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Date
Tuesday, Aug. 5, 2025 at 2:30 p.m. ET
Call participants
Chief Executive Officer — Steve Horn
Chief Financial Officer — Vincent Chao
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Takeaways
Average Debt Maturity-- Average debt maturity of 11 years as of Q2 2025, positioningNNN REIT(NNN -2.35%) with sector-leading balance sheet flexibility.
Dividend Increase-- A 3.4% increase in the common stock dividend was announced in July 2025, marking the thirty-sixth consecutive year of annual dividend increases as of July 2025.
2025 Core FFO Guidance-- Core FFO per share guidance raised to $3.34-$3.39 for 2025, reflecting confidence in multiyear growth consistency.
Portfolio Scale-- A portfolio of 3,663 properties across all 50 states as of Q2 2025, with 410 tenants, demonstrating geographic and tenant diversity.
Lease Renewal Metrics
At Home Bankruptcy Exposure-- All 11 At Home locations remained current on rent as of Q2 2025, and none were listed for initial closure post-bankruptcy filing.
Q2 Acquisitions-- $230 million invested across 45 properties at a 7.4% initial cap rate and an average lease term exceeding 17 years in Q2 2025; 8 of 11 closings were with existing partners.
Year-to-Date Acquisitions-- $460 million invested in 127 properties at a 7.4% initial cap rate and an average lease term of more than 18 years for 2025.
Dispositions in Q2-- 23 properties sold, generating over $50 million in proceeds in Q2 2025; Year-to-date, 33 dispositions in 2025, including 14 vacant assets, delivered $65 million.
Disposition Cap Rates-- Sold assets traded at cap rates approximately 170 basis points below the 7.4% acquisition cap rate in Q2 2025, indicating value extraction from underperformers.
Available Liquidity-- Nearly $1.5 billion in liquidity as of July 1, 2025, including proceeds from a $500 million unsecured bond offering at a 4.6% coupon, poised to fund the 2025 acquisition plan: expects to complete $600 million to $700 million in acquisitions in 2025.
Core FFO and AFFO-- Core FFO of $0.84 and AFFO of $0.85 per share for 2025, each up 1.2% over the prior year period.
Annualized Base Rent-- $894 million in annualized base rent at Q2 2025. This represents an increase of almost 7% year over year.
NOI Margin
Free Cash Flow-- Approximately $50 million in free cash flow after dividends in Q2 2025.
Lease Termination Fees-- $2.2 million in lease termination fees recorded in Q2 2025, roughly $0.01 per share in Q2 2025; primarily due to early termination of an auto parts store and a restaurant.
Equity Issuance-- 254,000 shares issued at $43 per share via ATM in Q2 2025, raising roughly $11 million in gross proceeds in Q2 2025.
Dividend Metrics
Updated 2025 Guidance-- AFFO per share guidance increased to $3.40-$3.45 for 2025; Acquisition target raised to $600 million-$700 million for 2025; Disposition outlook raised by $35 million to $120 million-$150 million for 2025.
Bad Debt Guidance-- 60 basis points of bad debt embedded in full-year 2025 guidance; 15 basis points booked year-to-date through Q2 2025, principally attributed to At Home bankruptcy risk.
Non-Cash Rent Write-Offs-- $660,000 related to At Home was added to core FFO (non-GAAP) in Q2 2025. Included in core FFO but excluded from AFFO for 2025.
Leverage-- Quarter-end leverage was 5.7x in Q2 2025, temporarily elevated due to accelerated acquisition activity.
New Chief Investment Officer-- Josh Lewis promoted, expected to maintain disciplined capital deployment.
Summary
Management emphasized proactive portfolio management through both acquisition and disposition activity, including selling non-core and vacant properties at cap rates approximately 170 basis points below the portfolio investing cash cap rate of 7.4%. The company cited its ability to redeploy disposition proceeds into higher-yielding, longer-term leased assets and noted its rapid response to tenant distress, such as At Home's bankruptcy, by securing ongoing rent payments and attracting new tenant interest. Capital structure optimization, including early refinancing of upcoming maturities through a $500 million unsecured bond issuance (closed July 1, 2025) and maintaining a sector-leading average debt maturity of eleven years, was presented as a competitive advantage. Management also acknowledged heightened competition in the net lease sector as a driver of more conservative acquisition outlooks for the back half of the year, and shared insight into sector trends, including greater portfolio premiums and resilient auto service demand. The call concluded with management affirming the intention to balance acquisition velocity with prudent underwriting and opportunistic equity issuance, leveraging strong liquidity for continued growth.
CEO Horn said, "There is not a single tenant that currently gives me concerns keeping me up at night." while also cautioning continued vigilance on normal retail turnover.
Disposition proceeds were achieved by targeting non-gem income-producing assets and selling vacant inventory, demonstrating a strategy to optimize portfolio value.
Management stated Cap rates remained stable quarter-over-quarter in Q2 2025 and did not anticipate significant movement into the following quarter, citing ongoing robust private capital demand in the sector.
Resolution of Badcock and Frisch’s vacancies proceeded faster than historical averages, with management stating that resolution "moved pretty quickly compared to historical averages" and that for the furniture assets, "we are outperforming our expectations on those.", indicating successful re-leasing efforts.
CFO Chao said, "we increased our net real estate expense forecast for 2025, which is the result of delays in the expected timing of the re-leasing of certain properties" emphasizing a willingness to prolong vacancy for higher long-term lease value.
Industry glossary
Cap Rate (Capitalization Rate): The ratio of a property's net operating income to its acquisition price, used to assess investment yield and risk in real estate transactions.
Net Lease: Lease structure where the tenant is responsible for some or all property operating expenses (e.g., taxes, insurance, maintenance) in addition to rent.
NOI (Net Operating Income) Margin: Percentage of revenue remaining after operating expenses, reflecting property-level profitability.
ATM Program: "At the market" equity offering mechanism, allowing companies to issue new shares incrementally at prevailing trading prices.
Base Rent: Minimum fixed rental amount due under a property lease, typically excluding additional operating costs.
Disposition: Sale or divestment of assets, commonly used to optimize or rebalance a real estate portfolio.
Full Conference Call Transcript
Steve Horn: Thank you, Matthew. Good morning. Welcome to National Retail Properties, Inc.'s second quarter 2025 earnings call. Joining me today on the call is Chief Financial Officer, Vincent Chao. As outlined in the morning's press release, National Retail Properties, Inc. continued to deliver strong performance in 2025. Notably, we have improved our balance sheet flexibility following capital markets activity with a sector-leading average debt maturity of 11 years. Solid acquisitions driven by our tenant relationships and we published the third annual corporate sustainability report. These results and actions position us well to continue enhancing shareholder value as we enter the second half of the year and beyond. Also, as usual, we always have to mention the dividend.
In July, we announced a 3.4% increase in our common stock dividend, payable August 15. This marks our thirty-sixth consecutive year of annual dividend increases, a milestone that places us among very few, less than eighty, US public companies and only two other REITs that have achieved such a track record. Before we get into the operational performance and market conditions, I would like to touch on a few key recent events. First, I am thrilled to welcome Mr. Josh Lewis to the executive leadership team as our new Chief Investment Officer. Josh has been with the company since 2008 and has played a pivotal role from day one.
Known for his prolific deal-making ability and deep market relationships, Josh ensures that shareholder capital is deployed towards the most compelling risk-adjusted opportunities. I am fully confident we have the right person focused every day on driving long-term value for our shareholders. On the capital markets front, we successfully completed a $500 million five-year unsecured bond offering with a 4.6% coupon. In true National Retail Properties, Inc. fashion, the execution and timing of the deal in today's market environment were exceptional. More importantly, the transaction positions us strongly to continue executing our strategy moving forward.
Given our continued strong performance, we are also pleased to announce an increase in our 2025 guidance for core FFO per share, now expecting a range between $3.34 and $3.39. This update reflects the consistency of our multiyear growth strategy. Turning to the highlights of National Retail Properties, Inc.'s second quarter financial results. Our portfolio, consisting of approximately 3,663 freestanding single-tenant properties including 410 tenants across all 50 states, is performing well. Our leasing and asset management teams are operating at a high level. Those renewals align with our long-term historical trend of 85%, give or take, while achieving rental rates at 108% above prior rent.
Additionally, the team successfully leased seven properties to new tenants at rates at 105% above prior rents, reflecting strong execution and ongoing demand for our assets. As we sit here today, I feel good about the overall health of the portfolio. There is not a single tenant that currently gives me concerns keeping me up at night. We have had ongoing discussions with analysts and investors over many quarters regarding At Home, which finally officially filed for bankruptcy this past June. Regarding our exposure, none of our 11 were included on the initial closure list. Additionally, At Home remains current on all rent for all 11 locations post-filing.
We feel positive about the long-term prospects for these assets as the company works through the restructuring. Acquisitions during the quarter invested just over $230 million in 45 new properties achieving an initial cap rate of 7.4% and an average lease term of more than seventeen years. Notably, eight of the 11 closings this quarter were with existing relationships, partners with whom we do repeat business. For 2025, we invested $460 million across 127 properties, achieving an initial cap rate of 7.4% and an average lease term of over eighteen years.
Based on our strong transaction volume year to date, the robust pipeline of assets currently under LOI or in contract, and the high level of activity across our acquisition team, as one of the original net lease companies in the public markets, we have successfully operated through a wide range of economic and competitive cycles. While private capital has increasingly entered the space, we remain committed to a disciplined and thoughtful underwriting approach while continuing to emphasize acquisition volume through sale-leaseback transactions with our long-standing relationships. During the second quarter, we sold 23 properties generating over $50 million in proceeds to be redeployed into new acquisitions.
Year to date, dispositions have reached 33 properties, including 14 vacant assets, raising over $65 million in proceeds. Importantly, the income-producing properties sold were not considered the gems of our portfolio, and we sold approximately 170 basis points below our investing cash cap rate of 7.4%. This reinforces the strength of our underwriting and our ability to extract value from the underperforming holdings. While the primary focus remains on releasing vacancies, our leasing team continues to deliver strong performance. We will continue to dispose of underperforming assets when there is no clear path to generating stable rental income within a reasonable timeframe. This disciplined approach supports portfolio optimization and enhances long-term shareholder value.
Our balance sheet remains one of the strongest in the sector, supported by the average debt maturity of over eleven years I mentioned earlier. With nearly $1.5 billion in available liquidity, we are well-positioned to fully fund our 2025 acquisition targets and maintain flexibility for additional opportunities. The financial strength provides us with a significant competitive advantage as we continue our growth strategy without the immediate need for external capital. With that, I will turn the call over to Vincent Chao. He will walk through our quarterly results and provide more detail on the updated guidance.
Vincent Chao: Thank you, 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 laws. The company's actual or 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. Now on to results.
This morning, we reported core FFO of $0.84 per share and AFFO of $0.85 per share for 2025, each up 1.2% over the prior year period. Annualized base rent was $894 million at the end of the quarter, an increase of almost 7% year over year. Our NOI margin was 98% for the quarter, while G&A as a percentage of total revenues and as a percentage of NOI was about 5%. Cash G&A was 3.7% of total revenues. AFFO per share for the quarter was slightly ahead of our expectations, driven primarily by lower than planned bad debt. Free cash flow after the dividend was about $50 million in the second quarter.
Lease termination fees, as footnoted on page eight of the release, totaled $2.2 million in the quarter, or about $0.01 per share. This quarter's fees were in line with our expectations and were primarily driven by the termination of an auto parts store and a full-service restaurant. The auto parts store is under contract for sale, and the restaurant has already been re-leased and rent commenced to another restaurant concept, highlighting our proactive portfolio management strategy. From a watch list perspective, At Home is the major news for the quarter.
We have been flagging At Home as a risk for some time, and as we discussed on last quarter's call, we believe we have appropriately accounted for them in our outlook and expect the final resolution to be within our budget for the year. To reiterate what Steve said, none of our 11 stores were on the initial store closure list. Given the quality of our locations, we have already received inbound interest from high-credit retailers. Outside of At Home, there have been no notable changes to the watch list. Turning to the balance sheet.
Just after the quarter end, we significantly bolstered our liquidity and de-risked our capital requirements for the rest of the year by closing on National Retail Properties, Inc.'s inaugural five-year $500 million unsecured notes offering at an attractive 4.6% coupon. While this offering was earlier and larger than we were originally planning, given the positive market backdrop and strong investor demand, we decided to move forward with the deal. Form a for the offering, closed on July 1, we had close to $1.5 billion of liquidity, no floating rate debt, and no secured debt. Our debt duration remained a sector-leading eleven years even after accounting for the new issuance.
Our balance sheet is a source of strength, and we will continue to look for ways to utilize this competitive advantage to support growth while protecting downside risk. Also, given the positive momentum in the stock that we experienced at the end of the quarter, we issued 254,000 shares at an average price of just over $43 per share, primarily through our ATM program, raising roughly $11 million in gross proceeds. We will remain opportunistic in the equity markets and issue if and when we believe we can achieve an appropriate cost of equity relative to our deployment opportunities.
On July 15, we increased our quarterly dividend to $0.60 per share, up from $0.58 per share previously, which equates to an attractive 5.6% annualized dividend yield and a healthy 71% AFFO payout ratio. As Steve mentioned, National Retail Properties, Inc. has now raised its annual dividend for thirty-six consecutive years. The ability to grow the dividend through various economic cycles and black swan events is a true testament to the strength of National Retail Properties, Inc.'s platform and its strategy. I will conclude my opening remarks with some additional comments regarding our updated outlook.
We are raising core FFO per share guidance to a new range of $3.34 to $3.39 and AFFO per share to $3.40 to $3.45, each up $0.01 at the midpoint. This reflects our outperformance versus plan year to date, as well as updated assumptions over the balance of the year. We now expect to complete $600 million to $700 million in acquisitions, up $100 million from our initial expectation. We are also increasing our disposition outlook by $35 million to a new range of $120 million to $150 million.
And lastly, you will notice that we increased our net real estate expense forecast, which is the result of delays in the expected timing of the release of certain properties as we balance the impacts on near and long-term earnings. Despite this headwind, we are still in a position to raise overall earnings guidance for the year. From a bad debt perspective, we continue to embed 60 basis points of bad debt for the full year into our outlook, which includes about 15 basis points booked through the second quarter. As you update your models, there are a few other items to point out.
As noted earlier, we booked $2.2 million of lease termination fees in the second quarter, which is well below the first quarter level of $8.2 million but still above what I would consider a typical quarterly amount. Also this quarter, we took some non-cash write-offs of accrued rent below market rent related to At Home that in total added about $660,000 of income to core FFO, which should be excluded from the forward run rates. These non-cash items had no impact on reported AFFO. With that, I will turn the call back over to Matthew for questions.
Operator: Certainly. Everyone at this time will be conducting a question and answer session. If you have any questions or comments, please press 1 on your phone at this time. We do ask that while posing your question, please pick up your handset if you are listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press 1 on your phone. Your first question is coming from Jeff Spector from Bank of America. Your line is live.
Jeff Spector: Great. Thank you. Just first on the investment guidance. I know you raised it. It does suggest a slower pace in the second half. So I just wanted to confirm what is driving that implied deceleration. There is you mentioned increased competition, capital allocation, or is it just, you know, some conservatism in the outlook? Thank you.
Steve Horn: Yeah. I mean, given what we did in the first half, yeah, I see where, you know, it suggests a slower activity. We do not have any visibility to the fourth quarter. We do not want to get over our skis. Third quarter is feeling pretty good right now. But everything you mentioned, you know, the heightened competition overall, the market seems fairly robust. But it is more probably being conservative.
Jeff Spector: Okay. Thank you. And then if I heard correctly, it sounded that in terms of the acquisitions, eight out of the 11 were existing relationships. Can you talk about the new relationships and maybe the opportunity set there?
Steve Horn: Yeah. You know, we are pretty much going to disclose, you know, the few that we did not that were not relationships. But they were just our acquisition guys have calling efforts that have been going on for many years. Deal flow happened. They were in the auto service sector. And we only consider a relationship as a repeat business. So we have to close one or two transactions with you before you become, quote, a relationship. But just to add to that to your point, I mean, I think in any business, you want to have a good mix of existing deal volume as well as new volume.
And so, you know, the new relationships do open up additional opportunities.
Jeff Spector: Future. So we are hopeful that can continue.
Steve Horn: Great. Thank you.
Operator: Your next question is coming from Spenser Glimcher from Green Street. Your line is live.
Spenser Glimcher: Thank you. I am just curious if you could provide an update on the available assets, either being marketed for sale or trying to retenant. I know last quarter, you mentioned there was significant interest for these properties from strong national and regional tenants. So just curious how that process has been going.
Steve Horn: Yeah. I mean, as you could guess, Spenser, you know, primarily, it was the former furniture store, Badcock's, and, you know, a fair amount of restaurants from the Frisch's assets. And Frisch's was in business for, you know, sixty plus years, so they had a lot of infill locations, and that is where the strong demand is coming from. As a result, kind of convenience stores, car washes, collision repair, so there is still a lot of demand for those assets.
And just to kind of give you an idea, you know, call it 64 assets at the beginning, you know, 28 of them, you know, we are working with a tenant on releasing, then the remaining 36, four of them have been sold and or leased. 24 of those assets, we are in active negotiations. And there are different levels of or stages of those negotiations. And then eight of the 36 is just, you know, limited activity. So we are seeing encouraging signs across those assets. Specifically at the 36, and we are kind of expecting the rent recovery to eclipse historical averages. Would be 70%. And then that is I think you are actually. Yeah.
And then as far as the Badcock furniture assets, we are kind of we are outperforming our expectations on those. Just to recall for everybody, there were 35 of those assets. 19 of them have been resolved at greater than a 100% rent recovery. 12 are currently pending and are tracking to greater than a 100% recovery. And then there are four beds. There is work to be done. But the reality is if you took a downside scenario of just the four, you know, our total recovery for the furniture is expected to be greater than a 100%.
Spenser Glimcher: Thank you. That is very helpful. And then just last one. Cap rates were online with 1Q. Can you just talk about what you are seeing thus far into 3Q?
Steve Horn: Yeah. Kinda. And the 1Q call, I kinda said, second Q was gonna be pretty flat, and, yeah, we were right there. Third quarter, I am really not seeing any movement either way. It depends on the mix of closings in the quarter. However, I think, give or take, five, 10 basis points either side. Could happen.
Spenser Glimcher: Great. Thank you.
Operator: Thank you. Your next question is coming from Ronald Kamdem from Morgan Stanley. Your line is live.
Jenny: Hey. This is Jenny on for Ron. Thanks for taking my question. First is regarding your November 2025 debt maturity approaching, like, can you talk a little bit more about your specific, like, refinancing strategies and so forth. Thank you.
Vincent Chao: Hey, Jenny. This is Vincent. Yeah. So we looked at that and really we did the $500 million deal on July 1, and that kind of prefunded that refinancing. And so we are sitting on a bit of cash right now, as we work through acquisitions, but ultimately, those funds will partially be used to repay the $400 million financing. And then we may be back in the market later in the year. You know, if you just think about our normal of acquisitions, you know, based on the new $650 million of acquisition volume at the midpoint, you know, at 40% debt. You know, let us call it $250 million-ish of net new debt we would need.
So we funded some of that with the $500 million, so we may be back in the market for a smaller amount later this fall.
Jenny: Perfect. Second one regarding the average time from, like, a vacant property to be released. Like, maybe talk a little bit more about how does this, like, timeline compare with your historical average of nine to twelve months. Thanks.
Steve Horn: Yeah. I mean, the nine to twelve months is when rent starts coming in. But we will have activity within, you know, kinda thirty, forty days of marketing that asset. But, you know, to sell it or release it, there are usually contingencies in the contract before they start paying rent. And if it is a redevelopment, that is really when the nine to twelve months comes into play. But we are seeing I mean, kinda why I said we were outperforming our expectations with the furniture assets because it all moved pretty quick compared to historical averages. And the restaurants are good locations, really good dirt.
So, you know, that nine to twelve months is still gonna be the majority because there is redevelopment with a large regional operators.
Jenny: Okay. Perfect. Thanks so much.
Operator: Thank you. Your next question is coming from Smedes Rose from Citi. Your line is live.
Nick Joseph: Thanks. It is Nick Joseph here with Smedes. Maybe just starting on the bad debt. You talked about 60 basis points bad debt embedded in guidance still, only 15 basis points booked thus far. You also mentioned that there are no tenants keeping you up at night. So just trying to kind of understand the kind of keeping the 60 basis points for now.
Vincent Chao: Yeah. Hey, Nick. It is Vincent. I will start and let Steve jump in if he has anything to add. But really, as we think about the bad debt, we booked 15, so we have, you know, we have got 45 basis points to kind of play with, if you will. We are still dealing with At Home. It is in bankruptcy. You know, so we do not exactly know where that is all gonna shake out. We are pretty happy with the progress so far in we do not have anything on the initial closure list.
And as we have talked on past calls, we feel pretty good about the real estate and the rents that are embedded there, which are only $6.5 per square foot. So we feel good about our position, but they are in bankruptcy, so we have to keep some dry powder in case something goes against us on that front. You know, I think, typically, we do have between thirty and forty basis points of bad debt in any given year. And so we have still got two quarters left to go, and so we just do not want to again, just similar to our investment thesis, you know, we are not trying to get ahead of ourselves.
In terms of bad debt. Just knowing that there is At Home out there plus, you know, there is always normal turnover.
Steve Horn: Yeah. That is the tenants are keeping me up at night, meaning any substantial tenants. But just to reiterate, what Vincent said, we do deal with retailers and you know, sixty days from now, something might shift. So it is prudent to leave some of the bad debt in there.
Nick Joseph: That is very helpful. Thank you. And then maybe just back to cap rates. I mean, you had mentioned kind of capital coming in chasing larger volumes. How is portfolio pricing relative to individual assets right now? Are you seeing that spread widen a bit?
Steve Horn: I would say and I have seen the spread widen. Think with the new money coming into the sector, again, we have been doing this a long time, and we have seen competitors come and go that I still think there is a pretty good portfolio premium on certain deals. In that kind of that $100 to $200 million range, which is a nice bite but there is a lot of capital chasing it. We saw a handful of portfolios go off in the $6.05 $6.07 5 range. And that is probably the retail levels on the individual assets.
Nick Joseph: Thank you very much.
Operator: Your next question is coming from John Kilichowski from Wells Fargo. Your line is live.
John Kilichowski: Good morning. Thank you. Maybe just on the composition of the guidance raise, how much of that was driven by the actual increase in acquisition versus then you noted that termination fees kinda came back slightly more normalized, but still above what you all were expecting. I know you have not given specific number, but maybe if you could size that for us.
Vincent Chao: Yeah. Sure. Hey, John. It is Vincent. Yeah. Just to clarify, have no prepared remarks, the $2.2 million that we booked in the quarter, we were expecting that. That was part of the plan. So it was embedded in our guidance last quarter. My comment about $2.2 million being above, you know, it is above historical levels, so but down from the first quarter. So that was the point I was trying to make on that $2.2 million. But as far as the upside in the guidance, there are a couple moving parts there. You have got about a half a penny of upside on AFFO, just a little less than that through the first half.
But then you do have net expenses going up by about just over a penny. So that is a headwind to the guidance. And then I think the balance of it really is investment-related and as well as the bond offering that we did. So we are seeing a little bit of downside, call it, a half a penny or so from the bond offering relative to our initial guidance, and so we are sitting on a bit of cash right now. We are earning a pretty good rate on it but not the same as what we are paying on the interest side of things. So there is a little bit of headwind there.
And then offsetting all that is acquisitions, which one, timing of acquisition. So we have definitely been a bit ahead of our plan in terms of timing. And then on the flip side, on the disposition side, you know, typically when we give guidance on dispositions, we are assuming income-producing. If you look at it year to date, we have got about half of our dispositions have been vacant, and so we are picking up a little bit from that as well.
John Kilichowski: Got it. That is helpful. And then maybe just from a composition, can you talk about the sectors that you are targeting on both the acquisition and the disposition side?
Steve Horn: Yeah. I mean, the disposition side, it is more communicating with individual tenants. Just, you know, for example, you saw that our Camping World exposure dropped by a couple. Because that is you have some assets that were performing for world, they were not in the long-term plan. So we, you know, sold some assets back to them. So that is good for National Retail Properties, Inc. and good for the tenant relationship. As far as acquisitions, I think going forward, the auto service sector still seems to be the most robust activity. If it is M&A, or growth. And I think also we are starting to see some activity in the, you know, the QSR restaurants.
John Kilichowski: Very helpful. Thank you.
Operator: Your next question is coming from Michael Goldsmith from UBS. Your line is live.
Michael Goldsmith: Good morning. Thanks a lot for taking my question. The leverage ratio ticked up a little temporarily to pay down the line of credit? Or just trying to get a and then now that now that you are running as the CFO, like, how are you thinking about just like a target leverage ratio or where you want to be? Thanks.
Vincent Chao: Yeah. Hey, Michael. Thanks for the question. Yeah. I think from a quarterly leverage level of 5.7, so it ticked up a little bit from the first quarter. That really has to do more with timing of acquisitions, dispositions. We did a little bit of equity in the quarter, but, you know, it is really the earlier acquisition timing. And so part of our initial plan includes the benefits of free cash flow. But because we are buying ahead of plan, that is causing us to have a little bit of a bump up in leverage here in the near term. In terms of longer term, how do I think about leverage? I mean, lower is better, obviously.
We would love to be operating I would say, you know, targeting less than five and a half times, you know, put exact ranges, it is hard to say. But, certainly, you know, if we are in the five, ish range, that would give us a little bit more capacity to kind of lean in when opportunities arise. And so, you know, I would love to get it down below five and a half here shortly.
Michael Goldsmith: Got it. And just while I got you, Vincent, this you know, you have done a five-year bond here, so a little bit more shorter term than you have done in the past. Can you just talk a little bit about the benefits of that and how you plan to use that kind of, you know, use shorter-term debt going forward?
Vincent Chao: Yeah. I think it really goes down to asset and liability management. So if you look at our debt duration, it is around eleven years. Prior to this deal last quarter, it was eleven point six years. If you look at our average lease duration, it is just under ten. So, like, nine point eight years. And so from my perspective, that means we have a little bit of flexibility on doing a little bit of short-term debt in the near term just to balance out those assets and liabilities. And I think the other part of it is we look at our maturity ladder. We look at where we have holes.
And so we did have a hole in that five call it five and a half year period, really. And so, you know, that it is a combination of where do we have holes in the maturity ladder and, you know, how are we managing our assets and liabilities.
Michael Goldsmith: Thank you very much. Good luck in the back half.
Vincent Chao: Thank you.
Operator: Thank you. Your next question is coming from Rich Hightower from Barclays. Your line is live.
Rich Hightower: Hey. Good morning, guys. Just a quick one for me. We just noticed, I think, quarter over quarter, the ABR that is on sort of a cash basis payment ticked up from the first quarter. Not so much year over year, but, you know, quite a sequential jump. And then, you know, likewise, kind of a big jump in terms of the GLA on cash. And so my question there is, is that just related to At Home, or is there anything else kind of in the moving parts there that we should be aware of?
Vincent Chao: Yeah. Hey, Rich. And yeah. That is almost all of that is At Home. Okay. You recall that was up we are up about a little over a percent quarter over quarter in cash basis ABR and At Home's percent of our ABR, and then obviously a bigger percentage of our GLA given the size of the box.
Rich Hightower: Exactly. Yep. Exactly. And that was that is a difference from the first quarter just to be clear. Is that just based on timing around the bankruptcy? Filing?
Vincent Chao: Correct. Correct.
Rich Hightower: Okay. Got it. That is all I got. Thank you, guys.
Operator: Thank you. Your next question is coming from Wes Golladay from Baird. Your line is live.
Wes Golladay: Hey, good morning, guys. Just a quick question on the deal flow. Are you starting to see your partners get more on their business now that they have visibility on taxes and potentially more visibility on tariffs?
Steve Horn: Yeah. I think it is a good question. I think there is better visibility on the tariffs in the conversations that we have with our tenants. But I do not think they are quite there yet that they are ready to ramp up the pre, you know, levels going back to 2018, 2019. But we are starting to see, yeah, inquiries come in about funding new builds, you know, kind of a one-off here and there. However, we do see some M&A activity picking up where the buyers are able to underwrite the cash flow, the quality of earnings.
Vincent Chao: Okay. And then Wes, just to add to that. I mean, Steve mentioned earlier that all auto services is pretty robust right now, and, you know, I cannot say with certainty that is because of tariffs, but to the extent that it costs a lot more to buy a new car, you know, we should, you know, I think it is logical to assume that is gonna help our auto services business on the repair side as well as auto parts or is more of a self-help kind of thing. DIY.
Wes Golladay: Yeah. That makes sense. Even while I got you, when we look at your, yeah, call it nearly $900 million of ABR, some of the Badcock's and the Frisch's that you resolved. How should we think about timing of commencement for some of that? I guess, we call it, you know, sign out open pipeline.
Vincent Chao: Yeah. That is a good question. It is definitely not something that we track as closely as we did in the shopping center space. But for the most part, most of the ABR is commenced. We do not have a ton of sign that open per se. I off the top of my head, I cannot think of any major tenants that have not yet commenced that are not, you know, in that ABR number we gave you.
Wes Golladay: Great. Thank you.
Operator: Thank you. Your next question is coming from Omotayo Okusanya from Deutsche Bank. Your line is live.
Omotayo Okusanya: Yes. Good morning, everyone. Steve, I was hoping you could just kind of walk us through again. I know you kind of mentioned new tenants are kind of keeping you up at night. Quote unquote. But I was hoping you could kind of talk to, again, some of the retail categories that you know, are still kind of seeing pressure, whether it is, you know, competition, whether it is just, you know, concepts dying, whether it is tariffs, what have you. Just to get a couple of thoughts around, you know, restaurants and drugstores and, you know, and even furniture and consumer electronics that may get hit by tariffs just how are you thinking about that?
How do you kind of think about, you know, 60 basis points of debt maybe covering any of that risk?
Vincent Chao: Yeah. Hey, Teo. It is Vincent. Good to hear from you. I will start maybe just with lot specific type of commentary. It is a little easier than to talk a lot by lot. But, I mean, there are some areas that are probably more impacted by tariffs and some of that uncertainty than others. I mean, thankfully, you know, most of our tenant base is either necessity or service-based. About 85% of our ABR. So, you know, maybe a little bit less direct impact on tariffs and more of an indirect economic impact if there is any. But as far as restaurants go, I mean, just like most retail, there are winners and losers all the time.
And so, you know, you look at the Chili's, that is just absolutely crushing it right now. And then you have others to Roadhouse, others that are not doing quite as well. But I think it really is do you have a compelling product offering that gets people back in the door? And that is across not just restaurants, but, you know, there are definitely winners and losers throughout. And I think as pressure builds on some of the weaker players, that does open up an opportunity for the better players to take share. So we are seeing that. And, you know, I will give you another example.
You know, Camping World is one that, you know, obviously, it is a big tenant of ours. We did reduce exposure this quarter, but if you look at their earnings releases and calls, I mean, they are seeing pressure on their ASPs. They are seeing pressure on certain parts of their business, particularly new business, but they have a very strong used business. Right? So they are leaning into the parts of the investor or the customer base that are active and so on net they are still able to drive EBITDA and top-line growth. And so it is just, you know, can you adjust to the changing market conditions or not?
So I think it is not as simple as just saying, hey. You know, tariffs are gonna impact tenants negatively until on net, you know, an entire line of trade is good or bad. Having said that, you know, if we can get some more clarity on the economy and tariffs, job growth, etcetera. And people can feel more confident in making decisions. Then I think that is just net good for all lines of trade.
Omotayo Okusanya: Thank you.
Operator: Your next question has come from John Massocca B. Riley. Your line is live.
John Massocca: Good morning. Is already kind of addressed, but was there something specific that drove the increase in non-reimbursed real estate expenses? I mean, was that tied to maybe some of the former Frisch's properties and the timing you are thinking about with resolving those vacancies? Or even just baking in some conservatism given At Home's situation? Just kind of curious why that ticked up related to a specific tenant, and they kind of called it out a little bit prepared remarks.
Vincent Chao: Hey, John. I think without calling out specific tenants, I think you are spot on. I mean, it is definitely a little bit slower resolution of certain vacant properties that we are dealing with. And I think part of it is we are seeing a lot of good demand, and so we have some options and decide, okay. Do we want to release it immediately or there may be a higher credit or a better long-term value play that we can take that maybe takes a little longer to lease up? But ultimately ends up better for us and for shareholders.
And so we have made some decisions to delay certain openings to, you know, again, try to come up with a better long-term solution.
John Massocca: Does that indicate maybe, you know, in terms of resolving these vacancies, there is more of a leasing kind of angle you are taking or vice versa, maybe more of a disposition angle, and that is kind of what is driving the differentiated timing versus what you were expecting at 1Q?
Steve Horn: Yes. I mean, I think things are moving a little slower on a handful of the assets than you would like. That is just real estate. You know, if it is permitting process. But, yeah, I think you are probably right as far as timing. Leasing route on some of the assets. That is creating a little bit more carry cost than they originally thought. But, again, in the big picture, it is a pretty small number. As far as the impact on our financials. In the long run, it will create the most shareholder value.
John Massocca: You addressed this a little bit earlier in the call with regards to kind of your philosophy, but you know, when you think about maybe issuing debt on, you know, a five-year basis versus ten-year, is that something you are comfortable doing again, you know, given what you are seeing today in the maturity window? It is pretty attractive from a pricing perspective. So just curious, given the potentially some additional financing needed if not later this year than next year.
Vincent Chao: Yeah. Look. I think the guidepost here is not we want to have short-term debt or we are trying to get the lowest cost of debt. I mean, it is cheaper on the shorter end of the scale, so that is a benefit. But I go back to just trying to balance our assets and liabilities. So if we have got eleven years of duration on the debt, we have got under ten years of duration on the leases, there is a bit of a mismatch there and so, you know, to some degree, I think that gives us flexibility to opt for shorter-term debt if it makes sense.
You know, with regard to all the other decisions we have to make and all the other factors we have to consider. But ideally, you know, I would love to be issuing longer-term debt on a consistent basis, but we do have a bit of a mismatch between assets and liabilities. And so again, that gives me some opportunity to do some short-term debt here.
John Massocca: I appreciate the color. That is it for me. Thank you.
Vincent Chao: Thanks.
Operator: Thank you. Once again, everyone, if you have any questions or comments, please press star then 1 on your phone. Your next question is coming from Linda Tsai from Jefferies. Your line is live. And once again, Linda, your line is live.
Linda Tsai: Hi. Sorry. Maybe you alluded to this somewhat in your response to the earlier question. In terms of line items running slightly above the historical average, lease term fees and net real estate expenses, is your expectation these trends conclude by year-end? Or could it continue potentially next year?
Vincent Chao: Yeah. On lease termination fees, Linda, I mean, I think historically, we have talked about $2 to $3 million, but it has certainly been higher than that over the last, call it, two years or so. Part of that is, you know, we have been actively managing the portfolio and trying to look for, you know, opportunities to address problems before they come to a head. And so the DARPA paying and the sublease tenant list those are the ones that we kind of fish around for these lease terminations to try to address them.
And as we talked about on this call, the two biggest deals that we did this quarter, we had resolution for both of them by the time we did the lease termination fee, and that is the kind of outcome that we are looking for. So it might be elevated for, you know, the next year or so. But, you know, I do not think it will be the same as the last two years, but it could be higher than the $2 to $3 million in the next year or so.
And then in terms of the net real estate expenses, yes, I think we would hope to by the end of the year be back to a bit more of a normal level of real estate expense net. Which is, call it, $13 to $14 million on an average year. And then obviously, you know, that grows every year just from an inflationary perspective. But that is our hope.
Linda Tsai: And that is related to releasing some boxes?
Steve Horn: No. Exactly. It is just, you know, with the tenants that we are working with, just holding the assets a little bit longer trying to maximize value of our rent.
Linda Tsai: Makes sense. And then in terms of your ability to attract extract value from underperforming holdings, could you just give us some more color on how you achieve this?
Steve Horn: Right. I think it is discussions with our tenants understanding as lease term is burning off that they may not renew that lease at the end of the term. So sell whether there is some term and value to a potential investor. Opposed to letting it go vacant where you are getting a percentage of a recovery. But if there is some lease term, the income-producing asset, you can maximize value by selling it into the ten thirty-one market. And at the same time, you know, actively manage our portfolio, strengthen it in the long run.
Linda Tsai: Thank you.
Operator: Thank you. That does conclude our Q&A session. I will now hand the conference back to Steve Horn, Chief Executive Officer, for closing remarks. Please go ahead.
Steve Horn: Thanks for joining us this morning. National Retail Properties, Inc., we are in great shape for the remainder of the year, opportunistic, hopefully. And we look forward to seeing many of you guys in person in the fall conference season. Take care. Talk to you.
Operator: Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.