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Agree Realty Corp (NYSE:ADC)
Q2 2019 Earnings Call
Jul 23, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Agree Realty Corporation's Second Quarter 2019 Conference Call. [Operator Instructions]

I would now like to turn the conference over to Joey Agree. Please go ahead.

Joey Agree -- President and Chief Executive Officer

Thank you, operator. Good morning, everyone, and thank you for joining us for Agree Realty's second quarter 2019 earnings call. Joining me this morning is Clay Thelen, our Chief Financial Officer. I'm very pleased to report that our strong start to the year gained momentum during the second quarter. Robust investment activity, largely comprised of leading investment grade retailers, picked up pace during the quarter and continues to accelerate into the third 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 three external growth platforms totaled $183 million in 37 properties; 31 of these properties were sourced through our acquisition platform representing aggregate acquisition volume of more than $176 million 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're 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 steps from the Liberty Bell, 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 Wawa or Costco, you can anticipate that our acquisition yields will be more in line with our historical returns of approximately 7%.

Through the first six months of the year, we've invested a record $327 million into nearly 90 retail net lease properties spread across 31 states. Of the $327 million invested during the first half of 2019, approximately $317 million 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 73% [Phonetic] of the annualized base rent acquired during the first six 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 2019 acquisition guidance to a range of $625 million to $675 million. The low end of this range would represent record acquisition volume for our Company, surpassing the $607 million acquired in 2018, which of course included the Sherwin-Williams sale leaseback transaction. Notably, we have not closed, nor are we contemplating executing any large-scale transactions in this guidance. Our activities continue to be 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% 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, 7-Eleven 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 sell investment grade operators. The remaining 10% of the ground lease portfolio is leased to leading unrated retailers.

At quarter end, our total investment grade exposure stood at 54.2%, representing a substantial year-over-year increase of approximately 770 basis points. It's important to note that the investment grade makeup of our activities is a result of our distinct focus on the industry-leading operators rather than an explicit focus on an investment grade rated retailers. Our pipeline continues to be of the highest quality in the history of our Company and we anticipate our investment grade concentration to continue this upward trajectory.

Our top tenant roster continues to positively evolve. During the quarter, we acquired three Walmart supercenters. Consequently, Walmart is now the second largest tenant in our portfolio behind Sherwin-Williams.

Turning to our development in Partner Capital Solutions platforms, we have nine development and PCS projects that are completed or under construction during the first half of the year. They represent total committed capital of approximately $30 million. 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 life cycle of their assets.

During the quarter, we completed our second development with Sunbelt Rentals in Batavia, Ohio. The project had total cost of almost $2 million and is subject to a new 10-year net lease. Subsequent to quarter end, rent commenced with the company's third project with Sunbelt Rentals in Carrizo Springs, Texas. Construction continued during the second quarter at our fourth Sunbelt Rentals and our first ground-up project for the retailer in Georgetown, Kentucky. The project is anticipated to be completed by the third quarter of this year. Construction continued during the quarter on three additional development in PCS projects with total anticipated costs more than $15 million. The projects consist of the Company's first development with Gerber Collision in Round 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 ALDI, 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 continued during the second quarter as we sold four assets for gross proceeds of approximately $17 million . Included in these activities was the sale of three franchise-operated Sonic restaurants, reducing our exposure to franchise tenants to just 3.9% of annualized base rents. This represented a reduction of 160 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 quality assets. 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 first six months of the year have totaled six assets for growth proceeds of just more than $27 million, with the weighted average cap rate of approximately 7.3%. Subsequent to quarter end, we disposed of another Walgreens in Grand Lake, Michigan, the third 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 290 basis points.

Given our year-to-date disposition activities, as well as additional visibility into our pipeline, we are increasing the bottom end of our disposition guidance from $25 million to $50 million for the full year. Our asset management team also continues to focus on the upcoming lease maturities. As a result of these efforts, at quarter end, we had only three remaining lease maturities in 2019, representing just 0.4% of annualized base rents. During the second quarter, we executed new leases, extensions or options on approximately 56,000 square feet of gross leasable space. Notably, Dave & Buster's exercised their five-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 Bayoo Boulevard in Ninth Avenue in Pensacola, Florida. We are recapturing 108% of rent at this location with zero landlord investment or tenant brewing allowance. This transaction is emblematic of the high quality real estate that underlies our portfolio.

As of June 30th, our rapidly growing retail portfolio consisted of 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% of annualized base rents coming from investment grade tenants. The portfolio remains effectively fully occupied at 99.7% and has a weighted average remaining lease term of 10.1 years.

Before I turn the call over to Clay to discuss our second quarter and first half financial results, on behalf of all of our directors, I'd like to welcome Simon Leopold to our Board. As many of you are familiar, Simon currently serves as 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 as Simon's finance, capital markets and REIT industry expertise join our Board of Directors. With Simon's addition, we have added three new directors within the past 12 months, adding REIT, operational and human capital expertise at the highest level. Thank you for your patience.

And with that, I'll turn over to Clay to discuss our financial results for the quarter.

Clay Thelen -- Chief Financial Officer

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 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 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 second quarter was $31 million, representing an increase of 38.6% over the second quarter 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 second quarter was $30.6 million , 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 second quarter totaled $3.9 million. G&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&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 expense for the second quarter was approximately $195,000. For the full year, inclusive of the one-time tax credit of $475,000 realized in the first quarter, 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 and April of 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 second quarter 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 $0.01 to both core FFO and AFFO per share for the three-month period and roughly $0.02 for the six-month period. There will be no additional Treasury stock dilution for future quarters related to the September 2018 forward equity offering given we settle 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 1st, we settled the entirety of our September 2018 forward equity offering and received net proceeds of $186 million. In conjunction with the settlement of our September forward offering, we completed another follow-on public offering of 3.2 million shares of common stock in connection with the Forward Sale Agreement. Upon settlement, the offering is anticipated to raise net proceeds of approximately $200 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 April offering. We retained the ability to settle the transaction in whole or in tranches at anytime between now and May 1st of 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 million and remain within our stated leverage range of 5 times to 6 times net debt to recurring EBITDA.

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 million of senior unsecured notes. Once the agreement is funded, the notes will bear interest at a fixed rate of 4.47% and have a 12-year term. We can elect to fund the private placement and receive the $125 million of gross proceeds anytime between now and October 30th of 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 of $100 million of long-term debt until maturity. The Company terminated these swap agreements at the time of pricing the $125 million senior unsecured notes. Taking into account the effect of the terminated swap agreements, the blended all-in rate for the $125 million private placement is 4.42%.

As of June 30th, our net debt to recurring EBITDA was approximately 4.4 times, well below our stated range of 5 times to 6 times. Pro forma for the settlement of the approximately $200 million 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 12th to stockholders of record on June 28th 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 first six 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 second quarter were 76% of core FFO per share and 77% of AFFO per share. For the first six 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.

Joey Agree -- President and Chief Executive Officer

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 the quarters ahead. At this time, operator, we'll open it up for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Rob Stevenson with Janney. Please go ahead.

Rob Stevenson -- Janney Capital Markets -- Analyst

Good morning, guys. Joey, how much did the Wawa and Costco transactions pull down the cap rate for the quarter?

Joey Agree -- President and Chief Executive Officer

Good morning, Rob. We're talking about approximately 25 basis points between the Wawa flagship and the Costco ground lease, incrementally, I tell you, the three Walmart supercenters, two of which were ground leases, one of the very low rental rate on a Walmart supercenter is a former smaller format, that they demolish and added a full size center -- supercenter to brought it out incrementally. As I mentioned in our -- in the prepared remarks, we fully anticipate that the cap rate's going forward absent any unique transaction will be back at the 7% range.

Rob Stevenson -- Janney Capital Markets -- Analyst

Okay. And then after selling the 24-hour fitness, I guess more than 70% of the health and fitness bucket's now LA Fitness. Are we likely to see more non-LA Fitness assets sales? Or will we be seeing an LA Fitness sale as well? How are you feeling overall about that segment, given your comments?

Joey Agree -- President and Chief Executive Officer

Yeah, no, it's a good question. I'll be honest, we're really watching that space continue to develop. I think it's 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 that anymore 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 exposure is today. I think it's more of we just want to watch and see this space develop.

Rob Stevenson -- Janney Capital Markets -- Analyst

How much of the non-LA Fitness pocket is 24-hour? Is it a bunch of other sort of smaller operators comprising the $2 million or so of annualized rent?

Joey Agree -- President and Chief Executive Officer

Right. We just have one additional 24-hour Fitness, I believe, in Colorado. And then we have three or four Planet Fitnesses. So the vast majority is LA Fitness, mostly urban locations or early extensions that -- that comprises all of our health and fitness exposure.

Rob Stevenson -- Janney Capital Markets -- Analyst

Okay, and then you said that you sold three Sonic franchises during the quarter. What percentage of the portfolio today is franchisees?

Joey Agree -- President and Chief Executive Officer

We're down to 3.9% as of 6/30 of franchised restaurants, and so we really focused on reducing that. I 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 [Indecipherable] market. We'll continue to look for opportunities. Burger King, Wendy's, a few Sonics remaining in the portfolio as well as Taco Bell to divest of those at approximately 6% cap or lower and really redeploy the capital with the higher quality operators as well as real estate.

Rob Stevenson -- Janney Capital Markets -- Analyst

Is that part of the increase in disposition guidance?

Joey Agree -- President and Chief Executive Officer

[Speech Overlap] So really, it's the bottom end of the disposition guidance we brought up from $25 million to $50 million year to date, inclusive of the Walgreens sale in Grand Blanc, thAT closed subsequent to quarter end, we've disposed of almost $32 million and then our disposition pipeline includes additional franchised restaurants and then non-core assets where we'll recycle the capital. So we thought it'd be appropriate as of today at $31 million to bring that bottom end up.

Unidentified Participant

Okay. And last one for me, Clay, what share and unit count you'll be using for third quarter estimates?

Clay Thelen -- Chief Financial Officer

Sure. In terms of fully diluted share count, Rob, inclusive of units, we should be at 42.3 million shares.

Rob Stevenson -- Janney Capital Markets -- Analyst

Okay. Perfect, guys. Thank you.

Joey Agree -- President and Chief Executive Officer

Thanks, Rob.

Operator

Our next question comes from Christy McElroy with Citi. Please go ahead.

Katy McConnell -- Citigroup -- Analyst

Good morning, this is Katy McConnell on with Christy. So with --

Joey Agree -- President and Chief Executive Officer

Good morning, Katy.

-- investment grade tenant exposure moving up a good amount again this quarter, can you just give us an update on what you see as the target level? And has your view on this changed much in light of the retail environment?

Yeah, no, look, as I mentioned in the prepared remarks, I would tell you our investment grade exposure is really of -- it is predominately a function of our -- of our really our targeted sandbox to that 30 or plus or minus retailers. And so investment grade exposure is up almost 800 basis points, quarter -- or year-over-year, excuse me. We anticipate that to continue to trend upward. There's really no targeted level. I think, frankly, more investment grade is obviously better. No distinct targeted level. I 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 omni-channel 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.

Katy McConnell -- Citigroup -- Analyst

Okay, great. And then can you also just update us on the watchlist tenant exposure, including I think you had a few Fred stores. And at this point, if you know, any are planned to close?

Joey Agree -- President and Chief Executive Officer

Yeah, no, our watchlist continues to shrink. The biggest piece of our watchlist, frankly, was our PetSmart, which I believe we have six or seven in the portfolio. The Chewy IPO and the subsequent pay down of debt and PetSmart upgrade really gave us some breathing room we think there with PetSmart and gave the Company a continued runway. In terms of the Fred's, we have three or four in the portfolio. We don't have any finite outcomes with Fred's. It's only $300,000, $400,000 in annualized AVR.

Katy McConnell -- Citigroup -- Analyst

Okay, great. Thanks.

Joey Agree -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Collin Mings with Raymond James. Please go ahead.

Collin Mings -- Raymond James -- Analyst

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

Joey Agree -- President and Chief Executive Officer

Good morning, Collin.

Collin Mings -- Raymond James -- Analyst

First, I just want to start with the increase in the acquisition guidance. I know in the past, Joey, you've noted the Company typically has call about 60 days, 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 $150 million per quarter of acquisitions as being a run rate the platform should be able to execute on a go-forward basis? Or maybe just talk a little bit more, again, in context of the increased guidance and really no larger scale transactions being included in the back half of the year at this point?

Joey Agree -- President and Chief Executive Officer

Yeah, those are all -- those are all the logical data points for us in terms that 60 days to 70 days visibility from LOI execution to close, you know, transactions by their very nature are lumpy. I'll tell you right now, 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 or urban retail transactions, some blend and extend opportunities, really leveraging our relationships with our retail partners and the acquisition team's 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.

Collin Mings -- Raymond James -- Analyst

Okay. I'll sort of 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?

Joey Agree -- President and Chief Executive Officer

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 four Best Buys. We added one in Visalia, California. It's a relocation of an existing store immediately adjacent to a high-performing target. That's typically 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, it is the last man standing in the consumer electronics space, Hu Joly 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.

Collin Mings -- Raymond James -- Analyst

Got it. One last one from 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&A as we go through the balance of the year as we look forward?

Joey Agree -- President and Chief Executive Officer

Go ahead Clay.

Clay Thelen -- Chief Financial Officer

Sure. No, so we maintained our G&A guidance for the year. Collin, for 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 in -- or a 50-basis point decrease to last year, which is in the upper 7% range.

Collin Mings -- Raymond James -- Analyst

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

Joey Agree -- President and Chief Executive Officer

Thanks, Collin.

Operator

Our next question comes from Ki Bin Kim with SunTrust. Please go ahead.

Ki Bin Kim -- SunTrust -- Analyst

Thanks. Good morning, guys.

Joey Agree -- President and Chief Executive Officer

Good morning, Kim.

Ki Bin Kim -- SunTrust -- Analyst

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 -- touch about the ground leases, how do you guys view the full all-in LTV when you do a ground lease and what type of rent escalators are you getting versus regular fee simple type of acquisitions?

Joey Agree -- President and Chief Executive Officer

So escalators vary across the board, typically fixed every five years, as you expect from most national really superior tenants. Just a little color on acquisitions during the quarter, three Walmart supercenters, as I mentioned, one in Lake Geneva, Wisconsin; York, Pennsylvania, as well as a third one in Wichita, Kansas, across from the airport, the Best Buy in Visalia, California, the relocation store, we acquired an Ulta, a Ross, four TJX's that includes two home goods, a Marshall's and a flagship, a number of auto zones, O'Reilly, a couple of QuikTrip, 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, would you ask that again Ki Bin?

Ki Bin Kim -- SunTrust -- Analyst

Yeah, sure. How do you view the full LTV, all-in LTV on a ground lease, including the building costs? I guess I'm trying to get a sense of -- yeah, so I'm trying to get a sense of if you do a ground lease, you know, what percent of the actual building and land that represents the ground lease value?

Joey Agree -- President and Chief Executive Officer

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 third party unless we develop it. These aren't sale leaseback transactions, of course. So the Walmart -- the Walmart transactions, we acquired approximately a 20-acre parcel in lease transaction. Walmart has constructed approximately 190,000 square foot supercenter at their expense, including improvements as well as the building.

What we look for is high-performing stores and dominant retail corridors, no outlets 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 vacate. And so we have no bases in the building. We have no depreciation 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. Does that make sense?

Ki Bin Kim -- SunTrust -- Analyst

All right. Yeah. And in terms of your balance sheet, leverage dropped to 4.4 times. Obviously, you guys seem to have over equitized 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 we go back in to the 5% to 6% -- 5 times to 6 times range?

Joey Agree -- President and Chief Executive Officer

Well, I think that we haven't changed our stated range of 5 times to 6 times. We'll continue to maintain the dry powder or the capability to execute on our platform. I think when we did the most recent equity offering, we started to gain visibility into the -- really into the transactional market, our role in that space 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. Kim, is there any other question?

Ki Bin Kim -- SunTrust -- Analyst

And just last question. obviously the tenure going down is good for your cost of capital, but it probably also creates little bit more competition with traditional lenders. And you've seen a couple of them report already with shrinking NIM margins. Is that our alternative capital sources for your tenants becoming more competitive and relative to your business?

Joey Agree -- President and Chief Executive Officer

No, again, you know, being a third-party aggregator, we've only executed on a single sale leaseback transaction this year with National Tire and Battery. Being an aggregator in the third-party space, really our tenants' cost of capital or access to capital doesn't impact our ability to source opportunities.

Ki Bin Kim -- SunTrust -- Analyst

All right. Thank you.

Joey Agree -- President and Chief Executive Officer

Thanks, Ki Bin.

Operator

Our next question comes from Todd Stender with Wells Fargo. Please go ahead.

Todd Stender -- Wells Fargo -- Analyst

Thanks, guys. And just to keep on the Walmart theme, just because they're your second largest tenant. So these three separate investments, can you tell us how you got these and can you just maybe describe the yields or if you'd want to talk about specific yield, maybe just the spreads between the ground lease and then the true real estate acquisitions?

Joey Agree -- President and Chief Executive Officer

Yes, so three separate transactions, Wichita, Kansas, Lake Geneva, Wisconsin, York, Pennsylvania, all through different -- frankly all through different sourcing mechanisms, one-off transactions, one through a local broker in Wichita, Kansas, went through a joint venture partnership between a developer and an investment fund. And frankly, the third I cannot recall where it originated from, I think direct from the seller. So our Walmart portfolio today, as you mentioned, our number two tenant, almost $8 million in GAAP AVR, two Sam's Clubs, a number of Walmart supercenters in a single Walmart neighborhood market on the ground lease in Vero Beach. The average -- the average cap rate on the Walmart supercenter transactions was -- I'll call it the 6%, 7% range for these three transactions, all high performing stores. Obviously, Walmart's made significant investments in these assets and we're very happy to add them in the portfolio.

Todd Stender -- Wells Fargo -- Analyst

So none of which were sale leasebacks --

Joey Agree -- President and Chief Executive Officer

No.

Todd Stender -- Wells Fargo -- Analyst

-- and then can you address the Costco too because Costco owns a real estate, and so who was that seller?

Joey Agree -- President and Chief Executive Officer

No, sale -- 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 it was a six store portfolio in Q1. So no sale lease backs, 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, a ground lease, they build their own store. We're very familiar with the Newport News market and we've done a number of transactions there. And so, again, third-party seller, you're correct, they own the vast majority of their real estate, significant barriers to entry. It's a phenomenal store on a great piece of real estate.

Todd Stender -- Wells Fargo -- Analyst

But these anomalies, I mean, it's rare to see the Walmart's transact and certainly got them all at once. Should we expect more? Or really there's not many that do transact in your -- in your pricing area?

Joey Agree -- President and Chief Executive Officer

Yes. Just for clarification. Three different transactions, different sellers, not all at once. So these are -- I'd say if Walmart owns the majority of the real estate, that being said, is a significant number of Walmarts in third party hands, typically on ground leases. And our focus is high performing supercenters, select neighborhood markets. But yeah, I mean, I would say they're fairly rare. But look, the acquisition team does have fantastic relationships and continues 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.

Todd Stender -- Wells Fargo -- Analyst

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 point, maybe a higher propensity to draw down the line and then tap the private placement proceeds as we get close to that October deadline?

Clay Thelen -- Chief Financial Officer

Yeah, 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 placement will either be late third quarter or certainly early fourth quarter.

Todd Stender -- Wells Fargo -- Analyst

And then you have a year on the forward equity agreement, is that right?

Clay Thelen -- Chief Financial Officer

Correct. May 1st of 2020.

Todd Stender -- Wells Fargo -- Analyst

Okay, great. Thank you.

Joey Agree -- President and Chief Executive Officer

Thanks, Todd.

Operator

Our next question comes from John Massocca with Ladenburg Thalmann. Please go ahead.

John Massocca -- Ladenburg Thalmann -- Analyst

Good morning.

Joey Agree -- President and Chief Executive Officer

Good morning, John.

John Massocca -- Ladenburg Thalmann -- Analyst

Joey, is there maybe, touching on the ground leases again, a maximum exposure to ground leases you want as a percentage of the portfolio, I'm just kind of thinking how do you balance kind of the quality of that rent versus maybe the ground lease transactions, you know, inherently kind of coming in at lower cap rates and therefore being less accretive, you know, maybe limiting how much of your portfolio can kind of come from ground leases?

Joey Agree -- President and Chief Executive Officer

Well, I'd say there's no cap, I think to 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 we continue to hit them. Look, I think the ground lease transactions are unique. It's a unique part of our portfolio. We'll continue to add assets to the portfolio. And then we look at a total comprehensive investment strategy and we pick out the best risk-adjusted returns on them. I mean, I think that's really the key.

John Massocca -- Ladenburg Thalmann -- Analyst

And then you've highlighted how low your exposure to franchised restaurants is today. Is that property or tenant type kind of basically red lined even from kind of a development PCS perspective in terms of acquiring more of these assets? And just kind of asking because, you know, you had kind of franchised restaurant assets in your development pipeline as recently as kind of year-and-a-half ago. So is it a structural change or is it more kind of cap rates are driving out of that space?

Joey Agree -- President and Chief Executive Officer

Yeah, I think it's both. I would hate to see we red line anything, as a real estate underwriter who focuses on really a a bottoms-up approach. And to say we red line anything, it certainly isn't at the top of our list. The franchise restaurant space, the restaurant space in general, I personally believe has become overheated because of the low price point nature of those assets in the 1031 [Phonetic] market. And we will be happy to sell into those assets -- 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 franchised 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 a $1.5 million or $1.2 million franchised 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 million on an annual basis into any relationship with a three-year run rate. So we want visibility into the ability to deploy obviously on an accretive basis hitting our hurdles and objectives, $30 million over three years. And so developing seven franchised restaurants per year at a $1.3 [Phonetic] million, $1.4 [Phonetic] million on average, I mean, 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.

John Massocca -- Ladenburg Thalmann -- Analyst

And then apologies if I missed this in the prepared remarks, but what drove the impairment in the quarter?

Clay Thelen -- Chief Financial Officer

Sure. We recorded a $1.2 million 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.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. That's it for me. Thank you very much.

Joey Agree -- President and Chief Executive Officer

Thanks, John.

Operator

Our next question comes from Jon Petersen with Jefferies. Please go ahead.

Jon Petersen -- Jefferies -- Analyst

Great, thank you. So on the Wawa transaction, obviously you got the Street Retail, which is different than most of the rest of your portfolio. I'm just kind of curious, the availability out there of, you know, Street Retail type I guess opportunities like that and how do you underwrite that versus a kind of stand-alone piece of real estate?

Joey Agree -- President and Chief Executive Officer

Yeah, good morning, Jon, again, it's an area of interest for us. We're not going to stretch absent outside of our sandbox. And we have a number of assets that are Street Retail urban at the Ann Arbor, Walgreen's, the Harris Teeter in downtown Charlotte, the Dave and Busters in downtown New Orleans. Obviously this Wawa's in Philadelphia. And we have a top, but we have a couple opportunities 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 -- but an area where we continue to look for additional opportunities to either develop or acquire -- typically redevelop or acquire.

Jon Petersen -- Jefferies -- Analyst

Okay, that's helpful. And then on -- on dispositions, you mentioned some, I guess, specific areas, I guess 24-hour Fitnesses and franchised fast food that you're trying to reduce exposure to. But I'm kind of curious, higher level, how do 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?

Joey Agree -- President and Chief Executive Officer

No, no, it's a good question. It's really -- it's property specific. All real estate is local. It's a 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 leading 21st century retail portfolio which we think we've constructed here at this company? So I'll tell you, you know, Sonic franchised restaurants, Burger King franchised restaurants, I can't sit here to say, look, every day we decide to hold an asset is a 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.

Jon Petersen -- Jefferies -- Analyst

All right. It makes sense. Sonic does have the best ice in the industry. It's amazing.

Joey Agree -- President and Chief Executive Officer

Yes, it is. 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, it will be more power to the purchaser.

Jon Petersen -- Jefferies -- Analyst

Absolutely. All right. Thank you very much.

Joey Agree -- President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions]. Our next question is a follow-up from Christy McElroy with Citi. Please go ahead.

Christy McElroy -- Citigroup -- Analyst

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 ATM type strategy to match funds as you buy? And how does your broader view of the capital markets factor into this?

Joey Agree -- President and Chief Executive Officer

Good morning, Christy. Look, I think people tend to forget that we raised $200 million -- almost $240 million off of the ATM in Q4 and Q1. So, you know, 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.

Christy McElroy -- Citigroup -- Analyst

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 deals and growing that portfolio at lower cap rates or maybe doing more flagship feels 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?

Joey Agree -- President and Chief Executive Officer

It's a good question. We really honestly, we don't think of the proverbial green light or red light or white light or license to do it. We focus really on the underlying real estate and how it fits within our 30,000 perspective of retail real estate and operator. So, look, we'll continue to execute on unique transactions. We work with the retail partners and we have unique expertise to really bring those transactions to fruition. A lot of them have [indecipherable]. For example, the Wawa took six months or seven 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 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 makes sense?

Christy McElroy -- Citigroup -- Analyst

Yes. And then just lastly, congrats on the Simon Leopold addition. You've made a lot of progress on Board relocation 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?

Joey Agree -- President and Chief Executive Officer

Yes, you know, we're very excited to have Simon join the Board. As I mentioned, we've had three new directors in 12 months. It's really an ongoing Board transition. And so we've temporarily expanded the Board. We anticipate contracting it while this transition takes place. And so, with Simon's addition, Craig Erlich's addition, and Greg Lehmkuhl's addition, we really brought what we think is three high quality, really fantastic directors on board.

In terms of providing earnings guidance, again, with the 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 that the visibility of 60 days to 70 days, that it would be almost really counterproductive to what we're doing today.

Michael Bilerman -- Citigroup -- Analyst

Hey, Joe, it's Michael Bilerman, I guess --

Joey Agree -- President and Chief Executive Officer

Hi Michael.

Michael Bilerman -- Citigroup -- Analyst

Yes. Can you hear me?

Joey Agree -- President and Chief Executive Officer

Yes, right here.

Michael Bilerman -- Citigroup -- Analyst

Yes. So can you -- I mean, so I guess the de-staggering, will that be put forth in the next proxy season?

Joey Agree -- President and Chief Executive Officer

That's not -- no, not currently on the radar. Possibly haven't had any recent Board discussions, but the Board is always considering any potential move.

Michael Bilerman -- Citigroup -- Analyst

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 that they should be de-staggered?

Joey Agree -- President and Chief Executive Officer

I think -- well, I think there are multiple different perspectives on de-staggering the boards. I think there is a -- obviously there's a perspective that de-staggering in 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 the board today could potentially provide for activism and potential disruptions 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 would be a much more validity to potentially opening yourself up to disruption, short-term investors or frankly, just activists that are looking for pops.

Michael Bilerman -- Citigroup -- Analyst

Yeah, I think the proxy advisor firms, the majority of long only as well as hedge fund investors and institutional investors would disagree with those comments. And that's why the majority of companies do have de-staggered boards. But if that's what you guys want operate, that's the way you want to operate. In terms of FFO, I mean, you're north of a $3 billion company. You're no longer a couple of hundred million dollar company where I would argue back a number of years ago, providing individual details in terms of G&A, capital raising and all the various components, you would have wider ranges, but you are a -- 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 way of expectations would be, I think, very helpful. So I don't think you can hide behind we're still a small company in this growing where you are a major player now within the net lease space.

Joey Agree -- President and Chief Executive Officer

Yeah, I don't -- I don't think -- I have no intent of hiding behind anything. I think what we try to do would be as forthrightness -- forthright as potentially possible. We do that with our initial guidance of the year for $350 million to $400 million. I didn't expect to be sitting here increasing guidance of $625 million to $675 million. I mean, this company, while it has -- while it has grown and you're right, it is no longer a couple of hundred million dollar 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 component that I know Clay worked with everybody to give the components of how to build appropriate models and expectations.

But at the same time, I have continued -- I've continued concerns about providing benchmarks out there that necessarily could skew perspectives. And we have no interest in providing benchmarks out there that would simply be beaten or raised on a quarterly basis. Right? We want to run a business with a long-term perspective here and quarterly numbers and short-term guidance can be really defy retail net lease real estate today.

Michael Bilerman -- Citigroup -- Analyst

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, you know 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 million of deals, this is the way we're planning on finance, this is how we think about our debt and equity components, this is where we'd want to raise it. And then as the deals have accelerated, you can then update that for the market. I think having that capital discipline and communicating that to the Street's only begets a higher multiple, which will allow you to do more accretive deals.

Joey Agree -- President and Chief Executive Officer

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 first net lease company to do forward equity offerings. We've had a number of companies subsequently execute on and we've done three. We 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 returns for our shareholders. Does that make sense?

Michael Bilerman -- Citigroup -- Analyst

Yes.

Joey Agree -- President and Chief Executive Officer

So I think -- look, 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 and 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 entrepreneurial environment with 40 people that put their blood, sweat and tears in day in, day out. And we want to -- 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.

Michael Bilerman -- Citigroup -- Analyst

Okay, thank you.

Joey Agree -- President and Chief Executive Officer

Thanks.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Joey Agree for any closing remarks.

Joey Agree -- President and Chief Executive Officer

Well, thank you, everybody, for joining us. We look forward to speaking with you soon and hopefully everybody gets through earnings season. Talk to you soon. Thanks.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Joey Agree -- President and Chief Executive Officer

Clay Thelen -- Chief Financial Officer

Rob Stevenson -- Janney Capital Markets -- Analyst

Unidentified Participant

Katy McConnell -- Citigroup -- Analyst

Collin Mings -- Raymond James -- Analyst

Ki Bin Kim -- SunTrust -- Analyst

Todd Stender -- Wells Fargo -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

Jon Petersen -- Jefferies -- Analyst

Christy McElroy -- Citigroup -- Analyst

Michael Bilerman -- Citigroup -- Analyst

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