Essential Properties Realty Trust Inc (EPRT) 2020 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Essential Properties Realty Trust First Quarter 2020 Earnings Conference Call. (Operator Instructions) This conference call is being recorded, and a replay of the call will be available 2 hours after the completion of the call for 2 weeks. The dial-in details for the replay can be found in today's press release. Additionally, there will be an audio webcast available on Essential Properties' website at www.essentialproperties.com, an archive of which will be available for 90 days.

It is now my pleasure to turn the call over to Dan Donlan, Senior Vice President and Head of Capital Markets at Essential Properties. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate you joining us today for Essential Properties' First Quarter 2020 Conference Call. Here with me today, discuss our first quarter results are Pete Mavoides, our President and CEO; Gregg Seibert, our COO; and Anthony Dobkin, our interim CFO.

During this conference call, we will make certain statements that may be considered forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not release revisions to those 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 yesterday's earnings press release.

With that, Pete, please go ahead.

Thank you, Dan, and thank you to everyone who has joined us today for your interest in Essential Properties. First off, we would like to extend our thoughts and prayers to all of those impacted by COVID-19 pandemic and thank all of the frontline workers that are working hard to keep our country safe and healthy.

Starting with the current situation. We wanted to highlight what has changed since we first provided a business update on April 15. As of today, approximately 71% of our portfolio as a percentage of ABR is opened or operating on a limited basis, which compares to 66% as of April 15. April rent collection came in at 61% in comparison to 53% at April 15. While it is still early to tell, we forecast May rent collection to be a few hundred basis points lower and June rent collection to be a few basis points higher than April.

Consistent with past practices, we are committed to providing investors with current and important transparency regarding our portfolio performance, so you should expect to see timely business update as the situation continues to evolve.

Moving on to rent deferrals. Approximately 33% of our April rent was deferred versus 29% as of April 15. With that in mind, we have noticed that many market participants are looking at a level of rent collections versus rent deferrals as an accurate indicator of tenant credit and portfolio health. We believe it is much more an indication of how management has approached the crisis. When tenants requested potential rent deferrals in response to their operations being shut down or severely limited as a result of government-mandated stay-at-home orders, we took a very accommodative approach. As a result, we increased our rent receivable by approximately $16 million, which represents an average accommodation of roughly $180,000 across 88 individual tenants and 320 properties.

We very easily could have firmly exerted our rights under our lease agreements to minimize deferrals and maximize cash collections in April. We felt it was a more prudent business decision, given the extreme nature of the circumstances, to work constructively with our tenants with a longer-term view rather than a focus on short-term rent collections. Specifically, we believe our more accommodative stance has resulted in: one, tenants with a healthier liquidity position that are better able to maintain their workforce and invest in restarting their businesses when stay-at-home orders are lifted; two, stronger, long-term and differentiated relationships with our tenants, which should result in a more constructive relationship going forward; and three, a better position in the event that a tenant needs to file for bankruptcy as these rents now survive with the lease as a post-petition obligation. Again, we did not take the shorter-term view of maximizing a number to create an inflated view of credit worthiness in our portfolio. Instead, we took a longer-term view and elected to invest in our tenants and our relationships during this unprecedented time of distress. We firmly believe this stance will benefit the company in the long run.

In terms of the first quarter, we ended the quarter with investments in 1,050 properties that were 99.5% leased to 212 tenants operating in 16 distinct industries. Our weighted average lease term stood at 14.6 years with just 2% of our ABR expiring prior to 2024. Our same-store portfolio represented approximately 58% of our ABR at quarter end and includes 5 vacant restaurant properties, experienced a 1.8% year-over-year decline in cash rents. This quarter was heavily impacted by the Art Van bankruptcy, which was protracted by the shutdown of nonessential businesses in the State of Michigan. When excluding the impact of Art Van, our same-store cash rent grew nearly 1%.

In terms of Art Van, we have reached an agreement last week with a new operator to lease all 4 of our sites under a new master lease at a recovery of 70% versus prior rents, and we expect rent to commence later in the third quarter. Due to an in-place confidentiality agreement, we cannot comment further.

From a tenant health perspective, our portfolio has a weighted average rent coverage of 2.9x with 73.4% of our ABR having rent coverage ratio of 2x or better.

Looking out over the next 10 years, less than 1% of leases that expire have unit-level rent coverage below 1.5x, which we believe indicates a high likelihood of lease renewal at expiration. Additionally, only 2.9% of our tenants have both an implied credit rating lower than B per Moody's RiskCalc and a unit-level coverage below 1.5x, which represents a very manageable number of tenants and properties with elevated risk characteristics. We anticipate these characteristics and the profitability of our tenants to protect our collateral value and allow our tenants to perform under their lease obligations as our operations begin to normalize.

Turning to investment activity in the quarter. We invested $167 million at a weighted average cash cap rate of 7.1%. Approximately 88% of our first quarter investments were directly originated sale-leasebacks or mortgage loans subject to sale-leaseback transactions, 54% contain master lease provisions and 100% are required to provide us with corporate and unit-level financial reporting on a regular basis.

On the disposition front, in an effort to proactively mitigate risks and exposures, we sold 10 properties at a 7.1% cash cap rate during the quarter, generating $19.6 million in net proceeds.

Looking out to the balance of 2020. While we have deliberately slowed our investment activity, we do plan to invest on a highly selective basis, which will largely be funded through our accretive capital recycling program. Additionally, given the high level of uncertainty in the capital markets, maintaining a conservative stance towards our balance sheet and liquidity remains of paramount importance to us, as Anthony will discuss momentarily.

With that, I'd like to turn the call over to Anthony, who will take you through the balance sheet and the financials for the first quarter. Anthony?

Thank you, Pete, and good morning, everyone. I would like to start by thanking Hillary for years of excellent work with the company and making my transition into the interim CFO role as seamless as possible. As a member of the EPRT Board and Audit Committee, I had worked closely with Hillary in the past. And when I joined EPRT as interim CFO, I was pleased to confirm that she had built an excellent accounting and finance organization. Lastly, before I move on to the financials, I would like to say that as a Board member and a shareholder, I have been extremely impressed by the entire EPRT organization and how they have effectively managed through this unprecedented crisis.

Now onto the first quarter. Starting with the balance sheet. We ended the quarter with low leverage and significant liquidity and continued to reduce secured debt and grow our unencumbered asset pool. At quarter end, our total undepreciated asset base was $2.4 billion, and we had $871 million of debt, implying 36.2% debt-to-gross assets. Gross unencumbered investments stood at $1.8 billion, representing 82% of total gross investments. Secured debt was 7.3% of gross assets, down from 11.6% at year-end.

Net debt to annualized adjusted EBITDAre, which is our preferred leverage metric, was 4.6x as of March 31. Our total liquidity, which consisted of $214 million of cash, $335 million of availability under our line of credit, was $549 million as of quarter end, and we have no debt maturing prior to 2024. This approximate $550 million of liquidity is a key differentiator for us given our size as it represents 26% of gross investments is 3.4x our annualized base rent and is almost 4x our annualized cash fixed costs. Leverage and liquidity have not been this important of a market factor since the financial crisis, and I cannot emphasize our balance sheet strength enough.

During the quarter, we raised approximately $198 million of net equity at a weighted average price of $25.19, drew the remaining $180 million available under our term loan facility, retired $62 million of our secured ABS notes without penalty and ended the quarter with $65 million outstanding on our line of credit. As a result, due to the uncertain capital markets environment, we were intentionally carrying a larger-than-usual cash balance at quarter end. While we may choose to carry a lower cash balance in the second quarter, you should expect us to continue to manage our balance sheet in a very conservative manner until the environment improves so that we are primed to capitalize on future investment opportunities.

Turning to the P&L. AFFO was $27 million during the quarter or $0.29 per share, representing a 7% increase over the first quarter of 2019. We had several nonrecurring expenses during the quarter, all of which are detailed on Page 3 of our supplemental.

G&A during the quarter was higher than usual, both on a reported basis and after backing out the nonrecurring impact of employee severance expenses. This was largely due to elevated costs associated with the Sarbanes-Oxley 404(b) audit, along with front-loading of some employee-related expenses. And we expect that recurring G&A will be lower on a notional basis for the remaining 3 quarters of the year.

Lastly, given the economic uncertainty caused by the COVID-19 pandemic, we're withdrawing our 2020 guidance. As Pete mentioned, we will continue to provide the market with portfolio performance updates on a timely basis.

With that, I'll turn the call over to our Chief Operating Officer, Gregg Seibert.

Thanks, Anthony. I want to start with the impact of COVID-19 on our portfolio, which we have summarized on Page 15 of our supplemental. As of last week, 48% of our portfolio ABR was open, 23% was opened on a limited operating basis and 29% was closed. In terms of rent collection, 61% of our April rent was paid, 33% was deferred and 6% was unresolved. With over 200 tenants in our portfolio, I would like to thank both our credit and asset management teams for their diligent efforts and coming to terms with the vast majority of our tenant base in such a short period of time.

For greater context, we have agreed to defer April rent, either in full or part, for 88 tenants across 320 properties. These deferrals total $16.1 million in rent or 10% of our annual contractual cash rent. The average deferral period is 3.1 months with an average payback period of 12.7 months.

Breaking down the unresolved portion of April rent, AMC Theaters and Art Van furniture represent 73% of this cohort. And as Pete mentioned, we reached an agreement last week to re-let Art Van. The remaining 27% of unresolved rent is spread out across 9 different restaurant operators and 26 properties with average rent per site of $106,000. Coupled with the bite-size nature of these properties, we see minimal rent leakage on a re-let, should we not come to terms with the current tenants.

Moving on to investments. During the first quarter, we invested $167 million into 32 transactions and 63 properties at a weighted average cash cap rate of 7.1%. These investments were made within 9 different industries with early childhood education, quick service restaurants, medical/dental and auto service representing 75% of our investment activity in the quarter. The weighted average lease term of these properties was 16.1 years. The weighted average annual rent escalation was 1.4%. The weighted average unit-level coverage was 2.7. And our average unit investment per property was $2.7 million.

Consistent with our investment strategy, approximately 88% of our first quarter investments were originated through direct sale-leasebacks and mortgage loans subject to a sale-leaseback transaction, which are subject to our lease form with ongoing financial reporting requirements.

From an industry perspective, quick service restaurants remain our largest industry at 14.3% of ABR, followed by early childhood education at 13.3%, carwashes at 11.8%, medical/dental at 10.9% and convenience stores at 10.6%. From a tenant concentration perspective, no tenant represented more than 3.2% of our ABR at quarter end, with our top 10 representing 23.1% of ABR, which was down 30 basis points quarter-over-quarter.

Looking at the portfolio more broadly, approximately 94.4% of our ABR is derived from tenants that operate service-oriented and experience-based businesses. While several businesses within these industries have been severely impacted from COVID-19, we continue to believe tenants in these industries and, more importantly, the real estate occupied by these tenants are recession-resistant and better insulated from e-commerce pressures, which have been accelerated by the current situation.

Moving on to asset management. Our portfolio remains healthy with a weighted average rent coverage of 2.9x and 73.4% of our ABR having a rent coverage ratio of 2x or better. In addition, with 98% of our tenants required to report unit-level financials to us, we have near real time transparency into the health of our tenancy, which is an important component to managing risk in our portfolio.

In terms of dispositions this quarter, we sold 10 properties in different industries for $19.6 million net of transaction costs. Despite having 0.7x unit-level coverage, we achieved a 7.1% weighted average cash cap rate, which equated to a 3.2% realized gain versus our allocated purchase price.

With that, I will turn it back to Pete for his concluding remarks.

Thanks, Gregg. This past month has certainly been a trying time for many, if not all of us. I believe it is during times like these that management teams, underwriting and investment strategies are tested. I would like to thank all of our team at Essential Properties for readily adapting to the challenges and constructively working with our tenants to manage through this difficult time. I'm confident that over time, the strength of our investment strategy and durability of our portfolio will differentiate Essential Properties going forward.

With that, operator, please open the call for questions.

(Operator Instructions) And we'll take our first question from Nate Crossett with Berenberg.

I appreciate the comments on Art Van. I wanted to touch on AMC. I mean there's some news out there that Amazon may be interested. I'm not expecting you to comment on that, but just how should we think about your AMC here? Maybe you can characterize your current discussions with them. How would you decide the strength of the locations that you have?

Sure. As we said, AMC, as we sit today, we have 5 properties, less than 3% of our ABR. They are in our unresolved bucket. So obviously, that's an ongoing situation and negotiations, so I'd be reluctant to comment on it. I would say, in general, we're really comfortable with the theaters that we own. And we were very selective in the theaters that we purchased over the last 3, 4 years. And as with an Art Van situation, we would expect that if there is a bankruptcy filing, our assets would be assets that the company would choose to restructure around and we would emerge relatively intact. And so we have confidence on underwriting, confidence in our asset selection, and that pertains for the whole portfolio and specific for AMC.

Okay. Helpful. For the rent that's currently under deferral, is that just a straight deferral? Or are you guys getting any concessions in terms of extended lease term or interest?

Yes. Listen, with 88 individual deferral terms, deferral agreements, there's a wide variety. In some instances, we're getting interest. In some instances, we're getting extended terms or bumps. But I would say, in general, we try to keep it plain vanilla. And to the extent that we deferred a quarter and we're getting it back in a reasonable time frame, there was no offsetting concessions. But there's a whole wide range of synergies.

And next we'll move to Greg McGinniss with Scotiabank.

Just to follow up on that deferral question. Are taxes and insurance part of the deferred costs? Or how are you guys treating that with your -- with the tenants?

Yes. The treatment of taxes and insurance does not change. It's per the lease, it's a tenant obligation. And certainly, part of the deferral discussion was ensuring that our tenants remained current on the -- all their lease obligations with the exception of base rent.

Okay. And then, Pete, you mentioned potentially remaining active in the acquisitions market contingent on disposition funding. Just curious what your ability is to sell assets right now or off-load vacant assets in this market. And to add to that, how is holding potentially more vacant assets going to be impacting property cost leakage expectations this year?

Yes. Listen, we talk a lot about our fungibility and our granularity. And if you think about asset liquidity, it's directly correlated to the size of the asset and the purchase price inversely correlated. So with 2 point -- $2 million invested in each asset, we have good confidence that there's good liquidity for us to sell those properties. And if you look at our historical disposition activity in moving out risky assets, we've been very active in that regard. And so in my commentary, I said -- spoke about the important part of our investment strategy proving out. And I think the liquidity in properties is going to be part of that. And hand to hand in that is managing carry costs of those vacant properties. Since inception, we've largely operated at 100% occupancy. This quarter, we dipped down to 99.5%. But this good liquidity, if you think, and not to go on too long, if you think about our unresolved bucket and the color that Gregg gave you there, 26 properties at 106,000 site which is imminently manageable and granular.

And next, we'll move to Christy McElroy with Citigroup.

In regard to the deferrals, the point about post-petition obligation is well-taken. Of the $16 million of rent you've deferred thus far, we know that -- it looks like $5 million of that was April rent. How much of the remaining $11 million is associated with May and June? And then do you expect to still accrue all of these rents for GAAP and FFO?

Yes. I'll let Anthony tackle the accrual question. But we gave you the average deferral of 3.1 months, and so that'll give you the sense that the vast majority of that remaining $11 million is in April -- in May and June. In some instances, we've extended out beyond that, and that really was driven by a view of that specific industry and that specific tenant and their ability to kind of ramp operations back up, right? So really, we tried to grant deferrals into specific needs around the operating considerations of that business. In terms of the revenue recognition, Anthony, want to add to that?

Yes. Sure. As long as we believe that the -- that it is probable that we're going to receive those rents, then we are going to book them as revenues. So yes.

Okay. And then just with the 2Q collection rate as low as it's likely to be, and you gave April and said that May would be lower and June higher, how are you and the Board thinking about the dividend payout for this quarter? I mean we've seen many of the other REITs and thinking about the strip center REITs with collections that are at this level suspend the payout temporarily. How are you thinking about the dividend?

Well, we're not declaring a dividend on this call. First of all, our Board usually does that toward the end of the quarter, and we're going to do that again this quarter. So we have a good amount of time to -- it's a rapidly evolving landscape, and we'll know a lot more by then. So with that said, we do have a lot of liquidity. And our dividend is important to our shareholders. As I mentioned in our prepared remarks, I want to clarify something. Our liquidity is over 4x greater than our annualized cash fixed costs, including dividend payments and principal amortization. So we're sitting in a really good liquidity position and do have ample liquidity to be patient.

Okay. Got it. So yes, I wasn't expecting you to declare, just wanted to get a sense for some of the factors around that. But it sounds like you're comfortable with the liquidity position regardless of the collection.

We are.

And next, we'll move to Sheila McGrath with Evercore.

Pete, could you remind us what percent of tenants are master leased than unit-level economics and how that is an advantage for you when you're having these rental deferral discussions? Just want to understand that.

Sure, Sheila. Thanks. So 60% of our portfolio is fixed to master leases. And that having the master lease really wraps the location performance with others and makes that a singular negotiation. In the current situation, when most of our tenants are operating regional and most of them are 100% shut down, it doesn't help out a lot. But clearly, when operations are normalized and performance rebounds, having that kind of collective protection of a master lease is very important to us.

Okay. Great. And one other question. If you could just give us some insights on what percent of your tenants might have been eligible for the various government assistant programs and how that playing into your tenants' health?

Yes. So as we disclosed in our April 15 presentation, we estimated about 53% of our tenants were eligible for the PPP program. Obviously, that's not the only government program. There's other government programs out there, but we've seen very positive impacts of that program. Specific tenants where we had deferrals in place came back and ripped the deferral up. Tenants who had deferral requests withdrew those requests. And we saw it really a lot with the first round, and we continue to see benefits of that. So we're happy to report that that government program has been very constructive, both to our tenant base and to the overall economy in general.

Okay. And last quick one, actually. Anthony seems to be doing a great job, but I just wondered if you could give us an update on the CFO search. That must be difficult considering everybody's locked at home.

Yes. Listen, obviously, Anthony is our interim CFO, and that's broadly acknowledged. And we are conducting a search. We retained a search firm that has reached out and surfaced a great roster of potential candidates, and we're kind of running through that process now. And so a lot of -- in any search, a lot of the legwork is done upfront and on the phone. And so we're in a good spot with Anthony kind of manning the shop to kind of take the time and get to the right spot.

And next, we'll move to Sam Choe with Crédit Suisse.

Most of my questions have been answered. But just going back to your comment about the May rent and June rent collections. Just wanted to run through like how that expectation is kind of working out. Is it like a function of what you're seeing in terms of the state reopenings and the conversations you had with your tenants? Just wanted more color there.

Yes. So I mean, listen, with over 30% deferrals that span the entire quarter, a lot of the guys that are facing the greatest stress are kind of put to bed. We have a very manageable tenant roster with 200-plus tenants. And we look at each one and have had ongoing dialogue with every tenant, and so have an expectation about how they're operating, what their capitalization is and their ability to pay their obligations in both May and June. As we sit here on the 10th of the month, we're sitting at over 57% of May rents paid, which is a long way towards our expectation, and so we feel good about that. If you recall, in April, on the 15th, we were sitting about 53%. So we think we have good visibility and a good handle on who's going to pay us and who's been deferred and kind of where our collection shake out for the quarter.

And next, we'll move to Brian Hawthorne with RBC Capital.

Is EPRT more likely to focus on re-leasing vacant assets or selling them?

Brian, we're equally focused on both, trying to find the best outcome for a specific property regardless. We just want to maximize the economic return of that asset. And if it involves finding a new tenant, we'll take that path. And if it involves selling it to a -- selling it, we'll take that path.

In general, one of the benefits of operating in 16 distinct industries is we have a good roster of operators in all our industries. And so to the extent that an operator is unable to perform in a specific site, that gives us a dozen other guys that we can call as a first kind course of action to get them in those sites. And so if the site works in that current use, we're able to find and retenant it relatively quickly. If it needs to be repurposed, that tends to be a longer, more protracted process and more likely to result in a sale.

Okay. So then we shouldn't expect to see you giving more kind of improvements on your vacant asset leases?

I mean, listen, if we have vacant properties and it takes TI dollars to get a tenant in there, then that's what we're going to do. I would say we don't have a ton of vacants, and we have ample capital on our balance sheet to invest in our assets should we choose to do so and determine that there's a justifiable economic return for that.

Our next question comes from Ki Bin Kim with SunTrust.

So my question is regarding deferrals. And obviously, a lot of companies are making deferrals for tenants. But I'm curious, if the tenants doesn't pay you back in that 1-year time frame on average, is there a significant penalty that the tenant would be assigned? Because my kind of larger question and concern is that all these companies, including yours, are making deferrals for a year, but that's also like a maybe that you'll get paid back, right? So I'm just curious if there's a financial penalty that actually would make a tenant pay you back in that time period.

Yes. And listen, I think you're thinking about it wrong, right? It's not about the deferred amount. That's $16 million, right? That's not a material amount to this balance sheet. And so it's really when the tenant opens and is able to pay rent on an ongoing basis from a stabilized operations, whether that's base rent or base rent plus deferral, it's more -- the base rent is really what you're focused on. And I'd go back to our nearly 3x unit-level coverage post -- pre crisis. And you can make assumption about how people will respond and see that we'll still be in a healthy spot from a coverage perspective.

Specifically, in terms of deferral, that obligation and the proration of that obligation as additional rent is crossed to the lease. And so we own this real estate. We believe we have good real estate assets that are valuable to the tenant. And if they don't pay us rent, we take the property back and put in another tenant if that's the best course of action. And that rent now includes a deferred amount that is coming back to us. But it's really the stabilized cash flow that people should be focused on, which is the ability of these tenants to pay rent on a recurring basis.

I don't want to belabor the point, but is there a penalty if they don't pay it back within a year? Because I could imagine that it's being pushed back further.

Yes. It's a lease default and property eviction. That's the penalty. We take the properties back and the tenant can no longer operate in that property.

Okay. Well, so 71% of your tenants are open or on a limited basis. Just over the past few weeks, as we've seen some locations open up, have you guys tracked or do you have a sense of the type of improvement in traffic or business overall your tenants are seeing over the past few weeks?

Listen, we've been focused these last 30 days on getting these 88-plus deferrals in place. We have anecdotal information that spans our entire tenant base. And some guys are doing great. Some guys are doing less than that. We hear our restaurant operators in Kansas City, where they're open, are experiencing no foot traffic. Conversely, we hear restaurants open in Dallas are experiencing massive foot traffic. So the information really, though, Ki Bin, is it's too anecdotal to draw any real conclusions from. But it's slowly evolving. One of the reasons you see our deferrals span the entire quarter is that we wanted to give our tenants time to come out and get open, recognizing that June rent is really earned in May. And so it's early. Our states are opening up. Our industries are opening up. You can look to our industries and get a sense of what's opening sooner rather than later. But it's really -- it's too anecdotal to draw material conclusions from.

Okay. And just a quick one here. The retail segment, in your supplemental, you show a negative 45% change in contractual rent. Is that Art Van? Just curious what else is in that bucket?

Yes, that's all Art Van.

And next we'll go to Collin Mings with Raymond James.

I just wanted to go back to your comments earlier and one of the questions earlier about still planning to invest this year, again, largely through capital recycling. Pete, just given the high probability that social distancing policies are likely to last well beyond kind of widespread business closures, can you maybe just expand on how you're thinking about sectors of focus moving forward? And then to your point about investment strategies being tested in times like this, anything you want to adjust moving forward? And then have you closed on anything specifically here in 2Q so far?

Three questions, Collin. In terms of 2Q, you'll see as -- when we file our Q later in the day, our subsequent event activity, we deployed roughly $17 million into investments, sold about $5 million, I believe. And that was largely stuff that -- construction investments that we had are pre-wired. So you can see -- get a good sense of what's going on there.

In terms of our investment strategy, we firmly believe our investment strategy is where we want to be from a risk returns perspective. We don't see any material changes in the sectors or industries that we're investing in. Things like casual dining, furniture, health and fitness, these are all sectors that we have been lightening up on since coming public. And I think those are the sectors likely to be impacted going forward, and you should expect us to continue to lighten up there. I would throw movie theaters in that. But our focus on owning service and experience-based real estate that is granular and bite-sized in nature, we still think is the best place to be, provides the best risk-adjusted returns, coupled with the best asset-level liquidity. So you shouldn't expect material changes in our investment strategy as a result of this kind of onetime event.

Got it. And then just one point, I'm not sure if this was directly addressed or not, but just as it relates to the tenants not paying or tenants that you've agreed to deferrals with. Is there any notable trends as you review it by unit-level coverage or credit quality? Or is there just solely focus around sector exposure to the pandemic?

Yes. It's more how is that business specifically impacted by the pandemic and -- than anything else. There's not a correlation to corporate credit. There's not a correlation to tenant size. Some of our biggest tenants have had the most aggressive deferral requests. And so it's just really the underlying operating fundamentals of that sector.

And maybe to that point, are you having any conversations that you feel like they're maybe just opportunistic deferrals? And maybe just any thoughts there?

Yes. Not really, Collin. I mean if you think about our unresolved bucket of 6% and then you're able to identify 73% of that in Art Van and AMC, the rest is pretty granular. I think some of that could be opportunistic and really be the reason we haven't come to agreement. But it's a small amount. I would say more times than not, we think, got to a reasonable spot and were accommodative, and we didn't have a ton of people being opportunistic. I would also add, from our perspective, as a landlord, we try not to be opportunistic and extract undue economic terms on our side.

And next, we'll move to John Massocca with Ladenburg Thalmann.

So I know you can't comment too much on Art Van. But I guess is there any potential that you could collect some kind of post-petition rents on those properties kind of before the new leases come into effect in 3Q? Or has that all kind of been essentially waived as part of these new lease agreements?

I think that's accurate that we have no expectation to get any capital out of the Art Van estate.

Okay. And then building kind of on some earlier commentary on AMC, another net lease REIT decided to move this tenant to a cash accounting basis. Is that something you guys considered? And I guess maybe what would you need to see? What would be kind of factors that would determine whether you guys would need to do that as well, if you haven't already?

Yes. I mean to date, we have not accounted on a cash basis. But clearly, they're still in our unresolved bucket. And I think our determination on that will largely end up depending on where we end up on that negotiation. Clearly, they're facing some challenges. And their ability to pay rent has been compromised severely, and that will weigh in as we look at that.

Okay. And then with regards to that unresolved bucket, I mean how do you expect that to trend into May? Should that remain basically kind of flat with regards to kind of what you guys reported for April?

Yes. I don't see that bucket growing largely because most of the challenging issues have been deferred. If anything, I would expect that to kind of work its way down. Clearly, with Art Van in there, that's going to go down a chunk from that. And I would expect, over time, the other operators will come to the table and we'll get to a reasonable spot. In general, to the earlier questions, as people -- and even if you think about it in the context of our May collections versus April, it feels like the tenants are feeling more optimistic about their businesses, right? On April 15, we were at 53%. Here on May 11, we're at 57%. And people just have a better sense of the end and their ability to manage through it. And so as people get a better sense on the breadth and the width of this the situation, they're getting more comfortable in paying their rents and honoring their obligations.

(Operator Instructions) We'll move next to Ki Bin Kim with SunTrust.

A couple of quick ones here. Are you considering making any loans to tenants?

We have not to date. And if it makes sense and it's economic, we would look at it. Clearly, we've made -- with the exception of some mortgage loans. And so I don't want to say no, but it have to be economic and make sense for us.

Okay. And I think you acquired an early childhood education tenant in the first quarter. Noticed that Cadence went up here at top tenants. I'm assuming that's the acquisition. Just curious if they were current on their rent.

We try not to speak specifically on individual tenants. But I believe we have a deferral agreement in place with Cadence.

(Operator Instructions) And I'm showing no questions from the phone lines at this time, so I'll turn the call back over to management for closing remarks.

Great. Thank you. And thank you, everyone, for your time today. I would reiterate, this is certainly an unprecedented challenged times. It's important not to take short-term measure of companies and their assets. And really the -- I think the proof is really, as this thing unfolds and the portfolios rebound and people continue to prove their ability to operate and execute, I'm confident this team will be able to do that. And again, thank you for your interest in this company. Thank you, operator.

And that does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time, and have a great day.