Q3 2019 Earnings Call

Hello, and welcome to W.P. Carey's third quarter 2019 earnings Conference call. My name is Jesse and I will be your operator today all lines have been placed on mute to prevent any background noise.

Please note that east event.

As being recorded.

After today's prepared remarks, there will be taking questions via the phone line instructions on how to do so we'll be given at the appropriate time I when I will turn todays program over to Peterson director of institutional Investor Relations Mr. sense. Please go ahead.

Good morning, everyone. Thank you for joining us today for all 2019.

Third quarter earnings cool.

Before we will begin I would like to remind everyone.

Some of the statements made on the school another starts back maybe deemed forward looking statements factors that could cause actual results to differ materially W.P. Carey's expectations are provided in RCC.

This conference call will be made available in the Investor Relations section of our website.

The P. Carey dot com, where it will be archived for approximately one year.

And where you can also find copies of our investor presentations.

And with that I'll hand, the call either to our Chief Executive Officer stressful.

Thanks, Peter Good morning, everyone.

Since our last earnings call. We further strengthened our balance sheet continued to make accretive investments, including adding significantly to our deal pipeline for 2020.

Today I'll review, our recent investment activity.

Give a brief update on a couple of our top 10 tenants.

Talk about the steps we've taken to ensure we are.

Well positioned to drive future earnings growth, regardless of the economic backdrop.

Tony Sand, Joan our CFO will cover our third quarter results in updated guidance.

The financial impact to the CW why merger as well some of the details on a recent capital markets activity and balance sheet positioning.

We're joined this morning by or President John Park, and her head of asset management Brooks Gordon who are available to take your questions. When we get to that part of the call.

Before talking about the third quarter I went to briefly give some context to our recent announcement about the proposed merger and internalization of the two CW I lodging.

Funds, we manage.

In 2017, we establish a plan to simplify the company and improve our earnings quality by focusing exclusively on investing for our own balance sheet.

Our merger with CP, 17, which we completed a year ago accelerated that strategy essentially transforming us into a pure play.

Please read.

While last weeks announcement about the CW like funds has a relatively minor impact on us it does take us incrementally closer generating 100% of earnings from our real estate portfolio and bring to fruition. The strategic plan, we set in motion two years ago.

Turning back to the quarter starting.

And with the market environment.

In the U.S. the third quarter was very much a continuation of the same competitive environment you've spoken about in prior calls in Europe negative rates and the search for yield continues to attract investors to net lease driving further yield compression, especially for prime industrial assets.

We remain focused on high.

High quality real estate, it's operationally critical and backed by creditworthy tenants, particularly sale lease backs, we can often drive better terms through deal structure.

Continued improvement to our cost of capital has also enabled us to explore higher quality industrial assets at lower cap rates.

We continue to compete for deals.

Not just on price, but also based on our ability to provide certainty of close and ease of execution sellers.

Given our long standing presence in net lease and strong broker relationships. We continue to see virtually every deal in the market given the size and breadth of our portfolio, we have access to an array of off market.

Deals with existing tenants.

We also remain in a unique position of being able to transact on two continents across all property types.

Recently, we've seen the best opportunities in the U.S. and primarily within the industrial sector, which is reflected in our recent investment activity.

During the third.

Quarter, we completed $62 million of investments comprising three industrial sale leasebacks. These are operationally critical properties supported by growing tenant businesses that provides strong built in rent growth over long term leases.

One of the benefits of originating net leased investments through sale leasebacks is the ability.

Really to both transact at better than market pricing and achieve longer lease terms, our third quarter investment volume provided a good spread to our cost of capital the weighted average cap rate of 7.5% had a weighted average term of 23 years.

Since quarter end, we completed two additional investments.

Totaling $63 million, including the $53 million sale leaseback of a portfolio of three industrial facilities in the U.S. and Mexico Triple net leased to one of the world's largest producers of high performance tools. These deals Springer completed investments year to date through today to $520 million.

However, it does not present, the full extent of our recent investment activity.

We currently have about $407 million of capital investment projects outstanding comprising 11 projects totaling $282 million at quarter end, which are included in our third quarter supplemental table and an additional two projects totaling 100.

The $5 million that we've signed up since quarter end.

We expect six of these projects totaling $114 million to be completed in the fourth quarter with an estimated weighted average cap rate of approximately 8% illustrating the better than average pricing. We can often achieve on these sorts of investments.

The remainder are expected to be completed after the end of the year, adding to our investment pipeline for 2020 and into 2021.

As I mentioned at the outset, we're actively looking to use our improved cost of capital to invest in higher quality industrial real estate, which trades at lower cap rates and look to briefly review two.

Transactions that are good examples of this cap rates, averaging in the mid to high fives.

During the third quarter, we entered into a 68 million dollar for commitment on a 614000 square foot class a distribution facility in Tennessee net lease to an investment grade tenet for sending us the world's largest.

Hi, Alex its provider construction is expected to be completed in April of 2020 at which time will acquire the facility and lease it back to the company on a triple net lease basis for 20 years with fixed annual rent escalations.

And since quarter end, we've entered into a 55 million dollar build to suit commitment.

For a new 168000 square foot industrial R&D facility in Germany that we expect to be completed in early 2021 net leased to American axle, a global tier one automotive supplier with about $7 billion an annual sales.

Facility will be strategically located in a prime.

Real Park in your Frankfurt on a 20 year Triple net lease with annual Chairman CPI based rent Escalations.

Both of these deals are included in the $407 million of total capital investment projects that I mentioned are currently outstanding.

Turning to our top 10 tenants in the third quarter extra space moved into.

Our top 10 tenant list as a result of the transaction, we entered into with them to convert operating self storage assets to net leases.

Also in July extra space announced that it received an investment grade rating from S&P.

As a result at the ended the third quarter annualized base rent or Hbr gender.

Gated by investment grade tenants stood at 30% up from 26% a year ago.

Traditionally our focus has been on investments with tenants that are just below investment grade, which we view as a sweet spot for net lease in terms of the risk reward trade off.

It also has the potential to create value as tenants with growing.

Mrs and improving financial performance move up the credit spectrum or our acquired by strategic buyers with investment grade ratings.

Separately I wanted to provide an update on another of our top 10 tenants Penn Dragon to which we lease a portfolio of 70 car dealerships in the UK.

Combination of.

History wide pressures, including Brexit have created a challenging environment for car dealers in Europe , particularly in the UK.

We've been closely monitoring the situation at Penn Dragon and been in regular communication with the management as they work their way through near term issues, particularly excess inventory.

As part of Penn Dragons plant operational changes.

10 of the 70 sites, we own haven't Subleased and we expect an additional eight sites to be subleased in the coming months.

We've been encouraged by recent steps they've taken to improve their financial position, including suspending the dividend and divesting U.S. dealerships.

We've also recently hired a well regarded inexperienced CEO .

So to drive operational improvements and clarify their strategic direction.

They remain up to date on rent for 100% of the portfolio and we do not currently view them as a default risk given their liquidity and low leverage we will continue to stay in close contact with the tenant which represents 1.9% of total hbr and.

We'll of course provide an update on any significant developments.

The important benefit of our size and diversification is that no single tenant even one in the top 10 has an outsize impact on our overall business.

Our top 10 concentration remains among the lowest for net lease rights at 22.6% with no.

Single tenant accounting for more than 3.5% of FBR.

Turning briefly to our balance sheet and some closing comments.

This year the capital markets have remained conducive to both equity and debt capital raising.

During the third quarter, we successfully completed are nice offering of senior unsecured notes at our lowest.

On the date.

We've also raise additional equity through our ATM proactively pulled forward debt repayments and extended our debt maturity profile I.

Im pleased to say that in August S&P affirmed our investment grade rating, a triple B and revised outlook to positive up from stable, specifically, citing it's favorable view.

A recent deleveraging.

Given the improvement in our cost of capital we are willing to be more aggressive on price for high quality assets. However, we are maintaining our underwriting standards.

We're also focusing on transactions with long term leases and remain proactive and seeking lease extensions wellhead of maturities.

The current real estate.

Cycle is is approaching its 10th year, increasing concerns over the pace of it economic growth.

With a defensively positioned balance sheet, a large and diverse portfolio of operationally critical net lease real estate with built in contractual rent growth. We believe we're well positioned for a range of economic environments ahead.

And with that I'll.

I'll hand, the call over to Tony.

Good morning, everyone. We had a solid third quarter reporting AFFO per share of $1.30 with 95% or $1.23 per share generated by our core real estate segment.

Within our real estate segment lease termination and other revenue included the impact of two.

Nipigon items during the quarter during the third quarter.

First we collected $3.3 million and past due ran as part of the restructuring of our agriculture investment, which we discussed in detail on last quarter's call.

And as a reminder, we expect to continue collecting past due rents from this tenant in the same amount for the next two quarters.

Second during the quarter, we settled and collected a bankruptcy claim from a prior tenant dating back to 2009 that contributed an additional $8.3 million.

Well leased related settlements and recoveries at fairly common for a portfolio of our size. These amounts were on the larger side demonstrating the effectiveness of our asset managers in.

Ceiling and achieving positive outcome.

Maybe our grew to just over $1.1 billion at quarter end, primarily reflecting the impact of new investments and strong same store rent growth of 2.2% year over year on a constant currency basis.

This included a periodic rent increase of 7.6.

During the third quarter from one of our largest tenants you hall, which added $2.7 million to Hbr.

Excluding the impact of the U haul rent bump our same store rent growth was still strong at about 1.8%.

As Jason mentioned year to date through today, we've completed investments.

Totaling approximately $520 million and we currently have about $115 million of capital investment projects scheduled to be completed during the fourth quarter, bringing us to about $635 million for the year.

We continue to have an active pipeline and have started to build our pipeline for 2020 through the.

Forward commitments and build to suit Jason discussed.

We're pleased with the current pace of activity, which is picking up in the fourth quarter.

However, based on the visibility we currently have into the timing of deal closings, we've adjusted our expectations for full year investment volume to between 750 million in $1 billion.

This.

Is this an activity for the third quarter included four properties for gross proceeds of $14 million.

Subsequent to quarter end, we closed two additional dispositions for 60 million, bringing total dispositions for the year to $96 million.

We're on track to close the New York Times repurchase in December and remain under contract for the.

Pending sale of an operating hotel property in Florida for 115 million.

Our disposition pipeline includes a few transactions, which may slip into early next year, including the pending hotel sale.

For the full year, we've adjusted our assumption for 2019 dispositions to between 375 million in 550 million.

Dollars.

Third quarter leasing activity was relatively quiet impacting less than 1% of FBR.

We executed five lease renewals and extensions with existing tenants that in aggregate recaptured a 107% of the prior rent and added 10 years of incremental weighted average lease term.

Well no single quarter is meaningful in the Big picture. We're pleased that overall leasing results in the recent years are showing the benefit of proactively investing discretionary capital within our existing portfolio.

We are able to capture attractive incremental returns.

Strengthen our tenant relationships and importantly extend existing leases a favorable economics.

For new leasing activity, we entered into 20, new leases on existing properties with the weighted average lease term of 22 years.

The vast majority of the Hbr associated with this relates to the conversion of five additional self storage operating properties to net leases as part of the transaction with extra space, we announced last quarter.

As a reminder of the remaining nine properties included in the transaction will convert to net leases as they stabilize over the next few years.

Net income for the third quarter included a 26 million dollar impairment charge to reduce the carrying value of a portfolio for manufacturing facilities, which the tenant is currently working through corporate restructuring.

This particular tenant is comprise a significant portion of our heightened watch list for the last two years.

And we continue working with them to restructure the lease.

Maybe are related to this tenant at the end of the third quarter was $5.4 million and the tenant with current on all rent payments through the end of September .

As we work through the restructuring.

The tenant we expect annualized rent will initially be reduced to about $1 million starting in the fourth quarter with scheduled increases to 2.4 million over the next four years as the business stabilizes.

The ability to increase further depending on business performance.

Please note the restructuring commenced after.

We ended the third quarter, so the reduced rent will flow through hbr in the fourth quarter and we will be reflected in our leasing activity. Once the restructuring is completed.

In aggregate our heightened watch list represented about 1.8% of totally BRC ended the third quarter and overtime is generally trended between one and 2%.

A level, which we view is very manageable in the context of our large and diverse portfolio.

Importantly, based on prior outcome, we expect actual losses from assets on heightened watch to me much lower percentage mitigated through a combination of bark focused on investing and operationally critical properties and our proactive approach to asset.

Overall, the quality of our portfolio remains healthy and well diversified by tenant property type geography, and tenant industry and occupancy remains high ending the quarter, 98.4% up from 98.2% at the end of the second quarter.

Our weighted average lease term is 10.3 years and near term lease maturities are low.

With less than 2.2, 0.5% of FBR expiring before the end of 2020.

And the vast majority of those leases are currently either in negotiation or have been completed.

Moving briefly to our investment management segment.

For the third quarter investment management generated about 5% of total AFFO or.

Cents per share.

We've often talked about the contribution from this segment moving towards zero at the remaining managed funds roll off over the next few years.

Last week, the two lodging funds, we manage announced their intention to emerge and internalize management.

As part of this transaction, which includes the redemption of our special General partnership interest in the funds.

W.P. carry will receive consideration totaling $97 million comprising $32 million of common equity and $65 million a preferred stock in the merged company.

The merger is subject to customary closing conditions and shareholder approval.

Such we currently expect the transaction to close toward the end of the first quarter of 2020, therefore, having no impact on our 2019 results.

Once completed we accept expect the contribution from our investment management segment to be reduced by approximately half on an annualized basis to around 2% of totally S.F.

With management fees and earnings from our partnership interest in the funds partly replaced by dividends from our ownership stake in the merged company.

Upon completion of the merger. We also expect to provide transition services to the merged company for initial period of time, which will be fully reimbursed for resulting in a net neutral impact on our G.N.A.

While our exit from the Nontraded <unk> business has been widely discussed and at this point has a relatively immaterial impact on our overall earnings. This announcement Nonetheless represents further progress in our simplification.

Moving to our capital markets activity and balance sheet.

As Jason noted we've remained active on the capital markets front, accessing well priced capital through both equity in debt issuances.

We further utilized R.A.T.M. programs to efficiently raise $130 million of equity during the third quarter at a weighted average share price of $80 in 76 cents.

Adding 1.5 million shares to our share count, which is expected to result in a fourth quarter diluted share account of 173.5 million shares assuming no further ATM issuance.

This activity brought equity raised under A.T.M. programs. During the first nine months of the year to $524 million, which is that as the leveraging impact on our balance sheet.

During the third quarter, we also had great execution on a euro denominated bond issuance, raising 500 million euro with the maturity of 8.6 years and a coupon of 1.35%.

We continue to proactively peep prepays secured debt with mortgage pay offs totaling $400 million for the third quarter and $912 million year to date.

At quarter end are weighted average cost of debt with 3.3% down from 3.6% at the end of last year.

The mortgages, we were paid this year had a weighted average interest rate of 4.9% as compared to the 2.3% weighted average rate an hour to bond issuance is this year.

As a result, we expect to generate interest expense savings in the fourth quarter M.B. on.

We ended the third quarter was a net debt to adjusted EBITDA, a 5.2 times and debt to gross assets of 40.7%.

We've reduced our ratio secure debt to growth assets to 11.8%.

Down from 18.3% at the start of the year, we expect that to come down further in the fourth quarter to around 10%.

At the end of the third quarter 68 per cent of total A.B.R. was unencumbered compared to 53% at the start of this year.

Illustrating they significant progress we've made on our unsecured strategy since the C.P.A. 17 merger.

Now, let me wrap up with guidance.

As we noted in our release this morning, we lowered a narrow our <unk> for the year two between $4 in 95 cents and $5 in one cent per share with real estate A.S.F., though of between $4.70 to $4.76 per share.

This reflects the revised guidance assumptions for both acquisition and disposition volume that I previously mentioned.

After taking into account the impact of D., leveraging end transaction timing, which has been offset by the least settlements that I discussed.

Expect year over year growth in real estate, a if a folk or share of about 7.5%.

In summary, we've had great execution, this year and strengthening our balance sheet and positioning us welfare continued growth.

Looking ahead, while we're seeing some near term earnings impact from D., leveraging as well as from our continued execution on our plans to exit investment management. Our focus remains on the long term growth of our real estate or any.

And with that I will have to call back to the operator to take questions.

Thank you know at this time, we will take questions. If you would like to ask a question simply press star send the number one on your telephone keypad. If you would like to withdraw your question press the star So the number two.

Our first question is from Jeremy Mets with C.M.O. capital markets. Please proceed with your question.

[noise], Hey, you're more more generally <unk>.

The the acquisition guidance.

Dislike reduction or you have there you mentioned that competitive market Tony didn't mention some of the visibility.

In terms of that's what I'm, just wondering that more of a reflection of that visibility in pardon me or is it just harder to find deals right now or reflection without competitive landscape, making a little tougher to get stuff under contract.

Yeah, I mean, certainly it's a competitive market out there yields are low you know there's.

There's a you know with uncertainty and the economy, there's been generally a flight to C.D., which now at least provide some new certainly we've been a beneficiary of that their costs of capital you know, but it's also time and it's hard to predict especially the touch of deals we do the timing on transactions and look we feel good about or pipeline right now coming into the fourth quarter.

It's shaping up to be our most activity year. It at this point in time, which is not a typical for us, but I think maybe equally important you know we have about $400 million in progress expansions and build a suit there that are under way right now about 100 of those hundreds maybe 114 million.

Oh that 400, we expect to close.

Completed an error count towards acquisition volume in 2019, the rest will be 2020, some maybe into 2020, even or 2021, even but we feel pretty good about our pipeline going into 2020 as well at this point dog.

And just sticking with the pipeline and not just watch under a contractor for this word korber just even a little more for all the judge can you break it down a little between the U.S. in Europe in terms of activity and just how you're doing the best opportunity today as you look to deport capital.

A year to date, you know most of our deals almost all of our deals have been the U.S. Some of it's just where the opportunities of then some of their the dynamics that we see in Europe with negative race, and you know and even fiercer search for yield there but.

But you know we're starting to see more interesting opportunities in Europe right now I think you'll see more activity there in the fourth quarter, we're seeing some more build a suits. There I think we've observed that you know, especially in in the industrial space you know you're <unk> kind of a real estate stock is a little bit aging and so we've seen more bill to suit opportunities.

In every that we've been active in and have good relationship so hard to predict exactly what the split is going to be but the Europe is picking up for us real to the beginning of the year.

You know cap rates, you know I would say that they'd come down certainly we're still finding ordeals in the sixes and into the sevens.

But with our cost of Capitol you know, we've been you know bidding and and really seeing more assets that makes sense, you know sub 6% even into the low fives. You know do to deal is I referenced earlier <unk> and American actual are good examples of that high quality industrial assets.

Those are build a suit so we're going to be buying in you know it almost by definition that replacement cost.

So you know that that's what we're looking at we're looking for for good opportunities and G. extend we can add higher quality assets by getting a little bit more aggressive on pricing you know we've been they'll take our hurtle rates down a little bit given our cost of capital, but we still want to maintain you discipline on the underwriting side I think that's important for us.

Appreciated the last ones for me is you could you imagine can drag in India balding situation.

Viewed as a default risk.

I'm, just wondering <unk>, sorry, sorry, miserable, there's the least restructuring that Tony mentioned here that we should look on the fourth quarter or is that something we should be keeping an eye on as as we think about 2020 in any potential impact.

Yeah. It it's it's not that Lee structuring that Tony mention Brooks, you want to give a little.

<unk> Dragon.

Sure. So again to clarify that's not always restructuring and pen Dragon, We don't view, a a a new term default risk you know the very low leverage balance sheet with ample liquidity and they're taking all the right actions to to bolster that liquidity.

You know, they're certainly I've been a news and and facing a challenging a U.K. auto environment Brexit admissions regulations.

And other things.

Things impacting but we think they're doing the right thing some recent news from them as shown improvement.

We're just watching very closely and we stay in bed cold contact with them incentive to big tenant. We we thought it would be prudent to mentioned on the call.

Make sure the time.

<unk>.

Thank you are next question <unk> with Greenstreet advisers. Please proceed with your question.

Thank you.

I suppose a few bacon assets during the quarter. So just maybe as it relates to Saint property metrics could you maybe provides color on watching property occupancy and why did during the quarter.

Yeah sure you know we we we saw your no recently on that topic. So, but you know think it's something that we're always open to you know getting feedback from investors and and analysts on how to you know provide better disclosure enhance it you know we do currently provide.

Some same store metrics within our supplemental that's mainly intended to you know really show the growth it's embedded in our leases you know as you know we also provide a separate table that shows some total impact on.

On releasing spreads really new leases each quarter as well. So you know, but we are working on trying to get better disclosure around bacon season, I think credit losses as well you know both of which certainly have an impact on on growth each year Brooks I don't know if you want to talk a little more color about what we're doing.

And and maybe two Spencer's direct question about about Bacon sees a score.

Sure you're going in this quarter, you're you're right. We <unk>, we sold up for small properties. Three of those were were small big enough. That's one was a industrial property with the perception. So that was the one that wasn't a vacant property. You know these were pretty small in the big picture and I think overall they can they can just positions.

Will be a a minority part, but a part of our disposition strategy for sure.

Isn't mentioned you know, we're working on thinking about how to better Ah disclosed that and and think about what what we can provide there.

No I think the primary piece of this is really on the leasing front, where we do provide that just goes in the supplemental.

And if Tony mentioned, you know no one quarter is is a trend, but we have been seeing a pretty positive trend on that front in recent quarters. For example, if we look at kind of a trailing eight quarter measure of ugly thing activity, we recovered about 98% of B.D.R. minimal T.I.'s and leasing commissions at about eight years of term and that's.

A trend that's been improving for the past 10, or 12 quarters that trailing eight measure certainly focus there because that's a major part of it but we hear you on the other pieces as well and we're working on it.

Okay excellent. Thank you for the color.

<unk>.

[laughter].

Thank you are next question comes in a line of Anthony Paolone with J.P. Morgan place to say with your question.

Yeah. Thank you as you did it industrial when the U.S., which we think you've talked about in the past as being a pretty Ah T. area focus are you running in the other competitors Ah you know outside of that we'll use as you try to you know by this stuff given just desire for that property type.

You know it it is competitive I think there's a lot of of different investor types that are targeting at least we tend to focus <unk> that that the target industrial and we tend to buy our properties I would say mainly at this point through say at least back from Bill to suit. In addition to the expansions that are in bed in our portfolio and that's it.

Full you know part of our of our new investments in industrial.

But it's it's a competitive market space and I think a lotta people are targeting industrial given the long term fundamentals you know, we say at least backs we can.

You know compete perhaps better than others, given our history and the low execution risk associated with our.

With with with with the deals that we work on you know and we tend to see more sale leasebacks associated with industrial properties. So you know that's really a big area, where we can be we can get better yields and maybe equally important you know better least terms and structure as well.

Okay and then on the watch was thing you mentioned, 1.8%. So it sounds like that does not include pen Dragon.

And then does that.

That includes the pending we use restructuring.

Sure.

<unk> drag and as I mentioned, we don't view as an imminent default risk.

The tenant <unk> Tony mentioned in her prepared remarks with the restructure that's certainly does reflect that on the watch listen that had been on up watch list for you know maybe almost two years now I'm in is really the bulk of that list and just to be clear flowing through that as the prior A.B.R. that Tony mentioned in 5.4 million so that the larger.

A number there you know that'll organically come down a bit as I.D.B.R. gets adjusted but yeah. That's a that's a prime example of watch list on it.

So that 5.4 million <unk> by three point.

Three and changes that was that the number.

That's right I will come down on an annualized basis to about a million dollars initially.

Okay.

And then just just a question on F.X., the the $7.6 million.

In the quarter I think there was a loss and then it got added back for apropos.

Remind me what that is exactly.

You know as it relates to hedging and stuff like that and how that works.

Sure I think you know the way that we had our foreign currency risk you know first is obviously through the the natural hedges, we have with our euros nominated debt, but in addition to that we have foreign currency hedges in place cash flow hedges for the an effective the rest of that balance and.

What we see a running through the AD back line item that you're mentioning is is really the unrealized gains and losses on marking those derivatives quarterly.

So what does flows through <unk> the settlements of the hedges the cash piece of it when that occurs and what we're doing in the financial is what you're seeing as the AD back is the non cash component of the mark to market getting at it back.

Okay. So that that was that was no on realize the 7.6 million pages, that's correct. Okay.

Okay. So that if if if I were just think through.

Your your property I know, where I say <unk> quarter to this most recent court or if there's a change and effects that that worked against you. We were just see that in the.

Indiana why would just be coming through.

That's the right way to think about it. It's it's the net of a number of line items that have come through the N.Y. with the offset coming through our realize gains and losses on the settlements in the hedges.

Okay and this is that having an appreciable impacts just as you go from two two to three two and perhaps and 40 this year.

It's really not be not significant from one quarter to the next year over year, it's been fairly significant with the movement in the euro from last year. This year you know in terms of what we had baked in a to our guidance range you know, we'd certainly captured that.

I'm in large part, but it it you know we have an effective hedging strategy that really isn't having a material impact on our answer so during the year.

Okay, great. Thank you.

<unk>.

Thank you are next question it kind of some Todd sender with Wells Fargo pleased to see with your question.

Hi, Thanks.

With the A. if if.

I wondered if it.

Had to do anything with acquisitions that you expected.

To closing you just didn't get in early Q3 or is Tony you've just with the restructuring of that one tenant and sleaze, maybe that had to do with it just kind of getting a sense of because just because we're kind of getting late in the year. It seemed like a pretty good ratchet down in guidance, Yeah, I mean, I think to your point, there's a number of moving piece.

Is that go into our guidance on the acquisition timing you know I would say it was more timing than anything falling out specifically so if you really look at you know what we're expecting for the rest of the year. We are expecting you know about half of our volume almost in the fourth quarter. So you know that that shift from the third to the fourth quarter had a bit of in in.

Packed.

And I think you know maybe even more importantly, really was the d. leveraging that we we saw over the course of the year anything further into the third quarter.

You know if you look at kind of where we started the year and assuming we would run levick neutral over the course of the year and then layer on the activity that we saw as a result of being opportunistic in both the equity and the debt markets. You know that that had oh over the course is a year roughly afford a five cent impact on <unk>.

<unk>.

You know, it's something that you know we were happy to see in exchange for the the stronger balance sheet and improved credit profile. In addition to the longer term interest savings that we'll get resulting from the pre payment of our mortgage debt.

Okay. That's very helpful. Thanks, and then just I guess looking at the coupon you achieved on your Europe on at September I think it's the lowest I've ever seen does that allow you to I want I don't want to say chase cap rates, lower and maybe get into more investment great deals because of that.

That's one deal, but if you couple that with your gray cost of capital on the equity side, maybe just there's some deals that you may have passed on in the past that you're looking at now.

I think it's absolutely the case I mean, our costs of capital is the lowest it's ever been [noise].

And you know given our diversified approach in our reputation the industry. We are seeing you know very wide range of deals were seeing all the deals out there for that matter. So I think you'll start seeing that more you know I think we can do deals well into the five seen in the very.

Low five and still be a creative.

You know so what I think you'll see as get more aggressive on pricing, we we won't get more aggressive on writing we want to stick to our standards and if we lose deals based on underwriting I think that's okay. You know if I pointed out earlier, but if you think about the to build the soon to be we talked about American axle and percentage of both of those are.

Are high quality assets. These are build the suits class a product one of them just outside Frankfurt, Germany cap, which can be quite low and <unk> going to be really classy both distribution facility right near their largest manufacturing plant. Both of those deals were in the five I think the average was in the mid to high fives.

So you know to the extent, we can find higher quality real estate in again.

You know maintain underwriting standards I think you'll see as do more those type of deals.

No thanks, Jason and and just finally, just would have a cap rates on the acquisitions you made.

Diverse.

The U.S. looks like the Midwest counted in the Netherlands, maybe just kinda discuss those camp rates. If you can in in any differences you're seeing a across Europe .

A year to date right now I think our cap rate. Maybe this is through Q3 actually is about seven per cent, maybe slightly over 7%.

You know begged in that are against say at least backs and build a suits were able to generate some incremental yield is well to me expansion projects within our portfolio, which tend to be very high yielding relative to the same deal. If it were to your trading the open market I I would imagine that's going to come down some as we look to acquire higher.

Higher quality assets, but I think we'll still see some of the the the more.

You know generous yields given how we source transactions.

And I'm at length of lease I guess, maybe just a fault in any changes to length of leashes with the tenants are willing to <unk> to sign at this point.

You know, we still been able to generate long least terms I think the weighted average least term through Q3 for our 2019 deals was about 19 years again say at least bass and build a suits health is dictate terms. It's one of the things that we value instruction our own transactions.

You know we'd be willing to come down at least term if we're getting higher quality real estate and we think that that there's probably some of that in their pipeline, but I think you'll also see as continued you do see leaseback, where we can dictate terms.

Great. Thank you Yep welcome.

Thank you are next question comes from many Korchman with City group, we associate with your question.

Hey, good morning, everyone or injuries, maybe to continue on a conversation our other buyers thinking about least from the same way, we hear you're saying everybody higher quality real estate, but signing 20 or 25 year leases on and paying five caps.

Is there a big difference in the way you and others are thinking about you know a 25 year lease asset to a solid tenant maybe there's differences in credit under writing for the tenants.

But is it worth paying the five kept versus the seven cap and you're looking at 25 years.

You know I think there's a lot of criteria that goes into how we price transactions certainly you the credit Matterson, we've talked about before that we tend to focus just below investment grade. We think that's the sweet spot in at least investing you know we also like highly critical real estate tends to be a stick your on renewals as well as provide.

You know some downside protection to the extent attendant you know is restructuring and they're certainly going to need the critical real estate. So there's there's always a trade off in pricing mean higher quality real estate, you know with at or below market rents. We certainly are willing to to a accept shorter least terms on those and perhaps even pay the same type.

<unk>, so it's hard really too.

You know to give you a specific answer on that because there's a lot of variables, but we're open to a range of of of least terms I think because we're doing say leasebacks end and build a suit we don't have to necessarily.

Sacrifice or accept shorter least terms to get some deals done it yields that we like so I think you have T.V.D. on that but but it it's probably going to continue to be a a broad range of of least germs. Even know more recently, we've been able to generate no longer terms restructuring.

Got it and then just as we look at your A.F.O.'s stream and more of it's coming from the real estate business as as the other businesses wind down.

You are sort of approaching your your dividend payout with just the real estate if so component.

How should we think about dividend gross and coverage in that light.

Yeah, I think you know that's certainly something we've been mindful of as we've been you know moving away from the investment management fees streams. So we've been conservative in terms of our dividend gross over the last couple of years I think you know we're currently in the the low to mid 80% pay out range and you know even with C.W.I. role.

<unk>, we expect to stay in that range. So I think we'll continue to keep an eye on it and be conservative in that regard, but we feel comfortable around that range.

Thanks everywhere great.

Expanding.

[laughter]. Thank you. The next question as some Chris Lucas with capital once I <unk> pleased to see with your question.

Oh come on guys just a couple of questions on on guidance.

In terms of the acquisition Garden, specifically just remind me.

Includes both acquisitions that you're expected or are you close this year.

And either because at the four commitments to settle this year or the court commitments you enter into this year.

It's the one that forward commitments that settling come on line and start generating rent during the period. So anything source. This year that closes in a future period would be next year's acquisition volume Yeah, Chris I mentioned that the $400 million of of build the Susan expansion projects that are currently on the way.

Out of that 400 about 100 of those we expect to complete and start generating rent in the fourth quarter. So those will count towards you know that guidance range that Tony mentioned, the other 300 and while they're transactions that were you know that we've closed effectively but they haven't completed the.

Construction or commence rent they don't hit that transaction volume until it happens, which will be 2024, a lot of that some of it may still over into 2021.

Okay. Thank you for that and then I guess just maybe.

Kind of looked at the last five years and are split between sort of traditional.

Acquisitions of income producing property, you know sale leaseback type transactions and the forward. The you know the execution afford commitments that <unk>, yeah, what was that and then sort of because or should we expect that to change going for given the environment or is it expected to sort of say similar just trying to understand sort of you know how you guys think about that yeah. We.

We've been doing more of that I think I think we had a skill set in turn really to source a lot of those and certainly the relationships you know when we look at the the construction projects and he and we're not taking developing risk on any of these are build a suit your expansions within our portfolio that are already least under long term you know.

Brooks's team has really focused on mining our portfolio for 1200 properties and I think that there's a lot to do their terms of extending assets, perhaps some redevelopment as well depending on the situations I'm in build a suit. If you look at 2018 I think around.

10, or 12% of our deal volume were those expansions and build suits will be called capital investment projects. I think this year could be you know closer to 20, perhaps even 25% and that's probably based on the pipeline right. Now invisibility. We have for 2020, you know that could go even higher although it's hard to to predict that.

Current events.

Okay. Thanks for that face and then then.

There have been a lot of or several large M.A. transactions than the industrial space, particularly in the U.S. and those have tended to kick out a fair amount of.

Sort of resale opportunities I guess, if you want to look at a third or dispositions that come out of those transactions is their opportunity for you guys. In those words that stuff that you're just not interested or no I think there could be some opportunity. There I mean again I think the bulk of those portfolios, they're going to be shorter term and in many cases, multitenant industrial and that's where the.

Core properties that some of those acquires are looking to own long term anyway to the extent there are single tenant assets that have you know least term that kind of meets our criteria. We're certainly interested in again, we have the relationships where there's with the bankers are the brokers wherever engage in you know in in that process I think that we'll have some good opportunities there.

Okay, and then just to detail questions and I apologize if it somewhere in the disclosure I've had a chance to dig through the supplements, but the mortgage <unk>. So you you prepared a bunch of mortgages were there any penalties or you'll maintenance costs associated with those for the for the quarter.

Yeah I have the number in front of means for the full year, it's roughly about 18 million or about 2% of the total balances that were a prepaid.

And 20 were to those flow into your income statement. This this costs they los on extinguishment isn't or other gains and losses line item.

Okay, Great and then the last question for me just as it relates to the bankruptcy collection from a 2009 bankruptcy.

Did you guys have visibility on that when you said initial guidance or is that something that came along you know for some time later on in the year.

It's something that we've been tracking certainly over time as the cases progressed and I would say it was you know when we went out with God's at the beginning of the year, we gave us a pretty wide range really taking into account the possibility that that could settle this year I'm, certainly not having certain t. on timing or amount though.

Okay, great. Thank you that's only have this morning.

Thank you. The next question comes from she'll on the graph with Evercore, especially with your question.

Yes, good morning I'd.

Okay.

The larger tenant less <unk> less than five year remaining and New York Times, obviously it'll be sold shortly just wondering you hall and marry at how early do you you know <unk> typically you get some visibility on what's gonna happen or do you expect it.

A renewal just some color on those two tenants.

So this is Brooks you know typically worse in conversations, especially with large tenants you know as early as five to seven years in advance and that's certainly the case here you know nothing new to report on these tenants.

But you know rest assured we're we're certainly in conversations with all those tenants very early on you know typically with a a smaller town of maybe it's three to five years in advance you know, we're really taking off those conversations but that's really are approaches to be as productive as we possibly can on that.

You know it's important to know that.

New York Times that you mentioned has a <unk> option December U. haul is the is how the only other sajil perception, but it doesn't 2024.

2024, Okay, and then on the capital investments you've ramp those up and is there a rule of thumb for stabilize yield on cost her how the those yields are comparing to your acquisition yeah.

I mean, I think the rule of thumb is they tend to be higher I think it all depends on the situation and there's really two types of capital projects that we have they'll probably wasn't too, but I'll I'll talk specifically about to <unk>. These are externally source not associated with you know our existing portfolio, we tend to get premiums.

To wear those assets would trade wants to complete I'm, just giving the the type of structuring involved around build a suit transaction you know, maybe that's 50 to 100 basis points premium there, but it does depend you on the individual asset I think we get a bigger premium on the expansions that we do with in our <unk>.

Polio to get harder to put a number on it and it's probably a pretty big range because there's other benefits that we get out of expanding existing portfolios you know such as extending least terms. In addition to putting money to work at an interesting yield you know those could be you know anywhere from you know 50 to 300 basis points to give you a quite a.

Wide range, but again it does depend on the other benefits that we get as part of that expansion.

Okay. Thank you.

Thank you as a reminder, ladies and gentlemen, if he would like to ask the question at this time. Please press star one on your telephone keypad.

Our next question comes from Joshua Dennerlein West Bank of America Merrill Lynch pleased to see what their question.

Hey, good morning, guys Orange I'm, just curious on the pen dragging you mention that some of their properties were being subleased.

What kind of is it other auto dealers that or.

Renting the space from them or or what's the other kind of use for those properties.

Yeah for these Ah specific sites for sublease, that's typically the alternate use <unk> do I will note that there's a subset of the portfolio, which we view, having long term upside potential and conversion to for example, residential somebody's our.

In the path of of residential growth, that's certainly not baked in any of our thinking currently but that's important to know that that's kind of a a a much longer term central trends there.

[laughter], Okay interesting.

And I guess.

They don't ever really want those back there subways thing about what's it like a different.

Like auto dealer or as far as yep used cars or it's like new cars or something like how how come like I knew dealer things. They can make it work for a dragon must have trouble yeah, I think it as a little bit less to do what the specific location and more that pen dragging is kind of retrenching and just looking at their total portfolio and saying you know we want to focus on.

A particular subset of our brand subset of our stores.

So I think it's a little bit left to do with this particular corner was wasn't working and more and Dragon refocusing and so these locations still are are potentially quite good for a different auto dealer, who maybe other different a footprint in a different focus.

Okay. That's good color appreciated thank you.

Okay.

Thank you at this time I'm not showing any for their questions on I'll hand, the call back Tennessee fans.

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The day school, you might as well.

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