Good morning, ladies and gentlemen, and welcome to the National Retail Properties S econd Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Steve Horn, CEO. Sir, the floor is yours.
Thank you, Ali. Good morning, and welcome to the National Retail Properties Second Quarter 2022 Earnings Call. Joining me on the call is Chief Financial Officer, Kevin Habicht. As this morning's press release reflects, National Retail Properties performance in 2022 continues to produce strong results, including continued high occupancy, impressive rent collections, and solid acquisitions driven by our proprietary tenant relationships. We are in position to continue enhancing shareholder value as we move into the second half of 2022 and beyond. In July, we announced roughly a 4% increase in our common stock dividend to be paid August 15th, thus making 2022 our 33rd consecutive annual dividend increase. National Retail Properties is one of the select companies of under 90 U.S. public companies, including only two other REITs which have achieved this impressive track record.
Based on our continued consistent performance, we announced today a further increase in our 2022 guidance of Core FFO per share to a range of $3.07-$3.12 per share. Our long-standing strategy is designed to deliver consistent per share growth on a multi-year basis. This discipline of long-term approach is reflected in our second guidance increase this year. Turning to the highlights of National Retail Properties' second quarter financial results. Our portfolio of 3,305 freestanding single-tenant retail properties continued to perform exceedingly well, maintained high occupancy level of 99.1%, which remains above our long-term average of 98% plus or minus a fraction. We also collected 99.7% of the rents due for the second quarter. Staying a little bit more on rent collections.
The rent deferrals that we provided to a select tenant during the early days of the pandemic continue to track as we expect. At the end of 2022, 87% or $49.5 million of the original $56.7 million deferred rent will have been paid back, which is 100% that is due at the time. While we continue on the topic of the portfolio, Dave & Buster's moved into our top 10 tenants with the acquisition of one of our top 15 tenants Main Event in June. With regard to acquisitions, during the quarter, we invested just north of $150 million, 43 new properties at an initial cap rate of 6.2% with an average lease duration of over 19 years. Of which 14 of the 16 deals were from relationship tenants, with which we do repeat programmatic business.
The first half of the year, we invested over $350 million in 102 new properties with the initial cap rate of 6.2, with an average lease duration of 16.7. In an environment where cap rates are still near historic lows, but showing signs of adjusting, we continue our thoughtful and disciplined underwriting approach. NNN will continue to emphasize acquisition volume through sale leaseback transactions with our stable of relationship tenants. Based on our pipeline and dialogue with our partners, we remain comfortable with our ability to meet and hopefully exceed our 2022 acquisition guidance of $600 million-$700 million, primarily via direct sale leaseback deals with our company's long duration triple-net lease form, which is more landlord friendly than a 1031 market deal.
During the second quarter, we also sold 8 properties, raised almost $8 million of proceeds to be reinvested in the new acquisitions. Year to date, we have now raised $28 million of proceeds from the sale of 18 properties, including 11 vacant. Although job one is always to re-lease vacancies, and our leasing team does an outstanding job of it, we will continue to sell non-performing assets if we do not see a clear path to generating rental income within a reasonable timeframe. Our balance sheet remains one of the strongest in the sector. Our credit facility has plenty of capacity with only a balance outstanding of approximately $40 million, and we have no material debt maturities until mid-2024. NNN is well positioned to fund our 2022 acquisition guidance.
In closing, I'd like to thank our associates for their dedication and hard work putting NNN back to pre-pandemic momentum as we look to finish 2022 strong and position NNN for success over multiple years in the future. With that, let me turn the call over to Kevin for more color and detail on our quarterly numbers and updated guidance.
Thanks, Steve. As usual, I'll start with a cautionary note that we will make certain statements that may be considered to be forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not release revisions to these forward-looking statements to reflect changes after the statements were made. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in this morning's press release. With that, headlines from this morning's press release report quarterly Core FFO results of $0.79 per share for the second quarter of 2022.
That's up $0.09 or 12.9% over second quarter of 2021, and that's up $0.02 or 2.6% from the immediately preceding first quarter of 2022. The first half year-to-date Core FFO results were up 11.4% to $1.56 per share. Today, we also reported that AFFO per share was $0.81 per share for the second quarter. That's up $0.02 from the immediately preceding first quarter's $0.79 . We did footnote second quarter AFFO included $1.7 million of deferred rent repayments in our accrued rental income adjustment for the second quarter, without which that would have produced AFFO of $0.80 per share for the quarter.
The first half of 2022 AFFO included $3.5 million of deferred rent repayments in our accrued rental income adjustment for the first half, without which would have produced AFFO of $1.58 per share for the first half of 2022, which on the same basis compares to $1.43 per share for the first half of 2021, and that represents a 10.5% increase year-over-year. As the scheduled deferred rent repayments continue to taper off from peak levels in the first half of 2021, we are seeing improved results kicking in from 2021 and 2022 property acquisitions.
I will also note that we took a $2.7 million charge in the second quarter in connection with the retirement of our CEO in April, and that was excluded from our Core FFO and AFFO calculations. Excluding deferred rent repayments, our AFFO dividend payout ratio for the first half of 2022 was about 67%, and with the recent dividend increase, should run approximately 68% for the full year 2022. All that suggests that we will create approximately $180 million of free cash flow after the payment of all expenses and dividends for 2022. As we've discussed with investors, we burden this quote-unquote free cash flow at a cost of 8% for purposes of making capital allocation decisions in new properties.
There's nothing free about it in our minds, but it is a significant part of the equity need for, say, $600 million of acquisitions, especially if you couple it with $100 million of proceeds from dispositions. Occupancy was 99.1% at quarter end. That's been, as Steve mentioned, consistent with recent quarters. G&A expense was $9.7 million for the quarter. That is down from second quarter a year ago levels. Moving on, today, we did increase our 2022 Core FFO per share guidance from a range of $3.01-$3.08 per share to a new range of $3.07-$3.12 per share.
Similarly, increased our AFFO guidance to a range of $3.14-$3.19 per share, which reflects the scheduled slowdown in deferral repayments in 2022, as noted on page 13 of the press release. The guidance midpoints for both Core FFO and AFFO were increased by $0.05, compared to previous guidance. The supporting assumptions for our new 2022 guidance are on page 7 of today's press release and are modestly fine-tuned from last quarter's guidance. We are excluding any executive retirement charges from our guidance, as I mentioned, and 2022 acquisition volume was bumped up by $50 million.
As usual, we don't give any guidance on our assumptions for capital markets activity, except for the general assumption that we intend to behave in a fairly leverage-neutral manner over the long term. The most important takeaway from all this is that we expect to grow Core FFO per share results in 2022 by about 8% to the new guidance midpoint. Switching over to the balance sheet, the second quarter was quiet in terms of capital markets activity. We were very active in the debt markets in 2021 and are not unhappy to be on the sidelines at the moment.
We did issue a modest amount of equity, $32 million, during the second quarter and ended the quarter with only $40 million outstanding on our $1.1 billion bank credit facility, despite investing $365 million in the first half of the year. Our liquidity remains in excellent shape. Our weighted average debt maturity is now 14.2 years, which seems to be among the longest in the industry. Our next debt maturity is $350 million with a 3.9% coupon due in mid-2024, and all of our outstanding debt is fixed rate with the exception of that $40 million on our bank line. Net debt to gross book assets was 40.9% at quarter end.
Net debt to EBITDA was 5.4 times at June 30. Interest coverage and fixed charge coverage was 4.7 times for the second quarter. We're in very good shape to produce strong Core FFO per share growth with our 2022 guidance suggesting about 8% growth to the midpoint, at midpoint, importantly, without any heroic assumptions. Our focus remains on growing per share results over the long term. We think the asset growth-focused acquisition volume context in many sectors in recent quarters, maybe slowing a bit or at least getting a little more disciplined on price. If so, we think renewed investor focus on per share results and managing balance sheets will accrue to our benefit, but time will tell.
While there is currently an increased level of economic and capital market uncertainty, we are well-positioned for such. I'll close it there, and, Ali, with that, we'll open it up to any questions.
Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Thank you. Your first question is coming from Brad Heffern. Please announce your affiliation, then pose your question.
Hey, good morning, everyone. Brad Heffern from RBC. Can you talk about how much cap rates have moved, and has there been much of a difference across industry or across credit quality?
Hey, how you doing, Brad? The cap rates, yeah, we're starting to see cracks in kind of the second half of the quarter. We kind of started seeing movement in cap rates. More, you know, this conversation we had before when interest rates started moving up, you know, a lot of the private equity money moved out of the market. Now with the interest rates moving up, you know, we're seeing some institutions in the net lease business are drawing a line in the sand of, you know, call it 7 cap or high sixes. We've lost a little competition there within our market.
Yeah, we're starting to see about a 20-25 basis move for the asset quality that we target, meaning the sale-leaseback transaction, but more importantly, getting the long-term triple-net lease, you know, by way of, you know, we did 19-year average for the quarter.
Okay. Thanks for that. Any thoughts on the amount of exposure that you have in the tenant roster to variable rate debt and whether that represents a potential credit risk as that flows through?
Yeah, no, we don't feel like we have any notable exposure. It's really only the $40 million out of our $3.8 billion of debt. It's only $40 million related to our bank credit facility. We don't feel like we have any real exposure at all to variable interest rate risk.
Sorry, Kevin. I meant at the tenant level. Like, you know, tenants who have variable rate debt in their capital structure, and so, you know, perhaps at the store level, things look fine, but they might face issues with rising interest costs.
Yeah. Yes. Thanks for clarifying that. Yeah. That's clearly some of our tenants definitely do. I'd say about a third of our tenant roster is private equity backed, and they tend to operate under kind of debt terms that are variable rate. To date, we've not seen a lot of stress, if you will, at the property level and not too much really at the corporate level at this point in time. You know, I think it can get a little more challenging is if you've got some near-term debt maturities that you have to refinance. It's just a tough market for refinancing sub-investment grade debt in today's world.
We found, you know, it appears that our tenants are not having any challenges on the credit side at the moment.
Okay. Thank you.
Thank you. Our next question is coming from Spenser Allaway. Sir, please state your affiliation and pose your question.
Thank you. It's Green Street. I know you guys have had success on the deal front, you know, as evidenced by your Q2 results and obviously guidance. Can you just talk a little bit about existing customer sentiment in regards to growth, just given the broader economic backdrop? Just curious how recent conversations have gone, and if there are any tenant industries that are perhaps a little bit more cautious at this point than others.
Hey, how you doing, Spenser? Yeah, the conversations, obviously, we enter in conversations on a, you know, daily, weekly basis with our tenant base and the relationships. We've seen a lot of kind of organic growth increasing over the first six months of the year with our tenants, where they're doing new store development, and NNN's participating on that deal front. There's been a little bit less M&A in the second quarter that we found. That was more the tenants being a little bit cautious, more of the debt market than the consumer. The consumer's been pretty resilient in our tenant base. So they're not worried about the top line growth. And obviously, with inflation, you know, their margins are getting squeezed a little bit more on the profitability.
But it's not stopping them from growing, but they're just kind of being a little hesitant and finding their little price discovery.
Okay. That makes a lot of sense. Then just as you know, are executing some new lease agreements and whether that's with new tenants or with existing tenants, have there been any shifts or changes just in terms of what tenants are looking for in regards to term or, you know, escalators being CPI linked or whatnot?
I think in my entire 19-year career here at NNN, the tenant always wants shorter term and less rent escalators. That's a constant dialogue we have in negotiations. You know, we're pushing as hard as we can for, you know, higher rent escalators. The reality is we deal with large regional sophisticated tenants. You know, the commercial product right now in our market is that, you know, 2% annual, 10% every 5 years. So we're not seeing any increase currently. You know, if the market shifts and enough institutions keep pushing it, you know, it might shift. In the foreseeable future, you know, it's been pretty steady over the course of 20 years.
Okay. Thank you.
Thank you. Our next question is coming from Nicholas Joseph. Please state your affiliation and pose your question.
Thank you. Yeah, this is Nick from Citi. Maybe back to the transaction market. You touched on the cap rate movement in the broader market, but how does that play into the back half of the year guidance? Obviously, you raised acquisition guidance, but the second half does assume a decel from what you've accomplished year-to-date.
Yeah. The back half of the year, we're anticipating a little bit, you know, higher of a cap rate. A lot of the deals that closed in the second quarter, you know, reflected the 6.2 cap rate. We had a fair amount of April closings, so those cap rates were negotiated, you know, in February, call it. You know, it's that 60- to 90-day window to get a deal closed. We locked in the price, and that was the deal we cut. Now the second half of Q2 pricing from third quarter, we're seeing that 20-25 basis point increase.
Thanks. I guess just on the volume, is that also kind of a decision, either active decision by you, or is it more just kind of the market is pausing a bit, or is it just being a bit conservative in what you're assuming for volume in the back half of the year?
You know, our main focus is, you know, growing the FFO per share, not looking for the headline of acquisition volume. We're comfortable with the third quarter numbers we're gonna hit. Obviously, we don't have visibility quite yet to the fourth quarter, but we're creeping towards that. Yeah, we're not looking to, you know, blow out acquisitions at the expense of, you know, 2023.
Thanks. You touched a bit on how you think about cost of equity, or at least, internally. You issued a little equity in the quarter, and it came, I think $43 a share, which is a little below where street NAV is. How do you think about equity issuance, relative to NAV and relative to that cost of capital? I think you mentioned around 8%, at least internally, how you think about it.
Yeah. Hey, Nick, it's Kevin. Yeah, we put a modest amount out, so I wouldn't read too much into that. It was. Yeah, I think gross price a little over 44 and then net a little under 44. But yeah, we're sensitive to that. We're not exclusively driven by NAV in our shop. As you and investors know, we're very trying to focus on growing per share results, which we think over a long time creates total returns that are attractive. It's not at cross purposes with NAV with that approach either. That's the good news. You know, time will tell, but you will know, we have not issued very much equity in the last call it 6 quarters.
In large part for the very reason you're mentioning is we just didn't feel like it was appropriately priced. You know, to the extent that changes then we may have more interest as the share price rises. Like I mentioned before, it was a piece of the equation that we executed last year where we didn't really do much equity at all, but we did a lot of debt because debt was very attractive. We try to pivot to the piece of capital that's the most attractive at the time while keeping our eye on managing the balance sheet and our leverage metrics and liquidity and all those things.
It's a bit of an art and a little bit of science, but you know, we'll see where it goes from here in terms of our interest in issuing any equity.
Thank you.
Thank you. Our next question is coming from Wes Golladay. Please state your affiliation then pose your question.
Hi, everyone. Wes Golladay. Good morning, everyone. Just maybe sticking with that last question on, you know, cost of equity, maybe a little bit broader. Can you talk about how you wanna fund the near-term pipeline when you look at, you called out free cash flow, maybe a little bit of equity? It doesn't sound like maybe issuing debt would be high on the list, but maybe can you talk about your appetite for, you know, running a little bit higher line balance? You called out earlier your weighted average term is 14 years. Typically, I don't think you carry a line, but in the context of where capital markets are and how you position the balance sheet, how high would you wanna take that line or could you take that line and be comfortable with?
I never wanna take it very high. To your point, which is, we've articulated a little bit with investors in recent months and, in line with what I think with what you're asking is that given that we have a 14-year weighted average debt maturity, and little near-term debt maturities, we now have the luxury, and it's all fixed rate. We have the luxury of being able to use our line, more than what we've had in the recent past. I think on the average over the last six years, I think the weighted average outstanding bank line usage over the last six years was something like $55 million.
Because people say, "Well, why was that?" You know, the debt, the long-term debt and the equity markets were so attractive, we just found ourselves raising copious amounts of that kind of capital and didn't really use our line. Now that the capital markets are rockier, we can pivot and use our bank line more. Still have a balance sheet that's, you know, in very good shape and still have lots of liquidity. That's the good news. How high does it need to go before we get nervous? You know, we're gonna use well less than half of our bank line. Let's put it that way.
If it gets to $300 million-$400 million, then maybe we'll have to get more serious about thinking about terming out that capital with either debt and/or equity. As I alluded to in my prepared remarks, you know, $180 million of annual cash flow plus $100 million a year of dispositions, just on average, that's $280 million, and that goes a long way to funding, you know, $600 million-$700 million a year of acquisition. The need is not that great for either equity and/or debt. As I just said, we've got plenty of availability on the bank line and still stay within very conservative metrics.
Got it. I saw that Ahern made it into the top 20 tenant list. Are you doing more business with them or is this just a function of combining your two tenants that you mentioned at the top of the call?
It was largely a function of. Yeah, we had two tenants combine up above them, and so that pulled them from number 21 to number 20 on the list. You know, we are aware, you know, that's a tenant that we are comfortable with. Their property-level metrics are. We're very comfortable with, and the world is moving their way, I think in terms of just infrastructure. They will, we think, be in good shape. They are staring at a debt refinance issue that's I think weighing on them a bit at the corporate level, but we think that'll get worked out satisfactorily, in the coming quarters.
Yeah. Then, one last one, if I could. I know the, you know, sometimes companies have capital structure issues like you just mentioned with Ahern and where the coverage looks pretty good for you. Would you happen to have a ballpark estimate of your typical recovery in scenarios where there are, you know, call it a capital structure issue with strong rent coverage? It seems that I think in the past it was pretty high. I don't know if you have an exact stat for that.
Yeah, we don't have an exact one. Yeah, our experience is if you have well-located properties that have good unit-level metrics, and even in the event of a corporate balance sheet issue, we come out just fine. I mean, You know, obviously the pandemic had a piece of that flavor to it. 2008 and 2009 had that, and occupancy held up very, very well through all both of those stress tests, if you will. That's been our experience.
Got it. Thanks a lot, guys.
Thank you. Our next question is coming from Ronald Kamdem. Please announce your affiliation and pose your question.
Hey, this is Ron from Morgan Stanley. Couple quick ones. Just one on the guidance. Can you remind us what you're assuming for bad debt reserves for this year?
Yeah. We as have been consistent with the last many years in our shop, in our projections internally, we've always assumed about 100 basis points potential loss for rent, despite the fact that our experience has been better than that, meaning 50 basis points or less. We keep that general assumption out there just to be somewhat conservative.
Makes sense. Just staying on tenant health and so forth, just what are you hearing from the tenant side? I know that others have already asked questions on that. Just more broadly, when you're looking at different industries and so forth, is there anything that you're thinking or doing differently as we potentially go into a downturn, sectors that you're either doing more in or sectors that you're maybe pausing or trying to do less in?
You know, going forward, the strategy still, it'll be mining our relationships of our current portfolio. You know, the tenant knows their consumer even better than we know. So when they're comfortable to grow if it's through M&A or new store growth, we'll participate. You know, remember, when you do sale-leaseback, the underwriting is a little bit different because you do have the benefit of the tenant selling you the asset, and they're selling you assets that are pretty good because they're willing to sign a 15-2 0-year lease. So there's a self-selection aspect to our underwriting, which goes overlooked, hence why we have a high 85% renewal rate typically over the year.
Yeah, we never target what sectors we wanna go into more because we can only buy stuff that's for sale first and foremost. But remember, Ron, we do the bottoms-up approach. You know, we wanna grow the FFO, you know, that mid-single digit area, and then we grow and say, "Hey, what acquisitions do we have to do to achieve that?" That's really the first thing we target. Now, our thought process on movie theaters is still the same. You know, we got out of those a couple of years before the pandemic. We're not looking to add in that industry. The other industries, if you focus on real estate first, the credit isn't as important. We're at the heart, we underwrite the real estate and find the small good locations.
Great. Just my last one, if I may. If I think about the, you know, the AFFO number, which is basically $0.80 once you back out all the, you know, sort of all the back deferred rent collections and so forth. As you're going forward, and you're thinking about sort of that run rate, it sounds like potentially the interest cost could be, you know, could be higher, obviously, as you're going to a higher rate environment. Is there anything else? Because, you know, the acquisitions obviously are coming through and so forth. Is there anything else that's in that $0.80 number that's maybe non-recurring or one-timer that we should be mindful of?
No. The second quarter was relatively clean. We didn't have much, hardly any, lease termination kinds of income, which we did have some in first quarter. As usual, you know, the big variable that we don't give guidance on that has the potential to be a material impact is just capital markets activity. We obviously make some assumptions around that. We don't publish those, in part because we wanna retain maximum flexibility to do what we think is best at the moment for raising capital. Since the last year's in the past and the history, I can talk a little bit about what we assumed last year and what we actually did.
Last year, in our initial, you know, before the beginning of 2021, we assumed we'd issue 5 million shares of equity, and we'd issue no debt. Well, it turns out we issued no equity and $900 million of 30-year debt. We just felt like the relative value of debt at that point was a better place to raise capital and with the benefit of, you know, at least 6 months or 12 months of hindsight, you know, we like that decision. That's the rationale for not really part of the rationale for not kind of laying out our thought processes is that it's always evolving and tries to take advantage of what's available in the marketplace at the time.
Super helpful. Thank you.
Thank you. Our next question is coming from Tayo Okusanya. Please state your affiliation and pose your question.
Hi. Yes, good morning from Credit Suisse. Gentlemen, just a quick question around the acquisition outlook and just again, you know, the level of acquisitions currently happening. I mean, I would've ventured when we were all talking at the end of first quarter earnings, you know, concerns about rising rates. You know, everyone's stock price was down year to date. One would venture that everyone would kind of slow down on the acquisition front. You know, you guys, a lot of your peers kind of have a strong acquisition quarter or raising acquisition guidance. I guess, I'm curious, the backdrop doesn't seem to have changed that much.
Why there's still such a, you know, an appetite or so much positivity on the acquisition front, just kind of still given some of these headwinds on the capital market side, some concern about credit, you know, cap rates not moving, and things of that ilk.
I could take, you know, part of it, then Kevin can kind of chime in here on the capital market side of it. As far as the appetite, you know, at the beginning of the year, you know, we guided, I believe it was $550 million was the midpoint, or $600 million was the midpoint. That was based on the, you know, the first quarter pipeline. Then, you know, we've been in the business a long time and talking to the relationships with kind of the outlook for the year. Cap rates now kind of what I touched base on. They're starting to move. We came into the year, you know, we were fortunate. I think we had $173 million of cash at year-end.
We knew we had our acquisitions well funded going into the year. Now talking to our current tenants that they're looking to grow, cap rates will adjust accordingly. We're bullish on the second half of the year. You know, we're comfortable with our acquisition number.
Tayo, hey, it's Kevin. You know, I'm fully understanding the sentiment of your question. But we might not be the best ones to ask on that in some respects. I mean, it was a surprise to us over the last, call it, 18 months coming in prior to 2022, that so many decided to double down on acquisition volume at record low cap rates. To us, that didn't, on its face, make a lot of sense. At the cap rates, you know, where the market was, it just, to us, was not driving a sufficient amount of accretion per share growth, which, like we've talked about in our minds, is job one. Yeah, I think your observation's generally right that there hasn't been a real pause there.
As I mentioned, I think in my prepared comments, you know, that we think the asset growth focus, acquisition volume context of recent quarters may be slowing a bit, but we've not seen much of it yet. We're optimistic about that and hope it gets a little more disciplined on price. Fully understand the sentiment of your question.
Thank you.
Thank you. Our next question is coming from John Massocca. Please state your affiliation and pose your question.
I'm with Ladenburg Thalmann . Good morning.
Good morning, John.
Maybe going back to the balance sheet for a little bit. Has the outlook on long-term debt changed at all recently? I'm just thinking, you know, given some of the I know it's fairly volatile, but given where the yield curve kind of is today from a kind of inversion to kind of flatness aspect, I mean, does that change the outlook, you know, versus maybe when we were talking last quarter or even, you know, back at NAREIT?
Yeah. I mean, it's clear that pricing has changed, and the shape of that curve might alter one's view of what kind of debt they wanna be using at the moment. For us, like I'd mentioned on a previous question, you know, for us it allows because of the very long duration debt we issued in recent years, 3 of the last 4 debt offerings we did were 30-year variety. We could have gotten cheaper debt with shorter term debt, but we just wanted to lock in those low rates for a longer period of time.
Because of that, kind of that work and activity we did in the last couple of years, it affords us the opportunity to lean a little bit more on our bank line, which has largely been unused here to date. No, the pricing clearly is a factor, and that's why you think you gotta see some movement firming up of cap rates, because the pricing clearly has moved materially on the debt front for sure. Whether people, you know, the curve is so flat, you know, it's.
I'll be interested to see where any debt, not much debt getting issued in REIT world, but if it gets extended out further or it comes in shorter, and that might go to one's belief about how long-term these interest rates will be. Are they gonna be at these levels for the next five years or the next, you know, five quarters? I don't have a good answer to your question, but that's just some of our thoughts around that.
Okay. You know, maybe switching to kind of the disposition outlook. You know, I know it's not markedly lower than 50% of the low-end guidance, but maybe kind of, you know, what gives you confidence in kind of getting to the guidance target on disposition front, as we get to the back half of the year here?
Yeah, as far as dispositions, you know, what gives us a comfort level that, you know, we're, you know, below the 50%. I know what's happening on the disposition front, and what our team is working on. You know, a lot of it was kind of the lower number was more of a timing issue, you know, with the interest rates, you know, moving up. You know, the 1031 market is still very robust, but a couple of deals we're working on just got delayed. So that's it. That's why we didn't budge guidance and we remained the same to the $80 million-$100 million for the year.
Okay. That's it for me. Thank you very much.
Thanks, John.
Thank you. Our next question is coming from Spenser Allaway. Please announce your affiliation and pose your question.
Hi, Green Street again. I just had two follow-ups. My first question, just in regards to the inflationary pressure, have you guys had conversations with tenants regarding their ability to pass through costs to customers? Then kind of, you know, in line with that, can you comment on how rent coverage is trending given this dynamic?
Yeah. The conversations that we've been having with our tenants, you know, it's kind of the same at the, you know, throughout the quarter, that they were able to pass through the sales, you know, not quite at the rate of inflation. You know, it's still early in the cycle. The conversations, they're not concerned with it. They're still very profitable. The interesting thing is in an inflationary market where rent is held constant, the coverages are holding up even though their profitability's gone down just slightly. In the long run, our coverages are very healthy at the property level. The tenants, kind of what I, you know, I'll reiterate, they are having the ability to pass through some of it, but not all of it.
Okay, that's great color. Then maybe just one more going back to cap rates. It seems as though commentary from peers that, you know, they've been seeing cap rates rise slightly more, thus far in the back half of 2022 than maybe what you've cited. I know you obviously can't comment on where peers are executing deals or what they're sourcing, but any insight as to why perhaps cap rates have seemingly moved less on deals you've executed?
I think it's a function of the market we play in, the sale-leaseback with the large regional operators. I think historically when you had the investment grade tenants and the cap rates were trading at 5.5%, you know, 5.25%, or ground leases that were in the 4s%, those ones have moved up, you know, 25-50 basis points. I would expect that going forward. Then the cap rates that were at, you know, north of 7%, they haven't moved, you know, 50 basis points. They've moved, you know, to 20. That area that we play in, the low 6% market, you know, they've trended up a little bit, but not to the degree of the investment grade market we're finding.
The other thing you gotta think of is our deals are long-term leases on triple net. It's really tough to compare our peers to what we market, because if we were buying ten-year leases, those have moved up a s well, you know, the 25-50 basis points. But again, it's a function of our market, Spenser.
Yeah. As Steve said, this is Kevin. You know, it's I think you're getting more movement up where cap rates had compressed the most over the last year or two. To the extent if we were buying 5.5 cap rate deals, we might be talking about a larger increase in cap rates than where we've operated, as Steve's mentioned, in the low sixes.
Excellent. Thank you, guys. Thank you both.
Thank you. Our next question is coming from Linda Tsai. Please announce your affiliation, then pose your question.
Hi, from Jefferies. In your investor deck on page 14, you show the history of acquisition volume and how the relationship-based deals offer a 20 basis improvement over market auction deals. With interest rates higher now, does that delta shift for any reason?
We haven't done much of the market auction deals, but I would expect right now there's a little dislocation in the market, where we've negotiated a lot of our relationship deals prior to the interest rates moving. I would expect going forward, they would normalize to what historical levels were.
Thanks. At NAREIT, you discussed the opportunity to increase the tenant renewal rate of 85%. Could you just remind us again the factors driving that initiative?
Yeah, we're putting in place now. You know, we're a very seasoned NNN REIT. We've been operating the space a lot longer than a lot of our peers. We have a lot of leases now that are starting to come at the initial term. We're putting in place an extremely active portfolio management team to start getting ahead of the curve, you know, in the future. Hopefully, in a few years, we'll start seeing increased benefit of that.
Thanks. Just one last one. With real estate expense guidance down $1 million at the midpoint, what was driving that?
We really just have fewer vacancies. You know, the way we think about it here is, you know, we think of our property expense exposure as the tenant reimbursements minus our property expenses. It was about $1.8 million, I believe, for the second quarter, and that's detailed on page six, near the bottom of page six of the press release. Normal is, you know, kind of a low $2 million number for net property expenses. That's probably kind of more typical, and it's influenced notably by vacant properties or the lack thereof. That's what'll move that number around a bit. It's never too volatile.
It typically operates kind of in that $10 million-$12 million annual range, and we're at $9 million-$11 million for this year.
Thank you.
Thank you. Our next question is coming from Chris Lucas. Please announce your affiliation, then pose your question.
Capital One Securities. Hey, good morning, everybody. Kevin, just a quick follow-up on a comment you made earlier related to the bad debt you typically assume in your guidance of 100 basis points. What's the first half number on that?
We collected 99.7% in the first half. You know, so let's call it 30 basis points. You know, we're not prepared to necessarily call that 30 basis points bad debt in some respect at this point, we'll pursue collection of that. But that's what got collected. It's what got reported, just so you know, for revenues.
Okay. Steve, just taking a step back on the competitive, or the competition, you know, all the peers, you guys have talked about the fact that private equity pulled back when rates moved higher. Just curious as to whether or not you're hearing anything about their re-entry into the market, given you know, a little bit of a pullback in rates, although again, the market's pretty unstable. Just curious as to what you're hearing from that competitive set.
Yeah. In the second quarter, you know, I think we did 16 transactions and, you know, 14 of them were through the relationships, so we didn't participate in a lot of the, you know, the super large deals that might have been out there. But put it bluntly, I have not heard the private equity groups, you know, that came in the market second half of 2021, first quarter of 2022 back in the market at all.
Okay, great. Thank you. That's all I had this morning.
If there will be any final questions or comments, please indicate so now by pressing star one. Sirs, there appear to be no further questions in the queue. Do you have any closing comments you wish to finish with?
Yeah. Just, thank you for joining us this morning, and, we look forward to seeing many of you guys in person kind of as the fall conference season kicks off here, and, we'll see you then. Thank you.
Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.