And welcome to the Agree Realty Corporation's Second Quarter 2019 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity Please note this event is being recorded. I would now like to turn the conference over to Joey Agree. Please go ahead.
Thank you, operator. Good morning, everyone, and thank you for joining us for Agree Realty's Q2 2019 earnings call. Joining me this morning is Clay Phelan, our Chief I'm very pleased to report that our strong start to the year gained momentum during the Q2. Robust Investment activity, largely comprised of leading investment grade retailers, picked up pace during the quarter and continues to accelerate into the 3rd quarter. Our investment activities during the quarter were supported by strategic capital markets transactions that further reinforced our best in class balance sheet as well as a number of dispositions aligned with our long term asset management strategy.
Investment activity during the quarter was again of superior quality. A record 73% of the annualized base rent acquired was derived from leading retailers with an investment grade credit rating. Activity across our 3 external growth platforms totaled $183,000,000 in 37 properties. 31 of these properties were sourced through our acquisition platform, representing aggregate acquisition volume of more than $176,000,000 for the quarter. The properties were acquired at a weighted average cap rate of 6.7% and had a weighted average remaining lease term of 10.6 years.
The acquired properties are located in 20 states and are leased to leading retailers operating in 13 different sectors, including off price, convenience stores, Auto Parts, Dollar Stores, Warehouse Clubs, Consumer Electronics and Farm and Rural Supply. We are very pleased to have completed Several noteworthy acquisitions during the quarter that reinforce our real estate emphasis. As previously announced in May, we acquired Wawa's Flagship store in Philadelphia's historic city center. The 11,500 Square Foot store is located on the ground floor of the public ledger building just from the Libertyville, Independence Hall and Congress Hall. Additionally, we acquired our first Costco during the quarter, Located in a dominant retail corridor in Newport News, Virginia.
Costco is on a ground lease where they have paid for the construction of their building and improvements with approximately 15 years of remaining term. Going forward and absent any unique transactions such as the Wow Wow or Costco, You can anticipate that our acquisition yields will be more in line with our historical returns of approximately 7%. Through the 1st 6 months The year was invested a record $327,000,000 into nearly 90 retail net lease properties spread across 31 states. Of the $327,000,000 invested during the first half of twenty nineteen, approximately $317,000,000 was via our acquisition platform. The 79 properties acquired in the first half of the year are leased to 33 leading retail tenants operating in 20 distinct sectors.
A record 72% of the annualized base rent acquired during the 1st 6 months of this year is derived from investment grade operators. Given our record acquisition volume in the first half of the year and our robust and high quality pipeline, we are increasing our 19 acquisition guidance to a range of $625,000,000 to $675,000,000 The low end of this Would represent record acquisition volume for our company, surpassing the $607,000,000 acquired in 2018, which of course included the Sherwin Williams sale Notably, we have not closed nor are we contemplating executing any large scale transactions in this guidance. Our activities continue to be of granular in nature, leveraging our unique relationships and capabilities to execute on opportunities with superior risk adjusted returns. We continue to source a number of ground lease opportunities with leading retailers. Today, our ground lease portfolio spans 56 assets comprising 9.2 percent of our total annualized base rents.
We've increased our ground lease concentration by approximately 200 basis points year over year, Adding premier retailers such as Walmart, Costco, Home Depot, 711 and Sheetz Convenience Stores. At quarter end, nearly 90% of our ground lease rents were derived from investment grade retailers and conversely only 1% is leased to sub investment grade operators. The remaining 10% of the ground lease portfolio was leased to leading unrated retailers. At quarter end, our total investment grade exposure stood at 54.2 percent, representing a substantial year over year increase of approximately 7 70 basis points. It's important to note that the investment grade makeup of our activities is the result of our distinct focus on the industry leading operators rather than an explicit focus on investment grade rated retailers.
Our pipeline continues to be of the highest quality in the history of our company. We anticipate our investment grade concentration to continue this upward trajectory. Our top tenant roster continues to positively evolve. During the quarter, we acquired 3 Walmart Super Centers. Consequently, Walmart is now the 2nd largest tenant in our portfolio behind Sherwin Williams.
Turning to our Development and Partner Capital Solutions platforms, we had 9 Development and PCS projects either completed or under construction during the first half of the year They represent total committed capital of approximately $30,000,000 Our pipeline continues to progress nicely with several additional projects anticipated to commence yet This year, retailers continue to leverage our expertise to execute across the full lifecycle of their assets. During the quarter, we completed our 2nd development with Sunbelt Rentals in Batavia, Ohio. The project had total cost of almost $2,000,000 and is subject to a new 10 year net lease. Subsequent to quarter end, rent commenced for the company's 3rd project with Sunbelt Rentals in Carrizo Springs, Texas. Construction continued during the Q2 at our 4 Sunbelt Rentals and our first ground up project for the retailer in Georgetown, Kentucky.
The project is anticipated to be complete by the Q3 of this year. Construction continued during the quarter on 3 additional development and PCS projects with Total anticipated cost is more than $15,000,000 The project consists of the company's first development with Gerber Collision around Lake, Illinois, the company's redevelopment of the former Kmart in Mount Pleasant, Michigan for Hobby Lobby and the company's redevelopment of the former Kmart in Frankfort, Kentucky for all these Big Lots and Harbor Freight Tools. While our record year to date investment activity has improved the quality of our portfolio, We've also solidified and diversified our portfolio through proactive asset management disposition efforts. These efforts continue during the Q2 as we sold 4 assets for gross Proceeds of approximately $17,000,000 Included in these activities was the sale of 3 franchise operated Sonic Restaurants, reducing our exposure to franchise tenants to just 3.9% of annualized base rents. This represented a reduction of 100 and basis points year over year.
We continue to see opportunities to dispose of franchise restaurants at favorable cap rates and recycle the capital into higher Additionally, we continue to be highly selective in our approach to the health and fitness space. Rapid unit growth, A proliferation of specialty and discount operators, single purpose boxes as well as private equity sponsorship continue to make this a sector that is challenged to surpass Our stringent underwriting criteria. To that end, during the quarter, we also disposed of a 24 Hour Fitness in Fort Worth, Texas. Dispositions for the 1st 6 months of the year have totaled 6 assets for gross proceeds of just more than $27,000,000 with a weighted average cap rate of approximately 7.3%. Subsequent to quarter end, we disposed of another Walgreens in Grand Blanc, Michigan, The 3rd Walgreens that we have disposed of year to date.
This sale reduced our Walgreens exposure to approximately 4% of annualized base rents, representing a year over year decrease of 2.90 basis points. Given our year to date disposition As well as additional visibility into our pipeline, we are increasing the bottom end of our disposition guidance from 25 to $50,000,000 for the full year. Our asset management team also continues to focus on upcoming Lease maturities. As a result of these efforts, at quarter end, we had only 3 remaining lease maturities in 2019, representing just 0.4% of annualized base rents. During the Q2, we executed new leases, extensions or options on approximately 56,000 square Notably, Dave and Buster's exercised their 5 year option during the quarter on their 40,000 square foot location in Austin, Texas.
We are also very pleased to have executed a new 15 year lease with Panera Bread to backfill our only former vacant Applebee's at the corner of Bayou Boulevard and Avenue in Pensacola, Florida. We are recapturing 108 percent of rents at this location with 0 landlord investment or tenant improvement allowance. This transaction is emblematic of the high quality real estate that underlies our portfolio. As of June 30, our rapidly growing retail portfolio 722 properties across 46 states. Our tenants are comprised primarily of industry leading retailers operating in more than 28 retail sectors, Again, with 54.2 percent of annualized base rents coming from investment grade tenants.
The portfolio remains effectively fully at 99.7 percent and has a weighted average remaining lease term of 10.1 years. Before I turn the call over to Clay to discuss our 2nd quarter and 1st Half Financial Results. On behalf of all of our directors, I would like to welcome Simon Leopold to our Board. As many of you are familiar, Simon currently serves The Chief Financial Officer and Treasurer of Taubman. Prior to Taubman, Simon had an extensive career in real estate investment banking.
We are very pleased to have Simon's Finance, Capital Markets and REIT Industry Expertise join our Board of Directors. With Simon's addition, we have added 3 new directors within Past 12 months, adding REIT, operational and human capital expertise at the highest level. Thank you for your patience. And with that, I'll
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, 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 Q2 was $31,000,000 representing an increase of 38.6% over the Q2 of 2018. On a per share basis, core FFO increased to $0.75 per share, a 5.5% year over year increase. Adjusted funds from operations for the Q2 was $30,600,000 a 37.5% increase over the comparable period of 2018. On a Per share basis, AFFO was $0.74 an increase of 4.7% year over year.
General and administrative expenses in the 2nd quarter totaled $3,900,000 G and A expense was 8.6% of total revenue or 8.1 Excluding the non cash amortization of above and below market lease intangibles. We continue to anticipate G and A as a percentage of total revenue to be an Approximate 50 basis point improvement from 2018 or in the upper 7% range for 2019, Excluding the impact of above and below market lease intangible amortization in total revenues. Income tax For the Q2 was approximately $195,000 For the full year, inclusive of the one time tax credit of 475,000 realized in the Q1, we anticipate total income tax expense to be in the range of $350,000 to $400,000 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 2018 April 2019, Treasury stock has been included within our diluted share count in the event that prior to settlement, our stock trades above the deal price from the offerings. Since our average stock price for the Q2 was above the deal price for the September and April forward offerings, we included dilution related to both transactions.
The aggregate dilutive impact related to these offerings was a $0.01 to both core FFO and AFFO per share for the 3 month period and roughly $0.02 for the 6 month period. There will be no additional treasury stock dilution for future quarters related to the September 2018 forward equity offering, Given we settled the transaction in conjunction with the April Forward offering. Now moving on to our capital markets activities. We had another active quarter further strengthening our balance sheet and positioning the company for continued growth. We continue to maintain significant capital both debt and equity to execute on our robust pipeline.
On May 1, we settled the entirety of our September 2018 Forward equity offering and received net proceeds of $186,000,000 In conjunction with the settlement of our September Forward offering, we completed another follow on public offering of 3,200,000 shares of common stock in connection with a forward sale agreement. Upon settlement, the offering is anticipated to raise net proceeds of approximately $200,000,000 after deducting fees and expenses. To date, the company has not received any proceeds from the sale of shares of its common stock in connection with the April offering. We retain the ability to settle the transaction in whole or in tranches at any time between now May 1, 2020. The settlement of the September 2018 forward equity offering and the launch of the subsequent April 2019 forward equity offering provide the company the capacity to invest an incremental amount of approximately $700,000,000 and remain within our stated leverage range of 5 to 6 times net debt to recurring During the quarter, we were also active in sourcing long term debt financing.
In June, we entered into an agreement for a private Placement of $125,000,000 of senior unsecured notes. Once the agreement is funded, the notes will bear interest at a fixed Anytime between now October 30 this year. I would note that we continue to execute on longer term fixed rate debt that matches the underlying duration of our asset base. In March, we entered into forward starting interest rate swap agreements to fix the interest $100,000,000 of long term debt until maturity. The company terminated the swap agreements at the time of pricing the $125,000,000 senior Taking into account the effect of the terminated swap agreements, the blended all in rate for the $125,000,000 private placement is 4.42%.
As of June 30, our net debt to returning EBITDA was approximately 4.4 times, well below our stated range of 5 to 6 times. Pro form a for the settlement of the approximately $200,000,000 in proceeds from our April 2019 forward equity offering, Our net debt to recurring EBITDA is approximately 3.2 times. Total debt to enterprise value was approximately 21.6% And our fixed charge coverage ratio, which includes principal amortization remains at a very healthy 4.1 times. The company paid a dividend of $0.57 per share on July 12 to stockholders of record on June 28, 2019, representing a 5.6% year over year increase. This was the company's 101st consecutive cash dividend since its IPO just 25 years ago.
For the 1st 6 months of the year, the company declared dividends of $1.125 per share, a 6.1% increase over the dividends of $1.06 per share declared for the comparable period in 2018. Our quarterly payout ratios for the Q2 were 76% of core FFO per share and 77% of AFFO per share. For the 1st 6 months of 2019, our payout ratios were 76% of core FFO per share and 77% of AFFO per share, respectively. These payout ratios are at 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 performance in the first half of the year. We're in excellent position for the remainder of 2019, and I look forward to updating you in
Our first question comes from Rob Stevenson with Janney. Please go ahead.
Good morning, guys. Joey, how much did the Wawa and Costco transactions pull down the cap rate for the quarter?
Good morning, Rob. So you're talking about approximately 25 basis points between the Wawa flagship and the Costco ground lease. Incrementally, I'd tell you the 3 Walmart Super Centers, 2 of which were ground leases, one of the very low Rental rate on a Walmart Supercenter, it's a former smaller format that they demolish and added a full size center, Super standard. You brought us out incrementally. As I mentioned in our in the prepared remarks, we fully anticipate that the cap rates going forward absent any transaction will be back at the 7% range.
Okay. And then after selling the 24 Hour Fitness, I guess More than 70% of the health and fitness buckets now LA Fitness. Are we likely to see more non LA Fitness Of assets sales, will we be seeing an L. A. Fitness sale as well?
How are you feeling overall about that segment, Given your comments?
Yes. No, it's a good question. I'll be honest, we're really watching that space continue to develop. I think The fragmentation of just all of the concepts that continue to proliferate across this country, I mean, population is getting older in this country. I don't think they have any more people frankly are working out.
And so you have the world price point operators, the Planet Fitnesses of the world and the like, as well as the LA Fitness 24 Hour fitness, the specialty operators and the high end operators like Lifetime Fitness, which we don't invest capital in. So I tell you, we're very Pleased to sell the 24 hour fitness that had about 7.5 years of term left. We're comfortable with where our health and fitness I think it's more of we just want to watch and see the space develop.
How much of the non LA Fitness bucket is 24 Hours and a bunch of other sort of smaller operators comprising the $2,000,000 or so of annualized rent.
Right. So we just have one additional 24 Hour Fitness. I believe it's in Colorado. And then we have 3 or 4 Planet So the vast majority is LA Fitness, mostly urban locations or early extensions, that comprises all of our health and fitness exposure.
Okay. And then you said that you sold 3 Sonic franchisees during the quarter. What percentage of the portfolio today is franchisees?
We're down to 3.9% as of sixthirty at franchised restaurants. And so we've really Focused on reducing that. I'd tell you the IRRs that we're achieving on these franchise restaurant dispositions are typically in the 12% to 14% on an unlevered basis. And so we're selling these opportunistically, obviously, most likely in the 10/31 market. We'll continue to look for opportunities, Burger King, Wendy's, a few Sonix remaining in the portfolio, Well, Taco Bell, to divest of those at approximately 6% cap or lower and really redeploy the capital to higher quality operators as well as real estate.
Is that part of the increase in disposition guidance?
Well, I'll tell you, so
really it's the bottom end of the disposition guidance we brought up from $25,000,000 to $50,000,000 year to date inclusive of the Walgreens sale in Grand Blanc that closed subsequent to quarter We've disposed of almost $32,000,000 and then our disposition pipeline includes additional franchise restaurants and then non core assets will recycle The capital, so we thought it would be appropriate as of today at $31,000,000 to bring that bottom end up.
Okay. And last one for me. Clay, what share and unit count should we be using for Q3 estimates?
Sure. In terms of Fully diluted share count, Rob, inclusive of units, We should be at 42,300,000 shares.
Okay. Perfect, guys. Thank you.
Thanks,
Rob. Our next question comes from Christy McElroy with Citi. Please go ahead.
Good morning. This is Katie McConnell on with Christie. So with investment grade 10 and exposure moving up a good amount again this quarter, Can you just give us an update on what you see as a target level? And has your view on this changed much in light of the retail environment?
Yes. As I mentioned in
the prepared remarks, I would tell you our investment grade exposure is really function of our really our targeted sandbox to that 30 year plus or minus retailers. And so investment grade exposure is up almost 800 basis points year over year. We anticipate that to continue to trend upward. There's really no targeted level. I think frankly more investment grade is obviously No distinct target level.
I'll tell you our pipeline is of superior quality for Q3 with even higher investment grade exposure than Q2, hence the upward trajectory. But our focus remains on those top Omnichannel or e commerce resistant operators in their respective sectors, and it's about 30 retailers. And frankly, The majority of those retailers carry investment grade credit ratings because they're large publicly held companies.
Okay, great. And then can you also just update us on the watch list tenant exposure, including I think you had a few Fred's stores? And at this point, if you know any plan to close?
Yes. No, we were our watch list Continues to shrink. The biggest piece of our watch list, frankly, was our PetSmart, which I believe we have 6 or 7 in the portfolio. The Chewy IPO or Subsequent pay down of debt and PetSmart upgrade really gave us some breathing room we think with PetSmart and gave the company A continued runway. In terms of the Fred, we have 3 or 4 in the portfolio.
We don't have any finite outcomes with Fred's. It's only $300,000 $400,000 in annualized ABR.
Okay, great. Thanks.
Thank you. Our next question comes from Collin Mings with Raymond James.
1st, I just wanted
to start with the increase in the acquisition guidance. I know in the past, Joey, you've noted the company typically has, call it, about 60, 70 days of visibility on deal flow. In the prepared remarks, you made the point that guidance does not reflect any larger transactions. So just as we think about Going forward, are you thinking about, call it, dollars 150,000,000 per quarter of acquisitions as being a run rate the platform should be able Skewed on, on a go forward basis. So maybe just talk a little bit more again in context of the increased guidance and really no larger scale transactions
Yes. And those are all the logical data points for us in terms of that 60 to 70 days visibility from LOI execution to close. Transactions by their very nature are lumpy. I'll tell you right We have visibility into our Q3 pipeline, hence the 70 days. And the Q3 pipeline is quite substantial.
As I mentioned earlier, It's of superior quality. It's over 80% investment grade today, and it is really a number of unique transactions, Additional potential urban infill urban retail transactions, some blend and extend opportunities, really leveraging our relationships with our retail Partners and the acquisition team has done a fantastic job originating those opportunities. So today, I can tell you we have visibility into Q3. We don't have any visibility into Q4 absent a couple of smaller transactions, but we're obviously confident that we're going to be able to achieve that guidance.
Okay. I also wanted to touch on it. There was a measurable uptick in your exposure to Best Buy during the quarter. Can you maybe just discuss those specific opportunities?
Yes, we Best Buy continues to be a fantastic partner. We're really pleased with our relationship with Best Buy and the opportunities. Today in the portfolio, we have 4 Best Buys. We added 1 in Visalia, California. It's a relocation of an existing store immediately adjacent to a high performing Target, that's typically the predominantly how we what our Best Buy exposure looks like similar to Hillsboro, Oregon relocation of a former store Adjacent to a high performing target just outside of Portland.
So we continue to work with Best Buy. Obviously, they're the last man standing in the consumer electronics space. Jai and the team have done a fantastic job turning around that company and positioning it for future growth. And we'll continue to work with Best Buy across all three platforms.
Got it. One last one for me. Just again in context of the increased acquisition guidance and the continued growth of the platform, just any sort of updated thoughts On G and A as we go through the balance of the year as we look forward.
Go ahead. Go ahead. Sure. So we maintained our G and A guidance for the year, Colin. We're guiding exclusive of or excluding the impact of the amortization of above and below market lease intangibles within total revenue.
We're guiding to a 50 basis point decrease to last year, which is in the upper 7% range.
All right. I'll turn it over. Thanks guys.
Thanks, Collin.
Our next question comes from Ki Bin Kim with SunTrust. Please go ahead.
Thanks. Good morning, guys. Can you just talk a little more good morning. Can you just talk more about the acquisitions you made this quarter beyond just the cap rate and touch on things like Especially for the ground leases, how do you guys view the full all in LTV when you do a ground lease? And what type of run escalators are you getting versus regular fee simple type of escalations?
So escalators vary across the board, typically fixed Every 5 years that you expect from most national, really superior tenants. Just a little color on acquisitions during Quarter 3 Walmart Super Centers, as I mentioned, 1 in Lake Geneva, Wisconsin York, Pennsylvania as well as 3rd one in Wichita, Kansas across from the airport, the Best Buy in Visalia, California, the relocation store. We acquired at Ulta, A Ross, 4 TJXs that includes 2 HomeGoods, a Marshalls and a Flagship, a number of AutoZones, O'Reilly, a couple of Kwik Trip, Obviously, a dominant large format convenience store also was in there. We continue to work with Tractor Supply. So really, again, those industry leading operators.
In terms of your ground lease question, you asked that again, Akibin?
Yes, sure. How do you view the full LTV, all in LTV on a ground lease, including the building costs. So I'm just trying to get a sense of yes, so I'm trying to get a sense of like if you do a ground lease, what percent of the Actual building and land that represents the ground lease value.
So just for clarification for everybody, it's a point of confusion often for investors. So these are ground leases where the tenant constructed the building and the improvements at their own expense. We buy the fee simple interest Typically from a 3rd party unless we develop it. These aren't sale leaseback transactions, of course. So the Walmart transactions, Since we acquired approximately a 20 Acre Parcel Leach Transaction, Walmart has constructed approximately 190,000 Square Foot Supercenter their expense, including improvements as well as the building.
What we look for is high performing stores and dominant retail corridors, No outlast in front of the Walmart or in front of the Costco, like we talked about with Newport News. And then we look for the potential to redevelop That property, if Walmart were to ever or Costco were to ever vacant. So we have no basis in the building. We have no Appreciation tied to it or book value tied to it. We simply own the land, with Walmart or Costco or Home Depot or Lowe's having an obligation to pay rent on an annual basis.
That makes sense.
All right. Yes. And in terms of your balance sheet, leverage dropped to 4.4 times. Obviously, you guys It seems to have over equitized the deals in the short term. It sounds like there's a lot more coming in the 3Q and later in the year.
But On a medium term basis, how do you think about that leverage ratio? And as we go into next year, Should we see Agree go back into the 5% to 6% 5 to 6 times range?
Well, I think,
look, we haven't changed our stated range of 5 to 6 times. We'll continue to maintain the dry powder and the capability to execute on our platform. I when we did the most recent equity offering, we started to gain visibility into the really into the transactional market. Our role in that And the depth and breadth of the relationships that the team here has created. And so, we'll continue to maintain a conservative balance sheet, be opportunistic In terms of capital sources, but at the same time, be able to deploy that capital, in the short term when and if we do raise equity or debt capital.
And then I'll end there, Clay.
And just last
question, obviously the tenure going down is good for your cost of capital, but it probably Also creates a little bit more competition with traditional lenders. And you've seen a couple of them report already with shrinking NIM margins. Is that are alternative capital sources for your tenants Becoming more competitive and relative to your business?
No. Again, being a 3rd party aggregator, we've only executed on a single sale leaseback Transaction this year with National Tire and Battery, being an aggregator in the 3rd party space, really our tenants' cost of capital or access The capital doesn't impact our ability to source opportunities. All
right. Thank you. Thanks, Ki Bin.
Our next question comes from Todd Stender with Wells Fargo. Please go ahead.
Thanks guys. And just to keep On the Walmart theme, just because they're your 2nd largest tenant, so it was 3 separate investments. Can you tell us how you got these? And can you just maybe describe the yields or if you don't want to talk about specific yields, maybe just the spreads between the ground lease and then the true real estate
Yes. So 3 separate transactions, Wichita, Kansas, Lake Geneva, Wisconsin, York, Pennsylvania, all through different All through different sourcing mechanisms, 1 off transactions, 1 through a local broker in Wichita, Kansas, 1 through a joint venture partnership between a developer and an investment fund, and frankly the 3rd, I can't even recall where it originated from, I think direct from the seller. So our Walmart portfolio today, as you mentioned, our number 2 tenant, almost $8,000,000 in GAAP ABR, 2 Sam's Club, a number of Walmart Super Centers and a single Walmart neighborhood market on a ground lease in Vero Beach. The average cap rate on the Walmart Supercenter transactions was in, call it, 6%, 7% range for these three transactions, all high performing stores. Obviously, Walmart has made significant investments in these assets, and we're very happy to add them in the portfolio.
So none of which were sale leasebacks? And then can you address the Costco too, because Costco owns a real estate and so who was that seller?
Yes. No sale leasebacks This quarter, again, the only sale leaseback we've executed on year to date was with TBC, I. E. National Tire and Battery, I believe, and it was a 6 store portfolio in Q1. So no sale leasebacks, all private sellers, all very low rental rates given the nature of the ground lease.
For example, In Wichita or York, Pennsylvania, they're paying $3.31 a foot. In Wichita, Kansas, they're paying $2.22 a foot. So these are very, very low basis assets for Walmart and for us if we're ever to get the real estate back. The Costco, Similarly, Groundleaf, they built their own store. We're very familiar with the Newport Newsmark and the number of transactions there.
And so again, 3rd party sellers, you're correct, they own the vast majority of their real estate, significant barriers to entry. It's a phenomenal store and a great piece of real estate.
Are these anomalies? I mean, it's rare to see the Walmart's transact and certainly you got them all at once. Should we expect more or really there's not many that do transact in your pricing area?
Yes. Just for clarification, 3 different transactions, different sellers, not all at once. So these are I'd say Walmart owns the majority of the real estate. That being said, there's significant number of Walmart's and 3rd party hands typically on ground leases. Our focus is on high performing supercenters, select neighborhood markets.
But yes, I mean, I would tell you they're fairly rare, but look, the acquisition team does has fantastic relationships and continue to source these opportunities and We've seen the result. Walmart is our number one ground lease tenant at 21% of our total ground lease exposure approximately Followed by Lowe's, Home Depot, Wawa and Costco now. So we'll continue to look for and execute on high performing ground leases to industry leading retailers.
Great. Thank you, Joey. And then Clay, I guess just for modeling purposes, when we look at the private placement on the debt side from last month, If Q3 looks to be heavy on the acquisition front, is it fair to assume maybe you'll use the line at this Maybe a higher propensity to draw down the line and then tap the private placement proceeds as we get close to that October deadline?
Yes, I think that's right, Todd. We have ample liquidity under the line of credit, just given where the balance was at the end of 2Q. And we have up until the end of October to draw on the debt private placement. So, our funding of the debt private place It will either be late Q3 or certainly early Q4.
And then you have a year on the forward equity agreement. Is that right?
Correct. May 1, 2020.
Okay, great. Thank you.
Thanks, Todd.
Our next question comes from John Massocca with Ladenburg Thalmann. Please go ahead.
Good morning.
Good morning, John.
So is there maybe, you're kind of touching on the ground leases again, a maximum exposure to ground leases you want as a percentage of the portfolio? And I'm just kind of thinking, How do you balance kind of the quality of that rent versus maybe the ground lease transactions inherently kind of coming in at lower cap rates and therefore being less accretive, maybe limiting how much of your portfolio can kind of come from ground leases?
Well, I'd say there's no cap. I think they're the best risk adjusted transactions in retail net lease by a vast margin. There's certainly no cap. Frankly, we're surprised to be able to be north of 9%. But again, the team continues to source these opportunities and Look, I think the ground lease transactions are unique.
It's a unique part of our Portfolio will continue to add assets to the portfolio and we look at a total comprehensive investment strategy, and
we pick out the best risk adjusted I mean, I
think that's really the key.
Okay. And then you highlighted how low your exposure to franchise restaurants Is that property or tenant type kind of basically redlined even from kind of a development PCS perspective in terms Acquiring more of these assets, and just kind of asking because you had kind of franchise restaurant assets in your development pipeline as recently as kind of a year and a half ago. So is it a structural change or is it more kind of the cap rates are driving out of that space?
Yes. I think it's both. I would hate to say we redline anything. As a real estate underwriter who focuses on really a bottoms I would hate to say we redline anything. It certainly isn't at the top of our list.
Look, the franchise restaurant Brent base in general, I personally believe has become overheated because of the low price point nature of those assets in the 10/31 market. And we will be happy to sell into those Into that market and continue to deliver 12% to 14% unlevered IRRs and frankly in a short period of time. In terms of developing For franchise restaurants or restaurants in general, I'll be honest, this is a really busy team here today. We have approximately 40 people that are really focused, Developing $1,500,000 or up $1,200,000 franchise restaurant, it really isn't the best use of our time. We've really almost grown out of it.
And so when we look at our relationships and our tenant relationships, we really want to be able to deploy $10,000,000 on an annual basis into any relationship With a 3 year run rate. So we want visibility into 3rd the ability to deploy obviously on an accretive basis hitting our hurdles and objectives, $30,000,000 over 3 years. And so developing 7 franchise restaurants per year at $1,300,000 or $1,400,000 on average, I These are basically stick built houses with drive throughs, probably not the best use of our time. And given where those cap rates have gone, We think it's opportunistic and prudent to sell into that space.
Okay. And then apologies if I missed this in the prepared remarks, But what drove the impairment in the quarter?
Sure. We recorded a
$1,200,000 impairment for the quarter That was related to assets that were being marketed for sale and really just reflects An entry to adjust the previous book value to what we view market value to be today.
Okay. That's it for me. Thank you very much.
Thanks, John.
Our next question comes from Jon Petersen with Jefferies. Please go ahead.
Great. Thank you. So on the Wawa transaction, obviously, that street retail, which is different than most of
the rest of your portfolio. I'm just kind of
curious the availability Out there of street retail type, I guess opportunities like that and how you underwrite that versus A kind of standalone piece of real estate.
Yes. Good morning, John. Again, it's an area of interest for us. We're not going Stretch absent outside of our sandbox. We have a number of assets that are Street Retail Urban Assets, the Ann Arbor Walgreens, the Harris Teeter in Downtown Charlotte, the Dave and Buster's in Downtown New Orleans, obviously, just Wawa in Philadelphia.
And we have a couple That we're looking at that are really urban infill locations with retailers that fit within our sandbox with superior underlying real estate. So It's a unique subset of our portfolio similar to the ground lease, not as big as the ground lease subset of our portfolio, but an area where we continue Look for additional opportunities to either develop or acquire or typically redevelop or acquire.
Okay.
All right. That's helpful. And then, on dispositions, you mentioned some, I guess, specific areas, I guess, 24 hour fitness and franchise fast food that Trying to reduce exposure to, but I'm kind of curious higher level how you think about dispositions in the long run. Like is there a certain age of a building or remaining lease duration where It makes sense to look to dispose of a building?
Yes. No, no, it's a good question. It's property specific. All real estate is local. It's The calibration of where is the market, where can we dispose of the asset, what's our cost basis, how does this fit within our portfolio from a concentration perspective, where do we see that tenant Sector or industry trending.
And then most importantly, does it fit within the 21st Century Retail Portfolio, which we think we've constructed here at this company. So I'll tell you Sonic Franchise Restaurants, Burger King Franchise Restaurants, I can't sit here to say, look, every day we decide to hold an asset is the day we decide not to sell. And So we'll continue to be aggressive with assets that we don't fit that we don't believe fit within that context.
All right. Makes sense. Sonic does have the best ice in the industry. It's amazing.
Yes. They've got some good ice and look, we like Burger King's French Fries, but at a 6% cap or a 5.9% cap, more power to the purchaser.
Absolutely. All right. Thank you very much.
Thank you.
Our next question is a follow-up from Christy McElroy with Citi. Please go ahead.
Hey, good morning guys. Just sort of a follow-up from Ki Bin's leverage question, but how should we think about the equity capital raising strategy? Would you expect to continue to do these bigger Sort of forward deals and then reset the balance sheet periodically or when would you consider moving to more of a slower APM type Strategy to match fund if you buy and how does your broader view of the capital markets factor into this?
No. Good morning, Christy. Look, I think people tend to forget that we raised $200,000,000 almost $240,000,000 off of the ATM in Q4 and Q1. So the forward Instrument is a tool for us to lock in an attractive cost of equity when we have visibility into a pipeline where we'll be able to deploy it In the near or medium term. At the same time, I think most important and I think most interesting frankly is it doesn't preclude the ability to use the ATM Or any other capital raising tools on the debt or equity side.
So it's almost you can look at it almost as an insurance policy, if anything, we're pretty confident in our ability to source transactions as we've demonstrated this quarter with the increased guidance. At the same time, it's almost setting a floor on the cost of your equity, which is the most important component in the net lease space and for REITs in general.
Okay. And then you mentioned that you expect cap rates closer to 7%. Just following on some of the earlier questions about potentially doing more ground lease fields and Growing that portfolio at lower cap rates or maybe doing more flagship deals like Wawa. More philosophically, does your cost of equity and debt capital today Currently warrant buying more at lower cap rates today. Is the market effectively giving you license to do more of these deals?
It's a good question. We really honestly, we don't think of the proverbial green light or red light or license to do them. We Focus really on the underlying real estate and how it fits within our 30,000 perspective of retail real estate and operators. So We'll continue to execute on unique transactions. We work with our retail partners and we have unique expertise to really Bring those transactions to fruition.
A lot of them have hair on them. For example, the Wawa took 6 or 7 months. My transaction team Was very deep into that transaction for a long time. At the same time, we're not only focused on those types of deals. And so There's a broad range of the transactions we're interested in and that we're executing on.
And I think the ground leases, the urban infill, the street retail stuff, Really just fits into the larger picture of what we think, again, the leading a leading portfolio of retail should resemble in this country. It should have urban assets, suburban assets. It should have hard corners, it should have dominant outlast, it should have boxes next to super targets, and the like. And so that's really our focus. Does that make sense?
Yes. And then, just lastly, congrats on the Simon Leopold addition. You've made a lot of progress on board rotation over the last year. Maybe you could just provide your updated thoughts on the potential for the staggering of the Board and then also providing FFO guidance at some point?
Yes. We're very excited to have Simon join the Board. As I mentioned, we've had 3 new directors in 12 months as part of really an ongoing A Board transition. And so we've temporarily expanded the Board. We anticipate contracting it while this transition takes place.
And so With Simon's edition, Craig Ehrlich's edition and Greg Lemkooll's edition, we've really brought what we think is 3 high quality, really fantastic directors on board. In In terms of providing earnings guidance, again, with a small denominator and frankly with a ramping Company with the growth trajectory like we have, we just continue to believe that it would be such a wide band Given the visibility of 60 days to 70 days, it would be almost really counterproductive to what we're doing today.
Hey, Joe, it's Michael Bilerman. I guess Yes. Pete, can you hear me?
Yes. I'm right here.
Yes. So can you I mean, so I guess the destaggering, will that be put forth Next proxy season?
Not currently on the radar, We haven't had any recent Board discussions, but the Board is always considering, any potential improvement.
Why wouldn't I mean, in this day and age, the majority of companies in Corporate America, the majority of REITs Have de staggered boards. Why wouldn't you, as a CEO, be telling your fellow board members so they should be de staggered.
I think there are multiple different perspectives on de staggering the boards. I think there is obviously, there's a perspective that these staggering and classified boards, people believe that they no longer make sense. At the same time, I think There's really a truly a flip side to that coin. And I think that shareholders today through say on pay, All the other mechanisms that they have, I think frankly de staggering aboard today could potentially provide for activism, could potential disruption, Could get in the way of the continued execution of our operating strategy. Now if we were if this company had not performed, voters Shareholders can vote ultimately with their wallets and then also with their shares.
If this company hadn't performed over the short, medium or long term, Then I think there will be a much more validity to potentially opening yourself up to disruption, short term investors Or frankly, just activists that are looking for POPs.
Yes. I think the proxy advisor firms, the majority of long only As well as hedge fund investors, institutional investors would disagree with those comments and that's why the majority of companies do have de staggered boards. But if that's the way you guys want to operate, that's the way you want to operate. In terms of FFO, I mean, you're north of a $3,000,000,000 You're no longer a couple of $100,000,000 company where I would argue back a number of years ago, Providing individual details in terms of G and A, capital raising and all the various components, You would have wider ranges, but you are now a much larger organization, where providing that detail Would allow, given that your shares are owned by a variety of constituencies, a much broader constituency today than they ever were, providing and being in that A way of expectations would be, I think, very helpful. So I don't think you can hide behind we're still a small company that's growing where you are A major player now looking at lease space.
Yes, I don't think I have no intent of hiding behind anything. Think what we try to do is be as forthright as potentially possible. We do that with our initial guidance for the year for 3 $400,000,000 I didn't expect to be sitting here and say increasing guidance of $625,000,000 to $675,000,000 I mean this company, while it has What has grown and you're right, it is no longer a couple of $100,000,000 company. The company is still growing top line approximately 30% Even with that denominator and frankly, we are still learning about our capabilities across all three platforms. And I think we give the components and I know Clay works with everybody to give the components of how to build appropriate models and expectations.
But at the same time, I have continued concerns about providing benchmarks out there, that necessarily could Few perspectives and we have no interest in providing benchmarks out there that would simply be beaten raise on a quarterly basis, right? We run a business with a long term Perfective here. And quarterly numbers and short term guidance to me really defy retail net lease real estate to me.
Right. I think people would be very interested in how you think about sources and uses in terms of the acquisitions that you're targeting And then the uses of capital and how management and the Board thinks about both debt and equity, the relative costs, the term of that debt, When you're going to raise it, how much equity you're raising before to replenish the pipeline, all of those are important inputs as people model and think about the cash flow and earnings growth that the company produces. And so having that insight even at the beginning of the year, if you had targeted $300,000,000 of deals, This is the way we're planning on financing. This is how we think about our debt and equity components. This is when we want to raise it.
And then as the deals have accelerated, You can then update that to the market. I think having that capital discipline and communicating that to the Street Only begets a higher multiple, which will allow you to do more accretive deals.
I'll be honest, I would never want to telegraph to The Street, how we anticipate raising debt or equity on a go forward basis in a volatile environment like we have today. I never anticipated the 10 year being at 2% today. We were the 1st net lease company to do forward equity offerings. We've had a number of companies subsequently execute on and we've done 3. We will also want The ability to take advantage of capital markets and cost of capital and provide that firepower for our balance sheet on a whim and take advantage of those windows inclusive of the ATM, forward equity offerings, block trades, debt private placements.
So to telegraph how we're going frankly to source capital for the year, I would tell you, we go into every year with conservative assumptions internally and then we look for opportunities both on the use side as well as the source side To take advantage of and provide return for our shareholders. Does that make sense?
Yes.
So I think I think the most important thing we can do is continue to do historically what we have been doing, Chopping wood day in, day out, focusing on underlying real estate, constructing the highest quality portfolio we think In the retail world today in this country and providing a balance sheet for the continued growth that we anticipate that is conservative, That is nimble, that is flexible and that allows us to execute on our operating strategy. And frankly, anything that gets in the way of that, whether it's shareholder activism or noise or setting expectations and playing the game with Wall Street, we really want to avoid it. This is a real estate company to its core. It's an environment with 40 people that put their blood, sweat and tears in day in, day out. And we want to put our heads down and get to work on real estate And not placate all of the different constituencies out there.
It's impossible. If everybody's happy, then we probably got a problem.
Okay. Thank you.
Thanks. This concludes our question and answer session. I would like to turn the conference back over to Joey Agree for any closing remarks.
Well, thank you everybody for joining us. We look forward to speaking with you soon and hopefully you get everybody to get through earnings season. Talk to you soon. Thanks.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.