NNN - NYSE

Greetings, and welcome to the NNN REIT Inc. Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Steve Horn, CEO of NNN REIT. Sir, the floor is yours.

Thanks, Ali, and good morning. Welcome to NNN REIT's Fourth Quarter 2025 Earnings Call. Joining me on the call is our Chief Financial Officer, Vin Chao. As outlined in this morning's press release, NNN delivered a solid operating and financial performance in 2025, generating 2.7% growth in AFFO per share and completing over $900 million of acquisitions, the highest annual volume in NNN's history. The momentum exiting 2025 driven by elevated acquisition activity and the portfolio management of the vacancies positions NNN well entering more uncertain macroeconomic environment in 2026. I am certain in the team's ability to execute across the full investment cycle from sourcing the right opportunities to thoughtful underwriting to proactive management of the highly diversified portfolio by geography, tenant and industry. Before turning to the results and the outlook, I want to highlight several accomplishments in 2025. First, our 36th consecutive annual dividend increase. We maintained a highly flexible balance sheet, including a 10.8 year weighted average debt maturity, which is best-in-class. No incumbered assets and $1.2 billion of total available liquidity. We completed the executive team positioning and also we continued performance on the acquisition platform alongside proactive portfolio management. The long-term value proposition remains unchanged at its core, our strategy still continues to focus on executing a disciplined bottom-up investment approach, growing the dividend annually while maintaining a top-tier payout ratio, delivering mid-single-digit AFFO per share growth over the long term, aligning acquisitions, dispositions and balance sheet management to support these objectives. Turning to our outlook as we move through early of 2026, NNN enters the year on solid financial footing. At year-end, we had $1.2 billion of total available liquidity, followed by a record acquisition year. Looking ahead, we expect to fund our 2026 strategy through a combination of approximately $210 million of retained free cash flow, roughly $130 million of planned dispositions which together should result in manageable equity needs throughout the year while maintaining leverage neutral. NNN's self-funding business model can consistently deliver growth in good and challenging economic conditions. Our long-standing approach to capital deployment remains selective and opportunistic will not change. Current cap rates have stabilized for the most part, the fourth quarter initial cap rate in line with the third quarter and we're seeing that trend continue early in the first quarter of 2026, but anticipating slight compression as we move further into the year. During the quarter, we invested just over $180 million across 55 properties, at an initial cash cap rate of 7.4% and with a weighted average lease term of over 18 years. NNN historically sources most of its acquisition through long-standing relationship, does not typically target investment-grade portfolios which tend to have tenant-friendly lease provisions and lower organic growth, if any. Turning to the fourth quarter operating performance. Our portfolio of 3,692 [ free steam ] single-tenant properties is performing at a high level. As we sit here today, we're not having any conversations with portfolio tenants that raise concerns regarding operating performance or the ability to meet rent obligations. Our occupancy is up 80 basis points from last quarter to 98.3% which is in line with our long-term average of give or take, 98%. The increase in occupancy was a direct result of our asset management team and leasing department executing at a high level, addressing the elevated vacant assets from the end of the third quarter. I would classify the quarter as "in line on renewals and leasing". 55 of our 64 renewed ahead of our average renewal rate of 85%, but the run rates were 104% above prior. We leased 4 properties to new tenants at 109% in the prior run, demonstrating strong demand for the assets. As a quick update on the assets of the furniture and restaurants, which were trending ahead of schedule, First, the furniture assets. As of today, we have the last 5 properties under contract for sale. We expect the majority of those to close during the current quarter, but however, one or two could slip to the second quarter. With respect to the restaurant assets, the team continues to make solid progress identifying the optimal outcome for each property. Solutions include asset sales, releasing a redevelopment with strong brands across multiple industries. Currently, 32 properties remain, 15 are for sale and 4 are in advanced discussions about leasing. The remaining 13 were actively marketed. We expect to reach resolution on these assets progressively throughout the year. On disposition side, fourth quarter, we saw 18 income producing along with 42 vacant, generating $82 million of proceeds during the quarter. For the full year, dispositions totaled $190 million, including 49 vacant at a 6.4% cap rate and 67 vacant assets. While re-leasing remains our priority, we continue to be selective disposing of nonperforming assets where there's no clear path for near-term income generation. With that, let me turn the call over to Vin to provide additional detail with our quarterly results and updated guidance.

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 law. The company's actual future results may differ significantly from 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 and AFFO of $0.87 per share, each up 6.1% year-over-year. For the full year, core FFO per share was $3.41 and AFFO per share was $3.44 each up 2.7% versus 2024. These solid results come despite several headwinds to start the year and reflect the resilience of our cycle-tested business model. AFFO per share for the quarter came in slightly ahead of our expectations. The upside was driven by a number of small positive variances, including lower net real estate expenses, lower G&A and higher interest income. There were no notable run rate items to call out this quarter. G&A as a percentage of total revenue was 4.9% for the quarter and 5.1% for the full year. As a percentage of NOI, which we think is a better way to think about it, G&A was 5.1% for the quarter and 5.3% for the year. Free cash flow after dividend was about $51 million in the fourth quarter. As Steve mentioned, we ended the year at 98.3% occupancy, up 80 basis points over last quarter, which again speaks to the resiliency of our business model and the portfolio and the strength of our leasing and asset management teams. Annualized base rent was $928 million at the end of the quarter, an increase of close to 8% year-over-year compared to a 7% increase last quarter, driven by our strong acquisition activity throughout the year. With regard to our watch list, there have been no material changes since last quarter, and we believe our bad debt assumptions are sufficient to absorb any future tenant issues. Although headline risk can create noise, it's important to keep in mind that NNN's proven strategy of focusing on real estate quality, property and corporate-level credit and low cost and rent basis using a long-term sale-leaseback structure has allowed NNN to successfully navigate various economic cycles with limited long-term cash flow impacts. Turning to our capital markets activity. In November, we paid off our $400 million 4% coupon note at maturity. In December, we closed on a $300 million delayed draw term loan and entered into [ forward ] term swaps totaling $200 million that fixed SOFR 3.22%. In conjunction with the execution of the term loan, we amended our revolving credit facility to eliminate the SOFR credit spread adjustment, reducing the effective interest rate on our revolver by 10 basis points. Subsequent to the end of the quarter, we drew down $200 million against the term loan, leaving us with $100 million of remaining availability. Moving to the balance sheet. Our BBB+ rated balance sheet remains in great shape. At the end of the quarter, we had no encumbered assets and $1.2 billion of available liquidity. Pro forma for the full drawdown of our term loan floating rate debt represented just 1% of total debt. Our leverage was consistent with last quarter at 5.6x and our duration remains the highest in the net lease space at 10.8 years and is well matched with our lease duration of 10.2 years. On January 15, we announced a $0.60 quarterly dividend, representing a 3.4% year-over-year increase in equating to an attractive 5.5% annualized dividend yield and a prudent 69% AFFO payout ratio. I'll end my opening remarks with some additional color regarding our initial 2026 outlook. We are establishing an AFFO per share guidance range of $3.52 to $3.58. And core FFO per share guidance of $3.47 to $3.53. The midpoint of our AFFO range represents 3.2% year-over-year growth in 2026, accelerating from 2.7% growth in 2025 and as we move past the tenant issues experienced in late 2024. Consistent with past years, our initial outlook embeds a self-funded level of acquisitions with further upside dictated by market conditions and our cost of capital as we remain focused on driving efficient per share earnings growth. Specifically at the midpoint, our outlook embeds $600 million of acquisitions, which is funded primarily with $130 million of dispositions, expected free cash flow of about $210 million and a leverage neutral amount of incremental debt financing. From a credit loss perspective, we have included 75 basis points of bad debt in our full year outlook, which we think is prudently conservative to start the year. Additional details regarding the underlying assumptions embedded in our guidance can be found in our earnings release. With that, I'll turn the call back over to the operator for questions.

[Operator Instructions] Our first question is coming from Michael Goldsmith with UBS.

In the press release, Steve, you mentioned proactive portfolio management. So can you kind of provide the latest and greatest on what you're doing there, where you see it? And then I guess you can also tie that into your occupancy took a step up during the quarter to above 98%. But is that the long-term number you want to be? Or are you been higher than that in the past. Just trying to get a sense of where you're at in that?

Yes. I mean I think ideally, you want to be slightly above that, but we do deal with retailers. So with lease terms that come up, so we do get assets back. But what I mean on the proactive portfolio management, you have a portfolio and there's a bell curve. Everybody has kind of the bottom 10%, and with our relationships, we're always constantly in discussions. So we have a good idea of who's going to renew at the end of lease terms. And if we can get a sense of that, if there's 5 years left and we can dispose of the asset with the goal of getting our renewal rates higher over the course of time. We're just trying to get ahead of future problems. And it's more on the real estate side because credit can turn on a dime. And -- but we always are monitoring credit, talking to the tenants. We're just really just trying to keep the portfolio in good stead over time, which I think we have as far as our renewal rates being around that 85% and having over 100% recapture rate.

Got it. And then just on the bad debt assumption. It looks like you're starting with 75 basis points. Last year, I know it wasn't you who set up, but it started lower and then prior to that, I think the number was a bit higher. So can you just talk about why is 75 basis points the right way to start the year? And I think earlier, you mentioned that there was not any material changes on your watch list. So I'm just trying to get a sense of some context around that number.

Yes. Thanks for the question. Yes. So one, I would just start off by saying, no matter what number we put out there were either too conservative or too aggressive. So typically, it's been about 100 basis points. That's the long-term sort of starting point. Last year, we went to 60 basis points because we had already taken out two of our larger problem tenants, the most immediate concerns with the two tenants, the furniture and restaurant operator. So they've already taken out the numbers, and so we went with a lower number to start to reflect any other future speculative. For this year, I think as we looked at it, we don't really have any changes in the watch list. We haven't really had any known issues that are of any materiality. But we felt like, hey, going back to 75% would just be a prudent way to start the year. So far, we really haven't been impacted too much by some of the retailer headlines that have been out there, and we hope that remains the case. But historically, we've done between 30 and 50 basis points of realized bad debt. And so starting at 75% feels like a comfortable way to start to begin the year.

Our next question is coming from Spencer Glimcher with Green Street.

Maybe just piggybacking off the credit loss questions. Can you guys share some color on kind of rent coverage levels? And where is the portfolio coverage today? And how does that compare to historic levels?

Yes. Good question, Spenser. The vast majority of our tenants report property level financials, but we're not seeing a decrease in the overall portfolio. I was actually just looking at some of the carwash assets, I was surprised they ticked up a little bit. But when you focus on rent coverage, you got to really keep in mind it's a stale number because not all tenants report quarterly, some are on an annual basis. And the economy is moving so fast the consumer, we don't get hung up on one number in particular. We kind of look at the trends and that comes back to our active portfolio management. But overall, depending on the industry, we have the car wash, a lot of them are over 3x, 4 x all the way down to auto service might be closer to 2x. But overall, we're comfortable with the rent coverage and don't have any concerns with it.

Yes. And Spencer, we've talked about this before. I mean when you think about rent coverage, depending on what line of trade you're talking about, one number may be very good for one line of trade and not so great for another line of trade. So looking at the overall portfolio average, can help maybe somewhat with directional changes, but it's not necessarily a meaningful number in and of itself.

Yes, understood. That's why I was just asking maybe compared to historic levels. Yes, to your point, that the trends are important. But yes, second [indiscernible], just can you talk about which segments you your existing clients are looking to grow more aggressively in the near term?

Yes. We do the bottom-up approach. We don't target a specific sector because we can only buy stuff as for sale. But that being said, we do focus on the relationships and we focus on the smaller parcels, high visibility, high trafficked roads. And I'd say for '25 and the pipeline, it seems like auto services and convenience stores, our biggest opportunities currently.

Our next question is coming from Smedes Rose with Citi.

I just want to ask a little bit about the pace of kind of lease termination fees. I know they had been elevated back in the third quarter and then seems a little more normal in the fourth quarter, but maybe a little higher than normal. I'm just wondering what you're expecting as we move through 2026 on that front?

Smedes. Yes, as we've kind of discussed in the past, I mean, we did -- for the full year, it was about $11 million, just over $11 million of lease termination fees in 2025. The fourth quarter was around $230,000. So again, I would characterize that as a much more normalized level. But historically, we've probably done around $3 million-ish a year prior to the last 2 years, which were elevated. So that's, call it, just a little bit less than $1 million a quarter, would be sort of a normal level, but it is chunky, so it's not like you just have a very stable quarterly number. That's why we don't focus on it too much. But as far as how we're thinking about 2026, I would say we're assuming a more normalized level, more consistent with the $3 million to $4 million lease termination level.

Okay. And then I just want to ask you, just sort of in general, from yourselves and from others, it seems like 2026 acquisition activity remains relatively elevated to maybe what we've seen in the past. And I'm just curious as to -- are you not seeing kind of incremental competition for your assets? I know a lot of your has come through long-term relationships already. But just in general, maybe some thoughts on the kind of the broader landscape of what you're seeing in terms of acquisition competition?

Yes. We've always operated in a highly competitive environment. There's always been competition, just the names have changed over the course of 20 years of my career. So I'm not really seeing an incremental competition entering the market. All the deals we do for the most part are with sophisticated tenants. So they have a fiduciary responsibility to market the asset. But we just kind of get the first call and the last call, and that's where we rely on our relationships. But that's why I do expect cap rates to compress a little bit possibly in the second, third quarter, just because there's peers out there that feel the need to elevate the acquisition activity, so they got to win a lot more deals.

Our next question is coming from John Kilichowski with Wells Fargo.

My first one is just on the acquisition guide and thinking about funding mix. Could you just walk us through the building blocks here? I think it's about $200 million of free cash flow. You got high-end dispositions, $150 million. I'm just curious how much are you willing to take leverage up to maybe go above and beyond that high end? Or what's that capacity there?

John. So one, we really don't have any upside to take our leverage. We're sitting at 5.6x. I think ideally, we generally have been around 5.5x. So not looking to lever up to drive that acquisition volume. So as I said, we're projecting $600 million at the midpoint of our guidance, that is pretty much entirely self-funded with free cash flow of $210 million as expected, $130 million of dispositions and then some incremental debt financing to stay leverage neutral. And then again, beyond that, if there are additional opportunities, it really will depend on where -- what the market conditions are, where the cap rates we're talking about and what's our cost of capital at that time. The other thing that we could look to do is rather than lever up is leading to some more dispositions. That would be an alternate source of equity if the stock is not where it needs to be.

Got it. Very helpful. And then an extension of that would be sort of the cost of those dispositions. I know there's a handful of vacancies. What's like a good blended cap, I guess, we should be thinking about in terms of the costs that you're getting on those sales?

We don't know exactly which assets we're going to dispose of in the aggregate of that, at the high end of the range of $150 million. This year, there will be a little bit more defensive sales on the portfolio pruning. So I would guess on income-producing assets, I would expect a little bit of an elevated cap rate selling the assets. But when you blend it out, it will be, I would guess, significantly below the 150 basis points of where we're going to deploy capital.

Yes. And John we do have some vacancies are still higher than they were prior to the two tenants having some issues there in late 2024. And so there will still be a healthy number of vacant sales in 2026.

Our next question is coming from Ronald Kamdem with Morgan Stanley.

Just two quick ones. Just on the occupancy. Just where do you expect that to trend through the year, number one. And then the bad debt question, just if you think about sort of the experience that you had last year coming into this year, a 75 sort of basis points -- 75-basis point guidance. Can you just talk us through where you sort of got the confidence that you're not going to see another major one?

Yes. I'll take the occupancy and Vin can talk more about the bad debt. I think end of the first quarter, early second quarter. I expect the occupancy to trend up a little exactly what Vin said, we'll sell a few more vacancies that are in progress right now. But I don't expect it to be significantly higher, but trending a little bit higher. And our historical average is 98%, plus or minus. So I think we'll plateau there.

Yes. And Ron, on the bad debt, I mean, what gives us confidence in the 75. I mean, I think, one, you've got history, right? This is a portfolio that's been through every cycle, you can imagine. And historically, the company has realized, call it, 30 to 50 basis points of bad debt. So that's part of it. The other part is, as Steve and I both mentioned in our prepared remarks, we're really not seeing anything that we feel is an imminent issue from a watch list perspective, nothing at least of a material nature. There's always going to be some small tenants that fall out here and there. But from a material perspective, nothing really that we feel like we need to call out. And so that's giving us the confidence that again 75 basis points is higher than our historical. But again, to start the year, we're just trying to make sure that we're not getting ahead of ourselves.

Our next question is coming from Jana Galan with Bank of America.

Again, following up on the 2026 guidance, the expectation for the real estate expenses is down versus 2025. And it sounds like you're thinking that term fees will be lower. So would this just be better occupancy? Or were there any kind of onetime things that could be driving the expenses?

Yes. So Jana, last year, we did [ $17.3 million ] on net real estate expenses, and that's because we did have an elevated number of vacancies tied to the restaurant and the furniture operator. So we were sort of the peak, call it, 90-ish vacancies. We're down to about 64% at the end of the year. I think we do have some line of sight on some of the additional resolutions that Steve outlined in his prepared remarks. And so that's driving further vacancy declines and that would result in lower real estate expense net.

And then maybe just on the watch list, you mentioned no imminent issues, no major changes. But just curious, the current watch list. Are there any kind of kind of common themes with industries or regions? Or is this more like idiosyncratic one-off issues?

Yes. I think I would characterize it more as idiosyncratic. -- definitely no regional trends to call out, but the tenants that are on the watch list, I mean, AMC is on there, they've been on there just from a movie industry perspective. There's nothing imminent that we're sort of expecting from them, but that's a pretty specific situation. I wouldn't call that broad trend. And obviously, At Home is still on our watch list, even though they exited bankruptcy successfully and without any real issue to us. But again, idiosyncratic.

Our next question is coming from Brad Heffern with RBC Capital Markets.

Steve, can you give your thoughts on car wash. It looks like maybe you invested more in the quarter, and you've got 4 car wash tenants in the top 20. Has been a source of investor concern at times, although not necessarily a source of concern from REITs. But do you think the sector has sort of gotten through its tough patch and what's the outlook?

Yes. Based on our analysis of the car washes, ours are performing at a high level, high rent coverage. Most of the car washes that we did, the bulk of them [indiscernible] over a decade ago. So our price point on those are extremely low, and so the rent coverage by definition, is extremely high. We're highly selective when we do carwashes. So we really look at the price point -- and what we're finding just on an ancillary note, on a few of the vacancies on the restaurants, we had some car washes interested because it's great real estate. So they want to redevelop it. And we found there is a lot of cities that wouldn't allow a car wash in the city because there's already so many. So it's kind of interesting. I kind of look -- now there's a barrier to entry to a lot of our car washes and they're performing well. But yes, no concerns. And we were fortunate we didn't do the

Okay. Got it. And then, Vin, on G&A, it's a pretty big jump year-over-year. Is there anything unusual in there like investing in the platform or something like that?

Yes. So it is up a little bit more from a percentage basis more than inflationary amount. I think just to keep things in perspective, though, I mean, if you look at it as a percentage of total revenues, we expect to be in that 5.5 percent-ish range. So still very manageable. So in that context, not a significant jump. But there are a couple of things that are driving that increase, one of which is we were in a free rent period on our headquarters in Orlando here in 2025. And so that's about $1 million headwind in 2026. And then we did have a number of promotions. Our team is executing well and developing well. And so we have a number of promotions as well as a few net new hires. And then lastly, we did add one new executive to the team, in August. So those are sort of the drivers of the higher than inflationary amount of G&A.

Our next question is coming from Rich Hightower with Barclays.

Vin, I want to go back to, I think, one1 of your parts of the prepared commentary where you talk about sort of debt structure being sort of matched up with the average lease term in the portfolio, and I thought that was a helpful comment. So maybe if you don't mind talking about as you sort of increase the balance of term loans relative to other sources of debt within the debt stack, how do you sort of think about that trade-off between headline coupon and duration risk if we split it up that way?

Yes. Look, it all goes into the mixer as far as how we think about it, right? I mean we do have to think about the overall cost of debt. But at the same time, we were tracking around 11 years of duration and our lease duration actually has picked up in the last 2 quarters, which is not typical. But as we think about that, we had a little bit of room to close that gap. And so that allowed us to do a little bit of shorter-term debt on the term loan side. Again, it's not a strategy in and of itself to use short-term debt. It's just looking at our assets and liability matching and making sure that we're relatively close on that front and then weaving in some lower cost of debt if we can.

Okay. That's helpful. And secondly, I guess, on one of your peer calls earlier today, we sort of heard the comment that as far as the competition within the marketplace for acquisitions, you do have some buyers maybe a little more motivated by some of the accelerated depreciation features of the OBBBA bill that passed. And so what are you seeing in that regard? Do you see sort of irrational pricing? And would this cause you potentially maybe to lean into the disposition side of guidance a little more and obviously being cognizant of sort of earnings dilution that might come with that? Just how do you balance that out?

I think [indiscernible] in point, we had elevated dispositions because we've leaned into it on the vacant and the income producing. But as far as competition, a peer that may have on a call earlier, plays in a different market. Buys open portfolios or existing portfolios and larger ones, $50 million, $100 million. The competition that is in the market currently on the private side has to deploy a vast amount of capital. They're not going to go do a $10 million, $15 million sale leaseback. So the competition really isn't affecting us. If I had to do $1.5 billion, $2 billion, I'd probably have a different tune that competition is affecting us. But going from the midpoint of $600 million, we can find our fair share fairly easily and do the sale leaseback structure. Kind of what Vin just mentioned, it's an oddity that a net lease company lease duration, if you have any size, actually ticks up quarter-over-quarter. That's a combination of doing a sale leaseback and our acquisitions average over 18 years. But more importantly, it comes back to -- and I think it was Michael asked about the proactive portfolio management question that the proactive portfolio management is that we're selling shorter-term leases. The lease duration of our income-producing assets we sold were 6.1%. The [indiscernible] paying rent were 5%. So when you do that combination, and we sold them at a 6.4% cap rate, that's pretty stellar execution.

Our next question is coming from Omotayo Okusanya with Deutsche Bank.

Yes. So just wanted to understand, again, the occupancy, the quarter-over-quarter occupancy gain. Was most of that mainly because you just sold vacant assets? Or so we're really kind of thinking about really strong leasing activity as well in the fourth quarter and the implications for 2026?

Yes, I would say most of that upside was driven by vacant asset sales. We did have some releasing as well during the quarter. And so that's -- we're seeing good demand there, which is reflected in our recapture rates. But between, I think, about vacancies that were resolved because of vacant sales versus releasing, it's pretty heavily skewed to the vacant sales. So -- but as far as implications for 2026, again, I think we have a number of line of sight on a number of additional vacancy resolutions from an asset sale or a release perspective. And so I think we are expecting vacancies to decrease over the course, and that's reflected in our real estate expense net dropping year-over-year as well.

That's helpful. And then in regards to the '26 guidance, again, with the midpoint, 3.2% earnings growth that good to see acceleration from 2.7% in 2025. And I think, again, there is some headwind as it relates to termination fees, which was elevated in 2025. So the question is again, I just kind of think about what is normalized again not necessarily asking the '27 guidance or anything like that. But how do you guys kind of think about just normalized AFFO per share growth and kind of ultimately where you were trying to get to in terms of steady state earnings growth?

Yes. I think our bottom-up approach is we try to do that mid-single digits over the course of the long multiyear approach. And then a given year, for example, this year, '25 was 2.7%, our midpoint is 3.2%. Could the following year be elevated off of that. It's all [indiscernible] on the macroeconomic and the composition of the portfolio. But mid-single-digit consistent FFO growth is -- you followed us for a while that's our mantra.

Our next question is coming from Alec Feygin with Baird.

So you mentioned in your prepared remarks that you expect cap rates to compress later down in the year. Is that due to deal mix, -- or can you just speak about why that's your assumption?

I think it's a prudent assumption to think you might have a little compression in the cap rate. And it's really driven by working, as I said, in a highly competitive environment, it's driven by the pressure of peers deploying capital. And that's what it comes down to as we move through the year.

[Operator Instructions] Next question is coming from Linda Tsai with Jefferies.

The $3.55 midpoint of your AFFO per share guidance include a refinancing headwind from the $350 million debt coming due in December?

Linda, yes, we do have that debt coming due. It's not until the end of the year. So we do have some refinancing assumptions embedded, but it doesn't -- the actual refinancing part doesn't really impact us too much just given how late in the year that maturity is. But yes, we do have some assumptions embedded there.

Any sense of where -- what rate you could refinance that at?

Yes. So I mean, we're looking at a range of options. As we talked about in an earlier question, we do look at our duration and we look at our cost of debt and the different options that we have. We did execute on the term loan and a little bit shorter-term bond offering last year. So those are all still potential options. But I think if you're just talking about where could we price a 10-year today, it'd probably be in the 5.25-ish maybe 5.20% rate on a 10-year bond.

Got it. And then just a follow-up on the cap rate compression comment in 2Q and 3Q. Any sense of the magnitude?

I think it's going to be a slight compression right now. We're starting to price Q2 deals, call it, 5 to 10 basis points currently for Q2.

Our next question is coming from James Kammert with Evercore ISI.

Could you remind me after all this major acquisition activity in what is the representative average lease escalator now in the portfolio?

Yes. I mean we're a battleship, Jim. We could layer on $1 billion of acquisitions, and it's not going to change the portfolio escalator. It's still 1.5% for modeling purposes.

Fair enough. And then just to layer on, Steve, your earlier comment that you did a bit of defensive sales of occupied assets is what I read or interpreted, including in the fourth quarter. Realizing is hindsight, but what kind of drove that a little bit higher than maybe anticipated 7.6% cap rate of those 18 occupied assets disposed is that one particular tenant concentration? Or just curious what was going on there?

No, for the most part, it's -- we kind of get the "wink wink nod nod" from the tenant when we're in discussions that they want to exit a market. Who knows the market better and the asset better than the actual tenant. So we have those conversations and there was about 4 or 5 years left on leases, that they said they're not going to renew at the end of the year. So we sell them And then it wasn't one in particular tenant. There was one in particular industry. It was just kind of overall portfolio pruning. And that's -- a few of them more [indiscernible] paying rent. So the tenant wasn't occupying them. So you know those are problems that you're going to get back. But then there's another handful of income producing where the tenant -- in this particular case, what I'm thinking of is kind of casual dining said, "Hey, we're going to exit the market or redevelop another site. So we decided those are 6 years left, so we got out of them.

Our final question today is coming from John Massocca with B. Riley.

I know you've talked a lot about kind of cap rate trends over the course of the call, but maybe are you seeing some of that compression already in the, let's call it, 1Q pipeline, given that's kind of where you have the most visibility? Or is that relatively flat on a cap rate basis versus what you saw in 4Q?

Yes, it could be Q3, Q4 and Q1, kind of what I mentioned in the opening remarks are all kind of flat because we're -- we are through pricing on the first quarter at this point. Any deals that we source now is kind of early second quarter. And knowing the pricing in the second quarter, I'm seeing a slight compression. But first quarter is flat.

Okay. And then in terms of dispositions in 4Q, of those vacant assets, kind of roughly how much of that was former [indiscernible] locations?

The vast majority were [indiscernible] opposed to former [indiscernible]. The [indiscernible], as I mentioned, we have 5 of them left, which will all be for sale. But the restaurant assets, we were marketing for a long time since [indiscernible] all 2025, issue that they just kind of completed in that fourth quarter.

Okay. And then in terms of -- as I think about the disposition assumption in 2026 guidance, I mean, how much of that is general vacant assets or even stuff tied to specifically [indiscernible] in form [indiscernible] assets?

I mean I think the -- it will be probably more of the restaurant type assets that were tied to [ Frishes ] just because that's the majority of our vacant assets. So just mathematically, it works out that way. We treat all vacant assets the same if they're [indiscernible], or another industry, it's just math. Do we re-lease it at present value of cash flow, do we dispose of it, reinvest the proceeds. It's whatever is best for our shareholders. That's what we do.

But I guess, the visibility you have today? I mean, how much of the kind of overall expected disposition volume roughly would you expect to be vacant assets. Just because you have these [indiscernible] that are still kind of...

As a percentage. '26 will be less of a percentage than '25. I think the vacant assets in '25, it was a good percentage. '26 will be less.

Thank you. We have reached the end of our question-and-answer session. So I'd like to turn the call back over to Mr. Horn for any closing remarks.

No, I appreciate you guys taking the time listening in and then good questions. Look forward to seeing you kind of through the conference season. And then we're in good shape. I'll turn the page on '25 and get back to growth in '26. Thank you.