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VEREIT Inc (NYSE:VER)
Q3 2020 Earnings Call
Nov 5, 2020, 1:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the VEREIT 2020 Third Quarter Earnings Call. [Operator Instructions]

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

Bonni Rosen -- Director, Investor Relations

Thank you for joining us today for the VEREIT 2020 Third 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 Robert, our Chief Investment Officer. Today's call is being webcast on our website at vereit.com in the Investor Relations section. There will be a replay of the call beginning at approximately 2:30 p.m. Eastern Time today. Dial-in for the replay is one (877) 344-7529 with the confirmation code of 10148276. 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. Let me quickly review the format of today's call. First, Glenn will begin by providing a brief business summary, followed by Paul, who will give an operational update with Mike then presenting our financials and balance sheet. Glenn will then wrap up with closing remarks. We will conclude today's call by opening the line for questions where we will be joined by our Chief Investment Officer, Tom Roberts.

Glenn, let me turn the call over to you.

Glenn Rufrano -- Chief Executive Officer

Thanks, Bonni, and thank you for joining us. We had a very active quarter, increasing collections and allocating capital, while reducing debt and preferred stock. Here are some quick highlights. AFFO per diluted share for the quarter was $0.15, which includes the effects of COVID-related items, which Mike will discuss. Rent collection for the quarter increased to 94% from 87% in Q2. October was our highest monthly collection rate at 97%. Year-to-date, we've invested $489 million of capital, including $300 million of 6.7% preferred stock and $189 million of property acquisitions. In addition, we acquired $247 million for the industrial partnership and $33 million for the office partnership. Year-to-date dispositions totaled $358 million, including the company's share contributed to the office partnership of $110 million. Total office dispositions for the year have totaled approximately $280 million. We issued $94 million on our ATM and net debt to normalized EBITDA decreased from 6.1 times to 5.76 times. The second quarter was interrupted by the pandemic in many ways. Both notably capital markets and rent collections. Following an active first quarter, capital markets froze in the second, both in terms of debt and transaction activity. However, starting in the third quarter, there's been a thawing of debt markets and following Labor Day an increase in transaction activity. Reflecting on rent collections, we typically expect 100% of our rents to be collected but this year proved different. Through the efforts of our real estate operations teams, including asset management, leasing and property management, we have now increased our rent collection from 87% in Q2 to 97% in October. Combining these thoughts, reduced capital market activity and collected rent left us with a gap from our original February AFFO guidance of $0.64 to $0.66 per share. This gap has been primarily reduced by investing $489 million accretively, both in property and preferred stock, financed in Q3 by a portion of our second quarter debt offering, office dispositions at attractive cap rates, retained capital increased most recently by our reduced dividend and ATM proceeds and mix of options.

Additionally, our institutional partnerships approaching $1 billion provide alternative capital to create high returns on investment in the source of recurring revenue in the form of asset and property management fees. We have had a number of levers to progress in a difficult environment. As a result of our capital market and collection activity, we expect AFFO for the year to be approximately $0.62, not far off our original guidance. Projected deferrals in this estimate adjusted for general reserves approximate $0.02 or 3% of this year's estimate. A lower percentage than we would have expected in March or April and bodes well for income stability. Our real estate team, intact since 2015, with average tenure of eight years and 20 years of real estate experience, have closely monitored the market as we consider acquisitions and dispositions. We keep tabs on the single-tenant net lease universe of roughly $1.5 trillion and have sourced around $25 billion a year. With the post-summer pickup in activity, we were at $16 billion year-to-date. Looking forward, our property pipeline chosen to provide portfolio stability and growth could range between $150 million and $300 million in Q4 through Q1 of next year, and we will continue to be active in both institutional partnerships. After decreasing our preferred stock from $1.1 billion to $473 million, we will consider further reductions as we choose to allocate capital. By making option for prospective property and securities acquisitions will include the Q3 mix I just discussed, with emphasis on our active program of dispositions, which alone could cover our acquisition pipeline.

I will now turn the call over to our Chief Operating Officer, Paul McDowell, to provide an operational update. Paul?

Paul McDowell -- Executive Vice President and Chief Operating Officer

Thanks, Glenn. Our teams continue to be highly focused on rent collection but are increasingly pivoting to day-to-day leasing, asset management and property management as we return to more normalized rental collections. We had another very strong quarter of routine leasing activity, with 76 leases executed on over 1.5 million square feet, of which roughly 260,000 square feet were early renewals. Total activity included 737,000 square feet of industrial, 592,000 square feet of retail, 129,000 square feet of office and 81,000 square feet of restaurants. For renewal leases, we recaptured approximately 101% of prior rents on an initial cash basis and many of these newly extended leases have additional built in rent increases. Occupancy ended the quarter at a healthy 98.5%. Leasing activity on a year-to-date basis has also been very positive with a total of 193 leases at over 5.6 million square feet, of which roughly 2.5 million square feet have been early renewals. As you can see, we are very focused on being in front of our expiration schedules, which is best illustrated by the 2.5 million square feet of early renewals we have done so far this year. This has been a consistent effort. Over the last two years, we have reduced expirations for the next three years through 2023 by 3.6%. In just the past two quarters, we have leased or renewed close to 974,000 square feet of office space, which has reduced our office rollover for the remainder of 2020 through 2023 in that portfolio by close to 7%. Office retention has been 75% to 85% on average. In addition, we have been successful in extending leases and then placing those properties on the market for sale. This quarter is a perfect example. We sold two office properties with new lease extensions at disposition cap rates averaging approximately 6.1%. Turning to our COVID-related tenant activity. As of October 23, we had the following. For Q3, we entered into deferral agreements with 21 tenants or $3.9 million, representing 1.4% of third quarter rents. Executed deferral agreements for October were 0.02% of rents.

This brings executed deferrals for the year to $16.7 million, which includes an updated Q2 amount from $8.9 to $12.8 million, for agreements signed subsequent to our last reported date of July 29. The weighted average of the total deferral period is 3.5 months, and the weighted average payback is six months with 25% of repayments due in 2020 and 75% in 2021. Through October 31, approximately 100% of deferral repayments due were made by tenants. In addition, as we mentioned last quarter, we had 2.1% of blend and extend abatements in Q3 were $6 million, largely made up of one tenant where we were able to extend the weighted average lease term on the leases by approximately five years as well as other beneficial elements. The free rent period has now ended, as evidenced by an immaterial abatement amount for October. From a pure volume standpoint, we have entered into various COVID-related agreements, including extensions, covering 554 leases and nearly 11.7 million square feet. Mike will discuss the accounting impacts within his section. Now let's talk more specifically about our portfolio performance and where we are to date. Over the past four months, we have seen steadily improving collections, as Glenn has mentioned. Our Q2 rent collection came in at 87%. July was 92%, August 94%, and September 95%, bringing Q3 to 94%, and most recently, we disclosed October is at 97%. These percentages are based on pre-COVID rents and we have not adjusted the denominator for any rent relief. The underpinnings of these strong collection results were driven by our property type diversification, industry breakdown, investment-grade tenancy, public versus private ownership and geographic location. As we've discussed previously, our 80% 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 addition, our improving and other industry now average over 90%, with casual dining, notably at 91% in collections for October. In Q3 in October, all of our top 20 tenants effectively paid full rent during the quarter. Our approximately 38% of investment-grade tenancy for the total portfolio and 46% within retail, and now almost 40% and 50%, respectively, with the recent tractor supply rating were a strong component of rent collections at almost 100% during the quarter and in October. Over 65% of our tenants are public in the overall portfolio and approximately 74% are public within retail, which we view very positively. We continue to monitor our tenant's credit quality closely, particularly our larger exposures. So far, we have experienced a small percentage in bankruptcies this year with no material ones due to COVID as of now. Additionally, we have almost no exposure to movie theaters or child care. That said, the pandemic has clearly increased credit stress on a subset of our portfolio, which we continue to watch closely. In particular, we were gratified to see that Red Lobster's ownership was enhanced during the quarter with the announcement of Thai Union and investor Group called the Seafood Alliance led by Thai Union and international restaurant executives, coupled with existing Red Lobster management, acquired the remaining 51% of Red Lobster from Golden Gate Capital. Red Lobster remains headquartered in Orlando, led by the current CEO, Kim Lodrup, and the management team. Thai Union is a major publicly traded global seafood supplier with an enterprise value of approximately $4 billion. And the transaction deepens Thai Union's more than 20-year commitment to Red Lobster, first as a supplier and now as the effective owner of the brand. We view this transaction completed during the pandemic as a credit positive, given Thai Union's size, financial flexibility, large investment and integrated relationship as both a supplier and equity investor.

Confirming this view, we have seen strong improvements in the market pricing of Red Lobster's term loan from $1 price in the mid-80s to a current level in the mid-90s, essentially where it was pre-pandemic. We also viewed the recent merger announcement between Topgolf and Callaway as a credit positive. Our geographic diversity has also helped us in rent collections. Although many states are seeing an uptick in cases, and some are having to delay or roll back on fully opening, our October collection rates does not yet show any material effects. We are monitoring these states carefully and October collections were approximately on top of the overall portfolio collection rates for each property segment. See slide 15 of our investor presentation for further information. I would like to thank all of our teams who continue to do an outstanding job in drying circumstances, and our collections to date are reflective of those efforts. Our dedicated property type asset management teams remain in contact with our tenants to understand the impact of COVID-19 on their businesses. We have essentially completed all rent relief requests, except for resolutions on approximately 1.5% of rent. In closing, we've been very pleased with our portfolio's performance and rental collection numbers so far, which are at the top echelon for our sector. 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 third quarter financial highlights and provide some details on the Q3 effects of the COVID pandemic on our earnings. I'll break out some of the COVID related items that are included in our AFFO of $0.15 for the quarter and those that are not included. These items are in the following three categories: executed deferral agreements for Q3 as of October 23, where the collection of future cash flows was deemed probable, totaled $3.9 million. This rent is included in AFFO, and we expect deferrals related to Q4 rent to be significantly reduced. Executed blend and extend amendments, which contain an abatement of rent for a specified period totaled $6.5 million, of which $5.9 million related to third quarter rent and $0.6 million at second quarter end. This entire negative impact of these amendments reduced Q3 AFFO. And this, too, is expected to significantly decrease next quarter. Reserved rents of $9.2 million. That was related to the impact of COVID-19 pandemic, of which $5.1 million represents the general allowance for rental revenue and $4.1 million represents rents from tenants being accounted for on a cash basis and amount not probable of collection as of September 30, 2020. This full amount also reduces AFFO. Turning to our balance sheet. As of the end of the third quarter, the company had corporate liquidity of approximately $1.7 billion, comprised of $207 million in cash and cash equivalents and $1.5 billion credit facility undrawn.

In addition, secured debt was reduced by $62.4 million in the third quarter, bringing the total amount reduced for the year to $195 million and increased our unencumbered asset ratio to 82%. During the quarter, the company redeemed $300 million of VEREIT's 6.7% Series F preferred stock with $150 million completed on July 22, 2020, and $150 million completed on September 20, 2020. This leaves approximately $473 million outstanding. In addition, year-to-date, the company was able to take out and repurchased $69.1 million of its 3.75% convertible senior notes due December 2020, which leaves $252.7 million of principal. The remaining amount is covered from our bond issuance in the second quarter at 3.4%, along with our available liquidity. During the quarter and subsequent to September 30, 2020, the company issued 13.8 million shares at a weighted average price of $6.82, for gross proceeds of $93.8 million under its at the market equity offering program. Also, as noted in our earnings release, our Board has approved a one for five reverse stock split, which is scheduled to take effect on December 17, 2020, with trading on a post-split basis beginning on December 18. More details can be found in our 10-Q filed this morning. Our fixed charge coverage ratio remained healthy at 3.3 times, and our net debt to gross real estate investment ratio was 40%. The weighted average duration of our debt is 4.6 years, and we are 99.4% fixed. Net debt to normalized EBITDA ended at 5.76 times.

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

Glenn Rufrano -- Chief Executive Officer

Thanks, Mike. As I discussed earlier, retained capital from our dividend reduction was invested productively this quarter. As such, the Board has decided to maintain the current dividend, which had a 50% payout ratio in Q3 is a basis for growth. We expect to revisit and increase the dividend with 2021 guidance. As you heard in Paul's presentation, 97% October collection is a function of diversity, credit quality and a high percentage of larger public companies. Our operation teams are keenly focused on expirations and this year, we have leased 2.5 million square feet of early renewals to reduce future exposures. Our relationship with Golden Gate Capital has been very good. However, we are pleased with Thai Union, the new owner of Red Lobster, as are the credit markets. Mike presented accounting and current balance sheet statistics. Deferrals have been greatly reduced from Q2 to Q3 and are expected to be minimal on Q4 rents. Abatements were reduced in half over the same period and are also expected to be nominal on Q4 rents. While having quite a bit of capital activity over the quarter, net debt-to-EBITDA was reduced from 6.1 times to 5.76 times, while also decreasing our preferred by $300 million. As we enter this winter season, let's remember to support our healthcare professionals, first responders and essential workers.

With that, I'll now open up the call for questions.

Questions and Answers:

Operator

[Operator Instructions] The first question today comes from Haendel St. Juste of Mizuho. Please go ahead.

Haendel St. Juste -- Mizuho -- Analyst

Hey there. Good afternoon Glenn, impressive rent collections indeed, up to 97%, certainly helped by diversification, high-grade exposure on the other things you mentioned. But I guess I'm curious why you don't think you're getting credit for it here? Are you still trading at a meaningful discount to your peers. We think perhaps is a lack of a growth narrative. So I guess I'm curious what your perception of it is and perhaps some thoughts on what you can do to close the net gap? Thanks.

Glenn Rufrano -- Chief Executive Officer

We've trended pretty well over the last quarter or so relative to our peers. But I take your point, Haendel. And growth may clearly be the issue. We feel that in the third quarter, we had quite a bit of growth, a little disappointed that the market looks at buying back our press as not acquisitions. It is an acquisition. We're an allocator of capital, and we felt in the third quarter, $300 million of production is a pretty good production level compared to anybody else in our peer group, first about. So we feel we're in the growth mode and have done it wisely. We're not in the business of making deals for the sake of making deals. We're in the business of making allocations for the benefit of our shareholders. As we look forward, because we do understand the market has a preference for assets. We see the benefit of assets in a couple of ways. The press gives us -- I'll go back to the press, they gave us a good cap rate at 6.7% effectively. Reduces debt in many people's equations. And it's a very safe investment from a risk standpoint. Assets, however, are always important because they have to be put into the portfolio to tone it, refresh it, WALT, for instance. If you look at the acquisitions we made this year, the average WALT was 18 years and the dispositions were seven. So by being active in the portfolio, both acquisition -- from an acquisition and disposition standpoint, we benefit the portfolio in total. We also get growth in assets. Each year, we'll have some growth. It's been averaging about 1.5%. And it also provides -- assets also provide stability. Going forward, our growth will be based upon assets. We've given an estimate of $150 million to $300 million over the next two quarters. That could be higher. I don't think it will be lower, but it also can be combined with press. We have options. We're happy to have options. And so we -- the market will see our growth. And the growth will be based upon our allocation of capital, not just mindless buying of assets.

Haendel St. Juste -- Mizuho -- Analyst

Got it. Got it. Thank you for that. And just wanted to step back for a bit. You've been CEO of VEREIT now five -- just over five years. Maybe it feels longer that as time stands still here in COVID world. But in all seriousness, you've achieved the key goals you set out for the company when you joined, you've delevered the balance sheet, reduced net loss for exposure, set of litigation to name a few. So as you contemplate I guess, where VEREIT has been, where it is today, what do you kind of see as key portfolio initiatives or larger targets for the company, say, over the next five years?

Glenn Rufrano -- Chief Executive Officer

Well, that's a big question, and it's a big time frame. I'm not sure it's five years. But if I were just going to try to simply provide an answer it for a very good question. I would break it down into three components. Our original plan back in 2015, started out with let's strengthen the portfolio, let's strengthen the balance sheet as the one and two most important elements I would go back to that. We can continue to strengthen this portfolio. You can see how well we've strengthened it by our collections, but we can always do better. So number one, we would want to make sure our diversification works. We're in the right assets over time. We're always thinking about how we can change the portfolio and that has been a saying around here, and Paul and I and Tom and Mike talk about it, as long as our tenants pay us rent, we'll be fine. That's the most important part. And in order to do that, we have to keep our eye on the portfolio, not just for today, but certainly for that 5-year time frame that you've talked about. In terms of the balance sheet, we had a goal back in 2015, we were not investment-grade back then. We had a goal to be BBB. Today, we're BBB- or equivalent by two of the agencies and BBB by one. Our goal is to be BBB. We want to be BBB by all three and then see how we can move from that point in time. So that is a goal that's here, and we will meet in that 5-year period. I hope a lot sooner than that. Third would be growth and how we can grow. And I've talked about this with you and others. When we look at growth, we look at a variety of methods of growth. Today, obviously, collection is number one.

That's how you grow by making sure you collect your rent. Number two, the right side of the balance sheet financing our debt opportunistically with spreads, which we are doing. Financing our preps with spreads, which we are doing and by reducing the dividend, we've essentially created $65 million a quarter, which is equity. As we want to continue to figure out how to use the balance sheet, and that will be another 5-year effort for us. The next part of growth is the right-hand -- is the left-hand side of the balance sheet. It's the assets. I understand. And there, we're in pretty good shape. We have a group of assets, we believe, fit well in our portfolio. Our acquisitions will revolve around discount retail, quick service, restaurants, and for our balance sheet, noninvestment-grade industrial. And we may see some investment-grade industrial on build-to-suits, but primarily non-investment grades. It wouldn't be bad if we could expand that. We have expanded it, as you've seen into investment-grade industrial through our partnership with KIS, and we've expanded some office acquisitions, which we will not do on the balance sheet with our Middle Eastern investor. But we will continue over the next five years to find alternative ways to grow, whether it's different property types or different positions. For instance, last quarter, we told you about a $10 million mezzanine piece of paper we had on an investment-grade industrial project. This quarter, part of our $32 million of subsequent events was a $23 million mezz piece on another investment-grade industrial project. That's a new product for us. It actually starts out by controlling product for our institutional partnership. But it's a good program. Tom Roberts is running it. We have a development group that come to us for these mezz pieces. And so we will continue to look for alternative ways to grow. That's a very important goal over the next five years.

Haendel St. Juste -- Mizuho -- Analyst

Got it. Got it. Thank you for that.

Glenn Rufrano -- Chief Executive Officer

Thank you.

Operator

The next question comes from Anthony Paolone of JPMorgan. Please go ahead.

Anthony Paolone -- JPMorgan -- Analyst

Thank you. So first one, Glenn, just want to clarify, you made a comment, I think about the revisiting and increasing the dividend, I think, with 2021 guidance. So does that assume on the 4Q print?

Glenn Rufrano -- Chief Executive Officer

We don't know. I mean we were bold enough to give guidance for this year, Tony, I don't know how bold that is with seven weeks left in the year, but we felt very confident, and we thought it would be important for the market to know we understand our portfolio we can give guidance this year. What we don't know is what happens over the next few months relative to the pandemic. I would hope we would give our 2021 guidance in the normal cadence, which would be in February of next year. But I would just leave open the fact that we're going to watch this pandemic very closely, and we're going to watch our tenants very closely. But without some unforeseen event, and I'm not sure how much we can see. We would hope it would be February of next year.

Anthony Paolone -- JPMorgan -- Analyst

Okay. Thanks. And then on the deal pipeline, you had mentioned $150 million to $300 million over the course of the next couple of quarters. I guess, one, what do you think you do on the disposition side? And then two, of that $150 million to $300 million, do you think all of that is very share? Or does some of that go into the joint ventures?

Glenn Rufrano -- Chief Executive Officer

That $150 million and $300 million is of the balance sheet, that's us. The joint ventures, and we would hope to have some acquisitions certainly in the first quarter of next year. That's separate. So that's a separate item from the $150 million to $300 million. In terms of dispositions, as I mentioned, with the dispositions that we now have that we believe we can close in the fourth and first quarter, there are enough dispositions to finance the $150 million to $300 million. So the dispositions would certainly be in that range.

Anthony Paolone -- JPMorgan -- Analyst

Okay. So if those net out, then you're getting free cash flow, you did get a little equity out, does that suggest you could do more of the crafts or just keep capacity to do more as things come up?

Glenn Rufrano -- Chief Executive Officer

We could do either. And we like that. We like the option of being able to do some more preps if we feel that it's a risk-adjusted return relationship to assets. So we'll keep that open. We would like to do a combination of both, very frankly. But at this point in time, that's the allocation decision, the capital allocation decision that we will make.

Anthony Paolone -- JPMorgan -- Analyst

Okay. And then just last question on the 2021 lease rollover. Anything of note that are known move-outs we should be thinking about?

Glenn Rufrano -- Chief Executive Officer

I'll hand that over to Paul.

Paul McDowell -- Executive Vice President and Chief Operating Officer

Okay. Look, right now, we're -- we've had retention in the past has been good for us to run roughly around 80% over the past few years. And we don't expect that retention activity to change too much in the coming year. We do have some large industrial rollover during the course of the year most of that is toward the back end of the year. In fact, most of it's in the very last quarter. So we'll have a better sense of where we expect retention to be as we move through next year.

Anthony Paolone -- JPMorgan -- Analyst

Okay. Thank you.

Glenn Rufrano -- Chief Executive Officer

Thanks.

Operator

The next question comes from Sheila McGrath of Evercore ISI. Please go ahead.

Sheila McGrath -- Evercore ISI -- Analyst

Yes. Good afternoon. Glenn, I was wondering, I know it's a Board decision, but just wondering your big picture thoughts on the dividend payout when you choose to raise the dividend higher for 2021. If you're committed to maintaining a more conservative payout ratio than your pre-COVID payout, such that you'll get to a better balance sheet more quickly without external equity and then can you retain cash flow to invest as a means to enhance growth? Just wondering how we should think about that?

Glenn Rufrano -- Chief Executive Officer

I think I could probably just say yes. But, it's a very good point. But let me explain our view on that. We were at about 85% pre-COVID, which was a high number for the payout ratio. We started out, if you remember, 70% in 2015 and didn't expect to get to the 85%. But -- and I've said this before, the $1 billion litigation cost got us there. We would not want to get back to that, to your point, and we would agree with you 100%. In terms of where we'd want to get to. We know that a more traditional ratio could be 70% to 80% but we may get there over time. And so when we start increasing the dividend, we are going to consider everything you're talking about, the ability to use this capital for growth, but we want to reward our shareholders for supporting us. So we will consider what the traditional range could be. We may be at the lower end, but it may take some time to get there.

Sheila McGrath -- Evercore ISI -- Analyst

Okay. Great. And then on the restaurant collections, the casual dining bounced up to 91% in October. Is that just because there are more restaurants open now? Or were there new lease terms in place that motivated collections higher?

Glenn Rufrano -- Chief Executive Officer

I'll -- over to Paul.

Paul McDowell -- Executive Vice President and Chief Operating Officer

Hi, Shiela. To answer to that question briefly, is that it's primarily as a result of the businesses of our tenants beginning to recover as they were able to both reopen their dining rooms and to get there, to go orders and to get their businesses right-sized for the business environment during current pandemic as they were able to do that, it generated more cash flow and as they were able to generate more cash flow, they're able to begin paying rent again. As you know, most of our casual dining is concentrated -- almost all of it is concentrated in some of the largest brands, and as those brands found their footing, they're better able to pay rent, and you're seeing that flow directly through to our casual dining collections are above 90%.

Sheila McGrath -- Evercore ISI -- Analyst

Okay. Thank you.

Glenn Rufrano -- Chief Executive Officer

Thank you.

Operator

The next question comes from Spenser Allaway of Green Street. Please go ahead.

Harsh Hemnani -- Green Street -- Analyst

Hey, this is Harsh filling in for Spenser. I was just curious, you provide rent coverage in aggregate for retail and restaurants. But could you provide some high level color on how coverage levels have changed through the pandemic? And are there any industries within retail that are of concern looking at this metric?

Glenn Rufrano -- Chief Executive Officer

Let me -- the first part of your question, we do have an occupancy cost that we have been measuring and we have a general full WALT number that we put out as well for the total retail. But I think you're talking about the occupancy cost concepts. And for casual dining, we had a target of 6.75 to 8.0. And the last analysis we showed was about seven. Now that's pre pandemic so we were in very good shape in terms of occupancy costs with our restaurant tenants, which is one of the reasons and Paul's answer, they tend to come back. They were doing pretty good business prior to although the pandemic caused them to rethink how they did business. Where they are now on an occupancy cost basis, it's going to be not as good as that. We know that many of our restaurants were put out of business. They had off premises forms of capital coming in or revenues coming in, and they all have honed in on that very well and now have certain percentages of their dining rooms opened. We don't have a good handle as we speak now on their occupancy cost. We do expect and hope that their occupancy get back to pre-pandemic levels, but it's not today, it's at best next year. Paul, would you want to add anything to that?

Paul McDowell -- Executive Vice President and Chief Operating Officer

Yes. I'd say, if you look in our investor presentation on page 21, we show Q3 2020 rent coverage at 2.4%. That number has not yet been fully impacted by COVID impacts. There are some COVID impacts on in that number. But we'll watch that number closely as the quarters go by because many of our tenants report to us on an annual basis. So for several of our tenants, we have yet to see the impact on full WALT coverage. But as Glenn mentioned, at the beginning before the pandemic, our restaurant portfolio was very healthy, both from an occupancy cost, rent-to-sales perspective and from a full WALT perspective. And so they are able to absorb a quite a significant amount of reduction in sales and still be able to pay their rent, and we're seeing that in the portfolio at a 91% rent collection.

Harsh Hemnani -- Green Street -- Analyst

That's helpful. Thank you. And then you spoke a little bit about leases expiring next year and the mobiles you're expecting? Can you provide an -- can you give us some color about what tenants or concepts are in that pool? And if you would be -- if you're thinking about disposing some of those the recycled capital accretively?

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

Yes. I'll let Paul even OK.

Paul McDowell -- Executive Vice President and Chief Operating Officer

Okay. So if you look in our supplement, you'll see that we have 5.8% of rents are expiring in 2021. And just to note, that number was 6.8% a year ago and 6.3% last quarter. So we continue to focus on early renewals. And as Glenn mentioned, I think I mentioned in my remarks, we did early renewals of 2.5 million square feet. So we really focus very heavily on that. It's pretty well-laddered between retail, restaurants, industrial and office from a percentage perspective, from a square footage perspective, it's weighted toward the industrial with rollover next year. And as I mentioned, in the industrial portfolio, most of that is toward the tail end of the year. We don't expect next year to be particularly different than this year, that is we expect retention to still be in the roughly 75% to 85% that we've been able to achieve over the past several years.

Harsh Hemnani -- Green Street -- Analyst

Thank you very much.

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

Thank you.

Operator

The next question comes from Chris Lucas of Capital One. Please go ahead.

Chris Lucas -- Capital One -- Analyst

Good afternoon, everybody. Glenn, I guess I just wanted to go back to your capital allocation decision as it relates to the preferreds versus investing on the balance sheet and new acquisitions. I guess you've got a sort of, I guess, a 6, seven permanent flat investment in taking out your preferreds. What does it take in terms of the opportunity in sort of your targeted acquisition lines of business from a yield or IRR perspective that would make that more attractive and just the risk of the environment that is sort of guiding you to do the preferreds rather than asset investments?

Glenn Rufrano -- Chief Executive Officer

The other point on the preferred I'd point out, and then I'll come back to your real question, is that it is -- it's 6.7%, and it's flat. So you don't get the growth. You also don't get EBITDA, right? We understand that, Chris. So that's an important consideration. But what we do get is a number of our shareholders who include it as debt. So we get debt reduction, which we do believe is an issue relative to a multiple. And so any time you can take debt out accretively and get a multiple increase, we think you get it on both sides with the press. Now in terms of your question in, which is if you look at it an efficient frontier, where do you -- what's the number that you go from one to the other. We're looking at least a 7% first year cap rate. The spread to the 6.7% that has to be there plus growth. And those two are important considerations when you look at the economics relative to the pref. But there -- just as the pref has other considerations, so do the assets. WALT, for instance, is very important. We know that having a WALT that's closer to 10 is better. We only get that if we buy assets. And so we want to have a portfolio structure that gets us a better multiple. So when we're thinking about growth, we're not only thinking about AFFO growth, we're thinking about multiple growth. And both of them, those two acquisitions, the prefs or assets can get us multiple growth. And so we'd consider all those elements, as we look forward. But to your point, we're looking at some spreads of the 6, seven to make the acquisitions very appealing.

Chris Lucas -- Capital One -- Analyst

Okay. And then on the dividend policy, just unclear, you mentioned sort of a guide of 70% to 80% payout ratio. Getting to the lower end. I guess, does that mean that you are starting out at a payout ratio that you feel like would be sort of closer to maybe taxable minimum or just if you're below the range and you'll gradually sort of raise it to that more stabilized run rate. Is that how you're... yeah, OK.

Glenn Rufrano -- Chief Executive Officer

Yes. Well, just -- let me start with pressing 101 that says the board makes that decision, not us. But, but -- and the Board does not -- every quarter, we do -- we have a presentation to the Board on where the dividend is, how much cash flow there is after the dividend, what we do with that cash flow. And we make the decisions based upon what's best for the balance sheet in the long-term and the value of the stock. As we look forward, I give the ratio of 70% to 80% because it's commonplace. If you look at our peer group, that's about where it is. We're not going to get to 80% at the start, I will guarantee you that. We may -- and again, subject to Board approval, we may be less than 70% when we start and gradually get there. But that will be a function of what we can do with that capital relative to giving it to our shareholders. If we feel that we can improve the value of this company so that the total IRR to the shareholder is better. We may choose to keep more and then over time, increase the dividend until we get to a more normalized number.

Chris Lucas -- Capital One -- Analyst

Okay. Thank you for the call I had today. Thanks.

Glenn Rufrano -- Chief Executive Officer

Thank you.

Operator

The next question is from Frank Lee of BMO. Please go ahead.

Frank Lee -- BMO -- Analyst

Hi. Good afternoon, everyone. Sorry, Glenn, if I missed this in your earlier remarks, but what was the driver for tapping the ATM this quarter? And how should we think about ATM usage going forward to fund acquisitions?

Glenn Rufrano -- Chief Executive Officer

Well, when we think about the ATM, frankly, it's a pool of capital that we raise. So we're looking at the cost of our capital relative to the investment. And if we just took this quarter, for instance, we allocated $150 million of the bond issue we did in the second quarter for the prefs. All the capital was primarily used for the prefs and the $32 million that we purchased subsequent to the quarter. So $150 million was allocated at 3.4%. We sold $157 million of assets at around 6%, we then issued the $94 million on the ATM, and we had $65 million of free cash flow just from the reduction in the dividend. We actually had more cash flow from that, but I'll just speak to the $65 million reduction. Those are the four pools of capital we can choose from. And when we mix them together, that's the cost of capital that we used relative to buying the bonds and the assets we purchased. We actually, as you can see, if you added up all those numbers, it's much more than $300 million, which means we have some firepower from that going forward. The equity component is a component. And what it does do for us is it gives us balance sheet cushion so that as we buy assets, we have brought equity to the balance sheet as we have blended our cost of capital. Going forward, as I mentioned on the call, with the properties that we have in our pipeline, we could actually -- we expect to purchase them just from dispositions if we wanted to. But we have alternatives. And that's great. Alternatives and options are always great. And we have alternatives and options in all four of those areas that we talked about, we can have some level of debt without increasing our debt level, certainly. We'll have dispositions. We could have the ATMs if we choose, and we clearly will have free cash flow in the fourth quarter.

Frank Lee -- BMO -- Analyst

Okay. Great. And then if I look at the page where you show collections by state, is there any particular reason why QSR collections in the reopening states have declined in October and also in Q3?

Glenn Rufrano -- Chief Executive Officer

Yes, why don't I hand that over to Paul, who has been watching this.

Paul McDowell -- Executive Vice President and Chief Operating Officer

Yes. That's a good question, and I'm not sure we can draw too many conclusions from that just yet. We do characterize within the QSR, our buffet restaurants, Golden Corral and the like. So as a result, there may be some impact from some of those restaurants being forced to reshut. But I think it's too early to draw too much of a conclusion from that.

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

Frank, we expect the report. You'll see this every quarter. If it goes -- we had it last quarter. Yes, we have in future quarters. We constantly look at it. As time goes on, we expect that we may see more.

Frank Lee -- BMO -- Analyst

Okay. 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

Thanks, everybody, for joining us. And if anybody has any further questions, let us know. If we don't talk to you sooner, I'm sure we'll be talking to many people at NAREIT. Take care, and thank you.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Bonni Rosen -- Director, 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

Haendel St. Juste -- Mizuho -- Analyst

Anthony Paolone -- JPMorgan -- Analyst

Sheila McGrath -- Evercore ISI -- Analyst

Harsh Hemnani -- Green Street -- Analyst

Chris Lucas -- Capital One -- Analyst

Frank Lee -- BMO -- Analyst

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