Realty Income Corp (O) — Q1 2020 Earnings Call Transcript

Thank you for joining us today for the VEREIT 2020 First Quarter Earnings Call. Joining me today are Glenn Rufrano, our Chief Executive Officer; Paul McDowell, our Chief Operating Officer; Mike Bartolotta, our Chief Financial Officer and Tom Roberts, our Chief Investment Officer. Today's call is being webcast on our website at vereit.com in the Investor Relations section. There will be a replay of the call beginning at approximately 2:30 p.m. Eastern Time today. Dial-in for the replay is 1-877-344-7529 with the confirmation code of 10143075. 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. VEREIT's 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, as stated more fully in our SEC reports, VEREIT 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, Glenn will begin by providing a brief business summary, followed by Paul who will give an operational update with Mike then presenting our financial and balance sheet. Glenn will then wrap up with closing remarks. We will conclude today's call by opening the line for questions, where we will be joined by our Chief Investment Officer, Tom Roberts. Glenn, let me turn the call over to you.

Thanks Bonni. And thanks for joining us today. The world has changed and while we know that normal first quarter results will not be at the forefront of this call, there are a few quick highlights. AFFO per diluted share for the quarter was $0.17. Year-to-date acquisitions totaled $146 million. In addition, the office partnership acquired a $33 million property of which the company cash contribution was $2.7 million. Dispositions totaled $188 million including the Company’s share of dispositions contributed to the office partnership of $70.2 million. As the impact of COVID-19 grew in March, we paused balance sheet acquisitions to better understand the current environment. Net debt to normalize EBITDA was unchanged from last quarter at 5.7x. What have we been thinking about since the quarter end? We are certainly happy that our team together since 2015 executed a number of strategies and transactions as a prerequisite to begin growth in 2020. We believed it was prudent to sell the nontraded REIT business, Cole Capital, greatly reduced the concentration in our largest tenant and generally diversify the portfolio. Settle all outstanding litigation and obtain an investment grade rating balance sheet. Our business model diversifies our capital sources to include institutional partnerships, picking assets which pose no conflict. However, here we are in a disrupted economy. And we now have four overriding goals. Keep our employees safe and provide a work environment and tools to be productive. Recognize the extent of challenges and interact in a collaborative fashion. Maintain the progress we worked so hard for especially the resulting investment grade balance sheets and use the business model we built to grow AFFO when the market stabilizes. We understand there are a number of portfolio factors you are interested in and I will let our Chief Operating Officer, Paul McDowell, who has been working closely with our tenants, bring you up to date. Paul?

Thanks Glenn. As already mentioned, we know the focal point for this call is how the portfolio is performing during the COVID-19 pandemic. However, our teams are still very focused on normal asset management which is also very important. Leasing for the quarter was very strong with over 2 million square feet leased of which 1.4 million square feet were early renewals. Total activity included 1.3 million square feet of industrial, 498,000 square feet of office; a 190,000 square feet of retail and 73,000 square feet of restaurants. For renewal leases, we recaptured approximately 94% of prior rents on an initial cash basis. And many of these newly extended leases have additional built-in rent increases. Importantly, we were able to finalize leases we had in process prior to the pandemic disruption along with some dispositions and some of that activity has carried further into Q2. Occupancy ended the quarter at a healthy 99.1%. Now let's talk more specifically about our portfolio performance and where we are today. Our April rent receipt came in at 81% and so far rent for May is at 78% which includes 2% to be paid from a government agency tenant that pays in arrears. The underpinnings of these relatively strong collection results were driven by our property type diversification, industry breakdown, investment grade tenancy; public versus private ownership and geographic diversity. Our allocation to office, industrial and necessity-based retail including our top industry exposures such as discount, pharmacy, grocery warehouse clubs and convenience has helped in our rental collection. Overall, 17 of our Top 20 tenants effectively paid full rent in April. In May so far 16 of our Top 20 tenants have paid rent. Or approximately 37% of investment-grade tenancy for the total portfolio and 46% within retail were a strong component of April rent collections at almost 100%. And well over 95% so far in May. Over 60% of our tenants are public in the overall portfolio and over 68% are public within the retail portfolio which we view very positively. Fortunately, we have a lot of geographic diversity with many of our properties spread out in areas of the country that have had less impact from the virus and many are in states that have started to reopen for business. Although, they remain a patchwork of restrictions based on regions of the country open now or opening soon in some capacity, we have 3,393 properties or 88% in these open locations. Only about 9.6% of our portfolio is in the hard-hit northeast with 2.3% and 3.1% in the hardest-hit states of New York and New Jersey respectively. The largest real estate teams in our company have always been our strong and very experienced asset management and property management departments, which have served us well. These teams have been augmented in the past two months with personnel from underwriting and acquisitions. Collectively, they have been doing an outstanding job in trying circumstances and our collections to date are partially reflective of those efforts. And I will take this opportunity to thank them. Our dedicated property type asset management teams have been in discussion with our tenants to understand the impact of COVID-19 on their businesses. Rent relief requests have been received from tenants representing approximately 34% of rental income on an annualized basis. We have been evaluating each request on a case-by-case basis based on each tenant's unique financial and operating situation, analyzing metrics such as industry segments, geographic locations where they are operating; corporate financial health, rent coverage, and the tenants' liquidity. Our goal has been to help those tenants we think need and deserve it in the short run, while at the same time pressing for payment from those tenants who we judge do not merit rent relief, have access to other forms of capital or are being opportunistic. Of the received requests to date, a little over a third have been approved, about a third are in negotiations and about a third have either been denied or we have taken no action. The deferral agreements we have made generally have been in a two to four month range and pay back within 12 months with interest as appropriate. While we have generally structured any rent relief as deferral, not abatement, in a small number of cases we have created rent reductions for tenants we think will be here in the long term and where we think we've created value in a longer lease. It is worth noting again that the vast majority of our rental income comes from large public and private companies that have the financial resources and access to capital necessary to weather this storm. We do, however, have some smaller tenants and so we've also been monitoring the various government assistance programs, which we think can be helpful to some of our most impacted industries such as franchise restaurants and entertainment-related retail. About half of the tenants within the restaurant portfolio have applied to the Paycheck Protection Program and we expect some amount will have access to these funds. We also have been monitoring new governmental initiatives such as the Main Street Lending Program which may help some of our larger tenants. Finally, as I noted above, rent collections so far for May are 78% which is about 1% ahead of where we were during the same time period in April. As others have pointed out, many tenants went into April with some momentum from the first quarter with May being the month where the full impact of the shutdown has been felt. With that in mind, we are very gratified with our collection levels so far for May. Our current expectation is that total collections for May will be approximately where April ended. Industrial is so far coming in a bit lower than April primarily due to one tenant which paid in April and we believe can continue to pay. We are currently in discussions with that tenant. At this point, we think June collections will be in the range of collections for April and May. Further portfolio segment information and details can be found in our Investor presentation file today. I will now turn the call over to Mike. Mike?

Thanks Paul and thank you all for joining us today. Our first quarter numbers really were on target. However, we recognize that going forward for some time it's a different environment and what's most important is our balance sheet and liquidity. Before I get into that though let me quickly discuss how we prepared as a company to ensure the smoothest transition to our virtual environment. We're currently operating essentially 100% remotely. Anticipating that an office shutdown was probable, our IT team quickly mobilized our business continuity plans and made sure we had equipment for all employees who are able to work effectively from home. Employees are utilizing virtual private networks in their homes to maintain a high level of security and we prepared training and awareness materials for employees to help them get set up and they continue to have access to a 24x7 IT support desk. In addition, the management committee participates in daily virtual meetings to make sure the business is operating efficiently. I've been impressed with how well everyone has been able to adapt during this difficult period and I'd like to thank our entire team for all of their efforts in keeping the business running as normal as possible. Turning to our balance sheet now. The company remains well-positioned with net debt to normalize EBITDA unchanged from year-end at 5.7x. A key focal point for us as a company has been maintaining a strong and liquid balance sheet and we worked very hard over the last few years to regain our investment-grade rating. As the COVID-19 pandemic continued to unfold, we initiated an additional draw in excess of normal operating requirements of $600 million on our revolving line of credit to enhance our cash position. As of May 15, VEREIT had corporate liquidity of approximately $1.2 billion comprised of $601 million in cash and cash equivalents and $588 million of availability under our credit facility. Our fixed charge coverage ratio remained healthy increasing to 3.3x and our net debt to gross real estate investment ratio was 39%. Our unencumbered asset ratio increased to 81%; the weighted average duration of our debt was 4.4 years and we are 86% fixed, which reflects the higher utilization of our line of credit this quarter. Additionally, we have a very manageable amount of debt coming due in the near term. As of quarter end, we had $90 million in mortgage notes payable due this year at a weighted average interest rate of approximately 5%. And we had a $322 million convertible bond due at the end of December. In 2021, we have $299 million in mortgage notes payable due throughout next year but no other corporate bonds coming due until 2024. Based on what I see now, we see no issues with our covenants. Moving to our outlook. We withdrew guidance in April and are not providing an update at this time due to the uncertain market we all face; the Board of Directors is reducing the second quarter dividend from $0.1375 to $0.077 representing a decrease of 44%. The reduction was determined after extensive financial analysis. This allows us to prudently manage our debt levels and the balance sheet stability we worked so hard for over the last five years. The Board of Directors has not made any decisions with respect to its dividend policy beyond the second quarter and we'll continue to monitor the current environment and its impact on our tenants and business. Based on our estimate of taxable net income today, we see no issues with this reduction and satisfy our REIT requirements. And with that I will turn the call back to Glenn.

Thanks Mike. Our defined corporate commitment is to always serve to the best of our ability, three main constituencies. Our stakeholders, tenants, and employees. Our combined efforts continue to focus on all three. We transitioned our employees to a fully virtual work-from-home environment in the middle of March quickly new processes and business intelligence tracking tools were developed to assist in monitoring our tenants and potential risks that can come our way. We have a deeply experienced team here at the company not only on the executive management side, but within all of our real estate groups. As leasing and asset management becomes even more important during this time, we have transitioned some of our acquisition personnel as well as others to assist with navigating the challenges our tenants will be facing. Our legal staff, attorneys, and paralegals are working to support our efforts. I also said on daily calls where we strive to come up with the best tenant solutions. Every request goes through a process and ends with sign-off from our investment committee consisting of myself, Paul, Tom, and Mike. Our dedicated employee teams have collectively exhibited great energy and resolve and we thank them. Mike presented our current balance sheet statistics. Of note we maintain net debt to EBITDA at 5.7x. Our cash and revolving liquidity remain sufficient, and our assets are highly liquid with 81% unencumbered except for our converts later this year. We have no corporate bonds due until 2024. The Board's decision to reduce the dividend for this quarter is not based generally upon a micro review of our business, but more importantly on a macro view when uncertain economy. The difficulty in predicting the duration of this economic disturbance is glaring. Possibilities are extraordinarily wide. When you know where you are, you can better judge what to do and how to do it. While we are getting a better view of tenant receipts with April and May, duration can have a variety of outcomes. Our view is that with such uncertainties, a strong balance sheet maintains stakeholder value. The sizing of the dividend was based upon a series of financial analyses dissecting a range of possible outcomes throughout this year and next. We chose this base amount on which to build the dividend while protecting against any increase in debt. As more information is available in each of the next two quarters, this decision will be under constant review. As you heard in Paul's presentation, our portfolio diversification is serving us well not only by property type, but also investment-grade parentage, credit, industry and geographic limits, as well as a high percentage of public companies. We will of course reevaluate the portfolio parameters as we move throughout this year. While we are in a very difficult environment, our business model provides the ability to grow and thrive once we get past this. Although disappointed that 2020 will be a transition year, our experience in transforming the company over the last five years will provide strength to get us through this. Our expectations for the future is that our liquid balance sheet, diversified portfolio, experienced team, and partnerships will all perform and reignite hopefully in 2021. Before ending, I would like to applaud those in the healthcare profession and all first responders who have made such a difference in our lives, certainly mine. I also want to take this time to thank everyone for their kind notes during my recovery from the virus. They were great pick me ups, and I very much appreciate it. I'll now open the line for questions.

Hey, good afternoon. And Glenn, good to hear your voice again. Glad that you're back and well again. So first question is more high level to think about the portfolio and curious on how COVID and life in the aftermath of COVID might be impacting your view on your portfolio allocation and subcategory exposures going forward. Clearly having a bit more office and industrial has been beneficial. So I'm curious how the thinking yours, the board might be evolving here on portfolio balance effect or allocation post COVID? Thank you.

Thank you, Haendel. As you know, we have been quite disciplined since 2018. At that time, we didn't fully understand our portfolio, so we aimed to communicate our future vision to the market. We established metrics around various factors, including property types, tenant credit, investment-grade ratings, geography, and others to ensure diversification. We have always believed that comprehending the long-term view of our portfolio is essential, and we intend to maintain that approach moving forward. Looking ahead to January, we believed that experiential real estate would be a strong investment because it serves as a counterbalance to e-commerce, with restaurants and entertainment being advantageous. We have had discussions regarding the role of pharmacies in our portfolio, which has changed due to the pandemic and its impact on property performance. It’s important to note that we are not making decisions based on current events. We are in the midst of a challenging period, and we will wait until things stabilize before determining our metrics and how to adjust the portfolio. While some property types like office are currently performing well and our industrial sector is thriving, the main takeaway from the past five to six years is that diversification has been beneficial. We will continue to diversify but may revise some of our metrics in the future. We're just not prepared to make those changes yet, Haendel.

Got it. And thank you for the perspective, appreciated. And then a bit more on the dividend, appreciate your comments earlier but I was hoping if you could give us a bit more perspective on the process to cut the second quarter specifically at 44%. Some reason other sectors have opted to cut the dividend or suspend until the end of the year and make a final determination; others have cut immediately, so I'm curious on why 44% to second quarter versus these other options and perhaps are we trying to read too much into it to suggest or to think that this suggests an estimated recovery of maybe 90-ish percent of your cash flows, prior cash flow pre-COVID. So any other context around your thinking here and what maybe we should be reading into it. Thank you.

That was a great question. It was indeed a significant difference this quarter. Reducing a dividend is a tough decision that can be quite unsettling, but the company and the board felt it was necessary. This decision was driven not just by current economic trends but also by the uncertainty surrounding the economy. Predicting the duration of this uncertainty is challenging, and it will significantly affect how our tenants manage their businesses. We assessed various outcomes for the next one to two years, finding that the data from April and May was encouraging, even if uncertain. Based on what we've seen, maintaining a strong balance sheet was essential. Given that we had considerable cash flow over the last couple of months, it was reasonable to return some of that cash flow to shareholders. The challenge was finding the right balance for the dividend. We conducted a thorough financial analysis to understand different scenarios for this year and next. Our goal was to establish a base dividend while also safeguarding against increased debt. We analyzed three potential recovery scenarios: a quick V-shaped recovery, a slower U-shaped recovery, and a W-shaped recovery. Our conclusion was that a dividend of $0.077 this quarter is sustainable as a foundation for future dividends. However, we have only approved the second-quarter dividend and are not yet making decisions about the third or fourth quarters. If significant economic disturbances arise, we may need to reassess, but currently, we believe this is a solid base upon which to build our dividend moving forward, depending on the evolving environment.

Yes. Good afternoon. Welcome back, Glenn. Can you give us some perspective on credit loss typically for your portfolio maybe historically over time? And how you view the credit loss for the portfolio in the near term? And just following on that do you expect to be converting some leases to cash accounting in the near term?

Good. I think that those are two very good questions, Sheila and I'm going to pass the first one on credit to Paul and then Paul I would ask you to pass on in terms of accounting to Mike. So Paul, you take that first one.

Sure. Of course. Hi, Sheila. With respect to credit losses in the portfolio we've been pretty fortunate and that we've had very low credit losses over the past few years. So we haven't had much in the way of credit losses. We have had a few small bankruptcies as you know from time to time and we generally have lost that credit but we've also been able to relet the properties and regain cash flows. From a going-forward perspective here, we don't know exactly where this all ends up and as Glenn mentioned in his remarks the key here is duration. We went into this pandemic with a credit watch list that generally runs between 2% and 2% of adjusted rents and now suddenly we have a lot of credits in our portfolio that are very healthy companies that are through no fault of their own suddenly under a significant amount of credit stress. And the question is how long does that stress last. We're fortunate in that most of the portfolio is made up of public companies and they've got access to capital. So we're pretty confident that most of our tenants will be able to jump the ditch here and resume being the healthy companies they were before. But it's a little too early to give you a sense at this moment about where we expect credit losses to come to rest since we don't yet know the duration. And I think with that I'll give Mike the accounting question.

Hi, Sheila. It's Mike. I think the accounting question is really going to come down to the fact that typically before we had the pandemic if we had some deferrals or some changes to any of our leases, we would have treated it as a lease modification under 842, but the FASB came out with what they're calling an expediency because they understood that everyone is going to or many people were going to be dealing with deferral situations and what the new FASB says is the expediency says if you have a situation where you have no real substantial change in the original contracts cash flow, but rather just typically you have a two, three, or four-month deferral and then you collect that rent, let's say over the next six months or a year so that can be handled under this new expediency and the expediency has a couple of decision points. One is it reasonable that you're going to be able to make that collection during that period. If the answer is yes, you can then simply treat the revenue as you normally would and establish a receivable during those deferral periods and you would record the revenue during the deferral periods as regular revenue, you set up a receivable and your AFFO, your NOI, and your normalized EBITDA would all reflect it as if it were included in those amounts which is different than if there was a lease amendment. They do give you the option of something called variable accounting which is very similar to cash accounting. I'm not quite sure why one would want to use that given this other treatment, but you do have to first make a decision about collectability if you think there's some doubt about collectability then you account for it on a cash basis. And then the last option is if you're actually changing the terms of the lease and that could be typically a blend and extended for some reason, someone is getting a month or two of free rent and extended say for three to five years on the lease, you do have to go back and do the normal 842 lease modification accounting. So that decision tree is something we'll be going through every completed transaction and deciding which bucket it belongs in and how we account for it.

Hey, Paul. I was hoping you could provide us with an update on the situation with Art Van and your boxes there. Additionally, regarding the rent relief request, I'm curious about how you manage the balance between granting deferrals and not granting them. Just because some tenants could pay, many retailers notice others receiving deferrals. How do you ensure that you keep those tenants healthy and satisfied while also giving others some flexibility, especially in the retail and restaurant sectors?

You just want me to go straight into this, Glenn?

Yes, Paul, I appreciate Jeremy directing that question. I should have made sure it went to Paul, as he will provide a better answer than I can.

Sure. Regarding Art Van, as you may recall, we have eight stores. Art Van declared bankruptcy before COVID, and their bankruptcy was unrelated to COVID. Subsequently, they decided to liquidate. We have all those stores listed for sale, and we currently have a letter of intent with a very experienced operator for four of the eight, at about 70% of the previous rents. The remaining four are still on the market. As for managing deferral requests from tenants, it's a delicate balance. We need to consider our balance sheet and liquidity alongside the size of the tenants' balance sheets and their liquidity. We also evaluate the likelihood of tenants obtaining capital from other sources and maintain tenant relationships. We assess how often we interact with each tenant, the timing of renewals, and other related factors. We've received deferral requests from a range of tenants. Some requests come from tenants who clearly have the ability to pay, but ask for deferrals simply because others are doing so. We typically deny those requests. On the other hand, we also have tenants that are in significant distress, and we must determine how we can assist them, including how much help they need and for how long. We make these evaluations daily. Our committee meets several times a week, and I meet with our asset managers almost every day to discuss each request. After going through a committee process, the final decisions are made by Mike, Glenn, and me based on our judgment.

I appreciate the color. And if I could just go back and ask one follow-up on the Art Van based on your comments that four are going with the very experienced operator. It sounds like this is a different operator than the one we heard a couple of your net lease peers shuck a deal, is that correct?

That's correct.

All right. And then, Tom, I was just wondering on the deal front, it seems like there are still assets that are out there. You saw some 10.31 money sloshing around that we're hearing about. We're about two months into this, so I just wanted it if any color on what's happening on the ground? Are you seeing deals go under contract and what's the sort of early read on pricing? How much are yields resetting at this point? If there is activity, that's still happening.

You got it, Tom.

Sure. So as Glenn mentioned we're on pause as well as most of our peers, so not a lot of activity in the market right now particularly in the retail sector. I just think that's too early to pick up the impact on the market. Although you did mention there is 10.31 exchange activity in the market which we've been active selling some assets to those type buyers. But by far the strongest product type is industrial which is what we buy in our partnership with our Korean partner. There we've seen some pause in the market but probably just maybe 10%, 20% impact on pricing. Seller expectations have moderated slightly but we think there's going to be activity in that market as well. Office would be the same for single tenant long-term investment grade credits. I think the market has held up pretty well probably in that same price range. We hope to be active in both those front-end partnerships in the second half of the year. We do have a partnership transaction that we announced in our last call. A very large industrial project about 2.3 million square feet at $247 million transaction that we anticipate will close here mid-year. We also have two other build-to-suits that were under contract with that would close in that third or fourth quarter. So we remain active. They have been impacted by COVID but certainly, we hope that both partnerships will be active in the second half of the year. So I think generally too soon, too early to tell, but I think generally in our space and the industrial and office side, and even the investment-grade or higher quality retail will have very little impact on pricing, very small.

And so no VEREIT price. Sorry, Glenn. Go ahead.

No. I just wanted to make sure, Jeremy, what Tom said I think I misunderstood. Tom you had mentioned 10 to 25 in cap rates and not percent decline.

Yes. Very small percent.

I misunderstood, sorry I just misunderstood.

10 or 20 basis points which is far less than 5% impact on pricing and a lot of it just has to do with deal that's in place at the time. How badly does the seller want to sell? But I think generally this type of product type is very stable long-term credit leases no matter what the product type is, have held up pretty well I think at this point.

Okay. Thanks and glad you are well, Glenn. Question for Paul. You mentioned your view that June should look pretty close to April and May. I was wondering if you could just talk with a little more detail in terms of as you look inside the portfolio and what's happening at the asset level, where things look like they might be improving versus areas of the portfolio where it could be worse if things linger for a few more months like this.

Sure. We have been assessing the situation with our tenants and are fortunate that most of our portfolio is stable, primarily consisting of necessity-based retail, office, and industrial properties. This gives us confidence in our cash flows. Our focus is on the tenants who have paid and those who haven't, and we're actively negotiating with all tenants that have requested deferrals. Through these discussions, our asset management teams can evaluate expected payment streams in the upcoming months. We have already analyzed April and May, and our predictions aligned closely with the outcomes. Therefore, we have a reasonable expectation for June as well. Regarding improvement areas, we observe the most significant recovery in our restaurant portfolio. Initially, many of our restaurant tenants experienced severe impacts from the pandemic, but now, especially in the QSR segment, sales are only 10% to 20% down. While still substantial, these levels allow for profitable operations. Casual dining has also shown improvements, as many tenants rushed to develop to-go infrastructures during the pandemic, resulting in a recovery from initial sales declines of around 80% to now about 50%. This is a positive sign for cash flow in both the casual dining and QSR sectors as we begin to reopen.

Okay. Thank you for that. And then another question as I look at your expiration schedule. You got a couple points this year about 7% next year, is there any portion of that you know at this point is going to vacate that could be a challenge or that's notable for us?

Yes. I mean nothing particular as you know that we do have 7% coming due next year and we work hard at chipping away at that stuff in advance. So you noticed in my prepared remarks that we had some early renewals and those early renewals actually hit even further out in 2022 and 2023. In 2021, the expirations are pretty granular. We have sort of 180 leases in total that will expire, 70 to 75 each in retail and restaurants. So at this stage, don't see any particularly large holes where we say, oh, we think a large number of those will not renew. We will move through the renewal process and we've been doing renewals even during the pandemic and even in some of the restaurant portfolios have been reasonably routine so far. So we'll see how that plays out in the coming months and I think you'll see us beginning to pull our 2021 expirations down as this year as a remainder of 2020 progresses.

Okay. Thanks and just last question for Mike, with about 80-81% collections seems like it's where you think the quarter will end up. Is there anything you need to do from a debt or line covenant point of view that we should watch now for?

No. We are fine on the covenants. I mentioned that in my remarks and we're fine from that perspective. And we believe that where we are right now, we've drawn down the line so that we have about $600 million of cash and quite $600 million available so we feel comfortable with that mix of having $1.2 billion of liquidity broken into those two pieces. So I don't see any issues on that. We have some debt coming due about $400 million in total this year. Most of that is $320 some-odd million right at the end of December on a convert. So obviously we'll be looking at how we'll refinance that going forward. A month ago the IG markets were BBB or BBB minus, were not as good in the last three weeks or so. They've gotten much better still a little bit pricey, but we have a lot of time between now and then to make that decision plus a lot of liquidity. As we've always tried, we'll keep our options open so that we make the right decision as to how we refinance that obligation.

Well. Hey, Glenn. Thanks. It's good to hear your voice and then I guess just generally a couple quick questions for you guys. Mike you mentioned about how you're thinking about the debt that's coming due at the end of the year. If you had to price your long-term debt today what sort of spread over treasuries do you think it would be at?

I think today we're looking at a spread of around $450 million over Treasuries for a 10-year period. The spread between the ratings of A and BBB plus is quite significant, and our ratings include one BBB and two BBB minus. The spread within the net lease group is notably wide, so I would estimate that we're currently in the 400 range for a 10-year spread.

And, Chris, could I make one comment there because it's a very, very important subject for us in terms of pricing our capital and part of the balancing of the dividend that I discussed earlier. We hope will help us in the debt markets if we have to get into lease markets and we'd like to potentially this year so the spread and our ability to provide more cash flow in the balance sheet, we're hoping we get some momentum that it helps us there.

Okay. Thanks for that. And then, Mike, just on the credit facility. Can you remind us is your EBITDA test, is that a single quarter, two quarters, annualized, four quarter trailing, what's that look like?

It's a quarter annualized right now. That's the way we do the total asset test. You take the NOI and it's a 7% gross up and then you times it by four.

Okay. Well, and then I guess just going, Paul, maybe on the rent relief mechanics just so I understand them. You're basically offering two to four months then there's like a one-year payback period. I guess I am just trying to understand when you guys starting to expect the payback period to start? Would it be after the end of the rent relief period or would there be some sort of interim period before that would start up?

That's a good question and I would say that the answer to that runs the gamut. So, we have a variety of deferral requests and sometimes those deferral requests are for a 100% of rent; sometimes they're for percentages of the rent; 25% or 50% of the rent. We obviously negotiate each and every one and payback periods are sort of the same kind of ilk. Some payback periods we have running almost immediately after the deferral is over. And they run sometimes a pretty short period of time, a couple of months. Other payback periods we have where they start up after a couple of months with the tenant back at their normal rents to give them some breathing room. And build up some capital and then start to pay them again. A few we have deferred out into 2021 at least that's the idea right now, but again it's very, very dependent upon the tenant's circumstance; the tenant's financial situation and sort of our idea of how quickly we think they will recover and we as mentioned in my remarks too, we typically charge interest on deferral and sometimes that has an impact on the tenants’ desire to pay back their deferred balances more quickly.

Thanks for that. When you're discussing rent deferral requests with tenants, does the PPP program or Main Street Lending Program come up as a requirement for that discussion, or how do you incorporate that into the conversation, if at all?

Yes. No. We do factor it in and as I said before most of our tenants are large public companies or large private companies. So a lot of them except in the restaurant portfolio most didn't really qualify for PPP, but what we have in our agreements that we're working on with our various tenants at the moment is generally if they receive funds from the government that can be earmarked for rent. They need to pay those funds to us in rent and that's not generally controversial as we talk to these tenants. So they say, look, we get money from the government, we're happy to send it to you in the form of rent.

Okay. And then my last question just as it relates to the leasing activity particularly the early renewals, were there any sort of rent relief structures that were part of that or is it truly just early renewal type activity?

No. Yes, the early renewal activity we had was sort of the standard early renewal activity that we have and we mentioned no recapture rates and so and so forth. And so very often when we do what we would call a blended colloquially, a blend and extend. We typically or we occasionally will grant some free rent or some rent reductions upfront in exchange for a much, much longer lease, which gives us obviously an improved net asset value. So sometimes we'll trade a little of upfront rent in exchange for the longer-term lease, but the activity that we had in the first quarter on early renewals in that vein was completely routine.

I guess I was wondering I know it's early but I was just wondering what your expectations are for pricing on acquisition? Do you expect cap rates to increase despite the low interest rate environment? And do you expect any differentiation between like restaurant or experiential tenants to widen out more than grocery or pharmacy?

Tom, I'll start and then pass it to you. As mentioned earlier, I agree with Tom that retail is quite challenging right now. I'm uncertain about how to price certain entertainment properties today, and there may be some pricing considerations for grocery-anchored shopping centers, but that's also quite tough with not many comparable assets available. I concur with Tom that in the current retail environment, the bid-ask spreads are wide, making it difficult to navigate. The only assets that seem to have some pricing clarity are investment-grade industrial and office properties. Tom, why don't you elaborate on those two? We're seeing them more frequently as we continue to evaluate them for our industrial and office partnerships. So, over to you, Tom.

Yes, I agree with Glenn that there is not much activity in experiential retail or fitness entertainment, and therefore, those sectors have not been priced effectively. As Glenn pointed out, we are actively involved in the industrial and office segments with our partners, but again, there aren't many transactions happening. Generally, unless there is a pressing need to sell, properties may be held off the market for 60 to 90 days. There have been some transactions recently, and I think there has been a minor adjustment of about 10 to 20 basis points upward in the cap rate, which remains below 5%. Overall, we believe these sectors are holding up well. Industrial properties, in particular, are performing very strongly due to e-commerce demand, so prices in that area have remained robust. Similarly, office spaces with stable, high-quality tenants have not seen much change in pricing. Moving forward, we are taking a wait-and-see approach to how the market evolves as we approach the end of the year.

Okay. Thank you. I guess we need new business interruption insurance.

The ICFC is actively working on this issue. Although they prefer not to refer to it as business interruption insurance, it is called the Recovery Act or business Recovery Act. We have presented this matter to Congress as part of the ICFC, and I have been actively involved in pushing for some of what you’re requesting during the current phase of government subsidy. This concludes our question-and-answer session. I will now turn the conference back over to Glenn Rufrano for closing remarks. I thank everybody for joining us today. And look forward to speaking to many of you over the next few months. We'll talk certainly at NAREIT. And I wish you the best. Thank you very much.