Q1 2021 WP Carey Inc Earnings Call
Hello, and welcome to W. P. Carey's first quarter 2021 earnings Conference call. My name is Jessie and I 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 will be taking questions via the phone line and instructions on how did you said will be given at the appropriate time.
I will now turn today's program over to Peter Sands head of Investor Relations. Mr. <unk>. Please go ahead.
Good morning, everyone. Thank you for joining us this morning from 2021 first quarter earnings call.
Before we begin I would like to remind everyone that some other statements made on this cool on north 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 SEC filings.
An online replay of this conference call will be made available in the Investor Relations section of our website at WP Carey Dot com, where it will be archived for approximately one year and where you can all sorts of non copies of our investor presentations and other related materials.
With that I'll pass the call over to our Chief Executive Officer, Jason Fox.
Thank you Peter and good morning, everyone. I am pleased to report that many of the positive trends. We saw on the fourth quarter of 2020 has continued into 2021, we've had a very strong start to the year on shovel from first we've already on pace to exceed our initial expectations for investment volume in 2021, and our near term <unk>.
Lines are strong, perhaps even stronger than it's ever been with over $500 million of active deals at an advanced stage much of which we expect to close during the second quarter.
We delivered industry, leading rent collections throughout the pandemic and continue to have high confidence in how our portfolio will perform going forward, especially on a macro environment, where the U S and global economies are expected to improve as COVID-19 cases decline in business activity rebounds.
Third we executed on two significant bond issuances during the first quarter, highlighting our access to very attractively priced capital locking in record low coupons in both the U S and Europe and refinancing the majority of near term debt maturities.
Next meaningful maturity now schedule in 2024.
In the past week, we were also placed on positive outlook by Moody's, which reflects the positive trajectory of our business and balance sheet.
It gives us confidence that we will continue to have access to attractively priced capital going forward.
Fourth we raised equity through our ATM Accretively funding, our recent investment activity and modestly delever and compare to where we ended the fourth quarter.
We also still have equity proceeds available to the equity forward. We raised in 2020, so plenty of flexibility in how we fund our investment activity over the remainder of the year.
The combination of closed investments our active pipeline.
On portfolio performance and raising capital at attractive spreads on new investments has allowed us to raise our assets so guidance for 2021.
Toni Sanzone, our CFO to discuss our guidance raise along with our results for the quarter and balance sheet activity.
Toni and I are joined this morning by John Park, our President and Brooks Gordon head of asset management.
Yeah.
During the first quarter, we completed $214 million of investments comprising $149 million of acquisitions and <unk>.
$65 million of completed capital projects are.
Our first quarter investments had a weighted average initial cap rate of six 6%.
Like virtually all of our investments provide built in rent growth average to two five per cent per those with fixed increases which occurred over a long lease terms, averaging 23 years.
Reflecting our diversified approach our first quarter investments stand most of our core property types, but the bulk of our deals continued to be an industrial warehouse, which currently comprises about half of our portfolio on an ADR basis.
Touch upon a few of the more notable deals from the first quarter.
In February we completed the $75 million sale leaseback of two packing production and distribution facilities net leased to premium alone are the leading vertically integrated grower Packer and shipper of seasonal high value summer fruit in the U S. If you like teachers is roughly one in three chance.
The last one you eight processing facilities.
The property is our strategically located in proximity to the tenants farmland in California Central Valley and represent the majority of its storage processing and distribution operations significant portion of which was cold storage.
The tenant has invested significantly in the facilities underscoring their criticality and they're triple net leased under a master lease for a 25 year term with fixed annual rent increases.
During the quarter. We also completed the $52 million build to suit other new industrial R&D facility in Germany, net leased to American axle, which is a global tier one supplier to the automotive components and systems, including electric drive technologies.
Facility is strategically located in a prime industrial park, the Frankfort Airport Triple net leased for a 20 year term with rent increases tied to German CPI.
Since quarter end, we completed three additional acquisitions totaling $186 million.
The majority of which relates to our second significant investment over the last six months from grocery retail specifically in early April we closed the $119 million sale leaseback of three hypermarket properties located in southern and central France, which rank among the tenants top performing sites.
Our triple net leased to casino when the largest food retailers in the world.
From an ESG perspective. This was also an opportunity to invest in a tenant committed to transitioning to renewable energy the.
The properties are on a long term master lease with rent increases tied to French CPI.
Including the transactions, we completed in April our investment volume year to date totals $400 million.
In addition to accretive acquisitions, a meaningful contributor to our future growth comes from the rent increases built into our leases a significant portion of which is tied to inflation.
Given the renewed expectations for higher inflation I'll take a moment to provide a little extra detail on our rent escalations.
99 per cent of our ABR is generated by leases with some form of built in rent increases.
<unk> 61 per cent of ABR comes from leases tied to inflation. So if you enter a period of sustained inflation, we remain very well positioned for it to flow through incremental rent growth.
All of our leases with rent increases tied to inflation. The majority representing 38 per cent of total Edr is based on uncapped CPI with the largest category being those tied to U S E T.
The other 23 per cent of ABR, that's tied to inflation includes leases with floors and or caps, which we refer to as CPI based within this category. The average floor is around one five per cent on an annualized basis and the average cap is approximately 3%.
In an inflationary environment for 3% costs become relevant would likely mean that we would be achieving substantially higher same store rent growth than we are today for now. However, the floor has continued to be more relevant in the caps as drivers of annual growth in our leases.
Finally, <unk> 35 per cent of ABR is generated from leases with fixed rent increases for the average increases of approximately 2% on an annualized basis.
Rent increases generally occur annually overtime will flow through to rents.
Given the profile of a rent Escalations. We believe we are the ones on the best positioning net lease REIT for inflation.
Turning to how we're positioned in the current environment in the U S with economic indicators trending positive on the back of the vaccine led recovery, we're seeing strong deal flow across almost all property types.
Exception being office for sellers seem to be taking a wait and see approach given the significant rise of work from home during the pandemic.
Industrial assets continue to be aggressively pursued by a wide range of buyers, but it remains a very deep and diverse sector. We continue to find plenty of accretive opportunities as our recent transaction momentum demonstrates underpinned by our cost of capital.
As the manufacturing sector continues to gather strength in the U S. It should support growing interest in sale leasebacks as a means of freeing up capital to be redeployed in company's core businesses.
In Europe, while competition also remained strong for industrial assets, our significantly lower cost of debt in the region results from spreads that are generally 50 to 100 basis points wider than for comparable assets in the U S.
Food retail, particularly grocery that's proven to be a resilient sector. During the pandemic and has seen further cap rate compression, especially in the U S driven by a flight to quality.
Generally preferred retail in Europe, where there's lower retail square footage per capita higher barriers to entry less competition.
As a recent sizable investments in retail grocery illustrate we have good access to deals in the sector successfully executing on top performing stores.
Recent market seen in Europe has been the record amounts of real estate being sold their companies as they look to shore up their COVID-19 impacted balance sheets.
As the market leader for sale leaseback transactions in the region. This is a positive trend that expands our addressable market and we're confident in our ability to capture our share of deals.
Before I conclude my remarks, I want to briefly touch on spreads and our ability to continue generating growth even in an environment where cap rates remained tight.
Our cost of debt has become increasingly efficient in recent years in Europe, we issued nine year bonds during the first quarter, the coupon below 1% and in the U S. We issued 12 year bonds with a coupon in the low twos.
In addition, our investments continue to have an attractive built in growth and we originate leases that tend to be the longest from the net lease sector.
We believe it's important for investors to understand not only the day, one accretion from our going in cash cap rates, but also the average yield we're achieving over lease terms of 20 years or more with strong annual rent bumps.
From an investment within the initial cap rate in the mid sixes. The average yield over 20 years with 2% annual rent bumps is approximately eight per cent.
In closing through a combination of the deals we've closed to date the capital projects and commitments scheduled to complete this year and in near term pipeline is the strongest we've seen in many years. We're on track for a record year for deal volume supported by a favorable cost of capital substantial liquidity and the flexibility to access capital markets Opportunistically.
And with that I'll pass the call over to Toni.
Thank you, Jason and good morning, everyone.
This morning, we reported a S S L of $1 22 per diluted share.
And real estate a S S, though of $1 19 per share.
We had a strong first quarter on all fronts with our investment activity and debt refinancings positioning us well to raise our earnings expectations for the remainder of the year and as Jason mentioned, we have over $500 million of active deals in our near term pipeline.
Our portfolio continues to perform consistently well as it has since the start of the pandemic.
First quarter rent collections at 98 per cent of ABR.
The number of tenants with rent disruption remains very small and manageable with no news seems to report.
During the first quarter, we had one retail tenant in Europe, partially pay rent as a result of a temporary lockdown and we excluded the unpaid portion totaling $2 $9 million from a S. F O inline with our continued conservative approach to revenue recognition.
We're actively pursuing the French and but only recognizing in revenue and a F. O. Once there is more certainty of collection.
As a reminder, we had no significant rent receivables from 2020 and minimal rent deferrals.
Few deferrals, we did have a part of broader lease restructures, where the deferred rent amount is now reflected in current ABR and the tenants have resumed paying rent.
Overall, our collection rate remains very strong and on track with our expectations for the year with April collections in line with the first quarter.
As such going forward, we will be reporting rent collections on a quarterly basis.
Turning to same store rent growth.
Comprehensive same store rent growth, which is based on pro rata rental income included an a S. F O was negative 0.6% year over year in part, reflecting the fact that the prior period was pre COVID-19.
As we've previously noted this metric will move around from quarter to quarter, especially as COVID-19 related disruptions and rent recoveries flow through the period over period comparisons in our result.
For the full year, we expect our comprehensive same store rent growth to be in line with our pre COVID-19 growth rate.
Contractual same store rent growth, which reflects the average rent increases in our leases was one six per cent year over year and.
10 basis point increase over the fourth quarter.
Primarily by rent escalation for advance auto which has moved back into our top 10 tenant list as a result.
Leasing activity for the quarter was primarily comprised of five year lease extensions on properties leased to Obi do it yourself retailer in Europe, extending debt maturities from 'twenty to 'twenty four 'twenty 'twenty nine with full rent recapture on $14 million or 1.2 per cent of ABR and no capital outlay.
On a trailing eight quarter basis, we've recaptured 95 per cent of the prior rent, which relates to 11 five per cent of ABR and added 7.2 years of incremental lease term, while spending just $1 44 per square foot on tenant improvements and leasing commissions.
Moving on to our balance sheet activity.
The first quarter was a busy quarter for our capital markets activity raising over $1 billion in well priced long term and permanent capital.
In February we issued $425 million of 12 year senior unsecured notes at a coupon of 2.25%.
Representing a 108 basis point spread to the benchmark treasury.
Also in February we issued 525 million euro of nine year unsecured notes at a coupon of zero point 95 per cent representing.
Representing a 110 basis point spread to the benchmark.
I'm pleased to say both of these bond issuances were executed at our tightest spread and lowest coupons to date, demonstrating the continued strengthening of our credit profile.
Proceeds from these offerings were primarily used to prepay approximately $400 million of mortgages with a weighted average interest rate just over 5% and for the early redemption of 500 million Euro bond, which carried a 2% coupon and was scheduled to mature in 2023.
In addition to taking advantage of favorable market conditions, and getting ahead of a rising interest rate environment.
We effectively reduced refinancing risk by addressing the majority of our debt due before 2024, while extending our weighted average debt maturity from 4.8 to 5.9 years.
In addition, we further advanced our unsecured debt strategy, reducing secured debt as a percentage of growth assets to four 6% down from seven 2% at the end of the fourth quarter.
And increasing our unencumbered ABR to 87 per cent.
Locking in these long term rates also resulted in an overall reduction to our weighted average cost of debt by 20 basis points to two 7%, which is expected to generate annualized interest savings of approximately $17 million.
Since the debt repayments occur closer to the end of the first quarter.
We expect to see the interest savings start to flow through earnings more meaningfully beginning in the second quarter.
On the equity side during the first quarter, we tapped into our ATM program.
Issuing just over 2 million shares of common stock at a weighted average price of $70.26 per share raising.
Raising net proceeds of $140 million.
So far in the second quarter, we've issued just over 443000 shares at a weighted average price of $71 67 per share raising additional net proceeds of approximately $31 million.
We continue to have the flexibility to settle approximately 2.5 million shares under forward agreements in 2021 for anticipated net proceeds of approximately $160 million.
From a leverage perspective, we ended the first quarter with debt to gross assets of 41, 2% and net debt to adjusted EBITDA of 5.9 times, which does not factor in the additional equity we have available to issue under forward agreement.
We continue to target debt to gross assets in the low to mid 40 per cent range and net debt to adjusted EBITDA in the mid to high five times.
Our successful execution raising capital this quarter has bolstered our already strong balance sheet with over $1 8 billion dollar credit facility virtually undrawn at the end of the quarter, ensuring we remain extremely well positioned to execute on our investment pipeline and retain significant flexibility on when we decide to access the cash.
Markets.
Turning now to our 2021 guidance.
As announced this morning, we've raised our <unk> guidance range by six cents at the midpoint driven primarily by the strong momentum in our investment activity year to date, both in terms of volume and pace as well as by the interest savings, we will generate from the debt refinancing activity I discussed earlier.
We've increased our investment volume range to between 1.25 and $1 $75 billion, which is always includes capital investments and commitments scheduled to complete this year.
Our expectations for disposition activity remain unchanged at between 250 and $350 million per year.
Year to date disposition activity has generated about $93 million in proteins, including 79 million that closed in the second quarter.
Our guidance continues to assume uncollected rents of between one and 2% of ABR.
We continue to expect G&A expense for the full year to fall within our original range of $79 million to $83 million.
And I'll note that our first quarter G&A generally trends higher than other quarters due to the timing of payroll related taxes and is therefore, not a run rate for the rest of the year.
Embedded in our a S. F O guidance is $9 $7 million of cash dividends generated by other real estate investments, which we spoke about on our last earnings call.
In January we received $6 4 million dollar dividend on our common equity investment in lineage logistics, which we assume will be the only distribution we received from lineage of this year.
And in April we received $3.3 million of preferred stock dividends on our investment in watermark lodging trust, reflecting the amount due from the prior four quarters.
These dividends will be the primary components of the new line item on our income statement called non operating income.
Taking all of this together for the full year. We currently expect total a S F O of between $4 87.
And $4 97 per share, including real estate a S. S O.
Between $4.74 and $4.84 per share.
In closing we remain focused on growth.
Our strong start to the year and robust pipeline put us on a path to deliver our highest annual investment volume since converting to a REIT.
Furthermore, our balance sheet is well positioned for rising rates with no significant maturities until 'twenty 'twenty four and we have one of the best positioned net lease portfolios with embedded rent growth, especially for an inflationary environment.
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'd like to ask a question simply press Star then the number one on your telephone keypad. If he would like to withdraw your question Press Star then the number two.
Our first question is coming from the line of harsh on Ani with Green Street. Please proceed with your question.
Thank you Oh I just wanted to ask in light of Yesterdays been Oh, Oh Vod income on quieting belief.
Or do you feel like the competitive landscape will change with Realty income.
So Gordon.
And whether that could make it more difficult.
Our competitive for you the guidance there.
Yes, good morning.
I don't think it really changes anything you know this is certainly there are now a larger net lease REIT, but they've been making progress moving towards Europe. The U K first and you know based on you know what we read that they say.
Europe next and it's a big market over there it's John.
As large if not larger than the United States and is actually a higher percentage of owner occupied real estate. So the sale leaseback market is even deeper.
Generally we don't compete directly with them in the U S is probably a little bit more overlap in what we do in Europe, but I don't think this changes things and you know if anything I'll say that anything that brings attention to the net lease space maybe in particular, a diversified model within the net lease space and one that includes our geographic diversification.
No I think that's a positive from my point of view.
Thank you and then another one from me can you talk about Oh occupancy declines on.
On a sequential basis from the past two quarters.
What is driving this and then can you talk about what you're expecting going forward I know you don't provide guidance on this but just your outlook would be helpful.
Yeah Brooks you want to take that one.
Sure.
Vacancy did tick up slightly.
It's a few properties like five over that period that have come off lease.
Not really any trends in there.
Anecdotal, but we do expect occupancy will tick back up to in the 99% range over the course of this year Theres a lot of activity in process active deals on roughly 30% of that of that vacant square footage and good prospects on on the balance so.
They'll go up and down in any given quarter, but we would expect it to remain in that 99% range in the long run.
Okay. Thank you.
Welcome.
Thank you. Our next question is coming from the line of Joshua <unk> with Bank of America. Please proceed with your question.
Yeah, Hey, guys hope everyone's well hey, good morning, Josh.
Question on than what you see from one one on placing metric or your leases based on and then maybe what's the lag between when we see inflation and how that hits your P&L.
Sorry, Josh I didn't hear the very first part you said, what's the just the metrics yet.
Inflation metric like is it a.
Core C P I Oh got it.
Or or some other metric.
Yeah. It depends on the region you know clearly Brooks do you have the details on on kind of driving into the the type of C. P. R.
Yes, as Jason said, it's really a mixed bag, but on balance the majority of our on a headline basis.
On Europe, there's a bit more diversity in terms of country specific or or whether it's more of a producer measure or not but on the whole, it's largely a headline type metric.
From a timing perspective, CPI itself has a bit of a lag just inherently.
Actual.
Increases.
Flow through to the year over year metric.
From our lease perspective, it really just depends on when the actual bump occurs.
The frequency of our bumps as is generally annually on a weighted average basis I think about one and a half years. So it will flow through our <unk> or our revenues for sure, but theres a bit of a lag there.
Okay, Okay interesting and cool and then Josh I think we know the you know we do have you know close to two thirds of our leases tied to CPI, which is you know why you're asking the question of course, so we think there's some real upside in our same stores come on board.
Yeah, no and it's nice that it's hard to headline inflation to it.
It seems like it's.
Got a little bit more juice than core so.
Nice work and then on the on.
On the.
Prices on the euro debt issuance below 1%.
Do you think you'll kind of continue to kind of increase your leverage and in Europe to kind of continue to enhance your spreads are or is there some kind of a governor that you would limit yourself to over there.
Yeah. It was more of a hedging mechanism certainly, but John do you want to dig into some of the details.
Yeah, we certainly do look to kind of increase in over lever and Europe to protect ourselves on the foreign currency side, you know I I don't expect that we would take that up significantly higher than where we are from a leverage perspective, I think well you know by and large keeps the balance of where we stand now I don't think you know we're looking now.
Find a mixture really artificially create any arbitrage there.
Yeah.
Awesome. Thanks, guys appreciate it.
Thanks, Josh.
Thank you. Our next question comes from Sheila Mcgrath with Evercore. Please proceed with your question.
I guess good morning, I'm, Jason you mentioned new opportunities emerging in manufacturing in general is pricing of these assets are they at a meaningful yield premium to more traditional warehouses and just some more color on how you're sourcing needs opportunities are they widely marketed or relationship drove it.
Yeah, I mean, the thing you'll take the first part of the question first.
You know certainly the headlines that we all read about or for logistics assets. When we hear about them treating you know on the fours or even sub force them you know on occasion.
And a lot of that is driven by the type of real estate. The location, but also the fact that these are you know shorter term leases in many cases multi tenant and there's a real mark to market opportunity when those leases expire so that the stabilized yields you know might be meaningfully higher you know what were behind your stabilized assets. So the ZIP code in which he.
Our cap rates would range for for logistics themselves are probably more in the in the low fives in up into the 60, depending on a number of factors you talk about sourcing.
Much of what we do our sale leaseback. So there's you know inherently a more limited use.
Universe of buyers that participate in that market. So we think we do have some pricing power. In addition to the benefits that you Curt on structuring and underwriting given that our tenant is also on counterparty on the sale.
Digging a little deeper we do see that industrial is a really deep and diverse sector. It's not just you know logistics assets as you pointed out there's also a manufacturing, particularly like manufacturing that we do a meaningful amount in food production cold storage, we've talked about R&D you know all property.
Types, we've had success targeting and you know property is that they tend to have a meaningful yield premium.
Just given the the the fewer buyers targeting those assets generally for cap rates I would say our targets are from five 7% on.
We've averaged in the you know on the mid sixes you know over the last you know.
18 months, maybe a little longer and I think that'll continue going forward, perhaps it it dips down a little bit depending on the mix of assets and what we see trending in the market.
But we feel pretty good about our ability to.
To find these deals many pieces off market and in some cases, you know very limited marketing given the structuring of the transaction.
Okay, Great and one more question for me you do have lower investment grade revenues versus your peers and that might be some of the reason that you traded on lower multiple can you just outline for us how you don't necessarily think your strategy is more risky. Despite this different differ.
<unk> EBIT either like over historic context on you know collection losses or underwriting losses, just to give people the.
Perception of the risk inherent in your strategy.
Yeah sure I mean, we do have perhaps a little bit lower investment grade.
On rents compared to some of our peers, it's still stands around 30%. So it's a meaningful portion and obviously those those cash flows are quite strong.
Where we do focus the reason why it's 30 per cent and not higher perhaps because we do focus in the just below investment grade credit spectrum, an area that we think is there's much less capital flow. It requires more underwriting expertise, where our deal team can really differentiate themselves.
Long history of deep credit underwriting and structuring capabilities that I think really provides.
Competitive advantage for us and of course, you're also going to get some incremental better yields. There you also get that restructuring structuring we get longer lease terms.
Better bumps you know, we get you know occasionally get covenants, there and it doesn't necessarily lead to any difference in in in performance I think our collections throughout the pandemic reflects that you know from the very beginning.
You know we were in the mid Ninety's trended quickly once we got into summer to the high Ninety's and we remain in that area and it's mainly because when we were targeting sub investment grade. We're also focusing on larger companies companies with balance sheets that can withstand some economic disruption did access to institutional capital.
And we think that's really the sweet spot for investing in net lease.
Thank you one quick question for Tony on on.
The non operating income you said no more lineage distributions is that the case also for watermarks of that line item goes to zero.
That's our assumption right now the watermark preferreds.
Good day, there their quarterly payments they can pay it quarterly or annually. We're currently assuming we just collected the last four quarters that we don't see anything else for the rest of this year on guidance.
Okay. Thank you.
Thanks Sheila.
Thank you. Our next question comes from the line of Manny Korchman with Citi. Please proceed with your question.
Hey, good morning, everyone. Jason you talked about the pipeline I think of a 500 million with most expected to close in <unk> can you just give us a rough breakdown of the types of properties within that near term pipeline.
Yeah, sure and I'll, just recap quickly what we've done for the year, so far and when we feel like it's.
We've had great momentum coming out of Q2, and the beginning of Q4 and the beginning of it.
Q1, that's about $400 million of deals completed another $130 million of capital projects. These are under construction properties that are fully leased we expect to complete in 2021, and therefore commence rent. So there's about 530 locked in and then yes, I did reference I would call it over $500 million.
Deals in advanced stages and much of that we think will close in the second quarter and the pipeline continues to build as well.
Year to date just to give you some some.
In comparison year to date, it's about.
What we've closed is about 55 per cent industrial I think 30 per cent retail which is predominantly in Europe.
On the split between U S and Europe is about 50 50, it's call. It 50, 545 U S T or to Europe.
And then the pipeline is trending more towards industrial.
It's 80 plus percent industrial at this point in time, the remaining amount is really retail and again, it's slightly higher weighted towards the U S from call. It 60, 40, but that pipeline is is changing and building so.
Either.
The components of that book.
Will change as well and of course, it's what we've done year to date is almost entirely sale leasebacks.
On a build to suits or expansions of our existing portfolio I think all but one transaction at this point year to date on falls into this category. So we're still having a lot of success sourcing through those channels and and.
You know, putting putting meaningful dollars to work.
Great and then if we look at your overall pipeline for the year.
You, obviously increase your acquisition guidance, how have you changed your pricing expectations on that increased pipeline if at all.
Well I mean.
Given our diversified approach, we really target a wide range of cap rates I'd say generally speaking we've talked about this before probably is from 5% to 7% with some outliers above and below those ranges you know depending on the specific details of a particular transaction a year to date I think we're we're mid <unk>.
Six cap rate I, do think that probably trends down a little bit maybe into the low to mid sixes, but a lot of it will depend on the mix of properties in particular, Europe, you know cap rates might be a little bit lower in Europe, you know call. It 50 basis points lower but our borrowing costs are still you know of at least 50 basis points.
Probably more like 100 basis points cheaper there. So we're still generating better spreads despite a lower cap rates I think the other thing to note is that.
You know, we talk about going in cap rates, but you know I think you really got to factor in the bump structure that we have as I mentioned at the beginning of the call debt you know our leases have no meaningful bumps and you know the.
The going in cap rates, maybe are less relevant.
And the debt the average yield or or Unlevered IRR in many cases is more important than how we look at deals and how we evaluate their spread where it costs capital.
Thanks, Jason.
Yes.
Thank you. Our next question comes from Greg Mcginniss with Scotiabank. Please proceed with your question.
Hey, good morning.
Regards to the pipeline I guess just transactions in general have you changed your internal approach or are there. Some external factors that may be contributing to the improved pipeline and does this potentially point to a longer term trend of increasing investment expectations in future years.
Yeah. It's a good question, Greg and we've you know we've we've gotten that question in some individual meetings as well and I think there's a couple of things to talk about here and we understand that perception because the last number of years. We've hovered around you know the billion dollar Mark.
So it's probably helpful. Just to provide some context on them here on why maybe that's not a good run rate for us and it's something higher.
If you look back over the last number of years. There are some macro forces are really strategic events at WP Carey they are important to note.
The one we close CPA 17 merger at the end of 2018, and then from there. We continue the process of winding down the investment management platform. So as a result, our cost of capital has improved since the 2018 and that's really expanded our funnel, we began putting them into practice and you know call. It 2019, especially by the end of that year.
And at the beginning of 2020, you know I think at that time, we'd close probably about $500 million of deals in that fourth quarter and maybe the first couple of weeks of January So we're really beginning to hit our stride.
And in fact last March we were sitting on a very sizeable pipeline, probably something that feels a lot similar to what it is right now.
And then of course, we got derailed by COVID-19, which clearly none of us could it be predicted.
But I think what you're seeing now in 2021 is really just a combination of having clear runway you know free of all distractions from some of our prior strategic changes and really a cost of capital that works quite well.
Certainly our diversified approach helps you know, we can generate a pretty wide opportunity set across property types and geographies and as I mentioned, a few minutes ago broad range of cap rates and then our improved costs capital has also allowed us to expand that range to include probably more in that lower yielding the bottom end of that range, but what we think are higher quality.
The industrial assets, you know maybe ones that have higher embedded growth or mark or better market dynamics and then you know lastly, you know you've seen us continue to ramp up.
Sale leasebacks and the availability, let's say leasebacks really continues to to increase we feel is a bit of a permanent shift in how corporates view owning versus leasing real estate.
As the market leader in sale lease backs I think this is really a good trend for us.
So all of this is now being reflected in 2021 I mentioned you know year.
Year to date about 400 million feels gone to day. Another 130 under construction and then the pipeline of you know call half a billion in really growing so we feel like debt debt, that's a sustainable trajectory for us and kind of there's no reason to think that that.
Won't continue going forward.
Okay, great. Thanks for the color and then welcome.
Quick funding question.
So on the forward equity offering do you actually need to settle that Oh, maybe it makes sense to let it expire and just using the ATM at 73 Bucks a share versus the four or 63.
No I think you know, we we would have to settle that sometime this year I don't think we have to but I do think our expectation is that you know we liked that capital still we like having the flexibility of having it out there as you mentioned, we did hit it you know tap the ATM, you know pretty accretive pricing compare to our investment activity, but I.
Thank you know you would expect us to continue to do that as well as to potentially I draw that are remaining proceeds perhaps even as soon as the end of the second quarter. I think we'll just keep an eye on the investment volume, but the point is we have a significant amount of activity ahead of us that we need to fund and you know we like our opportunity set and you know where we can find.
Net from I think that you know both avenues are attractive to us.
Alright, Thanks, Tom.
Yeah.
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Our next question comes from the line of Frank Lee with BMO. Please proceed with your question.
Hi morning, everyone. Jason just curious where do you also took a look at debt. How did you say just curious did you also took a look at the very deal and did that transaction make it more imperative for you to do is to marry similar deal given their combined market cap and the advantages that brings.
Yeah, I mean, it's a high profile transaction and you know we're digesting that announcement on the details and provided but we probably can't talk too much about it specifically.
I don't think it changes anything from from how we're motivated we still are looking at everything.
Its portfolios individual acquisitions and potentially M&A as well I don't think that changes Realty income as I mentioned earlier, they were the largest share a little bit larger now.
So you know I think it's business as usual for us.
Okay. Thanks, and then.
You mentioned the majority of the 500 million of active deals will likely close in the second quarter. So that puts you close to 1 billion for the year. If you include the capital investment projects.
Safe to assume that there could be some upside to your investment guidance range given that the acquisitions tend to be back end weighted.
Yes, it's you know it's hard to predict what happens for the rest of the year. We don't have a lot of visibility into more than the next three months, but the trends are quite positive and I think if we continue at the pace that we're on right now.
You know I think you could probably expect something that could put us on the top half of that range or maybe even above the range in and we're talking next and at the end of July perhaps where we're talking about a further increase but it is hard to predict and as you know our transactions tend to be a little lumpier. So maybe even.
You know less visibility to them, but we like our pace right now we like the market opportunity. If you look at our cost of capital and liquidity. So you know, we're feeling quite positive about it.
Okay, and then just one more and then if we look at your capital investment pipeline.
I didn't and lab project I think this is the first one is property types can you talk about the opportunity there and potential for additional similar projects.
Yeah, I mean, we we're certainly you know as a diversified.
With our diversified approach you know within it and we feel that that R&D is kind of a hybrid between industrial and office in some ways. But this is a specific use the tenant tends to have a high investment into the property as well you kind of do these on long lease terms, which is the case here.
And you know you get some incremental cap rate given that it's a little bit.
Outside of the core focus of most industrial buyers who focus on warehouse. So you know we liked a lot about R&D. We think there are more opportunities. There are some on our pipeline that we're looking at right now.
And so.
You know again as a diversified net lease industrial weird the benefits to look across a broad range of.
Our property types and we'll continue to do that.
Okay, great. Thanks, Jason.
Yep you're welcome.
Thank you at this time I am not showing any further questions I'll now hand, the call back to Mr Sands.
Great. Thank you everyone for your interest in WP Carey if anyone has additional questions. Please call investor relations directly on to one to four nine to 1110. That's concludes today's school you may now disconnect.
Yeah.
Yeah.
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