Q2 2022 WP Carey Inc Earnings Call

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Hello, and welcome to W. P. Carey's second quarter 2022 earnings conference call. My name is Kevin and I'll be your operator today all lines have been placed on mute to prevent any background noise. Please note that today's event is being recorded after today's prepared remarks, we'll be taking questions via the phone.

So how did you so it will be given at the appropriate time.

My pleasure to turn the call over to Peter Sands head of Investor Relations. Mr. Sands. Please go ahead. Good morning, everyone. Thank you for joining US this morning for our 2022 second quarter earnings call.

Before we begin I would like to remind everyone that some of the statements made on this school 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 and.

An online replay of this conference call will be made available in the Investor Relations section of our website at W. P. Carey dot com, where it will be archived for approximately one year and where you can also find copies of our investor presentations and other related materials.

I'll hand, the call over to our Chief Executive Officer, Jason Fox.

Thank you Peter and good morning, everyone.

During the second quarter, we continued to successfully navigate a dynamic market backdrop performing strongly for a number of fronts same store rent growth, reaching a new high you raising your expectations for the deal volume we can achieve this year.

In an environment, where investors are concerned about inflation rising rates and the potential for a recession. We believe we're uniquely positioned among our net lease peers to continue growing.

Yes, the performance of our stock has enabled us to raise additional forward equity ensuring we have ample capital to deploy into new investments raised the stock prices that help offset some of the spread compression caused by sharply higher interest rates.

Cap rates moving higher we're optimistic about our ability to continue investing accretively in the second half of the year.

We also continue to offer downside protection just wanted a healthiest balance sheets in the net lease sector.

First site approach and at roughly 5% dividend yield supported by high quality cash flows and best in class rent collections throughout Covid.

I'm joined this morning by Tony stand down our CFO and together will cover. These topics. In addition to our earnings and updated guidance, which includes the impact of our merger with CPA 18 closing just a few days from now John .

Jon Clark, our President and Brooks Gordon head of asset management are also here to take questions.

I'll start with the acquisition of CPA 18.

Earlier this week, we announced the CPA 18 shareholders approved our proposed merger, which is scheduled to close on Monday August 1st.

Physician adds about $2 billion of high quality real estate to our portfolio at a cap rate in the mid sixes. After planned asset sales the vast majority of which have now been completed.

In addition to being well aligned with our existing portfolio with no integration risk and minimal balance sheet impact.

That concludes our exit from the non traded REIT business incrementally simplifying our company and enhancing the quality of our cashless.

I'm pleased to say that we ended up to the high side of our original estimates for accretion from the merger through a combination of several factors, including stronger NOI growth from its portfolio of operating self storage properties.

Moving to our internal growth with close to 60% of rents coming from lease is tied to inflation, we continue to generate sector, leading rent growth. A result of our long standing focus on sale lease backs, where we are able to directly negotiate lease structures.

During the second quarter about 15% of our inflation based ADR went through scheduled rent increases with an average increase of five 6% within this leases with uncapped CPI rent bumps rent increases averaging just under 7%.

And CPI based leases, which had rent bumps tied to CPI, but with cash rent increases approaching 4%.

This resulted in our overall contractual same store growth increasing at 3% during the second quarter, which we believe at the highest in the net lease sector.

Based on current forecasts for inflation, we anticipate that our overall contractual same store growth will further increase to about three 5% in the second half of the year and closer to 4% early 2023 with the potential to move higher if inflation remains at recent levels.

In addition to the assets, we're adding to the CPA 18 merger. We've also made excellent progress towards the investment volume embedded in our original guidance, including about $1 $1 billion of investments year to date, including $478 million of investments during the second quarter and just over $300 million in July .

Within our diversified approach, we remain primarily focused on warehouse and industrial properties, which comprised over 80% of our second quarter deal volume.

On a regional basis, our second quarter investments were split roughly two thirds to one third between the U S and Europe .

We continue to generate strong deal flow from existing tenant and sponsor relationships, representing close to 80% of our second quarter deal volume.

While our pipeline remains fluid, we continue to see plenty of opportunities and feel good about where we are at this point in the year in total given the transactions we completed so far.

We have in our pipeline at advanced stages and capital projects or commitments scheduled to complete in 2022, we have good visibility into investment volume approaching $1 $5 billion with five months of the year remaining including the fourth quarter, which is typically the strongest quarter of stellar seat to complete transactions ahead of year end.

Turning now to the transaction market backdrop, which continued to evolve during the second quarter. It can fairly be characterized as remaining and an adjustment period in response to sharply higher interest rates, our sellers' expectations on cap rates catch up with those buyers across property types and regions.

Broadly speaking the types of investments we target we've observed market cap rates move roughly 50 to 100 basis points higher year to date.

I'll give that movement occurring since the end of the first quarter.

The $1 $1 billion of investments, we completed year to date had a weighted average cap rate of about six 1%, which includes investments closed a tighter cap rates earlier in the year.

Well, we executed deals across a wide range of cap rates generally you went from making investments with going in cap rates in the fives during the first quarter to making investments with cap rates in the mid sixes during the second quarter and we see potential for cap rates to further increase during the second half of the year.

Of course, we are not solely focused on an initial cap rates importantly, our investment spreads are also benefiting from higher growth on newly originated deals.

For leases with rent Escalations tied to CPI, we're projecting a relatively high growth rate in the first year or two benefiting our unlevered IRR or average yields fixed rent bumps on new deals have also been getting gradually higher.

The combination of higher rent growth and a more favorable cost of equity means we wont need to see as much cap rate movement compared to most of our net lease peers in order to get back to the spreads we were achieving last year.

In terms of our ability to win deals. Our established approach continues to work providing certainty of close to sellers given the moderate use of leverage in your underwriting and ample liquidity and fat we've strengthened our competitive position now that the higher levered buyers, including private equity real estate funds and other buyers rely on C. N D. S have largely moved.

To the sidelines given dramatic increases in their cost of capital or the unavailability of asset level debt.

This is in March contrast in the last few years when sellers with largely overlooked the execution risks associated with such buyers, allowing them to win deals on pricing. There was only a few basis points tighter than traditional routes.

In terms of the types of transactions, we're focused on sale lease backs continued to comprise the large majority of our investments during the second quarter corporate owner users of real estate contemplating sale lease backs typically how to use of proceeds which supports deal flow during both times of economic expansion often in conjunction with M&A activity and <unk>.

In times of economic contraction when alternative sources of capital such as high yield debt are considerably more expensive or less available. This is especially the case for tenants just below investment grade, which is the segment of the state leaseback market and target.

Turning now to our capital position, having issued over $300 million of equity for its through our ATM program. During the second quarter at an average price close to $84 per share.

In an exceptionally strong position in conjunction with previously issued equity forwards that remain Undrawn. We currently have enough equity capital available to fund over $1 billion of investments on a leverage neutral basis, our ability to execute on our 2022 investment volume will therefore, largely be driven by what happens in the broader economy and net lease transaction.

Markets, particularly cap rates, rather than our ability to access the capital markets.

Before that could be sold during the second quarter also factors into our ability to maintain adequate investment spreads with our stock price improving since earlier in the year and relative to where it was during 2021.

And because we are conservatively levered, our cost of equity has a larger impact on our overall cost of capital and our cost of debt does the.

The improvement in our stock prices, therefore help to offset some of the increase in our borrowing costs.

In closing despite investors' concerns about slowing global economy, the potential for a recession. The factors I discussed this morning give us confidence in our ability to navigate the second half of the year.

In addition to higher internal growth, we expect to continue finding interesting new investment opportunities and increasingly wider cap rates arm with ample liquidity in an advantaged cost of equity.

We also continue to believe we are better positioned than any other net lease REIT for inflation protection.

One of the safest REIT portfolios with proven stability in our cashless and with that I'll pass the call over to Tony.

Thank you, Jason and good morning, everyone.

Total <unk> for the second quarter was $1 31 per share with real estate a F. F O of $1 27 per share driven by strong same store rent growth and the continued pace of our investment activity.

We are pleased to announce our updated guidance. This morning, with an increase to our expected real estate a S. F O of eight cents per share at the midpoint or about one 6%.

Largely by the expected impact of our merger with CPA 18.

Anticipated accretion from the merger combined with overall strong performance from our core real estate business is expected to more than offset the investment management income. We previously earned from managing CPA 18.

As a result for the full year. We currently expect total E F F O of between $5.22 and $5 30 per share.

An increase of two cents to the midpoint of our initial guidance range.

This includes real estate a F F O of between $5.13 and $5.21 per share representing estimated year over year growth of approximately five 7%.

As Jason discussed given the pace of our investment activity year to date and the visibility we have into our pipeline. We are raising our guidance assumption for investment volume by $250 million at the midpoint.

Between $1 75 and $2.25 billion.

Which of course is separate and in addition to the approximately $2 billion of assets, we expect to add to our merger with CPA 18.

Upon completion of the merger, we expect CPA eighteens net lease assets to add approximately $75 million of annualized base rent.

In addition, the 65 self storage operating properties, we are acquiring from CPA 18.

It to generate approximately $60 million of annualized operating NOI with an estimated $26 million contribution to our 2022 guidance from the close of the merger through the end of the year.

This is in addition to roughly $10 million of NOI. We currently generate from the 19 self storage operating properties, we owned prior to the merger.

Disposition activity remains on track with our initial expectations of $250 million to $350 million for the full year.

Second quarter dispositions comprised eight properties for total proceeds of $93 million, bringing.

Bringing the total for the first half of the year to $119 million.

Certain CPA 18 assets initially anticipated to be sold prior to closing the merger are now expected to close in the remainder of 2022, which may take us to the top end of the range.

The addition of high quality core real estate earnings from CPA eighteens assets over the remainder of the year is expected to offset substantially all of the income. We previously earned from managing CPA 18.

Our third quarter results are however expected to include approximately $1 million of asset management fees from CPA 18 as.

As well as between $3 million to $4 million of F. O from our ownership interest in CPA 18, which are included in earnings from equity method investments.

Beginning in the fourth quarter those income streams will be eliminated after which virtually all of our E. F. F. O will be derived directly from real estate further simplifying our business and enhancing the quality of earnings.

Turning now to our expenses.

We expect the CPA 18 merger to have a nominal impact on our expenses incrementally improving our overall efficiency in relation to our asset base and revenues.

Because substantially all of the net lease assets acquired from CPA 18 are triple net non pass through property expenses are not expected to change materially in the back half of the year.

For G&A expense, our updated guidance. It seems that will total between 88 and $91 million for 2022, an increase of approximately $2 million at the midpoint, primarily reflecting the loss of reimbursement from CPA 18.

Interest expense is expected to increase in the second half of the year as we take on approximately $780 million of CPA 18 mortgage debt.

At a weighted average interest rate of four 3%.

Lease termination and other income totaled $2 $6 million for the second quarter, a significant decline from $14 $1 million in the first quarter.

And our guidance currently assumes the total for the year will be approximately $25 million to $30 million.

Lastly, nonoperating income for the second quarter totaled $6 million, primarily comprising realized gains on foreign currency hedges.

As you May recall nonoperating income for the first quarter also included an annual dividend received from our investment in lineage logistics of $4.3 million, which we do not expect to receive again until the first quarter of 2023 and.

And a $900000 final cash dividend on preferred stock of watermark lodging Trust, which has since been redeemed.

For the remainder of the year. We therefore expect this line item to reflect only foreign currency hedging gains.

As a reminder, we hedge the impact of foreign currency movements on our cash flows in two principal ways.

First by over weighting debt denominated in foreign currencies, primarily the euro, creating a natural hedge through interest expense.

Our foreign denominated operating expenses also add to that natural hedge.

And secondly, we continuously monitor and hedged the majority of the remaining cash flows through to rid of his contract further insulating our earnings from adverse currency movements.

This dual approach has proved to be very effective and as a result, we expect the euro weakness in 2022 to have a very limited impact on our guidance.

Moving now to our balance sheet and capital markets activity.

Year to date, we further strengthened our balance sheet positioning through the use of our ATM program.

During the second quarter, we issued equity totaling $39 million at an average price close to $82 per share.

In addition to this we sold three 7 million shares through our ATM program in the form of equity forwards during the second quarter locking in our ability to fund future investments with over $300 million of equity raised at an average gross price close to $84 per share.

And with about $285 million remaining available for settlement under equity forward. We put in place. During 2021, we currently have nearly $600 million of dry powder available from Undrawn equity forwards.

On the debt side as we discussed on our last quarter's call. We exercised the accordion feature on our term loans in April for the equivalent of about 300 million U S dollars with proceeds used to pay down our revolver balances.

We ended the second quarter with about $400 million drawn on our $1 8 billion dollar unsecured revolving credit facility, which in conjunction with our Undrawn equity forwards puts us in an exceptionally strong liquidity position totaling over $2 billion at the end of the second quarter.

We expect to fund the merger cash consideration substantially from cash on hand generated by the proceeds received from CPA 18 asset sales with minimal required draw on the facility.

With no bonds maturing until 2024 and ample liquidity to fund our second half investments, we will continue to access capital markets, Opportunistically, and especially strong position to be in given the current uncertainty and capital markets.

Turning to our key leverage metrics at the end of the second quarter debt to gross assets was 39, 8% towards the low end of our target range, which is expected to be virtually unchanged with the closing of the merger.

Similarly, net debt to EBITDA was five six times at quarter end and is expected to remain well within our target range with the closing of the merger.

Cash interest coverage ratio was six six times over the second quarter among the strongest in the net lease peer group.

At the end of the quarter, our debt outstanding at a weighted average interest rate of 2.6%, reflecting the proactive management of our liabilities due to the debt refinancing we completed in recent years, helping offset the impact of rising interest rates.

And as a reminder, our credit facility represents the vast majority of our floating rate debt.

Lastly, I want to mention that earlier this week, we issued a green bond allocation report, which is available on our website.

I'm pleased to say the proceeds have been fully allocated to eligible green projects.

All of which have either brain very good or LEED gold ratings were better.

In closing, we remain uniquely positioned to outperform with our sector, leading internal growth and strong capital position supporting continued deal momentum in an environment, where cap rates are moving higher.

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

Thank you will now be conducting a question answer session, if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset.

Before pressing star one one moment, please while we poll for questions. Our first question today is coming from Anthony Pallone from JP Morgan. Your line is now live.

Yeah. Thanks, Good morning, I'm sure maybe question, Jason on the deal flow picking up and you seem pretty optimistic about what you're seeing there just wondering how much of that is the environment shifting and becoming more attractive versus just W. P. Carey's capital costs are holding up relatively.

Well I'm, giving you the opportunity to kind of be more aggressive.

Yes, it's probably a combination of the two Tony I mean, certainly you know our diversified approach has always given us a wider opportunity set than many of our peers both across asset types as well as geographies and then we also focus you know mainly on sale lease backs and I. We've continued to see the availability of those ramp up.

You know we've talked in the past about a shift in how corporates view owning versus leasing real estate and that's continued you were still seeing sale lease backs and supported M&A activity.

Particularly private equity backed activity, but maybe more recently with.

With the rising rates and the dislocation in the debt capital markets, especially the high yield bond markets, where.

Were you know many of our tenants.

We're focused just below investment grade you, we've seen and been sellers have seen sale leasebacks as maybe a better alternative source of capital and meaningfully more attractive than their other alternatives. So it's probably a combination of something specific to us, but you know you know rising rates, obviously I think sellers understand it.

Cap rates are going to go up as well and maybe theres an expectation for many sellers that they are going to continue to rise and this is a good time to get into the market.

Cap rates are going to continue to rise from here.

Got it.

Thanks, and then on on CPA 18, you know how much more in sales where you need to do after I guess it closes next week, just wondering like how long you'll be carrying some extra assets. There and then the the mid sixes I think cap rate that you had mentioned I mean, what what is what has been roughly.

The pick up I guess from from a better performance coming out of storage there.

Yeah Brooks do you want to take asset sales and maybe Tony you can just touch on on on C. P team storage.

Sure. This is brooks so on the disposition front, we've completed about 75% of what we planned. So we have two more in process. One we would expect a later in August and another kind of later in the summer or maybe early September .

Okay. So that's like I guess for well over $100 million of hundreds of $200 million that you kind of still keep for a few months there.

About 100 Yep.

Okay.

Yeah, and then on the the self storage side, you know I think we're just seeing continued improvements over the back half of the year I'm in line with what we've been seeing in recent periods. So you know what that's done is really kind of moved us into and a positive accretion or essentially breakeven from what we were initially expecting on the merger.

Yeah.

Okay, and then just last one your floating rate debt things about 15% of total and it sounds like you put a little bit more on there with CPA 18, Wood, where do you think you want that to be going forward, how should we think about it.

Yeah, I would say our floating rate debt is predominantly limited to our credit facility and our borrowings on our credit facility well CPA 18, well, we'll add pretty minimally to that I think you can expect that you know we'll continue to look to the fixed rate debt going forward and you know and on the variable side I think maybe it's important to also remember that.

A good portion of that is dominated in euro and so we haven't entirely seen kind of movements.

Zero with pegged at sort of a negative base rate them, even up until now. So you know I think that there's been minimal impact on rates rising for us as it relates to where we are in the year and what we're expecting for the remainder of the year, but I don't expect it.

<unk> interest rate to move up I think you would probably see that our exposure there moving down overtime.

Yeah, Tony keep in mind that we just mentioned that we have about $600 million of equity forwards left to settle so you know we have some flexibility on on you know how do we fund deals, but also how we treat the floating rate debt on our line.

Got it great. Thank you.

You're welcome.

Thank you next question is coming from Nicholas Joseph from Citi. Your line is now live.

You know as you execute on the new deals, particularly on a sale lease back side, how are conversations going in terms of rent escalators, either CPI based I'm, starting out in new leases or or just fixed rate, how how are those conversations actually proceeding.

Yeah look we still focus on C. P. I N and as you can imagine it's gotten maybe incrementally more difficult to get those but we're still seeing them, especially in Europe I think CPI linked leases are more standard there and you know prior to the recent trends in inflation you know almost all of our deals were uncapped.

C P I in Europe , especially I think caps and floors or maybe now part of the conversation, but we're still getting I mean year to date I think it's about it maybe just under 50% of the $1 $1 billion of deals year to date have CPI based escalators built in and I think our pipeline is about the same if some of those have caps I think the pipeline is.

Is maybe you know more significantly skewed towards uncapped CPI, but.

It is it's got any incrementally more difficult or maybe it's just part of the conversation, but it's still a big focus point of ours.

Thanks, That's helpful. And then just with CPA 18 closing in a few days.

How much integration work is there to do obviously you've done these in the past, but just you know as you think about bringing the assets onto the balance sheet.

Yeah. It's it's first time, we've been managing since inception, Tony if you want to talk quickly about the integration, it's mainly on the accounting side, but it's not from an operation standpoint or from an asset management standpoint at all.

Yeah, I think given where you can manage on their behalf as Jason said, it's pretty insignificant even bringing on from an accounting perspective, you know it's not.

As much of a heavy lift as you would expect in M&A.

Thank you very much.

You're welcome. Thank you next question is coming from Greg Mcginniss from Scotiabank. Your line is now live.

Hey, good morning.

Jason I'm just wondering how you are thinking about tenant credit risk today as the operating environment.

And I guess the official recession that we're now in a of course you had some tenants to your internal watch list.

Brooks you want to talk about the watch list and tenant credit.

Sure I mean credit quality is very strong right now investment grade is a little over 30% and we're collecting materially all of our rent from a watch list perspective.

Still very low it's about under 1% and that's down from a COVID-19 peak of that kind of 4% ish range.

Certainly we are potentially near the end of a business cycle and so this is the period of time, where we paying particularly close attention, but really no credit deterioration as of yet.

Yeah, Greg I think COVID-19, you're good stress test for any portfolio for that matter and I think we performed obviously very well during that period kind of sector leader in terms of collections. We you know kind of quickly got to the high 90% range in collections and its credit quality, but it's also a criticality of the assets that we own and the imports.

The tenants kind of keep a wrench current so we feel good about where we sit in the current environment and whether we do technically hit a recession or maybe we already have I'm not I don't think it's it's going to be a big concern are impactful for us, but as Brooks said, we we do keep a close eye on all the credits.

Credits within our portfolio.

Okay, Yeah, I just wasn't sure if that kind of continued supply.

Supply chain issues are matched up with your more industrial and warehouse focused the tenant base.

Uh huh.

Anything any difficulties over kind of the past few months versus kind of accelerated impact from COVID-19, but yep.

Yep Yep, Okay, and then do you have any update in terms of the expected plan for the self storage assets with superior team.

Yeah, No no no real update here you know we are acquiring a meaningful size portfolio. I think it's 65 operating assets 42000 units you know we still have a number of options. We've owned these for a long time is operating assets.

You know certainly we could continue to own these in that format under the current property management agreements with cube and extra space. Obi can also look to put in place in that lease structure similar to what we did with extra space. A couple of years back you know that's always an option.

And of course, you know, we could sell some or all of the properties depending on you know what we're seeing in our ability to fund new deals. So that is an option, but I think right now we look at all of those as you know very good alternatives, but I think we will be patient with whatever we choose especially given the high expected growth within that asset class and we want to see some more stabilized.

<unk> and NOI before.

We we really make any decisions there.

Okay, and I think you mentioned in the past and even if you do convert to a net lease structure you expect the.

<unk> contribution to earnings to be relatively the same.

Yeah, there there there could be a little bit of shift between how we book Capex versus how it flows through to two to NOI or a b R, but yeah, but it won't be beautiful okay. Thank you.

Thank goodness question is coming from Spencer all away from Green Street. Your line is now live.

Okay. Thank you.

In regards to your comment on cap rates being around 50 basis points higher and this is across the board or can you just provide a little more color on how that differs U S versus Europe , and perhaps a little bit more color on it.

Okay.

Yeah, I mean, I would say kind of you both geographies as well as maybe all property types that we're looking at they probably fall within that range of 50 to 100 basis points higher I mean, it's hard to you know to really quantify you know if anything I would say industrial assets in Europe , maybe you have seen a little bit more.

Movement in other asset classes, but that's mostly because they had also compressed. The most you know leading up to the end of last year into Q1 as well. So you know it's it's it's probably.

Fairly consistent across at least the asset types that we target or the types of deals that we target across geographies and property types.

Okay, and then just one on tenant health so energy costs in Europe are obviously are moving higher and Theres, a growing risk of restricted energy use for business and some particular countries have you guys heard anything from tenants and do you see any risk there.

Brooks anything on your side as Brooks, I mean lease up but I'll, let you answer.

Sure Yeah, certainly energy costs have moved sharply higher in Europe , we have not thus far seen any acute impact on tenants certainly some grumbling I will say it presents an opportunity for us solar is a big opportunity set, especially for industrial assets and so that's become incrementally more appealing for tenants.

And in certain areas of Europe extremely appealing and so that will present.

Good run rate opportunity for us going forward.

Yeah, and it's an opportunity both to invest some capital, but maybe equally important it allows.

Allows us to kind of have these conversations with tenants get lease extensions are kind of further embed our properties within their their operations. So I think that's all positive but he had the short term you know it's going to provide a little bit of pressure on some tenant margin certainly.

Okay. Thank you both.

Thank you next question is coming from Sheila Mcgrath from Evercore. Your line is that a lot.

I guess good morning, I'm, just curious if you could give us some insight on the T. P. I kept those leases that are capped it are the escalators are that I mean are the cats closer to two or three per cent.

I think historically I think within the portfolio Tony Correct me, if I'm wrong, the caps or are in kind of the low threes I think on deals that we've been negotiating more recently that include caps you know me.

They were up a little bit into the mid threes, but yeah I think internationally, it's mid mid threes and in the U S. It's closer to 3%.

Yeah, Okay, Great and then on guidance you did tweak that higher on acquisition growth even in the face of FX, which has been a headwind which has gotten worse I just wonder are you.

Absent the F X headwind would guidance have gone even higher and can you provide any insight on how much of a headwind on FX is for.

In the bed for W. P C in the back half of the year.

Sure, Yes, Sheila I'll take that I think you know I mentioned in my remarks that our hedging strategy mitigates. The majority of the rest of the movements in our foreign cash flows.

After taking into account hedging I think the impact from when we initially came out with guidance to where we are now is just under a 1% reduction in total SFO.

And that's really based on an assumption that the euro holds flat to where it is now which is about one O. Two so you know I think potentially there could be some upside there depending on which way you see rates moving over the back half of the year, but we were substantially able to mitigate that would be a hedging strategy that we have in place.

Okay. Thank you very much.

Thank you next question today is coming from John Kim from BMO capital markets. Your line is now live.

Thank you.

You remain very active in acquisitions with Jason you mentioned that the cap rate expansion has really accelerated since your last call. I'm wondering if you think that dynamic is going to continue and if so why not pause a little bit more on investment activity.

Yeah look it's it's it's hard to predict you know what's going to happen I mean, we have seen cap rates. If you look at just our portfolio, but we purchased them in the first quarter, we were buying deals kind of in the fives and you know a lot of those were originated in the second half of 2021, and then closed in Q1 and that was really before we saw a big shift.

And in interest rates and then in Q2 I think you know most of our deals are at least at the average of of our deals where you're more mid sixes I think our pipeline is probably similar maybe slightly higher depending on the mix of assets that that we close but I mean your question about is it better to wait for higher cap rates I mean, I guess from my perspective, that's the worry.

Able to generate sufficient spreads you know relative to the riskiness of the investments that we're making I think we want to stay active.

We do believe we're able to do that in the market and you know we're in a very good position from a capital funding perspective, as well with a $600 million of equity forwards in place that are left to be settled in when you combine that with the availability on our credit facility, we have kind of $2 billion of liquidity at this point in time, So I think.

We can do deals now because there because there are interesting and we hope that cap rates continue to increase.

Half of the year and into next year and.

You know, we'll get even more interesting.

Okay.

You have a fair amount of debt expiring in the next couple of years can you just provide an update on where you could raise mortgage debt and unsecured debt today.

Yeah, I mean look we're not really in the in the mortgage market. We do have some mortgages left on the balance sheet from some legacy assets Bettina will likely pay those off as they come due.

And we have paid off a lot of those over the past couple of years I'm in prepaid in many cases.

There's not a lot maturing over the next two.

Two years I think really our next biggest maturity is in 2024 and I think it's hard to predict where the bond market pricing is right now as to what you were probably two to 250 basis points wider than where we've issued in the past and that's probably both in the U S and Europe , but down, but it's pretty dynamics that's it.

It's kind of hard to predict I think importantly, we do have a lot of flexibility I mentioned, the $600 million of equity forwards on a lot of availability on our revolver and frankly, it's not just the bond markets. We look at I think bank debt as well as private placement marker also alternatives. So you know I think we have flexibility we can be opera.

<unk>, we really don't need to issue any debt because of the maturity schedule as well as kind of funding that's in place for the deal volume through the end of the year, So we'll be opportunistic but.

If the markets are pretty volatile right now.

Okay.

Yeah.

Thank you. Our next question is coming from Mr. Me from JMP Securities. Your line is now live.

Thank you just confirming there's no specific plan in place for the C. P a debt.

For the CPA data for the CPA mortgages that are in place right now yeah, yeah yeah.

Yeah, I mean, we're doing well there go ahead, Tony you can answer.

Yes, it's pretty minimal I think we have about 200 and a little under 300 million being added to our maturities in the next year or so and so you know I you know, we'll continue to look to take those out the same way we've been dealing with our mortgage debt is they've been expiring I don't you know in this environment and you know, we don't feel obligated to kind of bring any of that.

Forward any sooner than it would expire but I think we'll continue to address those as we have been with unsecured borrowings.

Okay. That's helpful and then.

If you can provide some perspective on the assets that you're disposing it looks like obviously, there's obviously some vacant but you know some warehouse and retail is that going to be you know kind of the mix, we should expect going forward and what sort of characteristics of these properties have.

Brooks you want to take that sure.

Yeah. So you know we continue to expect about 250 to 350 million and.

And as Tony mentioned, a couple of T. J E T dispositions coming having on balance sheet, you know Frank that likely maybe towards the higher end of that range deal type, it's about a quarter.

By proceeds it is taken assets the balance is really a mix of managing residual risk and a few opportunistic exits.

Property type B, a little over half office are about a third industrial and warehouse, maybe 10% retail. So it's a it's a pretty broad mix and typically these are really a bottoms up decisions were not necessarily taking a big thematic approach in any given year do I will say in the long run we tend to overweight.

Office disposition.

Thank you.

Thank you next question is coming from Chris Lucas from capital One Securities. Your line is that a lot.

Oh, Hey, good morning, everybody.

Can you hear me okay.

We can yes, good morning, Chris Okay. Good morning, so.

So I guess a couple of questions. Jason you've mentioned I mentioned that the competition on the has sort of gone away as rates have gone up.

Is there a difference in the competitive environment between the you know what's happening in the U S versus what's happening in Europe .

Yeah, I mean, maybe it's a little bit different I mean, we tend to see more private equity real estate buyers just competition in the U S than we do in Europe , and I think they are you know, they're they're typically higher levered buyers. They tend to rely on C. N B S. Another asset level debt. So you know that's either gotten.

Typically more expensive and in many cases unavailable. So I think it's thinned out probably be a little bit more in the U S. I think generally speaking no. There's just less competition in Europe for us it's not a crowded space. There is a there are no public Reits that focus on what we do in fact like many people in Europe consider us as the de facto net lease.

Public REIT, even though we don't obviously trading on exchange over there. So it's probably a little bit more more acute in the U S, but but some of those same dynamics play out to the extent there are private equity buyers that we're competing against in Europe .

I guess you know you mentioned.

Foreign exchange headwinds.

An issue related to sort of a year to date performance, but when I think about it I think about the buying power of that U S. Investors have relative to the euro does that make a big difference.

Peak to trough is like 13% move so far just this year.

Does that impact how you think about where the opportunity set is.

For you guys.

You know it may be incrementally it's helpful helpful, but no it's not it's not part of our thesis we're not.

Looking at our currency trade and in what we're acquiring you know we we we.

Do borrow meaningfully in euros and in ultimately match fund.

You know what we're doing over there, but you know to the extent we are buying now and we do see it.

Change or a strengthening of the euro I think that'll provide some cash flow.

Benefits in the future, but it's all muted you know based on you know the the hedging strategy that we have in place.

Okay, and then just a comment.

A comment earlier about sort of you know.

You know being maybe towards the end of the business cycle I guess curious just as it does it change the balls as it relates to your thoughts about.

Doesn't grade versus non investment grade rated tenants.

In terms of doing transactions at this point in the cycle.

You look at in this environment I think that we are seeing more opportunities with some investment grade.

Tenants, but our focal.

Our focus is still on just below investment grade I think that you know underwriting has always been a key part of our strengths and being in the net lease market.

Wiring are highly critical real estate as really important, especially as you know credit profiles potentially weekend, even if companies get into some balance sheet trouble and.

And there should be structure, we feel pretty confident especially with larger credits that they are going to restructure and with critical operating assets, we tend to fare quite well relative to maybe you have other unsecured borrowers are or the equity holder certainly.

Okay. Thanks, and then Tony question for you is sort of a follow up on the cost of.

Debt issuance today, but I guess more focused on what the swap to fix would look like relative to what you could do in the unsecured debt market on a similar maturities so five to seven years.

Situation.

I think it's tough to comment on that at any point in time, just kind of given the volatility that's out there both you know with rates and and the FX as we've talked about so hesitant to give us kind of a.

Our rate as to where we could swap I think that you know, we certainly think we could do better than what's out in the unsecured market and straight bond offering them, but you know hard to quantify the exact number.

So maybe just maybe simpler not what you were supposed to make number but just the relative cost is the swap to fix a more expensive Avenue at this point, whereas the unsecured bond market and more extensive that avenue.

Yeah, I mean, it maybe youre talking about the you know the bank markets or even private placements for that matter. It probably more the bank debt and you know I think it's probably a little bit more attractive than the bond markets given.

The volatility in and really the fact that no one's issued bonds in the REIT World anytime recently, so there's just a lot of uncertainty there as well.

Okay. Thank you that's all I have.

Youre welcome.

Thank you as a reminder, that star one to be placed in the question queue.

Our next question is coming from Josh <unk> from Bank of America. Your line is not a lot.

Hi, everyone I slippy blanking on for Josh.

Just a question on the record, saying or background, if you got a 3%.

You know that crossing pretty consistent across property type, but I'm. Just wondering you know if there's anything specific you see driving that additional 50 bed I believe you mentioned for the second half.

Is there any additional upside to that rent growth, we might expect from us.

Appetite thank you.

Yeah.

There was nothing specific.

Yeah, I've got that I don't think there's anything specific to highlight from an asset type perspective, I you know I think that the E inflation based linked leases or across the portfolio and we do continue to see the expectations on inflation outpacing or are the actual outpacing.

Expectations I think.

We've seen 2% to 7% in the first quarter, 3% in the second quarter, we do expect that to tick up with the rates coming in the back half of the year to closer to 3.5% and maybe importantly for us what we highlighted in the past and it's important to remember is that we do see a lagged effect in terms of when inflation runs through our leases. So.

Not all of our lease and bump every quarter.

And even every year and the vast majority of our escalations occur on a lag that generally has a look back period that will pull it inflation from three to six months prior to the escalation dates. So you know with the print you're seeing now you'll see that push us up in the back half of the year and then I think you know we're seeing current data that's showing stabilization.

Now pushing out to the end of 2023, both in the U S and Europe . So we would expect that to have a continued tailwind well into 'twenty three and into 'twenty four in terms of how our leases, but again nothing specific on an asset type.

Okay, great. Thank you.

Right.

July and Black Knight close and if maybe there was any change in your assumption your underwriting assumptions on acquisition, giving.

You know I mean portfolio from C. P I.

Yeah, I I missed the first part of that question don't know if it was on my side or your side. It broke up there a second could you could you repeat that do you mind.

I just around if you could talk a little bit more about the July investment closed I believe you said it was like an additional 300 million.

Yeah. It was it was about $300 million it was.

Prenup predominantly one one large transactions and several smaller ones. The large one was about a $260 million sale lease back it was with one of the largest food contract manufacturers in the U S. That you serve you know many or most of the the large consumer goods companies and you know they they basically.

Manufacturer, where we produce a lot of the recognizable brands you'd see in the food world.

So I see a lease back I think the proceeds were used for growth capital for that company I think they are investing in new production lines as they kind of expand and support some new customer products.

It was a portfolio of I think about 20 manufacturing and distribution assets all highly critical to the tenants operations. The bulk of those properties were under master lease and I think it was a 20 year term as well with fixing annual increases. So that's that was the largest deal in July and.

You know like I said, it was a U S deal with it.

Equity sponsors that we work with before so I think we're able to get some favorable economics as well.

Okay, great. Thank you and if I could just about.

One more question on that if there's any change in your thinking around underwriting you know besides concerns over at the macro environment, but you know any change in thinking getting the CPA yeah. That's for V. P. A.

No I mean, nothing nothing related to to the CPA acquisition, a CPA 18 acquisition I think underwriting generally you know as we mentioned earlier you know.

Where we're.

You know, there's some economic headwinds I think it will be even more acutely focused on credit underwriting and typical and we want to make sure that we're generating the right spreads we are seeing cap rates move up I think importantly, you know we are also still achieving a.

Meaningful percentage of these new deals with inflation base increases as well so it but overall no I don't think the underwriting has has has changed a lot from them from a credit perspective or from you know the real estate or criticality of that real estate to the operations company. It's all important.

Great. Thank you.

Yeah.

Thank you next question is coming from John the silica from Ladenburg Thalmann. Your line is now live.

Good morning.

Morning, John .

Just a quick big picture, one for me and you've given some of the success in kind of capital recycling with CPA 18 assets.

Does that make you look at your own office portfolio any differently, because I know a big portion of that capital recycling was office I mean is that.

You know that.

That gives you maybe confidence to potentially do more capital recycling with on balance sheet or currently on balance sheet office asset.

Yeah, I guess, maybe how would you weigh that against you.

Pretty strong cost of capital today.

Yeah, I mean look we've we've been doing a little bit more of that overtime I think Brooks mentioned that typically our dispositions are a little bit more weighted.

In office overall, and if you look at our office exposure I think five or six years ago. It made up about 30% of our ADR today, it's just under 20%.

Maybe that ticks up a little bit with CPA 18, all the pro forma for some of the dispositions, we're probably going to be you know in a similar Zip code.

So you know look we're always evaluating the best way to fund deals the best way to position our portfolio to optimize our cost of capital. So yeah. I think that's something that we think about but but really right. Now we're primarily focused on on adding industrial and in retail primarily in Europe , but also perhaps some in the U S is.

Well, that's where our focus is right now.

And I guess Big picture was the office in CPA 18 or for your office, particularly you sold or are selling from CPA 18.

Is that pretty comparable to what in the.

W. P Carey portfolio today.

Yeah Brooks do you want to take that.

Yes, broadly comparable maybe a slightly higher weighting towards Europe , and that you'd be 18 office portfolio.

But you know broadly comparable comparable kind of.

Investment types.

Okay.

It for me. Thank you very much thanks, Sean.

Thank you next question is from John Kim from BMO Capital markets. Your line is now live.

Thank you I was wondering among your top tenants if there's like a watch list you have or any concerns.

But do you have from a credit profile just given the looming recession.

Brooks you want to tackle that.

Sure. So you know broadly speaking as I mentioned credit quality is very good and that pretty much includes our top 10. So there's there's no top 10 tenants on our credit watch list.

Okay.

And I wanted to confirm that you increased your termination fee guidance for the year by $5 million to $10 million.

Wanted to confirm that's not included in your guidance.

Okay.

The increase that we are proposing that I mentioned, the $25 million to $30 million is included in our guidance.

It's part of it.

Yeah Yeah.

Okay, great. Thank you.

Thank you we've reached end of our question and answer session I'd like to turn the floor back over for any further or closing comments.

Thank you for your interest in W. P. Carey if you have any additional questions. Please call investor relations directly on to one to four nine to 1110.

And that concludes today's school you may now disconnect.

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