, it's primarily the auto space and convenience stores; we're seeing opportunities there. We're not seeing much activity in limited-service restaurants or movie theaters. Early childhood education also has opportunities. So the primary areas are auto service, convenience stores and early childhood education.

Your next question for today is from Rob Stevenson with Huntington.

Vin, back to the guidance question: any other major levers other than transaction volume that pushes you to the bottom of the range versus the top of the range at this point of the year?

Welcome back, Rob. The biggest drivers are generally the same: bad debt is a big swing factor. Things are calm right now, but if bad debt ticked higher that could move us lower, although we have a healthy cushion in our back-half assumptions. Timing and volume of acquisitions is a big driver, and the timing of our capital markets activities matters as well. We do have a $350 million debt maturity in December of this year; how we handle that and the timing could influence the numbers.

What's the best source of debt for you today? And where is pricing if you wanted to do something to fix that?

We look at all opportunities and evaluate different options. We have plenty of liquidity and the $272 million of forward equity we could draw down. In all likelihood, we are thinking about some kind of debt offering later in the year. Ten-year debt today moves around quickly, but I'd say we're probably in the mid-5% to 5.6% on a 10-year debt. If we go shorter, we could be inside of 5%. Given recent bond offerings and the term loan, I'm thinking more of a longer-term issuance.

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

For the most part, we have gone through the vacant assets we want to sell. Right now, we are working on re-leasing the majority of the remaining vacant assets. The timing varies—some may come online in the fourth quarter, some might come online in the third quarter next year because permitting and negotiations take time. For the most part, vacant asset sales will be limited moving forward.

Your next question for today is from Wesley Golladay with Baird.

I just want to go back to the comment about cap rate compression. Is that primarily due to mix or competition?

Both. Our composition is pretty much what we have in our current portfolio because we don't move up and down the risk curve. The cap rate compression is modest and occurred on some deals where, to win them with our current tenants, we had to go a little lower than in the first half of the year. Our bandwidth is pretty tight. We don't actively barbell high-risk and low-risk deals; our acquisitions are fairly consistent in risk profile.

Are you finding a lot more new tenants this year relative to last year?

I wouldn't say a lot more, but we are consciously asking our acquisition team to find new tenants for the out years. For example, M&A activity such as Big Brand buying Belle Tire will reduce smaller independent targets in the market, so new relationships need to backfill that gap. It's a conscious effort by our team.

When a company is acquired, is there any chance you can retain the relationship or do they typically go find another source going forward?

We do everything we can to maintain that relationship. Usually the target speaks positively about NNN. But often the acquirer has cheaper capital or brings its own relationships, so they do business elsewhere. We do everything we can to retain the relationship, but it's not always possible.

Your next question is from Omotayo Okusanya with Deutsche Bank.

Congrats on the quarter and the solid outlook. I wanted to focus more on the dispositions and the guidance raise on that front. You're getting great cap rates on these assets well inside where you're acquiring assets, and that looks like a win for you. I'm trying to understand how that pricing is coming about and why the buyer is comfortable paying those prices, especially when some of these assets are underperformers or nonstrategic. How is that pipeline existing against that backdrop?

We have 3,700 assets, so we have a lot of real estate. Dispositions typically fall into a few categories. One is defensive sales where relationships tell us they might not renew in the out years or they're changing markets, which gives us opportunity to maximize proceeds. Second, there are buyers who value the real estate more than we do or have other opportunities we can't pursue; they may overpay the asset. Also, 1031 buyers will often overpay to avoid taxes, which we are willing to accept. That's where many of the low cap rates come from. Vacant assets are another category; recovery rates have been decent recently because of inflation and our long tenure in the business resulting in a fairly low cost basis in many assets. That explains how we're getting attractive pricing on dispositions.

That's helpful. For the increase in the acquisition guidance, could you help with how you're thinking about the back half of 2026 and when some of those deals could happen to help with modeling?

Regarding guidance for the back half, we typically take a conservative approach. For live deals we have decent visibility over the next 90 days and can plan those. Beyond that we are more conservative on speculative deals. Those tend to be pushed toward the tail end of the quarters. A mid-quarter or mid-half convention for the back half is fair as a starting assumption.

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

Your next question is from John Massocca with B. Riley. For the back half, we typically take a conservative approach. For live deals we have decent visibility over the next 90 days and can plan those. Beyond that we are more conservative on speculative deals. Those tend to be pushed toward the tail end of the quarters. A mid-quarter or mid-half convention for the back half is fair as a starting assumption. Omotayo Okusanya, Analyst at Deutsche Bank: Great. All right. We look forward to you raising the high end of guidance and getting the stock back to $50.

Blue-sky question: how are you thinking about leverage? In an environment where the cost of equity has become somewhat decoupled from the cost of debt, does that create an opportunity to lean more on equity capital rather than the debt market, especially given successive maturities over the next couple of years? Curious about your philosophy given the interest rate cycle and valuations.

We think about overall leverage and try to balance it. We're targeting roughly 5.5x net debt-to-EBITDA and are comfortable going a little higher temporarily. That target dictates the mix between equity and debt more than the absolute cost of each. Because we can do forward equity, that gives us flexibility to issue equity when the price is right and draw it down to manage leverage. If the cost of equity continues to improve materially, we could use it to delever, but our current multiple is roughly 13.8x and we believe it can improve further.

Splitting hairs, but any thoughts on swapping out the remainder of the term loan? What drove you to leave some floating, and what's your view on having a bit more floating-rate debt going forward?

We have $100 million out of $500 million still floating, so swapping that last piece won't move the needle materially. The decision to leave it floating was driven by volatility around rates due to macro and geopolitical news; we're waiting for things to settle a bit before locking in the last piece. The same thinking applies to any potential offering later in the year. We are actively looking at hedging opportunities; as things settle we will look to lock rates.

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

No, guys, thanks for taking the time and joining the call. NNN is in really good shape here. We're looking forward to closing out 2026 strong with a solid pipeline, and I look forward to running into you in the halls during the upcoming conference season. Thank you.

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