Q2 2020 VEREIT Inc Earnings Call
Good afternoon, and welcome to the varied second quarter 2020 earnings Conference call.
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I would not only to turn the conference over to Bonni Rosen director of Investor Relations. Please go ahead.
Joining us today for the marine 2022nd quarter earnings call. Joining me today, our Glenn Rufrano, Our Chief Executive Officer, All Mcdowell, our Chief operating officer, Mike, but a lot of our Chief Financial Officer, and Tom Roberts, Our Chief Investment Officer, today's call is being webcast on their website at <unk> Dot com and the Investor Relations.
There will be a replay of the call beginning approximately at 230 PM Eastern time today.
I wouldn't put a replay is 1877 brief poor for seven five to nine with the confirmation code of 101 for six zero briefly.
Before I turn the call over to Glenn I would like to remind everyone that certain statements. In this earnings call, which are not historical facts will be board <unk> breed actual results may differ materially from these forward looking statements and factors that could cosby's differences are detailed in our SVP filings, including the quarterly report filed today. In addition, as stated more fully an RFP reports.
Disclaims any intention or obligation to update these forward looking statements, except as expressly required by law.
Glenn Let me turn the call over to you.
Thanks, Bonnie and thank you for joining up.
I will review customary metrics for the quarter, along with statistics, we have been providing during the pandemic.
Paul will then go into more detailed operational and clutch an item.
Michael analyze financial results and spend time discussing accounting for the quarter.
Here are some quick highlights.
Yes, that's helping diluted share for the quarter, let's 15 cents, which includes the effects of covered related items Michael outlined.
Battle collection for the quarter with 85%.
An increase to 91% for July.
We had a very successful bond offering issuing 600 million. The ultimately refinance ran and 22 million up converts at 3.75.
Due in December with a lower coupon of 3.4%.
We're also able to redeem another hundred 50 million to preferred stock, which had the 6.7% coupon.
Year to date acquisitions totaled 156 million.
We also acquired a 33 million dollar property for the office partnership and we'll close this month on a $247 million distribution facility for the industrial partnership.
Dispositions total 200 million.
Yeah, that's a normalized EBITDA ended at 6.1 time and includes the negative effects of portfolio enhancing state minimum it.
It's largely impact second quarter revenue.
Excluding this the metric would be 5.8 times.
Okay.
On our last call we lifted for overriding goal would remain our focus.
Let me take you through Leach and the progress made.
The first is the keep our employee safe and for body of work environment and to be picked up.
All of our offices are currently open on a voluntary basis.
And we find the combination of open offices as well as working remotely.
Has worked well.
We appreciate our team's effort.
Second recognized the extent of tenants challenges and interact collaboratively.
As you can see in poll section, we've been moving along with our tenants that have come to agreements on 52% of rent relief requests in negotiating in negotiation with 9% and of the remainder which we have denied 87% have paid in Q2 increased 89% in July.
Third.
Okay and the progress we worked so hard for up last five years, especially our diversified portfolio investment grade balance sheet.
We have proven the benefits of our portfolio diversification model by our rental collection statistics.
We have consistently had one of the highest collection rate that 85% for Q2, but July coming any been higher at 91%.
Our office and industrial.
Hi collection necessity based retail.
And quick service restaurants have provided a baseline of approximately 80% for rental collection.
We have also seen positive movement in certain categories, such as home furnishings, and sporting goods, leading to were higher July collection rate.
With regard to the balance sheet.
Our recent debt offering not only reduced the market spread on all our bonds by approximately 100 basis points.
Well, what six times oversubscribed.
Evidence that the work towards investment grade as provided liquidity.
And a lower cost of capital.
Our final goal is to use the business model, we built the growing AFFO.
This model allows the various methods of external growth.
Alan sheet acquisitions, and institutional partnerships, both supported by our experience real estate team.
In Q2, or our teams sold a 46 million dollar.
Office building in Seattle.
An attractive price of $300 per square foot.
And in Q3, we expect to close our third office property into the office partnership.
We will continue to use this form of internal capital as we have in the past.
For select balance sheet acquisition opportunity.
For example, during the quarter, we took advantage of attending in dollar mezzanine financing to participate in the last mile distribution transaction.
We have worked with this developer over the year expects to continue this mutually beneficial relationship.
I'll now turn the call over to what Chief operating officer form of doll.
To provide more detail on rental collections today.
Paul.
Thanks Glenn.
Our teams remain focused on working with our tenants that need regularly during the pandemic walk continuing routine leasing and asset management.
Help understand our recent activity, we will breakout routine non pandemic related leasing from transactions related to pandemic relief.
Regular leasing for the quarter remains strong with 64 leases executed on over 2.1 million square feet.
All of which roughly 863000 square feet early renewals.
Total activity included 845000 square feet of office 654000 square feet of retail.
460000 square feet of industrial.
And 111000 square feet of restaurants.
For renewal leases, we recaptured approximately 94% of prior rents on initial cash basis and many of these newly extended leases have additional built in rent increases.
Second quarter leasing, including early renewals reduced overall lease explorations by 2.6% between the end of Q1 2020 and 2023.
Occupancy ended the quarter at a healthy 98.8%.
Turning to our co bid related tenant activity in working with qualified tenants on their pandemic related rent relief requests over the past few months Weve broadly taken two approaches.
First standard rent deferrals for specified periods generally between two and four months with repayment generally by the end of 2021.
And second where we saw benefits for both parties in certain cases, we've negotiated blend and extend transactions, which contain lease extensions in exchange for combinations of rent deferral indoor abatement.
As of July 27.
We had the following activity in each tight for Q2.
In the first category, we had deferral agreements with 29 tenants, representing 3.2% of second quarter risks.
19 tenants, representing 1% of rents have agreed to begin repayment within twentytwenty and 10 tenants representing 2.2% of rents starting in 2021.
In the second category of blend and extend its we've agreed to some form of abatement with three tenants.
Representing 4% of second quarter rents in exchange for extending.
The walls or weighted average lease term on those leases by approximately five years on average.
Those deals extended the Walt from 8.3 to 8.5 years for the overall portfolio.
This included one of our major tenants and involves other beneficial elements that can't be disclosed at this time.
For July the amounts were as follows deferral agreements with 18 tenants representing 2.2% of July rent.
Abatements existed with one tenant representing 2% of July Red, which you can see was about 50% less compared to Q2 as we had at large tenant begin to pay partial rent per our agreement.
Mike will discuss the accounting impacts of this within his section.
Now, let's talk more specifically about our portfolio performance and where we are today.
Over the past four months, we've seen steadily improving collections.
Our April rent receipts came in at 86%.
May at 85%.
June at 86%.
And we saw a 5% increase for July at 91%.
These percentages are based on recovered rents and we have not adjusted the denominator for any regularly.
The underpinnings of these relatively strong collection results were driven by our property type diversification industry breakdown investment grade tenancy.
Public versus private ownership and geographic location.
Our allocation to office industrial and necessity based retail, including our top industry exposures such as discount pharmacy.
Grocery.
Warehouse clubs and convenience has helped in our rental collection.
In Q2, 17 of our top 20 tenants effectively paid full rent during the quarter.
And in July all 20 tenants were paying rent.
Our approximately 37% of investment grade tendency for the total portfolio and 46% within retail.
Were strong component of rent collections at almost 100% during the quarter and in July.
Approximately 63% of our tenants are public in the overall portfolio and over 71% our public within the retail portfolio, which we view very positively.
Our geographic diversity has also helped us in rent collections.
In general we do not have large property concentrations in major urban areas that have borne much of the brunt of the pandemic today.
Although many states are seeing an uptick in cases.
And some are having to delay or roll back on fully opening.
Our July collection rate does not yet show any material effect.
We are monitoring these states carefully and July collections in these states where approximately on top of the overall portfolio collection rates for each property segment.
See slide 15 of our Investor presentation for further information.
Additionally, we have experienced a small percentage in bankruptcy. So far this year with no material ones due to coded as of now.
The main bankruptcies, we spoke of last quarter, which were non pandemic related.
Our band at <unk>, 0.6%.
Crystals at 0.27% and Logans at 0.13% of income.
We are finalizing resolutions on all three of these in some capacity.
More recently, we have had three additional small bankruptcies.
24 hour fitness, where we have only two locations at <unk>, 0.2% of income.
And two small restaurant operators, which are less than 0.3% of income combined.
I would like to thank our real estate teams, who continue to do an outstanding job in trying circumstances and our collections to date are reflective of those efforts.
Our dedicated property type asset management team have been in discussion with our tenants to understand the impact of Kobin 19 on their businesses.
Overall rent relief requests have been received for tenants representing approximately 33% of rental income.
On an annualized basis.
We've been evaluating each request on a case by case basis.
Based on each tenants unique financial and operating situation.
Analyzing metrics.
Such as industry segment.
Geographic locations, where they are operating.
Corporate financial health.
Rent coverage and the tenants liquidity.
Our goal has been to help those tenants we think needed.
And deserve it in the short run while at the same time pressing for payment from those tenants. We judge do not Merritt rent relief have access to other forms of capital or being opportunistic.
Of the received requests.
To date, 52% had been approved.
9% or in negotiations.
And 39% have either been denied or we have taken no action.
I discuss the impact of the completed transactions as of July 27 above with the rest of them expected to be completed during the third quarter.
Many of the tenants, where we declined to offer rent relief judging they have had the wherewithal to pay in fact have paid with 87% paying in Q2 and 89% in July.
In other instances, we have been taking the necessary actions to protect our rights under our lease agreements.
We've been very pleased with our rental collections numbers, so far which are at the top echelon for our sector.
Our current expectation is that collections should remain reasonably steady for the for the rest of the quarter through September.
Further portfolio segment information and details can be found at our investor presentation filed today.
Ill now turn the call over to Mike Mike.
Thanks, Paul and thank you all for joining us today I'll cover our second quarter financial highlights and provide details of the Q2 effects of the cobot 19 pandemic on our rental revenue and the related receivable reserves related to certain of our cat.
In response to the anticipated large volume of rent deferrals caused by cobot 19.
As we attempted to provide clarity through new accounting guidance to address lease concessions related to the effects of the pandemic.
As part of this we elect to account for eligible lease concessions, which we deemed probable of collection as if there were no changes made to the lease agreement and accordingly continue to recognize income along with an increase in the related lease receivables.
Where we deemed future collection was not probable these are accounted for under the cash basis accounting, we refer to both as executed deferral agreement.
Lease modifications, where the cash flows in terms substantially increased the consideration in the original contract did not qualify for this as be expediency, but rather required the company to apply AMC 842 lease modification accounting.
Under this the company must reevaluate that lease classification, and Remeasure and reallocate the consideration over the remaining lease term.
We typically refer to these as blend and extend amendments.
Now, let's discuss how all of this was applied within our financials in Q2.
Ill break out some of the covered related items that are included in revenue and items that were not included in Russia.
These items are in the following four categories.
Executed deferral agreements in Q2 rents as of July 27.
Where the collection of future cash flows was deemed probable totaled 8.9 million. This amount is included in revenue.
Executed the girl agreements as of July 27th where the collection a future cash flows was not being probable totaled approximately $80000. This amount is not included and do it included and instead it gets accounted for under the cash basis of account.
Executed blend and extend the amendments which contain and.
Segment of rent for specified period totaled 11.2 million in Q2.
This entire amount was not recognized in revenue.
This amount is expected to decrease next quarter as a large tenants free rent period begins to expire as evidenced by our increase July collections, which Paul mentioned previously.
Reserve rents of 8.4 million that was related to the impact of Workover 19, pandemic of which point 9 million represents an increase in the general allowance for rental revenue and 3.8 million represents amounts not probable of collection as of June Thirtyth, 2020, and where we believe rental revenue should.
We recognize.
Cash basis.
And 3.7 million for straight line rent receivables related to these cash basis.
Our AFFO per diluted share of the quarter was 15 cents and our normalized EBITDA was 238.5 million, which reflects the characterization of the items just discussed.
Turning to our balance sheet. The company issued 600 million aggregate principal amount to 3.4% senior notes due 2028 at an issue price of 99.144% par value.
Proceeds from the senior notes along with borrowings under the company's revolving credit facility in cash on hand have been or will be used to fund the purchase will repayment at maturity of reached 3.75% convertible notes due December of 2020.
On June 25 to 2020, we were able to purchase 50.2 million, leaving 271.6 million principal amount remaining.
The company also utilized proceeds to fund the partial redemption of $150 million have reached 6.7 series a preferred stock on July 22nd 2020.
And repay borrowings under the Companys revolving credit facility.
The long term bond issuance increased our corporate liquidity from approximately 1.2 billion to 1.8 billion comprised of 279 million in cash and cash equivalents and the full 1.5 billion of availability under our credit facility.
Our fixed charge coverage ratio remained healthy at 3.1 times and our net debt to gross real estate investment ratio was 39%.
Unencumbered asset ratio was 84% the weighted average duration of our debt increased from 4.4 years to 4.8 years, and we are 99.5% fixed.
Net debt to normalized EBITDA ended at 6.1 times, which includes the negative effects of the blend and extend abatements and reserves.
Besides the converts which we already discussed we have a very manageable amount of debt coming due in the near term at quarter end, we had 78 million in mortgage notes payable due this year at a weighted average interest rate of approximately 5%.
And with that I'll turn the call back.
Thanks, Mike.
On our last quarterly call, we discussed our process whereby a range of possible cash flow outcomes were analyzed for this year next.
Based upon our analysis, we chose to reduce the dividends and allocate capital through the balance sheet.
Maximizing value to all stakeholders in the form of liquidity and future growth.
When you know where you are you can better judge what to do and how to do it.
Well, we have had a better than expected results and bank collection.
The duration of economic uncertainty continues to have a variety of outcome.
As such the board has decided to maintain the current dividend.
We get a 51% payout ratio in Q2.
As a solid base from which to grow to a more traditional level.
Mike presented the accounting.
And our current balance sheet statistics, we've always tried for full transparency in our disclosure.
And we continue to do so in this discussion and through our Investor presentation.
On the financial side on increased liquidity from 1.2 billion to 1.8 billion, which strengthened our the $600 million bond offering, which now finances are to our December 2020 convertible debt maturity.
And leaves us with no corporate debt due until 2024.
In addition, we continue to remain highly liquid on the asset side with 81% of the portfolio unencumbered.
As you heard and Pauls presentation, our portfolio diversification, serving as well.
Not only by property type, but also investment grade percentage credit industry.
Well as a high percentage of public company.
Our tenant negotiations have led to a number of mutually beneficial transactions.
Dennis had been supported economically in a difficult period.
While deferrals and blend and extend to enhance the portfolio increasing term and providing other economic benefits.
With regard to the portfolio office exposure will continued to decline.
And the two retail industries with lower collection rates casual dining entertainment.
I will be evaluated longer term as we can assess the cyclical or secular nature of their business.
I will experience transforming the company over the last five years into the current business model Energizes, then equips us to grow and thrive as we move past.
Our expectation for the future less on our increased liquidity.
Now tested diversified portfolio.
And experienced team.
As Youre aware, Mark or Dan a director who joined US in 2015 recently resigned from the board due to his appointment as CEO of Mednax.
You'll be missed.
We wish him well.
Before ending I would like to again the flow of those and the healthcare profession, and all first responders. We continue to make a difference in our lives during these difficult times.
I'll now open the lines for questions.
We will now begin the question and answer session.
You asked a question you May press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
Our first question comes from Sheila Mcgrath with Evercore ISI. Please go ahead.
Yes, good afternoon.
Glenn.
The additional disclosures on collections were very helpful. I've a question, though on page 16 of the investor deck.
You outlined the different buckets and into Q uncollected rent is about 7.4% of the total just wondering how we should think about that bucket going forward are there deferrals in place for that or what's the status of that bucket.
Thanks, Thanks Sheila.
The.
Im on page 16, and.
Just to clarify.
This is for I'm going to clarify it for the second quarter 2020, because we havent for both the second quarter in July but good question first of the second quarter, which is which is appropriate.
What you see there is there's 14.5%.
Uncollected rent.
Which 3.2% or executed and abatements executed a four so thats a total of 7.2.
First wanted to make is we just put executed transactions and these buckets.
We have additional.
Discussions going on and wondering I hand, it over Paul to take you through that.
Thanks plan in high Sheila.
So.
The 7.4% that quote in the uncollected bucket on page 16, any investor presentation.
Roughly 2% of that is where we've got deferrals or nearly all deferrals and we're working through the final approval processes associated with that.
3.6% is somewhere in process.
Either continuing to negotiate with a tenant just starting documentation and alike and nearly all of that is deferrals as well.
And the remaining close to 2% is sort of in the other bucket in the types of things that fall into the other buckets are things like.
Cam resolution.
Other routine sort of chasing down rents from tenants some cash reserves and the like sort of the typical things that we would have every quarter.
Okay, that's very helpful.
And maybe.
I'm not sure. If this is from Mike, but in that same slide.
7.1 million of abate mens executed I think you said those were blended and extend.
So should we assume that that 11 million comes back and.
Third quarter or should it be over over a longer period of time.
I'll start the answer on that then Mike maybe it will help me.
That's the that's the second quarter number and as Paul and Mike in there and they're discussion earlier talked about that that number.
Not that you can see if you go to July.
Where do you have abatement executed a 1 million a 94 that percentage came down to 2%.
So in July we reduced.
The abatement, which meant a tenet started to pay rent, which is what Mike said.
So we will have an abatement for the second quarter approximately half of the first quarter.
The second quarter, and then in the fourth quarter and essentially goes away and there will be minimal basis.
Okay great.
Last question Glenn on acquisition, you know given uncertainty still exist in our markets.
Back to be acquisitive in the second half or your thoughts on that.
Sure.
It's a very good question.
Sheila I'm going to go back for a second and then going backwards as a mean much today, but in the first quarter of the year, we and we had a fairly aggressive acquisition program we have billion three.
For the balance sheet and then.
Certain elements for the partnership four to 600 million for the industrial partnership and two to four for the office partnership approximately.
I had raised 880 million in the fourth quarter of last year in.
Block offering.
Paid off the litigation if you remember and we also raised 130 million on the ATM. So we were in pretty good shape and the first quarter to know what the will change and here we are today.
As we look at growth going forward.
Would want to put it in different buckets, not just acquisitions.
And we first of all want to grow by collecting rents and that the us as the primary today, we would have expected 100% of rent, but it's not so we've got to get there. So thats our number one growth element number two.
Referred to the right hand side of the balance sheet.
And on the right hand side or the balance sheet. We've already made some progress in growing the 600 million dollar transaction that Mike mentioned at 3.4% well financed the converts which were 3.7%. So there's a spread there for growth.
And we'll also finance a portion of our preferred that six seven so weve.
Accretive on the right hand side already this year.
We've also reduced the dividends.
And I think we all think of reducing the dividend as similar to raising equity monies just fungible.
So we've put capital back into the balance sheet growth.
So we we worked pretty hard on the right hand side and we've done a reasonable job.
The left hand side is what you're talking about which is growth through asset sales.
Then my section I do mentioned that we have some internal equity in the internal equities.
Sales, we sold at Seattle Office building.
And basically that building was vacant.
Redevelopment I for $46 million that we can use to recycle we have an asset thats going into the office partnership that we can use to recycle and we've also done a number of blend and extend our office buildings that we plan to or have put on the market.
So we see coming in from disposition.
Pretty good access to internal equity that we will use.
By opportunity, we're going to be very careful about what we looked at on the second half.
It'll be an opportunity form of investing and we'll use internal capital do that in addition, we will be.
On the other we were looking for assets for the office and industrial partnership and which will put 20%. So we have a number of ways.
To look at the left hand side and grow in glass.
We do have asset management fees from the partnership we value the infrastructure here, which we also believe the very important part of growth.
And the lab less concept I would throw in here that.
Whether it's the first second third or fourth buckets here.
How you view the market is pretty important.
And I would say all of us here on a long term basis.
To be optimistic in terms of the U.S. economy.
And our business model and how we can grow within this economy.
But you have to separate it had long and short.
On the short term.
I don't know if anybody has enough information to be opportunistic.
To be city did the positive or negative.
On this economy I don't I'm not sure there's enough information.
But we do believe we can be realistic.
And from a real it standpoint, we will continue to look for growth in collection.
Safety in the balance sheet.
And opportunities will will be brought into our balance sheet as we see them as true opportunities and not commodity purchases.
Okay. Thank you Glenn.
Thank you.
The next question is from Anthony pay alone with JP Morgan. Please go ahead.
Thank you and I like our which you mentioned about laying things out real well for us here. So thank you for that.
Thank you.
My first question is so if I look at your July collections like it basically seems like you now have deals done for 94% to 95% of your pre coded rents that you can negotiate a deferrals or abatements or some sort of deal on so just wondering like if you look past the abatement in deferral.
Period, and you don't have enough, that's Q1 2021 or two two or whatever it is for for all of these deals like what is the run rate.
Revenue coming out of this.
Compared to what it was pretty coated.
Hi.
Don't have a direct percentage for you.
Well, what I can do is backup a little bit and go through a couple of the words that weve used deferral entertainment products from a deferral day fertile basis. If you look at the second quarter that 8.9 million.
Tony but.
We believe the third quarter won't be too far off that and then it's going to really diminish in the fourth quarter.
If we look at the abatement.
Good day, and then we'll be happy in the third quarter from the second quarter and then diminish in the fourth quarter. So so those will be more stabilized certainly by next year.
Where we come out in terms of our run rate next year.
Thats guidance for next year.
We will provide guidance for next year, we have two at the appropriate time, but we're just not prepared to do that now.
Okay.
I understand and then.
So tough question maybe to answer but.
You went through all of these.
Deals with your tenants you probably got an added work inside of books and things like that you know any sense as to how much of a.
If things go backwards a bit how much can be which stood before having to come back and maybe do something like this over again or where where some of the risks in your mind bright still lie.
We understand that question and it's a real duration question, which which is up it's been the most problematic part of any decision we've made.
Paul when I handed over to you and give that a crack sure I mean.
You know we've taken a hard look with each one of our tenants so far.
I described in my prepared remarks, and tried to figure out where we had tenants that needed help and where they didnt need help and the ones that didnt need help we press them to pay and for the most part they paid.
With respect to the ones that needed help we tried to craft deferrals and abatements in a manner that gave them the breathing room to get across the Dutch as it were.
The question is we're not exactly sure how wide the digits.
So far our collections are sort of reflecting some positive momentum we're starting to see August collections, we feel pretty good about August collections so far.
To the extent that.
Lockdowns and and closing of the economy occurs again, which we don't particularly expect but if it does.
And tenants come back to US, we'll have to take a look at where they stand at that time, but we've been pretty impressed with how our tenants. So far have reacted to the current environment have they changed their business models, particularly within the casual dining sector. So that they could withstand.
Additional shocks if they come but if it does come we're just going to have to take it on a case by case basis on a tenant by tenant basis.
During the year due to your point.
We've created a database that you'll see on page 15 of our presentation.
Where we've actually taken the portfolio statistics by retail service casual dining industrial and office.
And weve compared them to.
Reopen states reopening state pausing state and reversing state.
Good to try to get a better understanding of exactly what you're talking about and hopefully the geography can help us do that and we did they you'll see the database and you'll also see that and pull mentioned this we did not see a lot of difference in July relative to the total portfolio by those segments, but we may.
We will be running this database every month and every quarter, we'll be giving out to the so the market and here's where we may see a precursor of whats the comment if we can get ahead of it that would be great.
Okay, great. Thank you.
The next question is from Vikram Malhotra with Morgan Stanley. Please go ahead.
Taxing the question.
I know you've made it.
Pretty well in terms of fee unconnected rent deferrals the abatement.
But I just want to be clear for.
That's helpful purposes can you just clarify once again what is.
And what isn't and audiences.
Okay.
Good I'm going to hand, it over to Mike.
Sure.
So you have both the maintenance is is.
Causing apropos to go down.
As well as 4.7 million of the 8.4 million of reserves, we booked the only pieces reserves that though through but so is the straight line portion, which is 3.7. So there's you have two numbers running through there are 4.7 causes a decrease in AFFO.
7.1 is a decrease in AFFO.
Okay, great. Thanks.
And then so Glenn maybe just talking about the dividend.
Yeah. So.
Maybe proactively or conservatively I just have the dividend here now you've had pretty strong rent collection.
You are hearing positive anecdote I guess from your tenants.
Balance sheets into better shape, how should we think about sort of dividend levels near term riches may be entering into into 21.
We.
We're pleased with the dividend that we have now but one of the reasons is that we look at it.
Both on an AFFO basis, which is the 51%, but we also look at on cash.
And going forward.
Given given the way we are accounting today I think everybody has looked at it both on GAAP and cash.
So we took our 15 cents.
FFO as Mike described the pieces.
Again, if you refer to page 16 total uncollected ramp was 41 million. That's the reverse we collected 85, we didnt like 15, so we didnt collect 41 million.
If you took 41 million by our share count it's about four cents this year.
So in terms of cash.
We collected 11 cents and we paid 7.7 cents, that's a 70% payout ratio still a pretty good payout ratio, but we're going to be focused on both before we establish any final payout ratio.
I'll go back in time now in 2015, if you remember we did not have a dividend when almost got here.
Well I got here and it before but the management team together and when we established the payout ratio back then it was 70%.
Knowing.
That it was it would go higher as we reduce leverage.
It went to 85% higher than we expected mainly because our litigation was $1 billion and another 150 million in costs, we did not expect the deal that high.
Hi, number 85, I would say.
The higher end.
What we would expect if we then went back and I took all that information. It is whats say, what's more traditional I would say somewhere between 70% to 80% would be more traditional.
And as the appropriate time, we'll evaluate GAAP cash in a traditional ratio to establish one for ourselves I think that would be when we give guidance.
Okay Fair enough and then.
Going back to the.
Thanks for that to this end and ultimately.
The goal, but all the seat.
Hi them on that when others have held up.
But we've also heard in manufacturing for example, right soften a bit.
Yes, maybe didnt listen there can you talk about.
No kind of unmet.
Or maybe the definitely what areas are you sort of implementing insisted on from here and then what what.
Our unit.
No.
That.
We have a little bit of a bad connection vikram, but so I'm going to repeat.
But I, but I believe what you're asking is what what sectors are we more concerned about within our diverse hotel portfolio.
And I think maybe what where would we be pub. Some other areas that you main point.
Yeah, I mean, just in terms of acquisition and disposition.
Some of your P. as I've referenced reference manufacturing looking a little bit more interesting from a price perspective.
But we know what the challenge sectors Us I'm just wondering if you look forward in terms of dispositions and acquisitions, where you incrementally where do you want to add what do you want to crack.
Okay.
No. If we did our original guidance this year when we talked about acquisition. We had three areas that we would focus on loan discount retail second was quick service restaurants in the third was industrial non investment grade those are the three areas that we were focused on and we would continue to be focused on those we believe those are era.
Is that would add to the portfolio in terms of diversification and long term stability. So we can continue to look there as we go forward in terms of disposition and then I'm going to actually handover part of that question to Tom to talking about the acquisition market and perhaps dispositions on the disposition side.
He will continue to reduce our ratio.
I've, often where about 17% now and in our original guidance, we said, we'd like to get that down to be between 10, and 15% and we're going to continue to.
Looking at it that way, we also may take a look at.
Flat income stream.
If there's a there's pricing out there that we think makes sense for those.
The acquisition and disposition program.
All related to what the long term portfolio will look like and Thats. How we would look in terms of those markets why don't I just handed over to Tom who will then reflect upon the market for those assets.
Yes, I am as Glenn mentioned dispositions will be a source of internal equity.
And I kind of see our disposition program in three buckets are noncore assets, we continue to sell.
Darren vacant restaurant and retail operators or we're very short term leases, where we don't think they're going to renew and that bucket, we really sell the users and developers for redevelopment of the building and or the site. So that's the beauty of that program is your chart, a non cash flowing asset into cash and then redeploy in 778% very accrete.
The other bucket that Glenn touched on it maybe flat leases, we sold some flat leases in the first quarter and that was a program to bring our are flat leases down in the portfolio, obviously, they're very strong investment grade credits and and performed very well in the third a pandemic. So you kind of slowed that program down a little bit.
Red Lobster was the is obviously a program we've we've exercised in over the last five years.
Based on the casual dining that program has slowed a little bit but hopefully.
Tail ended the year in in 21, we'll continue to sell Red Lobster's, and and bank branches as well, we do a blend and extend on a bank branch and we are reducing our exposure there as well Glenn also touched on office.
Obviously, our asset management team did some very nice blend and extend programs, where we have investment grade office. That's on a 10 plus year lease in very good real estate location. So.
We think selling that is going to generate some cash that we can redeploy.
And some of those as I mentioned investment grade, great real estate or in the mid fives to 6% cap rate range. So those are institutional buyers that would buy those apps assets and then we redeploy it.
Seven or 75% picking up a 150 to 200 basis points spread so that's kind of our disposition program.
As you know as as you know we put our acquisition program on pause in the second quarter and our plan is to as I mentioned redeploy some of our disposition assets.
Or disposition proceeds.
With a focus really on build to suits and sale leaseback between build to suits and sale leasebacks, we can generate a little higher yield.
Build to suits were we have long standing developer relationships for both retail and industrial and we get a little higher yield we have a little forward commitment component and it's really based on a relationship and I certainly a close versus some type of a bidding a bidding process also I mentioned sale leaseback, we'd like those transaction.
Wins, obviously generally longer term leases. They 20 years, we can negotiate to lease documentation, we have some insight into the management of the company.
If it's an M&A deal certainly there again certainly at close is more important than price and we don't have to bid.
In the process. So same same prototypes discount retail as Glenn mentioned, we like C stores QSR is a non industrial non investment grade industrial on the balance sheet are kind of our our focus points.
Maybe focus a little bit on the market clearly the second quarter was slow down almost 70% from from last year.
Clearly people killed deals put deals on hold.
Sellers didn't bring a lot of assets to the market because of the uncertainty.
But we have seen activity pick up for both office industrial and essential retail that has picked up to maybe not quite cobot pre tobin levels, but certainly very active.
The areas it really haven't done well are not essential retail theaters health clubs.
Entertainment type retail there really has no activity there and is kind of hard to tell from a pricing standpoint.
Just drill is obviously, a very high product type.
Investment grade essential retail and investment grade office, we think pricing is almost back to pre tobin levels and in some cases, even even more aggressive based on kind of a flight to quality.
Non investment grade office, and maybe not as non investment grade essential retail yeah. I think pricing is down maybe 25 to 50 basis points, So which is only 5% to 10% say off pretty Tobin.
Pricing levels, and I mentioned theaters help US entertainment, it's just they're not trading and it's really hard to.
To figure out what the pricing levels would be on those assets.
Good become is that a good enough.
Cover everything.
[laughter].
I guess yet.
The next question is from Chris Lucas was capital one Securities. Please go ahead.
Good afternoon, everybody a Paul you started to answering one of the questions I had.
Weighted to the blend and extend.
If you were at a bucket sort of the allocation of those deals between sort of near term extensions that takes some risk off the table.
And then the other bucket being sort of leases that get you have some sort of high single digits over 10 years sort of creating value than the last bucket being sort of just longer duration.
Already long duration.
Leases, how would you how would you buckets, the abatement and blend and extend.
Actions you took.
I'm going to handed over the Paul, but just Chris I I think I understand you're talking about when where when we are increasing term.
What our focus be on very very long term.
Getting it over 10 years or just getting it over the line say between two in five years to an eight years, yes, yes, I think thats right.
Yes so.
Yes.
Two types of blend and extend that we do one to sort of routine and one is nonroutine. So from the routine perspective.
You know that's the kind of things, we do quarter ending quarter out those are generally on nearer term.
Lisa so leases are getting closer to coming due and so we're looking to extended the term beyond sort of a classic five year renewal option for tenant might have been we did a significant amount of that in the second quarter.
And then there's the.
Blend and extend that we did with respect to code and that was those transactions are really driven by what the position is that the tenant is in and what's their near near term pressures on their business versus their long term outlook. So with respect to those transactions those leases were a bit longer.
Sure.
In in nature than we would often do on a blend and extend but it helped get it help get the tenant over there they are near their near term issue. So.
You know helped them and helped us where the longer term asset, which now has a better NPV.
Okay. Thanks for that and then Mike.
On the converts that mature at the end of the year when are you able to.
Sort of redeem them completely without penalty.
I believe it's.
Either 45, or 90 days before the end of the year, but it's not it's not there's not a very long period.
There is actually I'm, sorry, there has actually know redemption.
We have and therefore, that's that's where it is.
Oh, okay. So so this process.
I'm just trying to understand the drag between the money raised.
Actual redemption of the.
Bonds, but you're basically going to how we are through this.
Fiscal year, we indicated in the queue that we've repurchased a little over 50 million so far as private actions.
So that that process may or may not continue depending on where the market.
Hello.
But once they get to the maturity date, I mean at that point.
Isn't it a redemption and then how does it and it's a redemption as far on December for Stan.
Okay, Great. That's all I had thank you.
Thanks.
Hello.
Hello.
Mr. Lee is your line muted.
Hi, Good afternoon, guys you mentioned the last call that about half of your restaurant tenants have applied to the TV program.
You have a sense of what percentage of those tenants take rent.
Pvp in July and what are your expectations for those tenants to continue to pay rent when funding went south.
Yes, they just just make sure I understand Frank you.
We we had conversations and all that so I'm going to hand this over the him on on PPV.
With our restaurants, so let me just all.
Turning to I'm not sure Paul sure so.
We did have a lot of our tenants in the last quarter when PTP pp. He came out to PBP came out too.
Applied for it and some got it.
We have had increased rental collections, but most of that was not driven by PPP fonts.
She was just by their businesses starting to recover in their ability to continue to pay rent I would say overall our.
Rent collections associated with the Paycheck protection program have been very small and we don't expect that to be materially bigger.
So it won't have a material negative impact to the extent those PPP funds run out for tenants.
Okay. Thanks, and then Glenn.
Talk to a bit about.
150 million a preferred that you redeemed.
Can I just can you provide some thoughts on how your weighing future redemptions versus deploying that capital into acquisitions.
Well, it's a it's Matt break that we're going to be considering here the the it's a 6.7% coupon.
The press switches are pretty high coupon and Thats why weve been redeem as you know we we had about 1 billion one when we started and after the latest redemption, it's down to about 623 million. So we've we've done a pretty good job at chipping away at that and we've done in a number of ways of looking at history.
When we sold assets into the industrial partnership we created a nice.
I think of capital internal capital at a good rate, we pay down a number of those.
Yes, I mean, we've continually taking capital that we brought back into the balance sheet and measured against.
Paying them off.
Versus.
Making acquisitions and we'll continue to look at it that way as we as we create internal capital.
We will then measure the spreads between acquisitions.
In the press.
And look at those spreads and then also make a judgment because I understand your point.
Many people, including yourself take the perhaps and put inventory debt ratios. So we do care about that and so we'll measure spreads and taking down our debt ratios.
And as always we're on offense.
We hope we make the right allocation decision.
Okay, great. Thank you.
Thank you.
The next question is from Spencer Alloway with Green Street Advisors. Please go ahead.
Thank you.
I know you guys mentioned I'm in your prepared remarks site near term maturities have decreased but you sound a relatively high number of expirations coming in 21 can you just comment on how you're feeling about your ability to recapture tommy's given the current environment.
Sure.
All right turn of the Paulista. That's a combination question is to make sure it's explorations and recapture.
Yes.
Yes, right so.
During this quarter, we were able to lower our 21 explorations from 7.1% to 6.3% next year.
We've essentially have the amount of expirations, we have for the rest of the year I would characterize the explorations we have for the rest of the year generally sort of routine renewals don't expect to have a material amount of pressure on a recapture rates with respect to those.
Next year much of the explorations, particularly some of the larger ones are back loaded into the second half of the year.
We have very little restaurants, coming due next year only 0.8%.
Okay, our iron our restaurants that are coming do we do have 1.7% of industrial which we feel pretty good about either we like the renewal probability on the asset where we like the assets themselves so not overly concerned about.
Rent recapture there.
2.6% his office and we've been working on.
Renewing a number of office portfolio office transaction, some of which we did this last quarter several of which are in process now.
When we feel pretty good about that so so far we're not seeing an enormous amount of pressure on our leasing spreads as a result of covance.
That may well change.
I think we would expect there'll be some pressure as time goes by but at the moment, we don't see material change from re leasing spreads as to where we are today, it's where we hope to be next year.
Okay. Thanks, and just one more item, but just trying to clarify something as it relates to the office leases expiring.
Anyone none of those properties or in your interest.
Thanks.
They they they may be under consideration so the best way I could I could tell you this right today.
They are not.
But they may be into consideration.
Depending upon the circumstances that what happens with those leases.
We mentioned Spencer where.
We when we do a blend and extend which we've done a number of in we'll get we may bring that to the market, which is what we're doing right now.
So it's a it's a maybe.
Subject to how we deal with the leap.
Okay, and sorry, just one more on the industrial side, just given you know obviously it's been.
Hi.
Parent really well you know him into pandemic and is there any opportunity there just where you have expiration.
Coming in the next year or two either any opportunity to actually increase.
Right.
I mean, I'm not going to answers the Paul.
Our average.
This is between four or five Bucks a rent is between four or five bucks.
So we have a very good basis and rent for our industrial at very good basis and price per foot as well and so I think there's certainly a possibility Paul would you agree yeah, obviously, especially we like that we'd like to increase rent. So if we're if we're able to do so I look forward to doing it and then reporting on it wont speculate in advance on whether or not will be.
Able to do so.
Thank you.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Glenn Rufrano for any closing remarks.
We thank you for joining us today and.
We wish everybody well and be safe.
During the summer season take care.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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