National Retail Properties, Inc. (NYSE:NNN) Q1 2020 Earnings Conference Call May 4, 2020 10:30 AM ET
Company Participants
Jay Whitehurst – President and CEO
Kevin Habicht – CFO
Conference Call Participants
Collin Mings – Raymond James
Christy McElroy – Citigroup
Vikram Malhotra – Morgan Stanley
Brian Hawthorne – RBC Capital
Rob Stevenson – Janney
Spenser Allaway – Green Street
Todd Stender – Wells Fargo
Joshua Dennerlein – Bank of America
John Massocca – Ladenburg Thalmann
Linda Tsai – Jefferies
Michael Gorman – BTIG
RJ Milligan – Baird
Chris Lucas – Capital One
Michael Bilerman – Citigroup
Operator
Good day, ladies and gentlemen. And welcome to the National Retail Properties’ First Quarter 2020 Operating Results Conference Call [Operator Instructions]. At this time, it is my pleasure to turn the floor over to your host Mr. Jay Whitehurst, President and CEO. Sir, the floor is yours.
Jay Whitehurst
Thanks Jess. Good morning, and welcome to the National Retail Properties First Quarter 2020 Earnings Call. Joining me on this call is our Chief Financial Officer, Kevin Habicht. After some opening remarks, I’ll turn the call over to Kevin for more details on our results.
First let me say that our hearts go out to all the families affected by the COVID-19 coronovirus, and the related economic dislocation across the country. We’d also want to offer our profound thanks to the medical professionals and first responders who are putting themselves in harms by everyday in order to keep the rest of us safe and healthy.
With the sobering perspective in mind, today’s first quarter earnings release reflected another steady consistent quarter for National Retail Properties with high occupancy, continued transaction activity and a very well timed issuance of 10 year and 30 year debt that raised $700 million. All of that steady execution occurred largely prior to the unprecedented spread of the coronavirus across the United States and related global financial market instability that exploded in March. Based on the current uncertainty about the depth and duration of the economic turmoil that almost all companies are enduring at the moment, we’ve withdrawn our guidance for 2020 results. We hop to be able to provide updated guidance later in the year. But for now, there is simply too much uncertainty to project how 2020 will play out.
Before discussing our quarterly performance, let me highlight some of the attributes of our long-term strategy that have positioned National Retail Properties to weather the current disruption. First, our balance sheet remains in excellent shape. We ended the first quarter with $217 million cash on hand and a zero balance drawn on our $900 million line of credit. Our next debt maturity is not until 2023. And we’ve taken a pause in our acquisitions in order to marshal our cash in this uncertain moment.
Second, our portfolio consists primarily of large well-capitalized tenants. Our largest tenants operate over 1,000 units each on average, and are typically the leaders in their respective lines of trade. These are large regional and national companies that are generally better positioned than smaller operators to withstand a major disruption in their business, such as occurring at the moment.
Third, our well-located real estate parcels remain integral to our tenant’s business expense once this disruption is passed. As we’ve often said, National Retail Properties is at its heart of real estate company. Our properties were highly occupied before all this started, and we’re confident that those same well located properties will continue to be in high demand after all this passes.
And lastly, we’ve been here before. Our entire management team was with the company during the great recession in 2008, and most of us have been through a number of other major downturns in the past. We’re a seasoned real estate company with in-house expertise to handle all the issues that might arise.
Turning now to our first quarter 2020 results. Our portfolio of 3,125 single tenant retail properties ended the quarter with an occupancy rate of 98.8%%, which is consistent with our long-term average occupancy. We do expect our occupancy rate to fall in the second quarter, but we’re working with many of our tenants to structure rent deferral programs that we hope will enable them to get through this period of business interruption and get their businesses back in full operation.
We acquired 21 new properties in the first quarter, investing slightly over $67 million at an initial cash cap rate of 6.9%. As usual, about two thirds of our investments were with our relationship tenants with whom we do recurring off market business. Our acquisition volume was muted compared to prior quarters. We elected to postpone or cancel some acquisitions scheduled for late in the quarter as we saw the economic downturn beginning to grow. We also sold 14 properties during the quarter, generating proceeds of just over $36 million at a cash tap rate of 4.7%. Once again, our ability to raise capital for accretive recycling highlights a strategic advantage of National Retail Properties over many other REITs.
Due to the sudden Impact of the COVID-19 pandemic on retail businesses and the economy beginning in mid-March, we are reporting today that we received approximately 52% of our rents due for the month of April. We also entered into rent deferral agreements or are currently negotiating such agreements with tenants representing approximately 37% of our annualized base rent.
While we are dealing with deferrals on an individual case by case basis. Generally, our rent deferral discussions involve deferring one to three months of second quarter base rent with a deferred rent to be repaid commencing in late 2020 through late 2021. Generally the tenants remain responsible for paying the triple net charges on a current basis. We are not discussing or agreeing to rent forgiveness with tenants, nor are we advancing funds to tenants to be repaid as rent.
As to the balance of the tenants, which did not pay or agreed to deferral arrangements, we are pursuing our legal remedies. Many of those cases involve tenants that we felt could pay some or all of their April rent but have so far chosen not to do so, or tenants that insistent on some immediate rent forgiveness, which as I said, was not the way we wanted to approach this fast moving and fluid situation. We remain in dialogue with many of these tenants and are hopeful about our ability to reach some agreement for payment with many of these tenants over time. Consistent with our long term practice of reporting results only quarterly, we do not anticipate reporting monthly rent collections for May or June in advance of our second quarter earnings release.
Lastly, before turning the call over to Kevin, I want to remind you all that we declared our regular quarterly common stock dividend in April. Our board will continue to review our dividend policy as we work through the current economic turmoil, and by no means is our dividend untouchable. We do believe, however, that our impressive streak of consistently increasing the dividend for 30 consecutive years is a powerful indicator of the value of our consistent conservative balance sheet philosophy and business model.
So in the first quarter behind us, you see National Retail Properties conserving its capital, working with its tenants to address the reality of their current businesses disruption and planning ahead for the new normal. Let me now turn the call over to Kevin for more details on the first quarter, our strong liquidity position and our thoughts around the balance of 2020.
Kevin Habicht
Thank you, Jay. And as usual, I’ll start with my usual customary statement that we may make certain statements and may be considered to be forward looking statements under federal securities laws. The company’s actual future results may differ significantly from the matters discussed in these forward looking statements. And we may not release revisions to these forward looking statements to reflect changes after the statements were made. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company’s filings with the SEC and in this morning’s press release.
With that headline from this morning’s press release before quarterly core FFO results of $0.70 per share for the first quarter of 2020, and that’s 4.5% higher than prior year results and consistent with our projections and guidance. And just a couple of comments about the first quarter, which I’m guessing few are focused on at this point. But our AFFO dividend payout ratio for the quarter was 72.4% and that was consistent the full year 2019 levels. Occupancy was 98.8% at quarter end. G&A expense was 5.8% of revenues for the first quarter, and that’s flat with the prior fourth quarter. And we ended the quarter with $677.5 million of annual base rent in place for all leases as of March 31, 2020.
As Jay mentioned, on February 18th, we issued $700 million of unsecured debt $400 million with a 10 year maturity and 2.5% coupon plus $300 million with 30-year maturity and 3.1% coupon. We used about half of those proceeds to redeem our $325 million of 3.8% 2022 notes due in March — we paid those off in March, they weren’t due in 2022. I will note that first quarter interest expense includes $2.3 million of accelerated note discount and note cost amortization as a result of that early ’22 note redemption.
Absent this incremental non-cash expense that would have allowed us to report $0.71 of core FFO per share, representing 6% growth over prior year results. But more importantly though this transaction enhance our liquidity just as the flu pandemic was beginning to unfold in the United States, and pushed on our next debt maturity to 2023. We ended the quarter with $217 million of cash on the balance sheet. And we have no amount outstanding on our $900 million bank line. These transactions pushed our weighted average debt maturity to 11.2 years with a weighted average interest rate of 3.7%. So we’re in a good liquidity position with very few capital obligations during the next three years.
Leverage metrics remain very strong. Debt to gross book assets was 35.3%, that was flat with year-end. Net debt to EBITDA was 4.9 times at March 31. Interest coverage was 4.6 times and fixed charge coverage was 4.1 time for the first quarter. If you excluded the $2.3 million of note discount and note costs amortization, those two metrics would have been 5 times and 4.3 times respectively for interest coverage and fixed charge. Only five of our 3,125 properties are encumbered by mortgages, totaling $12 million.
As Jay mentioned, we also announced this morning, we are withdrawing our 2020 earnings guidance in light of the uncertainty produced by the virus pandemic and the mandated store closures and associated economic and capital market turmoil. Until we get a better read on the duration of the shutdown, the shape of the recovery and what the new normal might look like, we’re not able to reasonably predict how things will play out.
While we’re dealing with these deferrals on an individual tenant basis. Generally, as Jay mentioned, they involve one to three month of rent deferral with that deferred rent of either paid over a period of months from late 2020 to late ’21. So we will be continuing to work with a number of our tenants to find a path forward for them to pay the rent owed to us. Our approach has been to work with the tenants and allow rent deferrals to help them get to the other side of the shutdown, and then get repaid in the not too distant future.
So much depends on the duration of the shutdown and the shape of the subsequent recovery. This level of uncertainty does not make it clear if we may have done too much or too little with our rent deferrals but we’re hoping we’ve struck a reasonable balance. As we work through what undoubtedly will be a difficult 2020 for the global economy and that we continue to work to give end and end the best opportunity to succeed in the coming years. And Jess with that, we will open it up to any questions.
Question-and-Answer Session
Operator
Thank you [Operator Instructions]. We’ll move first to Collin Mings at Raymond James.
Collin Mings
First question from me, just you highlighted the dividend track record but also acknowledged it wasn’t untouchable? Can you just elaborate on how you plan to balance your dividend track record, and potentially increasing leverage on the margin for a few quarters versus aligning dividends with cash flow generation in a given quarter?
Kevin Habicht
I guess the way I’d respond to that is, our dividend policy is not set on the basis of one or two quarters but rather on what we think is reasonably sustainable over the longer term. So one of the reasons you want to have 72% payout ratio like we did going into this pandemic is to provide some cushion and ability to support the dividend as we go through challenging periods like 2008-09 and like we’re going through today. So we were comfortable declaring our regular quarterly dividend a couple weeks ago and we’ll evaluate things as we go.
While clearly as Jay mentioned, we have a degree of pride in our 30-year consecutive years of increasing the dividend, it’s obviously not sacrosanct. The challenge with a current downturn is that it’s driven by healthcare that’s more difficult to handicap and how it will play out. But hopefully we’re going to gain some visibility in the coming months as to the timing and shape of that recovery. And that will help inform our thoughts about the appropriate dividend policy in the coming quarters. But I guess to reiterate where I started, we’re not going to decide our dividend policy based on one or two quarters of results.
Jay Whitehurst
And just to highlight again, Collin, we are in a very, very strong liquidity position that helped make that decision a lot easier recently.
Collin Mings
And Jay, I recognized you aren’t going to provide monthly updates. But just any initial color you can provide on collections or anticipated collections here in May, relative to April based on what you’ve received or heard from tenants? And are there many tenants that may be paid in April that have indicated they don’t plan to pay in May?
Jay Whitehurst
Collin, there is no real color I can give you on May. I think if you think about it though, to the extent you’ve agreed to rent deferrals in April and May then you can really expect that your May rent will be deferred. One thing to follow up on your question though just to talk for a moment about our approach to all this. I think I mentioned it a little bit in my comments and Kevin mentioned it a little bit in his comments, we’re just taking a very long term view toward our tenant relationships. These are our customers and in many, many cases they’ve been our customers for a long time. And so we want to be firm but fair with our long-term customers, but we are not looking to punch anybody in the nose in the middle of this unexpected unforeseen disruption. So we’re taking a very collaborative approach to working with our tenants through all this.
Collin Mings
Jay, just to that point. As you negotiate these deferrals, have you agreed to, or have your tenants agreed to any sort of additional thing in exchange for you granting them the deferral or is it simply just picking off the payments for now?
Jay Whitehurst
Generally, Collin, what we wanted to do at this moment, while things are moving so fast, is to just deal simply with short term rent deferrals that, as Kevin talked about, get paid back relatively soon and relatively fast. And so we did not look at this initial situation as something that we wanted to, again, try to push more onto our tenants. We just wanted to work with them at the moment and deal with these short term deferrals.
Operator
We’ll go next to Christy McElroy at Citigroup.
Christy McElroy
It looks like the straight line rents were lower than the normal piece in the first quarter. Did you write off any straight line rents receivable associated with converting any leases to cash basis accounting? And just in the context of the current environment and trends towards non-payment of rent. How do you think about the potential for needing to convert to cash basis converting more in recent quarters?
Kevin Habicht
No, there wasn’t any notable write off of accrued rent in the first quarter. Obviously, given we have meaningful amount of deferrals in process for second quarter, straight line rents, obviously, will be materially higher going forward. What was the last part of that question?
Christy McElroy
Well, I guess just how you’re thinking about the potential for needing to convert more, it leads to the cash basis. So as we think about the second quarter and you’ve had 48% non-payment of rents. How are you thinking about the potential for uncollectability probably on the…
Kevin Habicht
Yes, to your point at the moment, we don’t think that that will become a material amount, but that’s something we’re just going to have to evaluate as we go along the collectability of these deferred amounts. And if in fact, we get to a point where as you know if it’s not probable then we may need to go to a cash basis kind of recognition. But right now, we’re presuming that the vast majority of these deferrals will get approved and paid in accordance with the deferral plan.
Christy McElroy
And then just of the 48% that didn’t pay rent in April, do you have a sense for how many also did not pay their operating expenses like utilities and property taxes? So for us and trying to think about the potential cash burn as rents are not paid and some are deferred. How do we underwrite the operating expenses that you may have to cover that have not historically run through your P&L, and how are you tracking that non-payment of expenses?
Kevin Habicht
The vast majority of those are still paying for the expenses. Generally in our deferral agreements, we’re requiring that those expenses get paid. We are looking to only defer base rent. And just one metric that we use internally for thinking about that, if and that’s only if, where a tenant is not paying rent. We tend to assume that the property level expenses are going to equate to about 15% of the rent. So let’s say rent was $1 million a year, there’s probably $150,000 of property expenses that might go along with that. So that’s one way to estimate if and when that ever comes into play that’s the way we internally budget or project that.
Christy McElroy
And then just lastly follow-up on Collin’s question, understanding that you’re taking a balanced approach to the deferral negotiations, and recognizing you’re taking a long term view, you’ve got ton of relationships and you need to be collaborative. Can you kind of break out that 40%? I know you’ve had 37% of your rents requesting deferrals. But also as you pointed out, a lot of these are national tenants that can pay rents. So how would you break out that 40% between what you’re actually having negotiations on deferrals versus those that you’re playing more harder ball, in terms of ultimately wanting to collect those rents, and you’ve talked about pursuing legal remedies?
Kevin Habicht
Christy, I guess the way — we haven’t quantified the answer to your question. But I think that if you look at the tenants were we — that didn’t play and we don’t have deferral arrangements with, I feel like that anecdotally I think the vast majority of that are tenants that we think could pay and have so far felt like they weren’t willing to and so we’re taking the steps we need to take. But we’re still in dialog with those folks and optimistic maybe too good or too strong of a word at the moment but certainly hopeful, probably optimistic that a lot of that will get turned into a payment at some point.
Operator
We’ll go next to Vikram Malhotra at Morgan Stanley.
Vikram Malhotra
Obviously very changing times for everyone. Maybe just to expand or maybe a comment first. I know you mentioned, you won’t be providing May or June but sort of in this environment given kind of the historical stability of the triple net model and the triple net company to be, I just encourage I’d be actually really good to get updates on May and June either way. So to the extend you can give any color that would be helpful over the next few months. Just on the deferrals, you talked about having said like pushed them out couple of months, but I’m just wondering on the tenants that have not paid and you’re discussing. Would you be still willing to provide deferrals in exchange for say term or something else given that if they’ve not paid, it doesn’t seem like they will certainly come around in the near-term and pay?
Jay Whitehurst
Vikram, each discussion with each tenant is on a case by case basis. And so yes, we may well enter into those kind of discussions about other approaches to dealing with this and getting the rent restarted and the tenant back in occupancy if the tenant is choosing not to pay and we don’t have a deferral agreement. We do intend to exercise our rights. But for the moment, we are keeping it simple with our tenants. And recognizing that this is a challenging time for everyone, as you said and just trying to work with them on simple deferral arrangements.
Vikram Malhotra
And then just on any tenants that may have announced bankruptcy or some sort of restructuring, I know Chuckie Cheese, there’s an article out that they may be in some sort of restructuring. You did call it a few tenants last quarter. Any updates on those any thoughts around Chuckie Cheese specifically?
Jay Whitehurst
No nothing beyond kind of what’s in the news there.
Vikram Malhotra
And then just last one on the dividend, just I want to make sure I heard correctly. Obviously, it is a key focus, you have the track record. It may not be sacrosanct. But given when you say liquidity position, is it fair to assume that if there is a shortfall over the near term, let’s say second and third quarter, you would be willing to hypothetically lever up or use other proceeds to kind of keep the dividend intact, as long as you view this as a one to two quarter issue?
Jay Whitehurst
Yes, I think as Kevin mentioned, our dividend philosophy is a multiyear approach. And so no one month or one quarter or so. We’ve positioned ourselves so that a month or a quarter situation doesn’t affect that long-term approach.
Kevin Habicht
And I think what we’re hoping and I think everybody hopes is that in the matter of months, hopefully not too many, we’ll all have greater visibility on how things are going to shake out. And then once you have a better sense for that then we have a better ability to inform our decision about the sustainable dividend over a long period of time. But in the meantime for the next quarter or two, we’re very comfortable with our dividends.
Vikram Malhotra
And last one if I may, just some color around tenants requesting deferral, the types of tenants and specifically, I think you have 18% of your tenants are true investment grade. Has that group actually paid rents?
Jay Whitehurst
Yes, we’ve had very high success rate on getting paid by our investment grade tenants.
Operator
We’ll go next to Brian Hawthorne with RBC Capital.
Brian Hawthorne
Just one question from me, of the tenants that are paying rents. Are they paying full month’s rent or they — any of them paying partial rents?
Jay Whitehurst
All of them are paying full rent, yes.
Operator
We’ll go next to Rob Stevenson at Janney.
Rob Stevenson
On the 11% non-collections and non-deferrals, I mean, obviously, AMC is a well-publicized non-payer. But could you talk about what lines of trade that 11% is primarily aggregated in?
Jay Whitehurst
Rob, these are different tenants that kind of stand through a lot of the lines of trade that you might expect would be more troubled when you looked at our list of lines that are in the portfolio. But there is no — other than being in industries where their business is pretty much shut down, I don’t think there’s any real common characteristic.
Rob Stevenson
And then when you look at the two different lines of trade and restaurants, I mean both full service and limited service. Do you — talking with the tenants, do you have any idea as to how much of their normal revenues they’re doing under a takeout only? I mean is this 25% of normal revenues 10%? I mean, where are they sort of falling and what’s their ability to pay rents if the in-location dining does not come back very quickly?
Jay Whitehurst
I think it’s too early to try to project where it comes out at the end. And in some instances, the takeout business is strong and others it’s not. So, it’s kind of all over the ballpark. The food serve restaurants are doing relatively well on all of that and the casual dining restaurants are trying, they’re working hard to make it work. I will say just one thing in general about determinants that’s notable. We talked to a lot of our tenants, they are all working very hard to figure out a way to get reopened and get business started again in a fashion that’s safe for their employees and their customers. But what we see are good smart operators trying lots of different things to get themselves open. What we are having any conversations with really are companies that are just throwing in the towel. They’re all working on ways to get their businesses restarted.
Rob Stevenson
And then last one from me. Kevin, what percentage of your tenants are paying electronically by some form versus the sort of old school mailing in a check? And at what point in the month, given the various payment dates, do you really know what you’re going to get paid for that month normally?
Kevin Habicht
Yes, I don’t know the exact answer, but it’s a very high percent that pay electronically in some form or fashion. I’d call it 80%. And usually by the 10th or 15th, we’ve got a good read on how it’s going to go. I mean, obviously, April didn’t follow quite the norm but usually by mid month, we’re — have a good read on that.
Jay Whitehurst
Rob, your question was what was the normal and Kevin’s answer was what’s normal. In April, the discussions occurred all through the month.
Operator
We’ll go next to Spenser Allaway at Green Street.
Spenser Allaway
Maybe first you could just share what portion of your tenant base is currently open. I don’t think we touched on that yet.
Jay Whitehurst
We don’t track that Spenser real closely, because – there’s close, there’s partially open, partially closed and there’s fully open. But anecdotally, we think it’s probably around close to maybe half, half, fully open and another 30% or so percent maybe partially open and quarter maybe fully closed but that’s anecdotal. Those are very rough numbers.
Spenser Allaway
Just that was kind of the premise of my second question, just given the fact that some states are just starting slowly open and left their closure mandates. So I was just curious if you guys were encouraged or in any sense as to what portion of your tenant base maybe able to reopening — reopened given that some of the states lifting up mandates?
Jay Whitehurst
The information that we’ve gotten is, to the extent that states are allowing more customers to come in, they’re positioning themselves to be able to take advantage of that. So yes, you’re right it’s a fluid number that moves. And so I think we expect that will get better if the openings continue.
Spenser Allaway
And just one more if I may, on maybe your assets that you sold during the quarter were vacant, and could you provide the disposition cap rate on those which were occupied?
Kevin Habicht
I think the disposition cap rate we reported at, or Jay mentioned, at 4.7% I believe. And on terms of the 14 properties sold, six were vacant for total proceeds of about $8.4 million.
Jay Whitehurst
And Spenser, there was no cap rate on the vacant…
Operator
We’ll go next to Todd Stender at Wells Fargo.
Todd Stender
[Technical Difficulty] are open, but traffic volumes must be down. Can you guys just comment on that space, just because it’s your largest industry concentration and then maybe any details, or conversations you’re having with tenants? Thank you.
Jay Whitehurst
Todd, I hate to do it to you. But I need you to start your question again, the first half of it was cut off.
Todd Stender
When it comes to convenience stores, just because it’s your largest tenant, largest industry exposure and they’re open, but traffic volumes must be down. Maybe just comment on what you’re seeing, what you’re talking with the tenants about. Any details would be helpful? Thank you.
Jay Whitehurst
Sure. Convenience store business remained one of the much better, more solid businesses during the month of April. And yes, the traffic is down. The number of gallons sold at a convenience store down, but the margin on gasoline was up. And as you may recall, about two-thirds of the profitability of a convenience store is on inside sales. And our convenience stores arr suburban kind of locations where they’re where families go to get their necessities. So the inside sales with the convenience stores in our portfolio has been very solid. So we always felt like that was a good business as well as good real estate. And so far through this pandemic, that’s proven itself to be the case again.
Todd Stender
And then can you share just some thoughts on rent deferrals? Obviously, you’re [pointing] the cash for now. But what are some outcomes that you can see happening? Do you think you’ll get more real estate from tenants, get more term. Maybe describe some of the negotiations that are going on, maybe some the [financial] outcome?
Jay Whitehurst
Well, right now we’re not having those kinds of negotiations about other things that might, other types of currency that might come into play down the road. Right now what we want to do is try to just be a good partner to our longstanding tenants and craft these short duration deferrals simply and quickly with them. Down the road, assuming that we maintain a good relationship with our tenants, as I fully expect we will, then just like always we will be able to have a wide range discussion with our tenants about future business or changes in the lease documents or other elements of back and forth with the tenant as we get down the road. But for the moment, as I said earlier, what we didn’t want to do right now was just punch our tenants in the nose in the face of a disruption that they didn’t cause.
Todd Stender
And then Kevin, you haven’t tapped the line of credits just to sit on cash right now. Do you need to see dislocation in the credit markets to see that and just kind of ride this out with liquidity? And how do you think about tapping the line right now?
Kevin Habicht
Yes, and we got this question in 2008-09 as well and we didn’t draw it down then either. Obviously, the banks had a little bit more liquidity challenges back then than they have today. And we’ve debated internally and we could change your mind but we just don’t feel the need to draw down the bank line today, with $217 million of cash, no material capital spending, new investments or debt obligations, we really don’t have a need to do that. I know a number of REITs have done this and they may have a different view of their liquidity. But for now, we’re we’re good where we are.
Jay Whitehurst
Yes, Todd — and so I think to your point also, we don’t view the capital markets as being wobbly at the moment. And so to the extent we felt like there was an issue about being able to draw on it, we would most likely do that quickly. But we’re watching that but we don’t have that sense at all right now.
Operator
We’ll go next to Joshua Dennerlein at Bank of America.
Joshua Dennerlein
I just wanted to touch base on your comment in the opening remarks about tenants you following in 2Q. Is there any particular tenants that just kind of known move outs or was that something related to the pandemic?
Jay Whitehurst
No, I think it’s just a more general comment that, we have been running at the high end of our occupancy rates for a long time. And so, there may — it seems reasonable to expected in this current environment that that may go down some.
Joshua Dennerlein
So nothing specific there. And then for the one to three months of rent deferrals that you’re granting, kind of what’s driving that range? And then how do you even come up with that range in this environment?
Jay Whitehurst
Well, our approach was that to just do something short term and easy with our good customers at the moment. It’s impossible, where you said, certainly where we said a couple weeks ago and even today to try to figure out when exactly this will start to lift and as Kevin said, what will be the shape of the recovery. So we said, let’s just behave the way National Retail Properties typically behaves, which is take slow, thoughtful, methodical steps along the way. And then the discussion with the tenants is really over just kind of one to three months, because we feel like that’s a good reasonable time period to start with, while everyone tries to figure out how this is going to play itself out a little bit.
Kevin Habicht
Yes, I mean at the end of the day, it’s a judgment call and it’s difficult to know where things are going to play out. But like I said, hopefully, we’ve struck the right balance between doing too much and doing too little. And hopefully, we’re about right but we’ll see.
Joshua Dennerlein
And just maybe one follow up on that, like since we got three months from now and it’s kind of economy pandemic, it’s kind of the same as is that you have another three months of rent deferrals. How does that change kind of the payback? Would we think like it’s pushed out, any general thoughts on that would be helpful…
Jay Whitehurst
It’s a lot of speculation that I’m hesitant to get too definitive about trying to answer that. But to the extent we get to the end of these deferral periods and the tenant’s business is still struggling in a fashion that we need to have a discussion about greater deferrals then we’ll just have those discussions. As I mentioned to one of the other answers, there’s other currencies besides just flat out rent that a landlord can talk to a tenant about to create greater value at the property, either lease term or changing lease bumps, or changing lease documents, or some other things. And so to the extent this extends longer and we have to have second discussion with any tenants, it may be a more wide ranging discussion than the nice simple conversation we wanted to have for this first problem here in April.
Joshua Dennerlein
And one last question from me. For the rent deferral that you have, like the 37% of ADR. Is there any common themes as far as like industry exposure that you saw more requests from or just kind of curious on how that’s playing out?
Jay Whitehurst
Josh, I think if you looked into the list of of lines of trade in our portfolio, you’d see and kind of common sense as to where they were coming from. The sectors that were most affected by the shutdowns and the stay at home orders. So in the restaurant sector and family entertainment and health and fitness and movie theaters, those are the sectors where the tenants needed — definitely had their businesses significantly affected.
Operator
We’ll go next is John Massocca at Ladenburg Thalmann.
John Massocca
Understanding it’s still pretty uncertain times. What would you need to see to kind of maybe reaccelerate your acquisition platform and activity?
Jay Whitehurst
John, there’s no bright line answer to that. We are, as we’ve said, we’re in great financial position to kind of just stay in position and see how this recovery plays itself out. We are anxious to get back to playing offence, I will say. And we paused some of the acquisition deals that were scheduled for the first quarter have been paused, and we’re hopeful that we’d be able to restart those when that moment came where you said okay, this is the — we see the light at the end of the tunnel. But it is definitely more of an art than a hard science on that moment.
John Massocca
And are you seeing maybe, I know you guys have been through a lot of third party transactions. But are you seeing potential for deals out there, potential deal flow either third party kind of transaction market or with some of your traditional sale leaseback partners coming to you?
Jay Whitehurst
John, I’ll say so far we haven’t seen much in the way of busted deals that are coming back at higher cap rates or anything. We still — the 10/31 exchange market where you hit a lot of broker adds, the cap rates are still very low. I think it hasn’t really worked itself into the transaction market yet the effect of all this the big gap between the bid and the ask right I think.
John Massocca
And then with kind of the invoice portfolio. Have you seen any tenants that were looking for maybe kind of opportunistic deferrals back off? And I know its kind of fluid given the timing of expected receipt of rent. But did you have some people who may have been in that 11% bucket that kind of maybe saw the light and ended up paying later in April, or have indicated they’re going to pay in May?
Jay Whitehurst
Short answer to that’s yes. We’ve had — some of the discussions we’ve had with tenants that we felt were able to pay and wanted to see what kind of relief there was available after the conversation was over, they were in the bucket that paid rent. What we want to have is a good, open, candid dialog with each one of our tenants. We’re in this for the long-term with these tenants. And so this feels like the right way to go about this business is to work with them and have honest full conversations through this whole process.
John Massocca
And then one last quick one, if I may, given the backdrop of the pandemic. Has your outlook on leverage changed at all?
Kevin Habicht
No, I don’t think materially. I think we’re comfortable where we are. And obviously, when you come in this you always wish you had less leverage and more than liquidity but unfortunately, we don’t have — we’re fairly conservatively leveraged and have, I think, above average amount of liquidity. So we’re in pretty good shape. And so, I don’t think there’s much we would change in the way we’d operate the balance sheet at this point.
Jay Whitehurst
Our outlook on leverage is what has positioned us to be in such good shape right now for this.
Operator
We’ll go next to Linda Tsai at Jefferies.
Linda Tsai
First, I know that tenant base has changed since then. But could you remind us what trough occupancy was during the financial crisis? And then second, when you think about occupancy going down in 2Q, you’ll likely have a sense of who those tenants are and for those vacancies. Would you think the mix would be more backfill options or dispositions?
Jay Whitehurst
First off, at the depth of the recession 2008, 2009, occupancy dropped in 96.4% and it recovered in a couple of years back into the 98% range. And as to your second question, I think it’s just too early for us to talk about what properties might become vacant in the second quarter, or beyond, or what the right strategy for dealing with those properties. Our long-term philosophy on vacancies is that job one is to re-lease those properties. And so I would expect that that will still be job one for any vacancies that come out of this pandemic.
And as you’ve seen us in the last couple of years, if after significant efforts to re-lease the property, we conclude that we’re better off to sell the vacancy than you would see us to do that. But there’s nothing I think about what’s out there now that would cause us to change our general operating philosophy about how to deal with vacant properties in the portfolio.
Linda Tsai
And then in terms of transactions as the world begins to open up. Are there thoughts on whether deals might be transacted differently, do you think face-to-face is necessary?
Jay Whitehurst
We do think face-to-face is necessary early on in relationships for folks to get to know each other. Down the road, there maybe less travel to visit an existing tenant for the 15th or 20th time, but I think there’s no substitute for folks visiting with each other in the early stages of building a relationship.
Operator
We’ll go next to Michael Gorman at BTIG.
Michael Gorman
Just a quick housekeeping for me. I just wanted to understand, of the 52% of rent collected in April. Did any of that then subsequently asked for deferral. So is there any overlap between the 52 and the 37 that you reported in the release?
Jay Whitehurst
I think there is some overlap. I’m not sure — I don’t think it’s very much. But I suspect there’s some small amount of overlap there.
Michael Gorman
And then just, I guess could you just talk procedurally, because obviously you mentioned during the great recession, went down to 96.4 and…
Jay Whitehurst
We lost you right at the highlight…
Operator
[Operator Instructions] We’ll move on to RJ Milligan with Baird.
RJ Milligan
Just one quick question, most of my questions have been answered, but in terms of the dividend. How do you think about, or have you considered the idea of paying dividend in stock?
Kevin Habicht
I mean, not seriously yet, no. But that’s always an option on the table, but that’s not in our current — on our radar today.
Jay Whitehurst
To the extent, we felt like we weren’t in a good position with the cash, RJ, just be one more thing we would analyze.
RJ Milligan
Would that potentially happened before you reduce the dividend?
Kevin Habicht
I would presume so, if we were going to do that that couldn’t be an intermediate kind of step to take that doesn’t get you to cut the dividend fully. We didn’t do that in ’08-’09. We kept the dividend going up. I know a number of REITs did shift to the stock and cash combination to kind of bridge their way through the ’08-’09 turmoil. But we haven’t thought too much about that at this point.
Operator
[Operator Instructions] We’ll go next to Chris Lucas at Capital One.
Chris Lucas
Two quick ones for me. Jay, you mentioned I guess earlier in reference to the rent collected from investment grade rated tenants was very good. I guess curious just in terms of how you think about your credit profile of future acquisitions, your investment grade rated tenants sort of move up the , if you will?
Jay Whitehurst
Chris, we’re always thinking about and evaluating our acquisition strategy and we will continue to do that. But the focus for us has always been on well located real estate parcels leased to strong tenants where we acquire them at reasonable prices and the tenant pays reasonable rents. And for that, we get a high occupancy rate and a high tenant lease renewal rate. 85% of the time our tenants were renewing the lease without the landlord putting in any TI dollars or other lease incentives.
And so you really should expect that we’re likely to continue to follow that philosophy. The investment grade tenants that we have in the portfolio were not investment grade when we acquired their properties. They were regional tenants that grew and expanded or were acquired by investment grade tenants. And so we’ve got the best of both worlds in that higher better tenants balance sheet along with good real estate at the right price. We still view investment grade tenant credit as expenses and possibly fleeting. And so it’s nice to have it when at this moment, but it so far hasn’t changed our view that we should migrate to more of those properties, which have a lower initial yield, lower growth and lower price per property. All that said, we’re thinking about our strategy every day. But right now I would say, we’re more — I feel more inclined to stick with the strategy that we’ve got.
Chris Lucas
And then just as it relates to the rent deferrals that you’re giving. Are those being tailored to individual tenants based on March or their profit margin, or remaining term? Or are you trying to approach it on a simplified sort of one size fits all approach?
Jay Whitehurst
It’s not one size fits all, but we’ve been trying to keep it simple. And so we don’t have too many sizes, Chris. We’ve got small, medium and large, maybe in sizes. But if we haven’t — we’ve tried to just have direct candid conversations with our tenants to figure out what works for them and what seems to work for us and then structure the deferrals that way.
Operator
We’ll return to Christy McElroy with Citigroup.
Michael Bilerman
It’s Michael Bilerman here for Christy. Just to make sure in terms of your tenant obligations outside of the net lease payment they make to you, I guess what security do you have that the property taxes, insurance, the CapEx and everything is being paid and spent when half of your tenants are not paying rent to you?
Jay Whitehurst
Michael, we’ve got a group that tracks all of that. It is part of our discussion with the tenants at the front end and it is part of the documentation of the of the deferral. So we’ve got the — we’re tracking it but it is clearly those taxes, maintenance, insurance are clearly sold out as being the tenant’s continued responsibility.
Michael Bilerman
But you only got 52% of the rents in April, 37% have asked for deferral, some of the 37 is in the 52 but there’s still — you still got 15% of tenants that didn’t pay you rent, haven’t asked for deferral, maybe that’s even up to 20%. How do you know that all of their other obligations, which could become your obligation, have actually been paid?
Jay Whitehurst
Like I said, we’ve got a lease servicing group that tracks those responsibilities.
Michael Bilerman
But at what point do they come, what point you find out that they haven’t paid? I must say there’s the group of 20% your tenants that have not paid your rent or not working deferral, just taking the simple math of the 52 plus the 37 and some of the 37 being in the 52. How do you — when will you know that those tenants that haven’t asked you for deferral, haven’t paid your rent, haven’t paid their mobile packs bill, haven’t paid their insurance bill? I mean what point does it come back that those are obligations that you are then going to have to fund?
Jay Whitehurst
We typically find out after the tax bill is due, we are part of the notice process for that. So, we deal with large tenants that we think are highly likely to honor the commitments that they’re making to us. So I understand what you’re saying. But we’ve got the tenant’s obligation to do it and we find out when those bills aren’t paid directly from the taxing authority or the insurance vendor.
Kevin Habicht
And if it’s a smaller tenant and it’s one we’re worried about what you’re talking about, we may and it’s not often but we may structure an escrow situation where those funding for those items get escrowed on a monthly basis rather than waiting to the end of the year.
Michael Bilerman
It’s just the matter if your tenants have, half of your tenants have decided not to fulfill their contractual obligation with you, who’s to say that they’re not making the same decision with other vendors of theirs. And so I think that’s where it starts to unravel pretty quickly if those obligations become part of yours from an OpEx perspective. It sounds like what are your more over next coming quarters, which then sort of takes me to my second question, which is the dividend. And I get the fact that your balance sheet is in a better shape. I understand you have access to liquidity. I understand the 30 year history. I understand where the payout ratio was. But to your own admission and everyone dealing with this, we don’t know how long, we don’t know how deep, we don’t know what reopening is going to be like, we don’t know what the re-infection rate is going to be in the fall. There may come a time where we look in hindsight that you would have preferred to have that cash in the company. And because your dividend is an annual commitment based on annual taxable net income, not quarterly, I guess I’m struggling to understand why even pay out a cash dividend on a quarterly basis when only half of your tenants are paying you rent, right? You may look back on this and say, oh God, I wish I had that 2Q and 3Q dividend payment, because we’re going to have to adjust our policy going forward. And that cash would have been better staying within the enterprise for shareholders rather than being paid out.
Jay Whitehurst
Michael, it’s something that we think about long and hard. We are talking about one month, the month of April. And I’m sure what you would say and as well as [May], because the deferrals are going to be call it two months on average. But for a couple of months, we do feel like we’re in a solid enough liquidity position to make the judgment that let’s see how these next couple of months play out. Certainly, always keeping in mind, do we need to change our dividend policy for the next quarter, at the next quarter. But after just one month, it seems like too soon to make a dramatic change to a longstanding dividend policy.
Kevin Habicht
Yes, I mean as you said, our dividend payout ratio, liquidity, our balance sheet leverage metrics, we think afford us the ability to buy those sometime to see how it plays out before making a rash one quarter, two quarter decision, about the dividend policy. And sure if the shutdown lasts many more months and it’s everything’s worse than what folks are currently anticipating and you can always look back and say, I wish changed things sooner. But we’re just not there today. We don’t have that visibility. And we’ll see how it plays out.
Michael Bilerman
But to the same token, if you can’t even forecast your earnings for the rest of the year. How can you pay a quarterly dividend and get the cash out of the company? I think that’s the struggle I think from my vantage point is, there’s so much uncertainty about your forecasting ability to pay out cash that you may have wanted to have 12 months from now, or six months from now, or not even be required to pay it out, because your taxable income maybe lower, or will be lower. That’s to me maybe short sighted.
Kevin Habicht
We totally understand what you’re saying. And at the end of the day, it’s judgement call and it’s not an easy one at this point in time but we’re comfortable where we are.
Operator
We’ll take our final question as a follow up with Spenser Allaway at Green Street.
Spenser Allaway
Just one more, so just curious. So the deals that you went back out of in the first quarter. Was this decision primarily due to the fact that the tenants were in industries that you assumed would perhaps be disproportionately hurt during this pandemic? Or was it more so to do with preserving cash at this point?
Jay Whitehurst
Spenser, I wouldn’t say we backed out them, I’d say we paused them. And it was completely due to our desire to marshal our cash. As the end of the quarter approached, we said we have a few significant deals but we said, almost on Michael’s questions moment ago, we said when we look back later and say we should have preserved that money from these acquisitions and in that instance, we say yes let’s preserve the cash.
Operator
And with no other questions holding, I’ll turn the conference back to management for any additional or closing comments.
Jay Whitehurst
All right. We thank you for joining us this morning. Have a good day. Bye now.
Operator
Ladies and gentlemen, that will conclude today’s conference. You may disconnect at this time and have a great day.
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