NNN REIT, Inc. 2026 Q2 Earnings Call

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 Chow. 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 five 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 August 14th, marking 2026 as our 37th consecutive year of annual dividend increases. That places NNN among 70 U.S. public companies and just three 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 longstanding multi-year 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 two significant M&A transactions announced in mid-July involving tenants in the portfolio. Mavis Tire announced the 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 of 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 and 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 range have been fairly stable over the past six quarters, reflecting competitive investment environment.

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 that 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 non-core 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. 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 non-core 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 maintain $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 an 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 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. 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 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. 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 two 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 five 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 30th, 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 15th, we announced the $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 and 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 half a million dollar 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. 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 three of our earnings release.