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Agree Realty Corp  (NYSE:ADC)
Q3 2018 Earnings Conference Call
Oct. 23, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to the Agree Realty Third Quarter 2018 Conference Call. (Operator Instructions) And please note that, today's event is being recorded.

I would now like to turn the conference over to Joey Agree, President and CEO. Please go ahead, Joey.

Joey Agree -- President & Chief Executive Officer, Director

Thank you, operator. Good morning, everyone, and thank you for joining us for Agree Realty's third quarter 2018 earnings call. Joining me this morning is Clay Thelen, our Chief Financial Officer.

I'm pleased to report that we had another very strong quarter with our three external growth platforms producing record investment volume and significant capital markets activities that positions our Company for continued growth.

During the third quarter, we invested $159 million, among 52 high-quality retail net lease properties. 43 of these investments were sourced through our acquisition platform, representing aggregate acquisition volume of approximately $151 million for the third quarter. The properties were acquired at a weighted average cap rate of 7.2% and had a weighted average remaining lease term of 11.5 years.

The acquired properties are located in 20 states and are leased to 20 leading retailers, operating in 14 different sectors, including off-price retail, crafts and novelties, convenience stores, auto parts, and tire and auto service. Notable retailers include TJ Maxx, Walmart, Best Buy, Hobby Lobby, Tractor Supply, 7-Eleven, O'Reilly Auto Parts, National Tire and Battery, AutoZone and Firestone.

Through the first 9 months of the year, we've invested a record $366 million into over 100 properties geographically diversified across 29 states.

As of 9/30, we've acquired 96 properties for a total of $351 million. These assets are leased to 38 different leading retail tenants, operating in over 20 sectors. The properties were acquired at a weighted average cap rate of 7.2% with a weighted average remaining lease term of 12.3 years. More than 46% of the annualized base rent acquired during the first 9 months of the year comes from retailers with an investment grade credit rating. I would note that we do not imply ratings to high quality names such as Tractor Supply, Hobby Lobby and Publix.

Given our robust acquisition volume for the first three quarters of the year and our strong pipeline, we are increasing our 2018 acquisition guidance to a range of $425 million to $475 million. A component of that guidance includes transactions that we believe may close this year, but are subject to further conditionality. In total, we feel this range is appropriate heading into the last 2 months of the year given today's visibility across our pipeline.

Across all three external growth platforms, we anticipate investing over a $0.5 billion during the course of 2018, yet another record for our growing Company. Though we're able to increase our acquisition guidance for the year, I want to again emphasize that our underwriting standards are as rigorous as they've ever been. Our pipeline is a representation of the strongest retailers in our targeted lines of trade.

The continued transformation of our top tenant roster is dynamic, and emblematic of the high quality nature of our portfolio. This past quarter, Smart & Final and Michaels were eliminated for our top tenant roster, while we increased exposure to other top tenants including TJ Maxx, Walmart, O'Reilly Auto Parts, Tractor Zone, Tractor Supply, and AutoZone.

Similarly, Academy Sports, Rite Aid, BJ's Wholesale, 24 Hour Fitness and Burger King franchisee Meridian Restaurants, have all been eliminated from our top tenant list in the past year. Our portfolio will continue to evolve as we aggressively and proactively embrace today's changing retail environment.

Turning to our Development and Partner Capital Solutions platforms. During the first three quarters of 2018, we had 13 development in PCS projects, either completed or under construction that represent total committed capital of approximately $60 million. During the quarter, we completed three previously announced development and PCS projects. These include our second project with leading Burger King franchisee TOMS King in Aurora, Illinois; our first project with Burlington Coat Factory in Nampa, Idaho; and the Company's first PCS project with Aldi in Chickasha, Oklahoma. These projects had total aggregate cost of approximately $11 million.

We also commenced three new development and PCS projects during the third quarter with total anticipated cost of roughly $8.5 million. The project consists of our first two developments with Sunbelt Rentals in Batavia and Maumee, Ohio and the redevelopment of the former Kmart space in Mount Pleasant, Michigan for Hobby Lobby.

As mentioned in previous calls, we've executed a 15-year lease with Hobby Lobby in Mount Pleasant for the construction of a new 50,000 square foot prototypical store. Construction continued during the third quarter on two projects with total anticipated cost of approximately $5.5 million. These projects include our third and fourth developments with Mister Car Wash, both located in the State of Florida.

Moving on to our disposition efforts, we were extremely active in the third quarter, disposing of six properties for gross proceeds of approximately $30 million. These dispositions were completed at a weighted average cap rate of 7.3%, notable dispositions include Walgreens in Delta Township, Michigan. The only Shopko in our portfolio, a Smart & Final in Upland, California, a short-term Hobby Lobby in Palm Coast, Florida, as well as franchise restaurants.

Year-to-date, we've disposed of 17 properties for gross proceeds of approximately $62 million and we remain focused on proactively managing our portfolio and recycling capital where appropriate. As a result of our third quarter disposition activity, our Walgreens exposure has been reduced to 6.2% as of 9/30. This represents a year-over-year decrease of approximately 230 basis points, and more than 2,100 basis points in less than 5 years.

Similarly, our pharmacy exposure broke through the 10% threshold and stood at 9.7% at quarter end, representing a decrease of approximately 350 basis points year-over-year and more than 2,700 basis points since the end of 2013. Our asset management team has been focused on addressing our minimal upcoming lease maturities. Because of these efforts, we just have two remaining lease maturities in 2018, representing 0.2% of annualized base rent.

Our ability to leverage our relationships with retail partners is best demonstrated by the redevelopment efforts taking place at our two legacy shopping centers in Mount Pleasant, Michigan and Frankfort, Kentucky. Kmart failed to exercise options at both locations and we are currently in varying stages of redevelopment of both sites.

As previously mentioned, construction has commenced in Mount Pleasant to redevelop the former Kmart space into a prototypical 50,000 square foot store for Hobby Lobby. In Frankfort, we're currently in lease negotiations with three leading retailers in the discount grocery, off-price and home improvement sectors. We anticipate that these leases will be executed this quarter with demolition beginning shortly thereafter, and we look forward to updating you as this project progresses.

As of September 30, our rapidly expanding portfolio consisted of 520 properties located in 45 states. Our tenants are comprised primarily of industry-leading retailers in over 28 diverse retail sectors with more than 47% of annualized base rents coming from tenants who carry an investment grade credit rating. The portfolio remains effectively fully occupied in 99.7% and has a weighted average remaining lease term of 10.1 years.

On previous calls, we've highlighted the quality of our ground lease portfolio, which is comprised of leading retailers including Home Depot, Lowe's, Walmart, Wawa, Aldi, AutoZone, Chick-fil-A, McDonald's and Starbucks. This past quarter, we are very pleased at Walmart Supercenter in Manassas, Virginia and at Texas Roadhouse in Pittsburgh, Pennsylvania to our ground lease portfolio, which now represents almost 8% of annualized base rent.

At quarter end, nearly 90% of our ground lease portfolio derived its rent from retailers that carry an investment grade credit rating.

Given the high quality at each of our ground lease portfolio and the unique reversionary interest in the improvements, we continue to believe that this portfolio presents an extremely attractive risk-adjusted investment and we will continue to seek out opportunities to add to it.

With that, I'll turn it over to Clay to discuss our financial results.

Clay Thelen -- Chief Financial Officer

Thank you, Joey. Good morning, everyone. I'll begin by quickly running through the cautionary language. As a reminder, please note that during this call, we will make certain statements that may be considered forward booking under federal securities laws. Our actual results may differ significantly from the matters discussed in any forward-looking statements. In addition, we discuss non-GAAP financial measures including funds from operations or FFO and adjusted funds from operations or AFFO. Reconciliations of these GAAP, non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release.

As announced in yesterday's press release, total rental revenue including percentage rents for the third quarter was $33.6 million, an increase of 23% compared to the same period last year.

Year-to-date total rental revenue has increased 26.1% to $96.7 million. General and administrative expenses in the third quarter totaled $2.9 million or 7.9% of total revenue. We still anticipate G&A expenses will be approximately 8% of total revenues for the year. Income tax expense for the quarter was $125,000. We anticipate total income tax expense for the year to be in the range of $500,000 to $550,000. Funds from operations for the third quarter was $23.5 million, representing an increase of 17.7% over the comparable period of 2017. On a per share basis, FFO increased to $0.72 per share, a 4.3% increase as compared to the prior year period.

Funds from operations for the first 9 months in 2018 was $67.8 million, representing an increase of 23.5% over the comparable period of 2017. On a per share basis, FFO increased to $2.13 per share, a 6.6% year-over-year increase. Adjusted funds from operations for the third quarter was $23.4 million, a 17.4% increase over the comparable period of 2017. On a per share basis, AFFO was $0.72, an increase of 3.7% year-over-year. Adjusted funds from operations for the first 9 months of the year was $67.4 million, a 22.9% increase to the comparable period in 2017. On a per share basis, AFFO of $2.12 per share represented a 5.9% increase as compared to the first 9 months of 2017. On a quarterly and year-to-date FFO per share and AFFO per share were impacted by dilution required under GAAP related to the forward equity offerings we completed in March and September.

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. Since our average stock price for the third quarter was above the deal price of the March and September forward equity offerings, we included dilution related to both transaction. The aggregate dilutive impact related to these offerings is a $0.01 to both FFO and AFFO per share for the 3-month period and roughly $0.02 for the 9-month period. There will be no additional treasury stock dilution related to the march forward equity offering given we settle the transaction in September.

Now moving to our capital markets activities. As Joey mentioned, we had an active third quarter solidifying our balance sheet for future anticipated growth. On September 6, we settled the entirety of our March forward equity offering and received net proceeds of $160.2 million. In conjunction with the settlement of our March forward offering, we completed another follow-on public offering of 3.5 million shares of common stock in connection with the forward sale agreement. Upon settlement, the offering is anticipated to raise net proceeds of approximately $190 million 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 September offering. We retain the ability to settle the transaction in whole or in tranches at any time between now and September 3, 2019.

The settlement of the March forward equity offering and the completion of the subsequent September forward equity offering provides the Company the capacity to invest an incremental amount of approximately $600 million and remain within our stated leverage range of 5x to 6x net debt to recurring EBITDA. We view the forward equity offering to the prudent way to further fortify our balance sheet and lock in an accretive cost of capital, while mitigating external risks and market volatility.

During the quarter, we were also active in sourcing attractive debt financing. In July, we exercised the accordion option on our unsecured revolving credit facility, securing increased commitment to $75 million and increasing our total revolver capacity to $325 million. The increased capacity on a revolving credit facility reflects the continued growth of the Company, since our credit facility was last amended in December of 2016. In September, we completed a private placement of $125 million of senior unsecured notes. The notes bear interest at a fixed rate of 4.32% and have a 12-year term maturing on September 26, 2030.

Net proceeds from the private placement were used to pay down amounts outstanding under the Company's unsecured revolving credit facility. At September 30, we had just $14 million outstanding on our unsecured revolving credit facility reflecting additional capacity of $311 million.

Our capital markets activities demonstrate our conservative approach to opportunistically accessing attractively priced capital and positioning our balance sheet for continued growth. As of September 30, our net debt to recurring EBITDA was approximately 4.7x, well below our stated range. Total debt to total enterprise value was approximately 25.1% and our fixed charge coverage ratio, which includes principal amortization remains at a very healthy level of 4.1x.

The Company paid a dividend of $0.54 per share on October 12 to stockholders of record on September 28, representing a 6.9% year-over-year increase. This was the Company's 98 consecutive cash dividend since its IPO in 1994. For the first 9 months of the year, the Company declared dividends of $1.60 per share, a 6.3% year-over-year increase. Our quarterly payout ratios for the third quarter were conservative 75% of FFO and AFFO per share, respectively. For the first 9 months of 2018, our per share payout ratios were 75% of FFO and 76% of AFFO per share, respectively.

These payout ratios are at the low end of the Company's targeted ranges and reflect a very well covered dividend.

With that, I'd like to turn the call back over to Joey.

Joey Agree -- President & Chief Executive Officer, Director

Thank you, Clay. To conclude, I'm very pleased with our strong performance during the first three quarters. We're in a tremendous position for the remainder of the year and I look forward to seeing many of you at the upcoming REITworld Conference in November. At this time, operator, we will open it up for questions.

Questions and Answers:

Operator

Thank you. And we will now begin the question-and-answer session, (Operator Instructions) And the first questioner today will be Rob Stevenson with Janney. Please go ahead with your question.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Good morning, guys. Joey, can you talk a little bit about the cap rates on the two ground leases that you got -- you guys acquired versus the 7 2 (ph) blended for the overall acquisitions during the third quarter and why buying ground leases at this point is still attractive to you? I assume that the cap rates were lower than the 7 2 (ph)?

Joey Agree -- President & Chief Executive Officer, Director

Good morning. Robert, I think it's fair to say that those cap rates were generally lower on the ground lease transactions. At the same time, the rent per square foot along with the underlying real estate reflects the ground lease nature of those transactions. The notable ground lease transaction during the quarter was the Walmart in Manassas, Virginia, which is a supercenter, a high performing store, paying really $354 a square foot. And so I'll tell you, when we invest in larger boxes Walmart, Home Depot, Lowe's et cetera, we obviously prefer a ground lease structure rather than have our capital invested into the building improvement itself. So we'll continue to find opportunities and execute opportunities. I'll tell you, our pipeline has some more opportunities that are similar to the Walmart in Manassas as well as the Texas Roadhouse and we think it's a great risk adjusted return.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Okay. And now if I look at the changes in your sector exposure over the last year, main tire and auto is up 250 basis points, auto parts is up a 100. So you guys have materially increased your exposure to the auto space. Also the off-price retail, I think is up about 220 basis points, where the only real notable decline is in the quick service restaurants. I mean, how are you guys thinking about those sectors going forward? Is this the trend that you guys expect? Or is it more driven by just opportunistic? Is there -- should we expect to see quick service continuing to decline and autos continuing to increase or an aggregate is auto, it's sort of 12.5% of revenues, ABR about as high as you want on a combined basis about as high as you want to get it?

Joey Agree -- President & Chief Executive Officer, Director

Yes. No, it's a great question Rob, and it goes straight to the heart of our strategy, frankly. The only correction I would make is obviously pharmacies decreased year-over-year, 350 plus basis points as well. But you're correct to point out the restaurants-quick service decrease of roughly 130 basis points. We prefer industry leading retailers in those omni-channel sectors where -- which have motes around their businesses that are frankly small box retailers that we're going to buy a fee simple interest on a turnkey basis or frankly -- or develop for them. Tire and Auto Service specifically, there are some very high quality names that we have very good relationships with National Tire and Battery, with Goodyear, and so we target those across all three of our external growth platforms. The same can be said for auto parts, we are very active O'Reilly and AutoZone are both now top tenants for us. You're looking at the average box size of 6,000 to 8,000 square feet, main in main retail core orders, investment grade balance sheets, low rents per square foot, easily fungible boxes for retenanting, if and when they were ever to vacate the premises. And so we -- those are sectors that we -- frankly we are very attracted to and we will continue to invest aggressively as well as off-price with TJ Maxx, Marshalls, HomeGoods, Ross, as well as Burlington. So I think your question goes, as I said, right to the heart of our strategy. It's a strategy we've been executing on for a number of years and you'll continue to see us execute on the future.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Where is the Car Wash located, the Car Wash stuff located, what sectors that classified under?

Joey Agree -- President & Chief Executive Officer, Director

It's a good question. Car Wash is in auto service, so Mister Car Wash is...

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Okay. So that explains some of those increased from 5.5% to 8%.

Joey Agree -- President & Chief Executive Officer, Director

Correct, but there is also a significant number of tire stores in there as well, National Tire and Battery, Bridgestone, Firestone, Goodyear, Big O Tires, and so, and then the sale leaseback with Belle Tire, early in the year.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Okay. Thanks, guys.

Joey Agree -- President & Chief Executive Officer, Director

Thanks, Rob.

Operator

And the next questioner today will be Christy McElroy with Citi. Please go ahead.

Christy McElroy -- Citigroup Inc. -- Analyst

Hey, good morning, everyone.

Joey Agree -- President & Chief Executive Officer, Director

Good morning, Christy.

Christy McElroy -- Citigroup Inc. -- Analyst

Just that -- hey. So -- and raising the acquisition guidance, you're looking at another $100 million or so at the midpoint. Realizing there are only 3 weeks into the quarter, but you've got $350 million completed. Can you say how much you may have completed in October so far? Or how much is on your contract or LOI today. Just trying to get a sense for expected timing of deals in Q4, or whether it's more front-end loaded or back-end loaded in terms of your expectation?

Joey Agree -- President & Chief Executive Officer, Director

Yes, close to date in the first 3 weeks approximate, call it $10 million to $15 million, nothing significant, it will be back-end loaded. The team was really focused on the number of transactions here that we're closing at the end of Q3. I think we had 16 closings in the last week of the third quarter and so the transaction team was very busy there. In terms of the guidance, the increase in guidance, we want to give people the straight shot. And so we see obviously visibility to that $425 million to $475 million, you can assume that's either under contract or letter of intent. The challenge today and we have 70 days of visibility and we talked about that in prior calls and with investors is that we don't know if some of these transactions could push into the first quarter of 2019, depending upon the often sellers as well as retailers providing word and the like. So the only uncertainty we have there is the timing of these transactions, I'll tell we're already building our Q1 pipeline. And so as these transactions progress, we'll get some more visibility.

Christy McElroy -- Citigroup Inc. -- Analyst

Okay. And then sort of related to that, you've got the September forward in your back pocket. As we look into 2019, how are you thinking about the settling of the $190 million, would it be similar to the strategy around the $160 million, where you had sort of build up your pipeline to the point where you are nearing 6x and you pulled the trigger and understandably, it was related to the issuance of the September forward. But would you potentially use the same strategy next year as you're kind of building up your pipeline, you get to that 6x and you kind of pull the trigger on all of it or would you potentially do it in tranches, prior to September?

Clay Thelen -- Chief Financial Officer

Hey, good morning, Christy. First up, I'd say, ultimately the settlement of the September forward will be dependent on the uses of capital and the timing of those uses of capital. I'd say we're committed to staying within our targeted leverage range of 5x to 6x and we'll continue to evaluate our leverage to make sure we're selling an amount reflective of the growth of the business and ensuring on a quarterly basis we're within our stated range of 5x to 6x.

Christy McElroy -- Citigroup Inc. -- Analyst

Okay. And then just one last quick question on the Walgreens, given the decline in the exposure in the quarter, can you give us how many of the six properties sold were Walgreens? And can you tell us average cap rate on those, just to get a sense for where pharmacies are trading today with Walgreens BBB credit?

Joey Agree -- President & Chief Executive Officer, Director

Yes, sure. So one Walgreens was sold during the quarter was in Waterford, Michigan approximately 10 years left remaining base term there. I'd tell you its a BB minus store and that sold at approximately at 6.25% cap rate.

Christy McElroy -- Citigroup Inc. -- Analyst

Thank you very much.

Joey Agree -- President & Chief Executive Officer, Director

Thanks, Christy.

Operator

And the next questioner today will be Collin Mings with Raymond James. Please go ahead.

Collin Mings -- Raymond James & Associates, Inc. -- Analyst

Thanks. Good morning, Joey. Good morning, Clay.

Joey Agree -- President & Chief Executive Officer, Director

Good morning.

Clay Thelen -- Chief Financial Officer

Good morning.

Collin Mings -- Raymond James & Associates, Inc. -- Analyst

Just to start, Joey, can you just give us an update on your Mattress Firm exposure and how you're approaching their bankruptcy?

Joey Agree -- President & Chief Executive Officer, Director

Sure. We spent some time with them -- just the last couple of weeks. I'll tell you Mattress Firm -- first, we were wary of that business model to start, the store clustering never made too much sense to me to have two or three stores in any given intersection retail quarter. The real estate team frankly had a very poor reputation from the beginning. We have a total of nine stores in the portfolio, we sold one subsequent to quarter end, we have another store under contract to sales, we anticipate having eight stores here quite shortly. None of our stores have been closed or the lease rejected, I'll tell you that nearly all of our stores are outlets -- outlast, excuse me, to target Walmart or TJ Maxx anchored centers. So I think again it's emblematic of our real estate underwriting. If you look at our stores, they are fantastic pieces of real estate, and so we've been -- we haven't been part of any of the few hundred store closures or leases rejected or losing.

Collin Mings -- Raymond James & Associates, Inc. -- Analyst

Got you. So it sounds like it will be kind of a -- maybe a combination of maybe some dispositions as well as just some retenanting. Is that fair or?

Joey Agree -- President & Chief Executive Officer, Director

I think, we have another disposition under contract, I'll tell you, I don't think we'll have any retenanting. I think it's fair to assume that our expectation is that all these -- all of our stores remain open.

Collin Mings -- Raymond James & Associates, Inc. -- Analyst

Okay. I appreciate the detail there. And then just going back to some of the prepared remarks, just -- can you maybe just expand a little bit more on the opportunity and projected returns on the Sunbelt Rentals Build-to-Suit projects?

Joey Agree -- President & Chief Executive Officer, Director

Yes, our teams was down at Sunbelt -- developments last week. It's a fantastic relationship. We're working with Sunbelt obviously on these two projects that we've announced as well as additional projects. The two projects we've announced are retail and retenanting of existing structures. We also anticipate pursuing some ground-up opportunities with Sunbelt as well as some potential acquisitions. And so we'll continue to execute across all three platforms, returns will be in line with our historical thresholds.

Collin Mings -- Raymond James & Associates, Inc. -- Analyst

Okay. And I'll just sneak one last one in there, and kind of just on that note, as far as asset pricing. I recognize Joey, you call it in the past that you're not necessarily the best gauge of broader market movements given your strategy, but can you just maybe update us on what you're seeing in terms of pricing or deal flow, just especially in context of the moving to tenure since August.

Joey Agree -- President & Chief Executive Officer, Director

Yes, I would tell you that asset pricing, we haven't seen any movement in the tenure, they are correlated to the tenure as you mentioned, since August. The high-quality assets such as the assets that we're acquiring and developing continue to trade in a similar range throughout the year, even with that 70 basis point increase in the tenure since the start of the year. We'll see what that correlates to in 2019, but I think we're going to continue to see the bifurcation of high quality versus low quality, similar to what we've seen in the shopping center in the mall place, and there it is -- there is a lot of capital chasing the high quality assets typically or private dialers.

Collin Mings -- Raymond James & Associates, Inc. -- Analyst

All right. Thanks, Joey. I'll turn it over.

Joey Agree -- President & Chief Executive Officer, Director

Thanks, Collin.

Operator

And our next questioner today will be R.J. Milligan with Baird. Please go ahead.

R.J. Milligan -- Robert W. Baird & Co. -- Analyst

Hey, good morning, guys. Joey, first a couple of years ago, probably the normal run rate for acquisitions, I think you guys had said excluding sort of the bigger portfolio deals was about $200 million a year. Obviously, you guys have grown the portfolio, and grown the Company, and grown the headcount. And we saw obviously bigger acquisition volume last year, this year were over $400 million. I'm curious, what do you think the appropriate going regular way run rate is for acquisition volume?

Joey Agree -- President & Chief Executive Officer, Director

Look, I will tell you, we look at every transaction in its entirety and we're now -- we're true aggregators. So in terms of a run rate, the team here has grown both by headcount, as well as continues to grow in their terms of their professional development. And so our origination team today he has seven people. We just hired a new analysts, who will also be joining the team, that team continues to produce fantastic opportunities. In terms of go forward guidance, I'll be honest, I didn't think we would have a $425 million to $475 million at the beginning of this year, we'll evaluate where we are, We'll have some visibility into Q1 shortly and as we have historically released -- release our initial guidance, the first week of January as well as the total of our acquisitions in 2018.

R.J. Milligan -- Robert W. Baird & Co. -- Analyst

And so was -- were there any larger portfolio attraction to this quarter in terms of the activity?

Joey Agree -- President & Chief Executive Officer, Director

Not really. I mean there was a couple of portfolios called in $8 million to $12 million range, but outside of that, it's truly aggregation. So it becomes challenging to predict the timing, it becomes challenging to predict the volume, but the team here continues to produce high-quality opportunities. Just to give you a sense of our pipeline for Q4 little bit back to Christy's question as well, over 70% of our pipeline of the stands right now for Q4 is investment grade retailers, is dominated by Walmart, Home Depot, National Tire and Battery, O'Reilly, AutoZone, the highest quality names in those sectors. Those are all one-off opportunities that some we've been working on for 6 months, some we've been working on for 3 weeks or above. And so it really builds, it comes in waves, typically, the summer months are normally quiet, but we're going to continue to be actively sourcing high-quality opportunities.

R.J. Milligan -- Robert W. Baird & Co. -- Analyst

Okay, that's helpful. And I guess, my last question is, this quarter started three projects for $8 million or just over $8 million in the capital solutions. I'm just curious, how do you think about allocating resources in G&A to what's become a much smaller investment or pipeline relative to your acquisitions pipeline?

Joey Agree -- President & Chief Executive Officer, Director

Yes, we're very pleased to add it to that team recently. So Jon Bauman joined us previously add Ramco-Gershenson, Josh Bratton moved over from the diligence side to Director of Development and so Laith is doing a fantastic job building and growing that team. We've invested completed or commenced roughly $60 million to-date in 2018. We anticipate a couple of more projects commencing quite shortly here in Q4 as well. In terms of allocation of resources and G&A, we're investing across all areas of the business today. Our headcount is up to 37. We're currently in process of expanding our footprint in terms of office. We're out of seats here. We're investing aggressively in terms of people, processes, and systems because we know we have the balance sheet and the capabilities that continue to grow across all three platforms and then importantly, we have to support them from a lease administration, asset management in accounting perspective.

R.J. Milligan -- Robert W. Baird & Co. -- Analyst

All right. Thanks guys.

Joey Agree -- President & Chief Executive Officer, Director

Thanks, RJ.

Operator

And our next questioner today will be Ki Bin Kim with SunTrust, Please go ahead.

Alexei Siniakov -- SunTrust -- Analyst

This is Alexei filing in for Ki Bin today. Looks like my first question has already been asked with regards to the acquisition run rate. So I'll jump to my second question, could you shed some light on what the impairment charge relates to you this quarter?

Clay Thelen -- Chief Financial Officer

Good morning, Alexei. We recorded $488,000 an impairment charge for the quarter. This is driven by the termination of a lease and the write-off of the related intangible asset.

Alexei Siniakov -- SunTrust -- Analyst

Okay, understood. And another quick follow-up just correct me if I'm wrong, I think you mentioned that you sold your last remaining Shopko this quarter, is that correct?

Clay Thelen -- Chief Financial Officer

Right.

Alexei Siniakov -- SunTrust -- Analyst

Okay, great. Thank you.

Clay Thelen -- Chief Financial Officer

Thank you, Alexei.

Operator

And the next questioner today will be Todd Stender with Wells Fargo. Please go ahead.

Todd Stender -- Wells Fargo -- Analyst

Hi. Thanks. In the release you guys highlighted the Old Navy lease, I guess was extended in Q3. Can you provide some of the economics around that lease and maybe others that's either were extended or new and maybe just look at Q4 and early part of next year?

Joey Agree -- President & Chief Executive Officer, Director

Sure. Good morning, Todd. So Old Navy exercise their contractual option in Wisconsin that was a 20,000 square foot store, paying approximately $320,000 a year annually, 5-year option, CPI bump, embedded in that option. In terms of the remaining two leases expiring this quarter. One is a small Dress Barn space, which were already at LOI with another tenant. And then lastly, the remaining lease expiration is the Kmart in Capital Plaza in Frankfort, Kentucky which -- their option has last and I talked about the redevelopment that is under way that project.

Todd Stender -- Wells Fargo -- Analyst

Great. You don't have much renewing next year. but can you just address maybe what you're looking at as far as rents if they're below market and maybe any history, you can wrap around some of your renewal percentages?

Joey Agree -- President & Chief Executive Officer, Director

Sure, we only have about 1.8% coming up next year, the two biggest pieces of that are a Dave & Buster's in Austin, Texas, which pays percentage rent when the store was recently remodeled into. We're confident there. The second piece is our only remaining Kmart in Grayling, Michigan, which we look forward to recapturing at some point if and when that lease gets rejected through this year's bankruptcy. So those are the two big pieces for us the Kmart with our initial asset from the IPO of the 2016, that were put in 1994. We think there is opportunities there to retenant potentially redevelop that asset. Similar to the Mount Pleasant and Frankfort assets that have been undergoing redevelopment currently.

Todd Stender -- Wells Fargo -- Analyst

All right. Great. Just one last one. Looking at Tractor Supply just as a refresher, are these sale leasebacks with the company or you're buying them?

Joey Agree -- President & Chief Executive Officer, Director

They are.

Todd Stender -- Wells Fargo -- Analyst

They are. Okay.

Joey Agree -- President & Chief Executive Officer, Director

No, they're not.

Todd Stender -- Wells Fargo -- Analyst

They are not.

Joey Agree -- President & Chief Executive Officer, Director

They are not sale leasebacks. So they are track -- we're big fans of Tractor Supply, hence the jump this quarter, the company has a very, but conservative company. We have a fantastic relationship with their real estate team. The business is really thriving. They have no national competition. They also have the highest rated e-commerce website of any retailer. The profits have increased an average of 9% since 2012. Sales per square foot are approaching 260,000 foot just for context, Macy's is about 1.95. And lastly there the lease adjusted leverage ratio of approximately 2x. So it's tough to beat, its tough to be bad.

Todd Stender -- Wells Fargo -- Analyst

How big are these lots? What's the size of the lot and maybe the length of the lease as well?

Joey Agree -- President & Chief Executive Officer, Director

Typically, Tractor Supply signs executes 15-year initial based terms on approximately an acre and a half to two acres stores, prototypical stores are approximately 19,000 square feet plus an outdoor storage area. And so they are a force to be reckoned with in the farm and rural supply space and we continue to enjoy relationship and look for opportunities with them.

Operator

(Operator Instructions) And our next questioner today will be John Massocca with Ladenburg Thalmann. Please go ahead.

John Massocca -- Ladenburg Thalmann -- Analyst

Good morning.

Joey Agree -- President & Chief Executive Officer, Director

Good morning, John.

John Massocca -- Ladenburg Thalmann -- Analyst

So what was the cap rate on dispositions, ex the Shopko sale?

Joey Agree -- President & Chief Executive Officer, Director

The cap rate ex the Shopko sale,

Clay Thelen -- Chief Financial Officer

69.

Joey Agree -- President & Chief Executive Officer, Director

69 that's a gap cap rate, John.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. And then what maybe drove the increase in kind of rent from off-price retail. I know some of that was a couple of additions TJX, but what was maybe the rest of that?

Joey Agree -- President & Chief Executive Officer, Director

Yes. So that's TJ Maxx, we acquired an asset in Logan Utah, the Burlington in Nampa, Idaho came online, so that was the development project in Burlington -- in Nampa that we completed during the quarter. And so really off-price retailers comprised typically have three tenants for us. TJ Maxx that's Marshalls, HomeGoods as well as the namesake, Ross as well as Burlington and we look -- we're looking for opportunities, and frankly are executing an opportunity to continue to add exposure there.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay, make sense. And then Dave & Buster's also came up by about $1 million in rent. Can you provide more color on that transaction?

Joey Agree -- President & Chief Executive Officer, Director

Sure. We acquired a third-party transaction, again, not a sale leaseback acquired a Dave & Buster's in Kansas, Overland Park. So great demographics, high-quality asset. And so we are excited to add to that exposure, that brings our total Dave & Buster's exposure to the three assets downtown New Orleans, the Austin, Texas when I mentioned previously and now the Overland Park store.

John Massocca -- Ladenburg Thalmann -- Analyst

All right. That's it for me. Thank you guys very much.

Joey Agree -- President & Chief Executive Officer, Director

Great. Thanks, John.

Operator

And I look to be no further questions. So this will conclude our question-and-answer session. I would like to turn the conference back over to Joey Agree for any closing remarks.

Joey Agree -- President & Chief Executive Officer, Director

Well, thank you, everybody for joining us. Good luck on our earnings season and we look forward to speaking you -- speaking with you in Maverick (ph), California, Talk to you soon. Thank you.

Operator

And the conference has now concluded. Thank you for attending today's presentation and you may now disconnect your lines.

Duration: 63 minutes

Call participants:

Joey Agree -- President & Chief Executive Officer, Director

Clay Thelen -- Chief Financial Officer

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Christy McElroy -- Citigroup Inc. -- Analyst

Collin Mings -- Raymond James & Associates, Inc. -- Analyst

R.J. Milligan -- Robert W. Baird & Co. -- Analyst

Alexei Siniakov -- SunTrust -- Analyst

Todd Stender -- Wells Fargo -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

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