Logo of jester cap with thought bubble.

Image source: The Motley Fool.

VEREIT Inc (NYSE:VER)
Q2 2020 Earnings Call
Aug 6, 2020, 1:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. And welcome to the VEREIT Second Quarter 2020 Earnings Conference call. [Operator Instructions]

I would now like to turn the conference over to Bonni Rosen, Director of Investor Relations. Please go ahead.

Bonni Rosen -- Senior Vice President, Investor Relations

Thank you for joining us today for the VEREIT 2020 second quarter earnings call. Joining me today are Glenn Rufrano, our Chief Executive Officer; Paul McDowell, our Chief Operating Officer; Mike Bartolotta, our Chief Financial Officer; and Tom Roberts, our Chief Investment Officer.

Today's call is being web cast on our website at vereit.com in the Investor Relations section. There will be a replay of the call beginning approximately at 02:30 PM Eastern time today. Dial-in for the replay is 1877-344-7529 with confirmation code of 10146036.

Before I turn the call over to Glenn, I would like to remind everyone that certain statements in this earnings call which are not historical facts will be forward-looking. VEREIT's actual results may differ materially from these forward-looking statements and factors that could cause these differences are detailed in our SEC filings including the quarterly report filed today.

In addition, as stated more fully in our SEC reports, VEREIT disclaims any intent or obligation to update these forward-looking statements except as expressly required by law.

Glenn, let me turn the call over you.

Glenn Rufrano -- Chief Executive Officer

Thanks, Bonni, and thank you for joining us. I will review customary metrics for the quarter, along with statistics we have been providing during the pandemic. Paul will then go into more detailed operational and collection items. Mike will analyze financial results and spend time discussing accounting for the quarter.

Here are some quick highlights. AFFO diluted share for the quarter was $0.15, which includes the effects of COVID-related items Mike will outline. Rental collection for the quarter was 85% and increased to 91% for July. We had a very successful bond offering issuing $600 million to ultimately refinance $322 million of converts at 3.75, due in December with a lower coupon of 3.4%. We were also able to redeem another $150 million of preferred stock which has a 6.7% coupon.

Year-to-date acquisitions totaled a $156 million. We also acquired a $33 million property for the office partnership and we'll close this month on a $247 million distribution facility for the industrial partnership. Dispositions totaled $200 million.

Net debt to normalized EBITDA ended at 6.1 times and includes the negative effects of portfolio enhancing abatement amendments which largely impact second quarter revenue. Excluding this, the metric would be 5.8 times.

On our last call, we listed four overwriting goals would remain our focus. Let me take you through each and the progress made. The first is to keep our employees safe and provide a work environment and tools to be productive. All of our offices are currently open on a voluntary basis and we find the combination of open offices as well as working remotely has worked well. We appreciate our team's effort.

Second, recognize the extent of tenant challenges and interact collaboratively. As you can see in both sections, we've been moving along with our tenants and have come to agreements on 52% of rent relief requests, in negotiation with 9%, and of the remainder which we have denied, 87% have paid in Q2, increased to 89% in July.

Third, maintain the progress we worked so hard for over the last five years, especially our diversified portfolio and investment-grade balance sheet. We have proven the benefits of our portfolio diversification model by our rental collections statistics. We have consistently had one of the highest collection rates at 85% for Q2, with July coming in even higher at 91%. Our office and industrial, high collection necessity based retail, and quick service restaurants have provided a baseline of approximately 80% of rental collections. We have also seen positive movement in certain categories, such as home furnishings and sporting goods leading to our higher July collection rates.

With regard to the balance sheet, our recent debt offering not only reduced the market spread on all our bonds by approximately 100 basis points, but with six times oversubscribed. Evidence is that the work toward investment-grade has provided liquidity and a lower cost of capital. Our final goal is to use the business model we built to grow AFFO. This model allows various methods of external growth, balance sheet acquisitions and institutional partnerships, both supported by our experienced real estate team.

In Q2, our team sold a $46 million office building in Seattle at an attractive price of $300 a square foot and in Q3, we expect to close our third office property into the office partnership. We will continue to use this form of internal capital as we have in the past for select balance sheet acquisition opportunities.

For example, during the quarter, we took advantage of a $10 million mezzanine financing to participate in a last mile distribution transaction. We have worked with this developer over the years and expect to continue this mutually beneficial relationship.

I will now turn the call over to our Chief Operating Officer, Paul McDowell to provide more detail on rental collections to-date. Paul?

Paul McDowell -- Executive Vice President and Chief Operating Officer

Thanks Glenn. Our team's remain focused on working with our tenants that need rent relief during the pandemic, while continuing routine leasing and asset management. To help understand our recent activity, we will break out routine non-pandemic related leasing from transactions related to pandemic relief.

Regular leasing for the quarter remained strong, with 64 leases executed on over 2.1 million square feet, of which roughly 863,000 square feet were early renewals. Total activity included 845,000 square feet of office; 654,000 square feet of retail; 460,000 square feet of industrial, and 111,000 square feet of restaurants.

For renewal leases, we recaptured approximately 94% of prior rents on initial cash basis. And many of these newly extended leases have additional built in rent increases. Second quarter leasing including early renewals reduced overall lease expirations by 2.6% between the end of Q1 2020 and 2023. Occupancy ended the quarter at a healthy 98.8%.

Turning to our COVID-related tenant activity. In working with qualified tenants on their pandemic-related rent relief requests over the past few months, we have broadly taken two approaches. First, standard rent deferrals for specified periods, generally between two and four months, with repayment generally by the end of 2021. And second, where we saw benefits for both parties. In certain cases, we have negotiated blend and extend transactions, which contain lease extensions in exchange for combinations of rent deferral and or abatement.

As of July 27, we had the following activity in each type for Q2. In the first category, we had category, we had deferral agreements with 29 tenants representing 3.2% of second quarter rents; 19 tenants representing 1% of rents have agreed to begin repayment within 2020 and 10 tenants representing 2.2% of rents starting in 2021.

In the second category of blending extends, we have agreed to some form of abatement with three tenants, representing 4% of second quarter rents, in exchange for extending the WALT or weighted average lease term on those leases by approximately five years on average. Those deals extended the WALT from 8.3 years to 8.5 years for the overall portfolio. This included one of our major tenants and involves other beneficial elements that can't be disclosed at this time.

For July, the amounts were as follows. Deferral agreements with 18 tenants representing 2.2% of July rents, abatement existed with one tenant representing 2% of July rent, which you can see was about 50% less compared to Q2, as we had a large tenants begin to pay partial rent per our agreement. Mike will discuss the accounting impacts of this within his section.

Now let's talk more specifically about our portfolio performance and where we are today. Over the past four months, we have seen steadily improving collections. Our April rent receipt came in at 86%, May at 85%, June at 86% and we saw a 5% increase for July at 91%. These percentages are based on pre-COVID rents, and we have not adjusted the denominator for any rent relief.

The underpinnings of these relatively strong collection results were driven by our property type diversification, industry breakdown, investment-grade tenancy, public versus private ownership and geographic location. Our allocation to office, industrial and necessity-based retail including our top industry exposures, such as discount, pharmacy, grocery, warehouse clubs and convenience has helped in our rental collection.

In Q2, 17 of our top 20 tenants effectively paid full rent during the quarter and in July, all 20 tenants were paying rent. Our approximately 37% of investment-grade tenancy for the total portfolio, and 46% within retail were a strong component of rent collections at almost 100% during the quarter and in July. Approximately 63% of our tenants are public in the overall portfolio and over 71% are public within the retail portfolio, which we view very positively.

Our geographic diversity has also helped us in rent collections. In general, we do not have large property concentrations in major urban areas that have borne much of the brunt of the pandemic today. Although many states are seeing an uptick in cases, and some are having to delay or rollback on fully reopening, our July collection rate does not yet show any material effects. We're monitoring these states carefully and July collections in these states were approximately on top of the overall portfolio collection rates for each property segment. See Slide 15 of our investor presentation for further information.

Additionally, we have experienced a small percentage in bankruptcy so far this year, with no material ones due to COVID as of now. The main bankruptcies we spoke of last quarter, which were non-pandemic related were Art Van at 0.6%, Crystals at 0.27% and Logan's at 0.13% of income. We are finalizing resolutions on all three of these in some capacity. More recently, we have had three additional small bankruptcies of 24 Hour Fitness, where we have only two locations at 0.2% of income, and two small restaurant operators, which are less than 0.3% of income combined.

I would like to thank our real estate teams, who continue to do an outstanding job in trying circumstances and our collections to-date are reflective of those efforts. Our dedicated property type asset management teams have been in discussion with our tenants to understand the impact of COVID-19 on their businesses.

Overall, rent relief requests have been received for tenants representing approximately 33% of rental income on an annualized basis. We have been evaluating each request on a case-by-case basis, based on each tenant's unique financial and operating situation, analyzing metrics, such as industry segment, geographic locations where they are operating, corporate financial health, rent coverage and attendance liquidity. Our goal has been to help those tenants we think need it and deserve it in the short run, while at the same time, pressing for payment from those tenants we judge do not merit rent relief, have access to other forms of capital or being opportunistic.

Of the received requests, to-date 52% had been approved, 9% are in negotiations and 39% have either been denied or we have taken no action. I discussed the impact of the completed transactions as of July 27, above with the rest of them expected to be completed during the third quarter. Many of the tenants were we declined to offer rent relief, judging they have had the wherewithal to pay, in fact, have paid with 87% paying in Q2 and 89% in July. In other instances, we have been taking the necessary actions to protect our rights under our lease agreements.

We've been very pleased with our rental collections numbers so far, which are at the top echelon for our sector. Our current expectation is that collections should remain reasonably steady for the rest of the quarter through September. Further, portfolio segment information and details can be found in our investor presentation filed today.

I will now turn the call over to Mike. Mike?

Michael J. Bartolotta -- Executive Vice President and Chief Financial Officer

Thanks, Paul, and thank you all for joining us today. I'll cover our second quarter financial highlights and provide details of the Q2 effects of the COVID-19 pandemic on our rental revenue and the related receivable reserves related to certain of our tenant.

In response to the anticipated large volume of rent deferrals caused by COVID-19, the FASB attempted to provide clarity through new accounting guidance to address least concessions related to the effect of the pandemic. As part of this, we elected to account for eligible lease concessions, which we deem probable of collection, as if there were no changes made to the lease agreement and accordingly continued to recognize income, along with an increase in the related lease receivable.

Where we deem future collection was not probable, these are accounted for under the cash basis accounting. We refer to both as executed deferral agreements.

Lease modifications, where the cash flows and terms substantially increased the consideration in the original contract, did not qualify for this as the expediency, but rather require the company to apply AFC 842 lease modification accounting. Under this, the company must reevaluate the lease classification and remeasure and reallocate the consideration over the remaining lease term. We typically refer these as a blend and extend amendments.

Now, let's discuss how all of this was applied within our financials in Q2. I'll break out some of the COVID-related items that are included in revenue and items that were not included in revenue. These items are in the following four categories.

Executed deferral agreements in Q2 rent as of July 27, where the collection of future cash flows was deemed probable, totaled $8.9 million. This amount is included in revenue. Executed deferral agreements as of July 27, where the collection of future cash flows was not deemed probable, totaled approximately $80,000. This amount is not included and instead it gets accounted for under the cash basis of accounting. Executed blend and extend amendments which contain an abatement of rent for a specified period totaled $11.2 million in Q2. This entire amount was not recognized in revenue. This amount is expected to decrease next quarter as a large tenant's free rent period begins to expire, as evidenced by our increased July collections, which Paul mentioned previously.

Reserve rents of $8.4 million. That was related to the impact of the COVID-19 pandemic, of which $0.9 million represents an increase in the general allowance for rental revenue and $3.8 million represents amount's not probable amount's not probable of collection as of June 30, 2020, and where we believe rental revenue should be recognized on a cash basis and $3.7 million for straight line rent receivables related to these cash basis tenants.

Our AFFO per diluted share of the quarter was $0.15 and our normalized EBITDA was $238.5 million, which reflects the characterization of the items just discussed.

Turning to our balance sheet, the Company issued $600 million aggregate principal amount to a 3.4% senior notes due 2028 at an issue price of 99.144%, par value. Proceeds from the senior notes, along with borrowings under the Company's revolving credit facility and cash on hand, have been or will be used to fund the purchase or repayment at maturity of VEREIT's 3.75% convertible notes due December of 2020.

On June 25, 2020, we were able to purchase $50.2 million, leaving $271.6 million principal amount remaining. The Company also utilized proceeds to fund the partial redemption of $150 million of VEREIT's 6.7% Series F preferred stock on July 22, 2020, and repay borrowings under the Company's revolving credit facility. The long-term bond issuance increased our corporate liquidity from approximately $1.2 billion to $1.8 billion, comprised of $279 million in cash and cash equivalents and the full $1.5 billion of availability under our credit facility.

Our fixed charge coverage ratio remained healthy at 3.1 times and our net debt-to-gross real estate investment ratio was 39%. Our unencumbered asset ratio was 81%. The weighted average duration of our debt increased from 4.4 years to 4.8 years, and we are 99.5% fixed.

Net debt-to-normalized EBITDA ended at 6.1 times, which includes the negative effects of the blend and extend abatements and reserves. Besides the converts, which we already discussed, we have a very manageable amount of debt coming due in the near term. At quarter-end, we had $78 million in mortgage notes payable due this year, at a weighted average interest rate of approximately 5%.

And with that, I'll turn the call back to Glenn.

Glenn Rufrano -- Chief Executive Officer

Thanks, Mike. On our last quarterly call, we discussed our process whereby a range of possible cash flow outcomes were analyzed for this year and next. Based upon our analysis, we chose to reduce the dividend and allocate capital to the balance sheet, maximizing value to all stakeholders in the form of liquidity and future growth. When you know where you are, you can better judge what to do and how to do it.

While we have had a better than expected results in rent collections, the duration of economic uncertainty continues to have a variety of outcomes. As such, the Board has decided to maintain current dividend which had a 51% payout ratio in Q2, due to solid base from which to grow to a more traditional level.

Mike presented the accounting and our current balance sheets statistics. We've always strived for full transparency in our disclosure and we continue to do so in this discussion and through our investor presentation.

On the financial side, our increased liquidity from $1.2 billion to $1.8 billion was strengthened by the $600 million bond offering, which now finances our December 2020 convertible debt maturity and leaves us with no corporate debt due until 2024. In addition, we continue to remain highly liquid on the asset side with 81% of the portfolio unencumbered.

As you heard in Paul's presentation, our portfolio diversification is serving us well, not only by property type, but also investment-grade percentage, credit, industry as well as a high percentage of public companies. Our tenant negotiations have led to a number of mutually beneficial transactions. Tenants have been supported economically in a difficult period. All deferrals and blend and extends enhance the portfolio increasing term and providing other economic benefits.

With regard to the portfolio, office exposure will continue to decline and the two retail industries with lower collection rates, casual dining and entertainment, will be evaluated longer term, as we can assess the cyclical or secular nature of their business.

Our experience of transforming the Company over the last five years into the current business model energizes and equips us to grow and thrive as we move past this. Our expectations for the future rests on our increased liquidity, now tested, diversified portfolio and experienced team.

As you're aware, Mark Ordan, our Director who joined us in 2015, recently resigned from the Board due to his appointment as CEO of MEDNAX. He'll be missed, and we wish him well.

Before ending, I would like to again applaud those in the healthcare profession and all first responders who continue to make difference in our lives during these difficult times.

I'll now open the line for questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator instructions] Our first question comes from Sheila McGrath with Evercore ISI. Please go ahead.

Sheila McGrath -- Evercore ISI -- Analyst

Yes, good afternoon. Glenn, the additional disclosures on collections were very helpful. I have a question though on Page 16 of the investor deck. You outlined the different buckets and in 2Q uncollected rent is about 7.4% of the total. Just wondering how we should think about that bucket going forward? Are there deferrals in place for that or what's the status of that bucket?

Glenn Rufrano -- Chief Executive Officer

Thanks, Sheila. First, I'm on Page 16, and just to clarify, this is for, I'm going to clarify it for the second quarter of 2020, because we haven't fulfilled the second quarter in July, but your question first, to the second quarter which is appropriate. What you see there is 14.5% of uncollected rent, of which 3.2% are executed and abatements executed of 4%. So that's a total of 7.2%. The first point I make is we just put executed transactions in these buckets. We have additional discussions going on. And why don't I hand it over to Paul to take you through that?

Paul McDowell -- Executive Vice President and Chief Operating Officer

Thanks Glenn, and hi Sheila. So, of the 7.4% that's quote in the uncollected bucket on Page 16 in the investor presentation, roughly 2% of that is where we've got deferrals or nearly all deferrals. And we're working through the final approval processes associated with that. 3.6% is somewhere in process, we're either continuing to negotiate with a tenant, just starting documentation and the like, and nearly all of that is deferrals as well. And the remaining close to 2% is sort of in the other bucket. And the types of things that fall into the other bucket are things like CAM resolutions, other routine sort of chasing down rents from tenants, some cash reserves and the like, sort of typical things that we would have every quarter.

Sheila McGrath -- Evercore ISI -- Analyst

Okay, that's very helpful. And maybe, I'm not sure if this is for Mike, but in that same slide, the $11.1 million of abatements executed, I think you said those were blended and extend. So should we assume that that $11 million comes back in third quarter or should it be over a longer period of time?

Glenn Rufrano -- Chief Executive Officer

I'll start the answer on that, and then Mike, you may need to help me. That's the second quarter number. And as Paul and Mike in their discussion earlier talked about that, that number, as matter of fact, you can see if you go to July, where you have abatement executed of $1,894 million. That percentage came down to 2%. So in July, we reduced the abatement, which meant a tenant started to pay rent, which is what Mike said. So we will have an abatement for the second quarter, approximately half of the first quarter -- of the second quarter. And then in the fourth quarter, it essentially goes away and there'll be minimal abatements.

Sheila McGrath -- Evercore ISI -- Analyst

Okay, great. Last question on Glenn on acquisitions, given uncertainty still exists in the market, do you expect to be acquisitive in the second half or just your thoughts on that?

Glenn Rufrano -- Chief Executive Officer

Sure. That's a really good question, Sheila. I'm going to go back for a second and then going backwards doesn't mean much today. But in the first quarter of the year the year, we had a fairly aggressive acquisition program, we had $1.3 billion [Phonetic] of the balance sheet and then certain elements for the partnership, $400 million to $600 million for the industrial partnership and $200 million to $400 million for the office partnership approximately. We had raised $880 million in the fourth quarter of last year in a block offering that paid off the litigation, if you remember. And we also raised $130 million on the ATM. So, we were in pretty good shape in the first quarter, know what, the world changed, and here we are today.

So as we look at growth going forward, I want to put it in different buckets, not just acquisitions. We first of all want to grow by collecting rents and that to us is primary today. We would have expected 100% of rents, but it's not. So we've got to get there. So that's our number one growth element.

Number two, I'll refer to the right-hand side of the balance sheet. And on the right-hand side of the balance sheet, we've already made some progress in growing. The $600 million transaction that Mike mentioned at 3.4% will finance the converts which were 3.7%. So there's a spread there for growth. And we'll also finance a portion of our preferreds at 6.7%. So we've been accretive on the right-hand side already this year.

We've also reduced the dividend. I think we all think of reducing the dividend as similar to raising equity. Money is just fungible. So we've put capital back into the balance sheet for growth. So, we worked pretty hard on the right-hand side, and we've done a reasonable job.

The left-hand side is what you're talking about, which is growth through asset sales. And in my section, I did mention that we have some internal equity and the internal equity is our sales. We sold our Seattle office building and basically that building was vacant, it's a redevelopment site for $46 million that we can use to recycle. We have an asset that's going into the office partnership that we can use to recycle. And we've also done a number of blend and extends for our office buildings, that we plan to or have put on the market. So, we see coming in from dispositions a pretty good access to internal equity that we will use to buy opportunities. We're going to be very careful about what we look at in the second half. It'll be an opportunity form of investing, and we'll use internal capital to do that. In addition, we will be on the -- we will be looking for assets for the office and industrial partnership in which we'll put 20%. So we have a number of ways to look at the left-hand side and grow.

And last, we do have asset management fees from the partnerships, which value the infrastructure here, which we also believe is a very important part of growth. And the last concept I would throw in here is that, whether it's the first, second, third or fourth buckets here, how you view the market is pretty important. And I would say all of us here on a long-term basis, to be optimistic in terms of the U.S. economy, and our businesses model and how we can grow within this economy. But you have to separate it in long and short. On a short term, I don't know if anybody has enough information to be opportunistic, to be positive or negative on this economy. I don't -- I'm not sure there's enough information. But we do believe we can be realistic, and from a realist standpoint, we will continue to look for growth in collection, safety in the balance sheet and opportunities will be brought into our balance sheet as we see them as true opportunities and not commodity purchases.

Sheila McGrath -- Evercore ISI -- Analyst

Okay. Thank you, Glenn.

Glenn Rufrano -- Chief Executive Officer

Thank you.

Operator

The next question is from Anthony Paolone with JP Morgan. Please go ahead.

Anthony Paolone -- J.P. Morgan -- Analyst

Thank you and I'll echo what Sheila mentioned about laying things out real well for us here. So thank you for that.

Glenn Rufrano -- Chief Executive Officer

Thank you.

Anthony Paolone -- J.P. Morgan -- Analyst

My first question is, if you look at your July collections, like it basically seems like you now have deals done for 94% to 95% of your pre-COVID rents that you've negotiated deferrals or abatements or some sort of deal on. So just wondering like, if you look past the abatement and deferral period, and I don't know if that's Q1 2021 or Q2 or whatever it is for all of these deals, like what is the run rate revenue coming out of this compared to what it was pre-COVID?

Glenn Rufrano -- Chief Executive Officer

I don't have a direct percentage for you. What I can do is back up a little bit and go through a couple of the words that we've used deferral and abatement. From a deferral -- on a deferral basis, if you look at the second quarter, that $8.9 million, Tony, we believe the third quarter won't be too far off that and then it's going to really diminish in the fourth quarter. If we look at the abatement, the abatement will be halved in the third quarter from the second quarter and then diminish in the fourth quarter. So, those will be more stabilized certainly by next year, where we come out in terms of a run rate next year. That's guidance for next year, we will provide guidance for next year. We have to at the appropriate time, but we're just not prepared to do that now.

Anthony Paolone -- J.P. Morgan -- Analyst

Okay, I understand. And then, I know it's a tough question maybe to answer, but as you went through all of these deals with your tenants, you probably got an added look inside of books and things like that. Any sense as to how much of a -- things go backwards a bit, how much can be stood before having to come back and maybe do something like this over again and where some of the risks in your mind might still lie?

Glenn Rufrano -- Chief Executive Officer

Well we understand that question and it's a real duration question which has been the most problematic part of any decision we have made. Paul, why don't I hand it over to you, and give that a crack.

Paul McDowell -- Executive Vice President and Chief Operating Officer

Sure, I mean, we have taken a hard look with each one of our tenants so far. As I described in my prepared remarks and tried to figure out where we had tenants that needed help and where they didn't need help and the ones that didn't need help, we pressed them to pay and for the most part they have paid.

With respect to the ones that needed help, we tried to craft deferrals and abatements in a manner that gave them the believing room to get across the ditch as it were. The question is we're not exactly sure how wide the ditch is. So far, our collections are sort of reflecting some positive momentum. We're starting to see August collections, we feel pretty good about August collection so far. To the extent that lockdowns and closing of the economy occurs again, which we don't particularly expect, but if it does and tenants come back to us, we will have to take a look at where they stand at that time. But we have been pretty impressed with how our tenants so far have reacted to the current environment, how they chase in their business models, particularly within the casual dining sector, so that they could withstand additional shocks if they come. But if it does come, we're just going to have to take it on a case by case basis or on tenant by tenant basis.

Glenn Rufrano -- Chief Executive Officer

And Tony, to your point, we have created a database that you'll see on Page 15 of our presentation, where we've actually taken the portfolio statistics by retail, service, casual dining, industrial and office. And we have compared them to reopened states, reopening states, pausing states and reversing states, to try to get a better understanding of exactly what's you're talking about and hopefully the geography can help us to do that. And we -- you'll see the database and you'll also see that, and Paul mentioned this, we did not see a lot of difference in July relative to the total portfolio by those segments. But we may, we will be running this database every month, and every quarter we'll giving out to the market and here is what we may see a pre-closure of what's be coming, if we can ahead of it, that would be great.

Anthony Paolone -- J.P. Morgan -- Analyst

Great, thank you.

Operator

The next question is from Vikram Malhotra with Morgan Stanley. Please go ahead.

Vikram Malhotra -- Morgan Stanley -- Analyst

Thanks for taking the questions. I know you have laid it out pretty well in terms of the uncollected rent deferrals, the abatement. But I just want to be clear for AFFO purposes, can you just clarify once again what has improved and non-improved for AFFO purposes?

Glenn Rufrano -- Chief Executive Officer

Good. I am going to hand it over to Mike.

Michael J. Bartolotta -- Executive Vice President and Chief Financial Officer

For AFFO, you have both the abatement, is causing AFFO to go down as well as $4.7 million of the $8.4 million of the $8.4 million of reserves we booked. The only piece of the reserves that don't go through AFFO is the straight-line portion, which is $3.7 million. So you have two numbers running through there, $4.7 million because it's a decrease in AFFO and $11.1 million is a decrease in AFFO.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay, great. Thanks. And then, so Glenn, maybe just talking about the dividend you sort of maybe proactively or conservatively adjusted the dividend here. Now you've had pretty strong rent collection, you're hearing positive anecdotes, I guess, from your tenants, the balance sheet is in a better shape. How should we think about sort of dividend levels near-term versus maybe entering into 2021?

Glenn Rufrano -- Chief Executive Officer

We're pleased with the dividend that we have now, but one of the reasons is that we look at it, Vikram, both on an AFFO basis, which is the 51%, but we also look at it on cash. And going forward, you've given the way we're accounting today I think everybody has to look at it both on GAAP and cash. And so, if we took our $0.15 AFFO as Mike described the thesis. Again if you refer to Page 16, total uncollected rent was $41 million that's the reverse we collected 85%, we didn't 15%. So we didn't collect $41 million. If you took $41 million by our share count, it's about $0.04 a share.

So, in terms of cash, we collected $0.11 and we paid $7.77. That's the 70% payout ratio, still a pretty good payout ratio, but we're going to be focused on both, before we establish any final payout ratio. I'll go back in time now, in 2015, if you remember, we did not have a dividend when all of us got here. When I got here and before we put the management team together, and when we established the payout ratio back then it was 70%, knowing that it would go higher as we reduce leverage. It went to 85%, higher than we expected, mainly because our litigation was $1 billion dollars, and another $150 million in costs, we did not expect to be at that high. So, that's a high number in 85%, I would say. The higher end of what we would expect. If we then went back and I took all that information, and say what's more traditional, I would say somewhere between 70% and 80% would be more traditional and at the appropriate time, we'll evaluate GAAP cash and a traditional ratio to establish one for ourselves. I think that'll be when we give guidance.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay, fair enough. And then, just maybe going back to the potential acquisitions and ultimately dispositions, through COVID, obviously certain sectors haven't performed that well, others have held up. But we've also heard in manufacturing, for example, pricing has softened a bit. So, there's been some, I guess, years of maybe doing acquisitions there. Can you just talk about, kind of on that cases, or maybe just even separate, what areas are you sort of incrementally interested on from here, and then what sort of sectors are you looking to face some from here on?

Glenn Rufrano -- Chief Executive Officer

We have a little bit of a bad connection, Vikram. So I'm going to repeat. I believe what you're asking is what sectors are we more concerned about within our portfolio? And I think maybe what where would we beep up some of the areas. Is that your main point?

Vikram Malhotra -- Morgan Stanley -- Analyst

Yeah, I mean, just in terms of acquisitions and dispositions, some of your peers have referenced manufacturing, looking a little bit more interesting from a price perspective. But we know what the challenging sectors are. So, I'm just wondering if you look forward, in terms of dispositions and acquisitions, where you incrementally -- where do you want to add, where do you want to subtract?

Glenn Rufrano -- Chief Executive Officer

Our original guidance this year, when we talked about acquisitions, we had three areas that we would focus on. One, was discount retail, the second was quick service restaurants, and the third was industrial non-investment grade. Those were the three areas that we were focused on, and we would continue to be focused on those. We believe those are areas that would add to the portfolio in terms of diversification and long-term stability. So, we continue to look there as we go forward in terms of dispositions.

Now I'm going to actually hand over part of that question to Tom to talk you about the acquisition market and perhaps disposition. On the disposition side, we will continue to reduce our ratio of office. We're about 17% now, and in our original guidance, we said we'd like to get that down to be between 10% and 15%. And we're going to continue to look at it that way. We also may take a look at some flat income streams. If there's a pricing out there that we think makes sense for those. So, the acquisition and disposition programs are all related to what the long-term portfolio will look like, and that's how we would look. In terms of those markets, why don't I just hand it over to Tom, who will then reflect upon the market for those asset types?

Thomas W. Roberts -- Executive Vice President and Chief Investment Officer

Yeah, as Glenn mentioned, dispositions will be a source of internal equity. And I kind of see our disposition program in three buckets, our non-core assets, we continue to sell. Dark vacant restaurant, retail operators or very short-term leases where we don't think they're going to renew. And in that bucket, we really sell the users and developers for redevelopment of the building and or the site. So, the beauty of that program is you turn a non-cash flowing asset into cash and then redeploy it, 7% to 7.5% very accretive.

The other bucket that Glenn touched on is maybe flat leases, we sold some flat leases in the first quarter. And that was a program to bring our flat leases down in the portfolio. Obviously, they're a very strong investment grade credits and performed very well through the pandemic. So, we've kind of slowed that program down a little bit. Red Lobster was is obviously a program we've exercised in over the last five years, just based on casual dining, that program has slowed a little bit but hopefully, tail end of the year and in 2021, we will continue to sell Red Lobsters and bank branches as well. We do a blend and extend on a bank branch and we are reducing our exposure there as well.

Glenn also touched on office. Obviously, our asset management team did some very nice blend and extend programs where we have investment-grade office. That's on a 10-plus year lease in very good real estate location. So, we think selling that is going to generate some cash that we can redeploy. And some of those, as I mentioned, investment-grade real estate are in the mid-5s to 6% cap rate range. So those are institutional buyers that would buy those assets. And then we redeploy it, 7% or 7.5%, picking up 150 basis points to 200 basis points spread. So that's kind of our disposition program.

As you know, we put our acquisition program on pause in the second quarter. And our plan is to, as I mentioned redeploy some of our disposition assets or disposition proceeds with a focus really on build-to-suits and sale leaseback. Because build-to-suits and sale leasebacks, we can generate a little higher yield. Build-to-suit where we have long standing developer relationships for both retail and industrial. And we get a little higher yield, we have a little forward commitment component. And it's really based on a relationship and a certainty of close versus some type of a bidding process.

Also I mentioned sale leaseback, we like those transactions, obviously generally longer-term leases, say, 20 years. We can negotiate the lease documentation, we have some insight into the management of the company. If it's an M&A deal, certainly, there again certainly a close is more important than price. And we don't have to bid in the process. So, same product types, discount retail as Glenn mentioned. We like C-stores, QSRs, non-industrial -- non-investment grade industrial on the balance sheet are kind of our focus points. Maybe focus a little bit on the markets, clearly the second quarter was slow, down almost 70% from last year. Clearly, people killed deals, put deals on hold. Sellers didn't bring a lot of assets to the market because of the uncertainty. But we have seen activity pickup for both office, industrial and essential retail and that has picked up to maybe not quite pre-COVID levels but certainly very active. The areas that really haven't done well are non-essential retail, theaters, health clubs, entertainment type retail, but really there is no activity there and it's kind of hard to tell.

From a pricing standpoint, industrial is obviously a very hot product type. Investment-grade essential retail and investment-grade office, we think pricing is almost back to pre-COVID levels and in some cases even more aggressive based on kind of a flight to quality. Non-investment grade office, and maybe non-investment grade essential retail, I think pricing is down maybe 25 basis points to 50 basis points, which is only 5% to 10% say of pre-COVID pricing levels. And I mentioned theatres, health clubs, entertainment, it's just they're not trading and it's really hard to figure out what the pricing levels would be on those assets.

Glenn Rufrano -- Chief Executive Officer

Good, Vikram. Is that good enough? Did we cover everything?

Vikram Malhotra -- Morgan Stanley -- Analyst

I guess, yes.

Operator

The next question is from Chris Lucas with Capital One Securities. Please go ahead.

Chris Lucas -- Capital One Securities -- Analyst

Good afternoon, everybody. Hey, Paul, you started to answer I think one of the questions I had, related to the blend and extends. If you were to bucket sort of the allocation of those deals between sort of near-term extensions that take some risk off the table, and then, the other bucket being sort of leases that get you from sort high-single digits to over 10 years sort of creating value, and then, the last bucket being sort of just longer duration of already long duration leases. How would you bucket the abatement and blend and extend actions you took?

Glenn Rufrano -- Chief Executive Officer

I'm going to hand it over to Paul. But just, Chris, I think I understand you're telling that when we're increasing terms, would our focus be on very, very long-term, getting it over 10 years or just getting it over the line say between two and five years or two and eight years?

Chris Lucas -- Capital One Securities -- Analyst

Yeah. Yeah, I think that's right.

Paul McDowell -- Executive Vice President and Chief Operating Officer

So, there's two types of blend and extends that we do. One is sort of routine and one is non-routine. So from the routine perspective, that's kind of things we do quarter in and quarter out. Those are generally on near-term leases. So leases are getting closer to coming due, and so we're looking to extend the term beyond sort of the classic five-year renewal options the tenant might have. And we did a significant amount of that in the second quarter. And then there's the blend and extend that we did with respect to COVID. And that was, those transactions are really driven by what the position is that the tenant is in, and what's their near-term pressures on their business versus their long-term outlook. So, with respect to those transactions, those leases were a bit longer in nature than we would often do a blend and extend, but it helped get the tenant over there near-term issue. So, helped them and helped us with a longer-term asset, which now has a better NAV.

Chris Lucas -- Capital One Securities -- Analyst

Thank you for that. And then Mike, on the converts that mature at the end of the year, when are you able to sort of redeem them completely without penalty?

Michael J. Bartolotta -- Executive Vice President and Chief Financial Officer

I believe that either 45 days or 90 days before the end of the year, but it's not a very long period. There is actually, I'm sorry, there is actually no redemption period, we'd have to tender for them. That's where it is in investment.

Chris Lucas -- Capital One Securities -- Analyst

Okay. So, this process -- I am just trying to understand the drag between money raised and your actual redemption of the funds, but you're basically going to -- have been through this for the rest of the year?

Michael J. Bartolotta -- Executive Vice President and Chief Financial Officer

We indicated in our Q that we repurchased a little over $50 million so far in private collections. So, that that process may or may not continue depending on where the market value is for [Indecipherable].

Chris Lucas -- Capital One Securities -- Analyst

But once they get to the maturity date, I mean, at that point, isn't it a redemption? I mean, how does that?

Michael J. Bartolotta -- Executive Vice President and Chief Financial Officer

Then its a redemption at par on December 15.

Chris Lucas -- Capital One Securities -- Analyst

Okay. Okay, great. That's all I had. Thank you.

Glenn Rufrano -- Chief Executive Officer

Thanks Chris.

Hello? Hello?

Operator

Mr. Lee is your line muted?

Frank Lee -- BMO Capital Markets -- Analyst

Hi, good afternoon guys. You mentioned on the last earnings call that about half your restaurant tenants have applied to the PPP program. Do you have a sense of what percentage of those tenants paid rent with PPP in July? And what are your expectations for those tenants to continue to pay rent when funding went out?

Glenn Rufrano -- Chief Executive Officer

They just, just to make sure I understand frankly, we had conversations and Paul did it. So I'm going to hand this over to him on PPP with our restaurants. So let me just, Paul, why don't you, I'm not sure, Paul...

Paul McDowell -- Executive Vice President and Chief Operating Officer

So, we did have a lot of our tenants in the last quarter when PPP came out to apply for it, and some got it. We have had increased rental collections, but most of that was not driven by PPP funds, mostly was just by their businesses starting to recover and their ability to continue to pay rent. I would say overall, our rent collections associated with the Paycheck Protection Program have been very small. And we don't expect that to be materially bigger. So, it won't have a material negative impact to the extent those PPP funds run out for tenants.

Frank Lee -- BMO Capital Markets -- Analyst

Okay, thanks. And then Glenn, you talked a bit about the $150 million at preferred that you redeem. Can I just get your -- provide some thoughts on how you're weighing future redemptions versus deploying that capital onto acquisitions?

Glenn Rufrano -- Chief Executive Officer

Well, it's a math, Frank that we're going to be considering here, the 6.7% coupon on the breadth which is a pretty high coupon. And that's why we've been redeemed as you know, we had about $1.1 billion [Phonetic] when we started, and after the latest redemption, it's down to about $623 million. So, we've done a pretty good job of chipping away at that. And we've done it in a number of ways. So, look at history, when we sold assets into the industrial partnership, we created a nice chunk of capital -- internal capital at a good rate. We paid down a number of those, perhaps, and we've continually taken capital that we've brought back into the balance sheet and measured it against paying them off versus making acquisitions. And we'll continue to look at it that way, as we create internal capital, we'll then measure the spreads between acquisitions and the press [Phoentic], and look at those spreads. And then also make a judgment because I understand your point. Many people, including yourself take that press and put them into our debt ratio. So we do care about that. And so we'll measure spreads and taking down our debt ratios. And as always, we're on offense. We hope we make the right allocation decision.

Frank Lee -- BMO Capital Markets -- Analyst

Okay, great. Thank you.

Glenn Rufrano -- Chief Executive Officer

Thank you.

Operator

Your next question is from Spenser Allaway with Green Street Advisors. Please go ahead.

Spenser Allaway -- Green Street Advisors -- Analyst

Thank you. I know you guys mentioned in your prepared remarks about near-term maturities have decreased but you still have a relatively high number of explorations coming in 2021. Can you just comment on how you're feeling about your ability to recapture rent on these and given the current environment?

Glenn Rufrano -- Chief Executive Officer

Sure. I'll turn it over the Paul. That's a combination question, just to make sure its explorations and recapture.

Spenser Allaway -- Green Street Advisors -- Analyst

Yes.

Glenn Rufrano -- Chief Executive Officer

Yeah.

Paul McDowell -- Executive Vice President and Chief Operating Officer

Right, so during this quarter we were able to lower our 2021 expirations from 7.1% to 6.3% next year. We've essentially had the amount of expirations we have for the rest of the year, I would characterize the expirations we have for the rest of the year, generally sort of routine renewals, don't expect to have a material amount of pressure on recapture rates with respect to those.

Next year, much of the expirations, particularly some of the larger ones are back loaded into the second half of the year. We have very little restaurants coming during next year, only 0.8% of ARI are restaurants that are coming due. We do have 1.7% of industrial which we feel pretty good about, either we like the renewal probability on the asset or we like the assets themselves, so not overly concerned about rent recapture there. 2.6% is office and we've been working on renewing a number of office transactions, some of which we did this last quarter, several of which are in process now. And we feel pretty good about that. So, so far, we're not seeing an enormous amount of pressure on our leasing spreads as a result of COVID. That may well change. I think we would expect there be some pressure as time goes by. But at the moment, we don't see a material change from releasing spreads as to where we are today as to where we hope to be next year.

Spenser Allaway -- Green Street Advisors -- Analyst

Okay, thanks. And just one more, I just want to clarify something, as it relates to the office leases expiring in 2021, none of those properties are in your disposition bucket, are they?

Glenn Rufrano -- Chief Executive Officer

They may be under consideration. So the best way I could tell you this, right today, they are not. But they may be into consideration depending upon the circumstances and what happens with those leases. As we mentioned, Spencer, we are -- when we do a blend and extend which we've done a number of -- we may bring that to the market, which is what we're doing right now. So it's a maybe, subject to how we deal with lease.

Spenser Allaway -- Green Street Advisors -- Analyst

Okay. And sorry just one more. On the industrial side, just given, obviously, it's been one of the property types that fared really well amid the pandemic. Is there any opportunity there, just where you have expirations coming in the next year or two? Is there any opportunity to actually increase rate?

Glenn Rufrano -- Chief Executive Officer

I am going to hand this to Paul. Our average is between $4 and $5. Our rent is between $4 and $5. So we have a very good basis in rents for our industrial and very good basis in price per foot as well. And so, I think there's certainly a possibility. Paul, would you agree?

Paul McDowell -- Executive Vice President and Chief Operating Officer

Yeah, obviously, Spencer, we like to increase rent. So if we're able to do so, I look forward to doing it and then reporting on it, won't speculate in advance on whether or not we'll be able to do so.

Spenser Allaway -- Green Street Advisors -- Analyst

Thank you.

Glenn Rufrano -- Chief Executive Officer

Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Glenn Rufrano, for any closing remarks.

Glenn Rufrano -- Chief Executive Officer

We thank you for joining us today. And we wish everybody well and be safe during the summer season. Take care.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Bonni Rosen -- Senior Vice President, Investor Relations

Glenn Rufrano -- Chief Executive Officer

Paul McDowell -- Executive Vice President and Chief Operating Officer

Michael J. Bartolotta -- Executive Vice President and Chief Financial Officer

Thomas W. Roberts -- Executive Vice President and Chief Investment Officer

Sheila McGrath -- Evercore ISI -- Analyst

Anthony Paolone -- J.P. Morgan -- Analyst

Vikram Malhotra -- Morgan Stanley -- Analyst

Chris Lucas -- Capital One Securities -- Analyst

Frank Lee -- BMO Capital Markets -- Analyst

Spenser Allaway -- Green Street Advisors -- Analyst

More VER analysis

All earnings call transcripts

AlphaStreet Logo

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.