Realty Income Corporation (O) Earnings Call Transcript & Summary

Thanks, everyone, for being here today as we go over Realty Income's operating results for Q1 2020. Joining us to talk through the numbers are Sumit Roy, our President and Chief Executive Officer, and Jonathan Pong, Senior Vice President, Head of Capital Markets and Finance. On this call, we'll be making certain statements that federal securities law may treat as forward-looking. Actual future results for the company could differ materially from what any forward-looking statements describe. The factors that might cause those differences will be laid out in more detail in the company's Form 10-Q; during the Q&A part of the call, we're applying a two-question cap so that everyone gets a chance to take part. Should you wish to ask more questions, you're welcome to re-enter the queue. I'll hand things over now to Sumit Roy, our CEO.

Thanks, Andrew. Welcome, everybody. We're going to talk in depth about how the COVID-19 pandemic has affected the economy. To start, I'd like to call out a number of Q1 results that put us in a very strong position as the year began. In Q1, our AFFO per share came to $0.88, and we closed roughly $486 million of high-quality property acquisitions. On top of that, we brought in about $752 million of well-priced equity, priced at $77.37 per share. The quarter closed with net debt to adjusted EBITDA at five times, and our fixed charge coverage ratio of 5.5 times stands as the highest ever recorded in our company's history. COVID-19's impact has been felt, and is still being felt, across geographies, economies, and industries, and our thoughts stay with everyone affected; we keep running the business with an eye on all stakeholders — our shareholders, clients, colleagues, and community. With that in mind, we've used technology to keep operations running seamlessly while our employees work safely from home, and I want to thank my colleagues for the hard work and commitment they've shown in keeping our business operations strong. Our real estate portfolio was purposefully built to deliver predictable cash flow across many kinds of economic conditions, yet it isn't shielded from the economic shutdown brought about by COVID-19. Our tenants do business in 51 separate industries. We've always stuck to strict investment criteria, seeking out high-quality tenants that lead their respective industries. Close to half of our rental revenue comes from tenants carrying investment-grade ratings. Some tenants have asked for rent relief, and those requests have mostly involved deferral of rent rather than abatement. Each rent deferral request gets reviewed on its own merits. We see our tenants as partners and clients, and the relationship goes both ways. Even so, the approach we've adopted is to look independently at each tenant's individual financial and business position, and we have not accepted — and will not accept — rent deferral requests that we judge to be purely opportunistic. For April, we've collected about 83% of contractual rent, and from investment-grade-rated tenants we got essentially all of the rent we expected. Although we haven't traditionally focused on acquiring properties leased to investment-grade-rated tenants as a main goal, when the economy is uncertain, high-grade credit tenants generally do offer steadier income streams, assuming all other factors are equal. In our financial supplement, we reported the share of contractual rent we collected, broken down by industry. Our four biggest industries — convenience stores, drug stores, dollar stores, and grocery stores — all sell essential goods and account for roughly 37% of our rental revenue. From tenants in these industries, we've collected nearly all the contractual rent owed to us. Other industries, including theaters, health and fitness, restaurants, and childcare, have faced difficulties because of store closures and social distancing mandates. Out of the 17% of rent that went uncollected in April, 86% comes from operators in these particular industries. We think the strength of our corporate partnerships will matter as we work toward mutually beneficial resolutions, and we're glad to partner with leading operators across each of these industries. Furthermore, we stay optimistic about the long-term viability of every one of these industries. The theater industry's success has mostly depended on the quality of films Hollywood produces, and the U.S. box office hit an all-time high as recently as 2018. In addition, the economic business model for studios still indicates, in our view, that the theater distribution channel will stay appealing in the future. We also anticipate that the non-discretionary and low price point offerings of the quick service restaurant, health and fitness, and childcare industries will help sustain their ability to pay rent once their businesses fully reopen. This aligns with our ongoing effort to manage our portfolio in support of long-term value creation. We believe the breadth and depth of our asset management and real estate operations department, which is the largest department in our company, gives us a key competitive edge over our rivals. Turning to investment activity in the first quarter. During Q1 of 2020, we put about $486 million into 65 properties across 22 states and the U.K., with a weighted average initial cash cap rate of 6% and a weighted average lease term of 14.1 years. Measured by total revenue, about 36% of total acquisitions in the quarter came from investment-grade-rated tenants. Retail tenants produced 95% of revenues, while industrial tenants produced 5%. These assets are leased to 25 different tenants across 17 industries. Of the $486 million invested in the quarter, $320 million went domestically into 61 properties at a weighted average initial cash cap rate of 6.5% and with a weighted average lease term of 14.8 years. $166 million went internationally into four properties in the U.K. 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 U.K. of two properties leased to an investment-grade operator. During the quarter, we sourced approximately $18.1 billion. During the quarter, we sourced $18.1 billion, and $10.4 billion of that came from domestic opportunities, while $7.7 billion came from international opportunities. In Q1, we closed $486 million in total acquisitions, and 55% of those were one-off transactions. Investment spreads compared to our weighted average cost of capital were healthy this quarter, averaging roughly 247 basis points for domestic investments and 272 basis points for international investments, both well above our historical average spreads. We define investment spreads as initial cash yield minus our nominal first-year weighted average cost of capital. Our disposition program stayed active. In 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%. By tenant, industry, geography, and property type, our portfolio is well diversified, which helps stabilize our cash flow. At quarter end, our properties were leased to approximately 630 tenants across 51 different industries in 49 states, Puerto Rico, and the U.K. 84% of our rental revenue comes 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 continue to be the biggest sector we operate in, making up 11.9% of rental revenue. Across our retail portfolio as a whole, roughly 95% of rent is paid by tenants whose businesses include a service component, a non-discretionary component, and/or a low price point component. Our view remains that these traits let those tenants function across many different economic conditions and compete better against e-commerce. That has mattered especially in the current retail environment, since the overwhelming majority of recent U.S. retailer bankruptcies occurred in sectors lacking those traits. We still feel positive about credit quality across the portfolio, since about half of annualized rental revenue comes from tenants rated investment grade. For our retail properties, the weighted average rent coverage ratio is 2.8 times on a full year basis, and the median is 2.5 times. Occupancy measured by property count came in at 98.5%, down 10 basis points from the previous quarter. In the quarter, we re-leased 93 properties and recaptured 99% of the expiring rent. Since our 1994 listing, we have re-leased or sold more than 3,200 properties whose leases expired, recapturing over 100% of rent on the properties that were re-leased. Same-store rental revenue rose 0.2% in the quarter. The softer same-store rent growth stems partly from a methodology change, since we now recognize percentage rent in the period when it is accrued instead of the period when it is paid, which likewise produced stronger same-store rent growth in Q4 of 2019. Next, I'll give more detail on our financial results for the quarter, beginning with the income statement. G&A expense as a percentage of revenue, excluding roughly $3.5 million of severance tied to our former CFO's departure, was 4.4% for the quarter, and cash G&A margin, excluding severance, was 3.5%. We still have the lowest G&A ratio among net lease REITs. Non-reimbursable property expenses as a percentage of revenue was 1.3%. Because we redeemed our $250 million 2021 notes early, we recognized a loss on extinguishment of debt of approximately $9.8 million in the quarter. Now a brief look at the balance sheet. We have kept our capital structure conservative and remain among just a handful of REITs holding at least two A ratings. In April, we drew $1.2 billion on our revolving credit facility to boost our cash position as a cautious step given COVID-19 uncertainties. Under that revolving credit facility, our two A credit ratings give us a borrowing rate of LIBOR plus 77.5 basis points. At present we hold approximately $1.2 billion of cash and have another $1.1 billion available under our revolving credit facility, which gives us substantial financial flexibility. Going forward, our overall debt maturity schedule is still in excellent shape, since the weighted average maturity of our bonds is 8.3 years. On top of that, roughly $400 million in total debt will mature across the rest of 2020 and 2021. To sum up, our balance sheet looks excellent, with leverage remaining low, coverage metrics staying strong, and plenty of liquidity available. Back in March, we raised the dividend, marking the 106th time we've done so in the company's history. Since the company listed in 1994, we've boosted the dividend annually, compounding it at an average yearly rate of about 4.5%. It's a point of pride that we're among just three REITs in the S&P 500 Dividend Aristocrats Index that have lifted their dividend each year across the last 26 consecutive years. Let's move on. While steering through today's economic volatility and uncertainty, we see a robust financial position as essential. How long this economic uncertainty will last isn't clear, yet we think we're positioned well thanks to substantial financial flexibility. Moreover, we think we're positioned well to seize opportunities ahead once greater clarity about the present crisis emerges. To close things out, we delivered a very strong quarter and we're positioned well from a balance sheet and portfolio perspective as we enter this uncertain stretch. The COVID-19 pandemic has created an economic climate that is largely without precedent, but I have confidence in how resilient our tenant credit profile is, the caliber of our real estate, and the ability of our team members to keep driving solid shareholder value over the long run. With that, I'd like to turn things over for questions. Operator?

Hi there, I suppose I'd say good morning to everyone joining.

Morning to you as well, Haendel.

Appreciate you taking my question. Sumit, to start, here's a broad one. I'm interested in how COVID-19 and the way you've run the portfolio since then have shaped your thinking on allocation or on exposure to subcategories. Definitely want to know how that plays into your forward view on portfolio strategy, and it sounds like you remain a believer in movie theaters, casual dining, childcare. Curious whether you could add a bit more color on those sectors, and maybe when you think you'll be made whole on those rents, plus what your plans are for those subsectors' exposures over a longer horizon? Thank you.

Sure. Thanks for the question, Haendel. You've asked quite a lot. I'll do my best to go one by one. Beginning with a big-picture take on the COVID-19 situation and whether our approach would have differed going into this crisis. The answer is still that, look, nobody, or at least I wasn't clever enough to see a downturn scenario in which businesses go from X revenues to zero literally in one night. The downturn itself isn't something we hadn't expected; we'd been in the longest recovery seen in the past 60, 70 years. Much of our thinking had focused on the idea that a downturn is coming. What does the portfolio look like right now? How will it hold up? We were kind of applying the last great recession as a screen through which to test our portfolio allocation, our industry concentration, and so on. Across any of those scenarios, we believed we were positioned very strongly. What we didn't see coming was the social distancing phenomenon. I'd argue that if this downturn had taken on a different character, with the drivers not necessarily resembling the last recession, 2008 through 2010, but without the social distancing norm in the picture, the industries we find hit hardest by this pandemic, theaters and fitness, would have kept thriving just as they did in the last downturn. That's why we're reluctant to claim that, unless our view of what will cause future downturns has changed dramatically, which it may have. Pandemics will be situations that happen more frequently going forward, where businesses can be shut overnight for extended periods. Should that become the norm ahead, and I'm not clever enough to say whether it will or won't, then yes, I do believe it will shift our philosophy regarding the allocation we have today. What we also believe will happen, now that we've been through this pandemic, is that we'll be better prepared. More resources and infrastructure will be allocated to anticipate a possible future pandemic. When you have situations like this, where companies aren't basically closed for long stretches, the businesses in our portfolio that get hit hardest — theaters, health and fitness, casual dining, and so on — won't see as much of an impact. Theaters and health and fitness in particular should keep performing well, exactly as they did during the previous downturn. This is somewhat of a wait-and-see moment, to find out what we take away from this specific situation, and what provisions the government puts in place to anticipate these things and be better equipped to deal with them down the road. If this downturn had been set off by some factor other than social distancing, those two industries would have come through just fine. It's a bit too soon to determine whether wholesale changes to our portfolio allocation are needed going forward, without getting answers to some of the questions that are still unresolved in my mind. When you run through the list of industries hit hardest, it's the ones I just named. Take the theater industry — it accounts for roughly 6% of our revenue stream, and they're more affected, with essentially every one of their locations shut, and they're bringing in zero revenues right now. Although we anticipate it will take more time before customers are at ease with returning to cinemas once the shutdown ends, our core view regarding this business remains positive, at least for the time being. We think it's improbable that studios would bypass theaters and release straight to consumers, especially when it comes to big titles, since the profit margins from theatrical distribution are far greater. Yes, some cite the case of "Troll" and how they charged $19.99 for PVOD releases; from our perspective, that was mostly a result of people being stuck at home with nothing else to choose from. My view is that cinemas are still going to be the main way films get out there, particularly for big tentpole titles, simply because of how the money works. Even so, this sector is going to need more time to bounce back. My sense is that audiences will feel quite reluctant about returning to cinemas. When you consider the kinds of auditoriums available on the exhibition side, we're confident that locations with lower density, reclining chairs, and a smaller number of guests in each auditorium will likely recover faster than the standard cinemas. Health and fitness was the other sector I brought up. Those companies had been doing really well, then their revenue dropped to tiny slivers — single-digit percentages. In our view, that segment could recover far faster than movie theaters can. For the theater side, we expect things to get back to normal somewhere in the three-to-four-month range. Luckily, casual dining makes up only a sliver of what we do — about 3% of rental income — and it has taken a hit too, with that piece needing a longer stretch to recover. My view is that unless you're paired up with operators possessing both the balance sheet and the liquidity to survive a lengthy shutdown or a partial one, a handful of operators in that specific business are going to fail. Fortunately, in that particular area, we're mostly matched with operators that are either publicly traded or that have the liquidity and the means to keep managing their way through this crisis. Childcare is another sector we're watching closely, and it accounts for roughly 2.5%, 2.4% of our rent. Again, fortunately, we're exposed to two of the bigger national operators, KinderCare and La Petite. This sector definitely includes a lot of small, family-run businesses, and they'll probably end up going bankrupt since they don't have the cash reserves or financial resilience to survive an extended closure. Those four sectors are the ones we think warrant closer monitoring, and that's exactly what we're doing. The people running these operations talk with us all the time, and we're trying to find arrangements that benefit both sides.

That's useful detail. Thanks, Sumit. If I could squeeze in one more. This is more about rents, and I'm hoping for additional detail on April. What portion of April's rent came in on schedule, and perhaps you could give some detail on how that stacked up against roughly a year earlier. Some investors worry that PPP funds won't be sufficient to rescue enough landlords, so is it fair for us to worry that collecting May and June rents might turn out to be harder than it was in April? Thank you.

Sure. As you're aware, we ultimately brought in just about 83% of the rent we were owed for April. If you jump ahead to the close of March and the start of April, the figures we saw were significantly greater when it came to the inbound requests. What makes this particular scenario so intriguing is partly that our tenants' liquidity positions shift nearly every single day. In the earliest conversations we were having with certain tenants, during those talks, they were dependent on banks. They were examining instruments such as PIPEs, and so forth, to obtain other sources of liquidity. Across that 30-day stretch, parties we had assumed might have liquidity lasting six to eight months turned out to be capable of raising private capital, whether via a bank loan or via PIPEs, and so on, and managed to build a liquidity position quite unlike what it appeared to be when the month started. Consequently, our negotiations shifted over that period so we could meet our own requirements. Fortunately, because of the kinds of relationships we hold and the kinds of operators we hold, which tend to be bigger, better capitalized operators with greater access to capital, we managed to bring in far more rent than we had initially expected to bring in when April began. We believe the same pattern will hold for May. Another factor that has shifted is that additional states are now reopening. This Friday is expected to be the cutoff date for several more states to begin reopening. Some businesses will begin to reopen. Yes, recovery will take some time, but the mere fact that these businesses will reopen alters their liquidity position relative to the assumptions we originally used, in which businesses would stay closed for a stretch, definitely longer than a single month. Since the data keeps shifting and developing, it's extremely hard for us to tell you the exact figure for rent we will bring in for May. From the standpoint of collecting rent, we are quite sure that May is going to be worse than April. The reason is that certain tenants have informed us they will pay for April but want us to think about postponing what they owe for May. We understand this situation is going to occur. Out of the tenants who approached us seeking a deferment, we have only settled 6%. This is partly due to the fact that the other 94% remains unresolved, and partly because their liquidity situation keeps shifting and developing. April was excellent. We think May will be somewhat worse, and June is simply too distant to predict what will take place.

I appreciate that insight. Wishing you success.

Thanks, Haendel.

Hi, Sumit. Thanks. Near the close of your prepared comments, you said something about how you'd pursue opportunities in capital allocation, though not until there's greater clarity around this crisis. I'd just like to understand better. Clearly your near-term liquidity is excellent, yet at the same time you're weighing that against possibly funding more deferrals and then unpaid expenses. Would it be fair to think you've significantly scaled back putting capital toward acquisitions right now, no matter what the pipeline shows? Perhaps offer a bit more detail about your appetite for directing money into acquisitions under these conditions.

Absolutely. To be completely candid, Christy, it's something of a balancing act. Our liquidity situation is quite strong. Today we definitely have somewhat better visibility than was the case in April, and that gives us somewhat more confidence than we had at April's start. That said, we remain unable to gauge how long this downturn will last. We understand what the tenants want, or at least the spectrum of their requests. Internally, the issue we keep wrestling with is whether that genuinely reflects what will actually play out. That's what leaves us somewhat reluctant to go out and commit a great deal of capital. Now, there was a rationale behind our announcing a very robust acquisition figure early in the year. Our pipeline was extremely strong. Much of what you observed us ultimately getting across the finish line stemmed from that pipeline we had assembled, and you'll see that in the second quarter we'll close on some of it as well. That said, I tend to view the acquisitions market as having three compartments, so to speak. First, core product remains available and keeps performing very well; in fact, I'd argue there are tailwinds stemming from this COVID-19 situation, and they're the same familiar names. Grocery, convenience stores, drugstores, plus dollar stores. Those have kept flourishing. Cap rates and so on there appear largely unchanged. If we can seize an opportunity to grow in that product type, we will. Our approach will be extremely selective. Part of that extreme selectivity stems from being unable to gauge how long this downturn lasts, and so what will our actual liquidity requirements be down the road? What we're attempting, and what every department is attempting, is to remain very connected with our contacts, and to keep hunting for opportunistic transactions. Should the length of this pandemic become clearer at some point, our aim is to be at the front of the queue to pursue acquisitions with real aggression. We will proceed cautiously.

Moving to the topic of debt capital, if this was already covered I apologize, but there's a term loan maturing in June. What do you plan to do about it? Are you interested in tapping the unsecured bond market at this time? Do you have any idea what pricing you could get on a bond offering right now?

Regarding that term loan, you're correct. A $250 million portion reaches maturity in June. The market for term loans is still accessible. According to the banks we've been in discussions with, they would gladly refinance that $250 million term loan. What will change, though, is the duration tied to that loan. We originally took it out with a five-year term. At present, the most favorable option, in my view, would likely be a one plus one structure. If I were to weigh simply leaving it on my line of credit against arranging a term loan through banks, I believe the cost of keeping my line outstanding is more favorable than going through a bank refinancing; that option does exist for us; as for the unsecured bond market, I'm aware of just two deals completed lately involving companies with ratings comparable to ours. The first was Camden, and the second was Boston Properties. As I recall, one came in at 2.8% and the other at 3.25%. Our ratings are similar. We think we'd land in a comparable range. What works in our favor right now is that there's no obligation to act in the unsecured market. Based on our ratings and these two precedents, we're confident that market is still available to us, and if the opportunity arises, we'll seize it when it makes sense. There's no requirement for us to do so.

Okay. Thank you.

Thanks.

Hello, Greg McGinniss here. Nick is with me. We're just wondering about your capacity to sell off empty properties in the current environment. If you end up holding more vacant buildings, along with tenants who aren't paying rent or insurance, how does that affect expectations for property cost leakage?

Sure. Well, I do believe the transaction market has decelerated somewhat. During Q1, we managed to dispose of 13 vacant assets. There are still buyers out there hunting for opportunities when the timing works. As a matter of fact, we had empty properties that closed after the Q1 period. A market does still exist; I'd describe it as simply far more discerning. Fortunately, when you look at our portfolio right now, we don't have many new resolutions to work through for the rest of the year; we believe our position is fairly strong. Things are definitely slower now compared to how they were during the middle of Q1.

Right. Okay. I value the details you've shared up to this point regarding what you anticipate for May and the way that picture keeps shifting. Do you still anticipate gathering close to 100% from investment-grade renters like you managed during April and May too?

We can't say yet. Our expectation is that we'll bring in a very high percentage. Whether it reaches 100%, the way it did in April, I'm not sure. That's the point where certain folks have stepped in and tried to seize the moment to their advantage. Here, I believe the spirit of the discussions has been undermined, and we've taken a fairly firm stance whenever we've negotiated or dealt with some of these parties. That said, when their businesses are concerned and they're able to identify a legitimate request for a short-term deferral, we do work with them on those. As for the bar for approving the proposals coming from investment-grade tenants, it sits extremely, extremely high. What we anticipate is that, should it not mirror April, it ought to be quite close to April with respect to what we can accomplish in May. Once more, I'll just qualify that by noting we still can't say yet.

All right, thanks.

I apologize — my line was muted. Right. Appreciate you fielding this. Regarding the cinema operators in the U.K. that failed to make rent payments during April, could you walk us through how that procedure functions over there compared with the U.S., specifically concerning what rights and obligations we hold under these circumstances and where the differences lie?

Hello, Shivani. That's a solid question. From our standpoint, it's one and the same tenant — Cineworld — that leases from us in the U.K.; we aren't separating our talks according to location. What we're having with them is a comprehensive conversation. We understand the state of their liquidity; we conduct our own separate liquidity analysis to gauge their position, what their regional rules permit regarding reopening, and how tight those restrictions are. With that as a foundation, we keep refining our approach about where we'll eventually land when it comes to settling things with that specific tenant; it's mostly identical; actually, over in the U.K., we can lock a tenant out, something we cannot do in the U.S. That's somewhat more favorable to landlords than the situation we face in the U.S. As I mentioned, we regard our tenants as our clients, and this is a symbiotic relationship, and that isn't what we're aiming for. We'd like to collaborate with them, particularly with companies that have taken a hit. These folks went from enjoying a fairly strong stretch to basically no revenue at all. We're attempting to collaborate with them; we're attempting to grasp their circumstances and arrive at an answer that benefits both sides.

Thank you for that. Could you then give us some detail regarding those industrial purchases completed over in the U.K., specifically how the lease structures and the assets underneath them stack up against the ones you hold in the U.S.?

Sure. That deal made us quite proud. It was the very first industrial deal we closed. The tenant is a pharmaceutical business with an investment-grade rating, and the site made us quite comfortable; it sits in an industrial hub, an excellent spot, and the sector appeals to us, as does the land. This is a genuine triple net lease, closely resembling those we see in the U.S. Across the board, it was a solid deal for us.

Hello, everyone. Would you consider acquiring properties where the tenant has either postponed payments or stopped paying rent entirely? For the acquisitions made during the first quarter, what percentage involves tenants who deferred or failed to pay April rent?

We won't purchase properties when, at the time of that purchase, a rent deferral is anticipated. That simply isn't how our business model works; it's not the way net lease companies are set up, Rob, as you're aware. If a specific deal was already underway and we had basically completed our due diligence, we had no exit options, and the choice came down to either finalizing or walking away, we will definitely finalize those deals. Actually, one instance comes to mind in which part of the rent was postponed for the month of April; those were mostly deals that were already in the pipeline. There was a verbal agreement, and we believed we had to stand by our commitment, and we did. This is a circumstance where we have a fair amount of confidence in the tenant over the longer term, and we believe they'll be able to recover once some of the social distancing measures are more or less removed.

All right, could you discuss what April rent collections looked like for the industrial and office portfolios versus retail?

What I'd say is — and I don't have those figures sitting right in front of me — but on the industrial and office portion, we basically brought in 100%. The bulk of it, the overwhelming majority, I'd nearly say all of it, though I can't put my hands on the exact figures, Rob. Normally I'd be surrounded by my entire team handing me those figures at this moment, but that isn't the case here. On the retail portion, when it comes to rent, I believe the overwhelming majority — possibly even 100% — came in.

Okay. All right. Thanks, I appreciate that.

Thank you for taking my question. Sumit, I don't want to dwell on this too much, but just so we can grasp what might theoretically occur — and it's all theoretical since it's still early. Considering the deferral rate you saw in April, and then mentioning that certain April tenants could require a deferral, would it be wrong to assume that if we simply total up health, fitness, theater — the kinds of segments where you've encountered problems, which make up 24%, 25% of rents — is it reasonable to say deferrals in May might climb toward that level and we shouldn't expect anything significantly different?

Yeah. Without limiting my options, Vikram, as I mentioned, the sole information available for us to depend on is exactly why I hold back from providing figures. I examine April, and I examine our position near the close of March along with what we anticipated for April, and where things ultimately landed, I'd describe as quite distinct. If your aim is to single out the four largest sectors that have had an effect in terms of the overwhelming bulk of this 17% deferral, you're completely correct; those four sectors account for 86, nearly 90% of the deferred sum. Might that serve as a ZIP code for where everything winds up? Yes, it could. Bear in mind, even among those four categories, apart from the theater operation, collection was only partial. That may be more than counterbalanced by certain other businesses that haven't been hit the way these four have, and there are parts of that which likewise land in this deferred bucket. As a beginning point, I'd say that's the way to approach the troubled sectors and where deferment ought to be concentrated, when it comes to the size of the deferment. Those four sectors would constitute the overwhelming majority of the-

Okay. Fair enough

deferred rent.

So how does that shape your thinking around the IG mix? It might not have been some fully deliberate plan where each quarter or each year you target a specific IG mix, but the experience has clearly been that IG has proven much more resilient. I'm curious, over the near term and the medium term, how do you weigh IG acquisitions against the others?

Well, we've consistently stated that our goal is putting money into companies whose operations are strong enough to endure different economic cycles. Having an investment grade rating wasn't exactly what we set out to pursue, but by and large, the way we framed the box we were pursuing was typically investment grade. Obviously, if you looked at our April numbers, the investment grade portion has performed quite strongly; that isn't happening by coincidence. Such operators generally enjoy greater access to liquidity; they possess more sources of capital compared with certain more regional and smaller players. As a result, even when their businesses are entirely shut down, they can still cover partial rent and, in certain instances, the full rent, since they have the liquidity strength to manage it. All things being equal, an investment grade rating is definitely something that has demonstrated its value really well in this specific situation.

All right, excellent. Only one more from me. In a scenario like this, I recognize it can be tricky — perhaps even unjust — to approach tenants and offer deferrals in return for concessions, and I'm aware this topic has come up during several prior calls. What I'm curious about is this: when you consider how much leverage a lease provides, the entitlements you hold, comparable circumstances probably arose during an ordinary downturn or perhaps another downturn too. Is there a subset of tenants where, say, you believed they didn't actually require relief, yet you still wished to be accommodating? What might you receive back, and what exactly are you seeking to secure should that kind of scenario emerge, in terms of obtaining concessions in return for a prolonged deferral?

What I'd say is, we believe there are plenty of tenants right now who truly require assistance, and who truly need to draw on our liquidity. All right; we'd far prefer to be in a position to assist them through this difficult period, particularly when our view is that the medium- to long-term outlook for those companies and those specific operators remains solid. We'd be glad to extend our liquidity to them. Okay? That isn't the same as handing over capital. It simply means granting deferments. Correct? When circumstances arise in which a financially healthy tenant comes asking to exploit our balance sheet opportunistically, and so forth — that's the point where we encounter a bit of a problem; which isn't to say we won't participate, but the bar is significantly higher for them to persuade us that they must borrow our capital, or that we should push back rent collection and thereby generate liquidity on their behalf. If they're unable to plainly demonstrate a route to — hey, this is a matter of survival, or even when survival isn't at stake, it leaves them substantially stronger and enables them to operate far more vigorously — that argument proves extremely hard to make for certain tenants of ours that are already very robust. Broadly speaking, those who might have pursued those sorts of conversations during earlier phases have acted appropriately and ultimately paid the rent obligations they had to us; it's a tale of two cities. Some clearly require our assistance, and we're working hard alongside them to deliver that, while a far, far smaller subset sought to act opportunistically — and with them, fortunately, the proper outcomes are taking shape.

Okay. Thank you.

Thanks, Vikram.

Sumit, I hope you're well.

I am, Todd. Hope you are well, too.

Absolutely, I do. I appreciate it. Typically, when you're the property owner under a triple net lease arrangement, you hold the upper hand in negotiations. You're the landlord — but thanks to COVID-19, I'd guess you've surrendered a portion of that advantage, since there's no real replacement tenant available to fill the space. Could you share your approach to these conversations about deferring rent, given that this situation might drag on for some time? Renters' income has definitely fallen and could stay depressed for a while. How do you assess where you stand today in terms of bargaining strength?

Yeah. Look, we've never viewed it that way, even though we happen to be the biggest landlord for a great many of these renters — we've never treated that as leverage. We understand the predicament our tenants are facing. We sincerely want — for a few of the reasons you just listed — we sincerely want to ensure they make it through and emerge in good shape, and that they're able to live to fight another day. That said, we wouldn't be fulfilling our role if we weren't considering what some of the more inventive approaches might be to generate choices for ourselves concerning certain of these asset types. Sure, if you follow the conventional route of seeking a different operator in the same sector, sure, that's one route. Maybe a more robust operator with a greater likelihood of making it, starting those kinds of talks earlier. Yes, that's definitely one route. We also need to think creatively about the whereabouts of these assets, who might stand to gain from these locations, genuinely consider asset management through a completely different lens than a purely real estate one in order to begin generating alternatives and investigating those alternatives, which is exactly what we're doing. That doesn't mean we'll deploy this as leverage during our negotiations. It's simply us doing our job. Look, we get what the situation is, what COVID-19 has inflicted on certain of our tenants, and we're attempting to do what's right, and the most efficient outcome for us will always be that the existing tenant makes it through and flourishes as a going concern once this is over. Is there a way for us to bring these tenants from where they currently stand to that stage where they can operate as a going concern? That's what we're investigating as our number one priority. As for priority two, it's what I just told you.

That's useful. One final thing. Regarding rent deferrals in general, my guess is they might run somewhere between a single month and a quarter, just initially, assuming that sounds right.

Yes.

What sort of window are you providing to tenants for paying that back? Will this spill over into Q1? Clearly, April is the month we were discussing, yet May is already here. June will arrive before long. Might those deferred payments stretch far into next year? What's your way of thinking about that?

Not one of our conversations has involved the deferral window extending beyond. The request has consistently been, just as you described, 30 days to 90 days. What we've put together is 30 days to five months. One month to five months. A reason behind doing so was to say, "Send us some money." That assists us on the cash flow front, and the overall size of your deferral will remain unchanged, alright? We're going to distribute it across a longer stretch. It isn't the case that you'll receive 0% deferral. A share of your rent will be deferred, and we'll bring in some rental income throughout this stretch, and it'll provide you the time required to become healthier. Those are the ones we've settled, and it carries that character. The repayment of that deferred rent takes roughly within that 9 to 10 months timeframe, for us to be made whole. In no case that I know of as of today has anyone requested from us a deferral beyond three months.

That's helpful. Thank you.

Thank you.

Good afternoon.

Hey, John.

Assuming we eventually return to conditions where you'd feel comfortable pursuing growth through buying other companies—and I realize other considerations feed into that choice—what level of spread over your cost of capital would you need before speeding the acquisition engine back up looks appealing? Does that spread even act as a hurdle right now, or is it mainly worries about macro turbulence?

No. Whenever you're evaluating the M&A landscape, John, you want to be certain you keep locking in a certain amount of spread from day one, and afterward your leases grow, letting you keep capturing an ever-larger spread; that's definitely a factor we'll weigh whenever we choose to deploy our capital in a targeted way. As I mentioned, our focus at present, lacking clarity on how long this specific pandemic will last, means we'll be highly selective about where we deploy capital on the buying side. I'd say it's somewhat premature to say. What we're attempting to do, though, is get ourselves ready—regarding liquidity, regarding capital, regarding conversations—to move when the market permits and once we can see more clearly where this pandemic is headed and what the actual effect will be. The moment that grows a bit more apparent than it is right now, I believe we want to be positioned to be first through the door, so to speak, and capitalize on the acquisitions market.

During the past two quarters or so, your spreads have come in above the historical average. Do you need that level to re-enter the acquisition market? Would it be acceptable if spreads moved back closer to your long-term historical range?

A return to our long-term historical spreads would be completely acceptable. We sat at a spread of 150 basis points. That figure represents the average we've delivered across our company's history, and it would definitely be an appealing enough zone. Once more, the product itself will determine this. With riskier assets, we'd be far more reluctant to chase such deals, even when spreads are unusually wide. When they sit right down the fairway, as I mentioned, we've split the acquisition markets into 3 buckets. The first bucket we turn to is the one where markets truly haven't shifted. We're hoping that changes, and should it, those products will keep enjoying tailwinds in the current environment and will keep flourishing in it; we'll grow that specific element judiciously, though not today. All of this depends on gaining more clarity regarding how long this pandemic will endure.