Logo of jester cap with thought bubble.

Image source: The Motley Fool.

National Retail Properties Inc (NYSE:NNN)
Q1 2020 Earnings Call
May 4, 2020, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the National Retail Properties First Quarter 2020 Operating Results Conference Call. All lines have been placed on a listen-only mode and the floor will be opened for your questions and comments following the presentation.

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.

Julian E. Whitehurst -- President and Chief Executive Officer

Thanks, Jes. 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 coronavirus and the related economic dislocation across the country. We also want to offer our profound thanks to the medical professionals and first responders who are putting themselves in harm's way every day in order to keep the rest of us safe and healthy.

With that 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 the 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about the depth and duration of the economic turmoil that almost all companies are enduring at the moment, we have withdrawn our guidance for 2020 results. We hope 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 consist 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 tenants' business success once this disruption is passed. As we've often said, National Retail Properties is at its heart, a 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 cap 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 the 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 agree to deferral arrangements, we are pursuing our legal remedies. Many of those cases involved 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 insisted 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 dialog 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 with the first quarter behind us, you see National Retail Properties conserving its capital, working with its tenants to address the reality of their current business 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 -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you, Jay. And as usual, I'll start with my usual customary statement that we may make certain statements that 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, headlines from this morning's press release report 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 is 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 with 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 a 2.5% coupon plus $300 million with a 30-year maturity and a 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 till 2022.

I will note that first quarter interest expense include $2.3 million of accelerated note discount and no cost amortization as a result of that early 2022 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 down our next debt maturity to 2023.

We ended the quarter of $217 million of cash on the balance sheet and we have no amounts 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 times for the first quarter. If you excluded the $2.3 million of note discount and note cost amortization, those two metrics would have been 5.0 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. Till 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 are dealing with these deferrals on an individual tenant basis generally, as Jay mentioned, they involve one to three months of rent deferral with that deferred rent to be repaid over a period of months from late 2020 to late 2021.

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 struck a reasonable balance.

As we work through what undoubtedly will be a difficult 2020 for the global economy, we continue to work to give NNN the best opportunity to succeed in the coming years.

And Jes with that, we will open it up to any questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions]. We'll move first to Collin Mings at Raymond James.

Collin Mings -- Raymond James & Associates, Inc. -- Analyst

Hey, good morning guys.

Julian E. Whitehurst -- President and Chief Executive Officer

Hey.

Collin Mings -- Raymond James & Associates, Inc. -- Analyst

First question question from me, just -- you highlighted the dividend track record, but also acknowledged it was an 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 -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. 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 a 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 of weeks ago and will evaluate things as we go. Well, 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 the current downturn is that it's driven by a healthcare that's more difficult to handicap how it will play out. But hopefully, we're going to gain from 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.

Julian E. Whitehurst -- President and Chief Executive Officer

And just to highlight again, Colin, we are in a very, very strong liquidity position that helped to make that decision a lot easier recently.

Collin Mings -- Raymond James & Associates, Inc. -- Analyst

Got it. Helpful color there. And Jay, I recognize 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.

Julian E. Whitehurst -- President and Chief Executive Officer

Well, Colin, there's no real color I can give you on May. I think it's -- if you think about it though, to the extent you've agreed to rent deferrals in April and May, then you would expect that the May rent will be deferred. One thing to follow up on your question 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 a little bit in his, we are 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 -- Raymond James & Associates, Inc. -- Analyst

Jay, just to that point, you've negotiated 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 just simply just pushing up the payment for now?

Julian E. Whitehurst -- President and Chief Executive Officer

Generally, Collin, what we wanted to do in 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 on to our tenants, we just wanted to work with them at the moment and deal with these short-term deferrals.

Collin Mings -- Raymond James & Associates, Inc. -- Analyst

Thank you. Stay safe.

Julian E. Whitehurst -- President and Chief Executive Officer

Thanks buddy.

Operator

We'll go next to Christy McElroy at Citigroup.

Christy McElroy -- Citigroup Inc -- Analyst

Hey, good morning. Thanks guys. 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 toward non-payment of rent, how do you think about the potential for needing to convert to cash basis converting more during the quarter.

Kevin Habicht -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. No, there wasn't any notable write-off of accrued rent in the first quarter. Obviously given we have a meaningful amount of deferrals and process for second quarter straight-line rents obviously will be materially higher going forward.

And sorry, what was the last part of that question.

Christy McElroy -- Citigroup Inc -- Analyst

Well, I guess how you're thinking about the potential for needing to convert more [Speech Overlap] cash basis. So as we think about the second quarter and you had 48% non-payment of rent, how are you thinking about the potential for uncollectability probability [Speech Overlap].

Kevin Habicht -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. To your point at the moment, we don't think that it 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 accrued and paid in accordance with the deferral plan.

Christy McElroy -- Citigroup Inc -- Analyst

Okay. 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, I am 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.

Julian E. Whitehurst -- President and Chief Executive Officer

Yeah. The vast majority of those are still paying for the expenses generally and our deferral agreements were 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 would a tenant 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 is 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 -- Citigroup Inc -- Analyst

Okay. And that's helpful. 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 tenant relationships and you need to be collaborative. Can you kind of break out that 48%. I know you've had 37% of your rent requesting deferrals, but also as you pointed out, a lot of these are national tenants that can pay rent, right. So how would you break out that 48% between what you're actually having negotiations on deferrals versus those that you're playing more harder ball, right, in terms of ultimately wanting to collect those rents and you talked about pursuing legal remedies.

Julian E. Whitehurst -- President and Chief Executive Officer

Yeah. Christy, I guess the way -- we haven't quantified the answer to your question, but I think that if you look at the tenants that didn't pay and we don't have deferral arrangements with, I feel like the -- anecdotally I think the vast majority of that -- our 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 and optimistic may be to go too strong of a word at the moment, but certainly hopeful, probably optimistic that a lot of that will get -- turn into a payment at some point.

Operator

We'll go next to Vikram Malhotra at Morgan Stanley.

Vikram Malhotra -- Morgan Stanley -- Analyst

Thanks for taking the questions. Obviously, very challenging time 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 companies, I just encourage you would be as you really good to get updates on May and June either way, so to the extent you can give any color that would be helpful over the next few months.

Just on the deferrals. You talked about having said like to push 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 have not paid it didn't seem like they will suddenly come around in the near term and pay.

Julian E. Whitehurst -- President and Chief Executive Officer

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 -- Morgan Stanley -- Analyst

Okay, fair enough. And then just on any tenants that may have announced bankruptcy or some sort of restructuring. I know Chuck E. Cheese's, there was an article out that they may be in some sort of restructuring. You did call out a few tenants last quarter, any updates on those, any thoughts around Chuck E. Cheese's specifically.

Julian E. Whitehurst -- President and Chief Executive Officer

No, nothing beyond kind of what's in the news there.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay, fair enough. 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.

Julian E. Whitehurst -- President and Chief Executive Officer

Yeah. 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 -- Executive Vice President, Chief Financial Officer and Treasurer

And I think what we're hoping and I think everybody hopes is that in the matter of months, hopefully not too many, we will all have greater visibility on how things are going to shake out. And then once you have a better sense for that, then we can 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 dividend.

Vikram Malhotra -- Morgan Stanley -- Analyst

Great. And sorry, last one if I may. Just on some color around the tenants requesting deferral, the types of tenants and specifically, I think you have 18% of your tenants are true investment grade, have that group actually paid rent.

Julian E. Whitehurst -- President and Chief Executive Officer

Yeah. We've had a very high success rate on getting paid by our investment grade tenants.

Vikram Malhotra -- Morgan Stanley -- Analyst

Great. Thank you.

Operator

We'll go next to Brian Hawthorne with RBC Capital.

Brian Hawthorne -- RBC Capital Markets -- Analyst

Hi, just one question from me. All the tenants that are paying rent, are they paying full month rent or any of them paying partial rents.

Julian E. Whitehurst -- President and Chief Executive Officer

All of them are paying full rent. Yeah.

Brian Hawthorne -- RBC Capital Markets -- Analyst

Okay. Thank you, guys.

Operator

We'll go next to Rob Stevenson at Janney.

Robert Stevenson -- Janney Montgomery Scott LLC -- Analyst

Good morning, guys. On the 11% non-collections and non-deferrals, I mean obviously AMC is a well-publicized non-payer, but can you talk about what lines of trade that 11% is primarily aggregated in.

Julian E. Whitehurst -- President and Chief Executive Officer

Rob, just these are different tenants that kind of span 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's no -- other than being in industries where the business is pretty much shut down, I don't think there's any real common characteristic.

Robert Stevenson -- Janney Montgomery Scott LLC -- Analyst

Okay. And then when you look at the two different lines of trade in restaurants, I mean both full service and limited service, do you -- in 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 they are sort of falling and what's their ability to pay rent if the in-location dining does not come back very quickly.

Julian E. Whitehurst -- President and Chief Executive Officer

Yeah. I think it's too early to try to project where it comes out at the end and in some instances, the take-out business is strong and others it's not, it's kind of all over the ballpark. The quick-serve restaurants are doing relatively well on all of that and the casual dining restaurants are trying, they are working hard to make it work. I will say just one thing in general about the tenants 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 our good smart operators trying lots of different things to get themselves open. What we aren't having any conversations with really are with companies that are just throwing in the towel. They are all working on ways to get their businesses restarted.

Robert Stevenson -- Janney Montgomery Scott LLC -- Analyst

Okay. 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 -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, I don't know the exact answer but it's a very high percent that pay electronically in some form or fashion, I 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 will have a good read on that.

Julian E. Whitehurst -- President and Chief Executive Officer

Yeah. Rob, your question was, what was the normal and that's Kevin's answer, what's normal. In April, discussions occurred all through the month.

Robert Stevenson -- Janney Montgomery Scott LLC -- Analyst

Okay. All right. Thanks guys.

Operator

We'll go next to Spenser Allaway at Green Street.

Spenser Allaway -- Green Street Advisors, LLC -- Analyst

Hi, good morning guys.

Julian E. Whitehurst -- President and Chief Executive Officer

Hey.

Spenser Allaway -- Green Street Advisors, LLC -- Analyst

Maybe first, you can just share what portion of your tenant base is currently open. I don't think we've touched on that yet.

Julian E. Whitehurst -- President and Chief Executive Officer

We don't track that Spenser real closely, because there is closed -- there is partially open, partially closed and there is fully open but I -- anecdotally we think it's probably around close to maybe half fully open and another 30% or so may be partially open and a quarter may be fully closed, but that's anecdotal. Those are very rough numbers.

Spenser Allaway -- Green Street Advisors, LLC -- Analyst

Okay. Just kind of the promise of my second question, just given the fact that some states are just starting to slowly open their closure mandates. I was just curious if you guys were encouraged or at any sense as to what portion of your tenant base may be able to rere-open, given some of the states are lifting up mandates?

Julian E. Whitehurst -- President and Chief Executive Officer

Yeah. No, we are -- our tenants -- the information that we've gotten is there to the extent the states are allowing more customers to come in -- they are positioning themselves to be able to take advantage of that. So yeah, you're right, it is a fluid number that moves. And so I think -- we expect that will get better if the openings continue.

Spenser Allaway -- Green Street Advisors, LLC -- Analyst

Okay, great. And just one more if I may. How many of 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 -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. I think the disposition cap rate we reported at or Jay mentioned at 4.7% and in terms of the 14 properties sold, six were vacant for a total proceeds of about $8.4 million.

Spenser Allaway -- Green Street Advisors, LLC -- Analyst

Okay. Thank you, guys.

Julian E. Whitehurst -- President and Chief Executive Officer

Yeah. And Spenser, there was no cap rate on the vacant asset.

Spenser Allaway -- Green Street Advisors, LLC -- Analyst

Yeah. Of course. Yeah.

Operator

We'll go next to Todd Stender at Wells Fargo.

Todd Stender -- Wells Fargo Securities, LLC -- Analyst

Stores 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 detailed conversations you're having with tenants. Thanks.

Julian E. Whitehurst -- President and Chief Executive Officer

Todd, I hate to do it you, but I need you to start your question again. The first half of it was cut off.

Todd Stender -- Wells Fargo Securities, LLC -- Analyst

Sorry, a little mumbling on my end. When it comes to convenience stores, just because it's your largest tenant -- largest industry exposure, never open, but traffic volumes must be down, maybe just comment on what you're seeing, what you're talking to the tenants about any details would be helpful. Thank you.

Julian E. Whitehurst -- President and Chief Executive Officer

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 is down, but the margin on gasoline was up. And as you may recall, about two-thirds of the profitability of the convenience store is on inside sales and our convenience stores are suburban kind of locations where there were families go to get their necessities. So the inside sales with 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 be the case again.

Todd Stender -- Wells Fargo Securities, LLC -- Analyst

Thanks. And then can you share just some thoughts on rent referrals. Obviously, you're punching the cash for now. But what are some outcomes that you can see happening. 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 of the [Speech Overlap].

Julian E. Whitehurst -- President and Chief Executive Officer

All right. Right now we're not having those kind 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 long-standing 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 of 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 this face of a disruption that they didn't cause.

Todd Stender -- Wells Fargo Securities, LLC -- Analyst

Okay. And then Kevin, you haven't tapped the line of credit, just to sit on cash right now. Do you need to see dislocation in the credit markets to do that and just kind of ride this out with liquidity, how do you think about tapping the line right now.

Kevin Habicht -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. And we got this question in 2008-'09 as well, we didn't draw 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 good where we are. Yeah.

Julian E. Whitehurst -- President and Chief Executive Officer

Todd, I think to your point, also we don't view the capital markets being wobbly largely 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.

Todd Stender -- Wells Fargo Securities, LLC -- Analyst

Good. Thank you. Stay well.

Julian E. Whitehurst -- President and Chief Executive Officer

Thanks buddy.

Operator

We'll go next to Joshua Dennerlein at Bank of America.

Joshua Dennerlein -- Bank of America Merrill Lynch -- Analyst

Hey Jay, hey Kevin. Hope you guys are doing well. I just wanted to touch based on your comment in the opening remarks about occupancy falling in 2Q. Is there any particular tenants that just kind of known move-outs or was that something related to the pandemic.

Julian E. Whitehurst -- President and Chief Executive Officer

No, I think it's just a more general comment that -- we have been running at the high end of our occupancy rate for a long time and so there may -- it seems reasonable to expect that in this current environment it may go down some.

Joshua Dennerlein -- Bank of America Merrill Lynch -- Analyst

Okay, so nothing specific there. And then for the one to three months 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.

Julian E. Whitehurst -- President and Chief Executive Officer

Yeah. Well, our approach was that to just do something short-term and easy with our good customers at the moment, it's impossible where we sat, certainly where we sat a couple of 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 -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. I mean at the end of the day, it's a judgement 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 well and hopefully we're about right, but we'll see.

Joshua Dennerlein -- Bank of America Merrill Lynch -- Analyst

Okay, all right. That makes sense. And just maybe one follow-up on that. Like say, if we get three months from now and kind of economy pandemic, it's kind of the same as it is and you have to say, do another three months of rent deferrals, how does that change kind of the payback, would we think like it's pushed out -- sorry, any general thoughts on that would be.

Kevin Habicht -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. That's just -- 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 tenants 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 in one of the other answers, there is other currencies besides just flat-out rent that a landlord can talk to a tenant about to create greater value of the property either lease term or change in lease bumps or change in lease document or some other things. And so to the extent this extends longer and we have to have the 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 -- Bank of America Merrill Lynch -- Analyst

Okay. And one last question from me. For the rent deferral that you, like the 37% of ABR, are 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.

Julian E. Whitehurst -- President and Chief Executive Officer

Josh, I think if you look through the list of lines of trade in our portfolio, you'll see it would be 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, in the family entertainment and health and fitness and movie theaters, those are the sectors where the tenants needed -- definitely had their businesses significantly affected.

Joshua Dennerlein -- Bank of America Merrill Lynch -- Analyst

Got it. All right. Thanks guys. [Speech Overlap]

Julian E. Whitehurst -- President and Chief Executive Officer

All right, Josh. You too.

Operator

We'll go next to John Massocca at Ladenburg Thalmann.

John Massocca -- Ladenburg Thalmann & Co. Inc. -- Analyst

Good morning.

Julian E. Whitehurst -- President and Chief Executive Officer

John.

John Massocca -- Ladenburg Thalmann & Co. Inc. -- Analyst

Understanding, it's still pretty uncertain times, what would you need to see to kind of maybe reaccelerate your acquisition platform and activity.

Julian E. Whitehurst -- President and Chief Executive Officer

John, there is no bright line answer to that. As we've said, we are in great financial position to kind of just stay in position and see what, how this recovery plays itself out. We are anxious to get back to playing offense I will say and we've 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 OK, this is -- 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 -- Ladenburg Thalmann & Co. Inc. -- Analyst

I mean are you seeing maybe -- I know you guys don't do a lot of third-party transactions, but are you seeing potential for deals out there, potential deal flow either in the third-party and transaction market or with some of your traditional net sale leaseback partners coming to you.

Julian E. Whitehurst -- President and Chief Executive Officer

Yeah. John, I will 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 [Phonetic] exchange market where you get a lot of broker and the cap rates are still, it's still very low. I think it hasn't really worked itself into the transaction market yet, the effect of all this. There is a big gap between the bid and the ask right now I think.

John Massocca -- Ladenburg Thalmann & Co. Inc. -- Analyst

Okay. And then it was kind of the in-place portfolio. Have you seen any tenants that we're looking for may be kind of opportunistic deferrals back off, I mean it's kind a fluid given the timing of expected receipt of rent, but did you have some people who -- they 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.

Julian E. Whitehurst -- President and Chief Executive Officer

A short answer to that is yes. We've had -- some of the discussions we've had with tenants that have, 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 pay rent. What we want to have is a good open candid dialog with each one of our tenants. We are 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 -- Ladenburg Thalmann & Co. Inc. -- Analyst

Okay. 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 -- Executive Vice President, Chief Financial Officer and Treasurer

No, I don't think materially. I think we're comfortable where we are and obviously when you come in on this, you always wish you had less leverage and more liquidity, but fortunately 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 I don't think there's much we would change in the way we operate the balance sheet at this point. Our outlook on leverage is what has positioned us to be in such good shape right now for this.

John Massocca -- Ladenburg Thalmann & Co. Inc. -- Analyst

All right. That's it from me. Thank you guys very much for taking the question.

Julian E. Whitehurst -- President and Chief Executive Officer

Thanks, John.

Operator

We'll next to Linda Tsai at Jefferies.

Linda Tsai -- Jefferies LLC -- Analyst

Hi. First, I know the tenant base has changed since then, but could you remind us what cost occupancy was during the financial crisis. And then second, when you think about occupancy going down in 2Q, do you likely have a sense of who those tenants are and for those vacancies, would you think the mix would be more backfill options or disposition.

Julian E. Whitehurst -- President and Chief Executive Officer

First off, at the depths of the recession in 2008-'09 occupancy dropped to 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 these properties. Our long-term philosophy on vacancies is that job one is to release those properties. And so I would expect that our -- 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 release the property, we conclude that we're better off to sell the vacancy, then you would see us do that, but there is 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 -- Jefferies LLC -- Analyst

Thanks for that. 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.

Julian E. Whitehurst -- President and Chief Executive Officer

We do think face to face is necessary early on in relationships for folks to get to know each other. Down the road, there may be less travel to visit an existing tenant for the 15th or 20th time, but I think there is no substitute for folks visiting with each other in the early stages of building a relationship.

Linda Tsai -- Jefferies LLC -- Analyst

Thanks for taking my questions.

Operator

We'll go next to Michael Gorman at BTIG.

Michael Gorman -- BTIG -- Analyst

Yeah, thanks. Good morning. Just a quick housekeeping from me. I just wanted to understand of the 52% of rent collected in April, did any of that then subsequently ask for deferral. So is there any overlap between the 52% and the 37% that you reported in the release.

Kevin Habicht -- Executive Vice President, Chief Financial Officer and Treasurer

I think there is some overlap. I'm not sure -- I don't think it's very much, but I expect there is some small amount of overlap there.

Michael Gorman -- BTIG -- Analyst

Okay. And then just I guess could you just talk procedurally because obviously you mentioned during the great recession it went down to 96.4% -- [Technical Issues]

Julian E. Whitehurst -- President and Chief Executive Officer

Hello. We lost you right at the highlight.

Operator

[Operator Instructions] We'll move on to RJ Milligan with Baird.

RJ Milligan -- Robert W. Baird & Co. -- Analyst

Yeah. Hey guys, 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 -- Executive Vice President, Chief Financial Officer and Treasurer

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. Yeah. 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 -- Robert W. Baird & Co. -- Analyst

Would that potentially happen before you reduce the dividend.

Kevin Habicht -- Executive Vice President, Chief Financial Officer and Treasurer

I would presume so. Yes, we want to do that. That could be an intermediate kind of step to take, but 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 cash combination, the kind of bridge their way through the '08-'09 turmoil, but we haven't talked too much about that at this point.

RJ Milligan -- Robert W. Baird & Co. -- Analyst

Okay, that's all I have. Thanks guys.

Julian E. Whitehurst -- President and Chief Executive Officer

Thanks, RJ.

Operator

[Operator Instructions] We'll go next to Chris Lucas at Capital One.

Christopher Lucas -- Capital One Financial -- Analyst

Hey, good morning guys. Two quick ones from me. Jay mentioned I guess earlier in the reference to the rent collected from investment grade rated tenants was very good. I guess I'm curious just in terms of how you think about your credit profile or future acquisitions, do investment grade rated tenants sort of move up the ladder, if you will.

Julian E. Whitehurst -- President and Chief Executive Officer

Yeah. Chris, we're always thinking about 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 at least where we acquire them at reasonable prices and the tenant pays reasonable rents and for that we get high occupancy rate and a high tenant lease renewal rate, 85% of the time our tenants will be 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 the higher, a better tenants balance sheet along with good real estate at the right price. But we still view investment grade tenant credit and as expensive and possibly fleeting. And so it's nice to have it when -- at this moment, but it's 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 of that said, we're thinking about our strategy every day. And so, but right now, I would say I feel more inclined to stick with the strategy that we've got.

Christopher Lucas -- Capital One Financial -- Analyst

Okay, great. Thanks. And then just as it relates to the rent deferrals that you're giving, are those being tailored to individual tenants based on March [Phonetic] or the other profit margin and remaining term or are you trying to approach it on a simplified sort of one-size-fits-all approach.

Kevin Habicht -- Executive Vice President, Chief Financial Officer and Treasurer

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, we have got small, medium and large maybe in sizes. But 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.

Christopher Lucas -- Capital One Financial -- Analyst

Okay, great. Thank you. That's all I have this morning.

Operator

We will return to Christy McElroy with Citigroup.

Michael Bilerman -- Citigroup Inc. -- Analyst

Yeah. It is Michael Bilerman here with Christy. Just in terms of your tenants obligations outside of the net lease payments they make to you, I guess what security do you have that the property taxes, insurance, the capex that everything is being paid and spent when half of your tenants are not paying rent to you.

Julian E. Whitehurst -- President and Chief Executive Officer

Yeah. 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 deferral. So we've got the -- we are tracking it, but it is clearly those taxes, maintenance, insurance are clearly spelled out as being the tenant's continued responsibility.

Michael Bilerman -- Citigroup Inc. -- Analyst

Right. But if you only got 52% of the rents in April, 37% have asked for deferral, some of the 37% is in the 52%, but there is still, you still got 15% of tenants that didn't pay you rent, haven't asked for a 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.

Julian E. Whitehurst -- President and Chief Executive Officer

Yeah. We like to say, we've got a lease servicing group that tracks those responsibilities.

Michael Bilerman -- Citigroup Inc. -- Analyst

But at what point do they come, what point do you find out that they haven't paid -- let's say there is a group of 20% of your tenants that have not paid your rent or not working deferral by just taking the simple math of 52% plus this 37% and some of the 37% being in the 52%. When will you know that those tenants that haven't asked you for deferral haven't paid your rent, haven't paid their local tax bill, haven't paid their insurance bill. I mean at what point does it come back, because those are obligations that you were then going to have to fund.

Julian E. Whitehurst -- President and Chief Executive Officer

Yeah. Michael, 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 their tenants 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 -- Executive Vice President, Chief Financial Officer and Treasurer

And it is Kevin. And if it's a smaller tenant and it's one we are 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 -- Citigroup Inc. -- Analyst

All right. It's just a matter of your tenants -- 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, right. And so I think that's where -- it starts to unravel pretty quickly if those obligations become part of yours from an OpEx perspective, but it sounds like we'll hear more over the next coming quarters, which I think sort of takes me to my second question, which is the dividend and look, 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 reinfection rate is going to be in the fall. There may come a time when we look at 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 payout 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, you know what, 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.

Julian E. Whitehurst -- President and Chief Executive Officer

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 is, 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 are 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 and at the next quarter, but after just one month, it seems like too soon to make a dramatic change to a long-standing dividend policy.

Kevin Habicht -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. I mean as you said, our dividend payout ratio, liquidity, our balance sheet leverage metrics we think afford us the ability to buy us some time to see how it plays out before making a rash one quarter two quarter decision about the dividend policy and look if the shutdown lasts many more months and if everything is worse than what folks are currently anticipating and you can always look back say, we should have 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 -- Citigroup Inc. -- Analyst

All Right. But to your -- the same token, if you can't even forecast your earnings for the rest of the year. how can you pay a quarterly dividend, get the cash out of the company. I think that's the struggle I think from my vantage point is there is 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 net income may be lower -- will be lower that to me maybe short side.

Julian E. Whitehurst -- President and Chief Executive Officer

We totally understand what you're saying. At the end of the day, it's the judgment call and it's not an easy one at this point in time, but we're comfortable where we are. Yeah.

Operator

We'll take our final question as a follow-up with Spenser Allaway at Green Street.

Spenser Allaway -- Green Street Advisors, LLC -- Analyst

Hi guys. Sorry, just one more. So just curious, of the deals that you backed out off in the first quarter, was this decision primarily due to the fact that the tenants or industries that you assume would perhaps being disproportionately hurt during the pandemic or is it more so to do with preserving cash at this point.

Julian E. Whitehurst -- President and Chief Executive Officer

Yeah. Spenser, I wouldn't say we backed out of 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 approach we said, we have a few significant deals, but we said almost all on Michael's question just a 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 said, yes, let's preserve the cash.

Spenser Allaway -- Green Street Advisors, LLC -- Analyst

Okay, great. Thank you for the color.

Operator

And with no other questions holding. I'll turn the conference back to management for any additional or closing comments.

Julian E. Whitehurst -- President and Chief Executive Officer

All right. We thank you for joining us this morning and have a good day. Bye now.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Julian E. Whitehurst -- President and Chief Executive Officer

Kevin Habicht -- Executive Vice President, Chief Financial Officer and Treasurer

Collin Mings -- Raymond James & Associates, Inc. -- Analyst

Christy McElroy -- Citigroup Inc -- Analyst

Vikram Malhotra -- Morgan Stanley -- Analyst

Brian Hawthorne -- RBC Capital Markets -- Analyst

Robert Stevenson -- Janney Montgomery Scott LLC -- Analyst

Spenser Allaway -- Green Street Advisors, LLC -- Analyst

Todd Stender -- Wells Fargo Securities, LLC -- Analyst

Joshua Dennerlein -- Bank of America Merrill Lynch -- Analyst

John Massocca -- Ladenburg Thalmann & Co. Inc. -- Analyst

Linda Tsai -- Jefferies LLC -- Analyst

Michael Gorman -- BTIG -- Analyst

RJ Milligan -- Robert W. Baird & Co. -- Analyst

Christopher Lucas -- Capital One Financial -- Analyst

Michael Bilerman -- Citigroup Inc. -- Analyst

More NNN analysis

All earnings call transcripts

AlphaStreet Logo