NNN REIT Inc (NNN) 2020 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the National Retail Properties First Quarter 2020 Operating Results Conference Call.

(Operator Instructions) At this time, it is my pleasure to turn the floor over to your host, Mr. Jay Whitehurst, President and CEO.

Sir, the floor is yours.

Thanks, Jess.

Good morning and welcome to the National Retail Properties' First Quarter 2020 Earnings Call.

Joining me on this call is our Chief Financial Officer, Kevin Habicht.

After some opening remarks, I'll turn the call over to Kevin for more details on our results.

First, let me say that our hearts go out to all the families affected by the COVID-19 coronavirus and the related economic dislocation across the country.

We also want to offer our profound thanks to the medical professionals and first responders who are putting themselves in harm's way every day in order to keep the rest of us safe and healthy.

With that sobering perspective in mind, today's first quarter earnings release reflected another steady consistent quarter for National Retail Properties with high occupancy, continued transaction activity and a very well-timed issuance of 10-year and 30-year debt that raised $700 million.

All of that steady execution occurred largely prior to the unprecedented spread of the coronavirus across the United States and the related global financial market instability that exploded in March.

Based on the current uncertainty about the depth and duration of the economic turmoil that almost all companies are enduring at the moment, we've withdrawn our guidance for 2020 results.

We hope to be able to provide updated guidance later in the year, but for now, there's simply too much uncertainty to project how 2020 will play out.

Before discussing our quarterly performance, let me highlight some of the attributes of our long-term strategy that have positioned National Retail Properties to weather the current disruption.

First, our balance sheet remains in excellent shape.

We ended the first quarter with $217 million cash on hand and a 0 balance drawn on our $900 million line of credit.

Our next debt maturity is not until 2023, and we've taken a pause in our acquisitions in order to marshal our cash in this uncertain moment.

Second, our portfolio consists primarily of large, well-capitalized tenants.

Our largest tenants operate over 1,000 units each on average and are typically the leaders in their respective lines of trade.

These are large regional and national companies that are generally better positioned than smaller operators to withstand a major disruption in their business, such as occurring at the moment.

Third, our well-located real estate parcels remain integral to our tenants' business success once this disruption is passed.

As we've often said, National Retail Properties is, at its heart, a real estate company.

Our properties were highly occupied before all this started, and we're confident that those same well-located properties will continue to be in high demand after all this passes.

And lastly, we've been here before.

Our entire management team was with the company during the great recession in 2008, and most of us have been through a number of other major downturns in the past.

We're a seasoned real estate company with in-house expertise to handle all the issues that might arise.

Turning now to our first quarter 2020 results.

Our portfolio of 3,125 single-tenant retail properties ended the quarter with an occupancy rate of 98.8%, which is consistent with our long-term average occupancy.

We do expect our occupancy rate to fall in the second quarter, but we're working with many of our tenants to structure rent deferral programs that we hope will enable them to get through this period of business interruption and get their businesses back in full operation.

We acquired 21 new properties in the first quarter, investing slightly over $67 million at an initial cash cap rate of 6.9%.

As usual, about 2/3 of our investments were with our relationship tenants with whom we do recurring off-market business.

Our acquisition volume was muted compared to prior quarters.

We elected to postpone or cancel some acquisitions scheduled for late in the quarter as we saw the economic downturn beginning to grow.

We also sold 14 properties during the quarter generating proceeds of just over $36 million at a cash cap rate of 4.7%.

Once again, our ability to raise capital for accretive recycling highlights a strategic advantage of National Retail Properties over many other REITs.

Due to the sudden impact of the COVID-19 pandemic on retail businesses and the economy beginning in mid-March, we are reporting today that we received approximately 52% of our rents due for the month of April.

We also entered into rent deferral agreements or are currently negotiating such agreements with tenants representing approximately 37% of our annualized base rent.

While we are dealing with deferrals on an individual case-by-case basis, generally, our rent deferral discussions involve deferring 1 to 3 months of second quarter base rent with the deferred rent to be repaid commencing in late 2020 through late 2021.

Generally, the tenants remain responsible for paying the triple-net charges on a current basis.

We are not discussing or agreeing to rent forgiveness with tenants nor are we advancing funds to tenants to be repaid as rent.

As to the balance of the tenants, which did not pay or agree to deferral arrangements, we are pursuing our legal remedies.

Many of those cases involve tenants that we felt could pay some or all of their April rent, but have so far chosen not to do so, or tenants that insisted on some immediate rent forgiveness, which, as I said, was not the way we wanted to approach this fast-moving and fluid situation.

We remain in dialogue with many of these tenants, and are hopeful about our ability to reach some agreement for payment with many of these tenants over time.

Consistent with our long-term practice of reporting results only quarterly, we do not anticipate reporting monthly rent collections for May or June in advance of our second quarter earnings release.

Lastly, before turning the call over to Kevin, I want to remind you all that we declared our regular quarterly common stock dividend in April.

Our Board will continue to review our dividend policy as we work through the current economic turmoil, and by no means is our dividend untouchable.

We do believe, however, that our impressive streak of consistently increasing the dividend for 30 consecutive years is a powerful indicator of the value of our consistent, conservative balance sheet philosophy and business model.

So with the first quarter behind us, you see National Retail Properties conserving its capital, working with its tenants to address the reality of their current business' disruption and planning ahead for the new normal.

Let me now turn the call over to Kevin for more details on the first quarter, our strong liquidity position and our thoughts around the balance of 2020.

Thank you, Jay.

And as usual, I'll start with my usual customary statement that we may make certain statements that may be considered to be forward-looking statements under federal securities laws.

The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not release revisions to these forward-looking statements to reflect changes after the statements were made.

Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in this morning's press release.

With that, headlines from this morning's press release report quarterly core FFO results of $0.70 per share for the first quarter of 2020, and that's 4.5% higher than prior year results and is consistent with our projections and guidance.

Just a couple of comments about the first quarter, which I'm guessing few are focused on at this point.

But our AFFO dividend payout ratio for the quarter was 72.4%, and that was consistent with full year 2019 levels.

Occupancy was 98.8% at quarter end.

G&A expense was 5.8% of revenues for the first quarter, and that's flat with the prior fourth quarter.

And we ended the quarter with $677.5 million of annual base rent in place for all leases as of March 31, 2020.

As Jay mentioned, on February 18, we issued $700 million of unsecured debt, $400 million with a 10-year maturity and a 2.5% coupon plus $300 million with a 30-year maturity and a 3.1% coupon.

We used about half of those proceeds to redeem our $325 million of 3.8% 2022 notes due in March -- we paid those off in March.

They weren't due till 2022.

I will note that first quarter interest expense includes $2.3 million of accelerated note discount and note cost amortization as a result of that early '22 note redemption, absent this incremental noncash expense that would have allowed us to report $0.71 of core FFO per share, representing 6% growth over prior year results.

But more importantly, though, this transaction enhanced our liquidity just as the flu pandemic was beginning to unfold in the United States and pushed down our next debt maturity to 2023.

We ended the quarter with $217 million of cash on the balance sheet, and we have no amounts outstanding on our $900 million bank line.

These transactions pushed our weighted average debt maturity to 11.2 years with a weighted average interest rate of 3.7%.

So we're in a good liquidity position with very few capital obligations during the next 3 years.

Leverage metrics remain very strong.

Debt to gross book assets was 35.3% that was flat with year-end.

Net debt-to-EBITDA was 4.9x at March 31.

Interest coverage was 4.6x and fixed charge coverage was 4.1x for the first quarter.

If you excluded the $2.3 million of note discount and note cost amortization, those 2 metrics would have been 5.0x and 4.3x, respectively, for interest coverage and fixed charge.

Only 5 of our 3,125 properties are encumbered by mortgages totaling $12 million.

As Jay mentioned, we also announced this morning, we are withdrawing our 2020 earnings guidance in light of the uncertainty produced by the virus pandemic and the mandated store closures and associated economic and capital market turmoil.

Until we get a better read on the duration of the shutdown, the shape of the recovery and what the new normal might look like, we're not able to reasonably predict how things will play out.

While we're dealing with these deferrals on an individual tenant basis, generally, as Jay mentioned, they involve 1 to 3 months of rent deferral with that deferred rent to be repaid over a period of months from late 2020 to late '21.

So we will be continuing to work with a number of our tenants to find a path forward for them to pay the rent owed to us.

Our approach has been to work with the tenants and allow rent deferrals to help them get to the other side of the shutdown and then get repaid in the not-too-distant future.

So much depends on the duration of the shutdown and the shape of the subsequent recovery.

This level of uncertainty does not make it clear if we may have done too much or too little with our rent deferrals, but we're hoping we struck a reasonable balance.

As we work through what undoubtedly will be a difficult 2020 for the global economy, we continue to work to give NNN the best opportunity to succeed in the coming years.

And Jess, with that, we will open it up to any questions.

(Operator Instructions) We'll move first to Collin Mings at Raymond James.

First question for me.

Just you highlighted the dividend track record, but also acknowledged it wasn't untouchable.

Can you just elaborate on how you plan to balance your dividend track record and potentially increasing leverage on the margin for a few quarters versus aligning dividends with cash flow generation in a given quarter?

Yes.

I guess the way I'd respond to that is our dividend policy is not set on the basis of 1 or 2 quarters, but rather on what we think is reasonably sustainable over the longer term.

So one of the reasons you want to have a 72% payout ratio like we did going into this pandemic is to provide some cushion and ability to support the dividend as we go through challenging periods like 2008 and '09 and like we're going through today.

So we were comfortable declaring our regular quarterly dividend a couple of weeks ago, and we'll evaluate things as we go.

Well, clearly, as Jay mentioned, we have a degree of pride in our 30-year consecutive years of increasing the dividend, it's obviously not sacrosanct.

The challenge with the current downturn is that it's driven by a health care that's more difficult to handicap how it will play out.

But hopefully, we're going to gain some visibility in the coming months as to the timing and shape of that recovery.

And that will help inform our thoughts about the appropriate dividend policy in the coming quarters.

But I guess to reiterate where I started, we're not going to decide our dividend policy based on 1 or 2 quarters of results.

And just to highlight again, Collin, we are in a very, very strong liquidity position that helped to make that decision a lot easier recently.

Got it.

Helpful color there.

And Jay, I recognize you aren't going to provide monthly updates, but just any initial color you can provide on collections or anticipated collections here in May relative to April based on what you've received or heard from tenants?

And are there many tenants that maybe paid in April that have indicated they don't plan to pay in May?

Well, Collin, there's no real color I can give you on May.

The -- I think it's -- if you think about it, though, to the extent you've agreed to rent deferrals in April and May, then you would expect that your -- the May rent will be deferred.

One thing to follow-up on your question, though, just to talk for a moment about our approach to all this.

I think I mentioned it a little bit in my comments, and Kevin mentioned it a little bit in his.

We're just taking a very long-term view toward our tenant relationships.

These are our customers.

And in many, many cases, they've been our customers for a long time.

And so we want to be firm, but fair with our long-term customers, but we are not looking to punch anybody in the nose in the middle of this unexpected unforeseen disruption.

So we're taking a very collaborative approach to working with our tenants through all this.

Jay, just to that point, as you've negotiated these deferrals, have you agreed to -- or have your tenants agreed to any sort of additional thing in exchange for you granting them the deferral?

Or is it simply just pushing off the payments for now?

Generally, Collin, what we wanted to do at this moment, while things are moving so fast, is to just deal simply with short-term rent deferrals that, as Kevin talked about, get paid back relatively soon and relatively fast.

And so we did not look at this initial situation as something that we wanted to, again, try to push more on to our tenants.

We just wanted to work with them at the moment and deal with these short-term deferrals.

We'll go next to Christy McElroy at Citigroup.

It looks like the straight-line rents were lower than the normal pace in the first quarter.

Did you write-off any straight-line rents receivable associated with converting any leases to cash basis accounting.

And just in the context of the current environment and trends towards nonpayment of rent, how do you think about the potential for needing to convert -- to convert to cash basis converting more in the second quarter?

Yes.

No, there wasn't any notable write-off of accrued rent in the first quarter.

Obviously, to the -- given we have meaningful amount of deferrals in process for second quarter, straight line rents, obviously, will be materially higher going forward.

Sorry, what was the last part of that question?

Well, I guess, just how you're thinking about the potential for needing to convert more leases to cash basis.

So as we think about the second quarter and the -- you had 48% nonpayment of rents.

How are you thinking about the potential for uncollectibility probability on (inaudible)

Right.

Right.

Yes.

Yes.

No.

Yes.

To your point, yes, at the moment, we don't think that it will become a material amount.

But that's something we're just going to have to evaluate as we go along the collectibility of these deferred amounts.

And if, in fact, we get to a point where, as you know, if it's not probable, then we may need to go to a cash basis kind of recognition.

But right now, we're presuming that the vast majority of these deferrals will get approved and paid in accordance with the deferral plan.

Okay.

And then just of the 48% that didn't pay rent in April, do you have a sense for how many also did not pay their operating expenses, like utilities and property taxes?

So for us, in trying to think about the potential cash burn as rents are not paid and some are deferred, how do we underwrite the operating expenses that you may have to cover that have not historically run through your P&L?

And how are you tracking that nonpayment of expenses?

Yes.

No, we -- the vast majority of those are still paying for the expenses generally, and our deferral agreements, we're requiring that those expenses get paid.

We're looking to only defer base rent.

And just one metric that we use internally for thinking about that if, and that's only if a tenant is not paying rent, we tend to assume that the property level expenses are going to equate to about 15% of the rent.

So let's say, rent was $1 million a year, there's probably $150,000 of property expenses that might go along with that.

So that's one way to estimate if and when that ever comes into play, that's the way we internally budget or project that.

Okay.

And that's helpful.

And then just to lastly follow-up on Collin's question, understanding that you're taking a balanced approach to the deferral negotiations and recognizing you're taking a long-term view, you've got tenant relationships, and you need to be collaborative.

Can you kind of break out that 48%?

I know you've had 37% of your rent requesting deferrals.

But also, as you pointed out, a lot of these are National tenants that can pay rent, right?

So how would you break out that 48% between what you're actually having negotiations on deferrals versus those that you're playing more harder ball, right, in terms of ultimately wanting to collect those rents, and you talked about pursuing legal remedies?

Yes.

Christy, I guess the way to -- we haven't quantified the answer to your question.

But I think that if you look at the tenants where we -- that didn't pay and we don't have deferral arrangements with, I feel like the -- anecdotally, I think the vast majority of that are tenants that we think could pay and have so far felt like they weren't willing to.

And so we're taking the steps we need to take, but we're still in dialogue with those folks.

And -- optimistic may be too strong of a word at the moment, but certainly hopeful, probably optimistic that a lot of that will get turned into a payment at some point.

We'll go next to Vikram Malhotra at Morgan Stanley.

Obviously, very challenging time for everyone.

Maybe just to expand or maybe a comment first.

I know you mentioned you won't be providing May or June, but sort of in this environment, given kind of the historical stability of the triple-net model and the triple-net company, it'd be -- I just encourage you, as it'd be really good to get updates on May and June either way.

So to the extent you can give any color, that would be helpful over the next few months.

Just on the deferrals, you talked about having said like, pushed them out a couple of months.

But I'm just wondering on the tenants that have not paid and you're discussing, would you be still willing to provide deferrals in exchange per se term or something else, given that if they've not paid, it doesn't seem like they will suddenly come around in the near-term and pay?

Vikram, each discussion with each tenant is on a case-by-case basis.

And so yes, we would -- we may well enter into those kind of discussions about other approaches to dealing with this and getting the rent restarted and the tenant back in occupancy.

If the tenant's choosing not to pay and we don't have a deferral agreement, we do intend to exercise our rights.

But for the moment, we are keeping it simple with our tenants and recognizing that this is a challenging time for everyone, as you said, and just trying to work with them on simple deferral arrangements.

Okay.

Fair enough.

And then just on any -- any tenants that may have announced bankruptcy or some sort of restructuring?

I know Chuck E. Cheese, there was an article out that they may be in some sort of restructuring.

You did call out a few tenants last quarter.

Any updates on those?

Any thoughts around Chuck E. Cheese, specifically?

No, nothing beyond kind of what's in the news there.

Okay.

Fair enough.

And then just last one on the dividend.

Just I want to make sure I heard correctly.

Obviously, it is a key focus.

You have the track record.

It may not be sacrosanct.

But given -- when you say liquidity position, is it fair to assume that if there is a shortfall over the near term, let's say, second and third quarter, you would be willing to hypothetically lever up or use other proceeds to kind of keep the dividend intact as long as you view this as a 1- to 2-quarter issue?

Yes.

I think, as Kevin mentioned, we -- our dividend philosophy is a multiyear approach.

And so no 1 month or 1 quarter or so -- we've positioned ourselves so that a month or a quarter situation doesn't affect that long-term approach.

Yes.

And I think what we're hoping, and I think everybody hopes is that in the matter of months, hopefully not too many, we'll all have greater visibility on how things are going to shake out.

And then once you have a better sense for that, then we have a better ability to inform our decision about the sustainable dividend over a long period of time.

But in the meantime, for the next quarter or 2, we're very comfortable with our dividend.

Great.

And sorry, last one, if I may.

Just on some color around the tenants requesting deferral, the types of tenants.

And specifically, I think you have 18% of your tenants are true investment grade?

Have all of -- have that group actually paid rent?

Yes.

We've had a very high success rate on getting paid by our investment-grade tenants.

Yes.

We'll go next to Brian Hawthorne with RBC Capital.

Just one question for me.

Of the tenants that are paying rent, are they paying full month’s rent?

Or are they any of them paying partial rents?

All of them are paying full rent, yes.

We'll go next to Rob Stevenson at Janney.

On the 11% noncollections and nondeferrals, I mean, obviously, AMC is a well-publicized nonpayer.

But can you talk about what lines of trade that 11% is primarily aggregated in?

Rob, it's just -- these are different tenants that kind of span through a lot of the lines of trade that you might expect would be more troubled when you looked at our list of lines that are in the portfolio.

But there's no -- other than being in industries where their business is pretty much shut down, I don't think there's any real common characteristic.

Okay.

And then when you look at the 2 different lines of trade in restaurants, I mean both full-service and limited service, do you -- in talking with the tenants, do you have any idea as to how much of their normal revenues they're doing under a takeout only, I mean is this 25% of normal revenues, 10%?

I mean, where are they sort of falling and what's their ability to pay rent if the in location dining does not come back very quickly?

Yes.

I think it's too early to try to project where it comes out at the end.

I mean, in some instances, the takeout business is strong and others, it's not.

So it's kind of all over the ballpark.

The quick-serve restaurants are doing relatively well on all of that.

And the casual dining restaurants are trying -- they're working hard to make it work.

I will say just one thing in general about the tenants that is notable, we talked to a lot of our tenants, they are all working very hard to figure out a way to get reopened and get business started again in a fashion that's safe for their employees and their customers.

But what we see are good, smart operators trying lots of different things to get themselves open.

What we aren't having any conversations with really are with companies that are just throwing in the towel.

They're all working on ways to get their businesses restarted.

Okay.

And then last one from me.

Kevin, what percentage of your tenants are paying electronically by some form versus the sort of old school mailing in a check?

And at what point in the month, given the various payment dates, do you really know what you're going to get paid for that month normally?

Yes.

I don't know the exact answer, but it's a very high percent that pay electronically in some form or fashion, I call it 80%.

And usually by the 10th or 15th, we've got a good read on how it's going to go.

I mean, obviously, April was -- doesn't -- didn't follow quite the norm, but usually by mid- month we have a good read on that.

Yes.

Rob, your question was what was the normal and that Kevin's answer was what's normal.

In April, the discussions occurred all through the month.

We'll go next to Spenser Allaway at Green Street.

Maybe first, you could just share what portion of your tenant base is currently open?

I don't think we touched on that yet.

We don't track that Spenser real closely because it -- there's close -- there's partially open, partially closed and there's fully open.

But I -- anecdotally, we think it's probably around close to maybe 1/2 fully open and another 30 or so percent, maybe partially open and 1/4 may be fully closed, but that's anecdotal.

Those are very rough numbers.

Okay.

Yes, just that was kind of the just -- the premise of my second question, just given the fact that some states are just starting to slowly open unless there are closure mandates.

So I was just curious if you guys were encouraged or any sense as to what portion of your tenant base may be able to reopening -- reopen sorry, given that some of the states are lifting those mandates?

Yes.

No, we -- our tenants -- the information that we've gotten is they are -- to the extent the states are allowing more customers to come in, they're positioning themselves to be able to take advantage of that.

So yes, you're right, it is a fluid number that moves.

And so I think we expect that will get better as if the openings continue.

Okay.

Great.

And just one more, if I may.

How many of your assets that you sold during the quarter were vacant?

And could you provide the disposition cap rate on those, which were occupied?

Yes.

I think the disposition cap rate we reported at -- or Jay mentioned at 4.7%, I believe.

And on terms of the 14 properties sold, 6 were vacant for a total proceeds of about $8.4 million.

Yes.

And Spenser, there was no cap rate on the vacant asset.

That's right.

We'll go next to Todd Stender at Wells Fargo.

Stores are open, but as traffic volumes must be down, can you guys just comment on that space just because it's your largest industry concentration?

And then maybe any details from conversations you're having with tenants?

Todd, I hate to do it to you, but I need you to start your question again.

We -- the first half of it was cut off.

Sorry, a little mumbling on my end.

When it comes to convenience stores, just because it's your largest tenant, largest industry exposure, and they're open, but traffic volumes must be down.

Maybe just comment on what you're seeing, what you're talking to the tenants about.

Any details would be helpful.

Sure.

Now convenience store business remained one of the much better, more solid businesses during the month of April.

And yes, the traffic is down.

The number of gallons sold at a convenience store are down, but the margin on gasoline was up and as you may recall, about 2/3 of the profitability of a convenience store is on inside sales and our convenience stores are suburban kind of locations where they're where families go to get their necessities.

So the inside sales with convenience stores in our portfolio have been very solid.

So -- we always felt like that was a good business as well as good real estate and so far through this pandemic that's proven itself to be the case again.

Okay.

And then can you share just some thoughts on rent deferrals.

Obviously, you're punting the cash for now.

But what are some outcomes that you can see happening?

Do you think you'll get more real estate from tenants, get more term?

Can you maybe describe some of the negotiations that are going on, maybe some of the potential outcomes?

Yes.

Right.

Well, right now, we're not having those kind of negotiations about other things that might -- other types of currency that might come into play down the road.

Right now, what we want to do is try to just be a good partner to our long-standing tenants and craft these short duration deferrals simply and quickly with them.

Down the road, we -- assuming that we maintain a good relationship with our tenants as I fully expect we will, then just like always, we will be able to have a wide range discussion with our tenants about future business or changes in the lease documents or other elements of back and forth with the tenant as we get down the road.

But for the moment, as I said earlier, what we didn't want to do right now was just punch our tenants in the nose in the face of a disruption that they didn't cause.

And then Kevin, you haven't tapped the line of credit just to sit on cash right now.

Do you need to see dislocation in the credit markets to do that and just kind of ride this out with liquidity?

How do you think about tapping the line right now?

Yes.

And we got this question in 2008 and '09 as well, and we didn't draw it down then either.

Obviously, the banks had a little bit more liquidity challenges back then, than they have today.

And we've debated it internally, and we could change our mind, but we just don't feel the need to draw down the bank line today with $217 million of cash, no material capital spending, new investments or debt obligations, we really don't have a need to do that.

I know a number of REITs have done this, and they may have a different view of their liquidity.

But for now, we're good where we are.

Yes.

Todd, and I think to your point, also, we don't view the capital markets as being wobbly at the moment.

And so to the extent we felt like there was an issue about being able to draw on it, we would most likely do that quickly.

But we're watching that, but we don't have that sense at all right now.

We'll go next to Joshua Dennerlein at Bank of America.

Just wanted to touch base on your comment in the opening remarks about occupancy falling in 2Q.

Is there any particular tenants?

Was that just kind of known move outs?

Or was that something related to the pandemic?

No.

I think it's just a more general comment that -- we have been running at the high end of our occupancy rate for a long time.

And so there may -- it seems reasonable to expect that in this current environment that may go down some.

Okay.

Okay.

So nothing specific there.

And then for the 1 to 3 months of rent deferrals that you're granting, kind of what's driving that range?

And then how do you even come up with that range in this environment?

Yes.

Well, we -- our approach was that to just do something short-term and easy with our good customers for the -- at the moment.

It's impossible, where we sat -- certainly, where we sat a couple of weeks ago and even today, to try to figure out when exactly this will start to lift, and as Kevin said, what will be the shape of the recovery.

So we said, let's just behave the way National Retail Properties typically behaves, which is take slow, thoughtful, methodical steps along the way.

And then the discussion with the tenants is really over just kind of 1 to 3 months because we feel like that's a good, reasonable time period to start with, while everyone tries to figure out how this is going to play itself out a little bit.

Yes.

I mean, at the end of the day, it's a judgment call.

So -- and it's difficult to know where things are going to play out.

But like I said, hopefully, we've struck the right balance between doing too much and doing too little.

And hopefully, we're about right, but we'll see.

Okay.

All right.

That makes sense.

And just maybe one follow-up on that.

Like, say, if we get 3 months from now and it's kind of economy pandemic, it's kind of the same as it is, and you have to, say, do another 3 months of rent deferrals.

How does that change kind of the payback?

Would we think it like it's pushed out -- sorry, any general thoughts on that would be helpful.

Yes.

Yes, that's just -- it's a lot of speculation that I'm hesitant to get too definitive about trying to answer that.

But to the extent we get to the end of these deferral periods and the tenant -- the tenant's business is still struggling in a fashion that we need to have a discussion about greater deferrals, then we'll just have those discussions.

There may -- as I mentioned in one of the other answers, there's other currencies besides just flat out rent that a landlord can talk to a tenant about to create greater value at the property, either lease term or change in lease bumps or change in lease document, or some other things.

And so to the extent this extends longer and we have to have second discussion with any tenants, it may be a more wide-ranging discussion than the nice simple conversation we wanted to have for this first problem here in April.

Okay.

And one last question for me.

For the rent deferrals that you -- like the 37% of ABR, are there any common themes as far as like industry exposure that you saw more requests from?

Or just kind of curious on how that's playing out?

Josh, I think you -- if you'd look through the list of lines of trade in our portfolio, you'd be -- it would be kind of common sense as to where they were coming from.

The sectors that were most affected by the shutdowns and the stay-at-home orders.

So in the restaurant sector and the family entertainment and health and fitness and movie theaters, those are the sectors where the tenants needed -- definitely had their businesses significantly affected.

We'll go next to John Massocca at Ladenburg Thalmann.

Understanding it's still pretty uncertain times, what would you need to see to kind of maybe reaccelerate your acquisition platform and activity?

John, there's no bright line answer to that.

We are -- as we've said, we're in great financial position to kind of just stay in position and see what -- how this recovery plays itself out.

We are anxious to get back to playing offense, I will say, and we paused some of our -- some of the acquisition deals that were scheduled for the first quarter have been paused, and we're hopeful that we'd be able to restart those when that moment came where you said, okay, this is the -- we see the light at the end of the tunnel, but it is definitely more of an art than a hard science on that moment.

Are you seeing maybe -- I know you guys don't do a lot of third-party transactions, but are you seeing potential for deals out there, potential deal flow either in the third-party kind of transaction market?

Or with some of your traditional net -- sale-leaseback partners coming to you?

Yes.

John, I'll say, so far, we haven't seen much in the way of busted deals that are coming back at higher cap rates or anything.

We still -- the 1031 exchange market where you get a lot of broker ads, the cap rates are still very low.

I think it hasn't really worked itself into the transaction market yet, the effect of all this.

So a big gap between the bid and the ask right now, I think.

Okay.

And then with kind of the in-place portfolio, have you seen any tenants that were looking for maybe kind of opportunistic deferrals back off?

I mean, I know it's kind of fluid given the timing of expected receipt of rent.

But did you have some people who -- they have been in that 11% bucket that kind of maybe saw the light and ended up paying later in April or have indicated they're going to pay in May?

Short answer to that's yes.

We've had -- some of the discussions we've had with tenants that have -- that we felt were able to pay and wanted to see what kind of relief there was available after the conversation was over, they were in the bucket that paid rent.

What we want to have is a good, open, candid dialogue with each one of our tenants.

We're in this for the long-term with these tenants.

And so this feels like the right way to go about this business is to work with them and have honest, full conversations through this whole process.

Okay.

And then one last quick one, if I may.

Given the backdrop of the pandemic, has your outlook on leverage changed at all?

No, I don't think materially.

I think we're comfortable where we are.

And obviously, when you come in on this, you always wish you had less leverage and more liquidity.

But fortunately, we don't have -- we're fairly conservatively leveraged and have, I think, above-average amount of liquidity.

So we're in pretty good shape.

And so I don't think there's much we would change in the way we operate the balance sheet at this point.

Our outlook on leverage is what has positioned us in the -- to be in such good shape right now for this.

We'll go next to Linda Tsai at Jefferies.

First, I know that tenant base has changed since then, but could you remind us what trough occupancy was during the financial crisis?

And then second, when you think about occupancy going down in 2Q, do you likely have a sense of who those tenants are and for those vacancies, would you think the mix would be more backfill options or disposition?

First off, the -- at the depth of the recession, 2008, 2009, occupancy dropped to 96.4%, and it recovered in a couple of years back into the 98% range.

And as to your second question, I think it's just too early for us to talk about what properties might become vacant in the second quarter or beyond or what the right strategy for dealing with those properties.

Our long-term philosophy on vacancies is that job one is to re-lease those properties.

And so I would expect that our -- that will still be job 1 for any vacancies that come out of this pandemic.

And as you've seen us in the last couple of years, if we -- if after significant efforts to re-lease a property, we conclude that it is -- we're better off to sell the vacancy, then you would see us do that.

But there's nothing, I think, about what's out there now that would cause us to change our general operating philosophy about how to deal with vacant properties in the portfolio.

And then in terms of transactions, as the world begins to open up, are there thoughts on whether deals might be transacted differently?

Do you think face-to-face is necessary?

We -- I think face-to-face -- we do think face-to-face is necessary early on in relationships for folks to get to know each other.

Down the road, there may be less travel to visit an existing tenant for the 15th or 20th time.

But I think there's no substitute for folks visiting with each other in the early stages of building a relationship.

We'll go next to Michael Gorman at BTIG.

Just a quick housekeeping for me.

I just wanted to understand of the 52% of rent collected in April, did any of that then subsequently ask for deferrals?

So is there any overlap between the 52% and the 37% that you reported in the release?

I think there is some overlap.

I'm not sure -- I don't think it's very much, but there's -- there -- I should expect there is some small amount of overlap there.

Okay.

And then just, I guess, could you just talk procedurally?

Because obviously, you mentioned during the great recession, it went down to 96.4 and (technical difficulty)

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(Operator Instructions) We'll move on to R.J. Milligan with Baird.

Just one quick question.

Most of my questions have been answered.

But in terms of the dividend, how do you think about -- or have you considered the idea of paying the dividend in stock?

I mean, not seriously, yet, no.

But that's always an option on the table, but that's not in our current -- on our radar today.

To the extent we felt like we weren't in a good position with the cash, R.J., it'd just be one more thing we would analyze.

Would that potentially happen before you reduce the dividend?

I would presume so.

Yes, I -- if we were going to do that, that could be an intermediate kind of step to take, that doesn't get you to cut the dividend fully.

We didn't do that in '08, '09.

We kept the dividend going up.

I know a number of REITs did shift to the stock cash combination to kind of bridge their way through the '08, '09 turmoil, but we haven't thought too much about that at this point.

(Operator Instructions) We'll go next to Chris Lucas at Capital One.

Two quick ones from me.

Jay, you mentioned I guess earlier in reference to the rent collected from investment-grade rated tenants was very good.

I guess I'm curious just in terms of how you think about your credit profile of future acquisitions.

Do investment-grade rated tenants sort of move up the ladder, if you will?

Yes.

Chris, we're always thinking about and evaluating our acquisition strategy, and we will continue to do that.

But the focus for us has always been on well-located real estate parcels, leased to strong tenants at -- where we acquired them at reasonable prices and the tenant pays reasonable rents.

And for that, we get a high occupancy rate and a high tenant lease renewal rate.

85% of the time, our tenants were renewing the lease without the landlord putting in any TI dollars or other lease incentives.

And so you really should expect that we're likely to continue to follow that philosophy.

The investment-grade tenants that we have in the portfolio were not investment-grade when we acquired their properties.

They were regional tenants that grew and expanded or were acquired by investment grade tenants.

And so we've got the best of both worlds in that higher -- a better tenants balance sheet along with good real estate at the right price.

But we still view investment-grade tenant -- credit as expensive and possibly fleeting.

And so it's nice to have it when -- at this moment, but it so far hasn't changed our view that we should migrate to more of those properties, which have a lower initial yield, lower growth and lower price per property.

All of that said, we're thinking about our strategy every day.

And so -- but right now, I would say we're more -- I feel more inclined to stick with the strategy that we've got.

Okay, great.

And then just as it relates to the rent deferrals that you're giving, are those being tailored to individual tenants based on their profit margin and remaining term?

Or is it -- or are you trying to approach it on a simplified sort of one-size-fits-all approach?

It's not one-size-fits-all, but we've been trying to keep it simple.

And so we don't have too many sizes.

We've got small, medium and large, maybe in the sizes.

But the -- if we haven't -- we've had -- we've tried to just have direct candid conversations with our tenants to figure out what works and -- for them and what seems to work for us and then structure the deferrals that way.

We'll return to Christy McElroy with Citigroup.

It's Michael Bilerman here with Christy.

Just in terms of your tenants' obligations outside of the net lease payment they make to you, I guess, what security do you have that the property taxes, insurance, the CapEx, that everything is being paid and spent when half of your tenants are not paying rent to you?

Yes.

Michael, we've got a group that tracks all of that.

It is part of our discussion with the tenants at the front end, and it is part of the documentation of the deferral.

So we've got the -- we are tracking it, but it is clearly -- those taxes, maintenance, insurance are clearly spelled out as being the tenant's continued responsibility.

Right.

But if you only got 52% of the rents in April, 37% have asked for deferral, some of the 37% is in the 52%, but there's still -- you still got 15% of tenants that didn't pay you rent, haven't asked for a deferral, maybe that's even up to 20%.

How do you know that all of their other obligations, which could become your obligation, have actually been paid?

Yes.

We -- like I said, we've got a lease servicing group that tracks those responsibilities.

But at what point do they come -- what point do you find out that they haven't paid, right?

Let's say, there's a group of 20% of your tenants that have not paid you rent are not working deferral, right?

Just taking the simple math of the 52% plus the 37% and some of the 37% being in the 52%.

How do -- when will you know that those tenants that haven't asked you for deferral haven't paid you rent, haven't paid their local tax bill, haven't paid their insurance bill.

I mean, what point does it come back?

Because those are obligations that you are then going to have to fund.

Yes.

Michael, we will -- we typically find out after the tax bill is due.

We are part of the notice process for that.

So we will -- we deal with large tenants that we think are highly likely to honor the commitments that they're making to us.

So I understand what you're saying, but we've got their tenant's obligation to do it, and we find out when those bills aren't paid directly from the taxing authority or the insurance vendor.

And -- this is Kevin, and if it's a smaller tenant and it's one we're worried about what you're talking about, we may, and this does -- it's not often, but we may structure an escrow situation where those -- funding for those items gets escrowed on a monthly basis rather than waiting to the end of the year.

Right.

It's just a matter of your tenants of -- half your tenants have decided not to fulfill their contractual obligation with you, who's to say that they're not making the same decision with other vendors of theirs, right?

And so I think that's where the -- it starts to unravel pretty quickly if those obligations become part of yours from an OpEx perspective, but it sounds like we'll hear more over the next coming quarters, which then sort of takes me to my second question, which is the dividend -- and look, I get the fact that your balance sheet is in a better shape.

I understand you have access to liquidity.

I understand the 30-year history.

I understand where the payout ratio was.

But to your own admission and to everyone dealing with this, we don't know how long, we don't know how deep.

We don't know what reopening is going to be like.

We don't know what the reinfection rate is going to be in the fall.

There may come a time where we look in hindsight that you would have preferred to have that cash in the company and because your dividend is an annual commitment based on annual taxable net income, not quarterly, I guess I'm struggling to understand why even pay out a cash dividend on a quarterly basis, when only half of your tenants are paying you rent, right?

You may look back on this and say, you know what, oh, God, I wish I had that 2Q and 3Q dividend payment because we're going to have to adjust our policy going forward.

And that cash would have been better staying within the enterprise for shareholders rather than being paid out.

Michael, it's something that we think about long and hard.

We're talking about 1 month, the month of April, and the -- and I'm sure what you would say is as well as May because the deferrals are going to be, call it, 2 months on average.

And -- but it -- but for a couple of months, we do feel like we're in a solid enough liquidity position to make the judgment that -- let's see how these next couple of months play out.

Certainly, always keeping in mind, do we need to change our dividend policy for the next quarter -- at the next quarter, but after just 1 month, it seemed like too soon to make a dramatic change to a long-standing dividend policy.

Yes.

Yes.

I mean, as you said, our dividend payout ratio, liquidity, our balance sheet leverage metrics, we think, afford us the ability to -- buys us some time to see how it plays out before making a rash, 1 quarter, 2 quarter decision about the dividend policy.

And look, sure, if things -- if the shutdown lasts many more months and it's -- everything is worse than what folks are currently anticipating, then yes, you can always look back and say, I wish I'd changed things sooner.

But we're just not there today.

We don't have that visibility, and we'll see how it plays out.

All Right.

But to your -- the same token, if you can't even forecast your earnings for the rest of the year, how can you pay a quarterly dividend, cash out of the company?

I think that's the struggle, I think, from my vantage point is, there is so much uncertainty about your forecasting ability to pay out cash that you may have wanted to have 12 months from now or 6 months from now or not even be required to pay it out because your taxable net income may be lower -- will be lower.

That, to me, may be short sighted.

Yes.

No, we totally understand what you're saying.

At the end of the day, it's a judgment call, and it's not an easy one at this point in time, but we're comfortable where we are.

We'll take our final question as a follow-up with Spenser Allaway at Green Street.

Sorry, just one more.

So just curious, of the deals that you guys backed out of in the first quarter, was this decision primarily due to the fact that the tenants were in industries that you assume would perhaps be disproportionately hurt during this pandemic?

Or was it more so to do with preserving cash at this point?

Yes.

Yes, Spenser, I wouldn't say we backed out of them, I'd say we paused them, and it was completely due to our desire to marshal our cash.

That we -- as the end of the quarter approached, we said we have a few significant deals.

But we said -- almost all on Michael's question just a moment ago, we said, when we look back later and say we should have preserved that money from these acquisitions, and in that instance, we said, yes, let's preserve the cash.

And with no other questions holding, I'll turn the conference back to management for any additional or closing comments.

All right.

We thank you for joining us this morning.

Have a good day.

Bye now.

Ladies and gentlemen, that will conclude today's conference.

You may disconnect at this time, and have a great day.