Realty Income Corp (NYSE:O) Q1 2020 Results Earnings Conference Call May 5, 2020 2:30 PM ET
Andrew Crum - Associate Director
Sumit Roy - President and Chief Executive Officer
Jonathan Pong - Senior Vice President, Head of Capital Markets and Finance
Conference Call Participants
Haendel St. Juste - Mizuho Securities
Christy McElroy - Citigroup
Greg McGinniss - Scotiabank
Shivani Sood - Deutsche Bank
Vikram Malhotra - Morgan Stanley
Todd Stender - Wells Fargo
John Massocca - Ladenburg Thalmann
Linda Tsai - Jefferies
Chris Lucas - CapitalOne Securities
Collin Mings - Raymond James
Joshua Dennerlein - Bank of America
Barry Raskin - Jordan & Jordan investment Group
Good morning and good afternoon. My name is Simon and I will be your conference operator today. At this time, I would like to welcome everyone to the Realty Income First Quarter 2020 Operating Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you.
Mr. Andrew Crum, Associate Director, Realty Income, you may begin your conference.
Thank you all for joining us today for Realty Income’s first quarter 2020 operating results conference call. Discussing our results will be Sumit Roy, President and Chief Executive Officer; and Jonathan Pong, Senior Vice President, Head of Capital Markets and Finance. During this conference call, we will make certain statements that may be considered forward-looking statements under Federal Securities Law.
The Company's actual future results may differ significantly from the matters discussed in any forward-looking statements. We will disclose in greater detail the factors that may cause such differences in the company's Form 10-Q. We will be observing a two question limit during the Q&A portion of the call in order to give everyone the opportunity to participate. If you would like to ask additional questions you may reenter the queue.
I will now turn the call over to our CEO, Sumit Roy.
Thank you, Andrew. Welcome, everyone. We will discuss in detail the economic impact of the COVID-19 pandemic. But first, I will highlight several first quarter results, which positions us very favorably to start the year.
During the first quarter, we generated AFFO per share of $0.88 and completed approximately $486 million in high quality property acquisitions. Additionally, we raised approximately $752 million in well priced equity at a price of $77.37 per share.
We ended the quarter with a net debt-to-adjusted EBITDA ratio of 5 times. And our fixed charge coverage ratio of 5.5 times is the highest in our company's history. The impact of the COVID-19 pandemic has been and continues to be felt across geographies, economies and industries and our thoughts remain with all who have been impacted.
We continue to manage the business with a focus on all stakeholders, our shareholders, clients, colleagues, and community. Accordingly, we have leveraged technology to ensure seamless business continuity with our employees working safely from their homes. And I want to thank my colleagues for their hard work and dedication to ensuring the strength of our business operations.
Our real estate portfolio is deliberately designed to generate predictable cash flow through a variety of economic environments. But our portfolio is not immune to the economic shutdown that has resulted from COVID-19. Our tenants operate across 51 different industries. We have always maintained stringent investment parameters, targeting high quality tenants, who are leaders in their respective industries.
Approximately half our rental revenue is generated from investment grade rated tenants. Certain tenants have requested rental relief, and these requests have primarily been for rent deferrals rather than rent abatement. We are reviewing rent deferral requests on a case-by-case basis. We view our tenants as partners and clients, and our relationship is symbiotic.
However, the approach we have taken is to independently review the individual financial and business positions of our tenants. And we have not and will not accept rent deferral requests that we believe are solely opportunistic in nature.
For April, we have collected approximately 83% of contractual rent, and we received essentially all of expected rent from investment grade rated tenants. While we have not historically perceived properties leased to investment grade rated tenants as a primary objective, during periods of economic uncertainty, high grade credit tenants do tend to provide more reliable streams of income, all else equal. We disclosed in our financial supplement the percentage of contractual rent collected by industry.
Our top four industries; convenience stores, drug stores, dollar stores and grocery stores, each sell essential goods and represent approximately 37% of our rental revenue. And we have received almost all of the contractual rent due to us from tenants in these industries.
Other industries such as theatres, health and fitness, restaurants and child care have been challenged due to store closures and social distancing requirements. Of the 17% of rent not collected in April, 86% is from operators in these select industries.
We believe that the strength of our corporate partnerships will be important as we seek mutually beneficial resolutions. And we are pleased to partner with leading operators in each of these industries. Additionally, we remain constructive on the long-term viability of each of these industries. The success of the theater industry has largely been tied to the quality of films produced by Hollywood, and the U.S. Box Office reached an all time high as recent as 2018.
Additionally, the economic business model for studios continues to suggest in our view that the theater distribution channel will remain attractive going forward. We also expect a non-discretionary and low price point propositions at the quick service restaurants, health and fitness on child care industries to support resiliency of their rent paying capabilities once their businesses are fully opened.
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 vis-à-vis our competitors.
Moving on to investment activity during the first quarter. In the first quarter of 2020, we invested approximately $486 million in 65 properties located in 22 states and the United Kingdom at a weighted-average initial cash cap rate of 6% and with a weighted average lease term of 14.1 years.
On a total revenue basis, approximately 36% of total acquisitions during the quarter were from investment grade rated tenants. 95% of the revenues were generated from retail tenants and 5% we generated from industrial tenants. These assets are leased to 25 different tenants in 17 industries.
Of the $486 million invested during the quarter, $320 million was invested domestically in 61 properties at a weighted-average initial cash cap rate of 6.5% and with a weighted-average lease term of 14.8 years, and $166 million was invested internationally in 4 properties located in the UK at a weighted-average initial cash cap rate of 5.1%, and with a weighted-average lease term of 12.5 years, including our first industrial acquisition in the UK of two properties leased to an investment grade operator.
During the quarter, we sourced approximately $18.1 billion. Of the $18.1 billion sourced during the quarter, $10.4 billion were domestic opportunities and $7.7 billion were international opportunities. Of the $486 million in total acquisitions closed in the first quarter, 55% were one-off transactions.
Our investments spreads relative to our weighted-average cost of capital were healthy during the quarter, averaging approximately 247 basis points for domestic investments and 272 basis points for international investments, which were well-above our historical average spreads. We define investment spreads as initial cash yield less our nominal first year weighted-average cost of capital.
Our disposition program remains active. During the quarter, we sold 17 properties for net proceeds of $126 million at a net cash cap rate of 6.2% and we realized an unlevered IRR of 11.1%. Our portfolio is well-diversified by tenant, industry, geography and property type, which contributes to the stability of our cash flow.
At quarter end, our properties were leased to approximately 630 tenants in 51 different industries located in 49 states, Puerto Rico and the UK. 84% of our rental revenue is 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. Convenience stores remain our largest industry at 11.9% of rental revenue.
Within our overall retail portfolio, approximately 95% of our rent comes from tenants with a service, non-discretionary and/or low price point component to their business. We continue to believe these characteristics allow our tenants to operate in a variety of economic environments and to compete more effectively with e-commerce. These factors have been particularly relevant in today's retail climate, where the vast majority of recent U.S. retailer bankruptcies have been in industries 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. The weighted-average rent coverage ratio for our retail properties is 2.8 times on an overall basis, while the median is 2.5 times. Occupancy based on the number of properties was 98.5%, a decrease of 10 basis points versus the prior quarter. During the quarter we re-leased 93 properties, recapturing 99% of the expiring rent.
Since our listing in 1994, we have re-leased or sold over 3,200 properties with leases expiring, recapturing over 100% of rent on those properties that were re-leased. Our same-store rental revenue increased 0.2% during the quarter.
The lower same-store rent growth is partially driven by a change in methodology. As we are now recognizing percentage rent during the period it is accrued, rather than during the period it is paid, which also resulted in higher same-store rent growth in the fourth quarter of 2019.
Moving on, I will provide additional detail on our financial results for the quarter starting with the income statement. Our G&A expense as a percentage of revenue excluding approximately $3.5 million of severance related to the departure of our former CFO was 4.4% for the quarter, and our cash G&A margin, excluding severance, was 3.5%.
We continue to have the lowest G&A ratio in the net lease REIT sector. Our non-reimbursable property expenses as a percentage of revenue was 1.3%. As a result of an early redemption of our $250 million 2021 notes, we recognized approximately $9.8 million loss on extinguishment of debt during the quarter.
Briefly turning to the balance sheet, we have continued to maintain our conservative capital structure and remain one of only a handful of REITs with at least AA ratings. In April we drew $1.2 billion on our revolving credit facility to increase our cash position as a conservative measure due to uncertainties related to COVID-19.
Under the revolving credit facility, our AA credit ratings provide for a borrowing rate of LIBOR plus 77.5 basis points. We currently have approximately $1.2 billion of cash on hand, and an additional $1.1 billion available under our revolving credit facility, which provides significant financial flexibility.
Looking forward, our overall debt maturity schedule remains in excellent shape as the weighted average maturity of our bonds is 8.3 years. Additionally, we have approximately $400 million of total debt coming due throughout the remainder of 2020 and 2021.
In summary, our balance sheet is in great shape. And we continue to have low leverage, strong coverage metrics and ample liquidity. In March we increased the dividend for the 106th time in our company's history. We have increased our dividend every year since the company's listing in 1994, growing the dividends at a compound average annual rate of approximately 4.5%. And we are proud to be one of only three REITs in the S&P 500 Dividend Aristocrats Index for having increased our dividend every year for the last 26 consecutive years.
Moving on. As we navigate through the current state of economic volatility and uncertainty, we believe a strong financial position is paramount. The timeline for economic uncertainty remains unclear, but we believe we are well positioned with significant financial flexibility. Further, we believe we are well positioned to capitalize on opportunities going forward once we receive additional clarity regarding the current crisis.
To wrap it up, we have completed a very strong quarter and we are well positioned from both a balance sheet and portfolio standpoint heading into this period of uncertainty. The COVID-19 pandemic has resulted in an economic environment largely unprecedented. But I'm confident in the resiliency of our tenant credit profile, the quality of our real estate and the talent of our team members to continue generating favorable shareholder value over the long-term.
At this time, I would like to open it up for questions. Operator?
Thank you. [Operator Instructions]. And your first question comes from the line of Haendel St. Juste with Mizuho. Your line is open.
Haendel St. Juste
Thanks for taking my question, Sumit. First, a high level question. I would be curious how COVID in your portfolio operations since has impacted your view on portfolio allocation or on subcategory exposures? Certainly curious on how that is impacting your forward thinking on portfolio strategy, and it sounds like you are still a fan of movie theaters, casual dining, child care. So, curious if perhaps you can sprinkle in some more commentary on those sectors and perhaps when you expect to be made whole on those rents and your plan for the sub-sectors exposures on a longer-term basis? Thank you.
Sure. Thank you for your question, Haendel. There is a lot that you have asked. So, I'll try to take it one at a time. Starting with a high level view as to the COVID-19 situation and whether we would have done things differently entering into this crisis. And the answer remains that, look, none of us -- at lease I wasn't smart enough to anticipate a scenario for a downturn where businesses would go from x revenues to zero literally overnight.
The downturn in and of itself is not something that we hadn't anticipated. We were in the longest recovery since in the last 60, 70 years. And so, a lot of our thinking had been centered around, there is a downturn coming. How is the portfolio currently constituted? How is it going to withstand? And we were sort of using the last great recession as a filter to run through our portfolio allocation, our industry concentration, et cetera. And under any of those scenarios, we felt we were very well-positioned.
What we didn't anticipate was the social distancing phenomenon. Because I would argue that had this downturn taken on a color, not necessarily the drivers of the downturn being similar to the last recession, 2008 through 2010, but if the social distancing norm wasn't part of the equation, the industries that we find most impacted by this pandemic, theaters and fitness, those would have continued to thrive as they did in the last downturn.
And so, which is why we hesitate to say that, unless our view of what is going to cause downturns in the future has dramatically altered, which it might and i.e. pandemics are going to be situations that are going to occur more often in the future when businesses can be shut down overnight for long periods of time.
If that becomes a norm going forward and I'm not smart enough to say whether it will or it won't, then yes, I do think that it will change our philosophy around the allocation that we currently have. But what we also think will happen, having gone through this pandemic is that, we are going to be better prepared. There will be allocation of resources and infrastructure put in place to anticipate a possible pandemic in the future.
And so, in situations like that where businesses are not essentially shut down for vast periods of time, the businesses that we are exposed to that are most impacted i.e. theaters, health and fitness, casual dining, et cetera, won't be quite as impacted. And especially theaters and the health and fitness will continue to do well, just like they did in the last downturn.
So, this is a bit of a wait-and-see, and see how we learn from this particular situation and what are the provisions put in place by the government to anticipate, and be better prepared to handle situations like this going forward. But had this been a downturn that was triggered by any other factor outside of social distancing, these two industries would have done just fine.
And so, it is a little too early to say as to whether we need to make wholesale changes to our portfolio allocation going forward without getting some answers to some of the questions that remain, that are unclear to me going forward.
Going through the list of the industries that have been most impacted, it is the ones that I have just mentioned. If you think about the theater industry, it represents approximately 6% of our revenue stream and they are more impacted with essentially all their locations being closed and they are generating zero revenues at this point.
Although, we think it will take longer for patrons to get comfortable attending theaters post shut down, our fundamental thesis on the industry remains constructive at least as of right now. We believe that it is unlikely that studios will bypass the theatrical releases and go direct-to-consumer, especially for major releases since the margins of the theatrical releases are so much higher.
And yes, people point to what is happened with Troll and the fact that they were able to get $19.99 for the releases to PVOD. But it is largely being driven by the stay-at-home and having no alternatives is our view. And I do think that theaters will continue to be the primary avenue for releases, especially the blockbuster movies, just given the economics.
This industry will take longer to recover though. I think people are going to be very hesitant to go back to theaters. But if you look at the types of formats that we have on the theater side, we do believe that those that are less crowded, that have reclining seats, fewer patrons at theater, those are going to probably see more of a quicker comeback than the more traditional theaters.
The other industry that I mentioned was our health and fitness industry. Those businesses went from being very healthy to generating fractions of revenues like in the single-digits and -- but we do believe that, that business has a potential to bounce back much more quicker -- quickly than that theater business. And we believe that within a 3 to 4 month timeframe the businesses should normalize for the theater business.
Casual dining, thankfully, it is a very small portion of our business. It is approximately 3% of our rent. And that too has been impacted and that business will take longer. And I think the fact that, if you are not aligned with operators that have the balance sheet and the liquidity to withstand a long duration shutdown or partial shutdown, you are going to see a few operators go under in that particular business.
But thankfully, we are aligned with -- in most cases in that particular area with operators that are either publicly traded, have the liquidity and the wherewithal to continue to manage through this crisis.
Another industry that we are keeping a close eye on is child care, which represents about 2.5%, 2.4% of our rent. And there, thankfully, again, we are exposed to two of the larger national operators, in Kindercare and La Petite.
But there do tend to be a lot of mom and pop players and they probably will be forced into bankruptcy within this particular industry, just because they don't have the liquidity or the balance sheet strength to withstand a longer term shutdown.
So, those are the four industries that we feel like we have to keep a closer eye on. And we are doing that, we are in constant conversations with our operators. And we are trying to work out solutions that, that is mutually beneficial.
Haendel St. Juste
That is great color. Thank you, Sumit. One more if I may. More of a question on rents, looking for a bit more color. On April, how much of the April rent was paid on time and maybe some color on how that compared to perhaps one year ago? And then there is investment concern that the PPP money isn’t going to be enough to save enough landlords. And so are investors -- are we right to be concerned that May and June rents could prove more challenging to collect than April's? Thank you.
Sure. So as you know, we ended up collecting almost 83% of the rent due to us in April. But if you were to fast forward to end of March, beginning of April, the numbers that we were looking at were much higher in terms of the requests that were coming in.
And part of the reason that it is so interesting about this particular situation is the tenants’ liquidity profile is changing almost on a daily basis. So the initial discussions that we were entering into with some of our tenants through those discussions, they were weighting on banks, they were looking at structures like [PIEs] (Ph), et cetera to have access to additional forms of liquidity.
And over that 30-day period, people that we thought may have liquidity for a 6 to 8 months period, ended up being able to raise private capital, either through a bank loan or through PIEs, et cetera. And we are able to create a liquidity position that was very different from where they looked at the beginning of the month.
And so, our discussions therefore evolved during this time to help accommodate our own needs and thankfully, given the type of relationships that we have, given the type of operators that we have that tend to be larger, better capitalized operators, have more access to capital.
We were able to collect a lot more rent than what we had originally thought we were going to collect at the beginning of April. And we suspect that the situation is going to be similar for the month of May. And one of the other variables that has changed is, there are more states that are now opening up.
This Friday is supposed to be the threshold date for a few more states to start opening up, there are businesses that will start to open up. Yes, things will take a while to sort of recover. But the fact that these businesses are going to open up, that changes their liquidity profile to the assumptions that we were originally running where businesses will be shut down for a period of time, certainly more than just a month.
And so, because the data continues to change and evolve, it is very difficult for us to share with you the precise amount of rent we are going to collect for the month of May. We do believe that the month of May will certainly be worse than the month of April from a rent collection perspective, because there were some tenants that told us that they are paying us for the month of April, but they would like for us to consider deferring their May rents. And so we recognize that that is going to be the case.
But we have only resolved 6% of the tenants that have come to us and asked us for a deferment. And partly because the remaining 94% has not been resolved, partly because their liquidity positions continuously evolve and change. So, April was great, May we believe will be slightly worse. And June is just too far away to forecast as to what is going to happen.
You next question comes from the line of Christy McElroy with Citigroup. Your line is open.
Hey, Sumit. Thank you. You made a comment at the end of your remarks in regard to capital allocation that you would be opportunistic, but only once you receive additional clarity regarding the current crisis. I just wanted to get a sense for -- you are obviously in a great immediate liquidity position, but you are also balancing that liquidity with funding, potentially more deferrals and then non-payment of expenses. Is it reasonable to assume that you have meaningfully pulled back on sort of allocating capital toward acquisitions at this point for now, regardless of what the pipeline looks like, maybe just give us a little bit more color on your desire to allocate to acquisitions in this environment?
Sure. It is a bit of a balancing act, Christy, to be very honest. We are in a very good liquidity position. We have certainly a bit more visibility today than we did in April, which gives us a bit more confidence today than it did in the beginning of April. Having said that, we haven't been able to handicap the duration of this downturn. We know what the tenants are asking for or the range of what they are asking for.
And the question that we are struggling with internally is, is that an accurate reflection of what will truly transpire and that is what is keeping us a bit hesitant in being able to go out there and invest a lot of capital. Look, there was a reason why we came out with a very healthy acquisition number at the beginning of the year.
It is because our pipeline was very strong. And a lot of what you saw that we ended up taking over the finish line was a reflection of the pipeline that we have in place and some of which you will see, we will also transact in the second quarter. But having said that, I think about the acquisitions market in three compartments if you will. One there is a core product that is still out there that is continuing to do really well.
And in fact, I would say there are tailwinds given this COVID-19 situation and they are the usual suspects; the grocery business, the convenience store business, the drug store business as well as the dollar store businesses. Those businesses have continued to thrive. And we don't see much of a change in cap rates et cetera there. But that is a product that if we can opportunistically expand on, we will. But we are going to be hyper selective.
And part of this hyper selectivity comes from not being able to handicap the duration of this downturn and therefore what our true liquidity need is going to look like going forward. But what we are trying to do and every department is trying to do is stay very close to our contacts to continue to look for the opportunistic transactions. And even when there is a bit more clarity in terms of the duration of this pandemic, we want to be first in line to be very aggressive on the acquisitions front. But we are going to track carefully.
And then just on the debt capital front, you have a term loan -- sorry if you already addressed this. But with June term loan coming due, what is your intention in regard to that? And do you have any desire to access the unsecured bond market today? Or do you have a sense for where you could price a bond deal today?
So the term loan -- you are absolutely right, there is $250 million club that is coming due in June. The term loan market remains open. We have been told by the banks that we have spoken with that they will be happy to Refi that $250 million term. What is going to be different however is the actual term associated with that term loan. So this was a five year term loan that we had entered into.
Today the best I think we will be able to do is a 1 plus 1. And you know, for me if I had to compare, just keeping it outstanding on my line versus doing a term loan with banks, I think I have a better cost associated with my line being outstanding than refinancing with the banks. But that is an avenue available to us.
With regards to the unsecured bond market I think there've been only two transactions that have been done recently. One, I believe was of at least similarly rated companies. One was Camden, and then the other one was Boston [Opus]. I think one was done at a 2.8%. The other one was done at 3.25%. We are similarly rated. We believe we will be in that similar zip code.
And the advantage that we have today is we don't have to do anything in the unsecured market. We believe, given our ratings, and given these two examples, that, that market remains open to us. And we will opportunistically take advantage of that market if it presents itself. But we don't have to do that.
Your next question comes from the line of Nick Yulico with Scotiabank. Your line is open.
Hi. This is Greg McGinniss on for Nick. Just kind of curious what your ability is to offload vacant assets in this market and how we are holdings potentially more vacant assets plus the tenants not paying rent or insurance impact, property cost leakage expectations?
Yes. Look, I do think that the transaction market has slowed a bit. We were able to sell 13 vacant assets in the first quarter, and opportunistically people are still continuing to look for assets. We in fact had vacant assets that we were able to close subsequent to the first quarter. So, there continues to remain a market.
It is just much more selective is how I would phrase it. And thankfully if you look at our portfolio today, there isn't a lot of new resolutions that we have to go through for the remainder of the year. So, we feel like we are in a pretty good position, but it is certainly slower today than it was in the midst of the first quarter.
And then I appreciate the information given so far and kind of your expectations for May and how it is still evolving. But is there any -- are you still expecting to collect the nearly a 100% from investment grade tenants that you did in April and May as well?
It is too early to tell. We do expect to collect a very high percentage. I don't know if it going to be a 100% just like we did in April, and that is where some people have come in and opportunistically try to take advantage of the situation, and this is where I think the spirit of the conversations have been compromised and we have drawn a pretty hard line, when we have negotiated or engaged with some of these folks.
But at the same time, if their businesses - and they could point to a short-term deferral request, which is legitimate, we are engaging in those. It is just the threshold for accepting proposals that are being put forth by investment grade tenants. It is very, very high. And so, our expectation will be that, if it is not similar to April, it should be pretty similar to April and in terms of what we are able do in May. But again, I would just caveat that by saying, it is still too early to tell.
Your next question comes from the line of Shivani Sood with Deutsche Bank. Your line is open. Shivani?
Thanks for taking the question. Just with regards to the theater tenants that didn't pay rent in the UK in April, can you just remind us of how the process works there versus the U.S. just in terms of your rights and obligations in this sort of a scenario and how it might be different?
Hi, Shivani. It is a good question. As far as we are concerned, it is the same tenants that we have here, in it is in a world that -- is our tenant in the UK and we are not isolating our discussions based on geography. It is a holistic discussion that we are having with them. We recognize their liquidity situation.
We do our own independent liquidity situation to get a feel for, where they are, what does their local jurisdiction allow in terms of reopening, how restrictive that is. And based on that, we continue to evolve our thinking in terms of where we ultimately end up with regards to resolutions with a particularly tenant. But it is largely the same.
In fact, in the UK, we have the ability to lock out a tenant, which we don't in the U.S. And so that is a bit more landlord friendly than what we have in the U.S. But like I said, we view our tenants as our clients and there is a symbiotic relationship. And that is not our intent. We want to work with them, especially with businesses that have been impacted.
I mean these guys have gone from having a pretty good run to essentially zero revenues. And so we are trying to work with them, we are trying to understand what their situation is and come up with a solution that is mutually beneficial.
And then can you share some color on the industrial acquisitions that were made in the UK? And in terms of how the structure of these leases and the underlying assets compares to what you guys own in the U.S.?
Yes. So we were very proud that was our first industrial transaction that we did. It is an investment grade pharmaceutical company. And we were very comfortable with the location. It is in an industrial hub, very good location. And we like the industry, we like demand, it is a true triple net lease, very similar to what we find here in the U.S. And so on all fronts, this was a good transaction for us.
Your next question comes from the line of Robert Stevenson with Janney. Your line is open.
Were you buying assets where the tenant is either deferring or not paying rents? And what percentage of the first quarter acquisitions have deferred or not paid April rents?
We will not be buying assets where going into that acquisition, there is an expectation for deferral of rent. That is just not part of our business model. It is not how net lease companies are structured, Rob, as you know. But if a particular transaction was in the works, and we had essentially done our diligence, we didn't have any outs, and it was a question of closing or not closing, we will absolutely close those transactions.
And in fact, I can think of one situation where a portion of the rent has been deferred for the month of April. But those were largely transactions that was already in the pipeline. We had -- there was a handshake agreement and we felt like we needed to honor our transaction and we have. And this is a situation that we feel pretty good about the tenant longer term. And we feel like they are going to be able to bounce back as soon as some of the social distancing is sort of lifted.
And can you talk about how April rent collections went within the industrial and office portfolios compared to the retail portfolio?
Yes, I would say -- and I don't have the numbers right off the top of my head, but by and large, we collected 100% on the industrial and office side of the equation. And most -- the vast majority -- I almost want to say 100% but I don't have the numbers in front of me, Rob. I would have had my whole team surrounding me and giving me numbers right now, but I don’t have that situation. But I think the vast majority, if not a 100% of it is on the retail side of the equation with regards to deferment.
Your next question comes from the line of Vikram Malhotra with Morgan Stanley. Your line is open.
Thanks for taking the question. Sumit not to beat a dead horse. But just so that we understand kind of hypothetically what could happen, all hypothetical, given it is early. But given the deferral percentage you had in April and talking about some of the tenants that might needing a deferral, is it a bad assumption to say if we just sort of add up health, sickness, theaters sort of the areas where you have seen the issues, which is 24%, 25% of the rents, is it fair to say that the deferrals in May could sort of trend up to that region, and we shouldn't see anything clearly different?
Yes, without boxing myself in Vikram, because like I said, the only data we have to rely upon is what makes me hesitate to give you numbers, because I look at April and then I look at where we were towards the end of March and what our expectation was for the month of April and where we actually ended up, I would say was very different.
But if you are trying to isolate the four biggest industries that have impacted, it is a vast preponderance of this 17% of deferrals. You are absolutely right. Those four industries represent 86% to almost 90% of the deferred amount.
So, could that be a zip code of where it all ends up? The answer is yes. And keep in mind, even within those four boxes, outside of the theater business, it was a partial connection. So, then that can be more than offset by some of these other businesses that haven't been as impacted as these four businesses. And there are portions of that sort of also falls into this deferred bucket.
So as a starting point, I would say that, that would be how you think about, the problem industries and where the deferment should dominate in terms of the quantum of the deferment. Those are the four industries that will make up a vast majority of the …
And then maybe just how does this make you think about the IG mix, whilst may not have been like a totally intentional strategy of like specifically every quarter we are having a certain IG mix. But certainly the experience has been the IG has held up a lot more. So I'm just wondering, near term and medium term is this -- how do you think about the IG acquisition relative to the others?
Look, what we have already said is we want to invest in businesses that have the operational strength to withstand various economic cycles and though having an investment grade wasn't necessarily something that we were chasing.
Most of what, how we define the box that we were chasing tended to be investment grade and clearly if you were to look at our April numbers, the investment grade side of the equation has held up very well. And so, it is not by accident that is the case. They tend to have more access to liquidity that they have will capital sources than then some of the more regional and smaller operators too.
And therefore they are able to, even in situations where their business is completely shut down, they are able to at least pay a partial grant and or in some cases full rent because they have the liquidity strength to do so. So, if all that is being equal, having an investment grade rating, certainly it is something that has shown really well in this particular situation.
Okay, great. And then just last one. I know in this situation it is sort of, maybe just difficult or unfair to go to 10 inch and kind of give them deferrals in exchange for something. And we have had this conversation on multiple calls, but I'm just sort of wondering, thinking about the follower of the leaves, the rights you have, similar things might have happened in a regular recession or some other recession as well.
So is there a group of tenants where for example, you said they do not need it and you know, yes, you want to sort of accommodate what could you get in return and what are you trying to enforce if that situation arises in terms of getting something in exchange for an extended difference?
We feel like there are enough tenants today that genuinely need help and they genuinely need to borrow our liquidity. And we would much rather be there to help them get over this hump, especially if we believe that the medium to long-term prospects for those businesses and those particular operators continues to be strong.
We would like to lend them our liquidity. And that doesn't mean, give them capital, it just means give them deferments. If there are situations where you have a healthy tenant who is asking to opportunistically take advantage of our balance sheet, et cetera, that is where we do run into a little bit of an issue.
That is not to say we are not going to engage, but it is a much higher hurdle for them to convince us that they need to borrow our capital or our ability to defer rent and therefore create liquidity for them.
If they cannot purely show a path to, this is big essential or even if it is not existential, it makes them much more stronger and allows them to be much more active. But that is a very difficult argument for some of our tenants who are very strong to make. And by and large those that may have engaged in those types of discussions in the earliest stages of that, how has that done the right thing and have ended up paying the rent that they owed to us.
And so, it is a tale of two cities, there are those that purely need our help and we are working diligently with them to make that happen. And, there is a much, much smaller group that wanted to be opportunistic. Thankfully the right resolutions are occurring.
Your next question comes from the line of Todd Stender with Wells Fargo. Your line is open.
Sumit, I hope you are well.
Todd. Hope you are well too.
Here I’m. Thank you. So, under normal circumstances, as the landlord of triple net lease, you have negotiating power. You are the landlord. But now with COVID you have lost some of that I would imagine, with no viable tenants to really back fill the space. Can you just comment on how you are going into these rent deferral discussions, knowing that we could be in this for a while, and as revenues are certainly down and maybe down for awhile. I mean, how do you look at your positioning right now with the negotiating power?
Yes. Look, we have never taught us despite the fact that, we tend to be the largest landlord for so many of these tenants. We have never thought of that as leverage. We recognize the situation that, our tenants find themselves in and we are genuinely interested for some of the reasons that you just enumerated, we are genuinely interested in making sure that they have survive and they come out healthy and they are able to live to fight another day.
However, we wouldn't be doing our job, if we weren't thinking of what are some of the more creative ways to create options for ourselves with regards to some of these asset types. And yes, if you go down the traditional path of looking for an alternative operator within the same industry, yes, that is a path, perhaps a stronger operator who has a higher probability of surviving, engaging in those types of conversations sooner.
Yes, that is certainly a path. But, we also have to get creative about, where are these assets located? Who could potentially benefit from these locations? Truly think about asset management from a very different perspective than a pure real estate perspective to try to stop creating alternatives and explore those alternatives, which is precisely what we are doing. But that is not to say we are going to use this as a leverage in our negotiations.
It is just us doing our job. But look, we understand what the situation, what COVID-19 has done to some of our tenants and we are trying to do the right thing and the most efficient resolution for us will always be that, the incumbent, survive and thrive as a going concern coming out of this.
And so, is there a path for us to take these tenants from the current situation that they find themselves in to that point where they can become a going concern, that is what we have exploring. I think a priority one. And at the second priority is what I just shared with you.
That is helpful. Last question, just under a general rent deferral, it could be, I would imagine a ranging of one month to three months I think just for starters if that is fair.
And how long are you giving tenants the opportunity to repay that? Is this going to bleed into Q1, obviously with just April we are talking about, but we are in May right now. We are going to be in June shortly that these deferral payments spread well into next year. How you kind of framing that?
In none of our discussions as the deferral period gone past and the ask has always been exactly like you said, 30 days to 90 days. What we have structured is 30 days to five months. So 1 month to five months, and the part of the reason why we did that was just to say, pay us something.
It helps us on our cash flow side and the total quantum of your deferral is still going to be the same. But we will spread it out over a larger period. So it is not that you are going to get zero percent deferral, you will get a portion of your rent deferred. And we will collect some rental income during this period. And it will give you the time, you need to get healthier.
Those are the ones that we have resolved in and tag that flavor to it. And the payback of that deferred rent is approximately in that nine to 10 months timeframe is for us to be made whole. But in no situation that I'm aware of today has anybody asked us for a deferral past three months.
Your next question comes from the line of John Massocca with Ladenburg Thalmann.
So if and when we get back to an environment where you kind of feel you can go on the offense from an acquisition perspective. And an understanding there are other factors that go into this decision. But what kind of spreads would you want to see your cost of capital to make reaccelerating the acquisition platform attractive? And is that even a gating factor today at all? Or is it mostly just concerns about kind of the macro volatility?
So it is, I mean, anytime you are looking at the acquisitions market, John. You want to make sure that you continue to capture some level of spread day one. And then you have growth in the leases, which allows you to continue to capture more and more spread. So that is absolutely something that we are going to take into consideration.
Even when we decide to selectively put our capital into work. But like I said, our top priority today, not having the visibility into the duration of this particular pandemic is going to make us very, very selective in terms of where we put our capital to work on the acquisition front.
So just I would say it is a little too early to tell. What we are trying to do, however, is position ourselves from a liquidity perspective, from a capital perspective, from a discussions perspective, to be ready to go, if and when the market allows us.
And we have more visibility into, where this pandemic is going and what is the true impact going to localize. As soon as that becomes a bit clearer to our senators today. I think we want to be in a position to be first out of the gate if you will take advantage of the acquisitions market.
I mean, you kind of over the last couple of quarters you guys achieve kind of above historical average spreads, Is that necessary to get back into the acquisition market? Or if it came back more towards, can you guys long-term historical spreads would that be kind of fine?
Long-term historical spreads would absolutely be fine. We were in that 150 basis points spread. That is the average that we have accomplished through the history of our company. And that is certainly an area that would be attractive enough. But again, it is going to be a function of the product.
If it is riskier assets, we are going to be a lot more hesitant to pursue those types of transactions, even at outsized spreads. If these are right down the fairway, like I said, the compartmentalized the acquisition markets into three buckets. And the first bucket that we go to is the one where, markets really haven't changed.
But we hope it does. And if it does, those are products that will continue to have tailwind in this environment and will continue to thrive in this environment. And so we will judiciously, roll that particular element but not today. This is all predicated on having more clarity as to how long this pandemic is going to last.
Great. I appreciate the color. Better for me. Thank you very much.
Your next question comes from the line of Linda Tsai with Jefferies. Your line is open.
Hi, recognizing you have a great track record with your dividend and liquidity remains ample for our own understanding how much revenues have to go down or decline the full year at a 100% for payout?
Yes. So I think the easiest way to answer that Linda is, our payout ratio at the end of 2019, or perhaps at the end of the first quarter was right around 80%. And so, if we lose 20% of AFFO, then you are going to be at a 100% payout ratio.
Thanks. And then how do you expect opportunity to look at the end of 2Q versus where you ended in 1Q?
It is a very interesting question. We just don't know, a deferment does not mean these assets are coming back to us and like I said, Linda, the vast majority of what we have been engaged in is a deferment, people want to continue to operate these locations. So I would be surprised if will it be lower than the first quarter.
I think it will. Because some of these smaller operators, unfortunately, despite that trying to work with them may not survive. But thankfully, that is a very small percentage of our overall portfolio. And so those will be coming back. But I don't expect it to be dramatically different. Will it be lower than the 98? 95? I think yes, the answer is with fairly below.
Thanks. Sorry if you answered this earlier, but any sense of what percentage of your tenant spaces open right now?
We would say about 80% of our retail tenants are open today and by that we mean, they are either fully open or partially open. And I would say 20% of our tenants are fully closed.
Thanks. that is it from me.
Your next question comes from the line of Chris Lucas with CapitalOne Securities. Your line is open.
Good afternoon everybody. Hey Sumit, a couple of quick questions for you. When was the last transaction completed in the first quarter?
When was the last transaction be completed in the first part of the quarter?
Yes. How far the quarter is?
I wouldn't be surprised if they weren't asked that we were closing in the last couple of days of the quarter.
Okay. And then you closed anything so far yet, this quarter?
Yes, we believe we have.
Okay. And my last question, let me back to that one. Any quantity that you want to share?
No. it is too early and what is already happened in the first month, it is probably not going to be reflective of what is going to happen, I mean, two months.
Okay. And then last question for me is, you talked a lot about line of business exposure deferral, any geographic issues that you are running into California and particularly providing leading Seaford for tenants just curious whether that is had any impact on your referral requests.
That is a great question, Chris. We have not seen that, when we have been doing our analysis, even with respect to a given tenant, obviously they have shared with us what that liquidity analysis looks like.
We have been doing it independently off our, tenants to try to get a sense for what the liquidity position looks like. And part of what we are trying to overlay with regard to our liquidity analysis is to look at the geographies and then, take into consideration what some of the state specific rulings have been.
Like I would say that Georgia and Ohio and Tennessee, they are being a bit more aggressive in terms of opening up or allowing stores to open up. What does that mean, which are the States that are going to be potentially slower in terms of, store openings, et cetera. And so what does that do for those stores that we have in our portfolio and their ability to pay?
And sort of at that level we try to capture the liquidity position of each of these tenants would look like when we engage in a conversation with a tenant. And they either help, support our thought process or our challenge our thought process to continue to refine the analysis.
But this was based on forecasting when some of these States are going to open. Last Friday was the first day that some of the States decided to open up. And so what is actually going to end up playing out could be a little different from what we have underwritten. And that too would be then overlaid on top of our analysis do to reflect what is truly happening.
In some cases, States have pushed out, the opening day then and others they have stayed true and they have a different staging through to, you know, what is considered phase one opening versus phase four opening, for instance in New York it is very different from what it is here in California.
So we do take that into account, but it is in anticipation of what we see happening and again to early to tell, what the true impact is. But most of our operators are national operators and so the conversation is more holistic, but we do overlay that into our liquidity analysis.
Great. Thanks you. I appreciate it.
Your next question comes from the line of Collin Mings with Raymond James. Your line is now open.
Thanks. Good afternoon. Just one quick one for me. Just recognizing there wasn't a lot of overlap in terms of timing, but just as you read leased properties toward the end of 1Q, was there any shift in what tenants would agree to as it relates to term or other lease language and how do you expect this to evolve given the pandemic?
You know, most of our discussion Colin has been around making sure that we are collecting the deferred rents as soon as possible. I mean, that is key to us form a cash flow perspective. And, we state that as one of the objectives that we have, while entering into any of these negotiations.
And so, but I think I have mentioned this in one of the previous answers, most of the ask that we received from our tenant base has been 30 to 90 days of deferment. What we have structured is a slightly longer deferment and those are the ones that we have structured, a slightly longer deferment period, but collecting partial rent, during that posture, longer deferment period.
And then making sure that we are getting back our deferred rent within a period of 10 months from the time that the deferment went. That is the structure that we have engaged in. But, the vast majority of the discussions haven't been resolved yet. And part of it is because the liquidity situation continues to evolve for some of these tenants.
And so, our goal is to try to collect it in the initial, whatever was the initial lease term period and not stop to engage in, let's extend out these terms. If that is economically a far better outcome for us, we will absolutely do that.
But for us, the goal is yes, we will engage in a conversation that we want to get paid back as quickly as possible and if that means not having to necessarily revised lease terms, that is okay with us.
I apologize, Sumit in terms of leases that were up for natural expiration or renewal, that kind of dynamic had changed or just how that dynamic would change, not specifically related to any sort of rent deferment negotiation.
I'm sorry about that Colin. Look, we had a pretty good first quarter in terms of recapture rate. We were at 99%, which is right on top of our historical average, and this is across the spectrum. Renewals and new tenants.
And so, do we expect that to change? Perhaps, but it is again going to be a subsector-by-subsector phenomenon. These are renewables in the grocery business or in drugstore business or dollar businesses, those will continue to get renewed with the existing rent options and the rent bumps that is associated with those options in place. If they tend to be in industries that have be more impacted i.e. casual dining, et cetera.
I think those are going to suffer. But nevertheless, those locations are inherently valuable to the operators and even though they are shut today, but they recognize that, these are all locations that have historically done very well and should do well once a social distancing is alleviated. Then, I think they will still want to enter into discussions with us.
But, it is too wordy comments to tell you precisely how it is going to play out. This is, yes, the speed with which all of this happened was pretty dramatic. But the first quarter, if that is the data that you want to lien on, it was a pretty good quarter for renewals.
Okay. Thank you.
The next question comes from the line of Joshua Dennerlein with Bank of America. Your line is open.
Hey, good afternoon. Thanks for the question. You mentioned earlier that you expect some tenants who paid in April or requesting May rent referrals. Are those tenants concentrated in the four industries that drove most of non-collection growth or some of that in like another industry category?
Look, the vast majority, I would say falls into that full categories that we have highlighted, but then there are other businesses as well. Automotive services is another area that we have tenants that have paid April rents, but they might, and they have discussed with us and we have actually working with them to help alleviate or defer some of the rents for the month of May. But the four industries that, for sure, continues to be the industries that are most impacted other ones that we have talked about Joshua.
And then just we talked about it yet on the call. Just an update on the CFO search, where that is in the process. And any expectations on when you can get a new CFO in place?
Look, it is obviously a bit difficult right now, given that so many of the existing CFOs are so entrenched right now and trying to resolve their own company's issues, et cetera. So we do find ourselves in very interesting times.
Having said that, look, we have engaged an external search firm to help us through the CFO search process. They are continuing to be very active. We have gone through first round of interviews with a select few candidates that sort of more stepped up.
We are continuing to go through first round interviews. So my hope was that we would be able to wrap this thing up by June. But given this COVID-19 situation and the inherent slowdown that this has imposed, it will probably be much later, by the time we get somebody to fill that seat. And truth be told, we have such a good team between Jonathan and Sean.
I don't feel like we are really lacking in any area of the business with regards to the CFO. That is not to say, it wouldn't, that it wouldn't help to have somebody else here, helping take the load off of Jonathan and Sean.
But we want to find the right person. And that to us is of paramount importance. And so if it takes us a bit longer, that is okay. And given the current situation, I do think it will take us a bit longer.
Okay. Thank you. I appreciate that.
Your next question comes from the line of Barry Raskin with Jordan & Jordan investment Group. Your line is open.
So I have a couple of quick questions. One is, many of the other questioners asked a lot of my questions. So that was really good. But I guess I'm thinking of just from a more long-term perspective as it relates to your dividend, which is kind of your brand. In terms of the refund the retail perspective.
I guess fundamentally, how safe is this dividend and how much pressure is there on you and your organization to continue to meet the criteria to be a dividend aristocrat? I'm thinking because the reason I'm asking is because the reason I'm asking is, because when I look at these, what percentage, over 11% of your top 20 tenants by revenue, being restaurants or casual dining, gyms and theaters, my perspective is that these things aren't going to come back for a long time like you have said, and even when the restrictions are lifted, from a government perspective there is very - I see more bankruptcies coming from these theaters and restaurants.
And as you said, maybe not as much from gyms, but the overhead and capital structure of these institutions seemed very weak if you have to go for three or four or six months without any revenue. Anyway, so that is sort of a fundamental question, which you guys borrow money or would you need to borrow money? Continue to pay that dividends? So that is sort of my first question.
Yes. Look, I mean, that really is what goes to the I think it was devalue without the question, how much room do you have, and it goes back to our payout ratio. We have 20%off of room within our business model to help support the dividends that we have in place.
Yes, it is our brand. We are the monthly dividend company. It is very much part and parcel of how we operate our business. It is our mission. And so, this is one of those tools that we certainly have available to us, we manage liquidity.
But one that we feel, at least given the lay of the land today and despite all of the things that you have laid out, we do not need to pull on and part of that goes back to the liquidity strength that we have to be able to withstand disruptions, even medium term disruptions and still be able to maintain a profile of the business that continues to be very strong and continues to support the dividends. As you know, we were added to the dividend aristocrat earlier this year, it took us 25 years to get there.
And you don't want to lose that.
Well, you don't and for a variety of reasons that I just laid out. But at the same time, if this is a two year phenomenon rather than a six month phenomenon or a nine month phenomenon, then that too is a level that one might need to lean on. But it is certainly not one that we feel like we need to lead with.
And it is a testament to the portfolio that we have created. It is a testament to the ratings that we have and the access to liquidity that we have and our ability to be a lot more patient, and potentially some of our peers and the fact that our portfolio has performed at least for the month of April, the way it did, continues to provide some level of tailwinds to that thesis. But look, these things are evolving situations and things can change. But we remain hopeful.
Well, yes, I think it is a testament too, which is why I'm an investor in your company for a long time. Because I think you have very strong team. The pressure on the company to continue to perform in this way must be enormous. I could just see what would happen to the share price. If that dynamic changed. Luckily, like you said, You seem to have the additional liquidity and I like what you said that, in essence, your tenants with some cases can lean on you to use your liquidity, in essence that you are their bank for awhile. I know that, [indiscernible] outside of owning and we have had to give deferrals and in some cases full forbearance, some of our tenants, most cases they will pay us back.
Well they say they are going to pay us back. We will see. I think, I'm sure you guys are doing scenario planning for the worst case scenario and I'm assuming you have contingencies in place. And I appreciate that. My only other question has to do with how you are communicating with all of your tenants, particularly these more vulnerable tenants and if they get released from PPP loans or insurance relief, of course that is a big hairy monster, the whole insurance industry and what is going to happen with force measure and business interruption. And there are a lot of cases moving through the courts already on that.
But if any of your tenants, these particularly these that get released, have you put them on notice, notice that if they do get this relief that you are going to expect some relief back to you guys. Or is that just kind of you are going to see in wait and see how that happens? I'm wondering if they are already on notice that if they do get this release that you'd like to have some legal means by which to share in that.
Look, instead how often do we communicate with our tenants constantly is the word that comes to mind. Even the building that we have resolved, a different structure for their rents and I will tell you that because our communication is so constant, and it is not just because we want to be made whole, it is to make sure that these guys are doing well and that they are continuing to do expand this pandemic situation as best as they can.
And there is a relationship here that we want to continue to build on, that in situations when, some of our tenants who were able to get the PPP loan, they came back and they paid us the rent even though in the beginning of their request for was for a deferral.
So this goes back to the testament of, you know, being constantly in touch with your tenants and making sure that you remain engaged. And, the liquidity situation, I think I have referenced this multiple times during this call, continues to evolve.
Not just for the better capitalized tenants who have access to multiple sources of capital, but even for some of these smaller tenants who tend to be a very small portion of our overall tenant portfolio.
I mean largely dominated by national and regional players, but you know, it is about staying in touch. It is about making sure that they are doing well, they are continuing to remain healthy. And through those, their liquidity situations changed.
We can engage in those conversations. And more often than not, they will pay if they feel like they are in a better place. So that has been the situation for us.
So thank you. So you haven't had, you haven't put people on notice specifically that if they get released that you are just keeping in touch with them. And if they do this, they don't pay you back, then you ask them?
It goes back to, if there is a resolution in place, then there are provisions that if your liquidity situation where it could change, you should consider paying us back. But remember that we have already resolved 6% of the tenants who have come and asked us for, some sort of a deferment. And a big reason for that is because the situation continues to evolve.
And so, rather than striking a transaction which could become obsolete, we much rather stay engaged and get real time information on how things are evolving for each one of our tenants and therefore, the situation with whether or not they can pay their rent changes. That is the reason why we have just chosen to stay engaged rather than necessarily to get it over the finish line.
That is great. Thank you very much.
Thank you. Any other questions?
This concludes the question-and-answer portion of Realty Income's conference call. I will not turn the call over to Sumit Roy for your concluding remarks.
Okay. Thank you all for joining us today and we look forward to connecting with everyone virtually at the upcoming conferences. Thanks. Bye. Bye.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.