Good morning, welcome to the Agree Realty third quarter 2019 conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch tone phone. To withdraw your question, please press star then two. Each questioner will be limited to two questions only. Please note, this event is being recorded. I would now like to turn the conference over to Joey Agree, President and CEO. Please go ahead, Joey.
Thank you, operator. Good morning everyone, and thank you for joining us for Agree Realty's third quarter 2019 earnings call. Joining me this morning is Clay Thelen, our Chief Financial Officer. I'm very pleased to report another extremely strong quarter of execution across all aspects of our business. Robust acquisition activity during the quarter was of the highest quality in our company's history. A record 85.5% of acquired annualized ABR was derived from leading retailers with investment grade credit ratings. During the quarter, we invested over $252 million in 74 high-quality retail net lease properties across our three external growth platforms. 68 of these properties were sourced through our acquisition platform, representing aggregate acquisition volume of more than $246 million for the quarter. The properties were acquired at a weighted average cap rate of 7% and had a weighted average remaining lease term of 12.3 years.
The acquired properties are located in 27 states and are leased to retailers operating in 16 different retail sectors, including off-price retail, convenience stores, auto parts, tire and auto service, dollar stores, home improvement, pharmacy, and farm and rural supply. Notable acquisitions during the quarter included a CVS in downtown Greenwich, Connecticut, located on Greenwich Avenue. CVS has committed to a long-term net lease with nearly 19 years of remaining base term. This acquisition adds yet another unique urban street retail asset to our portfolio. During the quarter, we also acquired our first Mariano's grocery store located just outside of Chicago. The lease is guaranteed by Kroger, which carries a triple B rating from S&P and has more than 15 years of remaining term.
We also acquired 10 7-Eleven properties located in Virginia and Florida, and we're very excited to have to work with 7-Eleven to construct a portfolio that has a weighted average lease term of more than 14 years. This was our first significant transaction with 7-Eleven. Through the first nine months of the year, we've invested a record $579 million into 157 retail net lease properties, geographically diversified across 37 states. Of the nearly $580 million invested year to date, approximately $563 million was sourced through our acquisition platform. The 147 properties acquired are leased to 45 different retail tenants operating in 22 distinct sectors. Most notably, 78% of the annualized base rent acquired during the first nine months of the year comes from retailers that carry an investment-grade credit rating.
Our stringent focus on premier operators and avoidance of private equity sponsored or second-tier retailers is continuously demonstrated through the quality of our investment activity. We continue to view the retail world as dynamic and believe the risk-adjusted returns we are achieving are exceptional. Given our record year-to-date acquisition activity, improved visibility into the pipeline for the remainder of the year, we're increasing our full year 2019 acquisition guidance to a range of $650 million-$700 million. While increasing our full year acquisition guidance, I want to again reiterate that our activities remain granular in nature, and we continue to leverage our unique relationships and skill sets to identify and execute on best-in-class opportunities. During the quarter, we continued to add properties to our ground lease portfolio. We acquired four ground lease properties, including a Wawa in Cocoa, Florida, and three geographically diverse AutoZone stores.
Today, our ground lease portfolio spans 60 assets, comprising 8.6% of total annualized base rents. At quarter end, nearly 90% of ground lease rents continue to be derived from leading investment-grade retailers, including Walmart, Home Depot, Costco, Aldi, Wawa, 7-Eleven, and AutoZone. Conversely, only 1% of the portfolio is leased to sub-investment grade tenants, and the remaining 9% is leased to leading unrated retailers. Our focus on creating the country's leading retail portfolio is also demonstrated by the continued transformation of our top tenant roster. During the quarter, we are very pleased to have added Home Depot to our top tenant list, marking the third new entrant to be added to this list this year alone. At quarter end, approximately 57% of our annualized base rents were derived from investment-grade retailers. This represents a nearly 1,000 basis point year-over-year increase.
It's important to again note that the investment grade makeup of our recent activities is a result of our rigorous focus on best-in-class retailers, rather than an explicit focus on A-rated companies. Turning to our development and Partner Capital Solutions platforms, we had 10 development and PCS projects either completed or under construction during the first nine months of the year that represent total committed capital of more than $32 million. During the quarter, we completed four previously announced development in PCS projects. The project had total aggregate costs of $12.2 million and include the company's third and fourth developments with Sunbelt Rentals in Carrizo Springs, Texas, and Georgetown, Kentucky, the company's first development with Gerber Collision in Round Lake, Illinois, and the company's redevelopment of the former Kmart space in Mount Pleasant, Michigan for Hobby Lobby.
We also commenced our first development with Tractor Supply during the third quarter in Hart, Michigan. Anticipated completion is the second quarter of next year. Construction continued during the quarter on the redevelopment of the former Kmart in Frankfort, Kentucky for Aldi, Big Lots, and Harbor Freight Tools. The project is anticipated to complete in the first half of next year. We continue to work to foster deeper relationships with retailers in our top 10 roster. These relationships enable our retail partners to leverage our capabilities while consistently demonstrating our ability to add value across the full life cycle of an asset. While we've strengthened our portfolio through record year-to-date investment activity, we've also diversified our portfolio through strategic asset management and disposition efforts. During the quarter, those activities continued as we sold three properties for gross proceeds of approximately $8 million at a weighted average cap rate of 6.8%.
Dispositions during the quarter were comprised of a Walgreens in Grand Blanc, Michigan, a Mister Car Wash in Flowood, Mississippi, and a franchise-operated Taco Bell. Through the first nine months of the year, we sold nine assets for total gross proceeds of $35.4 million. These dispositions were completed at a weighted average cap rate of 7.2%. As I discussed on last quarter's call, we continue to be very discerning in our approach to the health and fitness space. Subsequent to quarter end, we sold an LA Fitness in Maplewood, Minnesota. This disposition reduces our current LA Fitness exposure to approximately 2.6% of annualized base rents, representing a year-over-year decrease of approximately 100 basis points. This week, we will also be closing on the sale of another Walgreens in Ypsilanti, Michigan.
Pro forma for this sale, our Walgreens exposure will be reduced to 3.5% of annualized base rents, a 270 basis points reduction year-over-year. Our asset management team also continues to proactively address our upcoming lease maturities. As a result of their effort at quarter end, our 2019 lease maturities represented just 0.2% of annualized base rents. During the third quarter, we executed new leases, extensions, or options on approximately 148,000 sq ft of gross leasable space. Notably, we acquired a 31,000 sq ft Best Buy in Sanford, Florida, and extended the lease commensurate with the acquisition. As of September 30th, our rapidly growing retail portfolio consisted of 789 properties across 46 states. Our tenants are comprised primarily of industry-leading retailers operating in more than 28 distinct retail sectors, again, with nearly 57% of annualized base rents coming from investment-grade tenants.
The portfolio remains effectively fully occupied at 99.7% and has a weighted average lease term remaining of 10.2 years. Lastly, our second headquarters building continues to make substantial progress. We're looking forward to having additional capacity for our growing team, as well as providing enhanced amenities and functionalities to our team. We anticipate move-in to occur by Thanksgiving and look forward to many of you visiting our campus in the future. I thank you for your patience. Happy to answer any questions after Clay discusses our financial results for the third quarter. I'll turn it over to Clay.
Thank you, Joey. Good morning, everyone. I'll begin by quickly running through the cautionary language. Please note that during this call, we will make certain statements that may be considered forward-looking under federal securities law. Our actual results may differ significantly from the matters discussed in any forward-looking statements. In addition, we discuss non-GAAP financial measures, including Core Funds from Operations or Core FFO, Adjusted Funds from Operations or AFFO, and net debt to recurring EBITDA. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release. Core Funds from Operations for the third quarter was $33.4 million, representing an increase of 42.2% over the third quarter of 2018. On a per-share basis, Core FFO increased to $0.78 per share, an 8.8% year-over-year increase.
Adjusted funds from operations for the third quarter was $32.7 million, a 40% increase over the comparable period of 2018. On a per-share basis, AFFO of $0.77 represented an increase of 7.1% year-over-year. General and administrative expenses in the third quarter totaled $3.8 million. G&A expense was 8% of total revenue or 7.4% excluding the non-cash amortization of above and below market lease intangibles. We continue to anticipate G&A as a percentage of total revenue to be an approximate 50-basis point improvement from our 2018 from 2018 or in the upper 7% range, excluding the impact of above and below market lease intangible amortization in total revenues. On a quarterly and year-to-date basis, Core FFO per share and AFFO per share were impacted by dilution required under GAAP related to the forward equity offerings we completed in September of last year and April of this year.
Treasury stock is to be included within our diluted share count in the event that, prior to settlement, our stock trades above the deal price from the offerings. There was no treasury stock dilution in the third quarter related to the September 2018 forward equity offering, given we settled the transaction in conjunction with our April forward offering. Our year-to-date results included treasury stock dilution from both transactions. The aggregate dilutive impact related to these offerings was roughly $0.01 to both Core FFO and AFFO per share for the three-month period, and $0.03 for the nine-month period. To the extent that prior to settlement, our stock continues to trade above the deal price of the April 2019 forward, we will continue to record treasury stock dilution.
To date, we have not settled any of the 3.2 million shares from our April forward and view this as a meaningful equity backstop to fund future growth. Moving on to our capital markets activities. In July, we entered into a new $400 million at-the-market equity program. During the third quarter, we issued over 400,000 shares of common stock through our new ATM program at an average price of $74.30, raising gross proceeds of $33 million. We've raised more than $270 million via our ATM program in the past four quarters, which demonstrates our view that the ATM is an efficient tool to raise equity given the granular nature of our business. Subsequent to quarter end, we funded a $125 million of senior unsecured notes per the agreement that we entered in June of this year.
The proceeds were used to pay down the outstanding balance on our revolving credit facility. The notes bear interest at a fixed rate of 4.47% and have a 12-year term. As a reminder, in March, we entered into forward-starting interest rate swap agreements to fix the interest for $100 million of long-term debt until maturity. The company terminated the swap agreements at the time of pricing the senior unsecured notes in June. Taking into account the effect of the terminated swap agreements, the blended all-in rate for the $125 million private placement is 4.42%. Our balance sheet continues to be in fantastic shape. As of September 30th, our net debt to recurring EBITDA was approximately 5.1 times, which is at the low end of our stated range of 5 times to 6 times.
Pro forma for the settlement of the nearly $200 million in proceeds for our April 2019 forward equity offering, our net debt to recurring EBITDA is approximately four times. Total debt to enterprise value at the end of the third quarter was approximately 23%, and our fixed charge coverage ratio, which includes principal amortization, increased to a company record of 4.3 times. The company paid a dividend of $0.57 per share on October 11th to stockholders of record on September 27th, 2019, representing a 5.6% year-over-year increase. This was our company's 102nd consecutive cash dividend since our IPO 25 years ago. For the first nine months of the year, the company declared dividends of $1.695 per share, a 5.9% increase over the dividends of $1.60 per share declared for the comparable period in 2018.
Our quarterly payout ratios for the third quarter were 73% of Core FFO per share and 74% of AFFO per share. For the first nine months of 2019, our payout ratios were 75% of Core FFO per share and 76% of AFFO per share, respectively. These payout ratios are near the low end of the company's targeted ranges and continue to reflect a very well-covered dividend. With that, I'd like to turn the call back over to Joey.
Thank you, Clay. To conclude, I'm very pleased with our execution through the first nine months of the year. We're in excellent position to close out 2019 strong. At this time, operator, we will open it up for questions.
We will now begin the question and answer session. To ask a question, you may press star, then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Rob Stevenson with Janney.
Good morning, guys.
Morning, Rob.
Hey, thanks. Joey, can you talk about the development in partner capital pipeline behind the 4 projects that you currently have? You've got the three that are at the Frankfort site and then the Tractor Supply. How robust is the sort of shadow pipeline on the stuff that you're working on behind that? As we look at this, is this going to grow, or are we going to basically be at sort of 4 projects, plus or minus, at any given time over the next couple of years? How much of a focus is this for you guys going forward versus the acquisitions? Can you just share a little insight there?
Sure. I think we look at all three external growth platforms as providing a unique value proposition for our sandbox of retailers. That really consists of 30 to 35 retailers that we're focused on growing those relationships with. We're very pleased to announce the Tractor Supply in Hart, Michigan. That's a former Shopko, our first project with Tractor Supply on the development/redevelopment front. We have a number of projects that are in the shadow pipeline that we anticipate commencing either fourth quarter of this year or first quarter of next year, really subject to weather and timing, similar in scope to the Tractor Supply, existing retailers looking to grow our relationships. That said, we will continue to be discerning where we deploy not only our capital, but more importantly, our time and our energy.
We want to continue to be a full service provider for those leading retailers, but we're not willing to go up the risk spectrum or down the credit spectrum to put shovels in the ground.
Okay. The second one for me, anything abnormal in the market that's causing you guys to see higher than normal acquisition opportunities? I guess what I'm getting at is if you have the people and the relationship right now to be able to do $650 million-$700 million of acquisitions this year, is there anything other than the availability of cost-effective capital that would suggest that the 2020 run rate shouldn't be, and forward shouldn't be at that level or higher?
Look, I tell you, there's nothing macro in the market today that changes our perspective, hence keeping our balance sheet in such a prime position to continue to execute our operating strategy. That said, look, we are an aggregator by nature. We added approximately 70 properties to the portfolio in this last quarter alone. It's really opportunistic and opportunity dependent. No, there's nothing out there on the horizon that we see should change our level of activity or the opportunity set that we see.
Okay. Thanks, guys.
Thanks, Rob.
Our next question comes from Nate Crossett with Berenberg.
Hey, thanks for taking my question, guys. I wanted to touch on maybe tenant concentrations and Sherwin-Williams, and I'm wondering if you acquired any of those in the quarter. I saw that they reported today, and they noted they opened 31 new stores year to date. I'm just curious on your thoughts for owning more Sherwin. Is there even an opportunity to maybe own Benjamin Moore as well?
Well, I tell you first, thanks for joining us, Nate. Look, Sherwin-Williams is down to approximately 5%, just over 5% of the portfolio. That's up from 6% at the time of the sale leaseback transaction with the 100-plus stores. We didn't acquire any Sherwin-Williams during the quarter, nor dispose of any Sherwin-Williams since the acquisition of those 103 stores. We're not focused necessarily on Sherwin-Williams or Benjamin Moore today. It's really a natural attenuation of that 6% to 5.1% in terms of pro forma concentrations. Overall, I'll tell you that we continue to be big fans of Sherwin. Benjamin Moore's a great operator as well. Really the portfolio from a tenant concentrations is really in a strong place with Sherwin at approximately 5%. We anticipate, just again, natural dilution from denominator growth. Sherwin will be sub 5%.
We have no really material concentrations that are outside to speak of.
Okay. I know that they have a lot of locations in Canada, and I'm just curious. I know Europe's probably too far away, but would you ever consider going to Canada if it was with a tenant that you really like and deal with?
We think the opportunity set here domestically, at least for the foreseeable future for us, is very vast, and we're focused really on the continental United States. We're in 46 out of 48 continental United States today, and that's really our focus.
Okay, just one quick maybe on the G&A load. As you guys continue to kind of scale, are there any more heads that need to be added, or are you guys set for the time being?
I'll let Clay speak to quantitatively in terms of G&A and trajectory, but I'll tell you with the addition of our new building, as I mentioned in the prepared remarks, really gives us the continued opportunity to grow headcount across the organization, while also gaining leverage in terms of G&A as a percentage of revenue. We continue. We had two new members of the acquisition team join three weeks ago. We have a new member of the property management team growing. As you expect with a dynamically growing portfolio, with revenue growing 40% year-over-year last quarter, we're going to continue to add headcount and frankly, invest in the fantastic team that we've built here.
Sure. Nate, in terms of run rate, we're guiding to a 50 basis points improvement. For G&A, it's a percentage of revenues year-over-year. We're currently in the middle of our annual budgeting process and going through 2020. We'll provide guidance, again, as a percentage of total revenue on our 4Q call for G&A.
Okay, thanks, guys. Very helpful.
Thanks, Nate.
Our next question comes from Collin Mings with Raymond James.
Thank you. Good morning, guys.
Good morning.
First question from me, Joey. I know in the past you've discussed that your deal flow does not necessarily reflect pricing trends in the market more broadly. That said, can you maybe update us on your take on competition for deals and seller pricing expectations, just given the move in interest rates, in particular the 10-year here over the last few months?
Sure. I think, one, it's important to note, again, the average transaction here takes approximately 61 days from a letter of intent to execution to close. There's always a lag in what we report to the market at where it closed or what we originate. I tell you, for a couple of months there with the tenure compressing approximately 50 basis points, the investment sales community as well as owners and developers some of them saw an opportunity to try to compress cap rates or corollary increase pricing. I tell you, if anything on the margin, we've seen cap rates for high-quality projects compress with the tenure still below 1.8%. In terms of competition, look, we are in a very unique position. We are the largest aggregator, the most well-capitalized aggregator in this space, and at the same time, we have the best relationships and capabilities.
We don't see any changes on the horizon in terms of private or public purchasers in competition generally. We think we're very well positioned to continue to execute.
Got it. Overall, the deal flow is still there, just maybe on the margin a little bit more expensive. Is that a fair way to take it?
We don't anticipate our cap rates compressing in any material way. I tell you, I wouldn't assume a significant deceleration in activity. Obviously, Q3 was a near record quarter for us. We'll continue to be highly selective and disciplined in what we acquire. There are no shortages of net lease retail product in this massive and fragmented space in which we operate. Just as a reminder to everybody, I look back at our notes, and last year at this time, the Sherwin-Williams transaction hadn't even come up. Our original offer on the Sherwin-Williams transaction was sent November 10th of 2018. It is a very fluid marketplace. We try to give the best guesstimate of our visibility. It is large, it is fragmented, and we move decisively and quickly.
Okay. Then, one more from me. Just can you expand on how the 7-Eleven portfolio opportunity came together and then the potential to expand that relationship moving forward?
It was originated by our acquisition team. It was an off-market opportunity from a third-party seller. We worked with our retail partners to create really a win-win situation for both parties. We're excited to add 7-Eleven in a material way. I think we had one or two prior to the transaction. In a material way, obviously, a fantastic operator and fantastic credit. 7-Eleven now is a meaningful part of our tenant roster.
I'll turn it over. Thank you.
Thank you, Collin.
Our next question comes from Christy McElroy with Citi.
Hey, good morning, guys. Joey, you highlighted the Greenwich CVS and the Mariano's in Chicago that you completed in Q3. Can you just talk about the size and pricing of those deals relative to the rest? What's sort of your appetite for doing more of these kind of higher value urban deals like this going forward?
Good morning, Christy. I tell you, the Greenwich CVS, obviously, we have not been a net acquirer of pharmacy, with the Walgreens disposition during the quarter and then the one occurring this week, and then we anticipate future Walgreens dispositions going forward. It was really a unique real estate opportunity, compelling value proposition in the heart of Greenwich, on Greenwich Avenue, over 19 years left of remaining terms, significant growth in the lease. We're a big fan of high-quality street retail with long-term leases to leading operators. That was a very unique one for us. I tell you, I think it's fair to say that was, we haven't given specific guidance, but that was inside of our seven cap range. The Mariano's, again, Mariano's Kroger guarantee outside of Chicago. I wouldn't call it an urban street retail asset for us, but a high-performing location.
Mariano's is really performing well for Kroger, and has really become one of the dominant flags in the Chicago MSA. We'll continue to look at those transactions that are of that similar nature. Really, our business is aggregating $4.5 million-$5 million on average assets, really, across the country.
Okay. Any changes in sort of how you're thinking about your targeted 30 tenant list? As you continue to pursue deals with these and other investment-grade tenants, just kind of following up on Collin's question, you did comment that market cap rates have compressed a little bit. Does it make finding some of these deals tougher as you look to remain disciplined? Are you seeing sort of more bidders out there in the market for deals in a lower cost of capital environment?
To the last part of your question, we aren't seeing necessarily more bidders. I'll tell you, we will be more opportunistic on the disposition side. On the acquisition side, we do a lot of transactions with repeat developers, repeat sellers. We're not necessarily seeing more bidders. I think on the margin, pricing has skewed more expensive, or frankly, anticipated pricing has skewed more expensive. The proposition that we bring to close quickly, decisively, the relationships we bring, we don't think that's going to pose a challenge for us in this environment.
Okay. Then just lastly, a quick modeling question. The deal volume in Q3 was pretty heavy, obviously. Just when we think about the timing of when those deals closed through the quarter, was it more front-end or back-end loaded?
Yeah, we were a little more back-end loaded, Christy. Our weighted average closing date in the quarter was the 57th day of the quarter. A little back-end weighted, which is fairly in line with our last couple of quarters as well.
Okay. Thank you so much, guys.
Thanks, Christy.
Our next question comes from John Massocca with Ladenburg Thalmann.
Good morning.
Good morning, John.
I guess how many blend and extend transactions were acquired this quarter, kind of similar to the Florida Best Buy, if there were any others? How big is that market for that type of transaction?
Honestly, John, I don't have an exact count for you. I would tell you, if I had to guess, between 15 and 20, what we call proverbial blend and extend transactions. That's out of the approximately 67 assets that we acquired.
Okay. Is it just quarter to quarter is kind of going to depend on what's the deal flow? Is there a big market for that type of transaction, given the kind of value add you want to do to maintain cap rates?
Well, in reality, we're really making a market, right? We are either with direction from our retail partners or our acquisition team uncovering opportunities. We're really making a market there. It's not a market per se, where it's really value creation. Look, we continue to uncover all different types of opportunities, from ground leases to street retail to blend and extend opportunities. Really, like I said in previous quarters, there's really no rhyme or reason when you're playing in a market this size and with our breadth. I would anticipate that there won't be necessarily a run rate for any types of transactions, frankly, for us. Sometimes we're heavy on ground leases, like in Q2. This quarter was particularly heavy in blend and extend transactions.
I think the one consistent is that we're going to focus on those retailers in our sandbox, the industry-leading retailers, and the dominant players in the country.
Okay. Makes sense. Can you maybe provide some color on the dollar store acquisitions in the quarter? Seemed like that was mostly Dollar Generals. What maybe made those attractive, given some of the different characteristics of dollar stores that I guess are both kind of loved and hated by the market?
Look, I can talk about dollar stores and specifically Dollar General for a long time. I'll tell you that we have a few unique relationships with Dollar General, specifically. Dollar Tree, to a lesser extent, developers, where they are cycling through their pipeline, require capital to put new stores in the ground. I'll tell you, we are a fan. If you look at the overall grocery space in this country, we are a fan of what Dollar General is doing. You really see them in a lot of the rural food deserts in this country, combined with what we think is going to be some grocery store attrition in the near and medium term here. You really see them providing, really filling that void for those rural food deserts. They are the grocery store. They are the one-stop shop.
A lot of times they're also the convenience store when people don't want to make the 20-mile trip to the Walmart Supercenter. We think they are very well-positioned. Obviously, their comps provide for. They continue to move into more and more perishables and freezer and cooled items. We like the business model. They're performing very well, and we continue to work with those developers on their pipelines.
Understood. One last kind of quick one. Was there a big spread between cash and GAAP cap rates during the quarter, or was it kind of a marginal spread? Essentially just ballpark, what was the spread between cash and GAAP?
Yeah, generally, we're about 30 to 40 basis points. Varies by transaction.
Okay. Thank you very much.
Thanks, John.
Our next question comes from Todd Stender with Wells Fargo.
Hey, thanks. With The Home Depot being new to your top tenant list, sounds like they're not ground leases like the Walmarts. Maybe just describe what the deal contains and maybe some of the economics. Thanks.
Yeah. Good morning, Todd. We bought a Home Depot in Connecticut this quarter. Over two-thirds of our Home Depot exposure is ground leased. We'll continue to look to add high-performing Home Depots, again, a great retail partner of ours, obviously a dominant player in the home improvement space. We'll continue to add Home Depot in the fourth quarter, as well as continue to add them in 2020 as well.
Cap rate wise, I would suspect that that's going to be in the, gosh, is it six or sub six?
No, that was a six. I mean, we very rarely, if ever, frankly, have cracked six. That is in the, let's call it the mid six range on that transaction as well.
Okay. Thanks. Back to CVS. The rent went up pretty meaningfully from Q2. I know you talked about the Greenwich asset. Did you buy any?
Yep
That's just from that one?
That is just the Greenwich asset on Greenwich Avenue. Again, over 19 years a term, high-performing store, really unique, irreplaceable real estate.
At a pretty big price point, is that fair to say, in one asset? Is it a single-tenant triple net lease?
Correct. It's a single-tenant triple net lease. That transaction was approximately over $25 million.
Got it. Okay. The Best Buy, so obviously consumer electronic retailer, not quite in the non-discretionary bucket that I guess we're used to seeing from you guys. Can you speak to the size of the real estate that you acquired? I know some of the footprint has come down for Best Buy. Just speak to what you like about the real estate and the blend and extend piece. How long was that lease, and what did it go to?
Yeah. We acquired a couple of Best Buys during the quarter. The Sanford transaction, which you're referencing, is a 10-year lease now. It's approximately a 30,000 sq ft store, high-performing unit, freestanding, immediately adjacent to a Walmart Supercenter. We also acquired a Best Buy in New York during the quarter as well. Our Best Buy portfolio today is comprised of six assets, Fort Worth, Texas, Hillsboro, Oregon, immediately adjacent to a SuperTarget, Vestal, N.Y., Sanford, Florida, Visalia, California, and then Woodland Park, N.J. High-performing assets. We have a great relationship with Best Buy. They're obviously the last man standing in the consumer electronics business.
Hubert Joly, what he started there and what he accomplished during his term as CEO and now as Executive Chairman, we think is really just a wonderful and terrific example of how a retailer with a strong balance sheet and good leadership can thrive in an omni-channel world.
Thanks. Just lastly, so the Tractor Supply project you have going is your first one with them. Can you speak to some of the economics around that? What did you have to do to get that deal, and do you expect more to come?
Sure. Again, we're very pleased. We have a number of Tractor Supply in the portfolio today, over 25 in the portfolio. Again, the leading operator in farm and rural supply. Unrated retailer, but lease-adjusted leverage at, I believe, just under two times. Publicly traded, really a strong, robust balance sheet. This is our first project from Vacant Shop Co. We acquired the Vacant Shop Co., and they're retrofitting or redeveloping that existing building for Tractor Supply in Hart, Michigan. Those returns are in line with our historical, I'd call it PCS returns. Quick turnaround for us. We'd love to continue to expand the relationship with Tractor Supply. Just really a superior retailer.
Thank you.
Thanks, Todd.
Our next question comes from Linda Tsai with Jefferies.
Hi, it's Linda Tsai. Thanks for taking my question. When you look at your year-to-date stock performance and multiple, it's clear you're serving investors well in terms of acquiring high-quality properties creatively and driving sustainable growth. Do you have a sense of how large this portfolio can become ultimately over the next few years? By extension, what do you view as a base case sustainable AFF growth rate? I know you just said that the factors are in place to stay on the same level of acquisitions headed into 2020.
Great questions, Linda Tsai. Thanks first of all. Thanks for joining us. In terms of how large the portfolio can grow, I kind of put my foot in my mouth a few years ago when I thought we would become a $3 billion diversified REIT. Today we're north of $4 billion, we don't see any sign of slowing up. We are in a highly fragmented space, a large space. Our capabilities, the team, individual team members continuing to do a fantastic job. I'm hesitant to put a cap on the size of this organization, the size of the portfolio. Most importantly, though, our mission is very clear. It's in our one-page operating strategy in bold letters. It's to create the highest quality retail portfolio in the country.
It's not the largest port-- that is not in conjunction with being the largest operator or anywhere close. Look, we think we have significant runway. We think there's a vast opportunity set. You pair that with a great balance sheet and a terrific team, we got to get out and chop wood and execute. In terms of sustainable AFFO growth, look, we think mid, upper single-digit AFFO growth. It's not difficult for people to model our growth rate given the denominator and given our acquisition investment activities. It is realistic for us. Our goal is to deliver double-digit total shareholder returns that on a risk-adjusted basis, we think are superior.
We are using capital, frankly, very discriminately, very disciplined in the highest quality assets, paired with a cost of capital with sources that is very attractive today, which really provides for some meaningful spreads.
Thanks for that. Just one more. In terms of being at the low end of the payout ratio on a historical basis, would that leave room to raise the dividend more aggressively, or does this just reflect a moment in time and the impact of lower equity issuance?
I think it continues to allow us to raise the dividend on a consistent and transparent basis. We've effectively been on a Q2 and Q4 dividend run rate. We think that is core to our shareholders. As you pointed out, we're at the lower end of that payout ratio, which implies in the future, frankly, significant room for growth, while also managing the retained earnings and the cheapest form of capital that we have to reinvest.
Thanks.
Thank you, Linda.
Again, if you have a question, please press star then one. Our next question comes from Ki Bin Kim with SunTrust.
Thanks. Good morning, Joey. You guys bought about $250 million of assets at 7% cap rate with over 80% investment grade. When I think about that, it's a little surprising, positively surprising. You wouldn't think you could buy that much with that much investment grade at 7%. I'm just curious if you can provide a little more color behind that, and how much of the investment grade terminology is related to the actual real estate being backed by a balance sheet that is investment grade versus a franchisee that's part of a flag that's investment grade, where there isn't necessarily a credit backing behind it?
First off, your last question, zero. We have no franchise restaurants or franchise operations. This is all true investment-grade exposure. We've been really net sellers of franchise operations, franchise-driven or small balance sheets. The last question is zero. The answer is zero. Look, good surprises, we like providing those. I would tell you again, it's a testament to our team. First off, let me just speak to the quality of acquisitions, because I appreciate you bringing it up, and I think it's frankly underappreciated by a number of market participants. We come from this perspective that retail, and I think everybody would agree, is going through a dynamic transformation, the likes of which we've never seen, inclusive of the Great Recession.
I personally believe that this country is going from 24 square feet per capita on a retail basis to somewhere around 16 square feet in the medium term. Basically, we're cutting GLA in this country down in the medium term by approximately a third. That doesn't include the disruption that we foresee coming in the grocery space, where we have nearly 40,000 grocery stores in this country, excluding dollar stores, warehouse clubs, and super centers. We think that's on the horizon as well. You have to ask yourself, really, we start with the proposition is where do you see this significant GLA erosion coming from? Of course, the mall space is pretty well documented. It's pretty easily ascertainable given there's only about 1,000 malls in this country.
When you step back, the mall space only represents approximately 5%, 6% of retail GLA in this entire country. Open air centers are approximately 30% of GLA. Net lease retail is about 55% of GLA. The bottom line is that the weaker in-line and freestanding operators in this country are going to continue to erode with all the pressures that you're facing. I personally think we have another 10 years of disruption and adaptation ahead of us in retail here. We're going to watch legacy brick-and-mortar retails move to an omni-channel world, which is very expensive. We're going to watch native and historic online brands opening smaller format stores to showcase their products.
We look at the retail world today, we say this is a world of haves and have-nots, and retailers either have the balance sheet flexibility and generally have an investment-grade credit rating, absent the Hobby Lobby or Tractor Supply or Chick-fil-A or Publix of the world that are unrated, and they have the ability to invest in price in an omni-channel future, or we think they're eventually just going to die off. Our focus is discretely on the best and brightest operators in this country. The majority of those operators carry an investment-grade credit rating. We are going to continue to leverage all of our capabilities and all of our resources and all of our relationships to focus on those retailers that are in our proverbial sandbox.
1,000-basis point increase, or nearly 1,000-basis point increase year-over-year to 57% investment grade is something that I think people are going to look back on, and I think they're going to appreciate in time when we continue to see more disruption here.
All right. Thanks for that. Just following up with that last statement, 57% of your portfolio is investment grade. Is that similar where most of that or what percent of that is investment grade at the real estate level versus the franchisee thing that we were discussing earlier?
Again, there is no franchise investment grade exposure in that number. We don't score. We don't impute credit ratings. There is no franchise. If we have, for instance, a Taco Bell franchisee, we are not imputing Yum! Brands credit, it's the franchise credit. That is a true investment grade number without any non-third-party major agency validation.
Okay. Thanks for that clarity.
Great. Thanks, Ki Bin.
This concludes our question and answer session. I would like to turn the conference back over to Joey Agree for any closing remarks.
Great. Well, thank you everybody for joining us this morning. Good luck through earnings season, and we look forward to catching up in Nareit in California in a few weeks. Thanks again.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.