Q1 2022 WP Carey Inc Earnings Call
[music].
Hello, and welcome to W. P. Carey's first quarter 2022 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 instruct.
On how to do so will be given at the appropriate time.
I will now turn the program over to Peter Sands head of Investor Relations. Mr. Sands. Please go ahead good.
Good morning, everyone. Thank you for joining us this morning for our 2022 first quarter earnings call.
Before we begin I would like to remind everyone that some of the statements made on this cool 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 SEC filings.
An online replay of this conference call will be made available in the Investor Relations section of our website at W. P. Carey dot com, 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 pass the call over to our Chief Executive Officer, Jason.
Okay.
Thank you Peter.
Everyone.
The strong year over year <unk> growth, we reported this morning.
Both our sustained higher investing activity and inflation beginning to more meaningfully flow through to our rents.
Our CFO , Tony San John will cover our earnings in more detail.
Give an update on our portfolio balance sheet and guidance.
And over a decade since we've seen any real upward pressure on cap rates. So I'll focus my remarks. This morning on the current environment, including the impact of higher interest rates and inflation.
I'll also review, our recent investment activity and pipeline and give a brief update on our acquisition of CPA 18, as we move towards closing that transaction.
And in light of the conflict in Ukraine, I'll touch upon the continued strong performance of our European portfolio and expectations moving forward.
Tony and I are joined this morning by John Park, our President and Brooks Gordon head of asset management, who are available to take questions.
Plenty to get through so let's jump right in.
Starting with the broader environment, particularly the impact of higher interest rates on cap rates and investment spreads.
The 10 year Treasury rates up about 100 basis points since early March and 150 basis points compared to much of 2021, the long term cost of debt for all net lease Reits has moved meaningfully higher cap rates on the other hand generally react to rising rates on a lag typically measured in quarters rather than weeks.
Our cost of debt is undoubtedly move higher there are several mitigating factors that benefited our overall cost of capital and allow us to continue investing sufficient spreads.
First it's important to remember that we were very active in the capital markets. During 2021, raising almost $1 $5 billion in debt capital proactively pre funding almost all of our debt maturities through the end of 2023.
Locking in an attractive cost of debt when it's significantly lower than current market interest rates.
Second our cost of equity has improved meaningfully since late February where their stock currently trading around its highest level since late 2019 before the onset of Covid.
Given our capital structure and commitments, you're running conservative leverage our lower cost of equity is generally more impactful to our overall cost of capital and a higher cost of debt. Similarly from a competitive standpoint, we expect higher interest rates to more negatively affect higher leveraged private equity buyers.
Third as we've consistently said the spreads we generate on new investments are not driven solely by initial going in cap rates the.
The contribution to our earnings over time is better represented by the Unlevered internal rate of return or average yields we generate on our investments which factor in the favorable rent growth, we typically achieve over a long lease terms.
And because over 99% of our ABR comes from leases with embedded rent growth the majority of which is tied to CPI.
You need to feel good about the all in returns we are earning prior investors relative to our cost of capital in fact for investments with rent increases tied to CPI higher expected rent growth in the near term may partly compensate for the higher cost of debt.
Finally, while we've always expected to changes in cap rates would lag interest rates are starting to see signs of upward pressure on cap rates.
But it's important to remember that most of the movement in interest rates.
<unk> markets are reacting to happened relatively recently really over the last six weeks.
Meanwhile, deal cap rates will eventually respond to higher interest rates, it's too early to say exactly how much and over what timeframe to reach equilibrium.
So far we've seen cap rates move incrementally wider on new deals being priced in a handful of deals in the market being repriced in some cases. This has resulted in them coming back to market, we're coming back at WP Carey and today, we would also price them at wider cap rates.
During transitional periods in the market like we're currently experiencing salaries are more focused on execution risk our strong reputation for providing certainty of close and therefore, it gives us a competitive edge and also tends to result in our transacting at better yields.
With that as the market backdrop, I'll turn now to our recent investment activity.
Year to date, we completed investments totaling $415 million with a weighted average cap rate of 6% and a weighted average lease term of 21 years.
Our investments were predominantly sale lease backs, giving us the ability to directly negotiate lease terms, including rent escalations.
We continue to take a diversified approach, although we remained focused on warehouse and industrial which represented about half of our portfolio.
We're also maintaining our focus on essential retail in Europe , as well as exploring segments of U S retail.
Our office exposure continued to decline incrementally trajectory, we expect to continue given our underweight stance towards SaaS class.
Turning to our pipeline in.
In addition to the $415 million of investments, we completed year to date, we continue to see strong deal momentum currently we have over $400 million of deals in our pipeline at an advanced stage and about $175 million of capital projects or other commitments scheduled to complete in 2022.
That gives us good visibility into about $1 billion of investment volume still relatively early in the year and we continue to add to our pipeline at a healthy pace, making excellent progress towards our guidance range of one $5 billion to $2 billion for full year investment volume.
Our expectations on full year deal volume are of course before the impact of our proposed $2 $7 billion acquisition of CPA 18, which is expected to add about $2 billion of assets after approximately $700 million of anticipated dispositions.
Our announcement on CPA 18 was in many ways. The most significant event of the first quarter, providing an excellent opportunity to add high quality assets, you know very well that are well aligned with our existing portfolio with minimal balance sheet impact as well as essentially concluding our exit from investment management as we said at the time of our announcement, we expect it to.
Immediately accretive to our real estate and fell by around 2% largely offsetting the earnings we will lose from no longer managing CPA 18 with attractive embedded upside through its self storage portfolio.
Balancing this transaction, it's been positively received by investors and our conversations with them. We're wildly recognizing these benefits.
In terms of the progress update I'm pleased to say the 30 day go shop period ended at the end of March it's no competing proposals and we anticipate a closing date in early August pending the approval of CPA 18, stockholders and other customary closing requirements.
The contemplated $700 million of asset sales, primarily student housing and office assets also remain on track both in terms of our timing and pricing expectations the sales processes well underway.
Turning now to the more meaningful impact that inflation is having on our rents.
We continue to believe we are better positioned than any other net lease REIT to capture higher inflation through rent growth.
58% of our ABR, having a rent escalations tied to CPI.
On an ADR basis, 40% of our assets with rent increases tied to CPI went through scheduled rent increases during the first quarter with an average increase of four 5%.
To keep in mind that the four 5% is capturing the year over year impact of fourth quarter, CDI and with inflation currently running at around 8% in both the U S. In Europe , we would expect to see significantly higher rent growth in 2022, and even more significant impact in 2023.
We view this is especially valuable in the current environment, perhaps underappreciated by REIT investors given that it has no cost of capital associated with it and has the potential to provide a prolonged tailwind to earnings even after inflation it begins to decline.
And of course, if inflation expectations continue to move higher and for longer we would expect to capture additional upside.
Lastly, we're closely tracking the implication of the war in Ukraine.
Turning to the potential impacts on our tenants and the transaction market.
From a portfolio perspective is very limited assets in eastern Europe , which are entirely within NATO countries and we have no properties in Ukraine itself or Russia for that matter within eastern Europe . Our assets are largely in Poland, primarily Obi I, one of Europe's largest do it yourself operators and a strong German based multinational credit.
To date, we've not really seen any impacts on our tenant's ability to pay rent stemming from Ukraine conflict, either eastern Europe for Europe more broadly are there from higher energy prices or supply chain disruptions that could change. However, as the war continues if there are significant economic disruptions, which will likely have a global impact we remain well positioned.
For them.
We view our tenant experienced during COVID-19 during which we remained a sector leader in rent collections as the best indicator of our expectations. During the first quarter, we collected over 99, 7% of rent due for the portfolio overall and 99, 9% for Europe .
Similarly, we have not yet seen any meaningful impact on transaction activity in Europe .
Putting the business aspects to one side for a moment I'm going to also say we're committed to supporting the humanitarian relief efforts in the region and I've made a donation to the American Red Cross, which is getting much needed support to displace Ukrainian civilians W. P. Carey Foundation has also matched our donation to the Wan helped further its impact.
In closing we believe we're set up very favorably for the current environment for several key reasons.
Well positioned investment great balance sheet, it's about $2 billion of total liquidity and proven access to capital at a cost of capital that we believe will continue to provide sufficient spread to our investment opportunities even as cap rates lag interest rates.
Currently both S&P and Moody's have us on positive outlook, which could provide incremental benefits to our cost of capital even in a challenging capital markets environment.
Okay.
After a record investment volume in 2021, we continue to see strong deal momentum in active growing pipeline with good visibility into about $1 billion of investments, including investments completed year to date, we're making excellent progress towards the one $5 billion to $2 billion of deals embedded in our guidance.
In addition, we are confident in closing our acquisition of CPA 18, which adds about $2 billion of assets that will be immediately accretive to our real estate assets with additional upside and its self storage portfolio strategically. This transaction also simplifies our business, including our exit from investment management.
Finally, and perhaps most importantly in the current environment. We believe we're the best positioned net lease REIT for inflation, given our embedded rent growth high proportionate ABR tied to inflation.
Keeping records same store growth in 2022, which is expected to continue if inflation remains high.
And to the extent investors are concerned about uncertainty in the market in a possible recession. We also offer unique downside protection through our diversified approach and a roughly 5% dividend yield supported by high quality cash flows and sector, leading rent collections during COVID-19 and with that I'll pass the call over to Tony.
Thank you, Jason and good morning, everyone.
This morning, we reported total <unk> for the first quarter of $1 35 per share up 13 cents or 11% year over year.
This included real estate a S S. Though of $1 31 per share, which was up 12 cents or 10% over the same period.
Real estate revenues increased 12% year over year.
Given primarily by the strength of our investment activity over the last 12 months.
The impact of rent increases tied to inflation and strong performance across our portfolio.
Lease termination and other income totaled $14 $1 million for the quarter, including an 8 million dollar termination payment related to an asset which we subsequently sold in April .
A termination payment was contemplated in our initial guidance range and for the full year, we expect termination and other income to total around $20 million.
Within expenses G&A totaled $23 $1 million for the first quarter.
Up to $22 1 million for the prior year period.
As is typically the case G&A was slightly higher during the first quarter than we would expect on a run rate basis, due primarily to the timing of payroll taxes.
Our guidance continues to assume G&A for the full year will fall between 86 and $89 million.
Property expenses, excluding reimbursable tenant cost increased $2 $9 million year over year to $13 8 million, resulting from an increase in carrying costs and cost to reposition certain assets.
We expect to see quarterly property level costs remain at or just below this level for the remainder of the year.
Interest expense declined $5 $6 million year over year, reflecting the interest cost savings we generated from the debt refinancing we completed early in 2021.
Lastly, nonoperating income included $5 $2 million of cash dividends received during the first quarter comprising of $4 3 million dollar annual dividend on our lineage logistics common stock.
And a 900000 dollar final dividend on the preferred stock we held in watermark lodging Trust.
As I mentioned on last quarter's call our watermark preferred stock was redeemed at par or $65 million in January and as a result, we currently hold only common stock in the company from which we are not projecting to receive any dividends during 2022.
Turning now to our portfolio.
As Jason discussed on an ABR basis, 40% of assets with rent increases tied to CPI had rent bumps during the first quarter with an average increase of 4.5% the impact of which flowed through to our overall contractual and comprehensive same store metrics.
As a result contractual same store growth increased from one 8% in the fourth quarter to two 7% for the first quarter up almost 100 basis points.
Within this the uncapped CPI component increased 170 basis points to three 3%.
And the CPI based component, which includes leases tied to CPI, but with caps increased 70 basis points to two 4%.
As a reminder, the increases in these metrics during the first quarter reflect fourth quarter CPI data given the timing lag inherent in lease escalations.
We anticipate contractual same store growth at or above 3% for the remainder of this year and expect to see that trend meaningfully higher throughout most of next year nearing 4% based on current inflation projections.
Leasing activity for the first quarter included lease extension with one of our top 10 tenants Pendragon, which as a portfolio of car dealerships, we own in the U K.
We executed very attractive lease extensions on 30 sites, representing about $11 million of ABR, which added 11 years of lease term, while recapturing 100% of the prior rent and keeping the existing rent bumps in place.
12 sites are expected to be sold over the next year with pendragon continuing to pay substantially all rent until the assets are sold.
Upon completion of the remaining sales are pendragon portfolio will comprise 57 assets with a weighted average lease term of 14.8 years and total ABR reduced from one 8% to one 5%.
Disposition activity in the first quarter comprise six properties for total proceeds of $27 million.
Moving now to our balance sheet and capital markets activity.
We remain very well positioned from a balance sheet perspective, both in terms of our debt maturity profile and our liquidity position.
We have a well ladder series and debt maturities limited exposure to floating rate debt, primarily through our credit facility and our next bond maturity is not until 2024.
At the end of the first quarter debt outstanding had a weighted average interest rate of 2.5% and a weighted average maturity of 5.2 years.
Our cash interest coverage ratio increased from six to $6 four times over the first quarter and remains among the strongest in the net lease peer group.
We ended the first quarter with debt to gross assets of 39, 7% and net debt to EBITDA at five five times, both at the low end of our target ranges.
We expect to remain within our target leverage level of low to mid forty's on debt to gross assets and mid to high five times on net debt to EBITDA.
So far in 2022, our capital markets activity has comprised issuing equity under our ATM program and exercising the accordion feature on our credit facility.
Typically we've issued $2 7 million shares year to date under our ATM raising about $220 million in gross proceeds filled at a weighted average price of $80 79 per share.
Earlier. This month, we also exercised the accordion feature on our term loans for the equivalent of about 300 million U S dollars, increasing our total liquidity from $1 $8 billion at the end of the first quarter over $2 billion with proceeds used to pay down our revolver balances.
A substantially undrawn on our revolver as a result.
We therefore have ample liquidity to execute on our deal pipeline and flexibility and when we access capital markets, which is especially valuable in the current environment.
Lastly, I'll briefly recap our guidance.
We're maintaining our <unk> guidance range of $5 18 to $5 30 per share, including real estate, a SSO of between $5 three and $5.15 per share.
Which continues to assume investment volume of between one five and $2 billion.
And $250 million to $350 million of disposition.
And as a reminder, our current guidance does not reflect the impact of our proposed merger with CPA 18.
And with that I'll hand, the call back to the operator for questions.
Thank you at this time, we will take questions. If he would like to ask a question simply press Star then the number one on your telephone keypad.
We would like to withdraw your question Press Star then the number two.
Our first question comes from RJ Milligan with Raymond James. Please proceed with your question.
Thank you and good morning.
My first question is for Tony I think our previous guidance was for Q&A. After three 3% of same store rent growth for the year. So you saw the two 7% increase in <unk> and I think in your comments you said that you expect that to trend higher given higher inflation at or above 3% for the remainder of the year.
I'm, just curious where do you expect that to shake out for the full year, because I think the bulk of the increase was in the first quarter. So I'm just curious with the with the full year outlook looks like.
Yeah. Thanks R. J I think you hit the nail on the head I mean, we we we've raised from what we've seen based on the prints that were coming through now I will say you know with the first quarter, 2.7%. We do expect to see you know in the 3% range potentially over 3% as we get later in the year and I think what we've continued to highly.
<unk> is kind of a lag in the leases.
So while we're seeing that you know come through I think the impact of what we've seen since we announced guidance of the raise them in in the inflation prints is more likely to affect the back half of the year or really even closer to the fourth quarter and be much more impactful on 2023 and I think what we're also seeing is the.
You know the curves and the expectations for it to be sustained longer so potentially tailwind into 2023 and into 2024 as opposed to a more meaningful impact on 2022.
Understood and so just to clarify I think you are in your comments you said that you expect it to be near 4% internal growth or same store rent growth for 'twenty three just given what we've seen with the inflation numbers. So far this year.
Yeah, I think we could see certain quarters in 23 pick up to the high threes closer to four.
Okay. Thanks.
My second question is for just the comments on seeing signs of upward pressure in cap rate. So I'm just curious if there's any specific geographies or industries or sectors, where you're starting to see a little bit of breaking in terms of cap rates.
No.
It's really anecdotal at this point.
That makes sense I mean, the spike in interest rates really only occurred over the last six to eight weeks. So it's still pretty early.
But there are some signs and it's hard to quantify maybe its 25 basis points and some of the anecdotes, we're seeing as you know.
Deals getting repriced out in the market and in many cases going back to market and sometimes.
Back to us as a potential buyer and when we look at those transactions you know a month two months. After we originally had looked at them, we may be raising or our pricing on those by by some factor depending on obviously a lot of the specifics.
But yeah, it's it's more anecdotal than anything else, but the signs are there I would expect that.
That you know if if rates don't reverse course, and I think we without a doubt we'll see some widening by the end of the year. It's just hard to quantify at this point in time.
Thanks, and just as a follow up to that Jason just curious, obviously, but fewer levered buyers out there in the market I think the anticipation is that that you might see a little bit better pricing as you just mentioned, but curious how that impacts the disposition side of the $700 million of asset sales and whether or not.
Youre seeing potentially less interest or fewer buyers for those assets.
Given the move in interest rates.
Yeah, so the $700 million that we're disposing as part of the <unk> transaction about 60%. So a little over $400 million of that is the student housing portfolio that was under a purchase option.
That has since been exercised so that's a fixed price that won't be impacted at all by anything that's happening in.
The broader right markets I think the other 40% are those press processes are well underway. It's one student housing asset in the U S. It's a ut Austin as well as three European office assets and preliminary indications would suggest that we're kind of on schedule both in terms of timing.
And pricing, but well wait and see what happens when we get final execution.
Great. Thank you guys.
That's great.
Thank you. Our next question is coming from the line of John Masako with Ladenburg Thalmann. Please proceed with your question.
Good morning.
John So I know you kind of disclose that hasnt been.
Disclose the cap rate on kind of year to date acquisition activity was there any kind of bifurcation Navy between.
Stuff that closed in <unk> 22 in the stuff closing subsequent or even stuffed clothing and kind of January February and stuff clothing in March.
March April or just in terms of the cap rate, we're seeing on those transactions.
Yeah look there there is what we target a big range. It's a diverse portfolio of diverse model. So you know, we typically do transact within that 5% to 7% range that we talk about so there is some dispersion some of it could be you know.
Based on where rates have gone, but its probably more a function of you know the asset mix geographies Europe , we're still seeing cap rates that are a little bit lower and obviously, if we're buying logistics.
That's over say a manufacturing property there is maybe some delta between those as well so.
Probably not much correlation that we're seeing because it's a lot of those deals where we're pricing in process.
Six to eight weeks ago, almost at the time of of the interest.
The interest rate increase but.
But there is some dispersion certainly.
Okay.
And then the $400 million, that's kind of in the tangible pipeline what should we think about in terms of timing of close on those transactions is that.
But if it gets to the finish line would be in.
Kind of a six month window is that maybe you know stuff that could close over the remainder of the year just any color there would be helpful.
Yeah. No. These are more these are advanced stages. These are deals that we have under.
At lease signed letters of intent or some type of contract now theres diligence left so we won't say that these are done deals necessarily especially when you're dealing with sale lease backs, but timing expectations are over the next 30 to 60 days for for.
For those transactions things could drag and the market is volatile so its hard to predict exactly what happens, but those are in advanced stages in and.
We would expect to close them you know in the relatively near term probably by the end of this quarter.
Okay.
Then if you look at the comprehensive same store growth disclosure.
It seems like some of the strain.
The uncapped CPI growth was offset a little bit by.
Weaker increases in the fixed.
Just any color on maybe what was driving that.
Yeah.
Brooks or Tony if you have some insights into that.
Yeah.
Sorry, I thought he was there.
Okay got it Tony.
So I think I'm just looking at the your question is on the the fixed rate anchoring down the C. P. I bet yeah exactly in terms of disclosure on comprehensive same store growth. It seemed like it was a little weaker in the quarter I was just gonna be yep.
Small selection of assets, but.
Yeah, I think that's likely it I mean, what we typically see you know a comprehensive historically kind of pre Covid you know anywhere from 50 to 100 basis points lower than contractual I don't think there's anything specifically are trending in any of the metrics. This quarter. I think we are seeing still you know better a better result.
On the comprehensive side, but I don't think there's anything in particular, that's weighing that down I don't know Brooks. If you had any specific detail to add to that.
No I think it really just is kind of timing and anecdotal and what's in that specific quarter.
Okay.
That's it for me. Thank you all very much.
Great. Thanks, Sean.
Thank you. Our next question is coming from Joshua <unk> with Bank of America. Please proceed with your question.
Yeah, everyone everyone's doing well.
I was just looking at page three of the supplemental the normalized pro rata cash NOI it looks like it fell quarter over quarter is there.
What are the moving pieces there I would have assumed just like given the acquisitions it would've gone up.
<unk> for Q or something skewing the skewing that.
Yeah. Thanks for the question, Josh I think there's a couple of components, but skew that fifth quarter, when you're looking at it compared to Q4 and the first really is the movement in FX from last quarter. So you know this isn't on a constant currency basis, I think we've seen about a 2% decline in the average euro rate quarter over quarter.
And so that's probably about a 2 million dollar delta from last quarter and the other piece of it I mentioned in my remarks, which is just a higher property expense total for the quarter of about $2 million. So really the aggregated those two things are really driving at the offset to the acquisition volume in the same store growth.
Okay, Okay that makes sense and then it looks like you.
Entered kind of a new asset class there are holes in Spain.
How did you get comfortable underwriting those types of assets.
Did you disclose the cap rate on that.
We don't disclose individual cap rates.
I would say, it's probably in the bottom half of the range that we typically target and you know that's more of a function of the fact that it's in Spain, and the bulk of the value is infill locations within Barcelona, So really high quality.
Locations strong barriers to entry not a lot of obviously space to develop and compete in terms of the industry are that where the transaction itself look it was a it was an off market transaction was a portfolio of 26 properties with the largest funeral service provider in Spain and Portugal.
We've looked at this industry in the past we like the industry is very stable.
You know its really unaffected by economic cycles, we like the fact that there are tenants market leader.
Also as a well capitalized it's owned by Ontario teachers pension plan.
And then the structure was get master lease very.
Very good site level coverage 30 year lease with CPI increases so there's lots of like about it and as I mentioned is infield Barcelona, probably about half of the.
Oh, the values infill Barcelona and about half the portfolio is also green excellent right. So.
You know if I'd call. It a new vertical I think you've heard Jude adds but.
Yes, maybe new a new property type and if we can find some similar transactions that have.
Similar characteristics. This wondering may be you can see follow on deals with with the tenant itself out I think that we would welcome them.
Okay interesting.
Then just one quick follow up I just missed it in the opening remarks, what was the rationale for selling down some of the Dragon.
Dragon assets.
Brooks you might take that yeah sure. This is brooks.
You mentioned in the in the remarks, we extended 30.
<unk> 30 of those properties to 20 years, new fresh terms and created enormous value, they're very attractive extension terms as part of that extension, we're disposing 12 of the <unk>.
Weaker assets, we disposed three of those now.
Subsequent and the remainder will happen this year and that's all baked into our disposition guidance.
Awesome.
I can.
Great. Thanks, Josh.
Thank you. Our next question is coming from Greg Mcginniss with Scotiabank. Please proceed with your question.
Hey, good morning.
Just a couple a lease exploration questions here as we noticed the new disclosure on the expirations page relating to a 2000 $20 million to $60 million Marriott lease.
Is there some concern that tenants are not going to renew or why was that a lease called out.
Sure so.
We've talked about before we had our portfolio <unk> court.
Yeah, exactly yes, we have a portfolio of 18 courtyard marriotts.
Really the point of the additional disclosure was to make it clear there's two tranches. So the first is.
12 of those which is $16 million in January of 2023.
Second tranche it in 2027, so it was really just to distinguish.
As their blended together in the top 10 list there.
So.
The first tranche, we do expect a likely outcome there as those transition to operating hotels.
Those properties are recovering quite well so it's not really a non renewal there's an underlying business there.
Current expectations are that the underlying operations will actually exceed our in place here currently so.
But I just want to make that clear and disclosure.
Okay. Thank you and then the increase on.
I believe it was 2023.
Leases ABR as well.
Is that some short term lease acquisitions that you guys made just trying to understand what that increase was driven by an isn't there just was there some near term opportunity are you excited about.
No not nothing on an acquisition front that may have to do I think it's very slight if any I don't have the change right in front of me, but that might have to do with.
The resetting of some of the Pendragon that we are in process of disposing.
Kind of those 12 assets, there's also FX always flowing through that as well but.
Nothing notable there.
Okay. Thanks, and a question a little speculative question for you.
Jason.
Why do you think that there were no other bids on CPA.
<unk>.
We know that there's some private equity buyers out there looking for scale in.
Theoretically CPA 18 could help achieve that goal.
So I mean, I think that we had a number of advantages that we've talked about in the past certainly first and foremost where either the manager we assembled those portfolios, we know extremely well and therefore can submit a a strong no diligence bid.
There's also two other frictional costs that.
Prospective buyer would have to incur such as mortgage assumption costs and.
And some of the back end fees.
And and carry that that we would earn.
So you know that that's our guests I mean is it strong portfolio.
<unk> that the advantages that we had probably serve somewhat as a deterrent to others.
And look the period in which the go shop occurred was a pretty volatile point in time.
Interest rates shot up.
There's a war in Ukraine, So theres a lot of things happening in the world that may have made it difficult for the other party to two.
To make a bid on a on a pretty diverse portfolio. That's got student housing self storage net lease in both Europe and the U S. So that's our guests, but we don't have a lot of insights I think that the the.
The proxy has some details and color around the interest level that other bidders had I think there were a number of them that had signed Nda's did some work, but there was no competing bids.
Alright, Thank you yes.
You're welcome.
Thank you. Our next question is coming from the line of Brad Heffern with RBC capital markets. Please proceed with your question.
Hey, good morning, everyone going back to some of the market commentary about cap rates going up and deals being repriced.
Are there fewer bidders showing up or are people just sort of repricing their expectation.
You know it it it might be a little bit of both I mean.
When cap rates are when interest rates jump as much or they have I think buyers have.
Something that can point to to maybe get a little bit more yield on a particular deals I think thats happening some but it does feel like to me and this is again more anecdotal than anything else. It's more of a gut feeling that the competition has thinned out a little bit.
Does the higher leverage buyers, who are certainly more negatively impacted by the jump in rates they seem like they could be on the sidelines a bit were not as competitive and that's obviously a good thing for us.
But it does feel like that there's a little bit of a fitness and some of the processes or properties that we've been involved with not to see one there isn't one but in conversations with brokers. It does feel like that there's a little bit less.
A robust marketplace and again, that's a good thing.
Yeah Okay.
And maybe for Tony you know going back to the conversation on the increase in same store rent growth expectations.
I understand that probably biased towards the end of the year because it still seems like going from two above 3% would be enough to move the guidance a little bit so I'm just curious.
Are you just waiting until later in the year to see how acquisitions play out or was there some sort of an offsetting factor that that left the guidance unchanged this quarter.
Yeah, I mean, I think the the specific changed from when we went out with guidance to inflation. It has probably a two cent impact overall, you know and so I think that's still well within the guidance that guidance range and because a number of other moving parts that we've been talking about on this call, including kind of the impact on interest.
Right, Sam and how that might affect tighter cap rates. So you know I think all in that that too sense is not it's not as meaningful to this year in terms of where we are in relation to our guidance I think we felt good about where we are but there's you know there's certainly other moving parts within the range that would offset that.
Yeah, Okay got it and then just an administrative question if CPA 18 does indeed closed during the third quarter.
Will that be reported as discontinued ops or will the fee income be included in <unk>.
Sorry, if the CPA 18 disposition don't close.
No sorry, if CPA team does close.
Well the fee income be included in <unk> will be reported as discontinued operation.
Oh, sorry about that no. The theres no real concept of discontinued operations, there, but I think what's important to note as we report real estate a S. S L and investment management, a F O and so you'll see kind of a shift over to the real estate and with the acquired portfolio and then the investment management fee streams will just decline and essentially go away.
Okay. Thank you.
Thank you. Our next question is coming from Anthony <unk> with J P. Morgan. Please proceed with your question.
Yeah. Thank you my first one is just a two parter related to Europe , one does the Ukraine situation change, how youre thinking about allocating capital around the continent or even to the continent in general and then the second part is just as it relates to FX, what is sort of a bottom line ex.
Poser or hedging right now because I know you've got hedges and you got to work with that and so just where does that all net out.
Yeah, Toni let me take the first one and I'll pass the second one along to Tony San John So does it affect our underwriting on how we're looking at Europe .
You know.
Certainly the world events are are affecting our underwriting, but it's more on a I would say specific to your I mean, we're looking at what are the consequences that could have on our global economy.
You know how is that flowing through to supply chains and.
And energy costs, and how does that impact any credits. So that's just part of the calculus that we're doing on any deal for that matter I don't know if it's specific to Europe . At this point in time, we're certainly keeping a close eye on at all.
And and you know maintaining the same level of diligence that we've always done on deals, but that's kind of how we're looking at it right now.
Okay and on your question on the FX and the hedging strategy you know we talked about this a few times I think the you know the natural way that we do look to hedge we obviously is through issuing foreign debt to offset the impact on the revenues and then further we go ahead and having a hedging.
Program that eliminates kind of any additional R and the significant portion of the additional exposure I think youre right to kind of look at where we are right now and the way rates are moving but.
But we definitely hit a mitigate a significant portion of that I think if you look at the the overall net exposure and what remains for us to look at 2021 rates, we averaged about 118 on the euro and.
So we do expect about seven 7% to 10% decline year over year, and that's baked into our guidance I think that you know that could result in year over year FX exposure of roughly eight cents and you know that is one of the the headwinds that we're seeing this year, but we do expect that our hedging strategy.
<unk> more than mitigates the majority of that.
Okay. So the <unk>.
Eight cents is before incorporating the local debt and the hedging so the actual effect of how youre thinking about FX for this year is a lot smaller than that.
No the eight cents as after hedging so I think that's probably the the largest exposure you'll ever see in terms of the rate movement. We're seeing in any one year, but you know that that's a full year over year decline out of the way that I'm describing that so but it is after hedges I think the way we think about it internally you know every 10% change in the Euro could result in about.
1.5% per cent change in a S. F O after hedges on a full year basis.
Okay got it thank you.
And then.
I guess sticking with you and related to guidance you had last quarter and then maybe I missed this if you updated last quarter you talked about lease term fees being I think 18 to 20 million or something in that ballpark and it looks like you've got the bulk of that in one queue. So any.
Any change to the total number for the year thinking there and then also was there anything.
Outsized on the other income side and warranty related to you know, we're just working through CPA 18, or anything like that that we should be mindful of.
Yeah, I think on the first part of your question. We did we came out with an initial range on our expectation for other lease term income of about $15 million to $20 million I can put tracking towards the higher end of that now as you highlighted you know what.
We're front end weighted for sure we have about $14 million in total in the first quarter and we expected that that would be front end weighted so that's all been contemplated in guidance.
You know and in terms of the the one more significant one in the first quarter that I highlighted it was about $8 million and we did dispose that asset subsequent to quarter end, so no real NOI impact there.
In terms of what we expect for the rest of the year I think it'll normalize based on what we see right now.
Okay, and then just a last question related to the CPA 18, any updated thoughts in terms of how youre thinking about the storage component of that portfolio and how much to keep maybe operating versus net lease versus sale.
Yeah.
I would say, it's still on the table I mean, we have you know.
There are probably three good options and the way I look at it we have a long history of owning self storage within our portfolio and lease this portfolio specifically, we assembled over the last 10 years since <unk>. So we could continue to own those properties are currently managed by both extra space and cube.
That might be the right move for at least the near term given the high growth expectations embedded into that asset class right now.
But ultimately we could you put a net lease in place like we did with extra space I think we have a good blueprint.
For that we did back with the CPA 17 storage assets and then you know certainly the east assets will trade at pretty tight cap rates. So to the extent, we think that it's.
It's the best way to fund new deals than that then that's an option as well to sell all of our or maybe a portion of the properties that.
That's a good use of capital or a good a good allocation of capital at that at that point in time, but generally I think we can be patient right now because.
Because we do know these assets well and in New York stuck with some outsized growth within them.
Okay. Thanks for the time.
Yep you're welcome.
Thank you. Our next question is coming from John Kim with BMO capital markets. Please proceed with your question.
Hey, Good morning, guys, it's Eric on for John Just one quick one on CPI rents of the acquisitions closed year to date did any of those have the CPI at lease agreements baked in them.
But what we've closed year to date, yeah, it's about.
About 50% of our year to date and looking for the number were now just below 50% of our.
Just above 50% sorry of the deals we closed have CPI, that's a mix of both Europe , probably predominantly Europe I think there's some U S. In there as well and some have caps and some are uncapped and our pipeline is very similar it is actually just under 50% for the pipeline that we talked about in terms of the amount of of CPI.
Base increases versus fixed increases maybe.
Maybe the other thing to notice even the fixed increases doesn't getting we are able to negotiate a little bit higher of a increase in what we've seen in the past I mean typically in the past its probably been.
You know, 2% on average maybe even a little bit below that and I think now we're seeing a fixed deals in the 2% to 3% range. So there's some upside there.
Given the current market conditions.
Okay.
Conversations aren't becoming more difficult kind of given the current inflationary environment.
Yeah, I mean look they it's more of a conversation now certainly in Europe .
It is more standard or customary to have inflation. So we're continuing to get those I think there's more discussions around floors.
Oh, I'm sorry for per caps and if we do cats, we typically require floors as well.
In the U S fixed has historically been more standard, but it doesn't mean that we're not getting some of those but yes, there's more discussion around it and certainly one of the benefits of sourcing most of our deals through sale leasebacks, we can dictate structure and and we certainly have an emphasis on an inflation based increases in our leases.
They have some success.
Okay perfect. Thank you.
Welcome.
Thank you. Our next question is coming from Emmanuel Korchman with Citi. Please proceed with your question.
Hey, everyone just going back to the investment pipeline, just if you could share with us what you think the pace of closing those might be.
Through the year.
Yes, I mentioned.
On a prior question Manny that you know the 400 million that are in advanced stages.
Obviously the markets are volatile so its hard to predict entirely but our expectation is that we'll close.
Most of those during the second quarter.
The remainder of our kind of pipeline.
It is hard to predict I think that's gonna be further out in the year and obviously anything that we would close in the fourth quarter is likely not even in our pipeline at this point in time.
<unk> historically has been our most active quarter so.
For modeling purposes, you're looking for how to pace things out and maybe the only thing I can say is that second quarter should be active and we would expect the fourth quarter. We continue to be active in roofing. That's the third quarter full suite I guess.
And then Jason just following up on that given.
Cap rates are potentially moving upward.
Do you have any desire or do you even think about pausing things that say, hey, Luckily we don't have to do this as quickly as we wanted to maybe maybe it's to our benefit to wait or is there something else weighing against that or how do you kind of think about.
That environment right now.
Yeah, I mean look from my perspective, if we're able to generate sufficient spreads to our cost of capital.
You know then we want to stay active in the market.
Good access to capital.
We're in a really good place from balance sheet standpoint, right now Tony mentioned that we raised.
Well, yeah, we raised a 1 billion and a half of bonds last year, we have.
Expanded our exercise of our accordion feature on our term loan. So we have you know.
Close to 2 billion, maybe a little over $2 billion of liquidity. So we feel very good for me.
A capital availability standpoint, and we do like our spreads I think clearly the cost is higher on the debt side right now.
It was a couple of months back and certainly over last year, but you know were lower leverage buyer. So overall, our cost of capital is more impacted by our cost of equity, which has meaningfully improved since February . So we're feeling pretty good about our cost of capital I think that when you think about cap rates, it's hard to predict where they're going to go I think that they are seeing.
Some signs of increases, but you know if we can find some good deals now we want to continue to transact and and if rates rise throughout the year. Then we will be aggressive on those as well and we're gonna be mindful of our cost of capital all along but we do feel good about the spreads were able to generate.
Great. Thanks very much.
Youre welcome.
Thank you. Our next question is coming from Harsha <unk> with Green Street. Please proceed with your question.
Hey, My first question is around the 40% of lease within the portfolio linked to uncapped CPI.
How much of that is coming from Europe versus the U S.
Yes.
Tony Brooks.
Brooks out that I want to say that it's about 50 50, but go ahead Brooks.
Sure.
<unk> as you said around 40% its about 60 40 Europe to U S. If you were to split that 40.
That's helpful. And then you know you mentioned to the your own dose.
NOI growth that you expect from these leases to increase how much of that is yes.
The U S versus Europe .
I'm, sorry, I didn't catch the end of that question.
So you mentioned the NOI growth from these lease is moving up to 3% towards the end of the Oh.
How much of that is being driven by expectations that you're seeing already inflation from last year that will flow through into NOI.
How much of that is coming from the U S versus Europe , and then looking forward at 2023, even how do you expecting back moving.
Yeah, I think what we're looking at the curves that are out there right now for both the U S and various countries in Europe in which we operate and you know I think it's it's really across the board I would say that the curves in the in Europe has has moved along with the U S and are in the most recent months. So you know when I highlight.
It earlier, you know about a one to two cent increase over the back half of this year and in terms of what we've seen move in last month.
Month or two since initial guidance I think that's you know pretty fairly weighted between the U S and you're at the end so it's definitely in both locations.
Got it that's helpful. And then for my second question I wanted to touch on about two thirds of the acquisitions in the first quarter came from Europe .
I'm what I'm wondering is this is it because maybe you are seeing higher than that.
Now relative to the U S O.
How should we expect the trend for the rest of the year.
Yeah sure Yeah, we did have a higher amount of deals and in the first quarter I think year to date, it's about a 50 50 split.
Between the two regions so higher than we've had in the past I think 2021. It was about a third of our investments and our ABR is is is allocated about a third to Europe . So there's a little bit higher allocation right. Now I think generally speaking we were able to generate wider spreads in Europe , I think cap rates have.
You know compressed over the last year to two years inside of those in the U S, but not enough to offset the the the cheaper borrowing costs that we see over there.
Yeah, it's a good market for us it's there's lots of reasons why we like to be there certainly spreads is one.
But just the quality of the real estate barriers to entry.
You know and the lack of competition are all things that are positive attribute so we will continue to to hopefully find good investments there and the pipeline is also a little bit weighted I think it's about 50, 50, 50, Europe U S as well, so a little bit of an elevated.
Allocation relative to the existing portfolio.
Sounds good thank you.
Youre welcome.
Thank you. Our next question is coming from Sheila Mcgrath with Evercore ISI. Please proceed with your question.
I guess good morning, I, Jason I was wondering if you could remind us based on your experience of closing the other CPA funds is there short term selling pressure as the retail investors get more liquidity or just how should we think about that dynamic.
Yeah, I think for the first couple of days, maybe maybe a week or so you'll see elevated trading but it should moderate over time in the past.
Prior CPA is not not CPA 17, actually there were other CPA programs to reinvest into so there might be more selling pressure back then.
Over time, we've seen half, maybe a little bit more than half the shareholder stay in but it's the most most of the selling pressures pretty pretty short term and you know our expectation is they'll be institutional investors that will see it as a.
You know the elevated trading volume as a way to to maybe get a position in W. P. Carey and it should absorb a lot of the volatility.
Okay, and then on the positive outlook from the rating agencies is that driven in part by the additional diversification that you'll get on clothing CPA 18, So we.
We should wait for closings for any change.
Well, there's no I don't think it's that yeah, it's not the additional diversification I mean, we're very well diversified in CPA 18 is a diversified portfolio, but it's not adding.
That much, especially given the size of it relative to W. P. Carey's current size I don't know Tony if you want to tick through any of the two reasons, but generally speaking our credit profile has continued to to improve.
And I think that's probably more the reason in particular, our secured debt has come way down and leverage levels as well. So there's just a lot of positive momentum behind our credit profile.
Yeah, So like I said Oh go ahead.
Adding to that is it's really you know we don't expect any material change in our metrics as a result, the CPA 18, and so I think that's been positively by.
Rating agencies.
Okay and last question Tony.
Hypothetically if you were going to go into the unsecured 10 year bond market now where do you think a range rough in the U S and in Europe would be.
Just to help us and that's another great question, Sheila I think that's something that we're monitoring on a daily basis, but it really is a dynamic environment and you know I think we're aware obviously that rates have moved them from you know where we've laughed issued and certainly even in the last six weeks I'd say you know, it's moving by the day, it's really hard to pinpoint.
The number is.
You know, we do expect that it's moved up in both the U S and in Europe , you know in terms of where we could issue right now, but it is it's pretty challenging for us to pinpoint a number and I think what's more important is that we don't really have a reason to to transact at this point in time, given all the work that we've done on our balance sheet and how well positioned we are and so.
I did mention the the term loans that we are exercised and the increase on our credit facility. So we have a lot of room. There we have a lot of dry powder on the equity side with the the forward agreement that we still have outstanding and so we really don't expect to need to transact in this market where it stands right now.
Okay, great. Thank you.
Sure.
Thank you as a reminder, if he would like to ask a question. Please press star one on your telephone keypad at this time. Our next question is coming from Chris Lucas with capital One Securities. Please proceed with your question.
Hey, good morning, everybody, Hey, Tony just to stick with you for a second just going back to the term loan what's the duration and is there any prepayment penalties during the during the duration of the term loan.
Yeah under the credit facility for US matures in 2025, I think we'll certainly be looking to address it before that point in time, but in terms of the the actual prepayments and they're they're fully flexible. So there's there's no prepayment penalty on that which was one of the interesting components for us.
Okay, and then Jason just kind of going back to the conversation about you know your flexibility and optionality with with this self storage assets.
And then just thinking about the hotel export lease exploration.
So I guess sort of two parts one is what's your view or bias as it relates to what to do with the hotels once they roll off of the Master lease and then secondarily to that is there a.
Risk management profile that you want to keep in terms of limiting either by you know gross value of ABR exposure or as a percentage of overall ABR exposure youre willing to have an operating assets versus you know fully pass through triple net lease assets.
Yeah. Those are those are good questions Chris.
On Marriott and we would not expect to own those assets long term, we think that they would convert to franchise agreements to the extent they don't they don't renew the leases.
And we don't have to have a immediate sale I think it's probably prudent to.
Until those assets are more stabilized coming out of Covid.
I wouldn't expect us to hold them for very long hard to put an exact timeline and with a stable as stabilization would look like.
But ultimately we would certainly sell those I think.
The self storage is probably a little bit different we've there are different cash flow profile, obviously much more stable than the.
The hotel industry. So I don't think you'd see as much noise moving through the income statement or our even on our expense side of things.
Holding yourself storage, but it is a sizable amount I mean, it's not that big relative to the broader portfolio, but what we're adding is meaningful in size and we certainly keep that in mind as we look at our options.
Which you have to mitigate that could be to convert to net lease, which we did with the private portfolio for if you think that there are.
It's the right thing to sell and reinvest that into into net lease assets. You know that's something you can consider as well, but that puts you right. That's part of the the pardon.
Part of the consideration in in what we do these assets is how does that impact.
Ability of a net lease portfolio.
Great. Thank you that's all I had this morning.
Okay, great. Thanks, Chris.
Thank you at this time I am not showing any further questions I'll now hand, the call back to Mr fans.
Thanks, Jesse and thank you to everyone on the call for joining us this morning.
If anyone has additional questions. Please call investor relations directly on to one to four nine to 1110 and that concludes today's call may now disconnect.
Yeah.
Okay.
Okay.
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