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Greetings, and welcome to the Spirit Realty Capital Preliminary Earnings Results and Business Update Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Pierre Revol, Vice President of Strategic Planning and Investor Relations for Spirit Realty Capital. Please go ahead sir.
Thank you, operator, and thank you, everyone, for joining us today. Presenting on today’s call will be President and Chief Executive Officer; Mr. Jackson Hsieh; Michael Hughes, Chief Financial Officer; and Ken Heimlich, Head of Asset Management, will be available for Q&A.
Before we get started, I would like to remind everyone that this presentation contains forward-looking statements. Although the company believes these forward-looking statements are based upon reasonable assumptions, they are subject to known and unknown risk and uncertainties that can cause actual results to differ materially from those currently anticipated due to a number of factors.
I’d refer you to the Safe Harbor statement in today’s preliminary earnings release and presentation, as well as our most recent filing with the SEC for a detailed discussion of the risk factors relating to these forward-looking statements. This presentation also contains certain non-GAAP measures.
Reconciliation of non-GAAP financial measures to most directly comparable GAAP measures are included in today’s release and presentation furnished to the SEC under Form 8-K. Both today’s preliminary earnings release and presentation are available on the Investor Relations page of the company’s website.
For our prepared remarks, I’m now pleased to introduce Mr. Jackson Hsieh. Jackson?
Thanks, Pierre, and good morning. Like many of you, I’m here live from our Dallas Home speaking to you on my iPhone. So, I want to thank you for joining us during what we know is a very busy and challenging time for everyone. First and foremost, I hope you, your family and your employees are all safe and healthy.
While we have all dealt with business disruptions and inconvenience over the past few weeks, I know this crisis is exacting a very human and personal toll that overshadows any business concerns. Second, owing to the special thank you [indiscernible] employees are providing critical goods and services to people across the country while navigating through the hazards of COVID-19.
Given the fast changing environment, we decided to set up this preliminary earnings and business update call sooner than normal to briefly discuss our results of the first quarter, but more importantly tell you what we’ve been doing over the past several weeks. What we are seeing in terms of April rents and let you know what our priorities are going forward.
If you have had a chance to review our preliminary earnings release this morning, you saw that we had good operating capital deployment and financial results in the first quarter despite being impacted by various state and local stay-in-place designations in March. We operated our portfolio of 1,772 owned properties at 99.4% of occupancy, ending the quarter with 11 vacant properties.
Lost rent for the quarter was 0.6% and property cost leakage was 2.4%. I do want to note that leakage was high this quarter driven by property tax accruals for tenants who we believe payment is now doubtful. These accruals along with higher impairment charges during the quarter were all driven by COVID-19 related disruption during the latter part of March.
We completed eight acquisitions and revenue producing capital expenditures totaling 213.4 million with a weighted average cash yield of 6.5%. These assets were predominantly industrial, distribution and essential oriented operators and 96% of these tenants paid April rent. We sold seven properties for total gross proceeds of 15.7 million of which three were vacant.
Our estimated AFFO per share for the quarter is expected to be $0.77 to $0.79, which is within our expectations that inform the guidance we have previously provided for the full year. Our balance sheet, liquidity, debt covenants and future loan maturities are well-positioned to deal with the economic uncertainties created by COVID-19. As of April 10, after completing our recent 300 million funded term loan we have over $830 million in corporate liquidity.
Our adjusted debt-to-annualized adjusted EBITDAre will be in the range of 5.2x to 5.4x. So, again overall a very good first quarter, but now let’s talk about what we’ve been doing in response to the COVID-19 pandemic. In mid-Feb, as we began to recognize the challenging operating environment that was approaching we developed three key focus areas for the Spirit team over the next 90 days.
The first key focus area was preparedness and execution.
Knowing that a complete office shutdown was highly probable, we established business continuity procedures and ordered critical equipment to enable our employees to work from home well before Dallas County established shelter in place orders. Our first company-wide COVID related action was on February 28 when we restricted all non-essential travel.
In order to protect our employees through further social distancing, on March 16, we transitioned to a fully virtual work environment for our entire office. At that time, we also developed a COVID-19 watch-list by anticipating industries that would be impacted by social distancing and regional stay-in-place restrictions.
Anticipating disruption in many of our tenants businesses and what we believed would be a high velocity of tenant deferral requests resulted in us shifting more resources into our asset management team and we freed up bandwidth within our legal, credit, research and technology teams to provide additional support.
We also implemented newly designed processes, protocols, and business intelligence dashboards to capture additional credit metrics, operational status, ownership classification and deferral logs. Our second key focus was leveraging our extensive experience of our asset management platform.
As I said at our December Investor Day event, asset management is a centerpiece of our operations and the quality of our personal reflects that priority. Of our 85 employees, 28 are members of the asset management platform. Headed by Ken Heimlich with over 30 years of asset management and workout experience at GE Capital, Trust Street Properties and CNL American Properties Fund, our asset management team is built to navigate the challenges brought on by the current environment.
In addition, as you may recall from Investor Day, the entire acquisitions team is comprised of former experienced asset managers. We’ve taken advantage of this resource and conscripted our entire acquisition team to work in asset management during this challenging time. Lastly, we have four of our in-house attorneys and two paralegals, exclusively supporting the asset management platform.
Taken together and including the focus of our executive management team, including myself, we've devoted over half of our employees to the asset management function on the frontlines working daily with our tenants. I can tell you that this approach is working and I’m highly confident in the talent we bring to bear to confront this challenge.
Our third key focus was to strengthen our balance sheet and liquidity. Over the past three years we have intentionally forged a fortress balance sheet with an acute focus on conservative leverage and liquidity. I saw first-hand in 2008 and 2001 and 1998 and 1987 how quickly things can turn.
As the COVID-19 pandemic begins to unfold, we took the important steps to further strengthen our liquidity position by raising additional 300 million of term loan proceeds at a very attractive borrowing cost bringing our total liquidity in excess of 830 million. Our strong liquidity position gives us the ability to repay debt that matures in 2021, assist our tenants in working through these challenging times and notably to be opportunistic when attractive acquisitions present themselves.
So, now let’s talk more specifically about our tenants, our portfolio, and where we are to date. In a COVID-19 world, some industries are doing well and some are being hit really hard. The most resilient industries in our portfolio include grocery, drugstores, convenience stores, professional services, warehouse stores, logistics and distribution, office supplies, pet supplies, dollar stores, and home improvement.
The most challenged industries in our portfolio are movie theatres, gyms, entertainment, and casual dining. We began reaching out and having discussions with our tenants in early March as state governments were rolling out stay-at-home recommendations. The types of discussions and negotiations have depended on the particulars for that specific tenant such as their financial performance, access to liquidity, their industry, the lease structure, and their geographic location namely the extent to which a government action has forced their closure.
So far, we have received and are evaluating 126 tenant requests. There are a few points I want to walk you walk away with as it pertains to rent deferral requests. First, all the rent deferral requests we are evaluating are rent deferrals and not [forgiveness]. Second, we are evaluating each tenant deferral situation on an individual basis and by no means does a request for rent deferral result in an agreement.
While we will absolutely work with and support tenants in order to get them back on track we will also enforce our contractual rights under our leases. Third, as we negotiate rent deferrals we are considering any government stimulus that a tenant might qualify for in the near term.
And finally, many of you have heard of tenants who certainly can pay rent, but choose not to. We believe this is an unfair burden to place on landlords and actually impedes our ability to assist smaller more challenged tenants and we will pursue all of our rights and remedies under our leases to the [fullest extent] in those situations.
So to sum it up, here is where we stand as of April 9. First, 9 of our top 10 tenants are paying April rent. Second, 17 of our top 20 tenants are being April rent, including one that made a partial payment on some of their stores. That’s a total equivalent of 83% of our top 20 tenants contractual rent.
Third, 62% of our properties are fully open and operating. 10% are partially opened by providing either curbside service, takeout or pickup and 28% of our properties are closed. Fourth, 60% of April rent has been collected so far and we expect it to increase to a range of 65% to 70% by the end of the month.
And fifth, we have already executed two rent deferral agreements out of 23 that have been approved by our investment committee, which represents approximately 3.75 million in monthly rent. [Technical Difficulty] together in a very short period of time. [Technical Difficulty] team. It is hardly a coincidence that we haven't skipped a beat in executing at an extremely high level for our shareholders.
We spoke in length at Investor Day about the spirit process in our company's five KPIs; our balance sheet, our high quality real estate portfolio, our defined and disciplined investment strategy, our strong operating systems, and our outstanding people. We didn't arrive at this situation by choice, but we came prepared. We paid it forward with a lot of work over the last three years and the payoff is coming now. We built a fortress balance sheet and liquidity position.
We constructed a durable diversified high-quality real estate portfolio. We have hired the best people. I wouldn't trade them for anyone. And perhaps most importantly, the fire this organization has been through since May 2017 has forged us into an unbreakable team, sharpened our skills, and given us the confidence to meet the challenges before us and be ready to take advantage of the opportunities that will undoubtedly unfold.
As with any economic crisis there will be winners and losers. I have every confidence this team and this company will come out ahead for our shareholders.
With that operator, we can open the line for questions.
Thank you. [Operator Instructions] Our first question comes from line of Anthony Paolone with JPMorgan. Please proceed with your question.
Thank you. And thanks for doing this. I guess my first question is, can you maybe give us some examples or talk about some of the negotiations to defer rent and the scenario that you know it’s collectible over the next, whether it’s 12 months, I think you talked about and what needs to happen to business conditions to realistically, you know receive that and make that a realistic outcome?
Sure. Good morning. Thanks Anthony. You know, I’ll start with our typical lease agreement. So in a force majeure economic rent is not precluded from a tenants responsibilities it’s really generally related to nonmonetary exclusions. So, I’ll tell you kind of our approach to deferral conversations so far. First of all, it’s a very methodical approach. It starts with first, a tenant request. Tenant request comes in and then we will follow with a landlord information request that typically asks for most recent financial statements, balance sheet, cash flow coverage.
We’ll then start a landlord analysis, which is tenants tend to pay rent. What are their sources of liquidity? Are they getting available relief from their lenders, their vendors, their franchisors, their employees, are there government assisted programs that they can get as part of their program? If you’re owned by a private equity firm, are the private equity firms willing to put more money in their deferred fees?
So, generally our deferral approach, I’ll give you more examples in a minute, but I would say that they formed the three buckets. The first is a partner oriented approach. We will work through this together and get through it. The second approach would be, we haven't heard from the tenant, they haven't paid rent, so we’ll send a general notice saying, hey you forgot to pay rent, you’ve got a 10 day grace period we need to talk to you.
And a third bucket would be those and it’s a small number that can pay and won't pay and in those cases we will put a much harsher approach towards the deferral comment. I can tell you that I’ve been on many of these calls, Tony, and I would say to the large majority of our tenants, I’ve been so impressed with just the organization that these tenants are going through and this started in sort of early to mid-March where as things were turning down and closing down, tenants were giving us feedback real-time on what they were doing with sales, closures, getting visibility.
So, I would give you a good example on a couple of them that have been approved. You know, one of them was – recently was so frozen – a Freddie frozen customer franchisee. So this store is still open. They’re doing drive-through business, they’re DoorDash – they called us on May 23 and basically they kept all of their salary workers in place. District managers were working in the stores. They started to cut back on hourly wages and they asked for one month's rent deferral in April and they’ve basically agreed to pay it back before the end of June. So they’re open and doing well.
Before the crisis, this unit was doing about 1.7 million in sales and had pre-unit overhead three times coverage. The second is another franchisee; it’s a multi-unit franchisee that does chicken. Units were about $1 million in sales per unit. You know that coverage was just a little bit north of two times and they reached out to us in – at the end of March, and they were open, they’re doing drive through business and they are seeing about 15% impact on the top line.
The conversations started out first with only three months deferral. Then we asked them about where they are with the Cares Act and they were actually able to get some – they believe they will get proceeds through that channel. So, we ended up negotiating actually a one month deferral in April and they will pay back without interest by the end of June.
To give you another example, we have another gen type operator that closed. There is no business there and we’ve negotiated three-month deferral which they will pay back within, starting in, later this year and start paying back per month over the course of a year. We’ve got another entertainment type asset that’s closed at really strong coverage before going into the crisis north of 3x, and they asked for a one-month deferral, but they will pay back over six months.
So, I would say that the thing you should come away with, if you are getting away from this conversation is, you know we’ve only approved a small number of these requests because it takes time and diligence, we've got to go through an investment committee, and I can tell you that as time has gone on, the federal assistance and emergency aid that’s come through has helped a number of our tenants, whether it be the payment protection plan or the mainstream lending program, and you know, I'm so impressed with our tenants ability to navigate through these challenging times, and I’m just – I felt very good that we are going to get through this.
Do you think May would be better or worse just as this progresses?
Well, what we wanted to do is give you a snapshot into April. We’re all watching what the health professionals are telling us and watching the curves and seeing what these impacts of social distancing. I can't tell you that these – are tenants are doing everything they can to maintain their operations, deal with their employees, push out vendors, push out franchisors.
You know, I’ll tell you one other thing that’s an interesting in terms of phenomenon right now, and we’ve talked about this with a couple of our tenants, especially that are in the restaurant business, right now with the federal aid coming in. So, people that have been furloughed generally are getting state unemployment and that averages – and it depends on different states, but in this state we are talking about their employees were getting $580 a week.
So the federal government is going to put in an additional 600 per week for the next four months, so that is $1180 per week that an unemployed employee would get. So, as these small businesses try to apply for these payment protection programs, and you’re familiar with that program it’s $10 million forgivable loan at 2.5 times monthly payroll.
The challenge is that there are some people actually that are making more money than they were before this happened. So these operators are trying to balance all these different factors and we has a landlord, lenders, everyone is sort of, we’re sort of all in this together and I’m encouraged that things will snap back eventually, but it’s hard to predict what’s going to happen in May at this point, but we do appreciate tenants, especially ours, basically owning up to their commitments because you’ve seen some different propaganda out there about people not wanting to pay rent and just the other things. So, we really appreciate that.
Last one from me if I may, just for Mike, can you just give us the roll forward on the, like line of credit, cash position as of today?
Yes, Tony. This is Mike. We have over 830 million liquidity today as we put in deck, you know line balances is close to zero. So, as we roll forward, it looks pretty good. The only maturity we have is in 2021, which Jackson mentioned we can take care with the liquidity we have as the converts of about 345 million, there is really nothing else for a long time. So, some cash flow is good, liquidity is good, you know the term loan we put in place, we still have another 100 million accordion on that, and we could feel, and of course the mystery about the bank market certainly is open to us to add incremental liquidity. So, everything feels pretty good where we sit.
So, what was the cash position because there's nothing on the line and what’s cash?
Cash today, let's see, we have, I mean basically the line is undrawn and cash is roughly 50 million, around there. So…
Great. Thank you.
You’re welcome.
Thank you. [Operator Instructions] Our next question comes from the line of Haendel St. Juste with Mizuho. Please proceed with your question.
Hi, good morning. Jackson, just wanted to clarify one thing, I think you mentioned that you have [126 requests] being evaluated. I guess I’m curious that – is that on asset level basis I think you have almost 300 tenants, so maybe clarify that for us.
Yes, that’s on a tenant basis, so that’s 126 tenants that have come in. So, some of them could be operating one unit, some could be more, so the number of properties is far greater, but the important thing to understand there is first of all, not all 126 deferrals will be accepted, I can tell you that. The 23 that have been approved so far, you know, about half of those are looking for 30-day deferrals that will pay back generally before the end of the quarter, second quarter, about 14% are 60-day deferral requests and about 32%, you know, [rough math] the balance are 90-day deferrals. So, you know, there is sort of all case-by-case and we’re going through them very methodical at this point. As I said, you know, it takes time to go through these.
Got it, got it. And maybe Michael Hughes, can you help us understand the accounting treatment of this, the income statement impact of these deferrals, what’s getting booked in second quarter versus shifting into third quarter, is that – is what’s not being booked in second quarter effectively going to be written off as some form of bad debt? Or how does that impact the income statement in the second quarter? And then if the tenant catches up on deferral in third quarter, what does that [indiscernible]?
I’m trying to get…
And…
… layman’s view and then I’ll let Mike do it, but, you know, I guess when we talk about these rents received that’s cash, so 60% is cash collected rents like not GAAP cash, cash money and we think it’s like as you said, it’s going to probably go up to 70%, close to 70%. You know, typically, when we get a rent deferral request, the first thing that we do when it comes to investment committee is, are we going recognize this rent, the deferred rent as cash rent for GAAP purposes, and as you know that to be able to recognize that you have to have 75% confidence that you’re going to get that money back, the tenant will be able to pay through the course of the deferral.
So, I can’t tell you that of the 23 that have been approved a small handful of tenants that have requested a deferral, we will not recognize as GAAP cash rent in the second quarter because we think there maybe some risk to that. So, it’s going to be based on, you know, management team, accounting, and of course, a third or outside accounts. Mike, do you want to go more in detail there? I’m hopeful that was enough, but…
Yes, I think you did a great job on that. I mean that’s generally the premise. I mean obviously, there’s some technical details around these modification accounting and not changing lease, but Jackson is really right. If they have a high probability of being paid back on that deferral, and we're certainly assessing it every time we do any kind of deal with the deferral request.
So, you feel like you’re paid back, you feel like you’re going to do nothing relatively for a reasonable period of time, which also effects the probability to pay back then, you know, like any kind of GAAP accounting, you would treat that as base cash rent for the purposes of, you know, your accounting treatment. So, you know, and if you don’t then you would obviously not treat that as base cash rent and that would only be recognized on a cash base when you get paid at some time down the road.
Got it, got it.
And then, you know, one thing I would note, you know, it’s – you know in order to do this and I’m sure all of our [peers] are going through this exercise, you know, it does take a lot of effort because, you know, you obviously got to be hopefully somewhat methodical about the process, everything is got to be document, it goes through an investment committee, you know, we’re constantly working between our asset management and accounting on the likelihood of collectability, the other impacts and impairment, are we looking – you know thinking about tax accruals and things like that.
So they are all – there is a tremendous amount of effort that we’ve had to put in place process wise over the last, I’d say three weeks and it’s been going pretty smoothly, but first of all, it will be complicated to do it if we were in the office, but we are now all remote. So, I’m very happy that we set up all these processes well in advance of this sort of, what I’ll call onslaught of request, because they started to come in, you know, pretty fast and furiously in the last week and half of the month of March.
Got it, got it. And Jackson, just a follow-up. I’m just curious, you know, understanding that the COVID pandemic is temporary, thinking longer term, wondering, you know, how this experience, the recent tenant-level results perhaps impacts your view on industry exposures? I understand, you know, this is all [indiscernible] are new, but just thinking longer term, if there could be a view on perhaps less gyms, less movie theaters, less experiential, just curious how you could be thinking about what we’re experiencing today and how that might impact your views on the portfolio balance going forward? Thanks.
No, it’s a great question and, you know, it’s something we were already thinking about before because, you know, as you know from our Investor Day presentation, you know, we talked about getting the company back up to $600 million in rents. You know one of the things, obviously, that's working for us today is tenants that are in the, what I’ll call essential category versus non-essential, so that obviously one takeaway that we will really try to refine as we think about investment going forward, but the other thing that I think is really important is, when you own critical essential, you use this term a lot, mission-critical assets for tenants, you know, they need to be in those places, they need to operate if especially if its mission-critical, so they generally pay rent.
So that is a really obviously important thesis, and I think for us, as it relates to assets that have more experiential, more social gathering type aspects to it, you know, look, I could see us going forward on new deals, you know, looking for, you know, interest escrows or, you know, three months in case that there is a, you know, another forced closure because it’s not clear whether it’s – when we come back to work, when they open the country up maybe they got to close it again, you know, we saw that in China, you know, when they opened up ‘the country, movie theaters were opened’, that first weekend and they closed them again.
So, I think going forward, if we’re going to get into certain types of businesses, particularly, entertainment, you know, we might look at some additional new structures that could help us, mitigate some of this – you know some of these closures. We will – we have confidence in these assets. You know gyms are going to come back very, very quickly once people reopen because a lot of these gyms have monthly customers that they’ve frozen dues and as soon as they reopen, they are going to turn those on and they’ll be back, you know in-door entertainment. You know these kids are all in the backyards, you know, they need – or basements or wherever they are, you know, probably – so they need to get out and do things.
People are going to have parties again, so, you know, it will be good once we reopen. I think movies will be a little bit more challenged just given, you know, that – I think that will – you know that’s dependent on releases from the studios, and you know, it will take more time for people to come back into those venues, but I think long term, those categories will be very good. But to answer your question, yes, we are re-looking at what's working, what’s not working. I actually had a research team, they’ve been pretty busy, but they’re looking at, you know, how does our heat map play out, how are things performing, what do we think was right, how much correlation do we have in the portfolio.
If you look in Q1, pretty much everything we did was, you know, very industrial distribution rates. You know, we did that deal with Mac Papers; we bought a company that does safety and industrial products distribution, you know, N95 masks that are crushing it right now. We did a car wash portfolio, a United AG portfolio, a [BCA's warehouse store]. So, you know, there were no restaurants or entertainment type stuff in the first quarter, so you might see us continue to look at things like that.
Thank you. Our next question comes from the line of John Massocca with Ladenburg Thalman. Please proceed with your question.
Good morning.
Hi, John.
So, I’m sorry if I had missed this, but what percentage of contractual rents did not formally request a deferment, but also didn't pay in April, came above and beyond that 42?
Well, you know, so here’s the trouble. It’s – so 60% paid as we said, right, so that’s just in. There are some of those 126 when they paid, they just, you know – look, when this happened, a lot of people, three weeks ago, didn’t really know what the Federal Government was going to do, and obviously, the Fed and the [treasury secondary] have been all over this. So, I have a lot of confidence of what they're doing right now. So, things looked really bleak at one point like maybe three weeks ago, two weeks ago, but, you know, things are changing for some of our different tenants’ sort of case-by-case.
So, you know, to answer your question of that 42%, you know, that we have in that table, you know, not all of the – you know [for review] I can give you a case example like one of them on Friday, we said, okay, you want a rent deferral request, send us these financial statements, send us your most current operating statement, send us your balance sheet, and they sort of basically said, you know what, we’re just going to pay rent. We’re too busy.
So I don’t want to give you a number that's – you know the best number I can give you is, you know, from a cash – you know from a collective rent standpoint we’re at 60%, that number is going to go higher and we hope it gets up close to 70%, it could even possibly go to the low 70s, but I think, you know, we feel comfortable in that 65% to 70% range for April.
Okay, understood. And then I know you mentioned that you haven’t agreed to any abatements or long-term lease modifications, but have you had any request, especially from people who have not paid April rents and…
Sorry, John, could you just do that question again?
Sorry, if there is a bit of a [Indiscernible].
Yes.
I know you mentioned that you haven’t agreed to any abatements or kind of long-term lease modifications, but have you had any request especially from people who haven’t paid April rents or kind of or in that 18% that have, you know, not hadn’t accepted deferral request?
Yes, I mean, well, I would say like the way to think about it and like I said it's very – like once again I have to stress this, this is an extremely methodical process that we’re approaching. So of those 23 approved by our investment committee, rent deferrals, those just didn’t happen like over 24 hours. There was quite a bit of back and forth between our asset manager and the tenant, you know, in terms of getting financials, getting a clear picture of what's happening with the tenant, are they open, remember all those questions I mentioned, and then ultimately a structure needs to be discussed between the tenant and the asset manager and then has to be approved by investment committee.
I can tell you that just from the cadence, there had been some requests that have come in that weren’t approved by the investment committee and we made modifications, and then that asset manager went back to the tenant and then there was an agreement. So, the way you should think about it is if 23 have been approved out of 126, you know, there’s something like a 100 or so situations that are in various different stages.
So, if a tenant hasn’t really given us financials, I mean, we’re not really dealing with these guys right now, and I think one of the things that and I’ll let can Ken talk about this, but I’ll just set it up. You know, as the landlord, we don’t give up any of our rights, our contractual rights by rushing, you know, so I would say like time is probably on our side as it relates because we’re – all of these things don't require us to waive our reservation of rights under our lease, and you know, our typical lease has a 10-day grace period for rent.
If a tenant doesn't pay in 10 days, there’s typically, you know, a default premium, so usually about 5% and if the tenant doesn't pay, there's actually sort of an imputed interest rate that gets charged for the time that they don’t become current. So – and maybe Ken, I don’t know if you want to describe sort of a little bit about what – how your group and team are handling this, but…
Yes, Not sure. Clearly, there's a lot more going through the system than otherwise normally would be, but we have a very systematic approach for those folks that, you know, do not pay April rent, Jackson mentioned earlier. We have a – you know a couple of different ways we’re going to handle those, but again, Jackson mentioned that there – you gain nothing and you lose nothing whether you act upon a tenant that did not pay rent whether you did that on last Friday, this Friday.
Clearly, you're not going to wait, you know 60 days to address it, but it – we don't think it's prudent to jump in and start, you know, shooting letters out. It's a – like it's a very methodical approach. We are definitely attempting to make contact, try to come to a prudent resolution. In fact, if – you know if that fails and then in the appropriate time frame, we will address that whether that's through default letter, reservation of rights or whatever is necessary.
Understood, and thank you very much for all the color, especially during, what I’m sure is a very busy and turning time.
Thank you, John.
Thank you. Our next question comes from the line of Ki Bin Kim with SunTrust Robinson Humphrey. Please proceed with your question.
Thanks and good morning out there. What percent of your investment grade tenants did not pay April rent?
So, our investment grade are I think, around 20 – just under 24%. I don’t know if I have a number on that. Pierre, do you know? Pretty close to the majority of it.
Yes, [I do]. It’s close to zero [indiscernible].
Yes, I mean there are – I think there – you know this is the thing, Ki Bin, to keep in mind, I mean we’re only at April 13, right, and, you know, we had a holiday on Friday. You know rent is still coming in, and you know, everyone is, tenants and landlords, everyone is sort of trying to figure this out and, you know, one thing that I will really stress, you know, when I – when we talk to tenants, I mean rent is just a very small component of the issues and challenges that they are facing right now.
I mean it's amazing to hear these stories, you know, how they’re dealing with thousands of employees; how they’re dealing with supply chain; how they’re dealing with their franchisors if they are in a restaurant business; how they’re dealing with different governmental related action happening in different states; how they are dealing with their lenders; how they’re dealing with government stimulus? And to be honest, you know, like rent is just one of those small pieces of the puzzle, not the piece of the puzzle. You know, the landlord cannot stress this, the landlord cannot solve all the problems, you know, for what's going on or just [multiple speakers].
Sorry about that. It jumped to Bluetooth all of a sudden for no reason.
That happened to me yesterday.
Yes, thanks a lot. So, just to clarify that, you’re saying that 0% of your investment grade tenants, which are 24%, paid April rent, but maybe I should – just to clarify that, maybe I should have asked that a different way [multiple speakers].
So, all of our investment grade tenants actual investment-grade paid April rent.
Okay, that’s what I thought you said, okay. So, they all paid, okay. And have you gotten any deferral request from your investment grade tenants or no?
No, we have not gotten any deferral request from our investment grade tenants.
Okay. That’s good to see at least the investment grade is working the way it should. Now, my second question is, to your best judgment, what percent of the 42% of your tenants or of the rent that is being asked to be deferred? And I know this might be tough, but what percent of that do you think is actually longer term and permanent because, especially in the restaurant business or actually any business at this point, but especially restaurant business, you don’t have the equity cushions or line of credits to sustain zero month – zero revenue month in that business?
Yes, I mean I’ll try to – you know look, I know you’re trying – I know you’re trying to forecast where it goes, but I mean the way to think about these requests, so, you know, there are 126 of them and like I said, I don’t believe 126 will be approved and I think of those 126, some will just pay, about 20% of those are public tenants. The second next category are franchise, private operators, and the largest are private equity owned companies, and I would say that, you know, if you think about – and we tried to give this to you on Page 5, if you think about the percentage and the number of tenants, and we’ll go through the, what I’ll call, maybe the easier group, quick serve restaurants, many of them are actually open already, right.
They are just open and operating either through a drive through or a pick up or DoorDash, and so, they’re seeing [indiscernible] you know this is some rough numbers, they’re seeing about a 20% decline in their business. Casual dining, depending on what type of casual dining it is, a good majority of our stores are open, but they are just providing select delivery, select menu.
Look, they are not making a whole lot of money, they are keeping staff paid, kitchen staff, but it's more problematic to that group. And within the higher range casual dining, many [of stores] have been closed. So, I believe that casual dining will not recover as quickly, will recover, but not as quickly as quick serve when we come back. I think on health and fitness, as I mentioned, because a lot of our operators charge monthly dues, that's going to open up pretty quickly at least once the all-clear is announced and if you listen to what's happening, it’s going to be a really all – you know all clear, so at different states and at different areas start to reopen, you’ll start to see health and fitness reopen.
I think entertainment is probably a little – will take a little bit more time, so Topgolf, that’s really easy, so both outside and when they reopen, I think you’ll see a lot of people gravitate towards that. I think some of the indoor ones that are providing more, you know, games and bowling and slot machines, you know, for your video games that type of thing, birthday parties, I think that those operators are really thinking through how do we make our customers feel safe and they make – you know I’m sure wiping down, you know, having wipes all over the units will be real helpful.
I think maybe checking temperatures might be really helpful. The group that will probably be the longest to recover will be movie theaters, and that's simply a result of – you know, they are related to what's going over the box office, and I’m sure you’ve heard there's a tremendous slate of great movies that have been backed up that will come out through that distribution channel, but you know, I – my own judgment that will take the longest, and for us, as we structure these deferrals, that one will probably take more attention versus just the one-month deferral like some of these other categories. I don’t know if that helps you, but [indiscernible].
Thank you very much.
Okay.
Thank you. Our next question comes from the line of Vikram Malhotra from Morgan Stanley. Please proceed with your question.
Thanks for taking the question. so maybe just first to clarify, Jackson, you mentioned that it’s only April, you know, 9 as you looked at this data, do you have a sense or can you give us a stat on what percent of your tenants actually paid rent of April 9, last year versus what – the actual percent paid rent this year?
Yes, we do look at that number – I mean I’ll compare it to the trend over the last few months is quite a better one. By – usually by about this time, you know, we’re at about 90% of our rent collected. You know, we always have some late payers or some people that don’t pay on the first, but I would say generally by about this time we’re at 90%. And so, what’s unusual about this month is that it's not usual, right. So, we know that by just definition there are some major payers that we expect to pay this month, and then, there's another group that sort of don't know what they want to do yet. And so, that's why it gives us some confidence that, you know, 60% collected number is going to move up based on our experience, but 90% [indiscernible].
Okay, that’s helpful because I thought that there would be some tenants that probably pay into the second week or the third week, but…
Yes.
I guess that’s more in office, but that's helpful to have. Can you just maybe give a little bit more color on sort of the theaters, you know, Goodrich specifically and just kind of your expectation, you know, going forward?
Yes, so I’ll come back to Goodrich in a minute, but, you know, when you look at our movie segment, which is just a little over 7%, you know, total contractual rents, it’s broken down into, leaving Goodrich out, it’s seven operators and its pretty balanced. So like – you know our biggest one is but not the big 2, so Regal and AMC are on the top-end, but they are not the largest. So, it’s fairly spread out and I would tell you that some of our regional theater operators have really, really good credits like low debt-to-EBITDA, so we think that, you know, that’s going to probably be an opportunity for some of the regional’s to maybe consolidate more theaters as they think about, you know, their opportunity and you know, obviously we’re in a position to help them.
So we will look at that very carefully with them. But getting back to Goodrich, so Goodrich paid March rent, they are going to pay a nominal rent this month. You know the bankruptcy courts right now, I don’t know if you focused on what happened with Pier 1, you know, we have one of those stores; the judge basically kind of put a timeout on the going out of business sales as it relates to landlords getting paid rent during that administrative period. So, the Goodrich situation is sort of the same thing, kind of things are frozen right now at least for the next 60 days. I can tell you that we have interest in those theaters, you know, the master lease is still in place and – but there’s just not a whole lot happening in the bankruptcy courts right now just generally just given a lot of courts are not actually in place, physically in place right now.
Okay.
Ken, do you want to add anymore on Goodrich at this point now?
No, no. I think that captured it. It is just a – it’s what going on in a lot of bankruptcy cases. They’re kind of mothballing things for the next 30, 60 days until, you know, sale processes can be run as they should be, but...
Okay, that’s helpful. Just last one if I may, if you can just some – provide some thoughts on sort of dividend policy assuming this sort of, you know, persist for several months into the second – into the – well, in second and the third quarter and maybe that 24% number increases in terms of deferrals, can you give us some thoughts about dividend policy kind of options you have etcetera?
Yes, well, you know, we’re paying obviously a dividend on Wednesday for the – for – the Q4 dividend. And of course the dividends are really the Board's decision, but I can just tell you from where I'm sitting today, you know, I’m very – I feel very positive about the conversations we’re having. You know, our tenants that are asking for deferral, you know, it’s important to really think about this, our business is – and I would say like some of our peers in the triple-net business, you know, our business is not related to cotenancy.
So, you know, we are focused on our tenants’ ability to basically pay rent, be open, manage their parking lot, cover their roof expenses, paying their taxes, paying their insurance, and so, it’s a really different type of conversation that we’re probably having with our tenants vis-à-vis retail landlords that have either malls or shopping centers or power centers. You know, so ours is a really more – you know they control the door, right, they control what's happening, and so, it’s a very – I think it’s a very different type discussion.
You know we’re not going to subsidize tenants that affected adjacent vacancy if that makes sense to you, right. We’re really focused on – we have a tenant, they are operating, we want them to be successful, we want them to pay rent. So, as it relates to dividends for my perspective today, you know we have the wherewithal to maintain it. It’s going to be the Board’s decision, and we feel really good about what we’re seeing right now. You know this is only April, but what I can tell you is that the conversations that we’re having with our tenants on deferrals, it’s very methodical.
These 126 tenants are really serious about their business; they are not giving up. You know that's what’s really – for me is really impressive, they're not giving up. These are – a lot of these are local multi-unit operators versus what I would characterize as a mom-and-pop single unit operator. You know, these are fairly sophisticated operators and they’re working through it very methodically looking at all avenues and we’re partnering with them in this process.
Thank you. Our next question comes from the line of Chris Lucas with Capital One Securities. Please proceed with your question.
Good morning, guys. Thanks for doing this, it’s really helpful. Jackson, I guess one – you sort of raised the question or what raised the topic that I was looking at which is the expense side, but a good portion of – I guess the question for me would be, yes, you talked a lot about rent, what about your insight into what tenants are doing with the expenses that they are typically paying directly? Do you any insight into that? And how should we be thinking about, you know, your obligation on that front?
Yes, I mean, you know, look, clearly, one of the things that we talk about on a rent deferral is, you know, look, clearly, one of the things that we talk about on a rent deferral is, you know, are you current on taxes, you know, how are you – you know it’s a whole calculus that we kind of go through. I’ll give you a good example like, you know, with the Cares Act, you know, with this payment protection aid that’s coming through, if you think about it, the way the government set up the program is, you know, they’ve got to basically pick those loan proceeds and, you know, if they want them to be basically forgiven, they’ve got to use about 75% of that money for payroll costs and the remainder can be used for rent mortgage and utilities.
And if the loan is not forgiven, it’s a 1% interest rate, so that’s not bad at it right, but one thing that's really – we did some modeling on this, so if a tenant that’s operating a unit is effectively open, paying its employees through these loan acts, paying for utilities, you know, their margins will improve, right. Now their topline may be affected, but if you think about it, their margins are going to be improved because they’re effectively not paying for their, you know, people cost, which are one of the largest expenses that they have in their operations.
I can also tell you that these tenants have been extremely sophisticated about educating their employees about different, you know, how to get an employment at the state level. Many of them are furloughed so that they still have health benefits. And so, you know, these tenants have been extremely thoughtful and that’s what’s been so impressive to hear these conversations about how they’re approaching the business as opposed to hey, I don’t know what to do. So, I don’t know if that helps you with that …
Well, I guess another question for me is when I think about rent deferral and how much you guys are talking about, I guess I’m trying to figure out what’s the multiplier on expenses that we should be thinking about that sort of – you know what’s the real damage to the bottom line AFFO per share that's been done?
I mean that’s really – I mean to think about the real damage, it's only if a tenant goes away, right, and again, it’s – the way I would – and this is why we wanted to provide this information to you which is a whole helpful, if you look at the nature of the 126 deferrals, you know, the weighted average remaining lease term on those deferrals is about just 10.5 years, 10.6 years, so that's a good thing.
You know you wouldn’t – if it was a shorter lease term, you know, it’s more complicated because then you’re dealing with renewals and somewhat complicated discussion. The other thing is, if you look at the weighted average unit coverage for this group of tenants, you know, pre the COVID-19, they were at 2.5 times coverage. So that shows you that hey, the business it was working, right. Things were working before this whole situation.
So, when we look at it as a landlord, we’ve got a long-term lease from a tenant or a group of tenants that were adequately having coverage to pay all of their taxes, rent, utilities, and so, the question for us is, and this is where we went into how to reserve this stuff, not all of these renewals are – were recognized rent, and so, if we’re not going to recognize rent, that’s when we see property tax accrual start going up, impairment start going up because we’re – and look, it’s a bonus if they can get through, but that's kind of how we’re doing it and I don't know, Pierre, we have that one ratio on expenses, you know, if a tenant went away, you could think about.
Yes, I mean one way to think about vacancy cost is it’s a $4 a foot. I mean so, if – on average, if you just look at our overall portfolio, it depends on which district or what area. I mean, so if you have like a 1% occupancy and you apply that $4 a foot concept, it’s about $1.2 million to $1.3 million of NOI that get impacted.
Thank you. Our next question comes from the line of Wes Golladay with RBC. Please proceed with your question.
Hi, good morning, guys. And maybe just a follow-up on Chris' question, so for the tenants that have actually deferred the rent and you agreed to it, are you paying the taxes, insurance and all that for now?
For the majority of those that have been approved, we’re recognizing it as rent because we believe that they're going to, you know, bounce back very quickly. So, you know, I mentioned to you like 50% of 30-day deferrals, so a 30-day deferral that pays back in two months, I mean you’re not going to do anything with that, right, that’s – you know that’s – you know you’re very confident about the tenant going in. We’re going to recognize income as, you know, they’ll pay their expenses. So, I think that…
Okay, thanks.
Yes.
Oh! Sorry, go ahead, yes.
No, I was going to say like you know when we look at these deferrals, you know we’re really looking at – are they going to, what’s their probability of surviving, and that’s what I’m saying is, when we’re recognizing and you will see this with other companies, other peers of ours, when they are booking for GAAP purposes, cash rent, so they’ve – in this case they deferred, they are booking it as income. They believe that they’ve got a 75% probability of being repaid back.
So it’s a high threshold. So for us there are a number that we’re not booking because we think there’s some risk, and so when we believe that we’ll start, you’ll start to see lost rent go up for us. You’ll start to see properties cause leakage start going up like we talked about. So, but I don't think it’s – it's a very small portion of the portfolio, it’s actually the point.
Okay got it. And then it looks like you guys have done a deep dive on the Cares Act and the new Fed facility. So, I'm just wondering if you have a view on an estimate of what percentage of your tenants are eligible for either program? Do you know there is some governors on debt-to-EBITDA, can be PE-backed all that, just kind of wondering how your portfolio stands up to benefit?
So, I think for direct benefit auto dealers, auto service, you know the car washes, entertainment, health and fitness, home decor, home furnishings, movie theatres, and obviously restaurants are going to be a direct beneficiary, you know the way this small business protection aid works is, you know it’s 500 employees or less subject to affiliation rules, right, except for, you know when you look at these NAIC small business codes, 72, which is really restaurants and franchisees that designation is 500 per location.
Now, you might have a private equity firm that owns a large hotel or sorry large restaurant chain, they’re probably only going to -- they are going to max out at 10 million no matter what, but the other program that I think is interesting and it’s fairly, I kind of want to get some feedback, I haven't got it yet directly from tenants is that Main Street Lending Program, which is like the $600 billion program that provides loans, recourse up to businesses with 10,000 employees, you know that loan is over $1 million to $25 million kind of loan and there is an expanded loan facility that can go up to, I believe $150 million. So for certain eligible borrowers where their debt to EBITDA is no greater than 6x so, you know look these packages are still rolling out.
So, I have confidence that government is hearing industries and needs, so obviously you’ve got the restaurant industry in there, you’ve got hotels, airlines, you know other industries that are being impacted by the energy industry, autos, it’s just a lot of things happening right now. So, this is all happening real time, but do you think the government is being pretty sensible about this?
Yes. That's it from me and thank you for hosting the call at this time where there’s a lot of unknowns. So, thank you.
No, we appreciate it. Thanks.
Thank you. Our next question comes from the line of Greg McGinniss with Scotiabank. Please proceed with your question.
Hi, good morning. Jackson, I believe you mentioned about half the requests for rent deferrals or for one month deferrals, just curious with your confidence level as you're not going to be having the same conversation with those tenants next month?
Can't guarantee it. You know, I can tell you that because I have been in investment committee on each one of these and you look at the numbers, I would say for the 30-day deferrals, the ones that just went through, I have pretty high confidence in those because they – a lot of those situations the tenant has access to the payment protection programs and a lot of those tenants were actually doing okay and then we were operating. So, I think those would be okay.
The ones where you have real closure are a little bit more challenging and that, you know – companies can't just keep paying expenses if they’re closed forever unless they get government assistance. The other thing about just going back to deferrals and tenants things like that, I did say, what’s important for us is, and this is why I think our tenant rent will go up as the month continues to move forward, you know tenants who can pay rent really should pay rent, so I called tenants that can pay rent, they have their financial wherewithal to do it.
If they don’t do it, it obviously impacts our ability, you know we don't have infinite balance sheet to help tenants that really need our help, but I think some of the other longer-term, and this is one discussion I had with a tenant, I said you really have to think very carefully about trying to cut your month or two months off, but you could clearly pay this rent, because you know the other unintended consequence this could have on a tenant is that they have a lot of assets that are owned through the 1031 market.
Some of those buyers have mortgage debt on these properties or CMBS on these properties and that will trickle down into a perception of high risk that will impact future developers as they build these units, which means that they’ll need more yield and which will mean more higher rent in effect or less proceeds to these tenants.
So, I think tenants, especially the big national and regional ones, you know you’ve seen some kind of one size fit all, kind of notices going, and I won’t mention the names, you know which ones they are, saying, no I’m not being. Well I would tell you that that will not serve them well as it relates to impacts long-term in the 1031 market, it will hurt them. So, and you have seen some people back off and so hopefully tenants are being thoughtful, I'm sure they are about the impacts of landlords because, we landlords we are not the evil empire here, we have to pay rent, interests, we have salaried employees, and different obligations and we have secured mortgages, it all impacts everyone.
Thank you. Ladies and gentlemen, this concludes our question and answer session. I’ll turn the floor back to Mr. Hsieh for any final comments.
Okay. Thank you, operator. Well, to our audience I really appreciate you getting on. You know there are four takeaways here. The first is, you know we got this right now and I'm really thankful for the team I have in place. I think if you’ve heard this, I think our business model, which is owning essential freestanding and retail properties is not a four letter word, we don't manage adjacent occupancy, you know our portfolio is predominantly national, regional, and local multi-unit operators versus mom-and-pop operators, and as we get back to growing rent through acquisitions, you know we will add more dimension to essential services and what we’ve learned out of this pandemic. So, appreciate your attention and be safe and look forward to speaking with you all soon. Take care. Thank you, operator.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.