Q4 2020 WP Carey Inc Earnings Call
Hello, and welcome to W. P Carey's fourth quarter and full year 2020.
Earnings call.
My name is Diego and that will be your operator today.
All lines have been placed on mute to prevent any background noise.
Please note that today's event is being recorded.
After today's prepared remarks, we'll be taking questions via the phone line and <unk>.
Structures and how to do so will be given at the appropriate time.
I will now turn today's program over to Peter Sands head of Investor Relations.
Mr. Sands. Please go ahead.
Good morning, everyone. Thank you for joining us this morning core all 2024th quarter earnings call before.
Before we begin I would like to remind everyone that some.
Other statements made on this call are not historic facts and may be deemed forward looking statements factors that could cause actual results to differ materially from W. P. Carey's expectations are provided in our FCC Fox.
Online replay of this conference call will be made available in the Investor Relations section of our website W. 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 other related materials.
And with that I'll hand, the call over to our Chief Executive Officer, Jason Fox.
Thank you Peter and good morning, everyone 2020th year, Unlike any other and W. P. Carey has almost 50 year history.
Throughout the economic upheaval produced by the worst global pandemic and over a century, our portfolio has proven itself to be exceptionally resilient.
After stalling midyear market activity continues to accelerate and as we look ahead to 2021, we're extremely focused on increasing our investment volume.
Supported by substantial liquidity and proven access to capital and a robust near term pipeline.
On today's call I'll briefly recap 2020, including our recent investment activity, what we're currently seeing and the transaction market.
And how we're building on the deal momentum we saw in the fourth quarter.
After that I'll hand, it over to Toni Sanzone, our CFO, who will briefly review our results key aspects of our portfolio and balance sheet.
Well as our 2021 guidance.
Toni and I are joined this morning by our President John Park and.
And our head of asset management Brooks Gordon who are available to take questions later and the call.
Given the enormous impact the pandemic has had and our daily lives I'd like to start by acknowledging our employees, let's say how proud I am of the way our entire team has adopted it continues to perform to the highest standards.
I'd also like to mention and recent ESG accomplishments that we're very proud of.
And January.
V P. Carey had the honor of being one of just a few reach attitude and 2021, Bloomberg gender equality index, which recognizes companies showing leadership and advancing women in the workplace and it.
Commitment to transparency and gender reporting.
And recapping 2000, and 'twenty I'll start with our balance sheet positioning and capital markets activities, which support our ability to increase our investment volume and 2021.
One of the first significant steps we took in 2020, what's you renew our credit facility.
Wrong demand and the bank market for our credit allowed us to increase its size and improve our pricing duration and other terms and maintain.
Maintaining ample liquidity ensures we have the flexibility to raise capital when market conditions are favorable rather than out of necessity.
So when equity markets moved sharply lower from lease February through late March and volatility reach extreme levels, we remain extremely well positioned with a $1 8 billion revolving credit facility that was almost entirely undrawn very limited near term mortgage maturities and no bonds maturing until 2023.
Once the equity market stabilized regaining much of their initial losses, we took the opportunity to further enhance our balance sheet with a forward equity offering and June locking.
Blocking and our ability to match fund acquisitions, Accretively with well priced equity.
And in October we successfully completed a senior unsecured notes offerings strong demand allowed us to significantly upsize the deal and issue U S bonds at our tightest ever spread and the benchmark 10 year Treasury rate, which at the time was also the lowest coupon rate ever for a 10 year net lease spot.
Our balance sheet strength, coupled with superior portfolio performance since the start of the pandemic, we've reported our rent collections on a monthly basis, which we're consistently and the high 90% range for the second half of 2020.
Ranking among the best and the net lease sector as well as reach generally.
This is a direct result of our approached and net lease investment characterized by deep credit underwriting focused on mission critical properties leased to large tenants operating in recession resilient industries.
It also reflects the protections built into our leases and the effectiveness of our asset management team.
During the initial stages of the pandemic transaction market slowed significantly in both the U S and Europe.
We also paused external acquisitions as we focused on preserving financial flexibility.
Mark of activity soon rebounded however, and by the third quarter, our pipeline returned to pre pandemic levels and we ended the year with renewed momentum closing just over half of our 2020 external acquisitions during the fourth quarter.
Turning now to our fourth quarter investment activity in more detail.
We completed investments totaling $310 million during the quarter with a weighted average cap rate of six 4% and a weighted average lease term of 21 years.
This activity brought our total investment volume for 2000 $20 million to $826 million and a weighted average cap rate of six 5% and a weighted average lease term of 20 years, helping maintain and overall portfolio weighted average lease term of 10 six years.
The majority of our 2020 acquisitions were sale leasebacks, which generally allow us to negotiate better contractual lease terms compared to secondary market deals.
Give context to the six 5% average cap rate on our 2020 investments.
It's important to also consider the attractive embedded growth, we achieved and the large majority of our deals.
About three quarters of our 2020 deal volume had fixed rent increases with a weighted average increase of 2.4% annually with the remaining 25% having rent increases tied to inflation.
I'll touch upon two of our fourth quarter transactions and more detail both of which were in industries that have performed well during the pandemic.
And early November we announced the roughly $100 million sale leaseback of a 27 property supermarket portfolio located in northern Spain, and the value Erik pilots with the Roski, which is one of the largest supermarket chains in Spain, and an existing tenant at WP Carey.
Our portfolio is primarily located in dense residential neighborhoods with limited local competition strict planning laws and licensing requirements creates significant barriers for new entrants, thereby increasing the inherent value of these proven sites.
The portfolio is triple net lease under $3 20 year master leases with rent increases tied to Spanish CPI.
And we look to accelerate our external growth this transaction exemplifies our ability to make substantial investments into areas like central retail.
Actually in Europe, where there's less competition.
From an ESG perspective, I'm pleased to say this transaction was also an opportunity to expand our investment and a tenant committed to sustainability through a variety of initiatives, including minimizing environmental impact and its logistics and transportation operations.
And in combination with the existing warehouse and retail properties and our portfolio of their net lease two of Roski. It now comprises one 6% of total edr, placing it among our top 10 tenant list as a result advance auto parts, which is one of our largest investment grade tenants now sits just outside the top 10.
The other transaction I'll highlight is a further example of the follow on investment with an existing tenant and and off market transactions.
In December we completed a $23 million investment and a distribution facility in Utah net lease to or Gil the world's largest independent hardware distributor.
And modern facility serves as a key distribution centers strategically located along Interstate 15.
We also committed to and additional investment of approximately $20 million for a 430000 square foot expansion, which is scheduled for completion in 2022.
The facility is triple net leased with fixed increases for a 20 year term that resets upon completion of the expansion.
Warehouse and industrial property is comprised about two thirds of our fourth quarter investment volume and three quarters of our total investment volume for 2000, and 'twenty, resulting in those categories edging higher to represent a combined 47% of total ABR at year end.
During the fourth quarter, we also capitalize on a very unique and attractive opportunity to increase our investment and the privately held equity lineage logistics, the world's largest temperature controlled industrial REIT.
And we've been investing and the cold storage industry for over 20 years of business, we long ago recognized as having the potential to transform the way perishable food and distributed.
In connection with several sale leasebacks with lineage, we made our first investment in equity and 2011 within and CPA 17, which had an original cost basis totaling $28 million.
And it is currently marked at $195 million based on lineage is most recent equity raise.
Well, we remain long term holders of net lease cold storage assets lineages desire to buy back certain properties allowed us to opportunistically enter into what was essentially and asset swap with them during the fourth quarter and <unk>.
Changing to cold storage facilities for an additional approximately $95 million equity stake and the company.
This brought the total value of our equity investment and lineage, including the Mark and our original investment to approximately $300 million large majority of which was established at a significantly lower basis.
In addition lineage recently paid its first dividend, which Tony will discuss in the context of our 2021 guidance.
Given linear just rapid growth and the trading multiples of its publicly traded REIT peers, we expect our investment to further increase and value, thereby creating additional value for WP Carey shareholders, which can be harvested lineage go public over the next few years.
Turning to the market environment and pipeline.
After slowing dramatically mid year transaction volume and the U S accelerated during the second half of 2000 and 'twenty as investors came off the sidelines on the back of the vaccine developments and a favorable interest rate backdrop.
Cap rate compression continued, particularly for industrial and essential retail properties, driven by a flight to quality and historically low interest rates and <unk>.
Europe initial expectations and pent up demand for sale lease backs and the second half of the year did not materialize and part due to the alternatives that government programs provided.
2021, and started with a different telling and however, and we're seeing increased interest and sale lease backs by companies, which is also the case and the U S.
And while there's also no shortage of capital chasing deals and Europe, especially for food retail and industrial we remain competitive there which is reflected in both our recent deal closings and growing pipeline.
Looking ahead, we expect market activity in both regions to accelerate in 2021.
And by lower interest rates and increased economic activity and the back of the government stimulus as well as hopes that the vaccine rollout will boost and economic recovery.
Cap rates are likely to remain low and both regions, although possibly tempered by the prospect of inflation and ultimately higher interest rates and the U S. All the potential for repeal of 10 and 31 tax free exchanges has garnered a great deal of interest and could affect overall market activity. It's not a critical part of our business and we don't expect it to impact our deal flow.
As I mentioned the transaction momentum we saw in the fourth quarter has extended into 2021 year to date, we've completed investments totaling $203 million comprising three acquisitions, two completed capital investment projects.
We have an additional $102 million of capital projects scheduled for completion this year and.
And we also have a very active and near term pipeline with over $300 million of investments that are at and advanced stage, including deals where we had the purchase agreement in place.
Given that we're still in February we're confident and our ability to meaningfully increase our investment volume relative to recent years and with that I'll hand, the call over to Toni.
Thank you, Jason and good morning, everyone.
For the fourth quarter, we generated a S. F O have a $1 20 per diluted share driven mainly by the continued strength and our weighted collections and lower property expenses as compared to the third quarter.
For the full year 2020, a F F O with $4.74 per diluted share.
The pandemic related impact on a S. S. L was limited to about 20 cents per share for the year, driven primarily by uncollected or deferred rent and increased property expenses as well as lower income from other noncore assets and the portfolio.
And it's the start of the pandemic our rent collections have consistently been among the best and the REIT sector with 99% collections for rent due and the fourth quarter and 98% for January.
Over the last nine months of 'twenty and 'twenty since the pandemic took hold we've collected approximately 98% of contractual rents due.
Substantially all uncollected and deferred rents have been excluded from a S. F. L and are largely comprised of two components.
First as part of a broader lease restructure which we detailed on prior calls we deferred six months of rent for a tenant and exchange for extended lease term and improved rent escalations and the tenant has now resumed schedule rent payments, including the deferred portion.
Second and as expected the bulk of our remaining uncollected rents and from tenants and the restaurants fitness and theaters category, which represented just one 3% of the portfolios ABR at year end.
Comprehensive same store rent growth, which is based on pro rata rental income included and a S. F O rebounded from negative one 7% for the third quarter to positive 0.1% for the fourth quarter.
Certain tenants, including the 10 and I just mentioned resumed schedule rent payments during the fourth quarter, which along with back rent and recoveries led to the improvement and this metric.
And over time as the impact of Covid are resolved, we would expect comprehensive same store rent growth to become significantly more positive.
For the fourth quarter contractual same store rent growth, which reflects the average rent increase written into our leases with 1.5% year over year in line with the third quarter.
At the end of the year, 62% of ABR came from leases tied to inflation and 33% came from leases with fixed rent increases.
And as such if we do see inflation move higher going forward, we will be well positioned for incremental same store rent growth.
Turning to our asset management activities during.
During the fourth quarter, we completed four renewals or extensions covering just 0.6% of ABR on which we recaptured 64% of the prior rent and added 4.8 years of incremental weighted average lease term.
Included in this activity was the short term lease extension on and office property, resulting in a rent roll down and representing less than 0.2% of ABR.
And then the other category, we extended the lease on a technical training facility recapturing, 100% of the rent with eight years of incremental lease term.
Looking at renewals and extensions on a trailing eight quarter basis, which covers 11, 7% of ABR, we've recaptured over 95% of the prior rent and added 7.2 years of incremental lease term, while spending just $1.41 per square foot on tenant improvements and leasing commissions.
From a disposition perspective, the fourth quarter was relatively active as we exited 14 properties for total proceeds of $202 million at a weighted average cap rate of about 6% for occupied properties.
This brought total dispositions for the full year to 381 million comprising net lease dispositions of 266 million and the sale of and operating hotel in Miami for 115 million completed at the start of 'twenty and 'twenty.
Included in our fourth quarter activity was the opportunistic sale of two cold storage facilities to lineage logistics that Jason discussed.
And exchange, we received and additional equity interest and lineage with the value of approximately $95 million.
And I would disposition proceeds include the lineage assets the additional equity investment and lineage was excluded from our investment volume for the year.
As a result of our investment and asset management activities. We ended the year with 1243 properties covering approximately 144 million square feet net lease to 350 tenants and with an occupancy rate that remained high at 98, 5%.
Our portfolio continues to be very well diversified by property type tenant industry and geographic location with 61% of ABR coming from properties across the U S and 37% from properties and Europe, predominantly and northern and Western Europe, and our top 10 concentration remained among the lowest in the net lease.
Peer group and 22%.
Moving now to our capital markets activity and balance sheet.
During 'twenty and 'twenty, we continued to successfully access the capital markets raising over $850 million and well priced long term and permanent capital.
Early in the fourth quarter, we issued 500 million of 10 year U S bonds at a 2.4% coupon.
And during the second and third quarters, we issued $200 million of equity under the equity forward agreements, we put in place and Jim.
We have the ability to issue an additional $2 5 million shares for approximately $163 million of proceeds under our equity forward agreements.
And currently expect to deploy those remaining proceeds in the near term to fund our investment activity.
We've continued to benefit from the ability to replace higher cost mortgage debt with lower cost unsecured debt during the fourth quarter, we repaid $90 million of mortgages at a weighted average interest rate of five 4%, bringing total mortgage repayments for 'twenty and 'twenty to 294 million at a weighted average interest rate of five.
And 1%.
And then income, bringing additional $50 million of ABR.
At the end of 'twenty and 'twenty, our weighted average interest rate was two 9% down from three 2% at the end of 2019, driving a 10% or $23 million reduction in interest expense year over year.
Our secured debt as a percentage of gross assets was 7% at year end compared to 10% at the end of 2019.
We continue to look for new opportunities to replace higher cost debt, including both mortgages and bonds with lower cost unsecured debt, which has a number of benefits, including mitigating refinancing risk extending our weighted average maturity and taking advantage of historically low rates that would generate meaningful future interest savings.
Our key leverage metrics, we ended 2020 with debt to gross assets of 42%.
Which remains well within our target range of mid to low forties and.
Net debt to EBITDA was 6.2 times.
And factoring in the remaining shares we expect to issue under our equity forward agreements net debt to EBITDA would be close to the top end of our target range at six times.
We ended the fourth quarter with just $82 million drawn on our $1 8 billion revolving credit facility, which in combination with cash on hand, and remaining proceeds available under equity forward agreements provides $2 $1 billion of total liquidity.
As a result, we've entered 'twenty 'twenty, one and very well positioned with ample liquidity to execute on our investment pipeline and significant flexibility on when we access capital markets.
Turning now to 'twenty 'twenty, one guidance, we announced this morning.
For the full year, we expect to generate total E. F F O of between $4.79 and $4 93 per share, including real estate <unk> of between $4.66 and $4.80 per share.
Our guidance assumes investment volume of between one and $1.5 billion, including capital investment projects, we expect to complete during the year.
Regarding the timing of investments in 'twenty and 'twenty one.
Jason mentioned, we've already completed $203 million of investment so far this year, including capital investment projects.
We currently have an additional 102 million of capital projects scheduled to complete in 'twenty and 'twenty, one and we expect to add more as the year progresses.
The expected completion dates for current projects are provided in our supplemental.
Our guidance also assumes additional investment is not currently in our pipeline and more weighted towards the end of the year.
Disposition activity for the year is expected to fall between 250 and $350 million.
We expect the portfolio to remain resilient and while we continue to navigate the disruption caused by the pandemic.
Our current guidance assumes rent disruption continues to track and about the same level as we've been experiencing with the possibility of some variation in either direction, depending on the severity and duration of Lockdowns.
Our 'twenty 'twenty, one and <unk> guidance includes $9 $5 million of cash dividends generated from other real estate investments.
This amount includes the dividend we received in January on our equity investment and lineage logistics, which we expect to be the only distribution we receive from lineage this year.
It also includes dividends, we expect to receive and our preferred stock and watermark lodging trusts the surviving entity from our previously managed lodging funds.
Our investment management fees and earnings are expected to continue to represent approximately 3% of our total assets, though in 'twenty and 'twenty one.
On the expense side, we expect total G&A of between 79 and $83 million and increase primarily reflecting the elimination of rare and reimbursements previously received through the management interests and transition services agreements with watermark lodging Trust.
As I previously mentioned, we continue to look for opportunities to further strengthen our balance sheet, which includes accessing the capital markets Opportunistically and identifying debt prepayments, where it makes sense.
Our current guidance range does not assume any incremental debt prepayment activity outside of repaying maturing mortgages.
In closing, while we're pleased with the consistently high rent collections, we've generated since the start of the pandemic our focus remains on external growth.
With market activity accelerating both in the U S and Europe, the strength of our near term pipeline and combination with the substantial liquidity proven access to capital and a supportive cost of capital gives us confidence and our ability to deliver significantly higher investment volume in 'twenty and 'twenty one.
And with that I'll hand, 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 from this.
And the Starkey then the number one on your telephone keypad.
If you would like to withdraw your question press. The Star then the number two.
Thank you and our first question comes from Frank Lee with BMO. Please state your question.
Hi, Mark morning, everyone. It looks like I can see that the bid and the quarter can you talk about what drove this and your expectation for occupancy and 'twenty one.
Brian you might take that one Brooks.
Yeah.
Occupancy ticked down slightly it's really a couple of retail locations and a warehouse coming off lease.
In terms of expectations and.
And the current vacancy and we were.
That's the.
Roughly split between dispositions and releasing.
And we would expect that vacancy rates remain very low around that and kind of 1% to 2% range. So that should stay pretty consistent.
Okay. Thanks, and then second question and I have from the recent promotion of Chris to head of European investment.
And it sounds like this could be a newly created position just curious if you're seeing and increase and investment opportunities.
And he's over in Europe, and if we could see a higher percentage of your investments allocated to this region going forward given that you had.
Yeah, Chris has been with us for I think probably about 10 years now and you know he's been leading transactions over there quite some time so.
It is a new titles and we'd give them this year and you'll still report back.
And back across the pond to Gino.
To your question, Yes, and we are seeing a pick up in Europe, I think 'twenty and 'twenty was a little slow we started off the year with a deal in Europe, and we ended the year with the Iraqi deal that we talked about earlier.
But not much in between and you'll be seeing things pick up a little bit more in Europe and again, it's one of the benefits of being diversified across asset classes and industries, but also geography, you have an opportunity and to provide incremental growth by by doing deals and in different regions and we hope that continues to pick up.
Okay, great. Thanks, Jason.
Welcome.
Thank you. Our next question comes from Greg Mcginniss with Scotiabank. Please state your question.
Hey, good morning.
Good morning, Greg.
And Jason there's been obviously and you mentioned this in your opening remarks, but there's an increasing focus on inflation risk from investors and within at least I believe WP Carey as one of if not the highest exposure to leases with uncapped CPI based rent bumps.
Just looking at like the last year, or so and acquisitions and it doesn't seem like you've been putting those untapped bumps into leases, though that may just be language choice as to how you talk about the bumps.
Is there any reason you've been focused on this kind of you know 75% fixed bumps. This past this past year is that just the standard.
And then could you also explain how the just CPI based versus uncapped CPI rent bumps work.
Right sure.
And the the 75% and fixed increases that is a little bit higher than you know what we've done in the past and sometimes it comes down to.
Negotiations I mean, we do like having a portion of our leases anchored with fixed increases I think right. Now. It's you know maybe about a third of them are fixed increases with about two thirds of our total ABR index to inflation I think out of that two thirds is about 40 and be a little over 40% of that is uncapped.
The remaining 20% to 25%, having some kind of Catherine floor and and then.
And get your last question and <unk>.
CPI based typically has some kind of cap and floor and in some cases it might even have a multiple of CPI capped at some level.
Yeah.
Brooks I don't know if you have any data on you know what those caps and floors and look like they'll vary by region of course, but I would say somewhere between maybe 1% to 2% on floors and on caps, it's probably somewhere in the 3% to 4% range.
But it is important to note most of our CPI leases are uncapped so to the extent there is inflation I think you'd expect us to continue.
With our other performance on same store relative to our peers and there could be some good upside of course, and it's also you know and <unk>.
Rice hedge built into would.
And what otherwise are long duration cashless.
And just to clarify one point there on the uncapped CPI and therefore, it from there as well.
And in some cases, there may be floors.
But on casino by by definition, you don't have limits on the upside and virtually all of these C. T. I should mention and I didn't I don't think that that you're suggesting it's going to go and distraction, but there is a implied floor of other zero per cent and virtually all of the CPI leases.
Right Okay.
And the next question from me Toni for the guidance and given the strong performance from Q4, and we expect a level of 'twenty 'twenty. One investment we were a bit surprised by the bottom end of the guidance range. Now you beat my estimate which is great. But you also may be on Q4. So I'm just kind of curious what are the assumptions that could actually drive.
You are to the bottom of the range and 'twenty one.
Yeah, obviously the ranges there for a reason you know the biggest movement for us would be around acquisition volume timing you know it certainly could moved and we typically have a heavier fourth quarter and as Jay.
And noted we do have a lot of activity going on right now so any kind of movement, bringing that forward from the end of the year would move us to the top and any movement kind of shifting things out to the back end of the year from what we're seeing right now what would move us kind of just below the mid point and I think the other big factor really is around collections and this and.
And I am and so you know we continue to feel good about our portfolio and how it's performing I think the you know the range within our guidance is generally the collections. We've been seen 98%, 99% you know any variation kind of below that amount would certainly have an impact that would drive us below the midpoint.
Okay. So it really is just a more and more conservative view than them at the bottom end of the range than what youre actually seeing today.
Exactly Okay, and then just a final final question on the acquisitions, Jason I'm not sure. If you mentioned this or not but you talked about some of the compression that you're seeing have you guys talked about and the expectation on acquisition cap rates are and 'twenty one.
Yeah, I mean, it's certainly you know cap rates have continued to trend down I mean, if you look at industrial property, specifically and that's where we're focusing.
With a lot of our new investments I mean, we're we're we're back are probably well inside of pre COVID-19 levels. At this point, maybe even by 50 to 100 basis points. You know this is the broader market of course, we're probably flat to maybe where we were and in.
In the fourth quarter.
But we've talked previously I mean, we look at deals across a wide range of cap rates and and we think we can do accretive transactions into the low fives, and maybe even sub 5% cap rates depending on your other rent increases that are embedded in the lease.
And these would be for higher quality logistics properties, you know, maybe like the percentage of steel or the oriole deal that we closed last year, both both of which were warehouses.
But we also still have a good pipeline and new deals with cap rates into the six's and even in the Sevens and you know these are our typical sale lease backs, where we can drive some incremental yield through how we source these transactions and and the structuring and.
And then we also look at it you know a lot of deals within the industrial asset class, but maybe outside core logistics such as.
Light manufacturing and we've been doing some food production facilities.
Which are highly critical and and you know non discretionary products being produced.
And you mentioned cold storage and some R&D all property types that we've had success targeting and and ones, where we think we can generate some incremental yield.
You mentioned earlier that our 2020 weighted average cap rate I think it was around six 5%.
I think you know we'd be probably in that ZIP code for 'twenty and 'twenty, one perhaps trending slightly lower given where the markets are but also depending on the mix of the types of properties.
And you know they require that the did we acquire I think lastly, you know cap rates don't always tell the whole story. Unlike maybe many of our peers are leases have meaningful contractual rent increases so headline cap rates for us are going to produce higher you know spreads to our.
And two our cost of capital potentially given that there's built in bumps.
And at that point, Jason appreciate the color.
And welcome.
Our next question comes from John Masako with Ladenburg Thalmann. Please state your question.
Good morning.
And John.
So yeah.
I know it was a relatively small percentage of the portfolio, but leasing spreads were negative this quarter and they were negative basically throughout 2020.
Was that something you think at least in the back half of the year was driven at all by pandemic dynamics or is there something specific with some of the near term lease expirations that you know.
Could have caused this and could maybe continue as.
Moving into a more normal leasing environment.
Brooks you wanted to touch on that.
Sure so in the fourth quarter and.
So those are pretty anecdotal outcome and I think I'll note a few few topics. There one is that a very small portion of the whole as Toni mentioned about 6% of ABR.
And the majority of that was two deals one was an office building, which you mentioned in her remarks, where we had expected to vacancy and what we did is really just negotiated a holdover lease about 18 months hold over so you know that's pretty anecdotal I don't think kind of indicative of the portfolio overall the other.
And there was a 24 hour fitness property, where we restructured that lease that's part of the bankruptcy.
Important to note that that rent does bump up quite quickly back to around 85% of its prior contract. So look both of those are certainly roll downs and no doubt about it but pretty small with respect to the whole.
And there are.
Also note kind of on a trailing basis, we recovered about 95% of expiring rent and with very low T is.
Added about eight years of term so.
Q4, certainly not <unk>.
Other outcomes and that those two leases.
But I don't think it's indicative of a broader trend or really COVID-19 related.
And then maybe looking forward I know 2020 force kind of its own beast, but as you think about 'twenty 'twenty, one and 2022, I mean are there potential COVID-19 related impacts to releasing or is the outlook and what's expiring and kind of maybe COVID-19 resistant.
Yeah.
Yeah, I mean, I think you raise a good point that our near term expiries are quite low and.
'twenty 'twenty, one is less and 2%.
Over the next three years is less and 10% we don't really see a lot of COVID-19 specific impact that each deal is different we think this lease expiration outlook and for the near term is very much kind of business as usual and certainly time will tell and each deal is different and we're working very hard and all of those.
But as of now we're not seeing acute COVID-19 related changes and our tenant plan.
Okay, and then sorry, if I missed this in the prepared remarks, but can you provide a little more color on the impairments recognized during the quarter both on balance sheet and.
And once that flowed through the equity method investments.
Sure. The you know impairments that ran through on the consolidated properties all pretty small I think in total and they just.
Pull that up here.
We had one property that had a bankruptcy just after quarter end. So early in January and we mark that value down and that was really the bulk of it the other items and they were relatively small I'm on the equity investment side. We sure are we jointly owned a property with CPA 18.
And picked up and $8 million impairment and as a result of marking madigan and that's more of a result of the accounting treatment and for equity investments versus the on balance sheet assets. So I think you know and we kind of got tripped up under a model, where we don't look at on discounted cash flows and you know that really still has a.
No way if F O impact, but it did run through this period and about $8 million.
Okay, and then one last one on the kind of acquisitions and investment side of things how should we think about the capital investment projects as a proportion of investment spend this year could that amount increase.
You know in terms of deliveries in 'twenty and 'twenty or do you think thats pretty set.
Yeah, we've and it's in our supplemental.
We just closed one out during the day.
The first month of January with the property and Germany.
American axle or a a M.
So we have about as I mentioned earlier about $100 million of capital projects scheduled to complete in 2021, we do have some build to suits and our pipeline.
You know it's unclear.
When you know construction was completed and that's the point and time that we do add them to our investment volume you know there there might be something that could deliver in Q4 of.
This year pending you know some of those deals, but we do expect to continue to add.
You know both expansions from our internal portfolio as well as build to suits externally and to provide you know growth going forward I think historically, it's maybe then 15% to 20% of Oriental deal volume this year will probably be a little bit lower than that.
Based on the current dynamics, but I think going forward. There's no reason to expect it wouldnt be in that range.
Okay. That's very helpful and that's it from me. Thank you very much great. Thanks, John.
Our next question comes from Joshua <unk> with Bank of America. Please state your question.
Yeah, Hey, good morning, guys.
Good morning, John and a follow up.
I just wanted to follow up on Tony's comment about that distribution you receive from lineage was there.
Sorry, what was that in 'twenty, and 'twenty or 'twenty 'twenty, one and then and I think there was a comment that that's the only one you would expect so I was wondering if there was anything in guidance related to another one.
Nope that was in 'twenty, and 'twenty, one and and a little over $6 million. It is and our guidance and we don't currently expect anything additional and so.
And we sit here right now.
Okay, Okay, and so they did pay other ones and it can be a source of upside to your guidance.
And they could I think we are really looking at that and maybe I'm more of an annual basis and they are right and so we think their distribution requirement is probably just after year and but I think that that's based on our current expectations.
Okay. Okay interesting that that's it from me I appreciate it guys.
Thanks, Josh.
Our next question comes from Chris Lucas with capital One Securities. Please state your question.
Hey, good morning, everybody, Hey, Toni I got some remedial accounting questions for you. So just on that lineage distributions you will account for that and the period in which it has received him and not prorated over the course of the year correct. That's correct, you'll see that all and the first quarter.
Okay, and then going back to the impairment comments you made related to the CPA 18, just the difference and I understand that the treatment on the impairments related to consolidated assets on the equity.
Accounting what is what is the difference there between the two is there a timeframe that's put and imposed or is there a timeframe that you changed as it relates to the ownership of assets.
No I mean, it's really just and it's and other than temporary impairment model and so it doesn't really have the same look at cash flows as it does and you know for our held asset a long term on balance sheet, you know I would say.
Theres nothing specific there, we really run kind of probabilities of renewal and they run through the the models and a different way and I think that's really what triggers it and on the equity investment.
Okay and then the last question from me on these and remedial accounting topics relates to.
Foreign exchange issues, so for many years really.
Really the dollar euro relationship was pretty tight didn't really move but its certainly very very good considerably over the last year and it shows up and the U S dollar denominated.
Bond debt.
Yeah outstanding bid or euro denominated bonds, how does all of that flow through and two <unk> numbers and.
And how do you guys think about sort of you know dealing with the and so I guess your other January 'twenty. Three maturity is should we just be assuming that that just gets refined out and and euro denominated we don't have to worry about the sort of.
Value differences over and over a period of time.
Yeah, Let me start with the first part of your question I think at the highest level.
Strengthening of the Euro has a positive impact on our cash flows obviously that are denominated in euro you know our cashless strategy really does.
And look to mitigate that risk to a fairly de minimis amount and so you know, even a 10% swing and the FX next year. It wouldn't result in more than a five cent change and our full year a S. F. O. So you know, we really do look to a minimum and mitigate the downside risk there and we do that obviously to your point through the natural hedges.
So we are over hedged in euro on the balance sheet sites and with the bond that you referenced maturing. There you know I think you would look to us from continuing to replace that with incremental euro debt.
To maintain that level and relationship.
Sure. Thank you that's all I have this morning.
Okay. Thanks, Chris.
Our next question comes from Todd Stender with Wells Fargo. Please state your question.
Thanks.
And so investment guidance for this year suggests a pretty good move higher.
Is it too much to assume that the bulk of that or sale leaseback opportunities when.
And when we kind of think about coming out of the pandemic.
We're looking at like a pretty good M&A environment or does that assume you play more in the auction market. Then you have and the past maybe just some color there.
No I mean, I think our expectation is that we're going to be doing a meaningful portion of that probably the vast majority.
As sale lease backs, we have great relationships.
You know with our with our tenant base were follow on deals within the brokerage community.
Source deals you know private equity sponsors in many cases these are follow on deals with their portfolio companies.
And you're right there is correlation with M&A and I think that you know that.
And it's part of the reason why we have and would expect to continue to see some some uptick and sale leaseback zone and we're also seeing build to suit itself and and that's it.
A similar.
You know a similar structure and in many ways.
A couple of those build to suits and might be more structured as take out upon completion.
So not technically a sale lease back, but I think that you'll see.
A lot of the the deal flow that comes and we will have the same benefits and get out of sale lease backs.
Thanks, and just maybe hear your general thoughts or appetite for single tenant office with a work from home trend I'm kind of a day.
And at an inflection point, how do you guys think about and making your investment in and potentially long term with company headquarters and such.
Yeah, we've been under weighted office for quite some time and and it's trended that way. If you look back maybe four or five years, our percentage of ABR.
And with a little north of 30% you know at this point is down and the low Twenty's and I would expect that trajectory to continue that way, partly as we continue to overweight industrial but also you know I think office is something that you will do on and on occasion, and I think it's gonna be I, probably characterize it more as opportunistic.
You know where it will require longer lease terms and stronger credits and we generally underwrite.
And it was conservatively, especially lease and scenarios I think for a lot of those reasons.
No we're not generally competitive keeping our our our underwriting and so I don't think you'll see much change there because of the pandemic well and remain remain underway.
Okay, and probably the last one for Tony can you maybe just here I just want to hear your thoughts and how you are budgeting and capital raising for 'twenty and 'twenty one.
Heard you right in your prepared remarks, it sounded like leverage might tick up a little bit towards the high and your range just with acquisitions.
Yeah, I think you know from a leverage perspective, we're at the top of indoor range right now just over and if you don't kind of counter forward proceeds that we have there you know I think we're looking to bring that down over time, but we still continue to target the mid to high five times on a net debt to EBITDA basis and it.
In terms of when and how we issue capital. We you know we like to manage the balance sheet from a position of strength and you have a fair amount of flexibility I mentioned in my remarks the.
Remaining proceeds on our forward, it's about $163 million and I with the deal volume we have in front of US I think we'd expect to deploy that pretty early in the year.
You know beyond that I think you can expect it's reasonable to think that we would maintain leverage neutral to where we are now with you know our longer term desire to bring that back down.
That's helpful. Thank you.
Thank you. Our next question comes from harsh and Nalley with Green Street and please state your question.
Hey, good morning, Oh, you're born and look a little bit about.
You spoke a little bit about doing this.
Oh and I was just hoping you could touch on the M. P theater and that will soon and the quarter was that lease Gordon on the zone and then you said anything that on the GAAP rate.
Brooks, you want and touch on that.
Sure.
Total, one AMC theater, which had a and expiring lease.
So it had a I think a month remaining on it or thereabouts.
And there wasn't really a at least the sale and we don't comment specifically on cap rates.
But you know that was a net sale for Repurposing and then other use in this case and a church was the user buying the property from us.
That's really helpful. Thank you and then you also mentioned that Catherine for both grocery and and no shoes are coming down in Europe.
Oh can you best and deliberate about and what you're seeing under Peter you say food and.
And Europe and in the U S.
Yes sure.
We just did the roski transaction in the fourth quarter that we you know.
Went through and some detail.
Earlier, and and and that's that's a follow on deal and with a tenant that we've had a long term relationship. It's now.
And as we mentioned it's in our top 10.
And we'd like to do more grocery I think and you.
And in the U S. We are interested as well I think we're probably more focused on doing portfolio deals, where we can get critical mass and and structure and master leases to provide some more long term protection.
You know and the U S. I think the fundamentals are probably not quite as favorable as they are and Europe U S tends to be a little bit more oversupplied.
With less barriers for new development compared to Europe, Yeah. There's also.
Lots of competition and the U S cheese from the same deal so.
I think that where we have better economics.
You know with less competition, and we generate better spreads given the low cost tomorrow. So I think that we would expect to look to do more deals, they're probably going to be more biased towards Europe for those reasons that I mentioned, but you know we hope to find some good opportunities and the U S as well.
That's good thank you.
Thank you.
Our next question comes from Manny Korchman with Citi. Please state your question.
Hey, good morning, everyone or maybe put back to the the sale leaseback conversation and we've had and just how widely marketed or those deals.
And from others are you know.
Publicly and privately that that's a space that everyone's sort of and closely and looking at probably because cap rates have compressed elsewhere. So much.
Okay.
Yeah, I think it's a good point there you know, it's it's becoming incrementally more competitive, but we still feel like we have.
That's a real advantage in that space.
Incrementally more competitive, but it's it's still not as many it's a much smaller universe of buyers compare to the broader and net lease market.
A lot of the deals.
We will be limited lease marketed where execution is still kind of the the highest priority and obviously pricing is important as well, but pricing doesn't matter. If there's no deal that closes.
I think we still have an advantage there.
A lot of other deals we've done recently for instance, the Roski deal that was a purely off market deal. We're not aware that others haven't had any conversations with the company.
A lot of that is because of our reputation and Europe.
And that case also it was a existing tenant and you know Pat and good execution with a number of sale lease back with them and the past.
So, but I think your point is well taken you know there are perhaps more players and the sale leaseback market and there have been you know say.
And they say five years ago.
Yeah.
Great. Thanks.
And then in terms of the the lineage M sale or swap was that.
And did they have an option to buy those buildings or was that somebody approached you on and do any of your other tenants have options to buy at the moment.
That was not an option that was say they they approached us and I think as many people know they are now a REIT and so they have.
And some motivation to own more of their properties and to lease them.
We've done a number of sale leasebacks with lineage, especially early when.
The company was just being formed.
That was something that did they approached us and really we've had conversations with them for for several years now and it felt like this was the right time to do it given.
And that they were aggressively value from the disposition side, but also we really.
See a lot of value and increasing our investment in learning.
And coffee I mean for for starters were very bullish cold storage and we've been so for quite some time, you know may be dating back over 20 years and he first and acquiring.
The temperature controlled warehouses, and and we're even more bullish lineage and the number one market share globally, and I'll, probably by wide margin great management team.
You know top notch sponsorship and day Grove, and you know really proven their ability to grow so.
It was more opportunistic than anything else.
And your second question about options.
You know we've talked about U haul before that is something.
And that they have and option at the end of the 20 year lease term in 2024.
Occasionally there are options and leases I think most of them are structured as you know a greater a fair market value and some you know some some amount greater than our original purchase price. So we can capture the upside in and in most cases and those scenarios U haul is a little different and it was a fixed price.
Based on the original purchase price grown by inflation over the 20 year period, and so that that's the meaningful one that's that that's a that's in our portfolio and we've talked about that before.
Thanks, Jason.
And welcome.
Our next question comes from Chris Lucas with capital One Securities. Please state your question.
Hey, Jason just another quick one for me you you're seeing I guess the junk bond market. Just you know has rallied and youre seeing issuers able to do deal from 3% on 10 year unsecured bonds.
Does that cause that a positive or a negative to the sale leaseback market or does it not really matter.
You know it's a good question.
I mean, certainly that capital is competitive to stay at lease backs I think you're really companies can can you know fun and their capital needs through a number of options and one of courses and stay at lease back where they can unlock.
Any capital that's tied up in their real estate. So it's.
And it's probably a competitive in some ways, but I also say that you know the low interest rate environment. We're in right now which is what's driving the you know the high yield market is lower.
Maybe it's more impactful and sale lease backs, where companies can really lock in historically low interest rates are low rental rates.
For 20 plus year periods.
And and really you know the other merits of a sale lease back still apply its permanent capital no death and needs to be repaid and you know.
And in our opinion.
Companies should optimize your balance sheet and that does not include owning real estate on our cost of capital is set up to one and a diversified portfolio of real estate.
Corporates are better off unlocking net capital and reinvesting it into their their core business and generate.
The you know more appropriate return for their shareholders that way.
Okay, great. Thank you.
Welcome.
And thank you and just a reminder to ask a question press star one on your telephone keypad.
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Our next question comes from John Masako with Ladenburg Thalmann. Please state your question.
How's it going and just a quick follow up on on leverage with regards to target leverage as you think about optimal level is that pro forma outstanding forward offerings or kind of just direct in place equity levels.
And I think we we think about it both ways, but from and you know in place long term basis, and you know, we don't really factor and forwards are on an ongoing basis I think we do look at it at a point and time and then over the long term. So you know we continue to look at net debt to EBITDA and the mid to high five times I think we've mentioned.
And that the so it brings us down to about six times, we'd like to be below that level is longer term, but you know arent really factoring and forwards on AR and in terms of how we manage that.
Okay. That's it for me thank you very much.
Great. Thanks, John.
Thank you at this time I am not showing any further questions I'll now hand, the call back to Mr Sands.
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