Executive Summary / Key Takeaways

• NNN REIT's long history and disciplined net lease model, underpinned by a fortress balance sheet and deep operational expertise, provide a robust foundation for navigating volatile retail real estate markets.
• Recent tenant challenges, particularly with Badcock Furniture and Frisch's, are being actively managed with promising early results in re-leasing and sales, expected to have a minimal long-term impact (less than 1% on stabilized Core FFO per share).
• The company's relationship-driven acquisition strategy continues to yield opportunities at attractive cap rates (7.4% in Q1 2025), supporting external growth and the maintained 2025 guidance for Core FFO ($3.33-$3.38) and AFFO ($3.39-$3.44).
• A conservative capital structure, including a sector-leading weighted average debt maturity (11.6 years) and significant Credit Facility availability ($1.08 billion), provides ample liquidity and flexibility to fund investments and manage upcoming debt maturities.
• NNN's consistent performance, high occupancy (97.7%), conservative AFFO payout ratio (66%), and 35-year track record of dividend growth underscore its appeal as a stable income investment despite ongoing macroeconomic uncertainties and competitive pressures.

A Durable Model For Retail Real Estate Income

NNN REIT, Inc., established in 1984, has cultivated a reputation as a stalwart in the single-tenant net lease retail sector. Its core business revolves around acquiring, owning, and developing high-quality freestanding properties leased primarily under long-term, triple-net agreements. This structure places the burden of operating expenses – including taxes, insurance, maintenance, and capital expenditures – squarely on the tenant, providing NNN with a predictable and stable revenue stream. Over decades, NNN has weathered numerous economic cycles, including Black Monday, the dot com bubble, 9/11, the GFC, and the COVID-19 pandemic, a testament to the resilience of its model and the strength of its underlying real estate fundamentals.

The company's strategic approach is fundamentally bottom-up, prioritizing disciplined underwriting of individual properties and fostering deep, long-term relationships with tenants. This relationship-driven model is a significant competitive differentiator, often leading to repeat business through off-market sale-leaseback transactions. These direct deals allow NNN to be highly selective, focusing on well-located properties with strong regional and national tenants at appropriate rents, often resulting in longer lease durations (over 18 years for Q1 2025 acquisitions) and favorable terms compared to broader market transactions. This approach has historically contributed to high occupancy levels, consistently near or above the long-term average of approximately 98%.

While NNN operates within a highly competitive landscape against a diverse group of real estate investors, including larger net lease REITs like Realty Income (O), mall operators like Simon Property Group (SPG), and shopping center owners like Kimco Realty (KIM) and Regency Centers (REG), its niche focus and operational execution provide a distinct edge. Unlike competitors focused on multi-tenant centers or large enclosed malls, NNN's single-tenant, triple-net structure results in a leaner operating model and lower property-level expenses borne by the landlord. This contributes to a strong NOI margin, which stood at 95.9% in Q1 2025.

NNN's competitive advantage is not rooted in traditional product technology but in its sophisticated operational platform, experienced team, and data-driven processes. This "operational technology" enables superior underwriting, proactive asset management, and efficient resolution of tenant issues. The deep institutional knowledge within the team (average associate tenure over 10 years, senior leadership over 20 years) allows for effective evaluation of tenant creditworthiness, market trends, and property-level performance. This expertise is critical in identifying and executing strategic acquisitions and dispositions, as well as managing vacancies quickly and effectively, often achieving rent recapture rates above historical averages with minimal capital outlay.

Performance Reflecting Discipline and Resilience

NNN's recent financial performance demonstrates the stability inherent in its model, even amidst macroeconomic uncertainty and specific tenant headwinds. For the first quarter of 2025, the company reported Core FFO of $0.86 per share and AFFO of $0.87 per share, both representing a 3.6% increase over the prior year period. This growth was supported by a 7.2% increase in total revenues, driven primarily by a 7.3% rise in rental income, reflecting the accretive impact of recent property acquisitions. Annualized Base Rent (ABR) also saw healthy growth, increasing over 5% year-over-year to $874.3 million as of March 31, 2025.

The company's disciplined investment activity continued in Q1 2025, with $232 million invested across 82 properties at a weighted average initial cash cap rate of 7.4%. Notably, all these acquisitions were relationship-driven sale-leaseback transactions, aligning with NNN's core strategy and preference for long-term leases (over 18 years average). This acquisition pace, while higher than initially anticipated for the quarter, positions the company well towards its full-year target. Dispositions in Q1 2025 totaled $16 million from 10 properties at a weighted average cap rate of 4.9%, generating a net gain of $3.8 million. These sales, often strategic or defensive, allow for capital recycling into higher-yielding opportunities.

Operating expenses saw increases in Q1 2025 compared to the prior year, including a 3.4% rise in general and administrative expenses (though decreasing as a percentage of revenue) and a 31.0% increase in total real estate expenses. The latter was primarily driven by a 59.4% increase in non-reimbursed real estate expenses, directly attributable to a higher number of vacant properties. Depreciation and amortization also increased by 6.6% due to portfolio growth. Interest expense rose by 8.3%, reflecting changes in the debt structure, including the issuance of new notes at higher rates, partially offset by lower Credit Facility usage and interest rates compared to the prior year.

A notable item in Q1 2025 was $8.2 million in lease termination fee income, contributing approximately $0.04 per share to results. While unusually high compared to the historical average of around $3 million annually, this income is a direct outcome of NNN's proactive asset management, resolving future potential issues and allowing for the strategic re-tenanting or sale of properties.

Navigating Tenant Challenges and Market Dynamics

Despite the overall portfolio strength, NNN has faced specific tenant challenges, particularly with Badcock Furniture and Frisch's Big Boy, which impacted occupancy and expenses in late 2024 and early 2025. Badcock, representing 0.6% of ABR, rejected leases on 32 properties in Q4 2024 following liquidation. Frisch's, representing 1.5% of ABR, ceased rent payments in Q4 2024, necessitating eviction proceedings for 64 properties.

Management has been actively addressing these vacancies, leveraging their operational expertise and the strength of the underlying real estate. By Q1 2025, they had made significant progress, re-leasing or selling almost 50% of the former Badcock and Frisch's stores within approximately two quarters. Early results from 11 resolved Badcock properties showed a combined rent recovery of approximately 113% of prior rent through a mix of re-leasing (at roughly 70% recovery with no TIs) and strategic sales (at a 5.1% cap rate, allowing reinvestment at higher yields). For Frisch's, 28 properties were re-leased to another restaurant operator at approximately 50% of prior base rent plus percentage rent, with rent commencing in May 2025.

Management is confident that the vast majority of these vacancies will be resolved by year-end 2025, expecting the total impact on stabilized Core FFO per share from these two tenant defaults to be less than 1% when fully put to bed by 2026. This minimal anticipated impact underscores the value of NNN's disciplined underwriting and focus on fungible real estate assets, which attract significant interest from national and regional tenants across various sectors like automotive service, convenience stores, and QSRs.

The competitive landscape for acquisitions remains robust, with cap rates experiencing some pressure, particularly for larger portfolio deals which NNN has opted to forego. However, management expects cap rates for their target acquisitions to remain relatively stable in the mid-to-high 7s in the near term. The market environment, influenced by macroeconomic conditions and interest rate expectations, continues to present opportunities, and NNN's strong balance sheet positions it to capitalize on these.

A Fortress Balance Sheet and Clear Outlook

NNN maintains one of the strongest balance sheets in the REIT sector, providing significant financial flexibility. As of March 31, 2025, the company had $5.52 million in cash and cash equivalents and $1.08 billion available under its $1.2 billion unsecured revolving Credit Facility. The Credit Facility, extended to April 2028 (with extension options), also includes an accordion feature allowing expansion up to $2.0 billion, subject to lender approval.

The company's debt structure is characterized by long maturities and low floating rate exposure (2.5%). The weighted average debt maturity stood at a sector-leading 11.6 years as of March 31, 2025, with the next significant maturity being a $400 million bond due in November 2025. NNN's financial strategy emphasizes using internally generated free cash flow and disposition proceeds to fund a significant portion of its investments, reducing reliance on volatile capital markets. This self-funding model, combined with ample Credit Facility capacity, ensures the company can meet its material cash requirements, including debt service, dividends, and construction commitments ($55.9 million remaining as of Q1 2025). NNN's net debt to EBITDA was 5.5x at March 31, 2025, and 100% of its assets are unencumbered, providing additional flexibility.

For 2025, NNN has maintained its guidance for Core FFO per share at $3.33 to $3.38 and AFFO per share at $3.39 to $3.44. This outlook is supported by acquisition guidance of $500 million to $600 million and disposition guidance of $80 million to $120 million. The guidance embeds a credit loss reserve of 60 basis points, a level management feels comfortable with given the progress made in addressing recent major tenant issues and historical actual credit losses typically running lower than the 100 basis points often assumed in guidance. Property expenses net of reimbursement are guided higher ($15 million to $16 million) reflecting the impact of current vacancies.

Key risks for NNN include potential changes in economic conditions impacting tenant health, concentration risk within certain industries (automotive service, convenience stores, restaurants, family entertainment) and geographies, the ability to successfully re-lease or sell vacant properties, and the cost and availability of capital. However, NNN's long-term leases, diversified portfolio across 50 states, disciplined underwriting, strong balance sheet, and experienced management team are significant mitigating factors against these risks.

Conclusion

NNN REIT's first quarter 2025 results and maintained full-year guidance underscore the enduring strength and resilience of its disciplined net lease model. Despite navigating specific tenant challenges, the company's operational expertise, particularly in proactive asset management and re-tenanting, is proving effective, with minimal long-term impact anticipated on core earnings. The relationship-driven acquisition strategy continues to deliver accretive growth opportunities, while a fortress balance sheet provides the financial flexibility to execute its investment plans and manage market uncertainties. With a consistent track record of performance, high occupancy, and a commitment to dividend growth supported by strong free cash flow, NNN remains well-positioned to deliver stable income and long-term value for investors in the evolving retail real estate landscape. The company's ability to effectively manage tenant transitions and capitalize on acquisition opportunities at attractive yields will be key factors to watch as the year progresses.