National Retail Properties, Inc Q4 2025 Earnings Call Transcript

National Retail Properties, Inc (NYSE: NNN) Q4 2025 Earnings Call dated Feb. 11, 2026

Presentation

Operator

Greetings and welcome to the N and N REIT Incorporated fourth quarter 2025 earnings conference call. At this time, all participants are on a listen only mode and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press 0 on your telephone keypad. And please note this conference is being recorded. I will now turn the conference over to your host, Mr. Steve Horn, CEO of NNREIT. Sir, the floor is yours.

Stephen Horn — CEO

Hey, thanks Alex. Good morning. Welcome to NNN REIT’s fourth quarter 2025 earnings call. Joining me on the call is our Chief Financial Officer Vincent Chow. As outlined in this morning’s press release, NNN delivered a solid operating 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 encumbered 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, NN’s self funding business model can consistently deliver growth in good and challenging economic conditions Our long standing approach to capital deployment remaining selective and opportunistic will not change. Current cap rates have stabilized for the most part with 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 this 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 standing 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 or 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 quote in line. On renewals and leasing, 55 of our 64 renewed ahead of our average renewal rate of 85%, but the rental rates. Were 104% above priority. We leased four properties to new tenants at 109% of the prior rent, 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 five 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, re leasing or redevelopment with strong brands across multiple industries.

Currently 32 properties remain, 15 are for sale and four are in advanced discussions about leasing. The remaining 13 we’re actively marketing. We expect to reach resolution on these assets progressively throughout the year. On disposition side, fourth quarter we sold 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 non performing assets where there’s no clear path for near term income generation.

With that, let me turn the call over to Steve to provide additional detail with our quarterly results and updated guidance.

Stephen Horn — CEO

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 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. AFO per share for the quarter came in slightly ahead of our expectations. The upside was driven by a number of smaller positive variances including lower net real estate expenses, lower G and A and higher interest income. There were no notable run rate items to call out this quarter. G and 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, GNA was 5.1% for the quarter and 5.3% for the year. Free cash flow after Divin 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 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 starting swaps totaling $200 million that fixed SOFR at 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 5.6 times and our duration remains the highest in the net lease base at 10.8 years and is well matched with our lease duration of 10.2 years. On January 15, we announced a 60 cent quarterly dividend representing a 3.4% year over year increase and 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 AFO per share guidance range of $3.52 to $3.58 and Quora FFO per share guidance of $3.47 to $3.53.

The midpoint of our AFO range represents 3.2% year over year growth in 2026, accelerating from 2.7% growth in 2025 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 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.

Question & Answers

Operator

Thank you. Ladies and gentlemen, at this time we will be conducting our question and answer session. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue and you may press Star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Thank you. Our first question is coming from Michael Goldsmith with ubs.

Your line is live.

Michael Goldsmith

Good morning. Thanks a lot for taking my questions. 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, you know, your occupancy took a step up during the quarter to above 98%. But is that the long term number you want to be or you’ve been. Higher than that in the past? Just trying to get a sense of where you’re at?

Stephen Horn — CEO

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 get a sense of that, if there’s five 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.

But we always are monitoring credit, talking to a 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.

Michael Goldsmith

Got it. Thanks for that. And then just on the bad debt assumption, looks like you’re starting with 75 basis points last year. I know it wasn’t you, Vin, who said it, but it started lower. And then prior to that, I think the number was a bit higher. So can you just talk about, you know, why is 75 basis points the.

Right way to start the year? And, you know, I think earlier you mentioned that there was not any material changes on your watch list. So just try to get a sense of some context around that number. Thanks.

Stephen Horn — CEO

Yeah, thanks for the question. Yes. So one, I would just start off. By saying no matter what number we put out there, we’re either too conservative or too aggressive. So typically it’s been about 100 basis points at 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 were already taken out of 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 to the watch list.

We haven’t really had any known issues that, 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. So starting at 75 feels like a comfortable way to start, you know, to begin the year.

Michael Goldsmith

Thank you very much. Good luck in 2026. Thank you.

Operator

Thank you. Our next question is coming from Spencer Glimcher with Green Street. Your line is live.

Spenser Glimcher

Thank you. 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?

Stephen Horn — CEO

Yeah, good question, Spencer. You know, 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 car wash 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 over three, four times. All the way down to auto service might be closer to two. But overall we’re comfortable with the rent coverage and don’t have any concerns with it.

Vincent Chao — CFO

Yeah, 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 some somewhat with directional changes, but it’s not necessarily a meaningful number in and of itself.

Spenser Glimcher

Yep, yeah, understood. That’s why I was just asking, maybe compared to historic levels. Yeah, to your point that the trends are important, but yeah, second question just can you talk about which segments of your clients are looking to grow more aggressively in the near term?

Stephen Horn — CEO

We do the bottom up approach. We don’t target a specific sector because we can only buy stuff that’s for sale. But that being said, we do focus on the relationships and we focus on the smaller parcels. High visibility, high traffic roads and that safe 25 and the pipeline. It seems like auto services and convenience stores are biggest opportunities currently.

Spenser Glimcher

Okay, thank you guys.

Operator

Thank you. Our next question is coming from Smedes Rules with Citi. Your line is live.

Smedes Rose

Hi. Thank you. I just wanted 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 seemed a little more normal in the fourth quarter, but maybe a little higher than normal. I’m just wondering what you’re expecting as you move through 2026 on that front.

Stephen Horn — CEO

Yeah. Hi Smeet. Yeah, as we kind of discussed in the past, I mean we did, you know, 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 you know, 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 two years which were elevated. So that’s call it just a little bit less than a 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 to 4 million dollars lease termination level.

Smedes Rose

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. I’m just curious as to. Are you not seeing kind of incremental. Competition for your assets? I know a lot of yours come. Through long term relationships already, but just in general, maybe some thoughts on the broader landscape of what you’re seeing in terms of acquisition competition.

Stephen Horn — CEO

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 some 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.

Smedes Rose

Okay, thank you.

Operator

Thank you. Our next question is coming from John Kielchowski with Wells Fargo. Your line is live.

John Kilichowski

Hi, good morning. 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. 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?

Stephen Horn — CEO

Hey, John. So one, we really don’t have any appetite to take up leverage. We’re sitting at 5.6 times. I think ideally we generally have been around five and a half times. 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, 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 what the market conditions are, where the cap rates we’re talking about, and, 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 lean into some more dispositions that would Be an alternate source of equity if stock is not where it needs to be.

John Kilichowski

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 cost that you’re getting on those sales.

Stephen Horn — CEO

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, 150 million this year, there will be a little bit more defensive sales on the portfolio pruning. So I would guess on the income producing assets, I would expect a little bit of an elevated cap rate selling that assets. But when you blend it out, it will be, you know, I would guess significantly below, you know, the 150 basis points of where we’re going to deploy capital.

Yeah. And John, just

John Kilichowski

very helpful, thank you.

Stephen Horn — CEO

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, you know, there will still be a healthy number of vacant sales in 2020.

John Kilichowski

Got it. Thank you.

John Kilichowski

Thank you. Our next question is coming from Ronald Camden with Morgan Stanley. Your line is live.

Ronald Kamdem

Hey, 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, the 75 sort of basis points. 75 sort of basis points. Guidance. Can you just talk us through where you sort of got the confidence that. You’Re not going to see another major one?

Stephen Horn — CEO

Yeah, 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 Ben said. We’ll sell a few more vacancies that are in. They’re 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. Yeah.

Vincent Chao — CFO

And Ron, on the bad debt, I mean, what gives us confidence on the 75? I mean, I think one, you’ve got history. Right. This is a portfolio that’s been through every cycle you could imagine. And historically the company’s 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 that 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 to going 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.

Operator

Thank you. Our next question is coming from Yana Galan with Bank of America. Your line is live.

Jana Galan

Thank you. Good morning. Again, following up on the 2026 guidance, the expectation for the real estate expenses is 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 one time things that could be driving the expenses?

Stephen Horn — CEO

Yeah. So Jana, last year we did 17.3 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 at the peak, call it 90ish vacancies. We’re down to about 64 at the end of the year. And I think, you know, 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.

Jana Galan

Thank you. And then maybe just, you know, on the watch list you mentioned, you know, 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?

Stephen Horn — CEO

Yeah, I think I would characterize it more as idiosyncratic. You know, definitely not. No regional, you know, trends to call out. But you know, the tenants that are on the watch list, I mean, AMC is on there. They’ve been, you know, they’ve been on there as 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 a 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.

Jana Galan

Thank you.

Operator

Thank you. Our next question is coming from Brad Heffern with RBC Capital Markets. Your line is live.

Brad Heffern

Hey, morning Everybody. Steve, can you give your thoughts on car wash? It looks like maybe you invested more in the quarter and you got four 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

Stephen Horn — CEO

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 was 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 car washes. So we really look at the price point and what we’re finding. Just on an ancillary note, you know, 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 was 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 yeah, no concerns. And we were fortunate we didn’t do the zip steel when we kind of looked at all the price points of that. So we’re pretty good at underwriting car washes.

Brad Heffern

Okay, got it, thanks. And then Vin on gna, it’s a. Pretty big jump year over year. Is there anything unusual in there like investing in the platform or something like that?

Stephen Horn — CEO

Yeah, so it is up a little bit more from a percentage basis more than an inflationary amount. I think just to keep things in perspective though, I mean if you look at as a percentage of total revenues. You know, we expect to be in. That five and a half percentage range. So still very manageable. So in that context, not a significant jump. But there are a couple 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 a million dollar headwind in 2026. And then we did have a number of promotions. You know, our team is executing well and you know, developing well. And so we have a number of promotions as well as a few new net new hires. And then lastly, you know, 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 and A.

Brad Heffern

Okay, thanks.

Operator

Thank you. Our next question is coming from Rich Hightower with Barclays. Your line is live.

Rich Hightower

Hey, good morning guys. Thanks for taking the question, Vin. I want to go back to, I think one of your parts, the prepared commentary where you talk about sort of, you know, 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, talk 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, you know, headline coupon and duration risk if we split. It up that way?

Stephen Horn — CEO

Yeah, 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. But at the same time, you know, we were, you know, tracking around 11, 11 years of duration and our lease duration actually has ticked up in the last two quarters, which is not typical. But you know, 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, it’s not a strategy in and of itself to, 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.

Rich Hightower

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 obbb, a 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?

Stephen Horn — CEO

I think case 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, $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, 15 million dollar sale leaseback so the competition really isn’t affecting us.

If I had to do one and a half $2 billion, I’d probably have a different tune. The competition’s affecting us, but going for the midpoint at 600 million, we can find our fair share fair easily and do the sale leaseback structure kind of what Ben 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 dark but 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.

Rich Hightower

All right, great. Thank you.

Operator

Thank you. Our next question is coming from Omoteo Okosanya with Deutsche Bank. Your line is live.

Omotayo Okusanya

Yes, good morning everyone. 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 should we really be kind of thinking about really strong leasing activity as well in the fourth. Quarter and the implications for 2026? Yes.

Stephen Horn — CEO

Hey Teo. Yes, I would say most of that. Upside was driven by vacant asset sales. We did have some re leasing 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 re leasing, it’s pretty heavily skewed to the make and sales. So but as far as implications for 2026, you know, again I think we have a number of, you know, line of sight on a number of additional vacancy resolutions from an asset sale or release perspective. And so, you know, I think we are expecting vacancies to decrease over the course of 2026, you know, and that’s reflected in our real estate expense net dropping year year as well.

Omotayo Okusanya

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

Stephen Horn — CEO

I think our bottom up approach is we try to do that mid single digits over the course of the long run, multi year approach in any given year. For example, this year 25 was 2.7. Our midpoint is 3.2. And could the following year be elevated off of that? It’s all predicated on the macroeconomic and the composition of the portfolio.

But mid single digit consistent FFO growth is. You follow us for a while. That’s our mantra. Excellent. All the best in 26.

Omotayo Okusanya

Thank you.

Operator

Thank you. Our next question is coming from Alex Fagan with Beard. Your line is live.

Alex Fagan

Hey, thank you for taking my question. 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?

Stephen Horn — CEO

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, you know, 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.

Alex Fagan

All right, thanks for that. That’s it for me.

Operator

Thank you. As a reminder, ladies and gentlemen, if you have any questions, please press star1 on your telephone keypad. Our next question is coming from Linda Tsai with Jefferies. Your line is live.

Linda Tsai

Hi, Good morning. Does the 355 midpoint of your AFFO per share guidance include a refinancing headwind from the $350 million in debt coming due in December?

Stephen Horn — CEO

Hey, 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, you know, 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.

Linda Tsai

Any sense of what rate you could refinance that at?

Stephen Horn — CEO

Yeah, so I mean, we’re looking at a range of options. You know, as we talked about in an earlier question, we do look at our D 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 and a quarter ish, maybe 520 rate on a 10 year bond.

Linda Tsai

Got it. And then just to follow up on the cap rate compression comment in 2Q and 3Q, any sense of the magnitude?

Stephen Horn — CEO

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

Linda Tsai

Thank you and good luck.

Stephen Horn — CEO

Thanks, Linda.

Operator

Thank you. Our next question is coming from Jim Kamert with Evercore isi. Your line is live.

Jim Kammert

Hi, good morning. Thank you. Could you remind me after all this major acquisition activity in 25, what is the representative average lease escalator now in the portfolio?

Stephen Horn — CEO

Yeah, we’re a battleship, Jim. We could layer on a billion dollars of acquisitions and it’s not going to change the portfolio escalator. It’s still one and a half percent for modeling purposes.

Jim Kammert

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 hindsight what. Kind of drove that a little bit. Higher than maybe anticipated 7.6% cap rate. Of those 18 occupied assets disposed. Was that you know, one particular tenant. Concentration or just curious what was going on there?

Stephen Horn — CEO

For the most part it’s we kind of get the wink, wink, nod nodded from the tenant when we’re in discussions that they want to exit a market, you know, who knows the market better and the asset better than the actual tenant. So we have those conversations and there was four or five years left on leases that they said they’re not going to renew at the end of the year. So we sell them. And it wasn’t one in particular tenant, it wasn’t one in particular industry. It was just kind of over overall portfolio pruning. And that’s when a few of them were dark but 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, you know, 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 yeah, those are six years left. So, so we got out of them perfect. And nothing endemic.

Jim Kammert

Thanks. Appreciate it.

Stephen Horn — CEO

Thanks.

Operator

Thank you. Our final question today is coming from John Masaka with B. Riley. Your line is live.

John Massocca

Good morning. So now we’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?

Stephen Horn — CEO

Yes, Q3, Q4 and Q1 kind of what I mentioned, the opening remarks are all kind of flat because we’re from the. 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 of the second quarter, I’m seeing a slight compression, but. First quarter is flat.

John Massocca

Okay. And then in terms of dispositions in 4Q, of those vacant assets, roughly how much of that was former Frishes and Badcock locations?

Stephen Horn — CEO

The vast majority were Frishes opposed to former Badcocks. The Badcock, as I mentioned, we have five of them left, which will all be for sale. But the restaurant assets we were marketing for a long time, since it was a whole 2025 issue that they just kind of culminated in that fourth quarter.

John Massocca

Okay. And then in terms of as I. Think about the disposition assumption in 2026 guidance, how much of that is general vacant assets or even stuff tied to specifically Frish’s and former Badcock assets?

Stephen Horn — CEO

I mean, I think it would be probably more the restaurant type assets that were tied to Frisch’s 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 are Frisches Badcock or another industry. It’s just math. Do we re lease it? Present value, cash flow? Do we dispose of it, Reinvest the proceeds? It’s whatever’s on going best for our shareholder. That’s what we do.

John Massocca

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? Because you have these Frishes and bad cocks that are still kind of as.

Stephen Horn — CEO

A percentage, 26 would be less of a percentage than 25. I think the vacant assets in 25, it was a good percentage. 26 would be less.

John Massocca

Okay. That’s it for me. Thank you very much.

Stephen Horn — CEO

Thanks, John.

Operator

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.

Stephen Horn — CEO

No, I appreciate you guys taking the time listening to nnn Good questions. Look forward to seeing you gone through the conference season. And in that we’re in good shape to turn the page on 25 and get back to growth in 26. Thank you.

Operator

Thank you. Ladies and gentlemen. This does conclude today’s conference. You may disconnect your lines at this time, and we thank you for your participation.