Realty Income Corporation (O) Q1 2020 Earnings Report, Transcript and Summary

Good afternoon. Welcome to the VEREIT First Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Bonni Rosen, Head of Investor Relations. Please go ahead.

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. VERIET's actual results may differ materially from these forward-looking statement 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, VERIET disclaims any intent or obligation to update these forward-looking statement 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 work 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 a 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 our 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 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 per term 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 ARI 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 with in 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 the 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 be in 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 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 positions 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 gain back our investment grade rating. As 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 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 2024j. 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 work so hard for over the last five years. 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 and 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 a 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 5.7x. Our cash and revolving liquidity remains sufficient and our assets are highly liquid with 81% unencumbered. But the exception of 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 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 very much appreciate it. I'll now open the line for questions.

[Operator Instructions] Our first question is from Haendel Juste from Mizuho. Go ahead.

Hey, good afternoon. And Glenn, good to hear your voice again. Glad that budget 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.

Sure. Thank Haendel. And thanks for your kind note. As you know, we -- as you followed us, Haendel, and others we've been pretty disciplined since 2018. The portfolio at that time we generally not understood and so we try to make sure the market understood what we were thinking in the future. We put metrics around a number of elements here, percentages of property type, tenant credit, investment grade rating, geography and a number of others, all to provide diversification. So we have always thought that understanding the portfolio long term is the right thing to do. And we will continue due to that in future. So that's before. Now let's if I took us to just January first and we thought about where our portfolio should be, we'd be saying certain things like experiential real estates a good idea because it's a bridge against e-commerce and restaurants and entertainment is pretty good. We also had a number of conversations on these calls about pharmacies. Well, would pharmacies be best or not be best in the portfolio, that's turned around today. We have all turned around today based upon this pandemic in terms of what property types may or may not perform over periods of time. The one thing that I say for us now thinking about the portfolio is that we're not going to make decisions based upon what's happened today. We're in the middle of the storm. We're going to wait for some of this storm to subside before we make decisions on where the metrics will be and how we will reshape the portfolio. I believe there will be some reshaping but how we will shape is very hard for us to judge right now. To your point some property types like office are now performing well. Our industrial performance is very good and the only thing -- the only constant denominator that I can take out of what's happened over the last five to six years is that diversification is a plus, will always be diversified but we may change some of our metrics in the future. We're just not ready to do that 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 credit 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.

No, good, another good question. Certainly that was a difference this quarter. The first, I'd say it's not easy -- it's not an easy decision to reduce a dividend, it's just not. Make your feet burn and your stomachs turn when you have to make a decision like that but we as a company and the board thought it was necessary to make that decision. The decision itself as I mentioned wasn't only based upon the macro review what's happening today, it's more importantly it was really based upon the uncertainty of what's happening in the economy. It's a very difficult to predict duration here and we have -- will all have a hard time on duration and that will play a very important role in what and how our tenants will run their businesses. But what we decided was that we would take a look at various outcomes of what can happen over the next year or two. We have a basis in April and May which is helpful that it was better than the sort of April. I'm not sure we knew what was going to happen. We have a better feel for April and May and you've heard Paul talk about June and if we looked at the uncertainties in the future, the common denominator we saw was that we needed to maintain a strong balance sheet. But at the same time since we had, I'd say substantial cash flow over the last couple of months not a 100% which is what we wanted, but cash flow we thought it was fair to pay some of that cash flow to the shareholder. The question now was the balance of the two. The balance of the two comes with the sizing of the dividend, which is really a question. And we did that by starting and reviewing a series of financial analyses. We really did dissect possible outcomes through this year and next. And our guiding light was can we come up with a base amount of a dividend build on but at the same time protect against any increase in debt. And those were the two relationships that we work towards. And if you, if I were to try to describe our analyses, I would try to describe them in terms of a V, a U and a W. The V being a quick recovery; U being a slower recovery and perhaps the beginning of the U higher than the end of U and a W where clearly the middle of the W is not going to be equal to the left-hand side of it. I was just reading an article and it's almost the discussion between Minuchin and Powell. Minuchin would say it's a V; Powell would say it's a U or W. We seriously looked at all three of those which is really used on duration and based upon those views, we thought dividend which was $0.077 this quarter represented a sustainable dividend to build on. Now we're not -- we just provided second quarter dividend. We're not approving the third or fourth quarter dividend by any means and clearly if there's any real big disturbance in the economy, we're not sure that base but right now we think that's a very solid base on which to build a dividend. And that build will occur when we think it's appropriate relative to what we're seeing in the environment on a day to day basis.

Our next question is from Sheila McGrath from Evercore. Go ahead.

Yes. Good afternoon. Welcome back, Glenn. Can you give us 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 the few small bankruptcies as you know from time to time and we generally, we've 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 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 have 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, four months 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 extreme say for three to five year extension 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.

Our next question is from Jeremy Metz from BMO. Go ahead.

Hey, guys. Paul, I was hoping you could -- two parts. Just one could you give us an update on the latest with Art Van and your boxes there? And then going back to the rent relief request, I guess I'm just curious how you balance the fine line between granting deferrals and not granting. I mean arguably just because someone could pay many retailers see others getting deferral, so how do you balance keeping those tenants healthy, happy and in place so giving others breathing room particularly on the retail and restaurants.

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

Yes. Go. Paul, yes, I thought Jeremy -- thanks Jeremy for -- he directed it and I should have redirected it to make sure Paul gets it, I don't answer it because Paul, he'll answer that question better than I will.

Sure. With respect to Art Van, as you may remember we have eight stores, Art Van declared bankruptcy pre Covid and their bankruptcy had nothing to do with Covid. But subsequently they have decided to liquidate. We have got all those stores on the market and we have an LOI in place at the moment with a very experienced operator for four of the eight and had about 70% of the previous rents and the remaining four are on the market. With respect to the delicate balance between how do we manage deferral request from tenants, I touched on it in the script and I think you're accurate in calling it a delicate balance because there's a lot of things at play. We have what is the size of our balance sheet and liquidity and on the one hand what is the size of the tenants' balance sheet and their liquidity on the other. What are their likelihood of getting capital from other sources and we also have tenant relationships to think about how often do we interact with that tenant, how often -- when do we have renewals coming up and so on and so forth. All of those factors come into play. So and I say we've had deferral request across the range. We've had some sort of deferral requests that have been launched from tenants who clearly have got the ability to pay and are just asking for deferrals because everyone else seems to be asking for deferrals. And those we generally just simply deny and then we have other tenants where they're clearly in significant distress. And we have to make a judgment about whether or not we are in a position to really help them. And if we can help them for how much and for how long. And so we make those judgments every day. We have a committee that meets several times a week. I meet with our asset managers virtually every day to talk about each and every one of these. And we go through a committee process and once we make a judgement it goes up and then Mike, Glenn and I make a judgement about what to do.

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 our 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 -- pick an impact on the market. Although you did mention there is 10.31 exchange activities in the market which we've been active selling some assets to those type buyers. But despite, 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 is held up pretty well probably in that same price range. And 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 builder 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 we, 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 point 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 product type is very stable long-term credit leases no matter what the product type is, has held up pretty well I think at this point.

Our next question is from Anthony Paolone from J.P. Morgan. Go ahead.

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. Yes. So we're -- we've been building up our point of view about where tenants are coming out. We're very lucky in that most of our portfolio is very steady right. It's necessity based retail. It's office and industrial so most of our cash flows we feel very, very comfortable about. We will continue no matter kind of no matter what then it's really at the margin here where we're looking which tenants have paid, which tenants haven't paid. We're in negotiations with pretty much every single tenant who's asked for a deferral request. So we are talking to them and by talking to them, the asset management teams are able to make a judgment about where they see payment streams coming in the coming months. So we've got April and May under our belts now. We predicted where we thought those would come out. They come out close to where we predicted they would. And so we feel we have pretty decent insight into June, June so far. With respect to areas where we see improvement I think when we look operationally, the most market improvement is in the one that we would like to see improve the most that is in the restaurant portfolio. Initially many of our restaurant tenants were hit very significantly by the pandemic slowdown. And now many of them particularly in the QSR portfolio, sales are only down 10% to 20% which while still very, very significant they can operate profitably at those levels. We've also seen improvement in casual dining. A lot of our tenants didn't really have large to go infrastructures in place or we're just developing them when the pandemic hit. They have hit obviously the fast-forward button on those and it varies across the different brands, but they are improving their to-go performance and so their sales while down initially sort of in the 80% range are now down sort of in the 50% range. So we are seeing some significant cash flow improvements in the casual dining in a casual dining sector so and in the QSR sectors. So I think that's encouraging as we start to open back up.

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 hits even further out in 2022 and 2023. In 2021m 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 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 restaurants portfolio 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 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 refining that obligation.

Our next question is from Chris Lucas from Capital One Securities. Go ahead.

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 somewhere for a 10-year or somewhere around $450 million over Treasuries. I mean that there's been kind of a tremendous --the spread between the spreads of say A and BBB plus and then we're a mix of BBB minus and BBB right. We have one BBB and two BBB minus rating. So that's spread within the net lease group is pretty wide. So I would say right now we're somewhere in the 400 range on a 10-year between say 400 --

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. Were -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 pay back 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 tenants circumstance; the tenants 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.

Okay. Thanks for that. And then I guess just when you're talking to tenants about their rent deferral request does the PPP program or Main Street Lending Program become a prerequisite for that conversation or how is that -- how are you factoring 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.

Our next question is from Sheila McGrath from Evercore. Go ahead.

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, maybe I'll start and then I may kick it to you. Tom as mentioned before which I would agree with retail is really tough. I'm not sure how you would price some of the entertainment properties today or even I'm sure there's some pricing on a grocer-anchored shopping center, but I think that's pretty difficult and I don't think there's a lot of comps there. So I would agree with what Tom said before retail right now if there is a bid-ask, it's wide and so very difficult to figure out. The only assets that I think Tom has been looking at where there is some pricing is investment-grade, industrial and investment-grade office. And Tom, why don't you just kind of come back on those two -- we see those two more often now because we're still looking at them for industrial partnership and our office partnerships. So Tom?

Yes. Glenn, I would agree an experiential retail any type of fitness entertainment is just -- there's just not a lot of activity in the market. So I would agree that just not been priced. As Glenn mentioned, we are very active in the industrial and the office fronts with our partners and there again there's not a lot of trades. I think generally unless you really had to sell it you're going to put things on hold for 60-90 days. There has been some transactions that have awarded a bidder and I think as I mentioned earlier probably 10-20 basis point adjustment upward in the cap rate which is a very small percentage below 5%. So we think those are held up really well. I mean just the product types industrial is generally probably the number one product type in the market that has fared very well with e-commerce. So those prices as you would expect have maintained very strong by comparison. And I think offices as well generally long term, decent credit, and good credit tenants that pricing hasn't moved much. And I think going forward we're obviously on hold and we'll just see where the market goes between now and year end.

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

Well, the ICFC as you probably know, Sheila, is working very hard on that. It's called -- they don't want to call it business interruption insurance because the insurance companies don't want to think of it that way, but so it's called the Recovery Act, a business Recovery Act and we've been before Congress as part of the ICFC. I've been helpful there at least in the last few weeks trying to in the fourth phase of government subsidy, provide for some of what you're asking for. This concludes our question-and-answer session. I would now like to 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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.