Q2 2020 Realty Income Corp Earnings Call
Good afternoon, My name is Keyshia and I would be your conference operator today.
At this time I would like to welcome everyone to the Realty income second quarter 2020 operating results conference call.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one of your telephone keypad. If you would like to which were question press the pound key.
Please limit yourself to two questions. If you would like to ask additional questions you may reenter the queue.
Thank you I will turn call over to Mr., Andrew Chrome Associate director of Realty income you may begin.
Thank you all for joining us today for Realty incomes second quarter 2020 operating results conference call discussing our results will be Sumit, Roy President Chief Executive Officer, and Jonathan Pong, Senior Vice President head of capital markets and find out during this conference call will make certain statements that may be considered forward looking statements under federal Securities law the companies.
Actual future results may differ significantly from the matters discussed in any forward looking statements, we'll disclose in greater detail. The factors that may cause such differences and the company's form 10-Q.
We will be observing a two question when I joined the Q and a portion of the call in order to give everyone in the opportunity to participate if you'd like to ask additional questions you may reenter the queue.
I'll now turn the call over to our CEO Sumit Roy.
Thanks, Andrew welcome everyone.
I'd like to start by expressing my gratitude and appreciation towards my colleagues was resiliency and determination to remaining extremely productive in the face of the current pandemic continues to drive our business. We all want team and all employees have embraced this concept through effective communication and collaboration one working remotely.
Well I know, we empathize with the individuals and businesses impacted by called bid my team and we continue to partner with all clients to seek mutually beneficial outcomes.
Our operating results for the second quarter continue to demonstrate the stability and resiliency of our business as we generated amicable per share of 86 cents and ended the quarter with the booked 40 occupancy of 98.5%.
During the quarter, we invested over 154 million in high quality real estate, including $58 million invested internationally in the UK, which brings us to $640 million invested year to date.
Our quarter end to date and net debt to EBITDA ratio fell 5.1 time positions us well going forward, but significant financial flexibility.
One uncertainty remains due to the Colgate 19 pandemic, our business, which primarily focuses on owning real estate leased to essentially retail industrial tenants continues to perform well.
Rent collection since hitting the <unk>, 84.9% in Maine has steadily improved and also as of July 31st we have collected 86.5% contractual rent for the second quarter.
We have collected 99.1% to contractual rent for the second quarter from investment grade rated tenants.
Which further validates the importance of a high quality real estate portfolio. These two large well capitalized clients.
Why do we have not historically prioritize investment grade rated tenants as a primary objective.
During the periods of economic uncertainty high grade credit tenants and to provide more reliable streams of income at the last few months of proven out.
Well the month of July we have collected 91.5% to contractual rent, which represents the second consecutive month of improved trends connection and the highest monthly rent collection since the pandemic began.
Collected French continues to be primarily in the theater health and fitness and restaurant industries. As these industries accounts for approximately 81% unconnected drench during the second quarter.
Importantly, we continue to expect to collect the vast majority of uncollected rent as we continue to consider and negotiate wrench department agreements on a case by case basis.
We disclosed enough financial supplement the percentage of contractual rent collected by industry.
I'll talk more industries convenient stores drug stores dollar stores in grocery stores, each cell essential goods and represents approximately 37% or rental revenue and we have received almost all of the contractual rent due to us from tenants in these industries for the second quarter.
Other industries, such as Petters health and fitness and restaurants have been challenged due to store closures and social distancing guideline, but we are encouraged by improved rent collection in recent months.
We remain constructive under long term viability of these industries, particularly given our partnership with the top operators in each of these verticals.
Success of the Chinnery industry has largely been tied to the quality of films produced by Hollywood.
The U.S. box office reached an all time high as recently as 2018.
Additionally, the economic business multiple studios continues to suggest in our view that that she had a distribution channel we remain attractive going forward.
We also expected non discretionary and low price point proposition to the quick service restaurant and health and fitness industries to support resiliency off their rents being capabilities, particularly up their businesses begin to reopen in certain areas of the content.
As we continue to manage our portfolio to support long term value creation, we believe the breadth and depth of our asset management and real estate operations Department, which is our company's largest department is a key competitive advantage visa via competitors.
Moving onto investment activity during the first quarter.
The second quarter.
Twentytwenty, who invested approximately 154 million in 32 properties located in 15 stayed on the United Kingdom at a weighted average initial cash cap rate of 6.3% and with a weighted average lease term up 11.8 years.
On a total revenue basis, approximately 41% of total acquisitions during the quarter what from investment grade rated tenants hundred percent other revenues were generated from retail tenants.
These assets I'm pleased to 14 different tenants and eat industries.
We closed six discrete transactions and the second quarter and approximately 9% to second quarter investment volume, let's say leaseback transactions.
The $154 million invested during the quarter $96 million reinvested domestic mean 30 properties at a weighted average initial cash cap rate of 6.5% and with a weighted average lease term of 12.8 years.
During the quarter $58 million was invested internationally in two properties located in the UK at a weighted average initial cash cap rate of 6.1% <unk> weighted average lease term of 9.9 years.
Year to date, we've invested $640 million 94 property located in 25 states in the United Kingdom at a weighted average initial cash cap rate of 6.1% and with a weighted average initial lease term of 13.6 years.
On a revenue basis, 37% of total acquisitions off from investment grade rated tenants.
87% other revenues are generated from retail and 3% from industrial assets.
These assets I'm pleased to 29 different tenants in 17 industries be close 23 independent transactions year to date and approximately 22% of year to date investment Wally let's sale leaseback transactions.
The $640 million invested yet to date 416 million was invested domestically in 88 properties at a weighted average initial cash cap rate of 6.5%.
With that weighted average lease term up 14.3 years.
Year to date, approximately $224 million was invested internationally and six properties located in the UK at a weighted average initial cash cap rate of 5.3% and with a weighted average lease term up 11.8 years.
On the action Hello remains healthy as we saw US approximately 14.5 billion into second quarter.
Most of 14.5 billion sources during the quarter 9 billion was domestic opportunities and 5.5 billion international opportunities.
Investment grade opportunities represented 65% or the volume source of the second quarter.
Well, if the opportunity source during the second quarter, 55% for portfolio than 45% or approximately 6.5 billion well one off answer.
Year to date, Resourced, approximately 32.6 billion and potential transaction opportunities.
These opportunities 19.3 billion, what domestic opportunities and 13.3 billion way international opportunities.
Investment grade opportunities represented 49% of the volumes source year to date.
After 22.6 billion source here today, 56% put portfolios and 44% one off assets.
On the 154 million and total acquisitions closed in the second quarter, 41% when one off transactions.
Our investment spreads relative to our weighted average cost of capital during the quarter average approximately 131 basis points.
We define investment spreads that initial cash yield that's our nominal first year weighted average cost of capital.
Going forward I investment pipeline remains robust and we are well positioned with strong financial flexibility.
Accordingly, we have reinstating 2020 acquisition guidance with a range of $1.25 billion grew $1.75 billion.
Moving onto dispositions during the quarter, we sold 12 properties for net proceeds of 7.4 million and we realized an unlevered IR, 6.1%.
This brings us to 29 properties sold year to date for 133.6 million at a net cash cap rate of 6.2% and we realized an unlevered <unk>, 10.5%.
Our portfolio is well diversified by tenant industry, geography, and property type, which contributes to the stability of our cash flow.
Water end up properties would be used to approximately 600 tenants at 50 different industries located in 49 States, Puerto Rico in the UK.
84% apart rental revenues from our traditional retail properties the largest component outside of retail is industrial properties at approximately 11% of rental revenue.
Walgreens remains our largest tenant at 6% of rental revenue convenient stores remains our largest industry a 12% of rental revenue.
Within our overall retail portfolio approximately 95% upon rent comes from tenants with the service non discretionary and our low price point component to that business.
Continue to believe these characteristics allow tenants to operate in a variety of economic environment I'm to compete more effectively with E. Commerce. These factors have been particularly relevant to today's retail climate, where the vast majority of recent U.S. retailer bankruptcies have been an industry that do not possess these characteristics.
We continue to feel good about the credit quality in the portfolio with approximately half of our annualized rental revenue generated from investment grade rated tenants.
Weighted average rent coverage ratio for a retail affordable properties. It's 2.7 times on a four wall basis, while the median is 2.5 times.
Occupancy based on the number of properties was 98.5% consistent with the prior quarter.
During the quarter, we released 65 properties recapturing, 101.4% of the expiring rent during the first topic Twentytwenty, We released 158 properties recapturing 100.1% of expiring rents.
So our listing in 1994, we have released or sold over 3300 properties with leases expiring recapturing over 100% of Grand on those properties that we released.
Our same store rental revenue decrease 0.4% during the quarter and 0.2% year to date.
Our reported same store growth includes deferred rent an unpaid rent that we have deemed to be collectible over the existing lease them.
The decrease in same store rental revenue is primarily driven by write offs, we recognized in the restaurant industry as well as partially due to a change in methodology as Vietnam recognizing percentage rent during the Pea ridge is accrued rather than during the period you just paid.
Moving on I will provide additional detail on a financial results for the quarter, starting with the income statement, our gionee expense as a percentage of rental and other revenue for the quarter was 4.8%.
You have today Ginnie expense ratio, excluding approximately 3.5 million a severance related to the departure of former CFO was 4.6%. We continue to have the newest DNA ratio the net lease REIT sector, reflecting our best in class proficiency and the scale benefits afforded to us given our size.
Our non reimbursable property expense expenses as a percentage of rental and other revenue was 1.4% for both the quarter and year to date periods.
Oh per share during the quarter was 86 cents, which includes approximately 60.2 million or 17 cents per share on a fully diluted basis of deferred an unpaid rent that we deemed earned during the period I'm, probably not being collected during the existing Easton.
Briefly turning to the balance sheet, we have continued to maintain our conservative capital structure and remain one of only a handful of treats with at least to eat ratings.
During the quarter, we issued $600 million a senior unsecured notes due 2031 within effective yield to maturity of 3.36%.
And subsequent to quarter end, we added an additional $350 million at an effective yield to maturity of 2.34% blending out to just shy of 3% for the entire 950 million of note.
Additionally, we raised approximately $98.1 billion of equity during the quarter, primarily through our ATM program year to date, we have raised over $1.8 billion of well priced capital, including approximately 874 million of equity and 950 million of debt we ended the quarter bit.
Leverage and strong coverage metrics, but the net debt to adjusted EBITDA ratio of 5.1 times.
The fixed charge coverage ratio of 5.4 times.
We continue to have very strong liquidity with approximately 400 million a cash on hand, and $2.5 billion available under our revolving credit facility as of July 31st which provides us significant financial flexibility.
Looking forward, our overall debt maturity schedule remains in excellent shape at the weighted average maturity of up on is 8.3 years.
Additionally, we have invested $140 million of debt coming due through 2021.
In summary, our balance sheet is in great shape, and we continue to have low leverage strong coverage metrics and ample liquidity.
In June we increased the dividend for the 107 time in our company's history, we have increased our dividend every year since the company's listing at 1990 for growing the dividend at a compound average annual rate of approximately 4.5%.
We are proud to be one of only three recent the S&P 500 dividend aristocrats index for having increased the dividend every year for the last 25 consecutive years.
[noise] moving on we have always manage the business with a focus on economic resiliency and generating stable, an increasing cash flow through a variety of economic environments and we continue to do so through the current climate of uncertainty driven by corporate 19.
We deliberately designed to high quality real estate portfolio lease primarily to tenants, providing non discretionary or low price point goods or services as well as with the focus on partnering with large well capitalize operators who are leaders in their respective industries.
Our judicious balance sheet management, and the strength of our financial position are evidenced by up to a credit ratings and our current financial flexibility and liquidity positions us favorably to capitalize on growing opportunities going forward and we have reinstated 2020 acquisition guidance with a range of $1.25 billion to $1.75 billion.
At this time I'd like to open it up for questions operator.
Ladies and gentlemen to ask a question press Star then the number one on your telephone keypad again, please limit yourself to two questions. If you like to ask additional questions you may reconsider Keith.
And your first question comes from Shibani suit from Deutsche Bank.
Hi, Thanks for taking my question on touching on the investment pipeline I'm just curious.
The potential acquisitions, the depth of the buyer pool that you're sitting out there in terms of competition and how it compares to pretty cold that level. I guess is it mostly public buyers are pride that it hasn't been difference or larger portfolio transaction.
Yeah, It's a it's a very good question Shivani.
The way to answer it is for the high quality essential retail product.
The competition for that product remains fierce.
And in fact, it's translating into cap rates that I would say has tightened.
Vis-a-vis prequaled at levels.
And so you know.
In terms of number of potential buyers looking at that product continues to be very strong.
I would say that we don't see as many public net lease companies in the space. Today. This is an overall comment as we did pre coded.
But given what we've heard in the recent second quarter earnings announcement, I expect that that's going to change.
But at least over the second quarter and in transactions that we pursued more recently.
The the number of public buyers tend to be tend to be less.
On the international side. However, you know the number of buyers and most of the time be a competing with private institutes.
Has continued to be very strong.
And and in fact, there have been occasions wed be walked away fall from transaction stuck lower right down the fairway for us, but because of pricing getting very very competitive.
So.
You know in general I would say that for the product that we have pursuing the competition remains strong.
And I expect that most of the public.
Net lease buyers are going to start playing in that space soon enough.
And then as a follow up in terms of there being a seed investment guidance could that strength in the UK markets that Jeff that more of that those investment volume you source in the U.S. persist the UK.
Thank you.
Sure.
Look I think a the UK market and you know I'd say the overall European market has continued to be very strong source of growth for us.
You know they were about $650 million worth of sale leaseback opportunities that basically take all of the criteria that we'd be looking for outside the pricing.
And given our disciplined approach to acquisitions, we chose to not continue to two to pursue those transactions and if you look at the sourcing numbers you know I'm off the 34 billion 13 billion was has been sourced internationally.
That is well above what we had originally anticipated when we went into the UK market and so you know the product remains strong.
International markets I would say that even here in the U.S., our sourcing numbers is a testament to it.
You know there remains plenty of products both on the sale leaseback side to be equation as well as under one off market and.
The reason why be felt very comfortable reinstating our acquisition guidance is a testament to the pipeline that we currently have.
The discussions that we currently have with with our relationship tenants and on what we're seeing on the sourcing side of equation.
Thanks, very much for that clay.
Thank you.
And our next question comes from late Crossett bare fare.
Hi can you guys.
Ah, yes, Nate that set up this a bit of static, but we can hear you.
Ah. Thanks for taking the question you had mentioned that you've seen some tightening for the high quality product.
So you guys have a lot of that I'm. Just wondering if you guys are considering selling some of it into this attractive pricing and maybe redeploying that capital elsewhere.
[noise] look our our business philosophy has been that you know that the product that we like we would like to hold it forever you know in on being a bit facetious that but the idea being that trying to time to market and.
Sell when when we believe that the cap rates are low and et cetera.
It doesn't always play out and our history has proven that if we hold onto assets and continued to work with our partners.
For whom these assets are deemed critical we will create value and we will create value with with less volatility and you know and on and off off equivalent.
Nominal terms and that has sort of proven out to be the case, but that's not to say that that opportunistically. We won't take advantage of the market like we did in the first quarter, where on the consumer electronic side of the business you know.
Decided to two to sell.
The assets back to our tenants, which will be we're having discussions off.
Looking at other opportunities, but also looking to two potentially help them addressed some of their own objectives, and we were able to generate 11% Unlevered IR based on on selling those assets back, but our philosophy is let's buy the assets that works for.
Our tenants, let's get into a very long term leases with minimal to zero capital invested in those assets and we will create value, especially if it continues to look for our tenants and that that that continues to be our philosophy.
Okay. That's helpful. And then just one on the pipeline I was wondering if you guys to just give a little color on how much of it is retail versus industrial and then the same into UK. You mentioned 13 billion sourcing just curious how much of that is retail versus industrial.
Yeah, I would say the vast majority is retail.
It's not to say that.
You're not seeing industrial those are the only two products that we are really looking at right now Nate.
I would say you know anywhere between 60% to 70% off on what we're sourcing is under retailed sides of the ledger and you know 30% to 40% is going to be on the industrial side look it's no secret we want to grow the industrial portion of our of our asset type, it's something that we.
Our very much focus on we have made a concerted effort to.
You know.
Cultivate relationships with folks who could potentially provide us with this product and it is starting to take a take shape and we are being able to.
Generate some some transaction flow from that side of the business, but whats keeps us a little bit on the sidelines continues to be the fact that our cost of capital is not quite Larry was four months ago.
And you know if that were no longer a constrained in terms of the product itself and whats available. There is plenty of very good product.
In the industries that we want to participate in with operators that we would love to two to.
Grow our relationship with.
So you know.
So so yeah, it's about 60 to 70, 30% to 40% is the split.
Okay. Thanks, guys.
Yeah.
Our next question comes from Christy Mcelroy with Citi.
Hi, Thanks, so much.
Just a follow up on those comments.
And your comments on balance sheet in capital raising just in terms of your AG desire to do more I think deals.
From a capital raising standpoint, you recently issued that you get an equity raise earlier. This year you just get somebody ATM you tend to run it a conservative leverage level. So as you think about getting more details and you mentioned cost of capital just from a funding standpoint, what should we expect in terms of a further equity raises.
In the context of your guidance.
Yeah, that's that's a good question Christie.
We believe that we could get to the midpoint of guidance without having to necessarily rely upon the the equity market.
Capital markets and still stay within you know, what we would deem as conservative what our rating agencies would deem as ads.
As as being in line, but the ratings that we have.
Having said that our hope is that with continued.
Positive results on the operating side of the business and.
And continuing to post information that will allow our cost of equity to improve that you know opportunistically, we will be happy to continue to raise equity capital, but the point I want to leave you with is we don't have to do that part of the reason why we.
You know enter 20 lab and then we did that very large equity raise was to get in a situation, where we had created enough.
Offy Oh off of capacity and had under leveraged balance sheet coming out in March where if we needed to lean on the debt capital markets, which seem to have corrected you know a lot lot sooner than the equity markets have.
We could we could lead on that side of equation and still stay within you know.
Levels that that our rating agencies would continue to support the the to a ratings.
So that's that's where we are.
And then just a follow up on your comments on theater.
Two things really it's you know how much have good theater nonpayment of Brent could ultimately trying to convey can see in your view and then just talk about broader perspective, you met you talked about the economic model what are your thoughts on that economic model changing in light of recent AMC Universal appeal another.
Yes, I could follow that in terms of theater operators ability to pay the kind of Greg that their pain small.
Yeah, no, let's let's talk about AMC, we've just agreed to terms at the AMC. They started paying partial rent in the month of July which was a very good signal to us we've entered into a payback on.
The the deferred rent that we've entered into and.
The payback is going to be longer it's going to have a you know the average payback is going to be 2.7 years, but the fact that we weren't able to enter into.
In agreement with with and see the fact that they were able to start paying us rent for the month of July. These are good. These are good signs.
Look we are you seeing the same thing that you're seeing the advantage that we have as we can be can pick up the phone and be can have a conversation with the AMC and what they have shared with us with regards to.
You know the agreement that they've entered into with Universal is the basic premise.
For them doing this was that they believe that within the first 17 days, they get 70 to 75% to 90% of the box office revenues and put the blockbusters they generate 90% of the receipts within the first three weeks.
So.
They didnt believe that it would be significant cannibalization since a movie will be up will be advertise with you'd be already only after the first two weeks of the t. entre could release.
And and the fact that they also get a share of the PV Odie revenues is another source of revenue stream that you know that gave them comfort, but the basic premise was that the economic Hi Inn entering into this sort of an agreement is actually going to increase for both parties.
And so you know listened time will tell we run our own scenarios based on the information that that that AMC has shed and at the corporate level. We believe that you know they'll be either at zero percent to negative 5% off the profitability pre this arrangement.
And so.
We've seen but you know DAF. These feel confident enough to have entered into an agreement with us. It started paying showing they've started paying rents for the month of a July caution rent, but all of that continues to help support.
The thesis that we have that the AMC should should come out okay based on our own independent analysis, Christy we think that they will be fine through November even in this scenario, where they have zero openings.
And then obviously if we if this slowdown continues and more and more theaters that shut down or they are unable to open that theaters as as they've shared with US which is August 20, or they would like to start opening up some of that theaters. Then then of course, there's a chance that they might come back and ask for.
Deferred rent spreads.
But you know that's where we are currently and this is an analysis that we are doing on a month to month basis, which is primarily the reason why we took the eight and a half million dollars of write off for the second quarter. So we continue to believe that this is from an industry perspective, you know the theater business is a sound business.
But you know.
Certainly going forward, if you look at our overall portfolio.
You know we are revisiting in terms of what percentage of our overall portfolio should theaters constitute.
Assuming function, it's Michael Bilerman speaking you know you don't share in the revenues that when I am extremely universal movie.
In my House, Yes, there is a certain percentage of the revenues at this industry is producing that as a landlord to the Fox or you don't have rents it doesn't it.
Ultimately diminish the value Oh.
A theater box you own right. So shouldn't have a higher cap rate lower rent just because the revenues that are going to be generator and box or not what they used to be putting aside the whole thing right. [laughter]. This goes to the original issue with theaters, which was PV Eau de was increasing.
And now we've had a massive change going from 75 to 17 days nobody expected.
Yeah.
Michael that might turn out to be exactly the case and from a Tito perspective, I think you're right you know the actual box will potentially be generating.
No less profitability for AMC, the corporate but she is choose the other piece that I want.
You know us due to contemplate am I missing these are all.
He sees that we're putting out and we are trying to run numbers et cetera, but if you look at the math associated with its something that is shown in the theater versus PB odie.
Even for the studios.
The math is not going to pencil.
If it is PV already only.
The vast majority of their profitability comps from getting that 55% to 60% of off you know revenues that that are generated.
At the theaters and it is.
Much more for these big blockbuster movies, which tends to be way Hollywood is migrating towards.
And and I think this arrangement is multiple movies that potentially are not quite as popular.
Snore budget, how do we continue to maximize that revenue and perhaps PV OTI is a better way to maximize that piece.
Oh movies that are being generated by studios and so really.
Based on the conversations we've had the idea here is that this is going to allow for studios to become more profitable, but it should also at the very least make she edwards corporate level.
The whole or potentially participate.
And in some upside.
And at least at the studios become healthier there would be able to generate better movies that would be able to generate big tent movies and that should translate to better content for for the theater industry, but this is a thesis.
So I get your concern Michael we are we are following this very closely and you know, we'll see we'll see how old at this stage, though.
Thank you.
And our next question comes from Nick Yulico at Scotiabank.
And since we have begun to some with Nick.
Summit, the guidance levels acquisition inclusive or exclusive of any potential portfolio deals and how do you think about your ability to underwrite those 200 million dollar plus transaction given the number of pendants and leases in this more uncertain environment.
Yeah look though.
Even maybe out today, Nick I think we.
We feel we're not super excited about a cost effective but our overall cost of capital.
Jim will allow us to continue to chase.
Transactions that we otherwise believe checks all of the boxes in terms of the industry is we want to focus on the operators within those industries, we want to being on the real estate asset type.
And and that hasn't changed what gave us confidence in being able to put out the acquisition numbers was really a pipeline and the number of inbounds that we started to get.
You know over the last two and a half three months and the fact that are the volatility that was that we saw earlier on in the quarter, where you know stock could move.
Eight 9% on a day that seems to have button.
A bit more.
Benign it gave us the confidence to be able to go out and say face on the pipeline. We've created based on that Nick discussions, we're having that we'll be able to hit that 1.25 to 1.75 billion dollar acquisition number and our ability to do 200 million dollar portfolio deals has not changed.
The fact that we are today under leveraged.
I think allows us to not have to rely on the most of all the trials.
The biggest component of our capital stack, which is equity. We can you know just lean on the on the debt side of equation, which seems to have you know a normalized.
Considerably.
Since the earlier earlier month.
And be able to finance our acquisition so having that Optionality is obviously what gave us the confidence to be able to go out with a number that that we feel like we can.
Okay. So the portfolio deals may be included within the guidance number at this point.
Absolutely sorry, I didn't answer that directly that's correct. Okay. Thanks, and shifting gears a little bit just given the current presidential polls Biden looking to go after 10 31 exchanges and as tax plan would you expect the removal of like kind exchanges to have a measurable impact on the business or maybe the types of assets that you have to acquire.
You know.
I wouldn't use the word measurable, but yes on the margin do I expect to have an impact absolutely.
We don't necessarily compete with.
With 10 31 buyers too much.
Maybe on the quick service restaurants side of the business, we would run into some of these buyers on a one off transactions, but by and large we are buying portfolios, even smaller portfolio transactions and we have all of the usual suspects that are not tend to anyone buyers who play in that market.
Then switching over to the to the you know.
Disposition market.
Most of our dispositions tend to be vacant assets and you don't see tend to anyone buyers playing in that particular market it tends to be developers or.
Our tenants, who want to own their own space, who tend to to play in that particular market. So the only area, where we might see them.
Sending occupied assets.
On a one off basis and that doesn't tend to be a big part of our overall portfolio.
Great. Thank you.
Sure.
And our next question comes from Spencer Alloway with Green Street Advisors.
Thank you.
In terms of rent deferrals, you guys granted to tenants. So far this year has any of the terms changed since first negotiated to understand or how many tenants indicated that they would be paying back ran ahead of the original payback period.
Yeah actually a house so I'll answer your first first question second part of your question first expenses. That's okay. You know we've been shattering our monthly collection inflammation pretty much on a monthly basis.
If you recall you know when we first came out with April rents. We had said it was 82.9% today, it's tracking at 88.4% for me Ranted was a similar trend. We originally came out that 82% today, it's at 84.9% and similarly with June.
We were at 85.7% and today, it's at 86.1% so.
In each one of these months what happened was we've had some of our tenants who went back and made us hole or some of them where I'm from the on the restaurant side of equation some of them were health and fitness businesses and somewhere.
Datacenters that basically decided to to make us hold for the month of April may and June.
So so that certainly happened where initially be taught me may have to pursue deferment agreements with some of these tenants and they came back because that business has opened earlier than they expected and all they felt better about liquidity situation and decided to make us home.
But with respect to the first part of your question Spencer around did we have to alter the leases.
The vast vast majority of what we have entered into.
Which is that $14 million worth of rent off the totaled $60 million.
We entered into an agreement has been done without having to make amendments to the lease itself to the original lease term and so that is the main reason why we are being able to I'm going to stay within the accounting rules to view. These as deferred grants. So we haven't talked to set up.
You know request a longer duration for a payback et cetera, we expect to be paid back during the original lease term and therefore, we didnt have to enter into any lease modification.
And that is a similar story on the remaining 46 million that we have entered into discussions with now around the edges that have been some tenants where they requested getting any longer payback period, which went beyond the original eastern and those.
Have obviously been.
That but they're not part of the of the deferred rent a agreements, which didnt resulted in a lease amendment and so but that's a very very small percentage. The vast majority has been that.
You know without having to make amendments to the these itself.
Thank you.
Our next question comes from Todd Stender with Wells Fargo.
Thanks.
But if I heard you right. It sounds like you walked away from a portfolio transaction the quarter.
If I heard that rate just getting a sense of the with a cap rate was on that to see how low is too low for you guys.
Maybe with the investment spread just wasn't there.
Yeah, Todd actually there were a couple of there were a couple of transactions then the 650 million that I talked about.
Both were international and they were both products that we would have we would have.
Absolutely love to have owned.
I don't want to speak to you know.
The specific cap rates because these are fairly large transactions that if you do some amount of research you'd be able to figure them out.
And once not public yet so.
But what I will say, it's you know if you look at.
I'll answer your question slightly different be Todd if you look at the spreads we've been making.
You know, we made about 135 million total 135 basis points of spreads, which was 15 basis points inside of our.
Average spat spread that we've made in the history.
Uh huh.
Our our acquisitions.
So the point I want to make is yes, we are willing to make smaller spread but not to a point, which does not justify.
Know dajuan having.
Enough of a positive uplift from these investments and and take into account some of the risks that are inherent in these these.
Investments, though.
If you if you look at the industry you look at the operator.
These are the types of businesses and and on the operators that you've seen a very high level of confidence that not only will they will they make it through the initial lease term, but we'll continue to operate these businesses post their initial lease during monday's lease terms tend to be 15 to 20 years. So.
But but.
You know rehab, we've done up 231, so of basis point spread. So we're certainly willing to go south of what our average spread has been but but there is a point.
Beyond which we won't go.
Got it okay. Thank you.
And I'm not sure if I missed this but just looking at the when we look at the same store revenue growth quick service restaurants is what created the biggest hit I.
I wouldn't have guessed that the maybe maybe casual dining to that degree, but maybe just flesh out what happened there with a within QSR.
Sure so.
There are couple of.
Operators.
That that constituted the biggest chunk of that write off ones MPC.
That.
You know that that filed BK.
And another one is continuing to pay rent, but it's just one that we feel we don't have the same level of confidence.
And at this this is a name that has been on our on our watch list for over a year now.
And in fact.
They did and then they did end up paying to like red, but but nevertheless, we feel like our level of confidence doesn't quite meet that 75% collectability threshold until we decide to to write those off.
And so that's those are the two names that that constitute the QSR.
These are the right.
Okay. Thank you.
Sure.
And our next question comes from John Masako with Ladenburg Thalmann.
So apologies if I missed this in the prepared remarks, but as you look into July how much of the uncollected was deferred and how much was kind of not subject to an agreement and are there any industries that are driving the portion that wasn't the for.
Yeah, we did not shared with you John what the results off for July in terms of on negotiation what I have shared with you is all the 86.5% that'd be connected for the second quarter by either 13.5% that remained.
Uncollected.
You know 9% of off.
That is basically that 46.2 million that we've shared with you in terms of a rent that we are in the midst of.
Negotiating there isn't an agreement in place 14.1 million or approximately 3% our our negotiations that have completed or very close to being penciled.
And then the remaining 1.3% of that 13.5% uncollected was written off so that's that's the those are the three buckets of that totino half percent that we didn't collect for the second quarter, we haven't shed a for the month of July.
The age and a half percent of uncollected, what what what's the break up there, but those numbers obviously the.
Different what was being negotiated that number has has reduced because some of those negotiations have gotten over the finish line, but we will bring those we will share that information at a later date.
Okay.
And then I guess this question can go towards your overall portfolio maybe even.
Specifically with regards to health and fitness have you seen any operators.
Concerned about increased commercial restrictions that came into play any kind of start regional pandemic spikes in July.
I guess you have any had an initial take on how that may or may not impact August threat protection.
Yeah, I look thankfully all of this was playing out in the month of July you know how people felt at the beginning of July was very different from the end of July when the contraction rates have started to go up and both very concentrated in.
And the Smart States in Texas, and Florida, and Arizona, California.
Until early there was if not a slowing down there was even potentially an unwinding of the openings.
But outside of California.
Well and health and fitness, we're off to re close.
Florida, Texas.
They continue to basically just have the restrictive.
The restrictions in place in terms of the number of.
But that show a members who could be visiting the clubs et cetera stay in place and where they unwinded where on the more on the on the on the bars and beaches and things like that.
And while all of this was playing out we were in negotiations with.
One of our two largest.
Health and fitness clients and we are close to re up close to a an agreement with with one of them and the other largest operator has continued to pay rent throughout the pandemic to us so.
You know no does that mean that they.
It may not come back to us and talk to us if the slowdown of cars or if there is an unwinding also off some of the openings, yes, that's a possibility, but it was happening real time and as at least as of today, we have not heard back from you know from this this particular, operator, so and by that.
Way they ended up paying.
July rent. So that's part of the reason why our collections in July has been as high as constant 91.5%.
And just quick clarification, the tenant that you're negotiating with pace. So I look at the one is paid rent through the entire carry of QQ in July.
Right. So we are off the two largest operators that part of our top 21 has paid us ran all through and the other one ended up paying July rent.
Okay very helpful for me, Thank you very much.
Sure.
And our next question comes from high handle things just split at Mizuho.
Hey, there.
Most of might have been asked but I want to get some clarification on something you mentioned earlier.
Much that some tenants are paid partial brands can you talk about.
Some of the tenants or maybe industry that move to partial month beyond say the movies and do you also have Tennessee move to percentage rents and or have abated rest for yet thanks.
Sure handle.
Look I think most of the negotiations.
On the deferred part of the equation was around.
You know us independent be verifying the liquidity situation tours for some of these tenants and whether or not they were open what was there.
You know what was their balance sheet strength and their ability to pay and.
That is sort of how I mean speaking with them. We have concluded as to whether there needs to be some sort of a department.
Or not and then.
What shape is that department going to take you know should we have.
Them pay partial rent for the for the next few months should we have been pay 100% of the rent for the next few months, but but make us hole on the previous three months, where we may not have collected any rent all of that has been on a case by case spaces handle and so you know on the if you'd think about our.
Portfolio and you look at the industries that have been most impacted by this.
Colgate 19 induced pandemic, it's the once we've been talking about this heater business, it's a health and fitness business its day care to some extent.
And Oh and the restaurant business.
And and they all have a different profile attached to them. If you look at the theaters, we have almost 100% of thoughts here at or close today, you know with the expectation that they have start opening up in August 20th for AMC in August 21st four foot Regal.
But that again is subject to change if things don't improve.
If you look at the date cat business most of that day cat business has either been.
Has been partially open.
Because they still continue to have restrictions in terms of the number of.
I'll keep you know what percentage of occupancy they can they can hit.
Then you look at the health and fitness business.
A lot of the health and fitness business is open the fully open or partially open but even these occupancy numbers of off you know you contact more than 20%.
Occupancy does not impact you know the health and fitness business as much as it impacts some of these other businesses because they tend to run at 30% occupancy anyway.
So when you take all of that into account then you create a profile of who can pay watts rent and that leads to.
The types of off.
Agreements that we've entered into.
Which translates to that you know 91.5% collection for the month of July and so the remaining piece that hasn't been collected what shape is that going to take off some of them going to stop paying partial rent in the in the coming months.
That is the expectation, but I remain cautious because you know.
It is all subject to what we see happening with with.
The contraction rates and the mortality rates and as long as they are stable to two you know contained I think we're going to be okay, but but if it continues to get worse and.
There is a chance that remain you may see.
Some of the shutdown.
Reoccur.
And some of these discussions resets.
Certainly certainly I appreciate that.
And when one more I'm not sure if I missed earlier than in an office call with power outages here, but did you talk about your inclination to invest overseas here Europe.
By Canada than past last year that was I believe nearly half of your investment volumes. So.
So much your appetite here is how you perceive that risk or perhaps could we see the bulk of your investments and be more domestic thank you.
Yeah handle the vast majority of our investments.
Even even last year was here in the U.S.
We had about 800 million up to 3.7 billion that we did was in the UK market.
This year the mix is one code two thirds. So two thirds a bit has been here in the U.S. and one code has been in the UK and we expect that mix due to play out over the over the remainder, but when we first entered into the UK markets. What we had shared with the market.
At that time was at 25% off our acquisitions, we thought was going to be in the UK and 75% was going to continue to be here in the U.S. and that has shifted slightly to one to two third.
And I expect it's going to be in between those two numbers for the remainder of the year.
Okay.
Thank you.
And our next question comes from Anthony Paolone with JP Morgan.
Thank you.
So you have 12% of your revenue that here, they're negotiating or you're done with the deferral agreement. So just trying to understand if if if everything plays out the way. These are being drafted or have been written.
What does one questions look like come say, one Q2 Q2 thousand 21 is it to 92% is at 98% just trying to understand the cadence of this returning to.
Our centric.
Okay. The first metric on focused on Anthony is to see can be start collecting you know 100% of whats owed to us.
And the good news here is that at least we are trending in that direction with every month that has gone by.
And the second element of the good news that that I've I've seen as.
Not only I'll be trending upwards in terms of what is owed for a given month, but some of these tenants have gone back and paid US you know on ranch that they didnt pay in the months of April May and June and so that continues to give us.
Confidence that at least the outstanding confident enough to two to pass back.
Rents that we hadn't even accrete to in terms of a department agreement.
But I wonder I want to put all of that in context here you know.
Look.
If if if the.
Cobot 19 situation continues to deteriorate.
It's not out of the realm of possibility that some of these guys would come back and talk to us and say hey, sorry, if you have to cause again, because all of our you know stores have been shut down again.
But as long as that doesn't happen or that doesn't happen in scale.
Then then I think these these trends are going to continue and the first thing I'm going to be trying to look forward is when I'll be reaching the 100% off the old rents already given month when are we getting that 100% collection.
And as soon as we get that then you start to focus on okay. All the deferred amounts.
And the agreements that we have put in place are they starting to payback portions of it because if you look at you know.
The vast majority of the agreements that are already in place most of the payback is 4.5 months 4.7 months.
Sorry, 4.5 months of deferred rent and the payback is within a 12 month period. So portions of it need to start getting paid back over the next few months and so if we start to see them paying their their monthly rent plus some of the deferred rent. That's when I know, we have back to normal and going to the red.
If it is all noise as far as I am I.
I can see I mean look it's important to see what is happening in each state and all of that but ultimately it needs to translates to our operators being able to run that businesses and feel confident enough to make that's all.
Okay.
Thank you and then second question is on on 711 at a second largest tenant.
Just given what they announced earlier in the we can you just comment on your appetite for having substantially more exposure to say, one tenants and balancing that against their perhaps being right very good credit, which is sort of do well right now.
Yeah. So so Anthony look we like we like the convenience store business. It is the industry that we have.
Do we were 12% of our overall portfolio as convenient stores right now and within that we are very grateful to have a very good relationships with 711, and the fact that they were able to.
I don't know by another tenant of ours that just speedway.
Is it good thing in my mind that consolidating the industry.
I was going through their investor presentation yesterday, and it's got some very interesting statistic some of which continues to reconfirm you know what a good operator, they are and add some of the synergies that they can create.
Having said that we want to be mindful all of being able to run a very prudent.
Portfolio and.
But not every tenant and not every industry is created equal if there is an industry and there is a particular operator that we would make exceptions for it is absolutely 711, and it is absolutely the convenience store business.
But we comped, let convenience store dominate 40% far portfolio and nor can be that a single tenant dominate.
A big chunk of our.
Part of our register on a prominent basis, but hobby lobby willing to you know helps support some of our clients.
When we've had an amazing relationship and we believe in the industry and we believe and independent the answer is yes. So this is this is like.
Like one of our my colleagues told US this is the resolve the tactful fall.
Our realty income to get out to be able to go out and do these very large scale transactions and.
And and be able to help our clients and at the same time.
Creative portfolio that continues to become.
Incredibly strong and.
So so these these are the opportunities that we were hoping to two.
To to have discussions around then yes, if it presents itself and I.
I don't if it's going to be all 5 billion sale lease back that they have identified but if it's portions of it we'd be happy to engage in that.
Great. Thank you for the car.
Sure.
Again, ladies and gentlemen, if you like to ask a question Press Star then it number one on your telephone keypad.
And our next question comes from Linda Tsai with Jefferies.
Thanks for taking my question I, just had one understanding it's a function.
The next.
Hi, good.
Thanks, Good investment spread you've Jeffry Quinn you know how does that then of course coming quarters.
Linda you were breaking up and I don't if it's just me, but I think your question was around the spreads that we achieved in the second quarter and how do we see it going forward is that right.
Yes, that's right.
Okay.
Yes, so look.
The our cost of capital.
In the second quarter was obviously.
Impacted by what happened to the cost of equity.
During the three months.
When we went into mid Suffolk, the cobot 19 situation.
And.
The fact that our stated spread was 131 basis points is largely being driven by.
Two thirds of the equity piece being priced a reflective of where we were trading in these three months.
And the question of you know if all cost of equity is where it is today or continues to improve from where it is today those spreads should improve.
Because you know the product that we are seeing is very much along the lines of what we have done into first half. There's just a lot more of it and so.
Our expectation is that our spreads will improve.
Our expectation is that our overall cost of capital will improve.
But you know the fact that we have optionality to not lean on one particular source of capital versus the other.
I think just gives us more.
You know optionality in terms of how to be permanent be finance, our transaction and then what ultimately turns out to be.
The permanent spread that we are able to trap.
I think that is left to be seen but the expectation is that it should continue to improve going forward.
Thanks.
Sure.
And this concludes the Q1 day pushing of Realty's income conference call I would now like to turn the call over to submit relay for concluding remarks.
Thank you all for joining us today, and we'll keep everyone updated on the business going forward. Thank you key shift for orchestrating this call and we really appreciate it.
And this concludes today's conference call you may now disconnect.
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