Q1 2020 Earnings Call
[music].
Good afternoon, and welcome to the store capital first quarter 2020 conference call.
I was hoping they listen only mode should you need assistance, placing all conference specialist by pressing the star you followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on the telephone keypad to withdraw your question. Please press Star then too.
Please note this event is being recorded.
I would now like to turn the conference over to Lisa Mueller with Investor Relations. Please go ahead.
Thank you operator, and thank you all for joining us today to discuss store Capital's first quarter 2020 financial results. This afternoon, we issued our earnings release on quarterly Investor presentation, which include supplemental information for today's call. These documents are available any investor relations section of our website at <unk>.
Our dot store capital Dot Com under news and results quarterly results.
On today's call management will provide prepared remarks, and then we will open the call up for your questions.
In order to maximize participation, while keeping our call to an hour we will be observing a two question limit during the Q and a portion of the call participants can reenter the queue. If you follow up question.
Before we begin I'd like to remind you that today's comments will include forward looking statements under the federal Securities laws.
Forward looking statements by their nature involve estimates projections gold forecasts and assumptions and are subject to risks and uncertainties, including those are rising from the told at night team has done that and its related impacts on us and our tenants that could cause actual results or outcomes to differ materially from those expressed in <unk>.
Forward looking statements.
Discussion of the factors that could cause our results to differ materially from these forward looking statements are contained in our SVP filings, including our reports on form 10-K and 10-Q.
With that I would now like to turn the call over Chris Volk source, President and Chief Executive Officer, Chris. Please go ahead.
Yeah. So thank you and good afternoon, everyone and welcome to store Capital's first quarter 2020 earnings call.
With me today are married feed work, Chief operating officer, and Kathy longer Chief Financial Officer.
First things first we welcome the opportunity to speak to you today and hope that you and your families are healthy and see.
Well the journey to this unprecedented events. This stuff that's all will come through the other side together and we had store works the opportunities that away to us.
Meanwhile, we're very fortunate to have a team made up of 97 experienced and talented employees who've worked collectively to address impacted corona virus epidemic upon our customers.
There's also a time when our strategic investment in technology and systems are allowed us to quickly gap necessary information to address the needs of our customers.
Technology has been instrumental and the ability of our collective team to work remotely from home over the past two months.
Origination strategy, which fosters long term tenant relationships also improves our ability to address moments of national business interruption like this.
With that said, let me discuss our achievements for the quarter.
Even with the curtailment of our acquisition efforts, we had investment activity of over $260 million during the first quarter.
At same time portfolio remained extremely healthy with NAXI rate of 99.5% with continued stability in the percentage of net lease contracts rated investment grade quality based upon our store square methodology.
At quarter end, our funded debt to EBITDA on a run rate basis was 5.4 times, which is slightly below the lower end of our target range.
Or pool unencumbered assets stood at over five and a half a billion dollars for about 61% or total investments.
Leverage on this majority of our balance sheet stood at a sector low 23% of cost providing us with ample flexibility in our financing options to navigate this pandemic.
No. They do each quarter here are some statistics relative to our first quarter investment activity.
Our weighted average lease rate during the quarter was approximately 7.5%.
The lower than in late 2019.
We're.
The average annual contractual lease escalations for investments made during the quarter was higher than normal at 2.5%.
Providing us with a growth rate of return would you get by adding the lease escalations to the initial lease rate of about 10%.
This is also above recent quarters.
And with corporate leverage nearly a 40% or levered investor return will approximate 14%, but never turns after operating costs and the 12% to 14% range.
Our investor returns from store and for predecessor public companies have been mostly driven by favorable property level rates of return.
Why we take the time to disclose investment yield contractual annual lease escalators investment spread to our cost of long term borrowings and our operating cost as a percentage of assets.
These are the four essential variables that enable you to compute expected investment rates of return.
The weighted average primary lease term of our quarterly new investments continued to be long approximately 16 years.
The median post overhead you level fixed charge coverage ratio for assets purchased during the quarter was 2.7 to one.
The median new tenant Moodys riskcalc credit rating profile would be one or the incorporate the potent contract level fixed charge coverage is and the median new investment contract rating or store score for investments was far more favorable as readably too.
Our average new investment was made at approximately 77% of replacement costs.
90% of the multi unit net lease investments made during the quarter were subject to master leases.
In all 57, new assets that we acquired during the quarter required to deliver unit level financial statements, giving us unit level financial reporting from 98% of the properties in our portfolio.
This is critical to our ability to evaluate contracts and you already and real estate quality and has been really essential to our ability to quickly assessor tenants ability to pay rent during this endemic crisis.
And with that ill turn the call over tomorrow.
Thank you, Chris and good afternoon, everyone I'll start with a quick recap of our first quarter acquisition activity, we invested $264 million and real estate acquisition at a weighted average cap rate of 7.5%. This included investments and 21 separate transactions at an average size of about 12.5.
Million dollars.
As Chris mentioned, our portfolio remained healthy in the first quarter and only 12 of our more than 2500 property locations were vacant and not subject to at least agreement at March 31.
Which is unchanged from year end 2019.
We sold nine properties in the first quarter. The majority of these properties were sold as part of our ongoing property management activities and resulted in a recovery compared to our original cost of just under 80%.
Our portfolio mix at the end of first quarter remained steady 65% of our properties were in the service sector, 19% and experience show and service driven retail businesses and the remainder 16% were in manufacturing.
Our top 10 customers were unchanged from last quarter. However, we continue to improve the diversity of our revenue and as a result, our top 10 customers accounted for well below 18% of annualized rents and interest for the quarter.
Our portfolio remains diverse and granular and our single largest customer fleet farm represented just 2.8% of annualized rent.
Our second largest customer art, Dan declared bankruptcy in early March the bankruptcy process has experienced some temporary delays due to covert 19. However, we continue to make good progress towards the resolution.
Now turning to our response to the pandemic first I'd like to say, we could not be more proud of our entire team at store any effort. They have collectively made to step into action for our clients since the abrupt onset of cobot 19.
Hurt us say before that our focus on delivering value to our customers beyond real estate financing solution has resulted in close customer relationships and significant repeat business as you might imagine we have been an active dialogue with our customers over the past several weeks on many topics.
On rent collection, the government stimulus programs that might help them.
We also launched a coded 19 website as a resource to help our customers understand and access to various government relief programs. As you know the middle market has always been an especially vibrant part of the economy and a key driver of economic wells and job creation in the U.S. So it makes a lot of sense that the government is focused on helping middle market come.
Monies to pair that programs such as Paycheck protection program for smaller companies and the main street lending program, which is expected to launch in May for larger company.
Many of our tenants are well positioned to benefit from these stimulus programs and our team will continue to educate them about the options and help them through the process.
Now turning to April rent, we have made good progress on Red collection since our last update just a couple of weeks ago, our cash collections for April rent now represent 68% of our base rent and interest, including these cash payments, we have reached agreements for over 97% of our April rent.
For the rents that were deferred we negotiated short term agreement that included for example, interest higher lease escalations and or longer lease terms.
For the rents we agreed to differ for April more than 75% were concentrated in only six of our more of our more than 100 industries represented in our diverse portfolio.
These include industries like fitness clubs theaters early childhood education centers restaurants, and family Entertainment centers that have high mandated closure rates across the country.
Going into the pandemic, our portfolio is performing well with strong corporate and unit level coverages and in addition, there was no discernible difference in April rent payment as it relates to company size or whether they were backed by private equity, but what's clear is that tenants looking for rent relief are in businesses that have been temporarily disrupted.
It's a closed due to cold and 19, rather than experiencing a credit event.
We are therefore optimistic that these tenants will rebound nicely as the economy opens up again these are essential businesses that people value need and depend on.
We also believe that geographic diversity is an important factor in evaluating the impact of cold in 19 on store given that certain regions of the country are opening sooner than others.
Based on recent news announcement at least 17 states have eased restriction, so far and together they make up nearly 50% of storage space rents and interest.
So we are now talking to many of our customers were preparing to reopen their businesses Andy select state.
Well overall, our tenants viewed the corona virus or they temporary disruption and believe that their businesses will open and recover they realize that reopening will not happen overnight, but we'll be more of a phased in approach overtime.
In the meantime, our acquisition team continues to cultivate new and existing relationships to ensure that we continue to have a strong pipeline of opportunities.
In closing I'd like to reiterate our strategy, we invest in profit center real estate. It was profitable going into coated 19, and we believe these locations will be profitable after covered 19.
Our team is focused each and everyday on delivering the best outcomes for our customers our employees and our shareholders and that is what we will continue to do and now I'll turn the call to Kathy to discuss our financial results.
Thank you Mary.
I'll begin by discussing our financial results for the first quarter, followed by an update on our balance sheet and the steps we've taken to increase our financial flexibility in response to the pandemic.
Beginning with the income statement.
First quarter revenues increased 14% from a year ago quarter to $178 million.
An annualized base rent in interest generated by our portfolio in place at March 30, Onest was $730 million, an increase of 13% from a year ago.
Total expenses for the first quarter were $118 million as compared to $109 million in the first quarter 2019.
During the first quarter, we derecognized $6.7 million of non cash equity compensation expense related to certain performance based restricted stock unit awards that are no longer expected to be earned.
Excluding this adjustment the increase in total expenses was primarily due to higher depreciation and amortization expense related to our larger real estate portfolio as well or increased interest expense and property costs.
Interest expense increased by $3.6 million to $41.7 million, primarily due to additional long term debt, we issued in 2019 to fund investment activity.
Property costs for the first quarter increased by $3.4 million year over year, primarily due to property tax accruals related to nonperforming properties leased to tenets that may not be able to pay these expenses nearly half of this amount was related to the art band bankruptcy in Q1.
As a result of the Derecognition of a noncash equity compensation expense DNA expenses for the first quarter were $7.9 million down from $12 million a year ago.
And included a minor amount of expenses related to our covert 19 response.
Excluding the impact of noncash equity compensation DNA expenses as a percentage of our average portfolio assets decreased to 51 basis points during the quarter from 53 basis points a year ago.
During the quarter, we recognized a 2.9 million dollar impairment provision related to our real estate portfolio, primarily for properties were likely to sell.
Hey, AFFO increased over 11% to $120 million from $108 million a year ago.
On a per share basis, Hey, AFFO was 49 cents per diluted share a 2.1% increased from 48 cents per diluted share a year ago.
Now turning to our balance sheet.
We funded our first quarter acquisitions with the combination of cash flow from operations and $150 million of borrowings on our revolving credit facility along with proceeds from property sales and our ATM equity program.
In early January we issued about 4 million shares of common stock under our ATM program at an average price at $36.22 per share.
Raising net equity proceeds of approximately $149 million.
At March 30, Onest, we had approximately $3.6 billion of long term debt.
The year over year weighted average maturity of that debt rose to seven years and the weighted average interest rate decreased slightly to 4.3%.
In the first quarter, we extended the maturity of one of our 100 million dollar Bank term notes into 2021 and that note has two more one year extension options available.
We have no significant debt maturities for the remainder of this year.
We continue to be in compliance with all of our debt covenants and we expect to remain in compliance going forward.
We took steps in the latter half of the first quarter to augment our balance sheet and liquidity position in response to the Pandemics.
As previously announced at the end of March we drew down the remaining amount on our 600 million dollar credit facility as a precautionary measure to increase our liquidity.
We have an additional $800 million of capacity available under the accordion feature of our facility.
We've not yet requested access to that from our banks and the term debt markets remain open to us.
At the end of April we had over $550 million in cash after payment of the first quarter dividend and funding approximately $15 million in ongoing construction commitments.
With that amount of cash and perspective.
It's over two and a half times, our full year 2019 operating costs plus annual cash interest expense for the year combined.
We believe our conservative leverage profile and this higher than normal cash balance position will serve us well to navigate the pandemic.
Now turning to our outlook for the rest of 2020.
As previously announced in mid April lead with through our 2020 guidance based upon decisions, we've made to respond to the pandemics.
These include prevailing near term acquisition activity, maintaining higher than normal liquidity levels and deferring a portion of our rent noninterest income.
We will reinstate guidance when we have more clarity around the path and timeline for states and businesses to reopen and now I'll turn the call back to Chris.
Thank you so much Kathy.
As usual and for turning this call over to the operator for your questions I'd like to make a few comments.
We've included in a regular quarterly investor presentation, a handful of flies pertaining to the impact of cobot 19.
Including a slice it addresses our current sure evaluation.
We believe the value of Sourcegas more compelling when we started this company in 2011.
Should be since investors at the end of April could buy in at roughly 15% discount the actual cost of the equity we've deployed.
A discount is even more as I speak today.
Before I share purchase window expired and well after the extent of a pandemic was evident.
Much of stores leadership in several where members purchase yours at prices closer to $30.
But april for sure if it's on 61%.
For recovering to its still material drop of around 45% by the end of April.
You have a reason for this leaving our compelling valuation that comes in two parts.
First part is that our current sure price implies a permanent face Brendan interest income loss equating to about 70% of our tenants paying half their contracted rents.
We do not believe this will happen.
This leaves me to a second part of the reason, which is also evident from the supplemental slides.
As Mary mentioned virtually all the qubits related least accruals granted questcor emanated from closed sectors the economy.
Six of these sectors alone accounted for about three quarters of the rents deferred.
Our nation is we're pleased with restaurants education facilities health clubs movie theaters home furnishings retailers and family Entertainment facilities.
In our view these more close sectors represented within the store portfolio or central for past and future way of life.
We take heart in this because we absolutely believe me ability of our tenants.
Nonrated middle market and larger companies that fooling comprise these largely close sectors.
The successfully emerged from the spend dumber.
This leads to a clear lesson about academic like this.
Closures and weeks deferral requests did not pertain to kind of credit quality revenues for balance sheet size.
The results from a sensitivities of this black Swan event that mandated a broad will be a temporary cessation of commerce.
Surveying the wider landscape beyond the net lease arena. This notion becomes even more clear given the limited payments of rents from retailers of all sizes and credit ratings.
With this set an evaluation of store at this moment cannot rests on static benchmarks such as percentage of rents collected or percentage of investment grade tenants were oxy rate.
Everything is relative and our approach to investing begins with integrated business model that we pioneered in 1980 refined over the past four decades across three separate and successful public investment platforms.
Due to the slight I believe stores non rated tenants April rent collections less than at least sector.
We chose both to our work due to the diversity of our portfolio, which Fortunately for US included a number of sectors less impacted by the Pandemics.
And given the general spread between lease attainable from investment grade non rated tenants I would also positive its doors April cash yield on investment.
The impact is as it was for at least deferrals.
I didn't hear the very top of our net lease peer group.
We've always stated that we succeed where tenants succeed.
And the cases this cobot 19 event much for our ability to rebound is not tied simply to our tenants between entire essential sectors of the U.S. economy.
Global emerged from this the dynamic and strong position.
We fully expect to be proud of our tenants.
How they perform.
And we will continue our devotion to this market that really needs Oh.
Properties like store are essential for real estate capital formation, among middle market and larger not ready to companies and will help this country as we emerged from this endeavor.
I'll close with a few comments about our plans for investor communication going forward.
Since our last earnings call I wrote a letter in March we have conducted two webcast to update the investment community.
In a time with national business upheaval frequent communication has become essential.
So we plan to hold three webcast prior to the release for a second quarter financial results.
Hey, Mark your calendar for the first lease calls which will occur on May 27.
I'm not call, we expect to provide you with an updated on may rent collections.
And comment on the broader status of our tenants as various states because in the very hard to pass the reopening.
Because our annual shareholder meeting schedule for the theory next day, you will not be providing general business update at that meeting.
We look forward to providing these future monthly updates and to making ourselves available to answer your questions.
Now I'd like to turn the call over to the operator for any questions.
Thank you we will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your hands so before Chris.
Withdraw your question. Please press Star then too.
Please ask that you limit yourself to one question and one follow up if you have additional questions. You may remember the question Q.
At this time, we'll pause momentarily to assemble a roster.
And the first question today will come from Nate Krasik worth bearing Burke. Please go ahead.
Hey, good afternoon, guys I hope everybody is doing well.
So just a question I appreciate the slide on the cover 90 impact 68% of Iran was paid in April you mentioned, 98% of that are 98% you came to an agreement on.
Are these agreements for April rent only or do they include future months and then how should we think about kind of the mechanics of the deferrals you know how long it a payback period et cetera.
Yes. They made this Mary before we start the Q in a if you don't mind I'd like to just Krug provide a brief update on our band.
Okay, I've, Delaware, but yeah sure, okay, but the Delaware bankruptcy Court just approved the sale of certain our van assets, including existing inventory.
This approval has actually cleared the way for the re leasing up all of stores 23 art Van Wolf Enlivant location.
Stores entered into four master leases for all 23 store on location within existing customer of ours and so therefore, I know store on former our van location will be vacant.
Estimated recoveries in line with the rest of our portfolio at approximately 70% to base rent with potential upside actually written in these leases. So I just wanted to give a quick update on that for everyone.
So did I hear please.
Go ahead.
No I was going to that's helpful. On building a repeat my question or no I think I think I've got it. So I'm actually you asked about the the April rent collections at 68% in is that for just one months. Our average deferral agreement was for two months on average and so I would say that from that perspective at least.
I could be paid back within the majority of that within the next 12 months or.
So that kind of hopefully answers your question there.
Okay, and then 68% how many of those kind of access the P.P.P. or you know if you add the TGP and some of these spend you know fed programs like were not on its taken out.
You bet. So actually great question, 98% of the cash received in April with paid without TPP health.
So we just started as you know to come in towards the end of April and you know first of May here.
Okay sorry.
Well like what percentage of your tenants are saying that they.
And in will access to TPP in some way shape or form.
So we're estimating about half of our tenants maybe a little over that we'll be able to do the TTP program and obviously that doesn't include the main Street program. We're talking about just the paycheck protection if you're looking at it we have 491 tenants.
And in surveying the tenants, we think about 350 of them are eligible which is about 71% of the past, but it works out about a half the rents and then and then if you sort of further break it down and say Oh that have you know how much how many of them could actually get enough Pvp to really help on the rent were just not say that that up.
The other half won't help on the right because the PDP money, if any sort of helpful. But no. Other half about 175 was about 25% of rents and interest I watched the help out on the right you know have enough money to help out in the right. So it's possible that it may will benefit from that certainly we would like to hook. So.
And you know at June and then April it wasn't really a.
In fact, you know what would the as I went back.
Okay, Thanks, I'll get back into queue.
The next question comes from Craig Melman with Keybanc capital markets. Please go ahead.
Several Mary just maybe arc Dan.
You know the 70% recovery rate when does that kicking in and what's the drag on a dollar.
Basis.
Yes, Oh, just they know that the based on the new operator, we'll take possession by May Eightth in the 70% as a total total solution for these guys. So quickly, though they'll take possession, they've already got management in place.
So this is that how much almost.
70% includes all the cost all the drag so it's a net outflows on may not but you know they're the right quickstart as early as July but it may you know obviously other corporate 90 thing. So it just depends you know.
Well I just when it starts like what would the new rent be versus the previous right I'm just a dollar kind of dropped.
70% of nearly 70% of our of our original leases with our band as the rents or sorry.
<unk>.
Okay and then.
On the deferrals could you just kind of go through if at all any of that was abatement versus just kind of deferral loans and whether you know any of these agreements kind of go back and re cut the leases maybe you're extending term we're getting some other benefits.
Sure. So as I mentioned in the prepared remarks, so essentially there were no. There was no forgiveness or Bateman all all agreements that were made we got an economic benefit for here at stores. So that could have them. It could have anything from interest on the deferral as I mentioned to a longer lease terms higher escalation.
And stronger contracts, but there was no pure forgiveness of rent <unk>.
It is anyone going on non accrual.
No.
Thank you.
Our next question will come from Rob Stevenson with Janney. Please go ahead.
Good afternoon, guys. At this point are you guys looking too I mean, if acquisitions cut the zero at this point are you still selectively buying stuff and if so are you gonna be buying anything where the tenants deferring or not paying rents.
Okay, Hey, Rob. This is married so we are honoring our construction a commitment that we have outstanding and we've made a few small acquisitions very small a under where we had contracts in place right purchase and sale agreements in place and it made sense, but not without an update on the of course, an update on the credit and the cold.
Good environment, and so we would not be offended funding anybody who was asking who could not pay the rent oh, but really impacted Michael that.
Okay, and then I guess, the other one would wind up being like.
Were any you did you guys require in order to even have the deferral discussions did you guys require people to be current as of that point in time, and so you know is they're likely to be a great significantly greater percentage of people that don't wind up paying may rent versus April.
Or are the people that are you know not likely to pay may the same as there were like they didn't pay April.
The may ran at where is your sort of intertwining Robin. This is Chris. So you may have correctly here, but you shouldn't be intertwining the notion of doing new investments with may rats, and what impact that's going to have on may run.
I think the general consensus a if you're talking about made the general consensus of Ah between that I've listened to is that a maybe a different more difficult month potentially just because a with April.
People had at least half a month its operations in March so they have some they had some steam going into April and May of course, you know people work. We're fully closed down. So there's an increased pressure on people and may the offsetting part to that from our perspective businesses, we only got 2% of our payments and April from call it from that BPP.
That could be upside for us which might be at equalizer. So we'll see how that works and reopening yeah. Nobody can reopening is to reopening so were rice him. Some gradual reopening so and we'll keep times that so when we do our a conference call. It at the on May 27th will kind of give you an update as to who is open who's not I mean, what.
It's interesting and American elaborate on this but if you the other half what states out there that have thought actually not shutdown I mean, and so if you're just looking for state by state of the recoveries are those the rent payments. So we've had from those states are open tend to be closer and 80% range right now I. So that was suggested as states open.
Oh, there's an absolute outsiders, if we were to look at the states that are open to that.
Okay. So I mean for the states that were never really closed there was still a decent amount of revenue collected on those people just didn't stay home automatically.
Yes, that's correct for for the whole countless states I did not have a government declared stay in place order from our rank collections, we thought substantial materially better collections in those states as Chris mentioned.
Up 80 plus percent.
Okay. Thanks, guys appreciate it.
The next question is from Vikram Malhotra with Morgan Stanley. Please go ahead.
Hi, Thanks for taking the question. So I just wanted to clarify.
The difference between a deferral or and then interest can you clarify what sort of interesting just how are the mechanics on that.
So typically the way. It's works is that is there a variety of solutions in some cases, you're doing lease modifications near building esqueda payments into the lease modifications in some cases, you're doing in the form of note that actually have an interest interest rate something better than the notes.
And I I. So it's just a combination of those those those things and if you look at the deferrals and and expect to cash flows a substantial majority of the amount of friends at <unk> that will be deferred should be collected by the end of 2021.
And so these when you say north so are these like you'd be providing funds to tenants and they're giving you interest on those loans.
Hey proceed, but we're not providing we're not writing anybody at shock you know what we're doing is a if they can't pay us the rent we just make them to execute a note for that for that amount of brethren and we're not actually writing anybody a check or any kind of business loan there's no business loans.
Okay.
And then just on the Covenant got you mentioned sort of compliance with government and specifically.
Related to the master funding a kind of level in terms of the DSR coverage at one eight.
If you take that one eight into deferrals that you know the thirtyish percent deferrals that you've seen today are you sort of get to a level. That's close to the one three where certain things could trigger I'm just sort of wondering how do you bridge that those two numbers.
Okay would it be helpful. If I walk through some of the math on on the Master funding and how it would work.
Sure.
So as you know like at the beginning of the year I'll start with the beginning of the year because it's easier to go back to the 10-K and be able to pull numbers out of the management discussion and analysis section.
You know our annualized base rent and interest was $714 million for the whole portfolio.
And about 37% of the revenue comes from those assets that are in master funding. So that's about 264 million a year would be going into master funding.
So if you in a normal timeframe that 264 million covers principal and interest on the outside get that we have.
And about 140 million common shares to the bottom of the waterfall back to store capital.
It makes sense so far so that's what our normal time, when you're covering one eight or one nine.
If you take the 264 million of revenue coming in and you say, what if I only got 60% of that.
That's a $158 million.
When you compare that to the 122 million or so of debt service.
That's a 1.295 coverage, which gets you below that cash sweep trigger that you're talking about which is at 1.3.
But at that point, if you're getting 158 million a revenue and your covering 122 of debt service what would flow through the bottom of the waterfall is about 36 million a year and thats what gets trapped.
So that's about $3 million, a month and that wouldn't the most it could be by the way yeah. That's a worst case scenario neighbor everything else is nothing and I would say this too I mean, a they do Master Trust for April was well north of a 130 coverage. So.
So from a yeah, we're not we're not close to cast weeks I just want to point to South you wait and not a lot of ways. There were a lot of reasons why we're not close to them, but we're not close to them. If we ever got close them, it's not a big money amount and and I want to make it extremely clear you know as ER and happy to discuss it but.
That is our leverage Corporately is 40%, which is right in the strike zone and 40% cost US right in the strike zone of where pretty much every triple B company was in fact Realty income at the end of last year for there to directly to offering gave US your was right right around 40% plus or minus.
Hi, and the only difference is that we're not relying solely on unsecured money, we're relying on the Master Trust as well a master Trust has two thirds of our debt for the only has one third of our asset something less than that you know and so what ends up happening is that the unencumbered leverage its 23% in this low.
Less than that and the specs, there's no one that come close to it and so the question wise in in a real downside scenario.
And Vikram, you've mentioned that the master funding is it poses some sort of risk to US hi, given that you would have this non recourse debt on the balance sheet and it in a toll downside scenario Master Trust does a much better job of protecting our investors spend it would be if we were just unsecured debt only so you're in a much better position.
In any other re would be both from a diversity of capital and from a protection of on it.
And shareholders and on unencumbered noteholders, because our unsecured note holders because leverage is 23%.
Okay that makes sense I just wanted to clarify get the leveraged aspect and the unencumbered portfolio, but I'm just I'm just I'm not maybe I'm not understanding is when you have had eight it follows a 30% how are you what are the reasons for not being close to the one three if it's like our nested deferrals are really different into my stuff.
Funding vehicles versus like how is it more close to one three.
Fundamentally it comes down to the fact that where the service or and and because where the service or you all the waterfalls come to US. This is not like CMBS, where you have cash sweeps and you have a servicer. We are the servicer. So if we choose to waive fees. For example, a then obviously it changes the waterfall I mean I said so there are there things that we can.
Do with it or in our power to do.
That essentially allow us to not be subject to cash sweep and at the end of the day, if you're looking at us versus.
National retail Realty income both of which are reliance on unsecured debt virtually completely hi. This is the look at the same I mean, there's you know the cash flow comes and it goes out you know the only difference is that we have a chunk of assets that are non recourse vehicle, which at the end of the day prepare you know creates some protect.
Good for investors for based the basically because where the service or we can.
Manage the Oh, we can manage the cash wasn't such a way that we don't.
Trigger any any.
Cash suites.
Okay fair enough I'll, probably take it offline. Thank you so much.
And our next question will come from and they'll say just Mizuho. Please go ahead.
Hey, good afternoon up there I hope you got roll all well thanks for taking my question.
So Chris I, just want to you so than.
Understanding that this is all happening so quickly.
But just curious how coated and your portfolio performance and what you've seen in the marketplace in terms of other peers portfolio.
Those are the performance.
It's impacting your portfolio allocation theory at all you could this be favorite yields more middle market tenants versus a I agreed. So just curious on your your observation how they might be impacting your your thoughts or strategy are you willing to do a bit more high grade deal that you'll get a bit more a attractive here and then also can you wrinkle in some thoughts on how you're feeling about your exposures to.
Two.
The movie Theater restaurants, right, Jim and what do you think that the that road to recovery for those right it looks like.
I'm sure.
So.
[laughter] trying to.
Think about where we want us when it went to start here.
I think the more you know minor portfolio theory, a win win not when Eugene family came up with modern portfolio theory, I want to Nobel Prize for already wasn't thinking about covert 19.
And you know covert 19 is something that hasn't affected the United States for over a central and.
You know what we're seeing is that.
And he said can pay rent.
Our as those companies with the companies are best able to pay Rad today are those companies that oriented physicians that are somewhat immune to cope with 19. So it could be anybody from Amazon to grocery stores too high drugstores dollar stores have done well.
And.
So those would be sort of at the very best in that made it pretty much everybody else is done badly.
And even if you look at Reed.
Were you know companies have any rating aren't really designed to have to say shoe business. I. You know so my outlook on this going forward is a couple of things and then well I will have to wait and see what happens, but oh. The first thing is this this trend this illness.
As cost huge cost on our society and our federal government I mean its cost.
Pre treat them plus most likely from the federal government it may be more.
And just a 30 million unemployment, it's been an enormous.
Cost to just everyone, everybody and and so with such a cost my guess is that the U.S. government and every other government, it's going to do their very level best to make sure. This doesn't happen again.
And so the likelihood of Cove, it being something that we need to worry about next year a year. After I think it's gonna be pretty slim.
It really needs to be pretty slim because it's so ubiquitous you know you can't just go around and chase.
Cobot prove businesses and have those businesses have a lower cost of capital than other businesses.
And.
So you know in that case, you know, we're going to be going after a broad market of businesses middle market in larger non rated companies, which constitute the reality of companies in the United States and we're going to go after those companies and fulfill a very important need for them for Fisher real estate capital and ER and we're going to do what we do best.
Hi, you know as to whether we go into movie theaters or whatever we're only 4% into theaters anyway. So we're pretty light.
And the movie theater sector anyway, Hi, fitness centers were a little bit heavier I think that you'll see us evaluating what's the long term implications of cope with 19, our there'll be some societal impacts on coakley my team clearly you've seen that with Airtran said hotel hospitality industry or we certainly.
The streets it could potentially be permanently impacted by this up I don't believe for example that really child education, which was a big sector for us is going to be Permal impact I think that fitness clubs long term aren't that she was the impacted but at the jury's out I think the theaters will probably come back.
Hi stronger than people think just because there's still content related I mean, if you bring in content and people have the ability to go to theater and make a wash.
A new a blockbuster release I think they're going to want to go out and do that and this could be really tied to content.
Hi, So I think that.
A lot of these industries are coming back in one of things that we said in our prepared remarks was that 75% of our lost rents fruit for April or deferred rent.
Was tied to six sectors I mean, it's just nothing it's it's not Titus too you know middle market tenants are unrated tenants. You know hi, you know I mean, you know one of the things that you often get comments about a read your comments about at the somehow middle market tenants are riskier than because I mean, Kobe basically takes no prisoners I mean, it doesn't matter.
With your middle market or larger or whether you're a triple B company or a double the company is if you if you're in a co bid sensitive business, you're going to be really really hurt by this.
And and if you let it go on long enough for 30 million people all the rest of the people order be really hurt by it because it's going to impact just the overall economy. If we keep on going long enough for that so so we're going to do what we do best and we're going to stick to our strategy and we're going to evaluate these sectors closely and.
Uh huh.
And ER and take measures steps as we get through this and and when we always do is make bats, and one of things that we do when we make best as we diversify you know which gets you to another Nobel laureate, which is Harry Markowitz, we've talked about you know getting getting a official portfolio theory of having huge.
Sure massive diversification, which by the way is why if you look at store today store amongst all of them at least for each quite collected a higher percentage of branch from non rated companies than anybody else and we did that because we had switched diversity apart from the fact that we had a lot of people working hard on us.
I appreciate that so I certainly doesn't sound like a day near term imminent shift in strategy, but certainly a that or you know your commitment to middle market remains.
Just a couple of quick follow ups here did you guys talk about whats driving the bump in the annual contractual lease bumps here that the jump from.
Up to 2.5% does any single tenant industry can you talk a little bit more about that and then maybe share what the recollection was for us it within the trust during the month of April versus those outside the top thank you.
Yeah, I'm happy to answer that I.
I wonder if it seems like it make a small attendance in my last comments [laughter].
Which is that when you talk about risk either one of your questions with where you go after investment grade tenants, you know and implicit in that discussion or that question is somehow. These are less risky you know that ER and we would be just wouldn't be better be better off there you know and I would say that you cannot measure risk without measuring timely.
Actually discuss risk without discussing time you know.
Hi, now in the market like we're in today candidly like you know long term is lunch for most people. So they're just trying to figure out what's happening today. That's why we're having to do once a month a conference calls with people, but but really like over a 10 year period of time, if you know a triple B company is gonna be unrated, 60% at the time, but you can't treated like a triple B company and that's really the credit.
Racial statistics for Triple B company. So you know we're running this company not for Tomorrow. We're running this company for 10 years from now on works when we're thinking about risk.
And comparative risk, we're thinking about risk in this in the span of stuff for a decade of years, you know a and we know that risk adjusted returns have to be measured accordingly.
I would say that Oh in terms of that the transactions. This quarter. What happened was we we've got cut off you know honestly I mean, we were on a role to do a decent quarter worth of acquisitions I'm a week curtailed them out when we curtailed them, we have sort of a small sample.
Which makes it look like cap rates went down and bumps went up it was due to a handful of transactions, where we had higher moms and lower cap rates are really most of those bumps. We're really elevated in the short term. So so oh, hi, Ed but in my prepared remarks, I tend not to go into like a lot of detail. So that's what we did discuss.
Your next question will come from Giovanni sued with Deutsche Bank. Please go ahead.
Hi, Thanks for taking my question on puts you in sort of touched on the investment activity and Cathy you mentioned in her opening remarks that the team curtailed near term investment activity when 2020 guidance of called the I'm just curious what your team and need to see in the market or sort of the operating environment to get comfortable with dipping their toe back.
In the market again.
And can we see your team do something Opportunistically, if there were sort of an arbitrage opportunity to be hot.
It's Kathy I'll start and then married can talk about whats Atlanta for going forward. So.
Yeah, we we had.
Expected to have a bear quarter is as Chris had mentioned and.
Very very early when Kobe hit the U.S., we decided to curtail investment activity seven most of March was let's curtailed now we've got about 100 million of construction commitments that Mary you talked about earlier that that we will be.
Dealing and those are kind of spread out over the rest of the year. So when I mentioned things about the construction, that's what I'm talking about and then and I didn't get married prepared remarks, you did mention that our relationship managers continue to keep the relationships going on the deals that we were work.
Moving on and and our new deals for example, and maybe you could talk to that Mary Yeah, I would say that Shibani. Our pipeline you know our front end is they've been helping a lot with the cobot 19 activity, but the pipeline is still very robust we have many many long term relationships, there's not a lot of our businesses repeat we have a lot of grow.
Lean customers that are really on the engineers seat and anxious to do something again, so we're keeping a front end very warm and you know as soon as we can get back out there we will do that for sure on so I think what warm on the front end still.
Great. Thanks for that kind of <unk>, and then Mary Oh, sorry.
I think you had mentioned marry that and the 17 states that are starting to reopen represents about half of the company's annualized base rent.
I appreciate that it's still very early on but any commentary that you got its can share there about demand and how quickly it may or may not be returning.
Yeah, I'd say, it's a great question, but also a tough one as you know Chris has mentioned, it's just it's anybody's guess right now as to how.
Quickly. These are we opened interrupts fashion they'll be open I think our customers are you know cautiously optimistic that there will be able to get going but you know reopen doesn't really mean reopened right now there's a lot of faith in approaches there. There you know doing industry by industry. There's a lot of 'em precautions that needs to be put in place whether its math 30.
Taking temperatures or put it putting some you know spacing inbetween seats in movie theaters and so on so there's a there's some things to do and then that can you know consumer behavior has yet to show itself. So thats kind of the last piece the puzzle. So we'll see what consumers if they start to jump out there or not so I just think that it's really early shivani.
But there is excitement I definitely you get going yeah. Whenever you know if you look at some of the rules on state by state basis, though they'll tell people are on the restaurant business written in the early childhood education business, they could be 25% capacity, but if you're a business person running.
Restaurant or are we try to education facility, 25%, it's not going excite you enough to one open I see so mathematically you just need more room than that and Oh. So I think that we're going to see this happened gradually hi, hi, somebody from the New York Times. This.
Suggested that they were that we were in the second ending at this you know I don't know, whether it's the second or third inning, but you know I mean, it just could take a while right I mean, Oh and I think that no oh, we have to be prepared to be a patient with us and ER and work through which we will.
Your next question comes from Jeremy Metz would be ammo. Please go ahead.
Great. Thanks.
Yes, I just wanted to go back to the to the Master funding you mentioned, having well doors are the ones recovered cheer on being able to ways. You see is to help a board.
Yeah, there's potential cash sweep I guess, just given the composition of the property pool that supports it you know, it's nearly 25% restaurant.
That's a lot more than <unk>, what's in the unencumbered pool you have another 15% reach al you outlined there's question there being pretty low for industries like restaurants, I guess just.
Wondering what else is out you're just spoke about your to help keep in so far above that one three just your ability to swap property. There and is that something you are able to do is that something you're considering any color there.
Oh, that's the German we don't swapped properties into or out of Master funding. So we don't we don't swap between the unencumbered pool at Master funding.
We can't but we don't and Uh huh.
As far as Steve Coverages are concerned you know one way to another way to get the coverage one ways, obviously to subordinate fees. When we were up by the way the Triple B note interest income. So that's the 190 covers that people talk about is actually after paying us for our interest on the Triple B notes, you cant hogs and the fees right.
You see can basically subordinate all that stuff. If you want to right. Yes thing is if you Oh, if you take a rent deferral and you do it in the form of a note I. So if we make a no to a tenant and we're doing a rent those deferral is in that fashion then eyes the.
Master funding will look like it's been paid I mean, a and so there's no hi. This is you don't get to a cash if at all you know and and so you'll see see that happened as well. So there are a number of things that are disposal to be able to manage the master funding portfolio and if your.
In Investor and that match funding portfolio, you were actually want us to do all these things I mean, so this is not something you don't want us to do you want us to support it Hi, you know I mean going to cast weeks as easy as Cathy said you know you asked me if we if we were especially a cash we've only got a happened if we decide to a big it didnt master funding to be I mean, as it gets to be clear about I mean, a if we.
Were to stare say, we don't really care about these assets and then maybe you might get into a a suite, but it but assuming that you really care about these assets do you know that situation is temporary and defendants are going to rebound I, you're going to feel pretty good about it I mean, not under normal circumstances by the way the difference feel 190, and 130 or something like 45.
35, 40% or tenants have to default simultaneously, which is happening in a cobot environment to your point, but but Ah Ah. That's like also having 80% of your tenants have defaulting and having a 50% recovery rate right. I mean, it's it's a its something that would have been really unthinkable and its and its candidly unthinkable to me that Uh huh.
We're not going to be able to get those that that 35 or 40% of our tenants to be active again, because it's the risk isn't really a tenant risk at the sector risk and I for one don't think that the early childhood education sectors not gonna exist. So.
Okay that helps.
Yeah, and then the second for US is can you just give us your latest thinking your around the dividend here just somebody to what's going on right as some of them are quite you you've noted and some of the pressures across some of these industries.
I'm just wondering how what the latest says there. Thanks, Yeah, I mean, I think what we expect to be able to answer that in June for you I mean, I think our board of directors is going to evaluate the dividend closely and they're going to do what they should do I mean, Oh and ice you're looking at your in June and you have a transparency on June collections and as you've seen may and April collections.
As you more important than that are just as important as you as you can look forward and have some predictability of where do you think the to the world is heading you know I then I think boards are going to me in a very good position to make a cogent unclear policy and of course the stuff changes every day as you know so I want one day things recalls.
The next things things are open and so once before so.
So that's what's going to happen and of course, we're going to give you a monthly calls a web access before the next earnings call. So that means that you'll have an update now you should expect one.
And June and not all right and so when we do the one and Jim will be able to talk about the dividend policy as well and then we'll have another update in July.
The next question will come from Todd Stender with Wells Fargo. Please go ahead.
Hi, Thanks.
Obviously, a it's very early May you gave us the indications for April and May be made deteriorates I guess from a a rent collection standpoint.
Looking now it's maybe it's too early before in June and heading into July what kind of data points are indicators that we can keep an eye on for you guys.
That would give us an indication that you could start to.
Reinstate guidance a is it is it collections is just a having every state reopened.
How did you guys look about providing visibility on guidance.
No I think ties good question I think it's I think it's a macro issue you know I think it's a states being open and then knowing what's happening in the restaurant space in the early childhood education space and the industry is just the risks to store today from a deferred rent perspective, as I said before on this call or not a.
Our not tenant specific they tend to be much more sector specific right and when and when you got 75% of risk or the deferred rent tied to six sector is and its.
And then for you as an analyst looking out there you know those six sectors are important you know I mean, a and if a and they're showing no signs of opening or if consumers are cautious or if unemployment, saying Super high I mean, I think that or are these are all things to be a worry about.
And then when it comes to a number of months. So so far we're in the month one month to month three months ballpark of maybe rent deferrals at what point, how many months do you have to get too.
Tenant not saying they ran before it becomes a rents a false.
Well rent default doesn't happen unless we actually since the fall. So so you know I mean are kind of started calling us up in mid March you know and and so we started having dialogues with our tenants by the time April came around we pretty much had a very clear idea before April 1st came around who is not going to pay another why some people.
The you know you know come out of left field, but we had a pretty good idea for April 1st happened and Oh, and so our tenants worked with us partly because we have a good relationship with them and there are a big originated in will directly I mean, a high so I expect that if our tennis, Steve Moore assistance than what we've already agreed upon.
On that and we're going to have the exact same types. The dialogues and when you have those dialogues Oh, you know you and you're working with a tenant in the tenants part of the solution not part of the problem you're going to work with them.
Thank you and our last question today will come from John Soak up with Ladenburg Thalmann. Please go ahead.
Good afternoon.
Okay.
Let's see what percentage of your kind of plate, so big contractual rights.
Roughly came from leases than in some time do you know modification in April.
I know you gave that 60% cash payment number, but I would imagine that include parcel before old maybe some other kinds of modification or support you provided where rents kind of take in April. So just wanted to kind of good and general feel for how many tenants reached out to you.
The 68 as cash you know is as a percentage it over retina income or and I. So basically we are we're short 32% of rent collections for the month of April Oh, well, we did not really disclose how many tenants actually called us up and asked for things on what the negotiation wasn't.
We expect that's really right for us to get that disclosure I mean, obviously, there's there's there's back and forth in it and you're working on getting a mutually agreeable mutually acceptable relationship because all of US. It's just painful frankly for both for all of Us <unk>.
<unk> was there any kind of significant number of modifications that didn't turn out to be kind of monetary or where you didn't really impact the cash.
Payment in April.
Hi, all the all the modifications that were made to leases had to do with at least deferral or agreements. There's nothing that was done outside of that.
Okay, and then just a quick one what was there was you kind of you mentioned Dart man drove some of the elevated operating costs in one Q what was the other half it's the broad.
Things are looking for any other kind of specific tenants that were.
Maybe impacted in the quarter.
Yeah. This is Kathy Erfan was the only one that was big enough to point out separately the rest versus a handful of you know minor stuff.
Okay.
That's it for me that you guys very much for the time.
Thank you Vic.
All right, ladies and gentlemen. This concludes our question answer session I'd like to turn the call back over to Chris Volk for any closing remarks.
Well. Thank you all and it's been a pleasure doing I've described a and talking with you and we look forward to us talking to again on may 27th whenever we do a follow up call. A until then I have a great day.
And thank you conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].
[music].
[music].