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Essential Properties Realty Trust, Inc. (NYSE:EPRT)
Q2 2019 Earnings Call
Aug. 8, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Please standby. Good morning, ladies and gentlemen, and welcome to your Essentials Properties Realty Trust Second Quarter 2019 Earnings Conference Call. All lines have been placed in a listen only mode and the floor will be open for your questions and comments following the presentation.

If you should require assistance throughout the conference, please press "*0". This conference call is being recorded and a replay of the call will be available two hours after the completion of the call for the next two weeks. The dial-in details for the replay can be found in today's press release. Additionally, there will be an audio webcast available on Essentials Properties website at www.EssentialProperties.com. An archive of which will be available for 90 days.

It is now my pleasure to turn the call over to Dan Donlan, Senior Vice President and Head of Capital Markets at Essential Properties.

Daniel Donlan -- Senior Vice President and Head of Capital Markets

Thank you, operator, and good morning everyone. We appreciate you joining us today for Essential Properties Second Quarter 2019 Conference Call. Here with me today to discuss our second quarter results are Pete Mavoides, our President and CEO; Gregg Seibert, our COO, and Hillary Hai, our CFO.

During this call, we're gonna make certain statements that may be considered forward-looking statements under federal securities law. The company's actual future results may differ significantly from these matters discussed in these forward-looking statements and we may not release revisions to those forward-looking statements to reflect changes after the statements were made. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in yesterday's earnings press release.

Before I turn the call over to Pete, I would note that our 10-Q and second quarter supplemental are available on the investor relations section of our website. Pete, please go ahead.

Pete Mavoides -- President and Chief Executive Officer

Thank you, Dan, and thank you to everyone who has joined us today for your interest in Essential Properties. We are pleased to report our second quarter results, which include passing the one-year anniversary of our initial public offering. In the past four quarters since coming public, we have invested $546 million into 243 properties and sold 47 properties for $76 million, which equates to nearly 40% growth in assets over the last 12 months.

In addition, our 100% lease portfolio has performed exceptionally well with same-store contractual cash rent increasing between 1.8 and 1.9% since coming public. Similarly, our rent coverage ratio, which represents 98% of our cash ABR, has averaged between 2.8 times and 2.9 times since coming public, which speaks to the profitability of our properties and their value to the operations of our tenants. Coupling this strong internal growth with consistent external growth has resulted in improved diversity, rationalization of our G&A, and most importantly, dividends and earnings growth.

Turning to the second quarter and starting with the portfolio. As of June 30th, we owned 789 properties that were 100% leased to 184 tenants operating in 16 distinct industries. Our weighted average lease term was 14.5 years with only 3.6% of our ABR expiring through 2023. Our same store portfolio which represents 55% of our total portfolio at quarter end experienced contractual cash rent growth of 1.9% quarter over quarter and contractual NLI growth of 1.7% quarter over quarter.

As we have mentioned in the past, we expect our same store portfolio to grow at approximately 1.5% per annum, so we were pleased to exceed that threshold again this quarter through proactive asset management.

From a tenant health perspective, our portfolio has weighted average rent coverage ratio of 2.9 times, which is up modestly from 2.8 times last quarter. And 73.3% of our cash ABR has a rent coverage ratio of 2 times or better. With that in mind, less than 1% of our leases that expire over the next eight years have unit level rent coverage below 1.5 times, which we believe indicates a high likelihood of lease renewal at expiration.

Similarly, 2.1% of our tenants have both an implied credit rating lower than single B per Moody's Risk Analytics and a unit level coverage ratio below 1.5 times, which represents a very manageable number of tenants and properties with elevated risk characteristics.

Turning to our second quarter investment activity, we invested $190 million at a weighted average initial cap rate of 7.3%. This level of investment activity was above our trailing four quarter average of $136 million and represents our second most active quarter since inception.

Approximately 65% of our second quarter investments came via sale leaseback transactions. 65% were subject to master lease provisions and 100% are required to provide us with corporate and unit level financial reporting on a regular basis.

On the disposition front, in an effort to proactively mitigate risks and exposures, we sold 11 assets in the quarter, including one vacant property, for $26.8 million in net proceeds.

Subsequent to quarter end, we completed a secondary offering of common shares for $519 million for Eldridge Industries, our initial capital partner. As a result, Eldridge no longer owns any shares or OP units in EPRT. The Eldridge team was integral in growing this company from a business plan to a well-capitalized public company that it is today. We would like to thank the Eldridge team for their trust, support, and guidance over these past three years.

As we look out to the balance of the year, remain focused on growing our portfolio through the origination of sale leaseback transactions with middle market tenants and service-oriented and experienced-based industries. And we anticipate our level of investment activity to be consistent with our historical averages, with cap rates in the mid-7% range.

Overall, this was a great quarter for the company and it has paved the way for us to continue to scale our portfolio accretively and generate attractive risk adjusted returns for shareholders.

With that, I'd like to turn it over to Hillary Hai, our CFO, who will take you through the financials for the second quarter. Hillary?

Hillary Hai -- Chief Financial Officer

Thank you, Pete, and good morning, everyone. Starting with the balance sheet, we ended the quarter with $1.6 billion in total assets and $579 million of total debt, including $312 million of outstanding master funding notes, $200 million of unsecured term loan, and $67 million outstanding on our $400 million unsecured revolving credit facility.

We have no major debt maturities coming due until 2024 and our net debt to annualized adjusted EBITDAre was 4.7 times the quarter end, which gives us capacity to execute on our external growth plan while managing within our targeted leverage range.

Turning to the income statement, our second quarter net income was $10.6 million or $0.14 per diluted share. Nareit-defined funds from operations or FFO was $17.7 million or $0.23 per diluted share. Core funds from operations or Core FFO was $22 million or $0.29 per diluted share. And adjusted funds from operation or AFFO was $21.1 million or $0.27 per diluted share.

Of note in the quarter, we recognized a loss of $4.4 million related to the partial repurchase of our 2016-1 ABS notes, which included $1.4 million in premium paid, a $2.9 million write-off of deferred financing costs, and $100 thousand of legal costs. Given the one-time nature of these items, we add a new disclosure to this quarter to our income statement, called Core FFO, which adds back these items to Nareit-defined FFO.

While we continue to increase our operating efficiencies, G&A for the second quarter was 14.5% of total revenues We expect this metric to moderate as our portfolio grows in scale. Subsequent to quarter end, we paid a dividend of $0.22 per share for the second quarter, which equated to an 81.5% payout of our second quarter AFFO per share. We also filed a shelf registration statement, which gives us the ability to raise various forms of equity and debt capital on an overnight basis.

Turning to guidance. We are reiterating our 2019 AFFO per share guidance range of $1.11 to $1.15.

With that, I'll turn the call over to Greg.

Gregg Seibert -- Chief Operating Officer

Thanks, Hillary. During the quarter, we invested $190 million in 32 transactions and 91 properties at a weighted average cash cap rate of 7.3%. These investments were made within 10 of our 16 targeted industries, with convenience stores and early childhood education representing half of our investment activity in the quarter.

The weighted average lease term of the properties was 15.3 years. The weighted average annual rent escalation was 1.5%. The weighted average unit level of coverage was 3.2 times and our average investment per property was $2 million.

Consistent with our investment strategy, approximately 65% of our second quarter investments were originated through direct sale lease back transactions, which are subject to our lease form with ongoing financial reporting requirements and master lease provisions in most cases. In addition, 87% of our second quarter investment activity was relationship-based, which we define as transactions completed with operators, sponsors, advisors, or brokers that senior management has done business with in the past.

From an industry perspective, quick service restaurants or QSRs remain our largest industry at 12.8% of cash ABR, followed by early childhood education at 11.7%, convenient stores at 10.8%, carwashes at 10.7%, and medical/dental at 9.4%.

Conversely, due to property sales and portfolio growth in other industries, or home furnishings concentration declined 120 basis points quarter over quarter and is down 250 basis points year over year, which is a trend that should persist as we continue to seek better risk adjusted returns in other industries.

In addition, we continue to proactively manage our casual dining concentration through selective dispositions of underperforming locations in order to free up capacity to invest in higher performing brands and properties.

From a tenant perspective, no tenant represented more than 4% of our cash ABR. Our top ten tenancy represented 28% of our cash ABR at quarter end, which was down 270 basis points quarter over quarter. We expect our top ten concentration to further decline over the coming quarters as we continue to grow our exposures with existing tenants outside of our top ten and capitalize on newly developed tenant relationships.

Of note, we added 34 Circle K branded convenience stores to the portfolio in the second quarter, which resulted in a subsidiary of Alimentation Couche-Tard entering our top ten tenancy.

Looking at the portfolio more broadly, approximately 93% of our cash ABR is derived from tenants that operate service-oriented and experience-based businesses, which has been a deliberate focus for essential since we had started investing over three years ago. We believe tenants in these industries, and more importantly real estate occupied by these tenants, are more recession-resistant and heavily insulated against e-commerce pressures.

Moving on to asset management, our portfolio remains healthy, with a weighted average rent coverage ratio of 2.9 times, at approximately 73.3% of our cash ABR, having a rent coverage ratio of 2 times or better. In addition, with approximately 98% of our tenants required to report unit level financials to us, we have near real-time transparency into the health of our tenancy, which is an important component to managing risk in our portfolio. With an average investment per property of $2.1 million, our portfolio remains highly liquid from a sales perspective and readily fungible from a leasing standpoint.

Turning to dispositions. We sold 11 properties from 7 different industries this quarter for $26.8 million in net proceeds. The 10 of these properties were leased and sold for a blended cash cap rate of 7%, which was slightly elevated given the higher prevalence of portfolio repositioning this quarter.

With that, I will turn it back to Pete for the closing remarks.

Pete Mavoides -- President and Chief Executive Officer

Thanks, Gregg. Our portfolio remains in excellent shape with no vacancies, healthy coverage, coupled with strong transparency, good property level liquidity, and limited near-term lease expirations. Our investment pipeline is full, our balance sheet is well-positioned to fund continued growth, and we look forward to continuing to execute on our business plan.

With that, operator, please open the call up for questions.

...

Questions and Answers:

Operator

Thank you. The call is now open for questions. If you do have a question, please press "*1" on your telephone keypad to join the queue. If you are using a speakerphone, please pick up your handset to provide the best sound quality. Again, ladies and gentlemen, if you do have a question, please press "*1" on your telephone keypad at this time.

We'll go first to Christy McElroy with Citigroup.

Christy McElroy -- Citigroup -- Analyst

Hey good, morning, everyone. Just wondered if you could provide some additional color on your acquisition strategy with the pace in Q2 accelerating, you know recognizing that you had more dry powder to do deals following the equity raise this spring and also your cost of capital position is more favorable. What drove the accelerated pace and how should we be thinking about the rest of the year?

Pete Mavoides -- President and Chief Executive Officer

Great, Christy, and thank you. You know we certainly came into the quarter with a fully charged balance sheet and an attractive cost to capital as we went about investing. That said, you know we've been more focused on transacting around our historical average. We had a large transaction that you see in our top ten, a $52 million deal, that we bought during the quarter. And that really drove kind of the outsized performance in the quarter and that we would expect to be transacting more consistent with our historical average.

Christy McElroy -- Citigroup -- Analyst

Okay, got it. And then can you comment on your Perkins exposure and provide an update on where that stands today, how you're feeling about that credit?

Pete Mavoides -- President and Chief Executive Officer

Sure. And I think Perkins is a great example of the benefits of coupling great unit level visibility with asset fungibility. And so we acquired 21 Perkins properties when we bought the GE portfolio three years ago. We've been monitoring that credit and managing our exposure. To the point today, we sit where we have 12 properties representing about 1.8% of our cash ABR. We've sold or repositioned 9 properties and really reduced that exposure to a point where we feel comfortable with the assets that we hold.

You know we think this Chapter 11 restructuring will be a good thing for our tenant and we'll come out with our lease intact and a stronger tenant going forward.

Michael Bilerman -- Citigroup -- Analyst

Hey Pete, it's Michael Bilerman. Now that Eldridge is completely out of the stock, what is going to be the process and timing for their two board seats? That they have the nomination rights and also use to sit on the board. You obviously have a very small board, given the size of the company, and when you went public and were a controlled company. So can you talk a little bit about improvements that you want to make in corporate governance and the timing that that's going to occur.

Pete Mavoides -- President and Chief Executive Officer

Yeah, I think it's logical to assume the two board members, the two Eldridge board members will transition off in a reasonable timeframe. And I think that would be over the next quarter or so and that we would replace those seats in an orderly manner to bring more diversity and a broader perspective to the board. And so I think that is something that was discussed at our last board meeting and really would happen over the back half of the year here.

Michael Bilerman -- Citigroup -- Analyst

And you already engaged advisors to -- so the search is already under way and that will occur in the next three to six months?

Pete Mavoides -- President and Chief Executive Officer

We have not engaged a search. You know but the discussions are ongoing and once we have something to announce, we will announce it.

Michael Bilerman -- Citigroup -- Analyst

But you're committed to do it?

Pete Mavoides -- President and Chief Executive Officer

I think the Eldridge board members want to come off the board, given they have no economic interest in the company any longer. And you know I think that's the logical transition.

Michael Bilerman -- Citigroup -- Analyst

Okay, thank you.

Operator

And our next question comes from Sheila McGrath with Evercore. Please go ahead.

Sheila McGrath -- Evercore ISI -- Analyst

Yes, good morning. Pete, the coverage for the portfolio did increase to 2.9 times. Just wondering if that was driven by the mix of new acquisition or is some tenant segment performing well, boosting the portfolio coverage higher?

Pete Mavoides -- President and Chief Executive Officer

Yeah, there's a lot going on in that number, Sheila. And obviously if we bought $190 million representing just about 10 or 11% of our total assets at $1.6 billion, I think it's gonna be a combination of factors. Our coverage on investments for the quarter were 3.2 times and so it's slightly accretive to that 2.8, but I guess if you just did the pure math, you can figure out how much is from new investments and how much is from movements within the portfolio.

Sheila McGrath -- Evercore ISI -- Analyst

Okay. And then the sales, it was a fairly active quarter for you in historical perspective. Can you just give us your thoughts or what were the characteristics of the sale of assets and why you chose those assets to dispose of?

Pete Mavoides -- President and Chief Executive Officer

Yeah, really it tends to be de-risking sales. And that could be de-risking a specific asset where we don't see coverage or tenant credit that we like. Or it can be, you know in the case of this quarter, de-risking a specific industry sector where we sold down some of our furnishing and casual dining exposure. And so I think the quarter represented a good mix of both specific asset motivations as well as industry and tenant motivations.

Sheila McGrath -- Evercore ISI -- Analyst

Okay, great, one last question. You did reduce secured borrowings related to that master trust funding. Should we expect that will be continued -- you'll continue to pay that down over time?

Pete Mavoides -- President and Chief Executive Officer

Yeah, so we had -- our 2016 notes, we had the opportunity to purchase those notes using unsecured term loan that we put in place in connection with our recasted revolver. We have another chunk of those '16s that become pre-payable in November. And I think, in general, you should expect us to transition or balance sheet to a more unsecured borrowing strategy.

Sheila McGrath -- Evercore ISI -- Analyst

Okay, thank you.

Pete Mavoides -- President and Chief Executive Officer

Thank you, Sheila.

Operator

And next we'll go to Sam Choe with Credit Suisse. Please go ahead.

Sam Choe -- Credit Suisse -- Analyst

Hi, guys. So, you guys cited the debt to EBITDA of 4.7, which is kind of close to your preference to low to mid-5.0. Just wondering how you intend to manage that along with the expected investment pacing in the second half of the year.

Pete Mavoides -- President and Chief Executive Officer

Yeah, I think we'll manage that by raising equity. Obviously, we filed a universal shelf subsequent to quarter end and I think it's logical that you could expect us to get an ATM program in place in the near future and be in the market to raise equity to help fund our investments and manage our leverage within our leverage targets as we look at the back half of the year here.

Sam Choe -- Credit Suisse -- Analyst

Okay, that's what I thought. And then the property operating expenses were a little lighter this quarter. Could you give some color on that?

Pete Mavoides -- President and Chief Executive Officer

Yeah, Hillary, why don't you give some color on that.

Hillary Hai -- Chief Financial Officer

So last quarter it was higher because we had some one-time reimbursable property tax charges that was due to a tax reassessment. So going forward this quarter should be a better run rate for the last half of the year.

Sam Choe -- Credit Suisse -- Analyst

Okay, perfect. All right, thank you so much.

Pete Mavoides -- President and Chief Executive Officer

Thank you.

Operator

And next we'll go to Brian Hawthorne with RBC Capital.

Brian Hawthorne -- RBC Capital -- Analyst

Hi. Can you talk about which industries you're seeing the best or the most expansion plans and then kind of give us any color you can on the close rates of investments by industry?

Pete Mavoides -- President and Chief Executive Officer

Sure. You know, listen, we're pretty focused in 16 industries and we're originating across all of those industries, we're conducting sourcing activity across all those industries, and generically I would expect our exposures to grow ratably. You know in any given quarter, you'll see ebbs and flows across those industries, but this past quarter was 30% C stores and 20% child care. You know next quarter it could be 30% QSRs and 20% carwashes. But overall, you know I think you'll see us grow kind of ratably. You know with the exception -- you know we are consciously kind of managing down our home furnishing exposure and trying to stay more neutral on our casual dining and family dining exposure.

Brian Hawthorne -- RBC Capital -- Analyst

Okay, thanks.

Pete Mavoides -- President and Chief Executive Officer

Thank you, Brian.

Operator

Our next question comes from Nate Crossett with Berenberg.

Nate Crossett -- Berenberg -- Analyst

Hi, good morning, guys. Kind of similar to the Perkins question. Can you touch on your exposure to Pizza Hut, as I think they've announced a bunch of store closures?

Daniel Donlan -- Senior Vice President and Head of Capital Markets

Yeah, it's Dan Donlan. We have 40 basis points, roughly, of exposure to Pizza Hut as we stand.

Nate Crossett -- Berenberg -- Analyst

Okay.

Gregg Seibert -- Chief Operating Officer

Yeah, so 40 basis points of ABR spread across a good number of properties that are fungible and liquid and so we don't see any heightened risk there for our portfolio.

Nate Crossett -- Berenberg -- Analyst

Okay. And then on just on Art Van's. I know you talked about reducing home furnishings and I think they've -- they're trying to change the CEO and I see you kind of sold one of the Art Van's in the quarter. Just wanted to get a sense of how you feel about the other four locations.

Pete Mavoides -- President and Chief Executive Officer

Yeah, you know, listen, we made that investment not that long ago and we felt it was a good concept, a good brand, we had good assets subject to a strong master lease and that really hasn't changed. You know I think a management change there will be well-received. I think the founding family has come taken a more active role in the board, which I see as a positive, and we think that's a good company that should continue to grow. And so we're comfortable with our exposure there. Should we see an opportunity to reduce it accretively and opportunistically, we would, but we feel good about our exposure to Art Van.

Nate Crossett -- Berenberg -- Analyst

Okay, that's helpful. And then just one more. Can you remind us the size of the sales team? Do you guys feel that that's enough or are there gonna be more adds in the coming months?

Pete Mavoides -- President and Chief Executive Officer

No, you know, listen, I've often said we built this company and staffed this company when we were private to be able to transact predictably in its public form. And hopefully over the past 12 months, you know, you guys have come to appreciate that. And our team is in place, the infrastructure is in place to execute, and so the key seats are filled and we're transacting at a high level.

You know, generically, about a third of our 22 employees are focused on originations and closing, another third on asset management, and another third on finance and accounting. And that's not gonna change materially.

Nate Crossett -- Berenberg -- Analyst

Okay, thanks, guys.

Pete Mavoides -- President and Chief Executive Officer

Great, thank you.

Operator

And our next question comes from John Massocca with Ladenburg Thalmann.

John Massocca -- Ladenburg Thalmann -- Analyst

Good morning.

Pete Mavoides -- President and Chief Executive Officer

Good morning, John.

John Massocca -- Ladenburg Thalmann -- Analyst

So, if you looked at kind of page 11 of the SUP, you saw about 6% of the kind of portfolio move into the kind of B- category for the tenant credit breakout you give there in that bar chart. You know maybe just what -- any kind of color around that? What drove that move? Was any of that Perkins? Just anything you can provide would be helpful.

Pete Mavoides -- President and Chief Executive Officer

Yeah, I mean I don't have the specific breakdown on the tenancy there. You know you will see ebbs and flows in any given quarter. You know we certainly take comfort in the fact that a good chunk of that movement has healthy coverage and really doesn't give us any concern.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. And then on the home furnishings side, can you provide any color maybe on what tenants are in that subsegment besides Art Van?

Pete Mavoides -- President and Chief Executive Officer

We have a couple Ashley Furnitures besides that and you know really it's -- if you think about Art Van and the overall exposure, I think the entire balance is Ashley. That's right, Gregg?

Gregg Seibert -- Chief Operating Officer

That's right.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. And then one more detail question on the Perkins exposure. Are any of those branded Marie Callender's or are they all Perkins-branded locations?

Pete Mavoides -- President and Chief Executive Officer

Yeah. And so all 12 of them are Perkins sites or Perkins. And they're all corporate stores and they all are currently operating.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay, that's it for me. Thank you very much.

Pete Mavoides -- President and Chief Executive Officer

Thanks, John. Appreciate the questions.

Operator

And next we'll go to Caitlyn Furrows with Goldman Sachs.

Julian -- Goldman Sachs -- Analyst

Hey, this is Julian on for Caitlin. Earlier this week, another net lease REIT mentioned that noninvestment grade properties were trading at cash cap rates in the range of high 5's to low 8's. I know you mentioned you're expecting mid-7's for the rest of the year, which would be at the high end of that range. I guess, what do you believe is driving your ability to achieve cap rates at the high end and how sustainable is that?

Pete Mavoides -- President and Chief Executive Officer

Yeah, I would say, quite simply, I think we're good at what we do. You know if you look at the stats in our investor deck, a high percentage of the deals are deals we're doing with people we've dealt with in the past, you know into the 90%, so we have a good reputation and people trust us as a counterparty. We're also structuring sale leasebacks. A high percentage of our deals are direct sale leasebacks, where we're delivering capital into a capital need for a tenant. And so we're not competing in the broker market for existing lease/net-lease deals, which whoever that was, was probably referring to. We're moving upstream to work with relationships and counterparties that we know and trust us to structure deals in the context of sale leasebacks.

And we've been doing this for 20 years. And you look in our disclosure, you know we've consistently been in that mid-7 range, so we believe it to be very sustainable.

Julian -- Goldman Sachs -- Analyst

Got it. And I guess related to that, I know the release mentioned about 70% of the transactions year to date are sale leasebacks. I guess when we look at that other 30%, is that mostly made up of the brokerage market or what kind of other selling entities are we talking about?

Pete Mavoides -- President and Chief Executive Officer

Yeah, and we think about sale leaseback, where we're structuring a new lease at inception. And that could be in the broker market or it can be a direct deal. Outside of the sale leaseback, you know kind of the inverse of the sale leaseback is an existing lease deal, where we're buying a property subject to an existing lease. We generally focus on doing that only when we can create value either through restructuring that lease with the tenant or having unique insight into the tenant performance or relationship there, but generally trying to find inefficiencies where we're getting paid an attractive risk-adjusted return.

A great example of that is the Couche-Tard transaction that we transacted with $52 million in the second quarter here. That was an existing lease deal, but it happened to be a deal that my partner had originated 20 years ago. And so we had great insight into the structure, the nature of the lease. We had worked with and for the seller in the past and so we look for opportunities where we can deliver shareholder value in those existing lease buckets.

Julian -- Goldman Sachs -- Analyst

Awesome, thanks a lot.

Pete Mavoides -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Ki Bin Kim with SunTrust.

Ki Bin Kim -- SunTrust -- Analyst

Hey, good morning. Just a quick accounting question. The G&A was a little bit higher this quarter. I know you have addressed some of that, but just curious about longer-term, what is the right annualized G&A run rate.

Pete Mavoides -- President and Chief Executive Officer

Hillary, what do you got there?

Hillary Hai -- Chief Financial Officer

So, this quarter is a little bit higher. We had a few one-time expenses that came through. But looking forward to the next quarters, we should be around the 13% range of total revenues.

Ki Bin Kim -- SunTrust -- Analyst

Okay, how about in our dollars just because total revenues can change based on acquisitions.

Hillary Hai -- Chief Financial Officer

Yeah. So, we're looking at roughly per quarter, I would model it $4.6 to $5 million each quarter, depending -- also depending on the volume that we're doing. We do have certain variable costs.

Ki Bin Kim -- SunTrust -- Analyst

So the transaction expenses are in the G&A line item; is that correct?

Hillary Hai -- Chief Financial Officer

Not transaction, but we do have servicing costs that are very dependent on how many properties we have.

Ki Bin Kim -- SunTrust -- Analyst

Okay. And just one last question. On your AFFO calculation that you add back transaction cost, which is totally fine, but there seems to be no add back this quarter. Just curious why that is.

Hillary Hai -- Chief Financial Officer

The transaction cost is actually for our investments that's already in our investment total, so it's not in our AFFO calculation. So, that's why you don't see any.

Ki Bin Kim -- SunTrust -- Analyst

Okay, all right, thank you.

Pete Mavoides -- President and Chief Executive Officer

Thanks, Ki Bin.

Operator

And another question from John Massocca with Ladenburg Thalmann.

John Massocca -- Ladenburg Thalmann -- Analyst

Actually, I was gonna ask about the Couche-Tard transaction, but I think you covered it pretty well, so just pull me out of the queue. Thanks.

Pete Mavoides -- President and Chief Executive Officer

Great, thanks, John.

Operator

And as a reminder, ladies and gentlemen, if you do have a question, you can press "*1" on your telephone keypad. And there appear to be no questions at this time, so I'll turn it back over to management for any closing remarks.

Pete Mavoides -- President and Chief Executive Officer

Great. You know I think we're proud of the quarter we just reported. You know as you'll see in our 10-Q filed yesterday, we've had good progress into the quarter, into the third quarter here as we continue to execute. And so we look forward to engaging with you all conference season in September and hope you enjoy the rest of the summer. Thank you.

...

Operator

And that does conclude today's teleconference. We appreciate your connection. You may disconnect your lines at this time and have a great day.

Duration: 38 minutes

Call participants:

Daniel Donlan -- Senior Vice President and Head of Capital Markets

Pete Mavoides -- President and Chief Executive Officer

Gregg Seibert -- Chief Operating Officer

Hillary Hai -- Chief Financial Officer

Christy McElroy -- Citigroup -- Analyst

Michael Bilerman -- Citigroup -- Analyst

Sheila McGrath -- Evercore ISI -- Analyst

Sam Choe -- Credit Suisse -- Analyst

Brian Hawthorne -- RBC Capital -- Analyst

Nate Crossett -- Berenberg -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

Julian -- Goldman Sachs -- Analyst

Ki Bin Kim -- SunTrust -- Analyst

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