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Spirit Realty Capital Inc (NYSE:SRC)
Q1 2020 Earnings Call
May 5, 2020, 5:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Spirit Realty Capital First Quarter 2020 Earnings Conference Call.

At this time, I would like to turn the conference over to Pierre Revol, SVP of Strategic Planning and IR. Please go ahead.

Pierre Revol -- Senior Vice President, Head of Strategic Planning and Investor Relations

Thank you, operator, and thank you, everyone, for joining us today. Presenting on today's call will be President and Chief Executive Officer, Mr. Jackson Hsieh; Mr. Michael Hughes, CFO; and Ken Heimlich, Head of Asset Management, will be available for Q&A. Before we get started, I would like to remind everyone that this presentation contains forward-looking statements. Although the company believes these forward-looking statements are based upon reasonable assumptions, they are subject to known and unknown risk and uncertainties that can cause actual results to differ materially from those currently anticipated due to a number of factors. I'd refer you to the safe harbor statement in today's earnings release and supplemental information as well as our most recent filings with the SEC for a detailed discussion of the risk factors relating to these forward-looking statements. This presentation also contains certain non-GAAP measures. Reconciliation of non-GAAP financial measures to most directly comparable GAAP measures are included in today's release and supplemental information furnished to the SEC under Form 8-K. Both today's earnings release and supplemental information are available on the Investor Relations page of the company's website.

With that, I'm now pleased to introduce Mr. Jackson Hsieh. Jackson?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Thanks, Pierre, and good afternoon, everyone. So as a follow-up to our 1-hour and 10-minute pre-release Q1 2020 earnings call back on April 13, we wanted to share just a few comments since that call. I'll take a few questions. So just a few comments. But today, I'll tell you, I feel better about the health of our portfolio and tenants since our last April 13 update call. As you've read, we've collected over 70% of contractual rent for the month of April. nine of our top 10 tenants and 17 of our top 20 tenants paid full April By the way, that was the high end of the range with what we said was what we would collect back in our April 13 call. We've see continued trend of some of our smaller tenants being able to secure loans from the government. We've seen an increase in terms of properties opened and partially opened currently at 77% versus 72% back on our call on April 13. We've also processed the vast majority that went deferral request since our last pre-release call on the 13th. And finally, I'm happy to say we closed another $50 million of term loan financing through our quarter and getting total to $350 million.

So with that, operator, we can open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] And we will go first to Greg McGinniss, Deutsche Bank.

Greg McGinniss -- Deutsche Bank -- Analyst

In regards to collections in May, expecting a more difficult month. Are you expecting similarly? And then any thoughts as to what the incremental impact may be presume.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Sure. I think you broke up a little bit just on the connection, but I think you were asking about May. But we're going to $1 million June. So we don't really don't know at this point. I would say we collected 70% so far. Things have improved a lot since we started this process a couple of weeks ago. My guess is that May will be slightly lower than April in terms of rent collection. But a lot of these programs that have been put in place have improved the tenants that we're dealing with as well as some of these openings in various states have also accelerated. So given us some encourage in size.

Greg McGinniss -- Deutsche Bank -- Analyst

Okay. And just a follow-up there. So it's 54% of the deferrals granted were one month deferrals. Is that kind of still the key?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

When we gave that update back then, I would just describe it as I think if you've heard some of these other calls, they've been in the range of one to three months that generally pay back over a 12-month period. We've tried to keep these deferrals simple and through the lease itself. So I'd say that the average and there were a number of them, the last time we've talked about in the 1-month category. And I'd say the average duration is probably just slightly over two years to kind of look at the total complexion of it. And we're still still dealing with some tenants now. So I don't want to get too yet because these are on a one-off case-by-case basis. But let's say like the average the weighted average would be at just a little north of two months.

Greg McGinniss -- Deutsche Bank -- Analyst

Thank you.

Operator

And we'll hear next from Anthony Paolone of JPMorgan.

Anthony Paolone -- JPMorgan -- Analyst

Thanks. Just on the fact that it sounds like you've gotten given the majority of these deferrals, as you mentioned. Can you just like how do you get my around the idea that like you have about 30% of your tenants not pay rent after a few weeks of disruption to the business. But there's a high comfort level that in the next six months or 12 months, whether they're going to be able to come up with enough to kind of get that all to get these deferrals all paid back? And just walk us through like that walk and how you get to that comfort level?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Yes. I mean, maybe just like to I kind of wanted to read might give you some color because this is real. I won't mention the name of the restaurant group, but April 17. So last call. We have gotten a note from one of our restaurant tenants that was regarding April rent payment full. This is a restaurant group in Oklahoma, but I'll just give you some feel for sort of what we're seeing. So and it's continued to improve. So in this case, we have applied for and received SBA PPP stimulus money for the above restaurant. As of now, we are still closed and the states in which we operate will not have a definitive plan for reopening for a few more weeks. In closing, the April rent checks property. Negotiation of the check acknowledges waiver of any late fees or penalties associated with a payment of this ramp. Rent for the month of May will be paid as usual. We are awaiting further guidance from the treasury department regarding the use of the remainder of the stimulus We have also enclosed the previous letters for reference regarding the impact of the COVID-19 virus on our business. We appreciate your understanding and all you're doing, that we are all doing to protect the business interest of sincerely.

So that was kind of just an example of many examples of sort of a restaurant that got money. I was asking for actually several months deferral, is it going to pay May, just as closed. I'd give you another example of a fitness tenant that we just spoke to last week. I know the name of the tenant. They operate in 45 locations, six states. They are a high-volume, low price operator. They're opening 50% of their units this week, plan to open the other half by the early part of June. And when we talk to it and this is I could go do, this would be one of the 3-month deferral kinds of players, 3-month deferral, so you went back over 12 months. Basically, they had sort of three scenarios in terms of their opening scenarios. First, all employees would get temperature checks Phase one was on the opening, no classes, half of the cardio equipment is in the original space. So in other words, they have to the equipment in the current space that they operated in and no child care services. Phase 2, which would be group classes resume child care offered and then Phase III would be back as usual. Now what was interesting about this operator, was they were going to turn on their monthly memberships at the lowest tier price point as an investment to get customers come back in, but they had sort of a very detailed kind of operational check as to how they were planning on rolling out into different I'll give another example of early education operator that we have.

It's a big one. 46 schools, they're nationwide. 14 of the schools have been opened since the whole COVID over the last couple of months because of a number of that were either first responder or essential workers, and so they will work out sort of how to operate in this COVID environment portion of their portfolio. So there were 40 to 50 wins in the school. This is kind of early education, so under six years old. So the first thing that just said is on the safety protocols, obviously hand washing and cleanliness, temperature checks for any parent or child coming into the center. All staff members are were on masks. They utilize the gym space for education functions as opposed to play. They and they said, it's challenging to administer social distancing for three year olds, but they basically try to open up the space within the school. And they were seeing good results. And what they have been doing in this operator, they've been staying in contact with all the parents in their various schools, at least two times a week with just online parents, how to help children at home. The plan was at the 15 of the schools were opening at this week, seven in the Dallas area. And they're kind of going on a rolling program, but we're really focused right now on sort of the summer camp, but they're cautiously optimistic about people going back to work and students coming in. To give you another example, casual operator.

And I want to talk about PTT as well. So this is an operator that operates in a state where at the of these conversations have only experienced 20 deaths from COVID in the entire state. He had to basically was a portfolio. His plan was to not open until actually July, either or not. And so he said, he had his employees, including They were getting $600 a week, as you know, from and about $500 per week from the state. He said for a number of those employees, that was more than they would make if you actually ask to come back in. So his idea was between the PP money that he received, which was about $5 million. He would open kind of late June, kind of that July time frame. He would either try to figure out how to utilize the full portion of the PPP toward employment or would look, the rules are changing of these programs or you've looked at that as a 1% loan to pay back over two years. He was thinking about kind of dealing with tables and maybe this didn't include the 25% kind of opening capacity that a lot of states are employing. But point was didn't really want to open and be half utilized. Otherwise, he thought that was kind of a idea.

So I think the takeaway is the reason I give you an example is some of these programs are really helping these tenants. A lot of them are trying to figure out how to open. We're seeing a number of units opening. I mean, at home, for instance, is opening half of their stores this week. Mr. Carwash is opening their stores in Texas. So we're seeing things improve in our C-stores. As I look at, our c-stores are seeing increased travel over the last couple of weeks. And as you know, the margins are pretty good. So as I said even if states are different, and we have a high proportion of states where there are reopenings, we're seeing signs that are encouraging. It's the best way to put it. I don't think it's we're out of the woods yet, but it's a whole lot better than, say, a couple of weeks ago. So I was or way of answering that question, but I wanted to give you some color on it.

Anthony Paolone -- JPMorgan -- Analyst

Absolute. Great. My follow-up would just be on the dividend. Any additional comments or color on how you and Board were thinking about given balance of the year?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

So I got to be careful on we have the board week. So I don't want to get ahead of our Board. But if you listened to my comments last time and you sort of just couple of fact that I think things are better. I'll just leave it at that. Because dividends are going to be a board discussion, but I'm more encouraged now than I was a couple of weeks ago just by kind of what's happening with these programs and and how operators. They're not only just trying to open. They're trying to open the right way. And it's these examples I give you are kind of across the portfolio, where we have very sophisticated operators, and it's been quite helpful for us all to learn best practices. Because we're trying to share that information from what we learned with our additional tenants.

Anthony Paolone -- JPMorgan -- Analyst

Thanks for the update.

Operator

And we'll hear next from an Shivani Sood of Deutsche Bank.

Shivani Sood -- Deutsche Bank -- Analyst

Hi. Apologies if I missed this earlier. But can you give us a sense for what percentage of your tenants might be able to access the PPP or the Main Street lending program?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Yes. It's hard to give a percentage because we don't show any half of our tenants are public companies to the pension public. So obviously, that's if people got that money, they're probably giving it back just given the backlash. And roughly, I think it's 27% in that range are private equity tenants. I'm aware of some of the private equity tenants PPP proceeds, but it hasn't been substantial, just given the feedback that I got from And then a number of the small companies, like I just mentioned like that restaurant operator got PPP The GM operator got some money the unfortunately, like early indication, that's kind of a bubble, but they don't get they're not eligible for PPP proceeds now. But it's actually and the gym operators that had too many employees are excluded. So like the PPP money really works well for like for the restaurant auditors, QSRs and casual dining, there are some corporates that have PPP money as well. But tenants that like the schools, where there's a lot of employees that they don't qualify right now. And if you have too many gyms, that's a problem because the designation on the SBA doesn't allow them that flexibility in the restaurant chains given the designation?

Shivani Sood -- Deutsche Bank -- Analyst

Got it. That's helpful color. And then just you guys have ample liquidity at this level, which is definitely key. Just curious what you would want to see in sort of the broader environment before maybe repaying the revolver borrowings that are being held on the balance sheet, just sort of what would give you confidence that the worst of this is behind it?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Yes. So I mean, I guess when you look at the revolver balance as of the close of Q1, you'll see it was sort of around $500 million, that was probably a little bit more but especially in early March, a little bit concerned about what was going on in the financial system. I mean maybe it wasn't warranted, but that's an experience matters some bad things back in 2008. So we had drawn a little bit more pricing. We've got the full amount on a revolver into the end of Q1. We paid those revolver proceeds substantially down. So I think with this new $50 million term loan, if you can see it, I mentioned it, we closed another $50 million incremental amount on the for which is now a $350 million term loan. We'll pay down the remaining proceeds of the outstanding revolver. So I think, Mike, I think there's very little right now at this point, right?

Michael Hughes -- Executive Vice President and Chief Financial Officer

Yes, it's zero.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

We are just cautious.

Shivani Sood -- Deutsche Bank -- Analyst

Okay. Thanks so much.

Operator

[Operator Instructions] And we'll go next to Haendel Juste of Mizuho.

Haendel Juste -- Mizuho -- Analyst

Hi. So sorry about this, if you mentioned already, I jumped on a bit late, was on another call. But are you guys if you can color of you providing longer-term deferrals beyond, say, one to three months, more in the six to 12 month term? And if you are, are you charging interest? And is that something you'd be looking as a deferral? Or is that

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Well, yes. So right now, we're pretty the majority of what we're doing is through the lease. So we're not creating separate notes and things like that. We actually think for operational view, having the deferral thing at least gives us more rights as a landlord as opposed to structuring That's the way to that we've made. I can only think of one essence where we're considering having a discussion around an interest payment, but that's just because of the nature of how long it might go. But from a really large majority of them, they're pretty straight one to three months rental for a payback in 12 months, either starting later this year or beginning of next year. In the movie segments, I don't want to give into too much detail because we're not 100% done in that group, but I'd say we've got some different sizes. It's not a one size fits all for movies. Because the tenant health, those operators are very different. And so depending on what kind of drives our deferral as sort of the comprehensive package of their liquidity, what was happening in the business before, what we put the on for them to get back to normal. So but the movies will have, I would say, some will be three months, some will be a little bit longer. They're all slightly different. But yes, we don't have this kind of interest. I mean, there's one that's we might have an interest, but I don't think we can end up doing that. Just for us, rather just keep it simple I believe.

Haendel Juste -- Mizuho -- Analyst

Got it. And other in the category, I'm sorry if I missed it, but did you talk much about the 30% rent not received in April? What conversations you're having with that? What type of recovery or how we should be thinking about that recovery from perhaps the proportional or time line?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Look, I think the large majority, we think we're going to get paid back. I mean, and that sort of hits in that one to three months deferral range. And like I said, some of these might there's some upside to some of this because as these companies open, a lot of tenants actually surprisingly, if they get they don't want to mess it up. They just want to get try to figure out business up and running again. So I'd just sort of characterize that 30% that couldn't get paid in that one to three months with the weighted average being just slightly north of two months rent deferral. That would pay back kind of within 12 months of later this year or beginning of calendar year 2021.

Operator

And we'll go next to Collin Mings of Raymond James.

Collin Mings -- Raymond James -- Analyst

Hey, thanks, good afternoon. In context of your relatively more optimistic tone, Jackson, can you just maybe talk a little bit more about what you want to see to reaccelerate acquisition activity? I think you noted on the April call, in particular, the potential for some opportunistic acquisitions. So just maybe just update us on your thinking there?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Yes. I think it's probably twofold. Like I said, like we're encouraged by what we're seeing just in terms of getting deeper discussions with these tenants. We another strategy. We look at property tax payments. It's a pretty important part of what our team looks at. And I'd say we're like over 90% in appliance through the end of April. Now taxes, we don't give in too detailed. Some are annual, some are paid twice a year. For the different parts of our portfolio. So it's not straight-line across the quarters, but it's really kind of first quarter is bigger in terms of tax payments to the portfolio, fourth quarter is larger, second and third are smaller. But through the first quarter, we're like over 90%. And so we're monitoring that very closely. Just we look at that as part of the overall package of deferrals. So what I would tell you to answer your question, there's two things. I want to make sure I continue to see positive signs. I've got a call in to the gym operator that I spoke to last week, and we'll see how it's going, and we'll continue to have these discussions as well as rolling out.

That's going to tell us whether or not they're going to kind of get back up to speed, where, I'll call it, post the deferral period. And if we start seeing that positive sign. And then coupled with we're trying to find out, understand what is the right price for acquisitions in the market today. I can tell you that it's not a free out there. Transactions are still pricing. Temporary one market is still stabilized and doing what it does. If you're trying to sell movie theater now, that might difficult, to be honest with you. But for things that are normal things like industrial properties that we bought, like in the first quarter, we haven't seen gigantic changes in pricing at the So I think like to see two things. A little bit more price discovery where the market area is, coupled with continued positive feedback. You should suspect that all these tenants that were agreeing to deferrals or check all of them every week, just to see how it's operating. Because that's going to give us the confidence that the deferral in place is good and they'll get current, and obviously that's what we all want to see in this portfolio, all of us.

Collin Mings -- Raymond James -- Analyst

Thank you.

Operator

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

John Massocca -- Ladenburg Thalmann -- Analyst

Sorry if I missed this earlier in the call. But I guess, if you look at it at the 30% non the 30% of kind of cash rent that wasn't paid. I mean, how much of that might you characterize as being kind of more opportunistic non payers? And have you seen that number maybe trend better as there's been a little more pushback from landlords on payment or even kind of economic outlook have improved. Just take color given how that's kind of trended as well over maybe the course of April and how you see it going into May?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Yes. Let's say like I'm characterized. Look, there's we have 30% of our portfolio that is actually still closed. So I mean, they have kind of exactly, you should suspect that a large portion of that, the majority of that base is in that deferral universe. I'd say that the conversations with tenants has improved over the last couple of weeks. In early April, people were really quite scared, and we're just not doing anything and not acting normally and trying to understand what was available for government programs and other kinds of issues. But the country is opening that. So whether or not people like it or not, it's kind of happening. So those that campaign because they don't want to be with landlords. Now that being said, we've had to send out some notices that are not as pleasant. And so and that's getting some people to pay rent that should pay rent. And there might be a others where we'll have to kind of pick up to the next level. But I'd say, generally, people are things are getting better. Like I said, 7% of our rents are 7% more of our rents on the properties are now open versus two weeks ago. So you're starting to see people kind of They want to be mess around landlords.

They want to get their operations up and running. So I think that's part of what you're seeing to. not to cut you over the same, you guys know the difference, but we own free standing retail properties. I don't want to say, we don't care. But we don't have responsibility for adjacent occupancy or tenancy. We only care about, obviously, the contract between us and the tenant that's operating. And that's a big one. That's what they're focused on. So if you look at a large majority of it is truly freestanding. It's not really involved with another landlord, the mall or strip center or what have you. So it's very much this was a profitable operation for them, and that's why we gave those coverage stats when we gave the update a couple of weeks ago. It looks like 2.5 times average coverage of tenants looking for rental growth in terms of unit coverage. They were largely operating profitably. So their focus is trying to get that profitable, not fighting with landlords. I can tell you that that's generally our experience. Now I think it's different with other kinds of retail Landa, especially if the whole property is core, but I think it's a different issue. So that's just one I think it's real important one, and I expect to see faster recovery from a rent stabilization within our portfolio, not just ours, but other triple companies.

John Massocca -- Ladenburg Thalmann -- Analyst

Appreciate the color. That's it for me. Thank you very much.

Operator

And we'll hear next from Ki Kim of SunTrust.

Ki Kim -- SunTrust -- Analyst

Thank you. I wouldn't think about just longer term, the tenants that are getting rent deferrals, if you're a smaller business, do rental I know they help in the near term, but longer term, I mean, do these tenants generally have equity cushions to sustain just higher leverage by just owing more money? Or do you think and not just but just the industry overall deferrals end up being rent release at the end of the day?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Look, I mean, to be fair, like what we look at is and this is sort of if we think it's going to go away, we don't characterize it as net to fall. I mean, we looked at it seriously. So the first thing we decided is, as you know, those a tenant weren't them to fill. And if it has been, are we going to characterize it as rent that we're going to get back that's probable or rent that is going to be kind of really tough to get back. If it falls on tough to get back which is a small exception in our portfolio. We'll tack it on the back of the lease. We're not going to recognize it as income. And we'll start accruing we might even potentially start accruing But the large majority of what we defer, I would say, fall in the of that universe of 2.5 times unit coverage. And some of those were higher, some of them were lower. So they don't and I think your point is right, they don't have giant liquidity cushions, but they're pretty simple businesses. And if they can open them and they've got some federal assistance, especially like in the restaurant area, I think they have a good shift to come back and be solid again. And the thing goes for I think, the fitness. I mean, I do think people are going to want to get back into gym, the gym operators have to be smart about either creating social distancing, other I've talked to one of them, like how are they thinking about pricing.

Is it more elastic. So they're looking at all those different options to try to get back to a stabilization. I would say that a tenant given that was having problems before, this is just going to exacerbate. And our strategy for rental in that situation would literally be probably sticking on the back end, and we'll start probably accruing real estate taxes. And so you'll see that in 2Q if a small portion is not a big portion, but I don't know if that helps you. But I think if we're in a prolonged look, if we're in a prolonged economic downturn, we're going to have pressure like everybody else. I mean there's it's a small tenant or a big tenant based on its industrial grade, they don't have the wherewithal to they closed for extended periods of time. So I think that, like I said, I'm encouraged by the fact that the country is opening, the people that feel safe are going out, people that don't feel safe are staying home. And we'll know more as the weeks go. We're very close to our tenants. And that's going to inform us on a lot of different things. But right now, like I say, it sounds just pretty good.

Ki Kim -- SunTrust -- Analyst

And I think about half of your tenants, you have unit level reporting data for. Do you actually do you happen to have your tenants pro forma look to leverage ratios, at high level, what that looks like?

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

What report. we do, I mean we haven't really spread it to that level. I mean, it's part of our investment committee review. If you think about it, I think we described it to you all, we have three investment committees a week, for tenant And if you look at distribution on Page 13 of portfolio health, give some idea of like how big these from a revenue standpoint, where the percentage of rents fall. Most the large majority are over over $200 million in total revenue. So there's they're actually larger tenants than probably what you might think. We have very few small small proprietorship type tenants. So and that's why I think a lot of our tenants were happily on the plus side, a lot of them got the PTP. They obviously have local banking relationships. They figured out how to get it. They weren't asking for where the backroom door was, and that helped a lot. That's what got me much more encouraged about what we're seeing right now. And so we're still early days. I would say we're spike in yet, but it's better than it was a couple of weeks ago to say that.

Ki Kim -- SunTrust -- Analyst

Thank you.

Operator

And now I will turn the call back to Jackson Hsieh for any final remarks.

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Okay. Thanks, operator, and for everyone out there. I hope you all stay safe. I'm sure you guys are busy. We're sticking to our knitting, focused on close to our tenants, working with them and watching and seeing how their businesses are opening up. Thank you.

Operator

[Operator Closing Remarks]

Duration: 35 minutes

Call participants:

Pierre Revol -- Senior Vice President, Head of Strategic Planning and Investor Relations

Jackson Hsieh -- Board of Directors, President and Chief Executive Officer

Michael Hughes -- Executive Vice President and Chief Financial Officer

Greg McGinniss -- Deutsche Bank -- Analyst

Anthony Paolone -- JPMorgan -- Analyst

Shivani Sood -- Deutsche Bank -- Analyst

Haendel Juste -- Mizuho -- Analyst

Collin Mings -- Raymond James -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

Ki Kim -- SunTrust -- Analyst

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