Spirit Realty Capital Inc  (NYSE: SRC) Q1 2020 Earnings Call Transcript

Spirit Realty Capital Inc  (SRC) Q1 2020 earnings call dated Apr. 13, 2020

Corporate Participants:

Pierre Revol — Senior Vice President, Head of Strategic Planning & Investor Relations

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

Michael Hughes — Executive Vice President, Chief Financial Officer

Ken Heimlich — Executive Vice President, Head of Asset Management

Analysts:

Anthony Paolone — J.P. Morgan — Analyst

Haendel St. Juste — Mizuho Securities — Analyst

John Massocca — Ladenburg Thalman & Co. — Analyst

Ki Bin Kim — Sun Trust Robinson Humphrey — Analyst

Vikram Malhotra — Morgan Stanley — Analyst

Chris Lucas — Capital One Southcoast, Inc. — Analyst

Wes Golladay — RBC — Analyst

Greg McGinniss — Scotiabank — Analyst

Presentation:

Operator

Greetings and welcome to the Spirit Realty Capital Preliminary Earnings Results and Business Update Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Pierre Revol, Vice President of Strategic Planning and Investor Relations for Spirit Realty Capital. Please go ahead, sir.

Pierre Revol — Senior Vice President, Head of Strategic Planning & Investor Relations

Thank you, operator and thank you, everyone for joining us today. Presenting on today’s call will be President and Chief Executive Officer, Mr. Jackson Hsieh; Michael Hughes, Chief Financial Officer; and Ken Heimlich, Head of Asset Management will be available for Q&A.

Before we get started, I would like to remind everyone that this presentation contains forward-looking statements. Although the Company believes these forward-looking statements are based upon reasonable assumptions, they are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from those currently anticipated due to a number of factors. I’d refer you to the safe harbor statements in today’s preliminary earnings release and presentation as well as our most recent filings with the SEC for a detailed discussion of the risk factors relating to these forward-looking statements.

This presentation also contains certain non-GAAP measures. Reconciliation of non-GAAP financial measures to most directly comparable GAAP measures are included in today’s release and presentation furnished to the SEC under Form 8-K. Both today’s preliminary earnings release and presentation are available on the Investor Relations page of the Company’s website.

For our prepared remarks, I’m now pleased to introduce Mr. Jackson Hsieh. Jackson?

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

Thanks, Pierre, and good morning. Like many of you, I’m here live from our Dallas homes speaking to you on my iPhone. So, I want to thank you for joining us during what we know is a very busy and challenging time for everyone. First and foremost, I hope you, your family, and your employees are all safe and healthy. While we have all dealt with business disruption and inconvenience over the past few weeks, I notice crisis is exacting a very human and personal toll that overshadows any business concerns. [Technical Issues] employees are providing critical goods and services for people across the country, while navigating through the hazards of COVID-19.

Given the fast changing environment, we decided to set up this preliminary earnings and business update call sooner than normal to briefly discuss our results of first quarter, but more importantly, tell you what we’ve been doing over the past several weeks, what we are seeing in terms of April rents, and let you know what our priorities are going forward.

If you had a chance to review our preliminary earnings release this morning, you saw that we had good operating capital deployment and financial results in the first quarter despite being impacted by various state and local stay-in-place designations in March. We operated our portfolio of 1,772 owned properties at 99.4% occupancy, ending the quarter with 11 vacant properties. Lost rent for the quarter was 0.6% and property cost leakage was 2.4%. I do want to note that leakage was high this quarter, driven by property tax accruals for tenants who we believe payment is now doubtful. These accruals, along with higher impairment charges during the quarter, were all driven by COVID-19-related disruption during the latter part of March.

We completed eight acquisitions and revenue-producing capital expenditures totaling $213.4 million, with the weighted average cash yield of 6.5%. These assets were predominantly industrial, distribution, and essential-oriented operators and 96% of these tenants paid April rent. We sold seven properties for total gross proceeds of $15.7 million, of which three were vacant. Our estimated AFFO per share for the quarter is expected to be $0.77 to $0.79, which is within our expectations that informed the guidance we had previously provided for the full year.

Our balance sheet, liquidity, debt covenants, and future loan maturities are well positioned to deal with the economic uncertainties created by COVID-19. As of April 10, after completing our recent $300 million funded term loan, we have over $830 million in corporate liquidity. Our adjusted debt-to-annualized adjusted EBITDAre will be in the range of 5.2 times to 5.4 times.

So again, overall a very good first quarter, but now let’s talk about what we’ve been doing in response to the COVID-19 pandemic. In mid-February, as we began to recognize the challenging operating environment that was approaching, we developed three key focus areas for the Spirit team over the next 90 days. The first key focus area was preparedness and execution. Knowing that a complete office shutdown was highly probable, we established business continuity procedures and ordered critical equipment to enable our employees to work from home well before Dallas County established shelter-in-place orders. Our first Company-wide COVID-related action was on February 28 when we restricted all non-essential travel. In order to protect our employees through further social distancing, on March 16, we transitioned to a fully virtual work environment for our entire office. At that time, we also developed a COVID-19 watch list by anticipating industries that would be impacted by social distancing and regional stay-in-place restriction. Anticipating disruption in many of our tenants’ businesses and what we believe would be a high velocity of tenant deferral request resulted in us shifting more resources into our asset management team and we freed up bandwidth within our legal, credit, research, and technology teams to provide additional support. We also implemented newly designed processes, protocols, and business intelligence dashboards to capture additional credit metrics, operation status, ownership classification and deferral loss.

Our second key focus was leveraging our extensive experience of our asset management platform. As I said at our December Investor Day event, asset management is the centerpiece of our operation and the quality of our personnel reflects that priority. Of our 85 employees, 28 are members of the asset management platform. Headed by Ken Heimlich with over 30 years of asset management and workout experience at GE Capital Trust REIT Properties and CNL American Properties Fund, our asset management team is built to navigate the challenges brought on by the current environment. In addition, as you may recall from Investor Day, the entire acquisition team is comprised of former experienced asset managers. We’ve taken advantage of this resource and conscripted our entire acquisition team to work in asset management during this challenging time. Lastly, we have four of our in-house attorneys and two paralegals exclusively supporting the asset management platform. Taken together and including the focus of our executive management team, including myself, we’ve devoted over half of our employees to the asset management function on the front lines working daily with our tenants. I can tell you that this approach is working and I’m highly confident in the talent we bring to bear to confront this challenge.

Our third key focus was to strengthen our balance sheet and liquidity. Over the past three years, we have intentionally forged a fortress balance sheet with an acute focus on conservative leverage and liquidity. I saw firsthand in 2008, in 2001 and 1998 and 1987 how quickly things can turn. As the COVID-19 pandemic began to unfold, we took the important step to further strengthen our liquidity position by raising an additional $300 million of term loan proceeds at a very attractive borrowing costs, bringing our total liquidity in excess of $830 million. Our strong liquidity position gives us the ability to repay debt that matures in 2021, assist our tenant in working through these challenging times, and notably to be opportunistic when attractive acquisitions present themselves.

So now let’s talk more specifically about our tenant, our portfolio, and where we are to-date. In a COVID-19 world, some industries are doing well and some are being hit really hard. The most resilient industries in our portfolio include grocery, drug stores, convenience stores, professional services, warehouse stores, logistics and distribution, office supply, pet supplies, dollar stores, and home improvement. The most challenged industries in our portfolio are movie theaters, gyms, entertainment, and casual dining. We began reaching out and having discussions with our tenant in early March as state governments were rolling out stay-at-home recommendation. The types of discussions and negotiation are dependent on the particulars for that specific tenant, such as their financial performance, access to liquidity, their industry, the lease structure, and their geographic location, namely the extent to which government action has forced their closure. So far, we have received and are evaluating 126 tenant requests.

There are a few points I want you to walk away with as it pertains to rent deferral request. First, all the rent deferral requests we are evaluating are rent deferrals and not total forgiveness. Second, we are evaluating each tenant deferral situation on an individual basis, and by no means does a request for rent deferral result in an agreement. While we will absolutely work with and support tenant in order to get them back on track, we will also enforce our contractual rights under our leases. Third, as we negotiate rent deferrals, we are considering any government stimulus that a tenant might qualify for in the near term. And finally, many of you have heard of tenants who certainly can pay rent but choose not to. We believe this is an unfair burden to place on landlords and actually impedes our ability to assist smaller, more challenged tenants, and we will pursue all of our rights and remedies under our leases to the fullest extent in those situations.

So, to sum it up, here is where we stand as of April 9. First, nine of our Top 10 tenants are paying April rent. Second, 17 of our Top 20 tenants are paying April rent, including one that made a partial payment on some of their stores. That’s a total equivalent of 83% of our Top 20 tenant contractual rent. Third, 62% of our property are fully open and operating, 10% are partially open by providing either curbside service, takeout or pickup and 28% of our properties are closed. Fourth, 60% of April rent has been collected so far and we expect it to increase to a range of 65% to 70% by the end of the month. And fifth, we have already executed two rent deferral agreements out of 23 that have been approved by our investment committee, which represents approximately $3.75 million in monthly rent. [Technical Issues] it is hardly a coincidence that we haven’t skipped a beat in executing at an extremely high level for our shareholders.

We spoke at length at Investor Day about the Spirit process and our Company’s five KPIs. Our balance sheet, our high-quality real estate portfolio, our defined and disciplined investment strategy, our strong operating systems, and our outstanding people. We didn’t arrive at this situation by choice, so we came prepared. We paid it forward with a lot of work over the last three years and the payoff is coming now. We built a fortress balance sheet and liquidity position. We constructed a durable, diversified, high-quality real estate portfolio. We have hired the best people. I wouldn’t trade them for anyone. And perhaps most importantly, the fire this organization has been through since May 2017 has forged us into an unbreakable team, sharpened our skills, and given us the confidence to meet the challenges before us and be ready to take advantage of the opportunities that will undoubtedly unfold. As with any economic crisis, there will be winners and losers. I have every confidence this team and this Company will come out ahead for our shareholders.

With that operator, we can open the line for questions.

Questions and Answers:

Operator

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Anthony Paolone with J.P. Morgan. Please proceed with your question.

Anthony Paolone — J.P. Morgan — Analyst

Hi, thank you and thanks for doing this. I guess my first question is, can you maybe give us some examples or talk about some of the negotiations to defer rent and the scenario that it’s collectible over the next whether it’s 12 months, I think you talked about and what needs to happen to business conditions to realistically receive that and make that a realistic outcome?

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

Sure. Good morning. Thanks, Anthony. I’ll start with our typical lease agreement. So, in a force majeure, economic rent is not precluded from a tenant’s responsibilities. It’s really generally related to non-monetary exclusions. So, I’d tell you kind of our approach to deferral conversation so far. First of all, it’s a very methodical approach. It starts with first a tenant request. Tenant request comes in and then we will follow with the landlord information request that typically ask for most recent financial statements, balance sheet, cash flow coverage. We’ll then start a landlord analysis, which is, can this kind of pay rent? What are their sources of liquidity? Are they getting available relief from their lenders, their vendors, their franchisors, their employees? Are there government assistance programs that they can get as part of their program? If they’re owned by a private equity firm, are the private equity firms wanted to put more money in our deferred fees. So, generally our deferral approach and I’ll give you more examples in a minute, but I would say that they fall into three buckets.

The first is a partner-oriented approach. We will work through this together and get through it. The second approach would be we haven’t heard from the tenant, they haven’t paid rent. So we’ll send a general notice saying, hey, you forgot to pay rent, you’ve got a 10-day grace period, we need to talk to you. And the third bucket would be those and it’s a small number that can pay and won’t pay and in those cases, we will put a much harsher approach towards the deferral comment.

I can tell you that I’ve been on many of these calls, Tony, and I would say the large majority of our tenants have been so impressed with just the organization that these tenants are going through and this started in sort of early- to mid-March, where as things were turning down and closing down, tenants were giving us feedback real time on what they were doing with sales closures, getting visibility. So, I’ll give you a good example on couple of them that have been approved. One of them was a — recently was a frozen — a Freddy’s Frozen Custard franchisee. So, this store is still open. They’re doing drive-thru business and DoorDash and it closes on May 23 and basically they kept all of their salary workers on place — in place, district managers who are working in the stores. They started to cut back on hourly wages and they asked for one month rent deferral in April, and they basically agreed to pay it back before the end of June. So they are opening and — they are open and doing well. Before the crisis, this unit was doing about $1.7 million in sales and had pre-unit overhead of 3 times coverage.

Second is another franchisee, it’s a multi-unit franchisee that grows chicken. Units were about $1 million in sales per unit. That coverage was just a little bit north of 2 times. And they reached out in — at the end of March and they were open, they are doing drive-thru business and they’re seeing about 15% impact on the top line. The conversation started out first with only three months deferral. Then we asked them about where they are with CARES Act and they were actually able to get some — they believe they’d get proceeds through that channel. So we ended up negotiating actually a one month deferral in April and they’ll pay back without interest by the end of June.

To give you another example, we have another gym-type operator. They’re closed. There is no business there. And we’ve negotiated a three-month deferral, which they’ll pay back within — starting in maybe this year and start paying back per month over the course of a year.

We’ve got another entertainment type asset that’s closed, had really strong coverage before going into the crisis north of 3 times and they’ve asked for a one-month deferral that they will pay back over six months. So I would say that the thing you should come away with to get away from this conversation is we’ve only approved a small number of these requests, because it takes time and diligence. We’ve got to go through an investment committee and I can tell you that as time has gone on, the federal assistance and emergency aid that’s come through has helped a number of our tenants, whether it’d be the payment protection plan or the Main Street Lending Program, and I’m so impressed with our tenants’ ability to navigate through these challenging times. And I’m just — I feel very good that we are going to get through this.

Anthony Paolone — J.P. Morgan — Analyst

Do you think that May will be better or worse just as this progresses?

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

I — what we wanted to do is give you a snapshot into April. We’re all watching what the health professionals are telling us, and watching the curves and seeing what these impacts of social distancing. I can tell you that these — our tenants are doing everything they can to maintain their operations with their employees, push-out vendors — push-out franchisors.

I’ll tell you one other thing that’s an interesting phenomenon right now and we’ve talked about this with a couple of our tenants, especially that are in the restaurant business. Right now with the federal aid coming in, so people that have been furloughed generally are getting state unemployment and that averages — and it depends on different states, but in this particular state we are talking about, their employees were getting $580 a week. So the federal government is going to put in an additional $600 per week for the next 12 months. So that’s $1,180 per week that an unemployed employee would get.

So, as these small businesses try to apply for these payment protection programs and you’re familiar with that program, it’s $10 million forgivable loan at 2.5 times monthly payroll. The challenge is that there are some people actually that are making more money than they were before this happened. So these operators are trying to balance all of these different factors and we as a landlord, lenders, everyone is sort of in — we’re sort of all in this together and I am encouraged that things will snapback eventually, but it’s hard to predict, Anthony, what’s going to happen in May at this point, but we do appreciate tenants, especially ours basically owning up to their commitments because you’ve seen some different propaganda out there about people not wanting to pay rent and just that the other things, but really I appreciate that.

Anthony Paolone — J.P. Morgan — Analyst

Okay. Last one from me, if I may, just for Mike. Can you just give us the roll forward on the — like, line of credit, cash position as of today?

Michael Hughes — Executive Vice President, Chief Financial Officer

Yeah, Tony, this is Mike, yeah, we have over $830 million [Phonetic] liquidity. As we put in the deck, line balance is close to zero. So, as we roll forward, it looks pretty good. The only, I mean, the only maturity we have is in 2021, which Jackson mentioned, we can take care with the liquidity we have [Indecipherable] nothing else for a long time. So, cash flow is good, liquidity is good. The term loan we put in place, we still have another $100 million accordion on that [Indecipherable] demonstrated that the bank market certainly is open to us, that incremental liquidity. So everything feels pretty good where we sit.

Anthony Paolone — J.P. Morgan — Analyst

So what was the cash position that you said? Nothing on the line and what’s cash?

Michael Hughes — Executive Vice President, Chief Financial Officer

Yeah, cash today, we’ll see, we have, I mean, basically the line is undrawn and the cash is roughly $50 million around that.

Anthony Paolone — J.P. Morgan — Analyst

Great. Thank you.

Michael Hughes — Executive Vice President, Chief Financial Officer

[Technical Issues]

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Haendel St. Juste with Mizuho. Please proceed with your question.

Haendel St. Juste — Mizuho Securities — Analyst

Hey, Good morning. Jackson, I just wanted to clarify one thing, I think you mentioned that you have 126 requests being evaluated. I guess I’m curious that is that on the asset level basis? I think you have almost 300 tenants, so maybe clarify that for us.

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

Yeah, no, that’s on a tenant basis. So that’s 126 tenants that have come in. So some of them could be operating one unit. Some could be more. So the number of properties is far greater, but the important thing to understand there is, first of all, not all 126 deferrals will be accepted. I can tell you that. The 23 that have been approved so far, about half of those are looking for 30-day deferrals that will pay back generally before the end of the quarter, second quarter, about 14% are 60-day deferral requests and about 32%, rough math, the balance are 90-day deferrals. So, yeah, they are sort of all case-by-case and we’re going through them very methodically at this point, as I said. It takes time to go through these.

Haendel St. Juste — Mizuho Securities — Analyst

Got it. Got it. Maybe, Michael Hughes, can you help us understand the accounting treatment of this, the income statement impact of these deferrals, what’s getting booked in second quarter versus shifting into third quarter? Is that — is what’s not being booked in second quarter effectively going to be written off as some form of bad debt or how does that impact the income statement of second quarter? And then if the tenant catches up on deferral in the third quarter, what does that [Indecipherable]?

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

I’ll try to give a layman’s view on it and then I’ll let Mike do it. But at this — when we talk about these rents received, that’s cash. So 60% is cash collected rent, like not GAAP cash, cash money. And we think, like I said, it’s going to probably go up to 70%, close to 70%.

Typically, when we get a rent deferral request, the first thing that we do when it comes to investment committee is are we going to recognize this rent, the deferred rent as cash rent for GAAP purposes. And as you know that to be able to recognize that, you have to have 75% confidence that you’re going to get that money back, the tenant will be able to pay through the course of the deferral. So, I can tell you that of the 23 that have been approved, a small handful of tenants that have requested a deferral, we will not recognize as GAAP cash rent in the second quarter because we think there may be some risk to that. So it’s going to be based on management team, accounting, and of course referred [Phonetic] outside accounts. Mike, is that — you want to try to go more like detail there? [Indecipherable].

Michael Hughes — Executive Vice President, Chief Financial Officer

Yeah, I think you did a great job on that. I mean, that’s just is the premise. I mean, obviously, there is some technical details around lease modification accounting and not changed in lease. But Jackson is really right, you have to have a high probability of being paid back on that deferral and we’re certainly assessing it every time we do any kind of deal with the deferral request.

So, [Indecipherable] relatively reasonable period of time, which also affects the probability of payback then. Like any kind of GAAP accounting, you would treat that as base cash rent for the purposes of your accounting treatment. So, if you don’t, then you would obviously not treat that as base cash rent and that would only be recognized on a cash basis when you get paid sometime down the road.

Haendel St. Juste — Mizuho Securities — Analyst

Got it.

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

Yes. And then one thing I would note, in order to do this and I’m sure all of our peers are going through this exercise, it does take a lot of effort, because you’ve obviously got to be hopefully, somewhat methodical about the process. Everything’s got to be documented, goes through investment committee. We’re constantly working between our asset management and accounting on the likelihood of collectability. The — other impacts [Phonetic] to impairment. I’ll be looking to — thinking about tax accruals and things like that. So they’re all — there is a tremendous amount of effort that we’ve had to put in place process-wise over the last, I think, three weeks and it’s been going pretty smoothly, but first of all, it will be complicated to do it if we were in the office, but we’re now all remote. So, I’m very happy that we set up all these processes well in advance of this sort of what I’ll call onslaught of requests because they started to come in pretty fast and furiously in the last week and a half or the month of March.

Haendel St. Juste — Mizuho Securities — Analyst

Got it, exactly. And just a follow-up. I’m just curious in understanding that the COVID pandemic is temporary. Thinking longer-term, I’m wondering how this experience, the recent tenant-level results perhaps impact your view on industry exposures? I understand this is all [Indecipherable] in the longer-term. If there could be a view on perhaps less gym, less movie theaters, less experiential, just curious how you could be thinking about the — what we’re experiencing today and how that might impact your views on the portfolio balance going forward? Thanks.

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

It’s a great question and something we were already thinking about before because as you know from our Investor Day presentation, we talked about getting the Company back up to $600 million of rents. One other things, obviously, that’s working for us today is tenants that are in the, what I’ll call essential category versus non-essential. So that’s obviously one take away that we will really try to define as we think about investment going forward.

But the other thing that I think is really important is when you own critical, essential, I use this term a lot, mission-critical assets for tenants, they need to be in those places they need to operate, especially if it’s mission-critical. So they generally pay rent. So that is a really, obviously, an important piece. And I think for us, as it relates to assets that have more experiential, more social gathering type aspects to it, I could see us going forward on new deals looking for interest that’s closed for three months in case if there is another forced closure, because it’s not clear whether when we come back to work — when they open the country, maybe they’ve got to close it again. We saw that in China, when they opened up “the country”, movie theaters were opened that first weekend and they closed them again. So, I think going forward, if we’re going to get into certain types of businesses, think of entertainment, we might look at some additional new structures that could help us, mitigate some of this — some of these closures. We have confidence in these assets. Gyms are going to come back very, very quickly once people reopen, because a lot of these gyms have monthly customers that they’ve frozen dues and as soon as they reopen, they’re going to turn those on and they’ll be back.

Indoor entertainment, these kids are all in their backyards or basements or wherever they are probably — so they need to get out and do things, people are going to have parties again. So, it will be good once we reopen. I think movies will be a little bit more challenged just given that — I think that will — that’s dependent on the leases from the studios and take a little more time for people to come back into those venues, but I think long term, those categories would be very good.

To answer your question, yeah, we’re looking at what’s working, what’s not working. I’ve actually had our research team — they’ve been pretty busy, but they’re looking at how is our heat map layout, how are things performing, what do we think was right, how much correlation that we have in the portfolio. If you look in Q1, pretty much everything we did was very industrial, distribution-related. We did that big deal with Mac Papers, we bought a company that does safety and industrial products distribution, N95 masks, they’re crushing it right now. We did a car wash portfolio, a UnitedAg portfolio, a BCA’s warehouse store. So, there were no restaurants or entertainment type stuff in the first quarter. So you might see us continue to look at things like that.

Operator

Thank you. Our next question comes from the line of John Massocca with Ladenburg Thalmann. Please proceed with your question.

John Massocca — Ladenburg Thalman & Co. — Analyst

Good morning.

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

Hi, John.

John Massocca — Ladenburg Thalman & Co. — Analyst

So, I’m sorry if I missed this, but what percentage of contractual rent did not formally requested deferment, but also didn’t pay in April kind of above and beyond that 42%?

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

Well, here’s the trouble, so 60% paid as we said, right? So that’s just in. There are some of those 126 where they’ve paid, they just — look, when this happened, a lot of people three weeks ago didn’t really know what the federal government was going to do and obviously the Fed and the treasury secretary have been all over that. So I have a lot of confidence of what they’re doing right now. So things looked really bleak at one point like maybe three weeks ago, two weeks ago, but things are changing for some of our deferred tenants sort of case-by-case.

So, to answer your question, of that 42% that we have in that table, not all of the — some were reviewed. I can give you a case example like one of them on Friday, we said, “Okay, you want a rent deferral request, send us these financial statements, send us your most current operating statement, send us your balance sheet.” And they sort of basically said, “You know what, we’re just going to pay rent,” which they did. So, I don’t want to give you a number that — the best number I can give you is from a cash — from a collected rent standpoint, we have 60%, that number is going to go higher. And we hope to get that close to 70%, could even possibly go into low ’70s. But I think we feel comfortable in that 65% to 70% range for April.

John Massocca — Ladenburg Thalman & Co. — Analyst

Okay, understood. And then I know you mentioned that you haven’t agreed to any abatement or long-term lease modification, but have you had any request, especially from people who have not paid April rent?

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

Sorry, John. Can you just do that question again?

John Massocca — Ladenburg Thalman & Co. — Analyst

[Indecipherable]. I know you mentioned that you haven’t agreed any abatement or kind of long-term lease modifications. But if we had any requests, especially from people who haven’t paid April rent or kind of are in that 18% that have not had an accepted deferral request?

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

Yeah, I mean. Well, I would say like the way to think about it, and like I said, it’s very like once again I have to stress that this is an extremely methodical process that we’re approaching. So, of those 23 approved by our investment committee rent deferrals, those just didn’t happen like over 24 hours. There was quite a bit of back and forth between our asset manager and the tenant in terms of getting financials, getting a clear picture of what’s happening with the tenant, are they open, remember all those questions I mentioned. And then ultimately a structure needs to be discussed between the tenant and the asset manager and then has to be approved by our investment committee.

I can tell you that just from the cadence, there have been some requests that’s come in that weren’t approved by the investment committee and we made modifications and then that asset manager went back to the tenant, and then there was an agreement. So the way you should think about it is, if 23 have been approved out of 126, there is something like a 100 or so situations that are in various different stages. So if a tenant hasn’t really given us financials, I mean, we’re not really dealing with these guys right now. And I think one of the things that — and I’ll let Ken talk about this, but I’ll just set it up, as the landlord, we don’t give up any of our rights, our contractual rights by rushing. So I would say like time is probably on our side as it relates — because we’re — all of these things don’t require us to waive our reservation of rights under our leases and our typical lease has a 10-day grace period for rent. If a tenant doesn’t pay in 10 days, there is typically a default premium. So, usually about 5% and if the tenant doesn’t pay, there is actually sort of an imputed interest rate that gets charged for the time that they don’t become current.

So — and maybe Ken, I don’t know if you want to describe sort of a little bit about what — how you and team are handling this, but…

Ken Heimlich — Executive Vice President, Head of Asset Management

Yeah. No, sure. Clearly, there is a lot more going through the system than otherwise normally would be, but we have a very systematic approach for those folks that do not pay April rent. Jackson mentioned earlier, we have a couple of different ways we’re going to handle those, but again Jackson mentioned that there you gain nothing and you lose nothing whether you act upon a tenant that did not pay rent, whether you did that on last Friday, this Friday, clearly you’re not going to wait 60 days to address it. But we don’t think it’s prudent to jump in and start shooting letters out. It’s a like — it’s a very methodical approach. We are definitely attempting to make contact, try to come to a prudent resolution. In fact, if that fails, in the appropriate time frame, we will address that, whether that’s through default letter, reservation of rights or whatever is necessary.

John Massocca — Ladenburg Thalman & Co. — Analyst

Understood. And thank you very much for all the color, especially during what I’m sure is very busy and trying time.

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

Thank you, John.

Operator

Thank you. Our next question comes from the line of Ki Bin Kim with SunTrust Robinson Humphrey. Please proceed with your question.

Ki Bin Kim — Sun Trust Robinson Humphrey — Analyst

Thanks. And good morning out there. What percent of your investment grade tenants did not pay April rent?

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

So our investment grade are I think around 20 — just under 24%. I don’t know if I have a number in that period [Indecipherable] pretty close to like the majority.

Michael Hughes — Executive Vice President, Chief Financial Officer

Yeah, It’s close to zero by [Speech Overlap].

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

Close to Zero. It’s really — yes, I mean — I think there are — this is the thing, Kim, to keep in mind. I mean, we’re only at April 13, right? And we had a holiday on Friday. Rent is still coming in and everyone is — tenants and landlords, everyone is sort of trying to figure this out and one thing that I will really stress. When I — when we talk to tenant, I mean, rent is just a very small component of the issues and challenges they’re facing right now. I mean, it’s amazing hearing stories how they’re dealing with thousands of employees, how they’re dealing with supply chain, how they’re dealing with their franchisors if they are in a restaurant business, how they’re dealing with different governmental action happening in different states, how they’re dealing with their lenders, how they’re dealing with government stimulus. And to be honest with you like rent is just one of those small pieces of the puzzle, not the piece of a puzzle. The landlord cannot, I can stress this, the landlord cannot solve all the problems for what’s going on.

Ki Bin Kim — Sun Trust Robinson Humphrey — Analyst

I’ll just — sorry about that, it jumped to Bluetooth [Phonetic] all of a sudden for no reason.

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

That happened to me yesterday.

Ki Bin Kim — Sun Trust Robinson Humphrey — Analyst

Yeah. It’s odd. So just to clarify that, you’re saying 0% of your investment grade tenants, which is 24% paid April rent. But maybe I should — just to clarify that, maybe I should ask that a different way, [Speech Overlap] investment grade?

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

I said all of our investment grade tenant — actual investment grade paid April.

Ki Bin Kim — Sun Trust Robinson Humphrey — Analyst

Okay. That’s what I thought you said. Okay. So they all paid. Okay. And have you gotten any deferral request from your investment grade tenants or no?

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

No, we have not gotten any deferral request from our investment grade.

Ki Bin Kim — Sun Trust Robinson Humphrey — Analyst

Okay. That’s good to see. At least some investment grade is working the way it should. Now, my second question is, to your best judgment, what percent of the 42% of your tenant — or of the rent that is being asked to be deferred? And I know this might be tough, but what percent of that do you think is actually a longer-term deferment because especially in the restaurant business or actually any business at this point, but especially restaurant business, you don’t have the equity cushion or line of credit to sustain zero month — zero rent in a month in that business.

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

Yeah, I mean I’ll try to — look, I know you’re trying — I know you’re trying to — you’re trying to forecast where it goes, but I mean, the way to think about these requests, so, there are 126 of them, and like I said, I don’t believe 126 will be approved and I think of those 126, some will just pay. About 20% of those are public tenants, the second next category are franchise private operators and the largest are private equity-owned companies. And I would say that if you think about — and we tried to give this thing on Page 5, if you think about the percentage and the number of tenants and we go through the what I’ll call maybe the easier group. Quick serve restaurant, many of them are actually open already, right? They are just open and operating either through a drive-thru or a pickup or DoorDash. And so they’re seeing in my — and this was some rough numbers, they’re seeing about a 20% decline in their business.

Casual dining, depending on what type of casual dining it is, a good majority of our stores are open, but they’re just providing select delivery, select menu, like they are not making a whole lot of money. They are keeping staff paid, kitchen staff, but it’s not problematic for that group. And within the higher-end [Phonetic] casual dining, [Indecipherable] closed. So, I believe that casual dining will not recover as quickly, it will recover, but not as quickly as quick-serve when we come back.

I think on health and fitness, as I mentioned, because a lot of our operators charge monthly dues, that’s going to open up fairly quickly I believe, once the all clear is announced, then — if you listen to what’s happening, it’s going to be a rolling all clear. So, as different states and different areas start to reopen, you’ll start to see health and fitness reopen.

I think entertainment is probably a little — will take a little bit more time. So, top golf, that’s really easy both outside and when they reopen, I think you’ll see a lot of people gravitate towards that. I think some of the indoor ones that are providing more games and bowling and slot machines — video games, that type of thing, birthday parties, I think that those operators are really thinking through how do we make our customers feel safe and they may I’m sure wipe it down, having wipes all over the units will be real helpful. I think maybe checking temperatures might be really helpful.

The group that will probably be the longest to recover will be movie theaters and that’s simply a result of — it’s related to what’s going on with the box office. And I’m sure you’ve heard there is a tremendous slate of great movies that have been backed up that will come out through that distribution channel. But my own judgment that will take the longest and for us as restructure these deferrals, that one will probably take more attention versus just the one month deferral like some of these other categories. I don’t know if that helps you.

Ki Bin Kim — Sun Trust Robinson Humphrey — Analyst

Thank you very much.

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

Okay.

Operator

Thank you. Our next question comes from the line of Vikram Malhotra with Morgan Stanley. Please proceed with your question.

Vikram Malhotra — Morgan Stanley — Analyst

Thanks for taking the question. So maybe just first to clarify, Jackson, you mentioned that it’s only April 9 if you look at the data, do you have a sense of — can you give us the stat on what percent of your tenants actually paid rent on April 9 last year versus what the actual percent paid rent this year?

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

Yeah, we do — we do look at that number. I mean I’ll compare the trend over the last few months is probably a better one. So — usually by about this time, we’re at about 90% of our rent collected. We always have some late payers or some people that don’t pay on the 1st, but I would say generally by about this time, we’re at 90%.

And so what’s unusual about this month is that, it’s not usual, right? So we know that by just definition, there are some major payers that we expect to pay this month, and then there is another group that sort of don’t know what they want to do yet. And so that’s why it gives us some confidence that 60% [Phonetic] collected number is going to move up based on our experience. But 90%…

Vikram Malhotra — Morgan Stanley — Analyst

Okay, that’s helpful, because I thought that there would be some tenants that probably pay into the second week or third week, but yeah, I guess that’s more in office but that’s helpful to have. Can you just maybe give a little bit more color on sort of the theaters, Goodrich specifically, and just kind of your expectation going forward?

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

Yeah. So, I’ll come back to Goodrich in a minute, but when you look at our movie segment, which is just a little over 7% in our total contractual rents, it’s broken down into, leaving Goodrich out, it’s seven operators and it’s pretty balanced. So, like our biggest one is not the big two. So Regal and AMC are on the top end, but they are not the largest. So it’s fairly spread out and I would tell you that some of our regional theater operators have really, really good credit like low debt to EBITDA. So we think that — that’s kind of probably an opportunity for some of the regionals to maybe consolidate more theaters as they think about their opportunity, and obviously, we’re in a position to help them. So we will look at that very carefully with them.

But getting back to Goodrich, so Goodrich paid March rent. They’re going to pay a nominal rent this month. The bankruptcy courts right now, I don’t know if you focused on what happened with Pier 1, we have one of those stores, the judge basically kind of put a time out on the going out of business sales as it relates to landlords getting paid rent during that administrative period. So the Goodrich situation is sort of the same thing kind of things are frozen right now at least for the next 60 days. I can tell you that we have interest in those theaters. The master lease is still in place. And — but there just not a whole lot happening in the bankruptcy courts right now just generally, just given a lot of courts are not actually in place — physically in place right now.

Ken, you want to add any more on Goodrich at this point?

Ken Heimlich — Executive Vice President, Head of Asset Management

No, I think that captures as it’s just — it’s what’s going on a lot of bankruptcy cases. They are kind of “mothballing” things for the next 30 days, 60 days until sale processes can be run as they should be.

Vikram Malhotra — Morgan Stanley — Analyst

Okay, that’s helpful. Just last one, if I may, if you can just some — provide some thoughts on to the dividend policy. Assuming this sort of persist for several months into the second — into the — in the second and the third quarter and maybe that 24% number increases in terms of deferrals, can you give us some parts about dividend policy kind of options you have, etc.?

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

Yeah, well, we’re paying obviously a dividend on Wednesday for the — for Q4 dividend. And of course, the dividends are really the Board’s decision but I can just tell you from where I’m sitting today, I’m very — I feel very positive about the conversations we’re having. Our tenants that are asking for deferral, it’s important for you to really think about this, our business is — and I would say, like some of our peers in the triple-net business, our business is not related to co-tenancy. So, we are focused on our tenants’ ability so basically pay rent, be open, manage their parking lot, cover their roof expenses, pay their taxes, pay their insurance and so it’s a really different type of conversation that we’re probably having with our tenants vis-a-vis retail landlords that have either malls or shopping centers or power centers. So ours are really more — they control the door, right? They control what’s happening. And so it’s a very — I think it’s a very different type of discussion. We’re not going to subsidize tenants that affect adjacent vacancy, if that makes sense to you, right? We’re really focused on, we have a tenant, they’re operating, we want them to be successful, we want them to pay rent.

So, as it relates to dividends from my perspective today, we have the wherewithal to maintain it. It’s going to be the Board’s decision and we feel really good about what we’re seeing right now. This is only April, but what I can tell you is that the conversations that we’re having with our tenants on deferrals, it’s very methodical. These 126 tenants are really serious about their business, they are not giving up. That’s what’s really — for me really impressive. They’re not giving up. These are — lot of these are local multi-unit operators versus what I would characterize as a mom and pop single unit operator. These are fairly sophisticated operators and they’re working through it very methodically, looking at all avenues, and we’re partnering with them in this process.

Operator

Thank you. Our next question comes from the line of Chris Lucas with Capital One Securities. Please proceed with your question.

Chris Lucas — Capital One Southcoast, Inc. — Analyst

Good morning, guys. Thanks for doing this. It’s really helpful. Jackson, I guess, you sort of raised the question or raised the topic that I was looking at, which is the expense side. A good portion of — I guess the question for me would be you guys talk a lot about rent, what about your insight into what tenants are doing with the expenses that they are typically paying the rent? Do you have any insight into that and how should we be thinking about your obligation on that front?

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

Yeah, I mean look, clearly one of the things that we talk about on a rent accrual is, are you current on taxes, how are you — it’s a whole calculus that we kind of go through. I’ll give you a good example like with the CARES Act, with this payment protection aid that’s coming through, when you think about it, the way the government set up the program is they’ve got to basically take those loan proceeds and if they want them to be basically forgiven, they’ve got to use about 75% of that money for payroll costs and the remainder can be used for rent mortgages and utilities. And if the loan is not forgiven, it’s a 1% interest rate. So that’s not bad either, right? But one thing that’s really — we did some modeling on this, so if a tenant that’s operating a unit is effectively open paying its employees through these loan act, paying for utilities, their margins will improve, right? Now their top line may be affected, but if you think about it, their margins are going to be improved because they are effectively not paying for their people costs, which are one of the largest expenses that they have in their operations.

I can also tell you that these tenants have been extremely sophisticated about educating their employees, about deferred — how to get unemployment at the state level. Many of them are furloughed, so that they still have health benefits. And so these tenants have been extremely thoughtful and that’s what’s been so impressive to hear these conversations about how they’re approaching the business as opposed to, hey, I don’t know what to do. I don’t know if that helps you with that.

Chris Lucas — Capital One Southcoast, Inc. — Analyst

Well, I guess, really the question for me is when I think about rent deferral and how much you guys are talking about, I guess I’m trying to figure out what’s the multiplier on expenses that we should be thinking of sort of what’s the real damage to the bottom line AFFO per share that’s been done.

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

I mean, it’s really — I mean, if you think about the real damage, it’s only if a tenant goes away, right? And — because if — the way I would — and this is why we wanted to provide this information to you, which is real helpful, if you look at the nature of the 126 deferrals, the weighted average remaining lease term on those deferrals is about just 10.5 years, 10.6 years. So that’s a good thing. You would — if it was a shorter lease term, it’s more complicated because then you’re dealing with renewals and it’s a much complicated discussion. The other thing is, if you look at the weighted average unit coverage for this group of tenants, pre-COVID-19, they were at 2.5 times coverage. So that shows you that, hey, their business, it was working, right? Things were working before this whole situation.

So, when we look at it as a landlord, we’ve got a long-term lease from a tenant or a group of tenants that were adequately having coverage to pay all of their taxes, rent, utilities and so the question for us is — and this is where we went into how to reserve this stuff, not all of these renewals are where we’ll recognize rent and so if we’re not going to recognize rent, that’s when you see property tax accruals start going up, impairment start going up, because we’re — and look, it’s a bonus that they can get through this, but that’s kind of how we’re doing it. I don’t know, PIERRE, if we have that one ratio on expenses if a tenant went away, we could think about?

Pierre Revol — Senior Vice President, Head of Strategic Planning & Investor Relations

Yeah, I mean, one way to think about vacancy cost is it’s about $4 a foot. I mean, so on average, if you just look at our overall portfolio, it depends on what district or what area. I mean, so if you had like a 1% occupancy, you apply that $4 a foot concept, you got $1.2 million to $1.3 million of NOI that get impacted.

Operator

Thank you. Our next question comes from the line of Wes Golladay with RBC. Please proceed with your question.

Wes Golladay — RBC — Analyst

Hey, good morning guys. And maybe just a follow-up on Chris’ question. So for the tenants that have actually deferred the rent you agreed to it, are you paying the taxes, insurance and all that for now?

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

So the majority of those — that have been approved, we’re recognizing it as rent, because we believe that they’re going to bounce back very quickly. So I mentioned to you, like 50% are 30-day deferrals, so a 30-day deferral that’s paid back in two months, I mean, you’re not going to do anything with that, right? That’s — we’re very confident about the tenants going in. We’re going to recognize income and we’ll pay their expenses. So, I think that…

Wes Golladay — RBC — Analyst

Yeah. Sorry, go ahead. Yeah.

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

I was going to say, like when we look at these deferrals, we’re really looking at, are they going to — what’s their probability of surviving. And that’s why I’m saying is when we’re recognizing — and you’ll see this with other companies, other peers of ours, when they’re looking for GAAP purposes, cash rent, so they — in this case, they deferred, they are booking it as income, they believe that they’ve got a 75% probability of being repaid back. So it’s a high threshold. So for us, there are a number that we’re not booking because we think there is some risk. And so when we believe that, we’ll start to see lost rent go up for us. We start to see properties cost leakage start going up like we talked about. So that’s — but I don’t think — it’s a very — it’s a small portion of the portfolio that’s really the point.

Wes Golladay — RBC — Analyst

Okay, got it. And then it looks like you guys have done a deep dive on the CARES Act and the new fed facility. So I’m just wondering if you have a view on, an estimate of what percentage of your tenants are eligible for either program? I do know there is some governors on debt to EBITDA can be PE-backed all that, kind of wondering how you’re portfolio stands up to benefit.

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

Yeah, so I think for direct benefit, auto dealers, auto service, the car washes, entertainment, health and fitness, home decor, home furnishings, movie theaters and obviously restaurants are going to be a direct beneficiary. The way this small business protection aid works is if 500 employees or less subject to affiliation rules, right, except for — when you look at the NAIC small business code 72, which is really restaurants and franchisees, that designation is 500 per location. Now, you might have a private equity firm that owns a large hotel — sorry, large restaurant chain, they probably only going to max — they’re going to max out at $10 million, no matter what.

But the other program that I think is interesting and it’s fairly — I’m kind of want to get some feedback I haven’t got it yet directly from tenants is that Main Street Lending Program, which is like the $600 billion program that provides loans recourse up to businesses with 10,000 employees. And that loan is $1 million to $25 million kind of loan and then there’s an expanded loan facility that can go up to I believe $150 million, so for certain eligible borrowers where their debt to EBITDA is not greater than 6 times.

So, these packages are still rolling out, right? So, I have confidence that government is hearing industries in need. So obviously you’ve got the restaurant industry in there, you’ve got hotels, airlines, other industries that are being impacted by — the energy industry, autos, there’s just a lot of things happening right now. So, this is all happening real time, but we think the government is being pretty sensible about this.

Wes Golladay — RBC — Analyst

Yeah. That’s it for me. Again, thank you for hosting the call at this time where there’s lot of unknowns. So, thank you.

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

Yeah, no, we appreciate it. Thanks.

Operator

Thank you. Our next question comes from the line of Greg McGinniss with Scotiabank. Please proceed with your question.

Greg McGinniss — Scotiabank — Analyst

Hey, good morning. Jackson, I believe you mentioned about half the requests for rent deferrals are for one-month deferrals. Curious what your confidence level is you’re not going to be having the same conversations with those tenants next month?

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

[Indecipherable]. I can tell you that because I’ve been in investment committee on each one of these and you look at the numbers, I would say for the 30-day deferrals, the ones that I just went through, I have a pretty high confidence in those, because they — a lot of those situations, the tenant has access to the payment protection programs and a lot of those tenants were actually doing okay and they were operating. So I think those would be okay. The ones where you have real closure are a little bit more challenging. And that — the companies can’t just keep paying expenses if they’re closed forever unless they get government assistance.

The other thing about — just going back to deferrals and on some things like that, I did say what’s important for us is we — and this is why I think our tenant rent will go up as the month continues to move forward, tenants who can pay rent really should pay rent. So, I called tenants that can pay rent, they have their financial wherewithal to do it. If they don’t do it, it obviously impacts our ability. We don’t have infinite balance sheet to help tenants that really need our help.

But I think some of the other longer term, and this is one discussion I had with the tenant, I said, “You really have to think very carefully about trying to cut a month or two months off and you can clearly pay this rent.” Because the other unintended consequence this can have on a tenant is, is that they have a lot of assets that are owned through the 1031 market, some of those buyers have mortgage debt on these properties or CMBS on these properties and that will trickle down into a perception of higher risk that will impact future developers as they build these units, which means that they’ll need more yield and which will need more higher rent in effect or less proceeds for these tenants.

So, I think kind of especially the big national and regional ones, you’ve seen some kind of one-size-fit-all kind of notices going out, I won’t mention the names, you know which ones they are, saying, “No, I’m not paying.” Well, I had to tell you like that will not serve them well as it relates to impacts long-term with 1031 market. It will hurt them.

So — and we’re seeing some people back off and so hopefully tenants are being thoughtful, I’m sure they are, about the impacts to landlords because we landlords, we’re not the evil empire here. We have to pay rent interest, we have salaried employees, and different obligations or we have secured mortgages, it all impacts everyone.

Operator

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I will turn the floor back to Mr. Hsieh for any final comments.

Jackson Hsieh — Board of Directors, President & Chief Executive Officer

Okay. Thank you, operator. Well, to our audience, I really appreciate you getting on. There are four takeaways here. The first is, we got this right now and I’m really thankful for the team I have in place. I think if you’ve heard this, I think our business model, which is owning essential freestanding and retail properties, is not a four-letter word. We don’t manage adjacent occupancy. Our portfolio is predominantly national, regional and local multi-unit operators versus mom and pop operators. And as we get back to growing rent through acquisitions, we will add more dimension to essential services and what we’ve learned out of this pandemic. So, appreciate your attention and be safe and look forward to speaking with you all soon. Take care. Thank you, operator.

Operator

[Operator Closing Remarks]