Vincent Chao
Thank you, Steve. Let me start by letting you know that during this call we will make certain statements that may be considered forward-looking statements under federal securities laws. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not release revisions to these forward-looking statements to reflect changes after the statements are made.
Factors and risks that could cause actual results to differ from expectations are disclosed in greater detail in the company's filings with the SEC and in this morning's press release. With that out of the way, before I get into the quarterly review, I wanted to start with some broader commentary and initial observations.
Although today's elevated level of uncertainty has created volatility in the capital markets, our fortress balance sheet, combined with our deeply experienced team and battle-tested portfolio is well positioned for long-term success in almost any environment.
We know this because we've been there. In addition to the weathering, the GFC and COVID-19 that Steve mentioned, we are also the only public net lease re to have experienced Black Monday, the bursting of the dotcom bubble, and the attacks on September 11th, all while delivering 35 years of consecutive dividend growth.
While our long and successful track record gives me comfort that we can manage today's economic environment, it's the strength of the NNN platform and its people that give me the confidence that we will continue to create shareholder value in the years ahead and through economic cycles.
The depth of talent, the strength of the processes and systems, and the experience of the team are true differentiators within the universe. I'm not sure if everyone knows this, but the average associate has been with NNN for over 10 years, and the senior leadership team has been here for over 20.
The deep institutional knowledge is a key competitive advantage, particularly in times like these, and then then truly is a well-oiled machine. With that, I'll get off my soapbox and get into the quarter. This morning we reported core FFO $0.86 per share and AFFO of $0.87 per share for the first quarter of 2025, each up 3.6% over the prior year period, while annualized base rent was up over 5% year-over-year.
Results were slightly ahead of our internal plan, driven primarily by lower than planned, bad debt, and net real estate expenses. Our NOI margin was 95.9% for the quarter, while GNA as a percentage of total revenues was 5.6% and 5.9% as a percentage of NOI.
Free cash flow after dividend was about 55 million in the quarter. This quarter benefited from $8.2 million of lease termination fees, or about $0.04 per share. This fee was expected and largely driven by one lease that was dark but paying for some time. We were able to negotiate a deal to recapture the PV of the remaining rents and are now looking to sell the property.
Turning to operating results. Overall leasing activities for the quarter were strong with 25 renewals and 8 new leases completed in the quarter for a blended rent recapture rate of 98%, reflecting the high quality of the portfolio.
Occupancy remained high at 97.7% despite the fallout from Babcock and [fishes], and has never dipped below 96.4% over the past 20 years, reflecting the stability of the portfolio and its cash flows.
As Steve mentioned, we are making good progress on addressing our vacancies and have now released or sold almost 50% of our former Babcock and fishes stores in only about two quarters, and we have good visibility or good activity on the vast majority of the remaining stores, a testament to the strength of the underlying real estate.
Although these two tenants have created some near term noise, the reality is that our experienced operations teams are well equipped to effectively handle these situations as they have over the last 40 plus years.
As Steve noted, when all is said and done, we expect less than a 1% impact to annual effort FFO per share, and importantly, we expect to achieve this outcome with minimal tenant CapEx.
From a watch list perspective, things have not changed much since last quarter. No new tenants were added, and our primary concern remained at home, which we have been flagging for some time. As a reminder, we have 11 at homes that account for about 1% of ABR.
In-place rents are low at just over $6.50 per square foot, and our stores are well established with average tenure of about 12 years. Turning to the balance sheet, our triple B plus balance sheet remains in great shape, and it's what keeps me let me sleep well at night, despite what's going on in the world.
We ended the first quarter with the sector leading 11.6 years of term, remaining on our debt maturities and just 2.5% of our total debt tied to floating rates. This gives us strong visibility. Liquidity stood at $1.1 billion. Net debt to EBITDA was 5.5 times, and 100% of our assets are unencumbered, giving us great flexibility to execute our business plans.
On April 15th, we announced a 58% quarterly dividend per share, which equates to an attractive 5.4% handle at dividend yield at a at a conservative 66% AFFO payout ratio.
Lastly, I'd like to provide some color on our outlook for the balance of the year. As we discussed last quarter, we signed leases on former fishes locations that will add the greater of $2.8 million annually or 7% of sales when rent commences on May 1st.
Also, as discussed last quarter, we embedded a credit loss reserve of 60 basis points into the 2025 outlook. Given that we've had no notable credit loss year-to-date and in light of our outlook for the balance of the year, we feel comfortable with the 60 basis points for the full year.
Finally, we have a $400 million, 4% on maturing in November. For perspective, we believe current pricing on a new 10-year issuance would be about 5.6%. We also have capacity on a revolver, which is priced at sulphur plus 87.5 basis points and had an effective rate of 5.2% in the first quarter.
As always, we'll be opportunistic and look for ways to capitalize on the current market volatility as we manage our financing needs. Also, while we do not provide guidance on termination fees, given their inherently unpredictable timing, as you are updating your models, please keep in mind that the $8.2 million booked in the first quarter was unusually high and not reflective of a normalized run rate.
All that said, given our strong start to the year, our internally funded investment plan, and with over 40% of our acquisition volume already completed, we are comfortable maintaining our 2025 outlook for Core FFO per share of $3.33 to $3.38 and AFFO per share of $3.39 to $3.44.
Details regarding the underlying assumptions supporting our guidance also remain unchanged and can be found on page 3 of this morning's press release. Lastly, you may have noticed some changes to the earnings for weeks presentation. We take pride in the transparency of our disclosures and are committed to providing investors and analysts with the information they need to efficiently and effectively underwrite the long-term value of our company.
We hope you find the changes we made helpful in your analysis, and I'm always available to discuss ideas on how we can improve our reporting.
Before I turn the call back to the operator for Q&A, I want to thank the executive team and the Board of Directors for entrusting me as the only the second CFO in NNN's history. There's a long tradition of success here that I, along with the rest of the team, will work tirelessly to continue.
I also want to thank the entire organization for their warm welcome to the company and for their help in making this a seamless transition.
With that, John, please open the lines for questions.
(Operator Instructions)
Daniel Bailey, Bank of America.
Daniel Bailey
Good Morning. 1Q acquisition pace was much higher than expected. Could you expand on that? Do you see less competition in the transaction markets?
Stephen Horn
And I mean we, John, good question, this is Steve. Now we operate in a highly competitive, market, and we've been, it's been a highly competitive market for 20 plus years. I've been doing it just the names have come and gone, now the result was.
All of our transactions except one were sale leased back primarily through the relationships, but it was elevated just more timing, going into the 4th quarter we knew there were some M&A deals, that we're looking to get done, and they landed in the first quarter. However, it was within our guidance range for the full year, and it was primarily, the auto services again, was the sector where there's a fair amount of consolidation going on.
Daniel Bailey
Got it. And if I could just, follow up on that, could you touch on the expected pace of acquisitions moving forward? And do you plan on expanding into the auto services?
Stephen Horn
We do the bottom up approach, we can only buy stuff that's for sale and we look for consistent core FFO growth over time, we maintain guidance, of the $500 million to 600 million, but it's been alluded to, we, we're kind of 40% there, and looking at the pipeline for the second quarter, I'm very comfortable at, you know.
We'll hit that guidance range given where we stand today, but given everything that's going on in the macroeconomy and the uncertainty, I don't think it's prudent to elevate acquisition volume since I don't have visibility to the third or fourth quarter yet.
However, that being said, if everything kind of maintains status quo, I could see us, in good acquisitions for the year.
Daniel Bailey
Got it thank you.
Spenser Glimcher, Green Street.
Spenser Glimcher
Thank you. Given the recent economic volatility and ongoing uncertainty, can you just talk about existing tenant appetite for growth, and then maybe on the flip side, are there any tenants who had expressed interest to grow and maybe kind of, hit the brakes on growth plans as of late?
Stephen Horn
Yeah, I mean, overall I think they're re-evaluating, their growth plans, those deals or that we had in the pipeline were cancelled because of what's going on, they don't want to miss out on opportunities if things settle down.
So kind of what I alluded to in the first question, our pipeline for Q2 is pretty solid, and we're just starting to, look at stuff for Q3, but no, our tenants are still looking to, grow at the margin. I don't think you're going to see any heroic M&A deals in the near term, so we've noticed that pace has slowed down in the US.
Spenser Glimcher
Okay. And then any changes to tenant, rent coverages, just the ongoing tariffs, and things related to consumer spending.
Stephen Horn
Yeah, a Spenser, this is, been, yeah, as far as rent coverage and tariffs and all that, I mean, I would just say on tariff perspective, between service tenants and non-discretionary tenants, it's that's about 85% of our ABR and so we feel relatively okay about tariff impacts, other than the impact on the overall economy, which will filter through.
If things stay, in place or I'm not sure where we're at today, but, in any case, we feel like we're comfortable on the tariff side. As far as rent coverages go, as we don't, we don't really talk about rent coverages, in detail. But it, the data is usually a little stale, and so it's not reflective of any sort of tariff impact at this point anyway, but generally speaking, I would say rent coverages have remained stable on that.
I had a little, kind of real-time coverage for you, Spenser. Our team was out at the car wash, conference this past weekend and reported that the Car Wash sales were very strong for the quarter. And the CEOs that I spoke with and if it was collision or the tire sector and within the auto services, said the last two months they've seen an uptick in their sales, so that was all positive, but yeah, to echo what Vince said, for the most part I would expect our rent coverage is to be pretty stable throughout the portfolio.
Spenser Glimcher
Okay, thank you for the call.
John Kilichowski, Wells Fargo.
John Kilichowski
Good morning. Thank you. I guess an extension of the tariff question. It sounds like the existing portfolio is still performing well, but maybe as we think about, your strategy on underwriting go forward for new investments, have tariffs impacted that at all?
Like are you looking at different sectors or is it same old?
Stephen Horn
If you look across our portfolio, not that we're tariff proof by any means, but we have a very solid, tariff resistant portfolio, and since, two-third to three-fourth of our deal flow comes from our tenant base, I still expect it to be representative of our current portfolio. Now when you get into discretionary tenants, this is what separates the sale lease back model opposed to buying from developers, the sale leaseback model.
It's an inherent the tenant does some underwriting and they're signing the 15 to 20 year lease, so they do a self-selection and they know their consumer better than any real estate executive.
So we sit down with the tenants and it's more on the discretionary side that we are kind of sidestepping deals right now that might be pro forma on you know if it's family entertainment sector where it's a little bit more discretionary income but I think the auto services and C store if the opportunities come we'll still lean into those.
John Kilichowski
Okay, and then, maybe just jumping to the fishes and Babcocks side, we appreciate the update, how has that impacted the non-reimbursable percentage of your OpEx outlook? It sounds like credit is your credit expectations are still flat.
Stephen Horn
Yeah, I mean, if you look at our guidance for net real estate expenses, it's a little bit higher than we've historically reported, which is probably more in the $13 million range. We're 15 to 16 for the year on guidance. That's reflective of some of the vacancies from the Babcock and rises.
So as we release those or sell them over the course of the year, that should improve, but that's all embedded in our in our outlook.
John Kilichowski
All right. Thank you.
Michael Goldsmith, UBS.
Michael Goldsmith
Good morning. Thanks a lot for taking my question. Acquisition cap rates tick down about 10 basis points in the quarter. So in terms of what you're seeing in the pipeline, are you expecting that trend to kind of continue to tick down, or maybe just kind of flat line from there, just trying to get a sense of where we're headed from a cap rate perspective?
Stephen Horn
Yeah, good question, Michael. Yeah, I'm not seeing a material move up or down for the second quarter pricing. It's pretty much in line with the first. Quarter now as deals might slide to the third quarter, you might have, 5 basis points, 10 basis points either way, but the 740, is kind of where I'm looking at the, second quarter, again, third quarter is too far out to speculate, but as we run out our models, we're not, putting increasing cap rates.
Because people in the first half of the year are looking to deploy money, so deals cap rates get compressed a little bit unjustifiably I would say. And as I mentioned in my opening remarks, there were some large portfolio transactions that got done and they look like they were going sub-7, and we just didn't think that was the right price for the portfolios.
Michael Goldsmith
Got it. And I'm a little jealous that I wasn't able to make it to the Car Wash conference this year, but, last night the Mister Car Wash earnings, they talked about. A steady reprieve to the competitive incursion with the number of competitive new builds, since the peak in 2023, but they also talked a little bit about, market rationalization over the next several years.
So, do you think, the tenants, the Car Wash tenants that you have, do you see those ones that you partner with are as net winners over time and thus, have limited downsides from that perspective?
Stephen Horn
Very comfortable with our Car Wash holdings. I mean, the reality is Car Wash real estate is really solid in demand real estate, and the vast majority of our Car Wash holdings are with Mister Car Wash, arguably the best operator in the business, and we did those deals well before the market got overheated.
So our average cost in the, Mister Car Wash is significantly lower than the deals that were done in the last few years. And our acquisition team did a fabulous job passing on the deals where they thought there were financial engineers getting into the Car Wash business.
So yeah, I'm comfortable and I think we're going to be net winners in the long run on our Car Wash holdings, fortunately we didn't do any sets, for example, that was a good one not to do for us, but the rest of our operators we think are pretty solid and underwrote the assets appropriately.
Michael Goldsmith
Thank you very much. Good luck in the second quarter.
(Operator Instructions)
Smedes Rose, Citi.
Hey, good morning. This is [Maddie] for just on first needs.
I just wanted to ask, there's been kind of some negative headlines and so underperformance from some of your more discretionary focused tenants, particularly Dave and Buster's and Camping World. Do you have any overall concerns from a tenant perspective on these, and is there may be anything differentiating about the particular locations that you own that may make you less concerned from a risk perspective?
Stephen Horn
Yeah, we'll both, answer this, but, good question, Maddy. So as far as Camping World arguably is probably one of our greatest partnerships within the portfolio. We are actively managing that portfolio since we've been doing business with them for over 15 years.
So our rent coverage, in the peak during COVID, I would have thought Camping World would explode and become a cash cow, that we were over 8 times covered in those assets, and that's a testament to the management team at Camping World of calling us up and, renegotiating leases, selling assets, and only wanting to stay in the strong assets.
So the camping world property level coverage, I am very happy with and comfortable and the same goes with Dave and Buster. Our Dave and Buster exposure primarily was from Main Event over a decade ago of doing deals with them, and the Main event management team were two operators that wanted to keep the rent low.
So our property level coverage at Dave and Buster is very. Solid and you know kind of what I alluded to, there's a couple of deals in the past year which we passed on David and Buster because they were newer assets, and then we just thought the cap rates were getting a little bit too low for us, but they're a good partner, and they, going forward, we'll probably do more deals with them in the future.
Vincent Chao
Yeah, I think, Steve said it pretty well, so I don't have too much to add there, but the coverage on Dave and Buster's is pretty healthy here and on Camping World, they just reported yesterday. I know the stock didn't do so well, but, from our perspective as a landlord, there are some positives in the quarter, and I think their new business is a bright spot for them.
So as we're dealing with tariffs and uncertainty and possibly an economic slowdown, camping world, they're not catering to the highest end side of that market, and so we think that's relatively better, but then also the used business can really help offset, some of the tariff effects and that was quite strong.
Great. Thank you both.
Linda, Jefferies.
Linda Tsai
Hi, thanks for taking my question. Did less than expected bad debt contribute to 1Q and then of your 50 bits embedded reserves? How much of that is like known versus unknown?
Stephen Horn
Yeah, hey, Linda, it's been, so in the first quarter we really didn't have much in the way of bad debt or credit loss. So, if you think about it, 10 basis points of credit loss is about 0.5% per share. So that you can think about it that way for the first quarter. As far as known or unknown, I mean we've talked about at home that's probably the one on our watch list that's the one that we're most focused on, but this point, we have no credit loss associated.
Linda Tsai
And then on at home, what would be like the possible outcome? Do you think you would be able to sell those leases, or would there be a backfill?
Stephen Horn
Yeah, let me just start with that home in terms of their potential impact, right? I mean, I know there's been some news out there, on them.
At this point in the year, as I said, we don't have any loss, associated, and so if something were to happen, we think, our 60 basis points would still cover us. If you think about, if there is some kind of filing or something like that, we'd have some, a couple of months of additional, rents as they go through that proceedings.
So at 100 basis points, if we, if everything, were to be, rejected, that, that's about 50 basis points, but we think that's pretty highly unlikely given our low rent basis of just over $6.50. And so, we feel comfortable with our outlook for credit, loss. As far as the, recovery on that home, it's they're much larger, as so that, by default, it probably will take us a little longer than your, more fungible boxes that we typically invest in.
But there is a lot of good, interest. We're already getting inbounds from some really high quality, tenants, about some of the spaces, which we're pretty happy about, and, we've also got some flexibility, in terms of how we manage these properties.
I mean, yes, there's potential. But they sit on 11 acre lots and so that gives us a lot of optionality in terms of redevelopment, carving up the boxes, things like that. So, we're still evaluating all the different, options, but we do feel pretty good, where we sit yeah it's good.
Linda Tsai
Thanks for the context.
John Massocca, B. Riley Securities.
John Massocca
Good morning.
So just on the lease termination, income, apologies if I misheard something on that, but it seems like, there's kind of this constant narrative like, yeah, it's a little unusual to have this much, but then there's a couple of quarters.
It's been pretty heavy in in recent quarters. What do you consider the new maybe run rate to assume for lease termination income and maybe kind of what drove lease termination income in 1Q?
Vincent Chao
Hey John, this is Vin. Yeah, so the first quarter, as I mentioned in my prepared marks, I mean, we did have basically one tenant that really drove the bulk of the of the $8.2 million for the quarter. It was a dark with paying tenant that had been dark for, I don't want to say six years, five years, something like that. We were able to negotiate a great deal where we got basically the entire PV of the rent that was owed, over the balance of the of the lease.
And we're now able to potentially sell that that asset and, redeploy those assets that those that capital so we feel good about that outcome. As far as the go forward run rate, it's really tough. I mean, I would say lease termination fees are definitely part of the business. They are recurring, they're just very hard to predict, and that's why we don't really guide on it.
If you look historically, we've probably been long term average, call it $2 million to $3 million a year, but recent years it's been a lot higher than that. So, it's hard for me to say what the go forward run rate is just because it is unpredictable. But we do have additional lease terminations embedded in the outlook, but certainly not $8.2 million going forward.
Stephen Horn
I mean I was going to add a little bit more John on the in the lease term.
As we get bigger lease term fees, there's more opportunities. If you actively manage your portfolio, you're going to have lease termination fees. The lease termination fee is solving future problems and redeploying those proceeds into current opportunities.
So I agree with Vin, we don't know, it's kind of lightning in a bottle when they strike, you don't know as you're actively managing the properties, but the elevated, lease term in the last couple of years is a result of us really focusing in and creating a high quality of earnings, going forward.
John Massocca
But is there something maybe in terms of the tenant base or you know your portfolio of a certain vintage that drives this or something that's occurred in the last two to three years it seems like it wasn't really something that got called out on earnings calls, five or more years ago as much as it has been in the last, call it eight quarters?
Stephen Horn
No, it's primarily been just one tenant working with us reconfiguring their portfolio, and their larger boxes, higher rents, so that's why they've been elevated.
John Massocca
On the ferocious side, and, or former Ferocious side, I know it's early days with the new tenant and, the leased assets, the released assets, but, any outlook on to how their performance has been just given, some of the rent there is contingent on that?
Stephen Horn
Yeah, I mean just like any new retail concept when they first opened, they come out of the market really strong. There's that honeymoon period and we are currently in that honeymoon period. So they're performing exceedingly well currently, but as we look forward, they'll lose that a little bit, but very optimistic.
I spoke with the CEO recently in the last week, everything's going well for them, getting stores open slowly but surely, and, I would expect here in the next six months we'll have, I'll be able to answer that question as far as their performance a little bit more clear for you.
John Massocca
Fair, and then with the remaining kind of former restaurant properties, is the view with most of those that they would also remain in restaurants or?
Is a thought that either you know whoever you sell them to or yourself if you're looking to release them is going to convert them to something else and if that is the case, yeah, what kind of CapEx outlook there, maybe for you or a potential buyer?
Vincent Chao
It's too early to talk about the CapEx side of things, but we are getting interest, if it's Car Wash's , if it's convenience stores, and it's a large regional convenience store operators, great credit, and then there is some QSR involved, and we're early in negotiations, so we don't know if it's going to be a ground lease and they're going to fund the building or they're going to expect some CapEx from us currently, but that being said, we have a, some good interest on those sites right now.
John Massocca
Right, but I guess maybe the way you kind of phrased, it'd be fair to assume those are some of the later assets that are going to get dealt with in terms of both the former freshes and former Badcocks.
Vincent Chao
I think Badcock is going to definitely outpace the former freshes, because we're probably going to sell more of those, and the freshes there's a lot of redevelopment opportunities and just by definition, redevelopment takes a longer period of time to go through the permitting process and stuff like that.
John Massocca
Okay. That's it for me. I appreciate all the time.
Ronald Kamdem, Morgan Stanley.
Hey, this is [Jenny Fran]. Thanks for taking my question. I'm just curious if there's any specific like retail new concept, like you're looking to reduce exposure in the next 12 to 18 months.
Stephen Horn
I mean, ones that we're looking to reduce exposure. I mean, obviously we have our watch list and so, those are ones that we would love to pare back exposure, but, unfortunately by the time they're on the watch list, it's a little hard to get economics that makes sense.
So I'll give you an example. I mean, AMCs on there, it's been on there forever, more from a category perspective, not so much from bottom-up performance or recent issues or anything like that, but. It's not the easiest to sell one of those and so but that's sort of our target list. We also have, the DARPA paying list, we have the sub sublease list and those are the ones that we're trying to proactively manage to the best of our ability, but it's not specific to a concept per se.
I see, yeah, that makes sense. Regarding the acquisition volume and like in the last, I would say 20 days or so, like, do you see any changes in the competition landscape or compared to last year, if you can make some comment on that?
Stephen Horn
Yeah, no, I think the landscapes pretty similar. You probably have a little bit more of the private guys entering the market again as we move through the year. But again, kind of what I kind of said earlier, we work in a highly competitive market, just the names change, so I'm not seeing any more or less overall competition. There's plenty of opportunity for us to hit our numbers.
Makes sense. Thanks so much. That's all for me.
We've reached the end of the question-and-answer session. I will now turn the call over to Steve Horn, CEO for closing remarks.
Stephen Horn
I appreciate you guys taking the time this morning and jumping on the call, and we look forward to seeing you guys in the upcoming conference season here. Thanks.
This concludes today's conference, and you may disconnect your lines at this time.
Thank you for your participation.
