Agree Realty Corporation (ADC) Q4 2019 Earnings Report, Transcript and Summary

Good morning and welcome to the Agree Realty Fourth Quarter and Full Year 2019 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joey Agree, President and CEO. Please go ahead, Joey.

Thank you, operator. Good morning everyone and thank you for joining us for Agree Realty's fourth quarter and full year 2019 earnings call. Joining me this morning is Clay Thelen, our Chief Financial Officer. Before we begin, I'd like to digress for a moment and start this morning's call with a 30,000 foot perspective. I'll get to our most recent quarter and record full year accomplishments shortly. But first, I think it's important to speak to recent activities we have seen in the net lease space. Recent retailer bankruptcies and negative headlines has served to affirm our investment thesis, which is built upon a risk averse perspective of the retail universe. Over the course of the last several quarters, I've tried to emphasize and refocus investors away from not only per share earnings growth but also toward real estate fundamentals, market positioning and retailer balance sheets in an omnichannel retail world. The world today is changing dynamically and retail is going through constant disruption. Today's retail operators need to be adept, flexible and nimble. A strong consumer and lower interest rates can prolong the inevitable, but the reality facing today's poorly capitalized retailers is becoming abundantly clear. The ability to invest in e-commerce distribution, price and market share are critical. Leveraged balance sheets, private equity sponsorship and the lack of liquidity are nearly insurmountable challenges given these strong headwinds. Our investment strategy has been focused on the brightest and strongest retailers in this omnichannel world. Of the retailers that have been in the headlines recently, we have one prominent location among them. Our Art Van flagship store in Canton township is the preeminent retail location in the State of Michigan. Store is located on Ford Road, one of the most highly trafficked corridors in the state. The site shares a signalized intersection with Michigan's only IKEA store and is the regional draw for customers across the state as well as Northern Ohio. It is this type of disciplined and bottoms-up underwriting, which is the hallmark of our investment strategy. I would remind listeners today that we undertook the development of this store prior to Art Van and his family selling the company to TH Lee, which has since embarked on their aggressive growth strategy. We subsequently passed on a number of additional opportunities to participate in Art Van's rapid growth. The real estate we own in Canton is in our backyard. We know it extremely well and we are very confident in its long term value and success. I encourage everyone to visit our YouTube channel and see our drone video of the site themselves. Moving on to 2019, which marked our 25th anniversary as a publicly traded company and another year of record growth for our company. During the year, we accomplished several notable milestones, among them, we significantly improved portfolio quality, increasing our investment grade exposure by nearly 700 basis points. This is on top of a 740 basis point increase in 2018. As of year-end, our portfolio consisted of an industry leading 58% of annualized base rents leased to these leading retailers. In 2019, our portfolio exceeded 800 properties, while undertaking further diversification. We added over 190 properties during the year across 40 states in 22 distinct retail sector. We reduced our exposure to Sherwin-Williams, our top tenant by 110 basis points to 4.9% of annualized base rents, while adding a number of leading retailers to our top tenant roster, including Home Depot, National Tire and Battery and Sunbelt Rentals. We further solidified our industry-leading balance sheet with several strategic capital markets transactions, ending the year with net debt to recurring EBITDA of 4.5 times pre-forward settlement and 3.7 times, inclusive of the settlement of our outstanding forward. And lastly we are proud to have surpassed $4 billion in enterprise value. I'd like to take a moment to thank our fantastic and growing team members who amaze me every day with their commitment, day in and day out to our dynamically growing company. In addition to these milestones, we also completed our state-of-the-art campus to support our growing team, which now has 46 team members. Throughout the course of the last year, we have continued to add talented team members in all areas of our company, including acquisitions, asset management, finance, accounting, human resource and due diligence. Our state-of-the-art campus includes the AB Wellness Center, locker rooms and auditorium, integrated technology and unique collaborative meeting spaces. We have created a best-in-class work environment to motivate and accommodate our best-in-class team. During this past year, we invested a record $720 million in 196 high quality retail net lease properties. 186 of these properties were originated through our acquisition platform, representing total acquisition volume of more than $701 million. While we achieved yet another year of record acquisition volume, our rigorous underwriting standards and continued focus on best-in-class retailers is again evidenced by a record 76.7% of annualized base rent acquired being derived from leading investment grade operators. We closed out 2019 with a strong fourth quarter, investing in 41 properties across our three external growth platforms, while executing several strategic capital markets transactions that fortified our balance sheet and positioned us for growth in the year ahead. During the fourth quarter, we invested more than $141 million of which $138 million was sourced through our acquisition platform. Consistent with our focus on quality throughout the year, nearly 72% of annualized base rents acquired during the fourth quarter are derived from retailers that carry an investment grade credit rating. The 39 properties acquired during the fourth quarter are leased to 23 tenants operating in 17 retail sectors, including off-price, convenience store, auto parts, tire and auto service, Dollar stores and home improvement. The properties were acquired at a weighted average cap rate of 6.9% and had a weighted average lease term of almost 11 years. We continue to construct a net leased portfolio with sector-leading retailers that are well-positioned for success in the omnichannel retail world of today. As previously mentioned, we welcomed Home Depot, National Tire and Battery and Sunbelt Rentals to our top tenants during 2019. Concurrently, we eliminated AMC and PetSmart from our top tenant list since the fourth quarter of 2018. We will continue to cultivate our portfolio as we proactively embrace our dynamic omnichannel retail world. During this past year, we uncovered several opportunities to add to our ground lease portfolio. We added 12 properties to this unique portfolio which now stood at 8.5% of annualized base rents as of 12/31. Notable ground lease assets acquired during the year include our first Costco in Newport News, Virginia, an ALDI in Columbus, Georgia, a Chick-fil-A in Brockton, Massachusetts and a Wawa in Cocoa, Florida. Our ground lease portfolio derives 89% of rents from investment grade tenants and is comprised of leading retailers including Walmart, Home Depot, Lowe's, Wawa, Sheetz, ALDI, AutoZone, Chick-fil-A, McDonald's and Starbucks. Conversely, only 1% is leased to sub-investment grade tenants and the remaining 10% is leased to leading unrated retailers. We continue to identify and execute on high quality opportunities to add assets to our ground lease portfolio. Moving on to our development in Partner Capital Solutions platforms, we had 10 development in PCS projects either completed or under construction during the year that represent a total committed capital of more than $32 million. Eight of these projects were completed during the past year, representing total investment volume of approximately $22 million. During the fourth quarter, we completed landlords work for ALDI and Harbor Freight Tools at the company's redevelopment of the former Kmart in Frankfort, Kentucky. Work continued for Big Lots as of December 31 and we can anticipate completion and full rent commencement in the first quarter of this year. Construction continued during the fourth quarter on our first development with Tractor Supply in Hart, Michigan, which is expected to be completed in the first quarter of this year as well. Subsequent to quarter end, we commenced construction on two new projects, including our first development for TJ Maxx in Harlingen, Texas, immediately adjacent to a high performing Target. Rent is anticipated to commence in the third quarter of this year. We also commenced our fifth development project with Sunbelt Rentals in Converse, Texas with rent anticipated to commence during the second quarter of 2020. We continue to focus on providing full service real estate solutions to leading omnichannel retailers, many of which are on our top tenant roster. The relationships we built with these retailers continue to create investment opportunities across all three external growth platforms as we seek to leverage the complete spectrum of our real estate investment capabilities. While we strengthened our portfolio through record investment activity, we've also diversified our portfolio through strategic asset management and disposition efforts. The fourth quarter was particularly active on the disposition front as we sold seven assets for gross proceeds of approximately $32 million. Notable dispositions during the fourth quarter included an Academy Sports in Belton, Missouri, a Camping World in Tyler, Texas and an LA Fitness in Maplewood, Minnesota. I anticipate additional disposition activities during the first quarter of this year, as we continue to take advantage of market conditions and aggressively move to divest off assets that no longer fit within our investment philosophy. For the full year, we sold 16 properties for total gross proceeds of approximately $67 million. Of note, we sold four Walgreens assets during the year, bringing our exposure to 3.4% at year-end representing a 200 basis point reduction over the course of the year. The high per square foot rents, as well as, continued disruption in the pharmacy space continues to drive our disposition activities. We anticipate our Walgreens exposure to continue this downward trajectory during the course of 2020. Our asset management team has also been diligently focused on addressing any upcoming lease maturities. As a result of their efforts, our 2020 lease maturities represented just 0.5% of annualized base rent at year-end. Our portfolio remains in the best shape in our nearly 26 year operating history. During the fourth quarter, we executed new leases, extensions or options on approximately 55,000 square feet of gross leasable space. For the full year 2019, we executed new leases, extensions or options on approximately 370,000 square feet and as of January 1 of this year, we have exercised our recapture right on the last Kmart in our portfolio located in Grayling, Michigan. Kmart has vacated the space and I'm very pleased to announce we have executed a lease with Tractor supply to backfill the entire box. Additionally, we have carved out a pad in the parking lot for a future outlot development. This transaction is a testament to our asset allocation decisions and granular approach to real estate analysis. As you may recall, we chose to retain three Kmart stores from our initial public offering that were not sold in the last several years; Bradford, Kentucky; Mount Pleasant, Michigan as well as Grayling. We have now redeveloped or retenant all three stores with best-in-class retailers. Our decision to retain these assets has been confirmed by the quick turnaround by our asset management team. As of December 31, our rapidly growing retail portfolio consisted of 821 properties across 46 states. Our tenants are comprised primarily of industry-leading retailers, operating in more than 28 retail sectors, again, with more than 58% of annualized base rents coming from investment grade tenants. Our portfolio remains effectively fully occupied in 99.6% and has a weighted average lease term of 10 years. Our pipeline heading into 2020 is robust and I am very pleased with our progress to date. As indicated by our strong initial acquisition guidance of $600 million to $700 million, we are confident in our expanding teams capabilities to aggregate high quality transactions, while also continuing to review unique opportunities that cross our path. I'd like to take a moment to thank all of our loyal stakeholders for their support during another record year forAgree Realty. With that said, I again want to be clear that we remain intensely focused on constructing and constantly seeking to improve the highest quality retail portfolio in the country. I look forward to building upon our momentum in the upcoming year ahead. Thank you all for your patience, happy to answer any questions after Clay discusses our financial results for the fourth quarter and full year.

Thank you, Joey. Good morning everyone. I'll begin by quickly running through the cautionary language. Please note that during this call, we will make certain statements that may be considered forward-looking under federal securities law. Our actual results may differ significantly from the matters discussed in any forward-looking statements. In addition, we discuss non-GAAP financial measures including core funds from operations or core FFO, adjusted funds from operations or AFFO and net debt to recurring EBITDA. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release. Core FFO was $0.81 per share for the fourth quarter and $3.08 per share for the full year of 2019, representing 12.3% and 7.9% year-over-year increases respectively. Additionally, AFFO was $0.80 per share for the fourth quarter and $3.02 per share for the full year, representing 11.5% and 6.6% year-over-year increases. General and administrative expenses for 2019 totaled $15.6 million. G&A expense was 8.3% of total revenue or 7.7% excluding the noncash amortization of above and below-market lease intangibles, representing a 50 basis point year-over-year reduction. For 2020, we expect that G&A expenses, as a percentage of revenues, will contract an approximately additional 50 basis points. Income tax expense for the full year 2019 totaled $538,000, inclusive of the one-time tax credit of $475,000 realized in the first quarter. For 2020, we anticipate total income tax expense to be in the range of $1 million to $1.2 million. On a quarterly and full-year basis, core FFO per share and AFFO per share were impacted by dilution required under GAAP related to our forward equity offerings. Treasury stock is to be included within our diluted share count in the event that prior to settlement, our stock trades above the deal price from the offerings. The aggregate dilutive impact related to these offerings was roughly $0.01 to both core FFO and AFFO per share for the fourth quarter and $0.04 for the 12-month period. As Joey mentioned, we had another active year of capital markets activities raising or settling more than $740 million of capital to fund our continued growth and position our company for 2020 and beyond. In addition to capital raised, we also generated nearly $100 million through our disposition activity and free cash flow after dividend during the year. In December, we entered into an amendment to our revolving credit facility and term loans to increase our credit facility to $600 million. The credit facility is comprised of a $500 million unsecured revolving credit facility and $65 million and $35 million unsecured term loans. The credit facility includes an accordion option that allows us to request additional lender commitments up to a total of $1.1 billion. The revolving facility will mature in January 2024 with options to extend the maturity date to January 2025. In December, we settled the entirety of the 3.2 million share forward equity offering that was originally commenced in April 2019, receiving net proceeds of approximately $196 million. During the fourth quarter, we also entered into forward sale agreements in connection with our ATM program to sell an additional 2 million shares of common stock at an average gross price of $73.34 per share. Upon settlement, the ATM forwards are anticipated to raise net proceeds of approximately $145 million after deducting fees, expenses and other adjustments. To date, we have not received any proceeds from the ATM forward offerings. At December 31, we had $89 million outstanding on our unsecured revolving credit facility, reflecting additional capacity of $411 million. Our balance sheet remains in excellent position to continue to fuel our anticipated growth. As Joey mentioned, as of December 31, our net debt to recurring EBITDA was approximately 4.5 times, pro forma for the settlement of our forward equity, our net debt to recurring EBITDA is approximately 3.7 times. Total debt to enterprise value was approximately 22%, while fixed charge coverage ratio, which includes principal amortization, stood at a company record of 4.3 times. The company paid a dividend of $0.585 per share on January 3 to stockholders of record on December 20, 2019, representing a 5.4% year-over-year increase. This was the company's 103rd consecutive cash dividend since our IPO in 1994. For the full year 2019, the company declared dividends of $2.28 per share, a 5.8% year-over-year increase. Our payout ratios for the fourth quarter were a conservative 72% and 73% of core FFO and AFFO per share. For the full year 2019, on a per share basis, our payout ratios were 74% of core FFO, and 76% of AFFO respectively. These payout ratios continue to reflect a growing and very well covered dividend. With that I'd like to turn the call back over to Joey.

Thank you, Clay. To conclude, I'm very pleased with our record performance during this past year. We're in excellent position for 2020 and we are focused on continuing to execute. At this time, operator, we will open it up for questions.

[Operator Instructions] Our first question comes from Christy McElroy with Citi. Please go ahead.

Just, Joey, in the context of your comment on dispositions, you talked about taking advantage of market conditions and we've talked about this in the past, but it also came up as a topic on one of your peers calls yesterday in regard to the narrower spread between where investment grade and non-investment grade assets are being valued in trading today. What could cause that to reverse?

First, good morning, Christy. I'll be quite honest. We haven't really seen that spread necessarily contract. In the world in which we operate, we've seen, I'd tell you, minimal cap rate compression in high-quality assets. The retailers that we are typically doing business with are either investment grade or shadow investment grade, if you were to run them through a Moody's risk calculation. So I'd tell you, we're not really playing in that typical high yield pool. Our divestments and our disposition activity really falls into a couple of buckets. One is 1031 buyers typically franchise restaurants as well as the Walgreens, we sold during the fourth quarter, we sold three Taco Bell franchise restaurants during the fourth quarter as well as our Walgreens in Ypsilanti, Michigan and then assets such as the Academy Sports or the Camping World which we discussed, where we just want to pare back exposure and aren't comfortable with the real estate and/or the operator.

Okay and then just, Clay, in terms of the mechanics of settlement of the forwards, how should we think about the settlement of the forward ATM versus the prior settlement of the forward equity? Should we - where you did the priors more sort of all at once, should we think about the forward ATM more ratably through the year or would you expect that to be sort of all at once, as well?

No change in terms of thinking about thinking through settlement. Settlement ultimately will be dependent on the timing and uses of capital and we have until December to settle and no different than our previous forwards, we can settle in tranches or in whole.

But just in terms of how you expect to do that through this year, how should we - how should we be thinking about that from a modeling perspective?

Well, I think it will be really subject and dependent upon our pipeline and how our pipeline materializes and as we manage the balance sheet. So there's a number of factors there. I think the good - one of the most interesting things about that ATM forward or just any forward, it gives us total discretion to settle in one chunk as we did at the end of 2019 or settled with ratably or match fund investment activity. So I wouldn't say there is any ammo for us. I think it'll really be dependent upon market conditions and our pipeline.

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

So can you talk about your pipeline in 2020? I know everyone says their pipeline is big but that specific basket of deals that make sense for you at the type of quality that you're looking at, the pricing that makes sense. How does that kind of specific pipeline look like for you versus the past couple of years?

I'd tell you, as indicated by our initial guidance of $600 million to $700 million in acquisition, our pipeline entering the year was robust, is very high quality, it's comprised of typical one-off aggregation. Last year, our average price point was $4.2 million per transaction over 140 discrete transactions there and also have some other unique opportunities for us to invest in the highest quality retailers in the world. And so, we're very excited about our pipeline for Q1 and building into Q2. We have visibility into the beginning of Q2, at this point, we always talk about having 60 to 70 days of visibility, but I would tell you, it is very high quality and emblematic of what we've been executing for the last several quarters.

Any bigger portfolio deals you're looking at or is it still kind of more one-off?

I wouldn't call it necessarily bigger portfolio, obviously that's relative but not bigger portfolio deals, we will look at, and we do anticipate executing on. So I would call it smaller to medium sized portfolios of single credit industry leaders.

Okay and just last question. You have about 5% of ABR leased to Tractor Supply and Sunbelt Rentals. Just being honest, I don't really know those companies that well, part of it is maybe because I live in Manhattan, but I was wondering if you could talk a little bit more about those tenants and why you feel very comfortable owning more of those.

Sure. And I appreciate your honesty about living in Manhattan. Well, first of all, we have a really a fantastic relationship with Tractor Supply. Tractor Supply is the leading farm and rural retailer in this country. They have listed as a publicly traded company, so everybody can see their performance, they are unrated so they don't fall into our investment grade bucket but there are sub two times, I believe, lease adjusted leverage, a very conservative company, been very successful in their core business, we spend a lot of time with their real estate team as well as their executive team, really a dominant market position. Interestingly, Tractor Supply has also launched very successfully in e-commerce and have bought this platform. And so it's a very unique company, very conservative company and we think a real winner in an omnichannel world. Sunbelt Rentals, there are two large equipment rental companies in this country. There's a few that are smaller as well that consist of Sunbelt Rentals as well as United Rentals. Sunbelt Rentals is owned by the Ashtead Group. It's the only investment grade operator in the country. If you look at the equipment ownership versus rental in this country and that goes from all small equipment to larger equipment, it is very, very low relative to Western Europe. And so there is a big opportunity in this country for equipment rental rather than ownership. Sunbelt Rentals owned by the Ashtead Group, again investment grade, is taking advantage of a lot of that fragmentation and that lack of rental capacity in this country. They service all different types of users, of renters I should say, and that goes from gas and oil to general equipment to power and pump. And so, again, a great partner of ours, obviously starting our fifth project for them, we've acquired a number of them, a great balance sheet and we think a business model that really makes sense in a 21st century omnichannel world here.

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

First question from me is just going back to your prepared remarks on Art Van. Can you maybe just elaborate on what caution flags were raised that led you to not do any additional deals with them? You obviously mentioned private equity, but can you just maybe expand on that a little bit more? And then along those lines, are there any other notable recent examples where you can provide where you've shifted course whether it be because of private equity or other changes that just impacted your original thesis as it relates to the concept?

So the first part, I appreciate the question. Art Van is a company that's based in our backyard. I knew Art Van personally, the family office is about three miles straight down Woodward from our office here in Bloomfield Hills. I'll tell you, we bought this property directly from Art Van, it was really - it was really the pre-eminent site in Michigan head to head with the IKEA and proceeded with the reverse build-to-suit transaction with Art Van and really a unique retail opportunity. Again I really encourage people to look at our YouTube site and see this piece of real estate for themselves in the drone video. Ford Road is a dominant retail corridor, we are literally head to head with the only IKEA servicing Michigan, Northern Ohio and Northern Indiana. Prior to the transaction with TH Lee, Art Van had - it still does, has a dominant market position in terms of furniture and home accessories in Southeast Michigan. Once TH Lee entered the equation, we had a second transaction under contract with Art Van. We actually sold that purchase agreement and did not proceed and decided to keep only the flagship store in Canton and proceeded with that transaction. So a combination of the real estate, the residuals, the anticipated and prudent, our proven store performance of that location and obviously being heads up on the traffic signal with IKEA was very unique and we were very comfortable with that transaction. In terms of private equity ownership in real estate, if you like, I've been pounding on this for several years now, we just see a total misalignment of investment horizons. And today, as I mentioned in our prepared remarks, the ability to invest in price to withstand truly bottom-line margin compression, to have a balance sheet that can invest in e-commerce distribution in an omnichannel world is a critical component of almost every single retail sector. This is a fast and dynamically changing world and so we will continue to avoid private equity sponsorship in the limited cases where we have private equity ownership. We will continue to look to divest off those assets including the franchise restaurant space and we'll continue to invest in the strongest and best balance sheets in the top retailers of the world.

And then I just wanted to switch gears and you've previously discussed that on the development front, you've become increasingly selective with regards to committing human capital to one-off deals and really avoiding situations where there wasn't really a chance to enhance kind of a long term relationship. It sounds like you guys had a couple of deals from the backlog since the end of last year, but just curious on this front, as your relationships continue to grow, your platform expands, why hasn't the mix of PCS and development really kind of kept pace with acquisition activity? Again, are you leased a little bit of a differentiator for you versus peers? So just your latest thoughts on that front.

Yes, first off, we had - we have significantly scaled, you may have noticed in my prepared remarks, we have not scaled the human capital in regards to development activity. However, we scaled the remainder effectively of every department in this country - in this company, excuse me. And at the same time, with return on cost, where they are today for merchant developers who are performing turnkeys generally for retailers, we're not going to compete or do a turnkey for an industry-leading retailer with a 6% initial unlevered return on cost. That doesn't make sense for us. I'm very happy to announce that TJ Maxx in Harlingen, subsequent to quarter end, and that's our first ground-up for TJ Maxx, the fifth project was Sunbelt Rentals in Converse, Texas, and then I'll tell you since we've been together last, we have a number of other projects that we anticipate that will come to fruition. We're really focused and we'll announce in the next, probably, in the next quarter and get a few of them in the ground quite shortly here post winter. I'm really pleased with our efforts and our activities reviewing vacant boxes and then working with really our sandbox of retailers to backfill. We have a lot of GLA in this country, 24 square foot per capita, I think, there's a lot of press related to that. I personally think there is a lot of opportunity for retailers to takeover vacant boxes and we've been very focused on former drug stores and the former Tier one sites, it's the former Shopko sites. And so, a number of those opportunities are materializing in our pipeline today and we're working with our top retailers to look at it and there should be some interesting opportunities in there as well.

Our next question comes from Nate Crossett with Berenberg. Please go ahead.

Appreciate the color on Art Van. What else is on the watch list right now? I think there was an article that Bed, Bath & Beyond is closing 41 stores. I think you have a couple of those, so maybe just give us an update there and then just comments on furniture in general. Is this an area that ultimately goes online or how do you feel about furniture?

Yes, great question. I appreciate you joining us, Nate. So in terms of a couple of Bed, Bath & Beyond's we had, those were real estate plays. I'll tell you with the Bed, Bath & Beyond in Texas is paying $7.50 a foot in the dominant center there immediately adjacent to a TJ Maxx and HomeGoods. We're excited, we have one in Texas. That's a fantastic piece of real estate. We were frankly never big fans of Bed, Bath & Beyond and their merchandise stacked to the ceiling and lack of experience in the stores. So those are - they were very comfortable with those couple of stores in the real estate underneath them and potentially even have some upside. In terms of furniture, I'll hearken back to an NDR we had in New York and then it was repeated in Chicago about 12 to 18 months ago and we really used the opportunity to speak to millennials both in our office and on the road about what their consumer and consumer preferences and buying preferences are. We talked specifically about the furniture space and I asked a group of millennials, call it, an average age of 28 to 30, where they purchase furniture, how they purchase furniture and I apparently got horrified looks, and they looked at me and said, purchase furniture? If anything, we buy it online or it's in the lobby of our building downstairs. Now that's obviously, and we just take it for free. So that's obviously more of an urban perspective. What I'll tell you is that as long as Wayfair will lose $15 to $17 online per shipment, as long as you are able to return mattresses that you never see and they show up at your house and can just keep them for 60 or 90 days and then send them back, some cases even longer, and as long as the capital markets are willing to support and we don't see any end in sight, start up businesses that don't care about bottom-line but only top-line, I will tell you the home accessory and furniture space reminds me very similarly to the old days when the plasma TVs morphed from several thousand dollars to a few hundred dollars. Furniture in this country for the vast majority, outside of high-end furniture, is becoming disposable. Today when you sell your house, you don't bring your TVs with you, they sit on the wall and the successive purchaser keeps them. I think we're heading down the road where furniture doesn't get moved for the vast majority of residences when they sell their house today, similar to the LCD and the LED TVs we see today on the wall. And so a significant disruption there is price disruption, there is omnichannel disruption and American consumer preferences today are changing very quickly. And so I think it's a space that we will continue to avoid absent the unique circumstance. And it's a space we've been very, very selective with. There is a couple of winners in this space, I'll mention Lazy Boy, a fellow Michigan company. Lazy Boy is a winner in this space that has brick and mortar and has frankly a cult-like following among millennials, which is very unique. But at the same time, we're going to be very, very selective in any investment activities there.

And then maybe just one on G&A outlook for 2020. It looks like even you wanted to keep it flat roughly for the last three quarters. Can you just remind us the size of the sales force? Are you anticipating any new hires in the near term?

So we benefited from approximately, as Clay mentioned, 50 basis points in terms of G&A as a percentage of revenue year-over-year. We anticipate benefiting approximately another 50 basis points this year. We are actively, with our new building open next store, we are actively growing and scaling every aspect of this organization. First quarter is the largest in terms of G&A, generally just from aberrations historically for us, non-run rate activities, which is quarterly activity, but this is a company that's growing over 30% top-line, we're going to continue to invest in our people, both individually and their professional development, as well as, grow this team pretty dynamically. We went from about 33 people, I believe at the end of last year, 32, 33, to a, call it, 46. And so we're growing and we grew headcount by about 30%. At the same time, we're gaining efficiencies through all of the system work we've done, the processes we've instituted and really the rapid growth of the portfolio.

Our next question comes from Rob Stevenson with Janney. Please go ahead.

Joey, I think you mentioned completing some dispositions in the first quarter here. At this point is the $25 million to $75 million of guidance likely to be front-end loaded?

I think that it is possible that there will be some front-end loading for that disposition activity, we'll continue to dispose, we have another Walgreens that is under contract. I anticipate them being at or below 3% by 3/31. We have some additional franchise restaurants that are under contract that we will look to opportunistically divest into the 1031 market and then we are working on one or two other transactions that are similar to the Academy Sports, Camping World dispositions, where we just don't feel that the residuals or the long term interest on our end is there. So, Q1 could be fairly active on dispositions, frankly, I hope it is. That's in purchasers hands today. We're under contract with a number of assets going through diligence. But you will continue to see us be aggressive and even possibly raise the bottom end of that guidance pretty shortly.

And then the Kmart in Michigan that you're doing with Tractor Supply. Is this a scrape and rebuild or just a box rehab and then how much is that plus the new TJ Maxx and the Sunbelt Rentals developments expected to cost you guys?

Yes. So that's a - it's a former small format freestanding Kmart, again the last Kmart in our portfolio, we had waited patiently to exercise that recapture right for upwards of two years with Tractor Supply waiting patiently with us and we thank them for that. They are going to be retenanting that whole entire box. It will not be a scrape and rebuild. And then the Sunbelt Rentals as well as TJ Maxx at Harlingen, Texas, I would tell you, it's about aggregate cost of approximately $5 million.

[Operator Instructions] Our next question comes from John Massocca with Ladenburg Thalmann. Please go ahead.

So it sounds like you're pretty aggressively, and you have been for a while, selling down the kind of Walgreens exposure. I mean is Walgreens kind of in the same bucket now as some of your franchise restaurant field tenants where it's - the ultimate goal is probably to get it down to zero or close to zero?

Well, no, I don't think it's to get it to zero. I would tell you, we've rationalized exposure, if you hearken back several years, they were 40% of our portfolio. We have some significant gains. I think the challenge with some of the suburban Walgreens and pharmacies in this country is the very high per square foot rent and the 13,000 square foot to 14,000 square foot rectangle plus the drive through that sits on top. So we have - we have great pieces of real estate, hard corners, great access, visibility, parking, but I'd tell you the tenant pool today and how retailers have morphed, you are either backfilling those boxes generally with Dollar stores that are paying anywhere between 25% and 35% of the Walgreens rent or you are forced to demise those 13,000 square foot to 14,000 square foot boxes in the small strip centers, which we have no interest in doing. And so, we think, on a risk adjusted return basis, for us to divest off Walgreen typically in the mid-sixes, lower or mid-sixes, mid-sixes for approximately the 10 to 11 year Walgreens into the 1031 market continues to make significant sense for us. The second half of that is, I continue to see disruption in the pharmacy space and anticipate more disruption. The front end of the stores continue to really suffer from weak sales and the middle of the stores, frankly, remind me of the middle of the grocery stores in today's environment. And I think we're going to have to see the major drugstore chains in this country rely upon baby boomers. We're going to have to see some significant remerchandising efforts to drive traffic into those stores with higher margin items. And so we'll continue for all those above reasons, continue to look to dispose off the stores that we do not like. We have stores in our portfolio that are frankly fantastic pieces of real estate. Our flagship store in Ann Arbor, Michigan on the campus of University of Michigan, we will not sell unless somebody came with an offer we couldn't refuse. It's the best piece of real estate in Ann Arbor. So there are a number of stores that are either super high-performing, we really like the real estate, we want to hold it, absent a compelling offer. But in terms of suburban pharmacies, we are very critical of their future today.

And then bigger picture, there is a perception, it's kind of played out historically that larger footprint retail boxes are less fungible, harder to kind of relet in a tenant credit situation. How do you kind of mitigate some of that risk? I know obviously a lot of your larger box assets are ground leased assets. But is there anything else you can kind of do to kind of mitigate the risk associated with that - with these kind of less granular type assets you have in the portfolio?

Yes, look, another good question. The ground leased portfolio 8.5% at 12/31, we anticipate that frankly ticking up at 3/31. We have a number of assets currently under contract to purchase or has acquired subsequent to quarter end. I think there's a few mitigants, first credit. So number one, our big box exposure typically on a ground lease typically very low basis is with the leading operators in this country, that's Walmart, Home Depot and Lowe's, generally. And so we have no interest in big box exposure with private equity-backed retailers, privately held retailers generally or retailers that are on the sub-investment grade spectrum. That's very challenging. Second, when we look at any big box transaction, you can assume that we are in conversations with the retailer about the productivity of that store, of that unit on an isolated basis and then also how it compares relative to other stores in the district. We also get on the ground and our diligence team does a fantastic job of understanding the local markets in conjunction with our local partners. And then third, we're looking at the overall parcel, not only the box itself. We're looking at the overall parcel generally at the amount of frontage it has on a road, if there are any current outlots that are blocking our ability to one day redevelop it. But I'll give you an example, we looked at a large box recently, it had 600 feet of frontage on a major retail corridor, it was leased to the largest retailer in the world and we looked at it paying a few dollars a square foot, and we say, if they ever left this store, it's a highly productive store, if they ever left this store we'll have 600 feet of frontage which results in 4 to 5 outlots paying $80,000 a year and we will quickly recapture the NOI just from the outlots alone even if the big box in the future had to be - if the tenant ever left self-storage or some other use.

Our next question comes from Linda Tsai with Jefferies. Please go ahead.

Joey, you seem pretty emphatic about the eventual demise of lower cost furniture and mattress stores. Are there other categories where you're concerned like this?

Kind of thick. I think overall, this country, we are still in the early innings of retail disruption. I think if you look across, these aren't binary outcome. If you look across retail sectors in this country, it's very difficult to find a sector outside of consumer electronics that has gone through the disruption that we anticipate. and will go through additional store closures and retailers disappearing. Consumer electronics, Best Buy's the last man standing because Hubert Joly did a fantastic job in the turnaround, they had an investment grade balance sheet, Circuit City, H.H. Gregg, Comp USA and now we see a couple of the smaller regional scaling, it's effectively the last man standing. I think it's ironic that you look across even sectors such as office supplies, we still have Max Depot and Staples, you look across general merchants, we still have Sears stores in this country. And so there is going to be, we believe, a lot of closures in this country. I don't think there's necessarily binary outcome. But our goal is to pick the winner with the strongest balance sheet, the most competent management team and the best underlying real estate. And so the furniture space was quite obvious to us, what was going on there. There are other sectors that we're not overly interested, office supplies, again that movie theater space, I'd tell you, we are not overly interested at the movie theater space, sporting goods space, not overly interested and easily commoditized, hard or soft goods that can be purchased on the Internet without experience. And so there is a number of sectors that we aren't interested in, pet supplies being another one, that we kind of, I won't say we redline, but absent a unique piece of real estate or compelling opportunity, we won't touch.

Our next question comes from Chris Lucas with Capital One Securities. Please go ahead.

I had a couple of questions that's really kind of relative to cap rate questions and, Joey, so I guess the question for me on the ground leases is, could you give us a sense as to what the sort of cap rate gap is between a ground lease you're buying an a fee ownership position that you would acquire on a similar asset tenant?

Yes, good morning, Chris. I'll tell you, well, first off, many of the tenants that we acquired ground leases on, they don't even have turnkey so I'll tell you, we bought a Chick-fil-A ground lease during the quarter, last previous quarter, we bought a Sheetz ground lease, obviously a leading large format gas and convenience store last quarter. They don't have turnkey deals out there. And so - but I would tell you, ground leases typically trade at 150 to 200 basis points inside turnkey leases for like kind assets. That's kind of the rule of thumb, but there are a number of retailers out there that simply don't have turnkey leases.

And then I guess if I look at your top hold - your top investments in terms of tenant credit concentration, any thoughts about where cap rate movement has been the greatest either compression or expansion among those over like the last couple of years?

On a tenant specific basis?

Yes.

Yes, look, all in all, I would tell you, cap rates over the last couple of years were at historic lows, given the interest rate environment, have effectively been flat. We've seen some marginal compression in the smaller price points, super high quality retailers. Obviously that flows into the 1031 market, it flows into the franchise restaurant market, which we don't consider super high-quality. It's really fallen, I think, into the O'Reilly's and the AutoZone's of the world, the $1 million to $2 million, one-off transactions that carry super - fantastic balance sheet, high investment grade credit ratings and then lower price point. I'll tell you, that said, again operating in the fragmented space that we are, we acquired 13, sorry, O'Reilly's in Q4 alone. We were able to acquire those O'Reilly's because of our relationships, both with the tenant and repeat developers. They range from having eight years on the lease to full 20-year leases. And so even though you see that cap rate compression in the market, I'm very confident and I'm proud of our team being able to dig a big magical opportunities out there.

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

Well, thank you everybody for joining us this morning. We look forward to catching up during the upcoming conferences and good luck with the rest of the earnings. Appreciate your time.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.