Q3 2020 VEREIT Inc Earnings Call
2023rd quarter earnings call.
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Please note. This event is being recorded I.
I would now like to turn the conference over to Bonni Rosen SVP of Investor Relations I agree. Please go ahead.
Thank you for joining us today for the Vereit 2023rd quarter earnings call. Joining me today are Glenn Rufrano, Our Chief Executive Officer, Paul Mcdowell, Our Chief operating Officer, Mike part a lot of our Chief Financial Officer, and Tom Roberts, Our Chief Investment Officer, today's call is being webcast on our website at <unk> Dot com.
In the Investor Relations section there will be a replay of the call beginning at approximately 230 P.M. eastern time today dial in for the replay is 1877 reports for 75 to nine with a confirmation code of 10148 to seven SEC before.
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 forward looking breeds actual results may differ materially from these forward looking statements and factors that could cause. These differences are detailed in our SEC filings, including the quarterly report filed today. In addition that they didn't work fully in our EPS.
D.C. reports breed disclaims any intent or obligation to update these forward looking statements, except as expressly required by law.
Let me quickly review the format of today's call first I will begin by providing a brief business summary, followed by Paul who will give an operational update with my them presenting our financials and balaji.
Well I will then wrap up with closing remarks, we will conclude todays call by opening the line for questions World, where we will be joined by our Chief Investment Officer, Tom Roberts.
Let me turn the call Liberty you.
Thanks, Bonnie Thank you for joining us.
We had a very active quarter, increasing collection and allocating capital, while reducing debt and preferred stock.
Here are some quick highlights.
Hey, AFFO per diluted share for the quarter. The 15 cents, which includes the effects of public related items, which Mike will discuss.
Rent collection for the quarter increased 94% from 87% in Q2.
A pullback was our highest monthly collection rate at 97%.
Year to date, we've invested 489 million up capital.
Including 300 million of 6.7% preferred stock.
And 189 million property acquisitions.
In addition, we acquired 247 million for the industrial partnership.
33 million for the office partnership.
Year to date disposition totaled 358 million.
Including the Companys share consider.
Contributed to the office partnership of 110, though.
Total office dispositions for the you have totaled approximately 280 million.
We issued 94 million on our ATM.
And net debt to normalized EBITDA decreased from 6.1 time, the 5.76 dogs.
The second quarter was interrupted by the pandemic in many ways.
Notably capital markets and recollection.
Following an active first quarter capital markets rose in the second.
Both in terms of debt and transaction activity.
However, starting in third quarter.
There has been a boeing debt markets and following labor day, an increase in transaction activity.
Reflecting on rent collection.
We typically expect 100% of our rents to be collected but this year pretty different.
So the efforts of our real estate operations team, including asset management leasing and property management.
We have no increase or rent collection from 87% in Q2.
97% in October.
Combining these thoughts.
We do capital market activity in collected rent left.
Left us with a gap from our original February are you at the FFO guidance.
64 to 66 cents per share.
This gap has been primarily reduced by investing 489 million accretively built in property and preferred stock.
But he asked in Q3 by portion of our second quarter debt offering.
Office dispositions at attractive cap rates.
Retain capital increased most recently.
We do dividends.
And ATM proceeds and mix of option.
Additionally, our institutional partnerships approaching 1 billion provide alternative capital to create high returns on investment Nisource that recurring revenue in the form of asset and property management fees.
We've had a number of levers the graph in a difficult environment.
As a result of our capital market in collection activity, we expect AFFO for the year.
Approximately 62 cents.
Not far off our original guidance.
Projected deferrals in this estimate adjusted for General Reserve approximate two cents worth.
Or 3% of this years estimate it.
Lower percentage than we would have expected in March or April.
It bodes well bring some stability.
Our real estate team intact since 2015 with average tenure of eight years, and 20 years and real estate experience have closely monitor the markets as we consider acquisitions and dispositions.
We keep tabs on the single tenant net lease universe of roughly 1.5 trillion.
In the fourth round 25 billion a year.
With the post summer pick up in activity.
We were at 16 billion year to date.
Looking forward, our property pipeline chosen to provide portfolio stability and growth.
Could range between 150, and 300 million in Q4 Q1 of next year.
And we will continue to be active in both institutional partnerships.
After decreasing our preferred stock from 1.1 billion to 473 million, we will consider further reductions as we choose to allocate capital.
Anything option for perspective property, that's securities acquisitions willing.
Will include the Q3 mix I just discussed.
With emphasis on or after the program of dispositions, which alone could cover our acquisition pipeline.
I will now turn the call over to our Chief operating officer, a formidable provide an operational update Paul.
Thanks Glenn.
Our teams continue to be highly focused on rent collection, but are increasingly pivoting to day to day leasing asset management and property management as we return to more normalized rental collections.
We had another very strong quarter of routine leasing activity with 76 leases executed on over 1.5 million square feet.
Of which roughly 260000 square feet, we're early renewals.
Total activity included 737000 square feet of industrial five.
592000 square feet of retail.
129000 square feet of office, and 81000 square feet of restaurants.
For renewal leases, we recaptured approximately 101% a prior rents on an initial cash basis.
And many of these newly extended leases have additional built in rent increases.
Occupancy ended the quarter at a healthy 98.5%.
Leasing activity on a year to date basis has also been very positive with a total of 193 leases at over 5.6 million square feet of which roughly 2.5 million square feet have been early renewals.
As you can see we are very focused on being in front of our expiration schedules, which is best illustrated by the 2.5 million square feet of early renewals, we have done so far this year.
This has been a consistent effort.
Over the last two years, we have reduced expirations for the next three years through 2023 by 3.6%.
In just the past two quarters, we have leased or renewed close to 974000 square feet of office space, which.
Which has reduced our office rollover for the remainder of 2020 through 2023 in that portfolio by close to 7%.
Office retention has been 75% to 85% on average.
In addition, we have been successful in extending leases and then placing those properties on the market for sale.
This quarter is a perfect example.
We sold two office properties with new lease extensions, a disposition cap rates, averaging approximately 6.1%.
Turning to our cobot related tenant activity.
As of October 23rd we had the following.
For Q3, we entered into deferral agreements with 21 tenants.
For $3.9 million, representing 1.4% of third quarter rents.
Execute a deferral agreements for October.
0.02 per cent of rents. This brings executed for deferrals for the year to $16.7 million, which includes an updated Q2 amount from 8.9 million to $12.8 million.
For agreements signed subsequent to our last reported date of July 29.
The weighted average of the total deferral period is 3.5 months and the weighted average payback is six months with 25% of repayments due in 2020 and 75% in 2021.
Through October 30, Onest, approximately 100% of deferral repayments do were made by tenants.
In addition, as we mentioned last quarter, we had 2.1% a blend and extend to payments in Q3 or $6 million largely made up of one tenant where we were able to extended the weighted average lease term on the leases by approximately five years.
As well as other beneficial elements.
The free rent period has now ended as evidenced by an immaterial abatement amount for October.
From a pure volume standpoint, we've entered into various cobot related agreements, including extensions covering 554 leases and nearly 11.7 million square feet.
Mike will discuss the accounting impacts within his section.
Now lets talk more specifically about our portfolio performance and where we are today.
Over the past four months, we have seen steadily improving collections as Glenn as mentioned.
Q2, Red collection came in at 87%.
July was 92.
Yes 94.
September 95, bringing Q3 to 94% and most recently we disclosed October is at 97%.
These percentages are based on pre coburn rents and we have not adjusted the denominator for any rent relief.
The underpinnings of these strong collection results were driven by our property type diversification industry breakdown investment grade tenancy.
Public versus private ownership and geographic location.
As we've discussed previously.
80% allocation to office industrial and necessity based retail, including our top industry exposures, such as discount pharmacy grocery warehouse clubs and convenience.
In our rental collection.
In addition, our improving and other industry now average over 90% with casual dining, notably at 91% in collections for October.
In Q3 and October all of our top 20 tenants effectively paid full rent during the quarter.
Our approximately 38% of investment grade tenancy for the total portfolio and 46% within retail.
And now almost 40 and 50% respectively with the recent tractor supply rating were.
We're a strong component of rent collections at almost 100% during the quarter and didn't October.
Over 65% of our tenants are public in the overall portfolio and approximately 74% or public within retail, which we view very positively.
We continue to monitor our tenants credit quality closely, particularly our larger exposures. So.
So far we have experienced a small percentage in bankruptcies this year with.
With no material ones due to covance as of now.
Additionally, we have almost no exposure to movie theaters or childcare.
That said the pandemic has clearly increased credit stress on a subset of our portfolio, which we continue to watch closely.
In particular, we were gratified to see that Red Lobster's ownership was enhanced during the quarter with the announcement, the Thai Union and Investor Group called the Seafood Alliance led by Thai Union and international restaurant executives, coupled with existing Red Lobster management acquired the remaining 51% of.
Red lobster from Golden Gate capital Red.
Red Lobster remains headquartered in Orlando led by the current CEO, Kim loop drugs and the management team.
Hi Union is a major publicly traded global sea food supplier with an enterprise value of approximately $4 billion and the transaction deepens Thai unions more than 20 year commitment to red lobster first as a supplier and now as the effective owner of the brand.
We view this transaction completed during the pandemic as a credit positive given Thai union size financial flexibility large investments and integrated relationship as both a supplier and equity investor.
Firming. This view, we have seen strong improvements in the market pricing of Red Lobster's term loan from a dollar price in the mid Eighty's to current level in the mid Ninetys, essentially where it was pre pandemic.
We also view the recent merger announcement between top golf and Callaway has a credit positive.
Our geographic diversity has also helped us in rent collections.
Though many states are seeing an uptick in cases, and some are having to delay or roll back on fully opening.
Our October collection rates does not yet shown any material effect.
We are monitoring these states carefully and October collections were approximately on top of the overall portfolio collection rates for each property segment.
See slide 15 of our Investor presentation for further information.
I would like to thank all of our 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 teams remain in contact with our tenants to understand the impact of COVID-19 on their businesses.
We have essentially completed all rent relief requests except for resolutions on approximately 1.5% of rent.
In closing we've been very pleased with our portfolios performance and rental collection numbers, so far which are at the top echelon for our sector.
Further portfolio segment information and details can be found in our investor presentation filed today.
I will now turn the call over to Mike Mike.
Thanks, Paul and thank you all for joining us today I'll cover our third quarter financial highlights and provide some details on the Q3 effects of the Cobi pandemic on our earnings.
I'll break out some of the cobot related items that are included in our answer so of 15 cents for the quarter and those that are not included these items are in the following three categories execute.
Execute a deferral agreements for Q3 as of October 20, Threerd, where the collection of future cash flows was being probable.
Total 3.9 million this.
This rent is included in FFO, and we expect deferrals related to Q4 rent to be significantly reduced.
Executed blend and extend amendments, which contain an abatement of rent for a specified period totaled 6.5 million of which 5.9 million relate to third quarter rent.
10.6 million for the second quarter.
This entire negative impact of these amendments reduce Q3 FFO.
And this too is expected to significantly decrease next quarter.
Reserved rent of 9.2 line.
That was related to the impact of COVID-19 pandemic.
Of which 5.1 million represents the general allowance for rental revenue and 4.1 million represents rents from tenants being accounted for on a cash basis.
And amounts not probable of collection as of September 32020.
This full amount also reduces.
So.
Turning to our balance sheet.
At the end of the third quarter. The company had corporate liquidity of approximately 1.7 billion comprised of 207 million in cash and cash equivalents and $1.5 billion credit facility Undrawn.
In addition secured debt was reduced by $62.4 million in the third quarter, bringing the total amount reduced for the year to 195 million and increase our unencumbered asset ratio to 82%.
During the quarter the company redeemed $300 million of reached 6.7% series a preferred stock with 169 completed on July 27, 2020, and 150 million completed on September Twentyth.
This leaves approximately $473 million outstanding.
In addition year to date, the company was able to take out and repurchased $69.1 million up at 3.75% convertible senior notes due December 2020, which leaves $252.7 million of principle. The remaining amounts is covered from our bond issuance in the second quarter.
3.4%, along with our available liquidity.
During the quarter and subsequent to September Thirtyth 2020, the company issued 13.8 million shares at a weighted average price of 6082 cents per.
For gross proceeds of $93.8 million under its at the market equity offering program.
Also as noted in our earnings release, our board has approved a one for five reverse stock split which is scheduled to take effect on December 17th 2020 with trading on a post split basis beginning on December 18th.
More details can be found in our 10-Q filed this morning.
Our fixed charge coverage ratio remained healthy at 3.3 times and our net debt to gross real estate investments ratio was 40% the weighted average duration of our debt is 4.6 years and we are 99.4% fixed.
Net debt to normalized EBITDA ended at 5.76.
And with that I will turn the call back to go up.
Thanks, Mike.
I discussed earlier.
Retain capital from our dividend reduction was invested productively this quarter.
As such the board has decided to maintain the current dividend.
Which had a 50% payout ratio.
In Q3.
As a basis for growth.
We expect to revisit and increase the dividend with 2021 guidance.
As you heard and Paul's presentation, 97% October collection is a function of diversity.
Credit quality and the high percentage of larger public company.
Our operation teams are keenly focused on exploration and this year, we have leased 2.5 million square feet of early renewals to reduce future exposures.
Our relationship with Golden Gate capital has been very good. However, we were pleased with how union the new owner of Red lobster as are the credit market.
Mike presented accounting and current balance sheet statistics.
Deferrals have been greatly reduced from Q2 to Q3 and are expected to be minimal on Q4 rent.
Maintenance were reduced in half over the same period and are also expected to be nominal on Q4 rent.
Well, having quite a bit of capital activity over the quarter net debt to EBITDA was reduced from 6.1 times to 5.76 times, while also decreasing our preferred by 300 million.
As we enter this winter season, let's remember to support our health care professional.
First responders and essential workers.
With that I'll now open up the call for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then Q.
At this time, we will pause momentarily to assemble the roster.
The first question today comes from Haendel St. Juste of Mizuho. Please go ahead.
Hey, there good afternoon Glenn.
Yes, there's recollections indeed up to 97% certainly helped by diverse.
Diversification I agreed exposure the other things you mentioned, but I guess I'm curious why you don't think you're getting credit for it here, you're still trading at a meaningful discount to your peers.
We think perhaps is the lack of growth narrative. So I guess I'm curious what your perception of it is and perhaps some thoughts on what you can do to close that gap. Thanks.
We've we've trended pretty well over the last quarter or so relative to what peers, but I take your point Glendale.
And well they may clearly be the issue.
We.
Feel that in the third quarter of <unk>.
Hey, quite a bit of growth a little disappointed that the market looks at buying back our press as not acquisitions.
It isn't acquisition wherein allocator of capital.
And we felt in the third quarter 300 million of production is a pretty good production level compared to anybody else in our peer group.
Just about.
So we feel we're in the growth mode.
They have done it wisely, we're not in the business of making deals for the sake of making deals were in that business of making allocations for the benefit of our shareholders.
As we look forward because we do understand the market has.
Has a preference for assets.
We see the benefit of assets and a couple of ways. The press gives the I'll go back to the prep. They gave us a good cap rate of 6.7 effectively reduces dead in many people's equations, and this and it's a very.
Safe investment from a risk standpoint.
Assets. However are always important because they have to be put into the portfolio the tone it refresh it.
Walt for instance, if you look at the acquisitions, we made this year the average Walt was 18.
18 years, and the dispositions were seven so by being active in the portfolio both acquisition from an acquisition and disposition standpoint, we benefited portfolio in total we also good growth in assets.
Each year, we'll have some growth it's been averaging about 1.5% and.
And then also provide assets also provide stability going forward our growth will be based upon assets, we've given an estimate of $150 million to $300 million over the next two quarters.
That could be higher I don't think it would be lower.
But it also can be combined with press we have options.
We're we're happy to have options.
And so we the market will see our growth and the growth will be based upon our allocation of capital not just mindless buying of assets.
Got it got it thank you for that.
And just wanted to step back for for a bit you've been CEO varied now five different five years, maybe it feels longer than that.
It's time stand still here in coated world, but it.
In all seriousness you've achieved.
The key goals you set up the company. When you joined you did after the balance sheet, reducing red lobster exposure set of litigation to name a few.
Have you contemplated I guess, where the rig has been where it is today what do you do you kind of see and.
Two portfolio.
Initiatives or earn larger targets, but the companies say over the next five years. Thanks.
Well, that's a big question.
And it's a big timeframe I'm not sure it's five years, but but if I were just going to try to some.
An answer for a very good question I.
I would I'd break it down into three components our original plan.
Back in 2015.
Started out with let's strengthen the portfolio that strengthened the balance sheet.
As the one and two.
Most important element.
I'd go back to that we can continue to strengthen this portfolio.
You can see how well weve strike that by our collections, but we can always do better. So number we number one we want to make sure. Our diversification works. We're in the right assets over time, we're always thinking about how we can change that.
Portfolio.
And that has been enrolling.
Saying around here in Poland, I, and Tom and Mike talked about it as long as our tenants pay us rent will be fine.
That's the most important part and in order to do that we have to keep our eye on the portfolio not just for today, but certainly for that five year timeframe that you've talked about.
In terms of the balance sheet, we had to go back in 2015, we were not investment grade.
We had a goal to be triple B.
Today were triple B minus or equivalent by two of the agencies and triple B by one our goal is to be triple B.
We want to be triple B by all three.
And then see how we can move from that point in time. So that is a goal that here and we will meet in that five year period, I hope a lot sooner than that.
Third would be would be growth and how we can grow and I've talked about this.
With you and others when we look at growth we looked at a variety of methods of growth today, obviously collections number one that's how you grow by making sure you collect rent on.
And to the right side of the balance sheet.
Financing our debt Opportunistically with spreads, which we are doing.
Financing or perhaps with spreads, which we are doing and by reducing the dividend, we've essentially created $65 million a quarter, which is equity.
Because we want to continue to figure out how to use the balance sheet and that will be another five year effort for.
For us.
The next part of growth is the right hand is the left hand side of the balance sheet the assets I understand.
And there we were pretty good shape, we have a.
Group of assets, we believe fit well in our portfolio, our acquisitions will revolve around discount retail.
A quick service restaurants.
And for all for our balance sheet non investment grade industrial when we may see some investment grade industrial on build to suits, but primarily non investment grade.
It wouldn't be bad if we could expand that we have expanded it as you've seen into investment grade industrial through our partnership with Ks and we've expanded some office acquisition.
Acquisitions, which we will not do on the balance sheet.
With our middle Eastern Investor, but we went we will continue over the next five years to find alternative ways to grow whether it's different property types or different positions for instance last.
Last quarter, we told you about a $10 million mezzanine.
Piece of paper, we had on a.
Investment grade industrial.
Project.
This quarter.
Part of our $32 million subsequent events was a $23 million mezz piece on another investment grade industrial project, it's new product for us actually starts at by controlling product for our CASM.
Institutional partnership, but it's a good program Tom Roberts is running it we have a development group that come to us for these mezz pieces and so we will continue to look for alternative ways to grow that's a very important goals for the next five years.
Got it guys. Thank you for that.
Thank you.
The next question comes from Anthony Paolone of JP Morgan. Please go ahead.
Thank you. So first one Glenn just want to clarify you made a comment I think about.
The revisiting an increase in the dividend I think with 2021 guidance shows that you assume on the Fourq you Brent.
We don't know I mean, we were bold enough to give guidance for this year, Tony I don't know how bold that is with seven weeks left in the year.
But we feel very confident and we thought it would be important for the market to know we understand our portfolio. It can give guidance this year.
What we don't know.
Is what happens over the next few months relative to the pandemic I would hope we would give our 2021 guidance the normal cadence, which would be in February of next year.
But I would just leave open the fact that we're going to watch this pandemic very closely and we're going to watch our tenants very closely but but without without some.
On foreseen event and I'm not sure how much we can see.
We would hope it would be February of next year.
Okay. Thanks, and then on the deal pipeline you had mentioned 150 to 300 million over the course of the next couple of quarters I guess one.
What do you think you do on the disposition side and then too.
About 150 to 300 do you think all of that is a very.
Varied share to some of that go into the joint ventures.
That that the 100 6800 is the balance sheet that's us.
The joint ventures and.
And we would hope acquisition certainly <unk> in the first quarter of next year.
Well that's separate so that's it that's a separate item from the 150 to 300.
In terms of dispositions as I mentioned.
With the dispositions that we now have a that we believe we can close in the fourth and first quarter. There are enough dispositions to finance 150 to 300 say with the dispositions would certainly be in that range.
Okay. So if those net out and so you're getting free cash flow you do get a little equity out there does that suggest you could do more of the crafts or just keep capacity to do more as things come up.
We could do either and and Uh huh.
We like that we like the option.
Being able to do some more perhaps if we feel that its a risk adjusted return relationship to assets. So we'll we'll we'll keep that open.
Well, we would like to do a combination of both very frankly, but at this point in time, that's the allocation decision the capital allocation decision that we will make.
Okay and then just last question on the 2021 lease roll overs anything of note that are better known move outs, we should be thinking about.
[noise] I hand that over to Paul Okay.
Oh look right now we're we've had retention in the past has been good for us threat run at roughly around 80% over the past few years and.
And we don't expect that retention activity to change too much in the coming year.
We do have some large industrial rollover during the course of the year most of that is towards the backend of the year. In fact, most of it's in the very last quarter. So we'll have a better sense of where we expect retention to be as we move through next year.
Okay. Thank you.
Thanks Terry.
The next question comes from Sheila Mcgrath of Evercore ISI. Please go ahead.
Yes. Good afternoon, Glenn I was wondering if I know, it's a board decision, but just wondering your big picture thoughts on the dividend payout when you choose to reset the dividend higher for 2021, if you're committed to maintaining a more conservative payout ratio then your pre cove it payout such.
Such that you get to a better balance sheet more quickly without external equity and then can use retain cash flow to invest as a means to enhance growth just wondering how we should think about that.
I think I think I can probably just say, yes, but let.
This is a very good it's a very good point, but let me let me explain.
It.
Our view on that.
We were at about 85%.
The cobot, which was a high number for the payout ratio. We started out if you remember 70% in 2015 and it didnt expect to get to the 85%, but the and I've said this before the billion dollar litigation cost guidance. There, we would not want to get back to that to your point, we would agree with you 100% in terms of where we'd want to get too we know that a more true.
Additional ratio could be 70% to 80%, but we may get there over time.
And so when when we start increasing the dividend we are going to consider everything you're talking about the ability to use this capital for growth.
But we want to reward our shareholders for supporting us So we will consider.
What the traditional range could be made.
We may be at the lower end, but it may take some time to get there.
Okay, Great and then on the restaurant collections to casual dining bounced up to 91% in October is that just because there are more restaurants open now or where their new lease terms in place that motivated collection tire.
I'll Oh.
Oh hi.
Hi, Sheila.
The answer that question briefly is that it's primarily as a result of the businesses of our tenants beginning to recover as they were able to both reopen their dining rooms and to get there to go orders maybe.
Maybe to get their businesses right sized for the business environment. During the current pandemic as they were able to do that we generate more cash flow and as they're able to generate more cash flow they able to begin paying rent again as.
As you know most of our casual dining is concentrated almost all of it is concentrated in some of the largest brands.
Those brands found their footing, there are better able to pay rent and you're seeing that flow directly through to now our casual dining collections are above 90%.
Okay. Thank you.
Thank you.
Our next question comes from Spencer Ottaway of Green Street. Please go ahead.
Hey, this is harsh spending in let's say so.
Oh I was just curious you provide should then couldn't oh Gen comedy, which in aggregate for the retailers that Sean Oh.
But could you provide some high level color on how confidence levels have changed through the pandemic and I bet any industry, but then read in that out of concern.
Looking at this metric.
We let me take the first part of your question. We do have an occupancy cost that we have been measuring and we have.
I have a general four wall number that we put out as well so the total retail, but I think you're talking.
Talking about the the <unk> the occupancy costs on to.
And from casual dining we had a target of 6.75 to eight and the last analysis. We showed was about seven now that's pre pandemic. So we were we were in very good shape in terms of occupancy costs with our restaurant tenants, which is which is one of the reasons in Paul's answer the they tend to come back where they were doing pretty good business prior.
Or two although the pandemic caused them to rethink how they did business where they are now on an occupancy cost basis I, yeah, it's it's going to be not as good [laughter].
We know that many of our restaurants.
What were put out of business.
They had off premises.
Forms of capital coming in well revenues coming in and they all have honed in on that very well.
And now have certain percentages of their dining rooms open we don't have a good handle as we speak now on their occupancy costs.
We do expect and hope that their occupancy costs get back to pre pandemic level, but it's not today. It's at that's next year, Paul would you want to add anything to that [noise] yeah.
I'd say, if you look at our <unk> in our Investor presentation on page 21, We show Q3, 2020 rent coverage at 2.4% that number has not yet been fully impacted by cobot impacts there have there are some cobot impacts on in that number but.
What we'll watch that number closely as the quarters go by because many of our tenants report to us on an annual basis. So for several of our tenants we have yet to see.
The impact on four wall coverage, but as Glenn mentioned at the beginning before the pandemic our.
Our restaurant portfolio was very healthy both from an occupancy cost rent to sales perspective, and from a four wall perspective, and so they are able to absorb a quite a significant amount of reduction in sales and still be able to pay their rent and we're seeing that in the portfolio at a 91% rent collection.
That's helpful. Thank you.
And then you spoke a little bit about doing leases expiring next to it and the more votes Youre expecting Oh can you drill Baden.
Can you give us some color boat.
Boy and total concept in that but we Oh and.
If you would be if you're thinking about disposing some of it goes to recycle capital.
A key to me.
Yeah, I'll, let the bulk of that okay. So if you look in our in our supplement you'll see that we have 5.8% of rents are expiring in 2021.
And just to just to just to note.
That number was 6.8% a year ago.
And 6.3% last quarter. So we continue to focus on early renewals and as Glenn mentioned I think I mentioned in my remarks, we did early renewals of 2.5 million square feet. So we really focused very heavily on that it's pretty well laddered between retail restaurant industrial and office.
Yes.
From a percentage perspective from a square footage perspective, it's weighted towards the industrial with roll over next year and as I mentioned in the industrial portfolio. Most of that is towards the tail end of the year.
Don't expect next year to be particularly different than this year that is we expect retention to still be in the roughly 75% to 85% that we've been able to achieve over the past several years.
Thank you very much.
Thank you.
The next question comes from Chris Lucas of capital. Please go ahead.
Hi, Good afternoon, everybody, Hey, Glenn I guess I just wanted to go back to your capital allocation decision as it relates to the prefers versus you.
You know investing on balance sheet.
New acquisitions I guess.
You've got a sort of I guess, a six seven permanent slot investment in taking out your preferred.
What does it take in terms of the opportunity in sort of your targeted.
You know acquisition lines of business, you know from a from a yield or IR perspective that would make that more attractive.
Or is it just the risk of the environment that is sort of guiding you to do the preferreds rather than asset investments.
The other the other point on the preferred that I'd point out that all of them.
Back to your real question is that it.
It is 6.7 and it's flat. So you don't get the growth you also don't get EBITDA right. We we understand that Chris So thats, an important consideration, but what we do get is a number of our shareholders who included as Deb, So we get debt reduction, which.
We do believe as it is an issue relative to a multiple.
And so anytime you can take debt out creatively and get a multiple increase we think you get it on both sides with depressed.
Now on to in terms of your your question in France, which is.
If you look at it if that efficient frontier, where do you where do you. What's the number that you go from one to the other well we're looking at at least a 7% first year cap rate.
Spread to the six seven.
That has to be there.
Plus growth.
And those two are important considerations when you're looking at the economics.
Relative to the press, but theyre just just as the Pep has other consideration so do the assets.
Walt for instance is very important.
We know that having a a.
Hey, Walt that's closer to 10 is better.
We only get that if we buy assets.
And so we want to have a portfolio structure.
That gets us a better multiple so when we're thinking about growth, we're not only thinking about hey, AFFO growth, we're thinking about multiple growth and both of them. Those those two acquisitions, the prep or assets and get us multiple growth and so we'll consider all those elements as we look forward but to your.
<unk> point, we're looking at some spread to the six seven to <unk> to make the acquisitions.
Very appealing.
Okay and then thanks for that and then on the on the dividend policy just unclear.
You mentioned sort of a kind of 70% to 80% that ratio.
Getting to the lower end I guess does that mean that you are starting out at a payout ratio that you feel like would be sort of closer to may be taxable minimum worker.
The rings and they'll gradually.
You know sort of raise it to that or more stabilized run rate is that how you're yes. Okay.
Yeah, well you know just I'll, let me start with pressing one or one that says the board makes that decision not us, but but but and the board does not every every quarter. We do have we have a presentation to the board on where the dividend is how much cash flow. There is after the dividend, what we do with that cash flow and and.
We make the decisions based upon.
What's best for the balance sheet, and the long term and the value of the stock.
As we look forward I give the ratio of 70% to 80% because it's commonplace.
If you look at our peer group, that's that with where it is.
We are not going to get to 80% the store that will guarantee you that.
We may and again subject to board approval, we may be less than 70% when we start and gradually get there, but that will be a function of what we can do with that capital relative to giving it to our shareholders. If we feel that we can improve the value of this company. So that the total firearm to the shareholder.
It is better.
We may choose to keep four and then over time increase the dividend until we get to a more normalized number.
Okay. Thank you for calling her today thanks.
Thank you.
The next question is from frankly of BMO. Please go ahead.
Hi, good afternoon, everyone, sorry, Glenn if I Miss this in your earlier remarks.
What was the driver for tapping the ATM this quarter and how should we think about ATM usage going forward just to fund acquisitions.
Well when we think about the ATM frankly, it's a pool of capital that we raise so we're looking at the cost.
Of our capital relative to the investment and if we just took this quarter for instance.
We we allocated 150 million of the bond issue, we did in the second quarter for.
For the press all the capital was primarily used for the prep breadth and the 32 million that we purchased subsequent to quarter 250 was allocated at 3.4%.
We sold $157 million of assets at around the 6%. We then issued the 94 million or the ATM and we had 65 million of free cash flow just from the reduction in dividend, we actually had more cash flow from that but I'll just speak to the 65 reduction those are the four pools of capital we can choose from and when we mix them together.
That's the cost of capital that we used relative to buying the bonds and the assets. We purchased we actually as you can see if you added up all those numbers, it's much more than 300 million, which means we have some firepower from that going forward.
The the equity component is a component and what it does do for US is it gives us balance sheet question. So that as we buy assets, we have bought equity to the balance sheet as we have blended our cost of capital going forward.
I mentioned on the call with the properties that we have in our pipeline, we could actually we expect to purchase them.
Just from dispositions, if we wanted to.
But we have alternatives and that's great alternatives and options are always great and we have alternatives and options and all four of those areas.
We talked about we can have some level of debt without increasing our debt level certainly.
We'll have dispositions.
We could have the ATM, if we choose and we clearly will have free cash flow in the fourth quarter.
Okay, Great and then if I look at the page we show collections by state is.
Is there any particular reason why QSR collections and the reopening states have declined in October Green and also in Q3.
Yes, what I hand, it over to Paul.
Watching it.
That's a good question and I'm not sure we can draw too many conclusions from that just yet.
We do characterize within the QSR, our buffet restaurant.
Golden Corral and the like.
So as a result, there may be some impact from some of those restaurants being forced to re shot but I think it's too early to draw too much conclusion from that.
Frank We expect a ruckus report you'll see this every quarter because we had last quarter, yeah I'm in future quarters, we constantly look at it as time goes on we expect that we may see more.
Okay. 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.
Thanks, everybody for joining us and if anybody has any further questions. Let us know if we don't talk to you sooner I'm sure we'll be talking to many people when they read too.
Karen Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.