Q3 2020 WP Carey Inc Earnings Call

Hello, and welcome to W.P., Carey's third quarter Twentytwenty earnings Conference call.

My name is Brock and I'll be your operator today.

All lines have been placed on mute to prevent any background noise. Please.

Please note that todays event is being recorded.

After todays prepared remarks, we will be taking questions via the phone line.

Instructions on how to do so well be given at the appropriate time.

I would now turn today's program over to Peter Sands Director of institutional Investor Relations Mr. Sam. Please go ahead.

Good morning, everyone. Thank you for joining us today for our 2023rd quarter earnings call.

Oh, you begin we would like to remind everyone that some of the statements made on the school on North restarts facts and may be deemed forward looking statements factors that could cause actual results to differ materially W.P. Carey's expectations are provided in RCC filings and.

An online replay of this conference call will be made available in the Investor Relations section of our website at W.P. Carey Dot com.

<unk> for approximately one year.

And where you can also find copies of our investor presentations WPTE related materials and with that I'll hand, the call I've been taught chief Executive Officer.

Yes.

Thank you Peter and good morning, everyone.

I hope everyone remain safe and well during this period in which we've grown accustomed to working remotely and managing through the COVID-19 pandemic.

I'm pleased to say that we resumed external acquisition activity during the third quarter through a combination of ample liquidity in an advantaged cost of capital, we're very well positioned to execute on our growing pipeline of investment opportunities.

Be reinstated formal guidance, which our CFO, Tony San Jos will review, along with our third quarter results as well as touching on aspects of our portfolio and balance sheet.

Tony and I are joined today by John Park, our President and.

Brooks Gordon our head of asset management, we're here to take questions later in the call.

The third quarter post another stress test forgotten each reach during which our portfolio has continued to show remarkable resilience and consistency with rent collections that remain among the best and then at least peer group as well as the broader reach sector.

Overall, we collected 98% of rents do during the third quarter.

Collections again showed consistent strength across each of the three months across our core property types, including retail for which we collected 100% of third quarter rents and across the U.S. and European portfolios.

Furthermore to date all of our top 10 tenants have remained 100% turned on rent throughout the pandemic.

I'm pleased to say the overall strength of our collections has continued into fourth quarter, but the 99% collection rate for rent due in October.

This is a testament to our underwriting process focused on deep credit underwriting in mission critical assets as well as the expertise of our investments and asset management teams.

The carries portfolio generates rental income that is more reliable and therefore more valuable than that have reached with weaker or more variable collections.

The downside protection. It provides the differentiating factor that we believe the market is currently undervalued, especially in the present environment given the recent surge in case numbers in potential for new locked down measures.

Turning to our recent investment activity, although transaction activity paused. Following the first wave that's cold it significantly slowing our deal volume over the summer we focused on rebuilding our pipeline, which is translating to deal closings.

During the third quarter, we completed investments totaling $112 million comprising the origination of two industrial sale leasebacks in the U.S. and the completion of the warehouse expansion project for one of our grocery tenants in Europe.

Specifically in September we completed a $44 million sale leaseback of two state of the art food manufacturing facilities in the Midwest.

It's kind of the leading manufacturer of a wide variety of pencils and related snatched, including well known food brands.

Facilities are highly critical comprising the tenants entire manufacturing footprint in which the tenant has made significant capital investments into equipment.

Poor growing demand for its products their master leased on a triple net basis for 25 years fixed annual rent escalations.

Also in September we completed a $40 million sale leaseback, the light minutes bashing silly, not least Weber grills, the global leader in barbecue grills and accessories.

The facility comprises Webber's primary north American manufacturing footprint into which it has made significant capital investments. It's strategically located near Webber's Global distribution Center, it's wells being close to the I 90 freeway in Chicago's O'hare International Airport, it's triple net leased for 15 years, it's fixed annual rent escalations.

That same month, we also completed a $28 million capital projects, three 300000 square foot warehouse expansion near Lisbon in Portugal with their existing tenants don't <unk>, which is one of the country's largest food retailers. This is a good example of our ability to do follow on deals with existing tenants separately, we identify.

At the time of the original acquisition in 2018.

The expansion was added to the original lease which has been extended by 10 years to a new 20 year lease term.

Property include the 4000 megawatt solar roof installation, that's been approved freight LEED gold rating.

Our third quarter investments had a weighted average going in cash cap rate of 6.5%, providing a good spread to our cost of capital in a weighted average lease term of 21 years, helping maintain an overall portfolio weighted average lease term of 10.6 years.

These investments brought total investment volume for the first nine months of the year to $516 million since.

Since quarter end, we've completed an additional 51 million dollar investment, bringing us to $567 million up investments had a weighted average cap rate of 6.6% for the year to date period through today.

Moving to the market environment in the U.S. cap rates have continued to compress, particularly for industrial assets or those with tenants and pandemic resistant industries, given strong demand and low interest rates, which are expected to remain low despite expectations of further government stimulus, it's not been uncommon for these sorts of assets to treat it.

Cap rates lower than pre <unk> levels.

In Europe, it's been a similar story you made an even lower interest rate backdrop and government programs that have provided capital alternatives.

Capital markets in both regions have reopened and been accessed by corporations contributing to the downward pressure on cap rates.

Leasebacks, however remain a viable alternative for corporations twin lot existing capital tied up in real estate and allow us to generate incremental yield relative to secondary net lease asset trades we.

We remain competitive from a cost of capital perspective able to do higher quality deals at tighter cap rates on an accretive basis and.

The liquidity and the ability to provide certainty of close continue to give us an advantage, especially as corporations seek to complete deals at yearend, which often translates into our fourth quarter being the most productive year for deal closings.

Turning briefly to our recent capital markets activity and some closing comments on our pipeline.

Equity for to be completed in June along with the U.S. bond deal. We completed earlier this month exemplify just how much progress we've made in recent years in this area.

Both deals received strong support from institutional investors, including traditional retail focused institutions, resulting in beneficial pricing.

Yeah, you forward gives us significant flexibility locking in our ability to match funded deals in our pipeline with equity issued at a predetermined price.

Strong demand for the bonds, we issued in early October enabled us to significantly upsized the deal raising $500 million in senior unsecured notes and issue bonds at our tightest ever spread to the benchmark 10 year Treasury rate.

We also believe that at 2.4% it was the lowest ever coupon rate for a 10 year net lease spot.

Right to take cap rate environment strong demand for our capital has uninsured at cost of capital that supports accretive investment activity.

Deal activity has rebounded since the end of the summer and our pipeline has continued to build returning to pre pandemic levels further along with a variety of industrial opportunities in the U.S., but we're also seeing pockets of opportunity beyond industrial with Europe, historically offering better retail fundamentals.

With ample liquidity, we're confident in our ability to execute on our robust pipeline.

Given where we are in the year, we had good visibility to transaction is likely to close before year end, which is reflected in our guidance assumptions.

And with that I'll hand, the call over to Tony.

Thank you, Jason and good morning, everyone.

This morning, we reported total a AFFO of $1.15 per diluted share for the third quarter with 97% or dollar 12 per share coming from our real estate segment.

We continue to grow lease revenues through net acquisition activity and the Escalations built into our leases while also recognizing improve rent collections of 98% for the third quarter up from 96% for the second quarter.

Well the impact of uncollected rent has been de Minimis relative to our overall portfolio I'll spend a minute breaking down how that is reflected in earnings.

In terms of revenue recognition, we've taken the same approach I outlined last quarter in line with accounting guidance and taking a conservative view on Collectability.

As a result, our third quarter. After AFFO includes only about $1 million of uncollected rent, which we expect to fully collect over the next six months.

Approximately $5.7 million of uncollected rental income net of recoveries was not included in assets held during the third quarter down from 8.5 million in the second quarter, a certain tenants resumed paying rent.

About half or $2.8 million of uncollected rent for the quarter related to one deferral agreement, which we entered into I discussed last quarter as part of a broader lease restructure.

That was a six month deferral payable over five years and the tenant has resumed rent payments in the fourth quarter, including the deferred portion.

The remainder of the rent we did not recognize during the third quarter largely comprised rent due from fitness centers theatres and restaurants, some of which had have resumed paying reduced rent, but will remain on a cash basis for a AFFO purposes for the foreseeable future.

Turning to leasing activity.

We completed seven lease renewals or extensions across a variety of property types. During the third quarter, representing just under 1% a baby are on which we recaptured 95% of the prior rent and added 7.3 years of incremental weighted average lease term.

Given the quarter to quarter variability inherent in this metric internally, we continue to focus on it over the trailing eight quarters over which time frame, we've recaptured 97% of the prior rent and added 7.3 years of incremental lease term, while spending only $1.42 per square foot on tenant improvements and leasing commissions.

Contractual same store rent growth, which is measured based on hbr on a constant currency basis and reflects year over your rent growth built into our leases was 1.6% for the third quarter.

The decline in this metric compared to the second quarter, primarily reflects periodic rent increase rolling out of the calculation for our largest tenant U haul.

Comprehensive same store rent growth, which we added to our disclosure earlier. This year is based on pro rata rental income included an asset so taking into account any leasing activity vacancies restructurings rent deferrals or abatements and therefore fully reflects the impact of the pandemic on earnings year over year.

For the third quarter this metric improved to negative 1.7%.

From to negative 2.6% for the second quarter.

Primarily by tenants resuming scheduled rent payments as well as the recovery is back rent from certain tenants.

Turning briefly to expenses probably.

Property expenses ticked up slightly over the last two quarters driven by the accrual of real estate taxes on properties, where we believe there is a heightened risk of tenants not paying those expenses directly.

Our approach to accruing property expenses aligned with our evaluation of our tenants ability to pay rent and has resulted in an additional accrual $2.4 million during the third quarter and $4 million year to date.

DNA expense totaled $19.4 million for the third quarter and we remain on track for it to be between 76 and $79 million for the full year.

Moving now to our capital markets activity and balance sheet.

We continue to manage our balance sheet from a position of strength, allowing us to opportunistically access both equity and debt capital at pricing that enables us to invest accretively.

Towards the end of the third quarter, we raised $100 million net proceeds from the issuance of approximately 1.5 million shares under the equity forward agreements, we put in place in June.

Because those shares were issued at the very end of the quarter the impact on diluted share count will be reflected starting in the fourth quarter.

In total Weve now settled 2.95 million shares under the equity forward raising $200 million, leaving us the ability to issue an additional 2.5 million shares for approximately $166 million in equity.

During the third quarter, we repaid mortgage debt totaling $192 million, which had a weighted average interest rate of 5.1%.

It's further reduce secured debt as a percentage of gross assets to 8% at quarter end compared to 12% a year ago and unencumbered an additional $30 million a baby are in process.

Our balance sheet metrics remain strong ending the third quarter with debt to gross assets at 40.6% essentially flat to the prior quarter and at the low end of our target range.

Net debt to EBITDA was 6.1 times at the end of the quarter, a slight increase from the second quarter.

Factoring in the remaining shares we can issue under our equity forward agreements would bring net debt to EBITDA below six times.

We ended the third quarter with $1.9 billion of total liquidity, including 1.6 billion of availability on our credit facility cash on hand, and the approximately $166 million of proceeds available under equity forward agreements I noted earlier.

And as Jason mentioned, we further enhanced our positioning early in the fourth quarter with the successful issuance of $500 million of 10 year U.S. bonds at an annual coupon rate of 2.4% well.

Well below the interest rate on the mortgage debt, we repaid during the third quarter.

As well as our overall weighted average interest rate of 3% at quarter end.

This in conjunction with an advantaged cost of capital gives us a clear path to accretively execute on our investment pipeline through the end of the year.

Turning now to our 2020 guidance.

So the visibility we have into the remainder of this year. We've reinstated formal 2020 at the FFO guidance with a range of $4.65 to $4.75 per share, including real estate assets, though of between $4.51 and 14061 cents per share.

As Jason discussed year to date investments through today totaled $567 million and our full year guidance assumes total investment volume of between 750 million and $1 billion based on the current visibility into our pipeline.

But the dispositions based on what's been completed year to date and our expectations for the fourth quarter were assuming total dispositions for 2020 of between 300 and $350 million.

In closing I'm pleased to say that our third quarter results reflect another quarter of consistently strong rent collections something out portfolio has produced since the start of the pandemic demonstrating the reliability of our earnings and positioning us to perform well said the recent spike in case numbers cost further economic disruption.

Given ample liquidity an advantage cost of capital and increased deal activity. We're also confident in our ability to generate growth by executing on the accretive investment opportunities in our pipeline.

And with that I'll turn the call back to the operator for questions.

Thank you at this time, we will take questions. If you would like to ask a question simply press Star then the number one on your telephone keypad.

If you would like to withdraw your question press. The Star then the number two.

Our first question today comes from Greg Mckinley of Scotiabank. Please proceed with your question.

Hey, good morning, everyone.

Just a couple with just a couple of months left in the year, just curious what could drive you to the top or bottom end of the guidance range is there any potential tenant fallout or built into that assumption or is it really just based on yeah acquisition number.

Yeah, I think you know in terms of downside, Greg there's nothing specific that were concerned about at this point, but again timing of transactions uncertainty around the current environment. That's really all that's baked into the downside.

Okay. Thanks, and then regarding the potential for Q transactions.

If those expected acquisitions do not end up closing this quarter is it more likely that those deals are being pushed into early 21 or that they may not be completed at all.

Yes, probably a combination of the two Greg I mean, we have a number of transactions that are pretty far along and I don't think it'll be more of a timing issue but.

But we do feel good about the pipeline right now and you know there are deals that could straddle near the end of the year. You know those would be then included in next year deal volume in really the bottom line is whether it be close on December 31st Your January 1st not really impacts our R 2021 numbers any differently maybe that.

As to the basis of your question is will this does continue to grow.

Growth for next year, and I think generally speaking the answer is probably yes. Okay.

Okay. Thanks, and then just a final question.

On the warehouse rent collection, which remained at 94% this quarter is that.

Driven by any tenants in particular is the risk of losing that permanently or is that just the deferral agreement that the you alluded to before.

Brooks you want take that one.

Sure Yeah. It correct, it's really that one larger opportunistic for which we just got them on last quarter's earnings call and they've resumed paying rent.

Probably so.

That's picked back up.

Thanks, so much.

[laughter].

The next question is from Emmanuel Korchman.

I'm, sorry, I have Chris Lucas of capital one securities.

Please proceed with your question.

Hey, Good morning, guys. Just a couple of quick ones reminders on a Marriott resort type curve marry up or not leasing and I'm, assuming you're still getting around but I'm. Just curious is that correct.

Type of properties that are not pool.

Rob This is Brooks correct.

Correct. We're married has remained current throughout Corona virus period, a these are courtyard Marriott.

And they are open, but certainly operating at a lower occupancy through exactly.

Okay. Thanks, and then just on the a couple of the leases are done during the quarter were down double digits can you give some background as to sort of what those you know.

What those discussions were like.

Sure. There's there's two I think you're you're really referring to one is up and in the industrial side, a that was a long term blended extends transaction on a two property lease with properties at Kentucky and Tennessee.

You know your typical blend and extend type transaction there created an enormous amount of long term value, but certainly had a.

What rent reduction.

In immediate term.

And the other was a similar type deal on a automotive training school in Sacramento again, both we think create substantial intrinsic value, but did require a kind of an upfront reduction in exchange for long term lease extension.

Okay and then the last question for me Tony just in terms of your capacity to issue Euro bonds. At this point are you are you fully matched at this point or is there still an opportunity to do another long term you know institutional.

Institutional deal.

Yeah, I mean, I think we continue to kind of look at our leverage levels. Both you know as it relates to the overall level, but as well as kind of as you mentioned on a match funding basis and I think you know with the acquisition pipeline. There is some activity that we see building in Europe. So you know without there I think Europe always remains a possibility for us in terms of where we could acts.

Yes, the capital markets, but again were sort of mindful of the overall leverage levels at this point.

Okay. Thank you so much that's all I have this morning.

Great. Thanks, Chris.

The next question is from Emmanuel Korchman of Citi. Please proceed with your question.

Hi, Good morning, everyone I'm, Jason just as we look at your pipeline maybe beyond just the next couple of months since the 21, just how big is that sort of total pipeline and realize that you're here to my husband to give guidance for next year, but ER volumes can be somewhat or sort of what we expected going into the 20, and then also mix between the U.S.

In the Europe, and you're up there.

Yeah, I mean, we had good momentum right now we mentioned the Psi.

$567 million, we've done year to date and there are several imminent closings that would bring us near the bottom end of the reinstated guidance range that Tony mentioned earlier, you know beyond that we feel really good about our pipeline as we head into year I think there's visibility into a number of deals that could get us into the top half of our guidance range for this.

Sure.

You know 20, Twond you want it's difficult to really project out much further than the next couple of months, but you know I think that we do have good momentum and I think there's a couple of things to keep in mind at least for 2020.

One to the range that we've reinstated 750 to 1 billion. That's you know.

Expect to fall within that range of course, and that's despite the fact that our investment activity was on pause for close to six months of the year because the pandemic I think also in 2021, we do have visibility into is about a $170 million of build to suits and expansions that are currently under construction and expected to deliver and begin paying.

And during 2021, so and I think we'll add to that that amount, maybe with a build to suit or to that that you could reasonably out to be a complete next year as well.

And then you think about our diversified model that gives us the wider opportunity set and as Tony mentioned in her script.

You know, we have been able to pre fund deals with our equity forward and the the recent bond offering that we did with you know really attractive rates gives us a pretty good cost of capital to to compete so if the deal opportunities are there. We will we feel really good about 2021 in our position, but it's difficult to predict Tom as you can.

Imagine you are much further along than a couple of months I'm really anything that's 2021 outside of those expansions really aren't in our pipeline at this point in time.

Great. Thanks, and then just just forget disclosure of collections between Threeq you an October it looks like the Hbr and the fitness restaurant in that segment actually came down from 2% to one person maybe that's rounding.

Is there a tenant that might have come out of that is there something else. There that would change your exposure to that segment, even though collections have gotten better.

Oh, Yeah Brooks you want to talk about that.

Sure certainly be a that the area of weakness in our AR collections is really not one category that category did come down a little bit primarily that's that's two things. One is we had several Jim <unk> rejected in the 24 hour fitness bankruptcy.

And then also the restructure of several theater leases. So the combination of those two things but.

That combined really doesn't have a material impact on the overall collection store either.

Thanks, everyone.

Great. Thanks Manny.

The next question is from Anthony Paolone of JP Morgan. Please proceed with your question.

Hi, Thanks, good morning.

When he talked about high.

You all talked about for a bit now in the pipeline being skewed to industrial but you'd also mentioned some other areas and your diversified model what else is coming up that that seems interesting for you all in the pipeline.

Yeah, I mean, we are still you a bias towards industrial and I would look at that more as our core focus no anything that we do in office I would probably more characterized as opportunistic and we'd require longer lease terms and stronger credits and in general you underwrite those more conservatively, especially for lease and snack.

Areas, so less likely office, but I think that it's something that we would still consider and the rights and the right situation in retail is more likely to be in Europe. We think there is better supply fundamentals and pricing dynamics, there and you know of course less competition as well given that you don't have any retail dedicated not just reach.

In Europe. So you can typically generate no wider spreads there in addition to kids pushing that structure in these terms et cetera. So they still continue to see us do more industrial that's been the bulk of what we've done.

You know this year to date, the bulk of what's in our pipelines, but we are diversified enough good benefit where it gives us more pathways to two groups.

Okay, and then I'm looking at your major tenant roster you're married on U haul both with less than four years left.

Those situations look like today or how would you think about just like a mark to market on on those two.

Russ you want to talk about that.

Sure. So I'll take that those those two U haul you know as we've discussed before they have a purchase option and in April 2024.

And so we do expect them to exercise that that purchase option.

For Mary out we have a.

Two tranches of that lease you know we have regular dialogue with Marriott regarding these lease expirations and it's really too early to tell you I think what.

We do like is that we have some term there to really get past the coated period before where you know really entering into lease and outcomes. So both of those are certainly larger lease expiration, but both have you know.

Pretty solid at least on dotcom built in.

Okay.

And then just last question I guess for turn interest as we're clarifying items Youd mentioned, some property tax accruals and I don't know if I caught it all correctly, but just trying to understand like if I think about three Q and an impact from from Cove. It it sounds like you.

You were impacted by the additional accrual and also maybe some term reserves or non collections like <unk> what was the combined I guess.

Yeah, I think that's that's a good point and it really is the aggregation of the two that we're focused on and I think I mentioned it was about five and a half million of lost you know or uncollected rent that flowed or did not flow through <unk> AFFO and add to that a you know I've considered about a 2 million dollar increase in our expenses.

For the quarter. So you know all in a way that an ally on our leases is about a $7 million.

Okay, and you should think about those as bad as being.

We'll continue to do that until about situation with those whose parents change yeah.

Yeah, I think it's it is similar to how we look at the tenants from the revenue standpoint, you know what if we see them pay the rent, obviously <unk> sorry pay the taxes, we get to reverse that but we are taking kind of a conservative view in accruing it until we kind of see some improvement there.

Okay, great. Thank you.

The next question is from Spencer I'll away of Green Street. Please proceed with your question.

Yeah, I'm, just going back to external growth any I've already provided guidance and I know a lot of color here, but just perhaps higher level. How do you guys think about trying to balance your preferred property type exposure and external growth because if we look at where you focus your sister your acquisition efforts you guys are targeting industrial and you say.

Our bias here, but you also mentioned not that's not least prototype has certainly seen cap rate compression and there's a lot of capital chasing these deals. So just curious how you balance that give any outsize emphasis on external growth and in this sector in particular.

Yes, it's a good question and that's kind of the the the challenge that I think all of US are faced with it in the current environment I mean, I think across the board not just industrial cap rates have come in and there's more competition I think there's a lot of capital to.

To be deployed given the pause in deal activity for most investors you know in the first.

Half of the year I mean, generally speaking I think most of what we're buying or.

Through sale lease backs, where we can dictate structure and terms and especially generate some incremental pricing that works for us.

We also the cost of capital that allows us to to invest it at a relatively wide range can be talked previously about this you know what we'll do deals you know in the low fives and maybe even in in certain certain circumstances deals that are sub fives, depending on the the rent increases embedded leases or you know.

These would be for higher quality assets like the first eneas warehouse that we announced in the second quarter or the Stanley Black <unk> Decker.

Distribution center I'm outside of Charlotte given that we've talked previously about I'm sorry pipeline includes some of those deals and again our cost of capital can support.

You know those types of assets, where we can get some longer terms I mean, the deals that are trading at the tightest cap rates in cap rates is just one component of how we look at deals I'm certainly the unlevered Iris more important but you know the skews cap rates in industrial are going to be shorter term leases.

The leases and those that have real mark to market opportunities. That's what you're hearing that that's what's happening when you hear about four cafs and stuff. Some properties. There is a lot of growth built in so we can still buy these longer term leases that may not be as interesting too. It's your industrial buyers.

We're focused on these big mark to market opportunities.

You know of course, we're also mentioned sale leasebacks, we're also going to do our traditional sale leasebacks, where no timing of closing complexity of the deal will also add to our pricing power and you know we hope to continue to do deals in the sixes, maybe the sevens as well you know there was a weighted average cap rate for the year.

And then kind of mid Sixs that probably comes down a little bit, but I still think that we can you know one doubts or something in that neighborhood for the year.

Okay. Thank you and then maybe just shifting gears just hang your disposition activity in the quarter I'm just curious if the divest divestments that you made and we're more decision to exit certain regions or were they more tenant or industry specific.

I just want to take that.

Yeah. So these are really each one is very much its own story, but the largest one of the quarter was an opportunistic exit of an industrial property in Germany.

And so there is really really not a geographic or industries theme in our disposition plans here.

Okay. Thank you.

Thanks Spencer.

The next question is from John Massocca of Ladenburg Thalmann. Please proceed with your question.

Good morning.

They weren't John.

Maybe starting off on the balance sheet, you know, what maybe the kind of run way opportunity for mortgage debt kind of prepayment just beyond the scheduled repayments repayments you have here.

Oh, yes, I, obviously, that's been a big part of our balance sheet management over the last couple of years, bringing a secured debt down to the 8% level, where we are now you know as you mentioned kind of limited opportunity in terms of you know I think we have roughly 170 million due between now and the end of next year, but it is something that we.

Look at as were kind of seeing positive pricing you know in the markets. There and so you know I would say, it's not off the table, but it is something that we're looking at and evaluating you know with our other uses of capital, which primarily now are funding our investment activity that is our priority.

And structurally can you start maybe paying off some of the 2022 now it's I don't think that would change kind of.

Quarter over quarter, you're able to kind of dig into some of the 2021 maturities.

Maturities, but.

Yeah, I mean, you're right I think 2022, we do look at it kind of from a price point standpoint, and see you know economically what the cost might be to that and you know we'll weigh that with the other opportunities. We have for deploying capital you know obviously, we've been the beneficiary of significant interest savings as a result of paying that stuff down early so we'll continue to look at.

I don't think there's you know as significant an opportunity as we've seen in the past couple of years, but there is some still out there that we potentially could bring forward.

[laughter] and then maybe bigger picture on the investment front and they've talked about cap rate compression in the industrial space, a little bit already but is there other kind of levers you can pull to maybe.

Keep those yields higher or whether it be expanding kind of the geographic reach being more focused on manufacturing just things other than sale leasebacks.

Yeah, I mean that John a diversified approach does get us those opportunities, where we can allocate capital were seeing the best opportunities at the best yields on relative to the risk you know I think one area, that's a bit unique to us that weve been you know taking advantage of substantially over the last bunch of years is is really what.

We call internal investments these are going to be expansions of our existing properties follow on sale leasebacks are build to suits you know with our existing tenant base I'm here I think we've done maybe $240 million of of of that this year I mentioned earlier, the 170 million that's in our pipeline those tend to be at.

Higher cap rates, because they're a bit of a captive, especially the expansions there a bit of a task is investment for us where it's either us or the tenant that is going to put the money to the expansion of one of our buildings and because of that we can drive pricing structure. So I think you'll continue to see more of that but generally speaking I think that the diversified model will allow us to.

Explore lots of opportunities and we did experience across a number of different asset classes and geographies of course, so it does give us a path to continue to grow and add continue to generate job you know.

Tracks fields spreads.

Okay, and then digging into the comprehensive same store growth a little bit to the warehouse the negative increase there how much of that was tied to it if any to the the deferral agreement that was talked about earlier on the call and was that you had talked about last quarter and if that's excluded maybe what was that same store pro rata rental growth.

For just warehouse.

I don't know if I have that metric specifically in front me, but I think you are right in that that is the bulk of the the total in terms of what we see as the downside again, given kind of the collections and deferrals, we're not that impactful outside of that one deferral agreement.

But those would flow through same store I think you answered that earlier, but yes that is correct.

I wasn't sure.

That was really the the bulk of it was that one transaction from a comprehensive same store perspective.

[laughter] that's it for me. Thank you all very much.

Thanks, John.

The next question is from Sheila Mcgrath of Evercore. Please proceed with your question.

I guess good morning on T. said, there's been a lot of discussion about bringing manufacturing back to the U.S., particularly for medicines and P.P. any I'm just wondering if you're seeing any new build to suit manufacturing opportunities and given cap rate and warehouses are so low would you.

You know entertained skewing, a little bit more capital towards manufacturing.

Yeah, Ben Fashing has always been a core part of our investment thesis that we we tend to get longer leases. They tend to be highly critical assets. You know that the reduction of moving from a manufacturing plant shutting shutting down lines tend to be very expense.

And again disruptive to supply chain since it's a great investment for us we fared very well there.

I don't think there's anything specific that we're working on right now that has to do with shoring certainly if there are those opportunities we would you.

Very much welcome them to the build to suits that were doing right now and is it the sale lease backs provided capital. Some of these companies probably supports some of that but but nothing specific I think generally the reashure here on shoring trends.

Yeah, that's going to be a positive for our for our industrial portfolio, which makes up almost half of our over 80 Art's point in time. So if it happens I think that's a positive and we could see some tailwinds from that.

Okay, Great and then on the acquisition environment a lot of companies have the choice to go access though.

Interest rate debt capital just curious you know whats driving the on increasing acquisition pipeline are improving M&A prospects a positive for W.P. Carey in this regard.

Yeah, they they you're right, we do compete with cat or.

With with corporations alternative sources of capital that could be debt could be equity for that matter and there is correlation with M&A. So I think a lot of the deals we've been seeing theres been some M&A either you know some previously to our deal or concurrent to our deal in which case just another way to capitalize the company I mean, our argument is that.

At that you know the debt you, maybe 357 year terms on bank debt.

And you know in this low interest rate environment companies are better off the locking in these long term rental rates at historically low pricing and assets a pretty interesting option and I think that's resonating a lot of companies.

Okay, Great and last question on the fitness in restaurants component are such a small part of your portfolio just wondering how you're thinking about that once you stabilize those situation do you think you'll exit those assets or are you considering I you know just disposing them in the near term.

Well take that yeah. This this is Brooks I mean, yeah. It's it's certainly not a core part of our investment thesis or a portfolio. So I think overtime, we will be working that down.

Really not an optimal time to exit those at this moment.

But when the time is right, we will kind of look to trim that further.

Okay. Thank you.

Great. Thank you.

As a reminder, if he would like to ask a question simply press Star then the number one on your telephone keypad.

Our next question is from frankly of BMO. Please proceed with your question.

And morning, everyone with their lessons just around the corner just want to get a sense of how active you are in the 10 31 market and what are your thoughts on the potential impact to the industry.

This eliminates.

Yeah, we're not overly active in that market I think this you know we will do 10 31 is just to preserve some flexibility around our games, but generally speaking you know, we're pretty comfortable with how we manage taxable gains throughout the year and it it in a generally doesn't impact our our distribution.

And so there's other ways to manage that I think from an investment standpoint, you know, we typically don't play in that space I think it probably impacts.

Amount of trades that happen in the retail.

Markets, especially the smaller assets, where people can trade in and out of a things relatively liquidity. So you know not all that impactful to our business model correct.

Okay, and then can can you provide an update on your watch list has occurring lucky currently looking and how does it compare historically.

Brooks you want take that one.

Sure. So the watch list currently is about 4% of total KBR. So that's pretty consistent with during the whole cobot period, it's roughly double where it was kind of pre coated.

You will note that 75% of that is current on rent and you know absent some concentration forgetting that jim's theaters.

Space, there's not a whole lot of industry concentration, it's really kind of anecdotal but.

But certainly a little bit higher than it was pre coated, but but manageable and something we watch very closely.

Okay, great. Thank you.

Great. Thanks, Frank.

At this time I'm not showing any further questions. Thank.

Thank you for your interest in W.P. Carey if you have additional questions. Please call Investor relations at two one to four nine to one 110.

That concludes todays call you may now disconnect.

[music].

[music].

[noise] Oh [noise].

[music].

Oh.

[music].

Oh.

[music].

[music].

[noise] [noise].

[music].