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Agree Realty Corp
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Good morning and welcome to the Agree Realty's Third Quarter 2019 Conference Call. All participants will be in listen-only mode. [Operator Instructions] 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 at 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 rates.
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 in 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 the CVS in downtown Greenwich, Connecticut located on Greenwich Avenue. CVS is 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 the Kroger which carries a BBB 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 and do 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 at least 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 to the quality of our investment activity. We continue to view the retail world as dynamic and believe the risk-adjusted we are -- 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 to $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 continue to add properties to our ground-lease portfolio. We acquired four ground-lease properties including Wawa in Cocoa Florida and three geographically diversed 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 portfolios 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, marketing 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 points 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 rated companies.
Turning to our development and partner capitalist 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 projects had total aggregate cost 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 tenant roster. These relationships enable our retail partners to leverage our capabilities, while consistently demonstrating our ability to add value across the full lifecycle of an asset.
While we 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 and a weighted average cap rate of 6.8%.
Dispositions during the quarter were comprised of Walgreens in Grand Lake, 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 phase. 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'd 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 point reduction year-over-year.
Our asset management team also continues to proactively address our upcoming lease maturities. As a result of their efforts 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 square feet of gross leasable space. Notably we acquired a 31,000 square-foot Best Buy in Sanford, Florida and extended the lease commenced here with the acquisition.
As of September 30, 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 going forward to having additional capacity for our growing team, as well as providing enhanced amenities and functionalities to our team. We anticipate movement to accrue by Thanksgiving and look forward to many of you visiting our campus in the future.
I thank you for your patience and 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 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 settle the transaction in conjunction with our April forward offering. However, 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.
Now, moving onto our capital markets activities. In July, we entered into a new $400 million aftermarket equity program. During the third quarter, we issued over 400,000 shares of common stock through our new ATM programs, 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 $125 million of senior unsecured notes purchase agreement that we entered in June of this year. The proceeds were used to pay down the outstanding balance on our revolving current facility. The notes bear an interest at a fixed rate of 4.47% and have a 12-year term. As a reminder, in March we've 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 30, our net debt to recurring EBITDA was approximately 5.1 times, which is at the low end of our stated range of five times to six 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 11 to stockholders of record on September 27, 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 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'll open it up for questions.
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Rob Stevenson with Janney.
Good morning, guys.
Good morning, Rob.
Hi. Thanks. Joey, can you talk about the development and partner capital pipeline behind the four projects that you currently have? I mean, you've got the three that are at the Frankfort site and then the Tractor Supply. I mean, how robust is the sort of shadow pipeline on the stuff that you're working on behind that? Is this – as we look at this is this going to grow? Or we're going to basically be at sort of four 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 acquisition? Can you just share a little insight there?
Sure. I think look we look at all three external growth platforms as providing a unique value proposition for our sandbox of retailers. And again, that really consists of 30 to 35 retailers that we're focused on growing those relationships with. So, we're very pleased to announce that Tractor Supply in Heart Michigan that the former Shopko, our first project with Tractor Supply on the development/redevelopment front. And then, we've another – a number of projects that are in the shadow pipeline that we anticipate commencing either fourth quarter 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. And so we got to continue to be a full-service provider for those leading retailers, but we're not willing to go up the risk factor down the credit spectrum to put shovels in the ground.
Okay. And then 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 to $700 million of acquisitions this year, is there anything other than the availability of cost-effective capital that would suggest the 2020 run rate shouldn't be -- and forward shouldn't be at that level or higher?
What I'd say there's nothing macro in the market today that changes our perspective. Hence giving 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. And so it's really opportunistic and opportunity dependent, but no there is nothing out there 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.
Hi. 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 parts for owning more Sherwin? And then is there even an opportunity to maybe own Benjamin Moore as more?
I'll tell you first thanks for joining us Nate. Look, Sherwin-Williams has down to approximately 5%, just over 5% of the portfolio. That's up from 6% on the time of the sale leaseback transaction of 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.
So 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. But overall, I'll tell you that we continue to be big fans of Sherwin and Benjamin Moore is a great operator as well. But really the portfolio of maintaining concentrations is really in a strong place.
With Sherwin at approximately 5%, we anticipate just again just natural dilution from denominator growth. Sherwin will be sub-5%. So, we have no really material concentrations that are outside to speak of.
Okay. And then I mean, I know that they have a lot of locations in Canada and I'm just curious Europe is probably too far away, but would you ever consider going to Canada with a tenant that you really like and deal with?
No. 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 continents of the United States today and that's really our focus.
Okay. And then just one quick and that may be on the G&A load. As you guys continue to kind of scale are there any more heads that need to be added or you guys set for the time being?
Yeah. 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 buildings as I mentioned in the prepared remarks it should really give us the continued opportunity to grow headcount across the organization, while also gaining leverage in terms of the G&A as a percent of revenue.
So we continue -- we had two new members of the acquisition teams joined three weeks ago. We have a new property -- a new member of the property management team growing. And as you expect with the 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 built here.
Sure. And Nate, in terms of run rate we're guiding to a 50 basis point improvement as for G&A as 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 for me Joey. I know in the past you've discussed that your deal flow does not necessarily reflect spikes in terms of the market more broadly. That said, can you maybe update us on your take on competition for deals and sell a price in expectation just give the move in interest rates in particular the tenure here over last few months?
Sure. I think one is important to note again the average transaction here it takes approximately 61 days from a letter of intent execution to close. And so there is always a lag in what we report to the market that we're close or what we originate. I'll tell you for a couple of months there with the tenure compressing approximately 50 basis points the investment sale community as well as owners and developers some of them saw an opportunity to try to compress cap rates or increase corollary increase pricing.
I tell you if anything on the margin we're seeing cap rates for high-quality projects compressed with the tenure still below 1.8%, but 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.
And so we don't see any changes on the horizon in terms of private or public purchasers in competition generally and we think we're very well positioned to continue to execute.
Got it. So 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?
But we don't anticipate our cap rates compressing at any material way. I'd tell you, I wouldn't assume a significant deceleration on activity obviously, Q3 was a new 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 products in this massive and fragmented space in which we operate. And just as a reminder to everybody, I look back in our notes and last year this time the Sherwin-Williams transaction had it even come up.
Our original offer on the Sherwin-Williams transaction was sent November 10, 2018. So it is a very fluid marketplace. We tried to give the best guesstimate of our visibility. But it is large, it is fragmented and we moved decisively and quickly.
Okay. And then one more for me. Can you expand on how the 7-Eleven portfolio opportunity came together? And then the potential to expand that relationship moving forward?
Yes. It was originated as to the buyer acquisition team. It was an off-market opportunity region of third-party seller and we worked with our retail partners to create really a win-win situation for both parties. And so we're excited to add 7-Eleven in a material way. I think we had one or two prior to the transaction. But in the material way obviously, a fantastic operator and fantastic credit. And so 7-Eleven now is a meaningful partner of our tenant roster.
I’ll turn it over. Thank you, Joey.
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've completed in Q3. Can you just talk about the size and pricing of those deals relative to the rest? And what sort of your appetite for doing more of these kind of higher value urban deals like this going forward?
Yes good morning, Christy. I think the Greenwich CVS, we haven't but obviously, we've not been an acquirer of pharmacy with the Walgreens disposition during the quarter and then the one occurring this week and then we anticipate future Walgreen dispositions going forward. It's really a unique real estate opportunity compelling value proposition in the heart of Greenwich on Greenwich Avenue over 19 years left of remaining term, significant growth in lease.
We're a big fan of high-quality street retail with long-term leases to leading operators and so that was a very unique one for us. I tell you, I think it's fair to say that that wasn't given specific guidance but that was inside of our 7-cap range.
The Mariano's, again Mariano's, Kroger guaranteed outside of Chicago. Not really 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 it's really become one of the dominant flags in the Chicago MSA.
And so we'll continue to look at those transactions that are of that similar nature but really our business is aggregating $4.5 million to $5 million on average assets really across the country.
Okay. And any changes in sort of how you're thinking about your targeted 30-tenant list? And 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? I mean are you seeing sort of more bidders out there in the market for deals in a lower cost of capital environment?
Yes. So 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. But 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. But 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. And then just lastly a quick modeling question on 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?
Yes. We are a little more back-end loaded, Christy. Our weighted average closing date in the quarter was the 57th day of the quarter. So a little back-end weighted, which is fairly in line with our last couple of quarters as well.
Okay. Thank you so much, Joey.
Thanks, Christy.
Our next question comes from John Massocca with Ladenburg Thalmann.
Good morning.
Good morning, John.
I guess, how many buy and then extend transactions were acquired this quarter kind of similar to the Florida Best Buy if there were any others? And then how big is that market for that type of transaction?
Honestly John, I don't have an exact talk for you. I would tell you if I had to guess between 15 and 20, we recall for where will be blend-and-extend transactions, that's out of the approximately 67 assets that we acquired.
Okay. And then is it just quarter-to-quarter, it's kind of again depend on what 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, really -- in reality we're really making the market, right? We are either with direction from our retail partners or our acquisition team uncovering opportunities. We're really making a market there. So, it's not a market per se. We're -- it's really a value creation.
Look, we continue to uncover all different types of opportunities from ground leases to street retail to blend-and-extend opportunities. And really there, like I said in previous quarters, there's really no rhyme or reason when you are playing in a market this size and with our breath. And so, 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. And then, can you maybe provide some color on the dollar store acquisitions in the quarter? It 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 for 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. And so they are the grocery store. They are the one-stop shop a lot of times through also the convenient store when people don't want to make the 20-mile trip to the Walmart Supercenter. And we think they are very well positioned.
Obviously their comps provide for, and they continue to move into more and more perishables and freezer and cooled items. And so we like the business model. They are performing very well. And we continue to work with those developers on their pipelines.
Understood. And then 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 will there be spread between cash and GAAP?
Yeah. Generally -- we generally were about 30 to 40 basis points, varies by transaction.
Thank you very much.
Thanks, John.
Our next question comes from Todd Stender with Wells Fargo.
Hi, thanks. With the Home Depot being new to your top tenant list, it 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. So good morning, Todd. So we bought a Home Depot in Connecticut this quarter. Over two-thirds of our Home Depot exposure is ground lease. 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. And we'll continue to add Home Depot in the fourth quarter as well as continue to add in 2020 as well.
And cap rate-wise, I would suspect that that's going to be in the -- gosh, is it 6 or sub-6?
That was a 6. I mean we're very rarely if ever frankly have cracked 6. That is in the --what's called the mid-6 range on that transaction as well.
Okay. Thanks. And then back to CVS, the rent went up pretty meaningfully from Q2. I know you talked about the Greenwich asset. Did you buy anymore or that's just from that one?
That is just the Greenwich asset on Greenwich Avenue, again over 19 years of 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 over -- approximately over $25 million.
Okay. And then the Best Buy, so obviously consumer electronic retailer not quite in the nondiscretionary 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. Maybe just speak to what you like about the real estate and the blend-and-extend piece? How long was that lease and where did it go to?
Yes. So we acquired a couple Best Buys during the quarter. The Sanford transaction which you're referencing is a 10-year lease, now it's approximately 30,000 square foot store, high-performing unit, immediate free standing, immediately adjacent to a Walmart supercenter. We also acquired a Best Buy in New York during the quarter as well. And so our Best Buy portfolio today is comprised of six assets: Fort Worth, Texas; Hillsboro, Oregon immediately adjacent to a super target; Wetstyle, New York; Sanford, Florida; Visalia, California; and then Woodland, Park New Jersey. So high-performing assets.
We have a great relationship with Best Buy. They are obviously the last man standing in the consumer electronics business and Hu Joly what he started there and what he accomplished during his term as CEO and I was Executive Chairman we think we are -- we think it 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. And then just lastly. So the Tractor Supply project you are dealing is your first one with them. Can you speak to some of the economics around that? Where did you have due to get that deal? And do you expect more to come?
Sure. So again, we're very pleased. We have a number of tractor supplies in the portfolio today over 25 in the portfolio, again a leading operator in farming rural supply. Unrated retailer, but we suggested leverage and believe just under two times. So publicly traded it's really a strong robust balance sheet. This is our first private form vacant Shopko. We acquired the vacant Shopko and they are retrofitting or redeveloping that existing building for Tractor Supply in Hart, Michigan. Those returns were in line with our historical. I'd call a PCS returns quick turnaround for us and we'd love to continue to expand the relationship with Tractor Supply just really a superior retailer though.
Thank you.
Thanks, Todd.
Our next question comes from Linda Itcy [ph] with Jefferies.
Hi. It’s Linda Tsai [ph]. Thanks for taking my question. When you look at your year-to-date stock performance in multiple, it's clear you're serving investors well in terms of acquiring high-quality properties creatively and driving sustainable growth. That said, do you have a sense of how large this portfolio can become ultimately over the next few years? And then 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.
Look great questions, Linda. I say thanks first off – thanks for joining us. Look 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 have become a $3 billion diversified REIT. Today we're north of $4 billion and we don't see any sign of slowing up. Look we are in a highly fragmented space a large space -- our capabilities the team individual team members continuing to do a fantastic job. And so 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 -- that is not the -- that is not in conjunction with being the largest operator or anywhere close. And so look we think we have significant runway. We think there's a vast opportunity set we care that was a great balance sheet and a terrific team and then let me get it get out and chop wood and execute.
In terms of sustainable AFFO growth, look we think mid-upper single digit AFFO growth and it's not difficult to people to model our growth rate given the denominator and given our acquisition investment activities is realistic for us. Our goal is to deliver double-digit total shareholder returns that on a risk-adjusted basis are we think are superior and so that is -- 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. And 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 fee 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 are at the lower end of that payout ratio which implies in the future frankly significant room for growth while also managing the retained earnings in the cheapest form of capital that we have to reinvest in.
Thanks.
Thank, Linda.
[Operator Instructions] Our next question comes from Ki Bin Kim with SunTrust.
Thanks. Good morning. So you guys bought about $250 million of assets at 7% cap rate with over 80% investment grade. So when I think about that it is a little surprising -- positively surprising. You wouldn't think you could buy that much -- with that much investment grade at 7%. So 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 at an investment grade versus a franchisee that's part of a flag best investment grade where there isn't necessarily a credit backing behind it?
So first of your last question is zero. We have no franchise restaurants or franchise operations so this is all true investment-grade exposure. We've been net -- really net sellers of franchise operations. Franchise driven or small balance sheet. So the last question is zero. The answer is zero.
Look good surprises are look, we like providing those. I would tell you again, it's a testament to our team. First of all, 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. So basically, we're cutting GLA in this country down to medium-term by approximately 1/3.
That doesn't include the disruption that we foresee coming in a grocery space, where we have nearly 40,000 grocery stores in this country excluding, Dollar Stores warehouse stores and supercenters. And so we think that's on the horizon as well.
So you have to ask yourself, really we start with the preposition 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 is only about 1,000 malls in this country.
But when you step back the mall space only represents approximately 5% to 6% of GLA, retail GLA in this entire country, open-air centers are approximately 30% of GLA, net lease retail is about 55% of GLA.
So 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've another 10 years of description and adoption ahead of us in retail here.
And so, we're going to watch a legacy brick-and-mortar retails moved to an omni-channel world which is very expensive. And we're watching native and online based, historic online brands, opening smaller formats stores and showcase their products.
So we look at the retail world today. And we say this is a world of haves and have-nots. And retail providers have the balance sheet flexibility. And generally have an investment-grade credit rating absent to Hobby Lobbies or Tractor Supplies or AAA's or publics of the world that are unrated.
And they have the ability to invest in price, in an omni-channel future. Or we think they are eventually just going to die off. And so, our focus is discretely on the best and brightest operators in this country. And the majority of those operators carry an investment-grade credit rating.
And so, 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.
And so, a 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 and just following up on that last statement. 57% of your portfolio is investment grade. So is that similar, where 50 -- most of that or what percent of that is, investment grade at the real estate level versus the franchisee thing we were discussing earlier?
Again no -- there is no franchise investment-grade exposure in that number. We don't score, we don't impute credit ratings. There is no franchise. So if we have a for instance, a Taco Bell franchisee, we are not imputing young brand's credit. It's the franchise credit. So that is a true investment-grade number without any third -- without any non-third-party major agency validation.
Okay. Thanks for the 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 Marin California in a few weeks. Thanks again.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.