Q3 2022 WP Carey Inc Earnings Call
Hello, and welcome to the W. P. Carey third quarter 2022 financial results conference call and webcast. At this time all participants are in a listen only mode. If anyone tried a flyer operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation as a reminder, this.
Is being recorded its now my pleasure to turn the call over to Peter Sands Director of institutional Investor Relations. Peter. Please go ahead.
Good morning, everyone. Thank you for joining us this morning for all of 2022 third quarter earnings call.
Before we begin I would like to remind everyone.
Some of the statements made on this call knows historic facts and may be deemed forward looking statements factors that could cause actual results differ materially from W. P Carey's expectations.
If I had it 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.
Be archived for approximately one year and where you can also find copies on this.
The 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 I'm pleased to say, we generated strong third quarter results across several areas of our business raising our expectations for full year <unk> per share it with real estate as a vote per share on track for year over year growth of just over 6%.
Despite the unsettled market backdrop, we're in a position of strength armed with significant liquidity and the ability to invest across property types over two continents ready to capitalize on attractive opportunities as they arise.
The critical question is when is the right time to utilize our dry powder. Accordingly, I'll focus my remarks. This morning on our recent investment activity and how we're approaching new opportunities in the current climate, which is evolving quickly.
But before I do that I would have outlined three key reasons why WP carry remains uniquely positioned with a net lease.
First in a more challenging investment environment.
The ability to drive higher growth through our best in class contractual same store rent growth, which reached three 4% for the third quarter as.
As current inflation flows through to rents, we expect our contractual same store rent growth to move even higher in 2023 to between four and four 5% and to continue seeing the benefits into 2024.
Second we've raised well priced capital and have an exceptionally strong liquidity position.
So far in 2022, we've raised approximately $1 billion of permanent and long term capital at attractive prices.
Currently have approximately $650 million of untapped equity forwards raised at a stock price averaging in the eighties.
And we raised that capital priced in the mid threes through our recent private placement eurobond issuance.
Furthermore, our recent upgrade by Moody's to be double a one should enhance pricing on our bonds.
And with over $2 billion of total liquidity, we're confident in our ability to continue investing in appropriately priced opportunities.
Third we're benefiting from our recently completed merger with CPA 18, which resulted in better accretion than we initially anticipated but gains from high quality real estate eight so more than offsetting the loss of investment management earnings.
CPA 18, net lease assets are well aligned with our existing portfolio and we expect to realize additional benefits from its sizeable operating self storage portfolio.
Given strong self storage fundamentals these assets incrementally provide a tailwind to our growth now as we look to maximize value we have several options for them, including converting to net lease.
Selling at attractive cap rates, it's a source of capital we're continuing to hold some portion of them.
Moving now to our recent investment activity and the market backdrop.
During the third quarter, we completed an investments totaling $475 million, bringing our deal volume to $1.3 billion year to date, which of course excludes the more than $2 billion of assets, we added through our merger.
Within our diversified approach, we've remained primarily focused on warehouse and industrial which comprised about 80% of our third quarter acquisitions.
Meanwhile, we continue to explore a good number of opportunities in both regions during the quarter. The large majority of our investment volume was in the U S driven by a sizeable industrial sale leaseback.
Overall, our third quarter investments had a weighted average cap rate of six 3%, including completed capital projects and for external acquisitions. It was six 4% about 50 basis points wider than the average cap rate on our 2021 investments keep.
Keep in mind, we were able to find our third quarter acquisitions with debt capital raised at interest rates in the mid threes through our recent private placement eurobond and equity raise at a stock price in the mid eighties.
The significant majority of our third quarter investment volume closed earlier in the period and made a generally lower cap rate environment.
Over the full period, we transacted at a range of cap rates, including up into the Sevens.
Since then bond yields have moved higher and equities have come under further pressure, although some sellers have been stubbornly slow to react to current market conditions sellers holding onto a lower cap rate expectations. However are not getting traction on new deals.
Yes.
Buyers have also step back reducing competition for deals with lenders and risk off mode and leveraged buyers largely sidelined given the dramatic increase in their cost of capital or inability to secure asset level debt.
Recently, however deal pricing has become incrementally more interesting and.
And we believe market conditions are turning in our favor.
We're actively exerting our pricing power and new deals demanding higher yields which were beginning to achieve.
With a strong balance sheet and significant dry powder from equity that's already been raised we're able to provide certainty of close to sellers. They made a smaller pool of active buyers.
Deal timing remains uncertain, however, with sellers acclimating to higher cap rates at different speeds, although we believe sale leaseback sellers, which had a use of proceeds are likely to do so more quickly.
We also expect the types of investments, we focus on namely larger deals sale leasebacks and warehouse and industrial properties to see greater cap rate movement in commodity retail.
We've tempered our expectations for investment volume for the remainder of this year, but I would note that the current market conditions make it particularly challenging to predict investment activity over the near term.
But the deals in our pipeline today, we feel comfortable with the bottom half of the range our ability to move into the top half will largely be governed by sellers' willingness to transact at reasonable pricing, which has the potential to push deals into 2023, setting us up for higher investment activity next year at wider spreads.
In summary W. P. Carey is ideally positioned for the current environment.
Having raised well priced capital and sitting on over $2 billion of liquidity, we're poised to capitalize on appropriately price opportunities as they arise.
We're able to exert pricing power and made a smaller pool of buyers and sellers are beginning to acclimate to higher cap rates.
Cap rates more broadly aligned with funding costs. However, the capital we've raised at attractive prices will allow us to continue investing in the best opportunities and we'll continue benefiting from our sector, leading inflation driven rent growth.
To the extent, we enter a recession in 2023, we have one of the safest REIT portfolios with proven stability in our cash flows across economic cycles.
And with that I'll hand, the call over to Toni Sanzone, our CFO to review our results guidance and balance sheet after which we'll take questions along with our head of asset management Brooks Gordon.
Thank you, Jason and good morning, everyone. We had a strong third quarter reporting total <unk> of $1 36 per share up 12 cents or nine 7% from the year ago quarter and derived almost entirely from our real estate segment, which generated a S. F O of $1 34 per share.
Our results reflect the accretive impact of our net investment activity and sector, leading same store rent growth as well as the contribution from the net lease and operating real estate acquired in our merger with CPA 18.
As a reminder, that transaction closed on August 1st and therefore, our third quarter results do not yet capture a full quarter of earnings from the assets acquired.
Through our merger with CPA 18, we acquired 41 net lease properties, adding about $77 million of annualized base rent or ABR.
We also acquired 67 operating properties the vast majority of which comprised of high quality self storage portfolio, which is not reflected in our a b R or any of our core net leased our same store metrics, but serves to further improve our overall diversification and incrementally adds to our organic growth.
As a result today, we have a portfolio of 84 operating self storage properties, which are generating annualized operating NOI of approximately $70 million for 2022.
Which is essentially the baseline for future NOI growth.
Additional details on this portfolio can be found on a new page we've added to our supplemental.
I also want to remind everyone that in January 2023, 12 of the Marriott hotels, we own that are currently not leased well convert to operating properties.
We expect their annualized NOI contribution to be roughly in line with the lease revenue, they're currently generating resulting in no material change to a S. F L.
Turning now to our same store rent growth and asset management activities.
W. P. Carey continues to offer the highest level of inflation protection within the net lease sector with 55% of ABR generated from leases with rent increases tied to inflation.
During the third quarter overall contractual same store rent growth increased to a record three 4% year over year the.
The highest in our net lease peer group.
Given the timing lag on which are inflation based leases escalate, we expect our fourth quarter same store growth to track at a similar level to the third quarter before increasing to between four and four 5% during the first quarter and trending at or around 4% for the remainder of 2023.
Even if inflation starts to moderate the lag effect in our leases will continue to produce elevated levels of same store rent growth well into 2024.
Comprehensive same store rent growth for the third quarter, which is based on pro rata net lease rent included in our S. F. O was one 5% year over year.
Selecting the impact of elevated rent recoveries in the prior year period.
Also during the current year period, we proactively terminated our lease with an office property tenant in order to redevelop it into higher yielding lab space.
For which we already have a newly signed up.
Connection with the termination, we received a payment totaling $4 $2 million.
So mitigate a large portion of the rental downtime and carrying costs during the redevelopment period further improving our overall outcome on this asset.
We had an active quarter for leasing activity with 10 renewals or extensions overall recapturing 108% of the prior rents and adding just over 10 years of weighted average lease term.
Disposition activity during the third quarter comprised three properties for gross proceeds of $57 million, bringing total disposition proceeds through the end of September to 176 million.
For the full year, we currently expect to complete dispositions totaling between 200 and $300 million.
Given the current environment in Europe , I want to highlight a couple of important points about our European portfolio.
Amid the region's current spike in energy prices, our European assets have continued to perform well and to date, we've not experienced any defaults or non payments nor received any inbound communications from tenants that their operations are at risk due to high energy costs.
We monitor the situation very closely as those risks could change, but our portfolio in tenant base has proven very resilient across business cycles and throughout the stress test of Covid as well as the more recent challenges stemming from the war in Ukraine.
And regarding currency movements, our dual approach to currency hedging has been remarkably effective in mitigating our risks to the strengthening U S dollar.
First over weighting our debt in foreign currencies, primarily the euro serves as a natural hedge generating foreign denominated interest expense, which reduces our net cash flow exposure.
Second we further reduced the net exposure through low cost contractual cash flow hedges typically locking in rates on a ladder approach four to five years out.
Realized gains on our cash flow hedges totaled $8 $7 million for the third quarter and $18 million year to date, which appear in the nonoperating income line on our income statement and flow through to our S. F O materially offsetting the impact of the strengthening dollar.
After taking into account hedging.
Impact of foreign currency movements is expected to result in about a 1% decline in our 2022 a S F O per share as compared to our initial guidance at the start of the year.
And we would expect our hedging strategy to provide the same level of protection into next year, assuming currency rates remain at or around their current levels.
Of course to the extent the euro or British pound strengthened from current levels higher foreign currency cash flows would be partly offset by lower realized hedging gains, resulting in potential upside to our S. S O.
Moving now to our balance sheet and capital markets activity.
As Jason discussed we remain in a very strong capital position further bolstered by the debt and equity we raised during the third quarter and our continued ability to access various forms of capital.
On the debt side, we are among only a handful of Reits that successfully executed debt capital market issuances during the quarter with an inaugural private placement bond offering in which we issued 350 million euro or senior unsecured notes over two tranches at a weighted average coupon of 3.58% and a wait.
Average term of eight seven years.
I'm pleased to say, we price the two tranches at 165, and 182 basis points over the seven and 10 year Euro benchmark rates respectively.
This offering was well executed locking in additional attractively priced debt capital that supports continued growth through accretive investments.
On the equity capital side, we settled a portion of our outstanding equity forward during the quarter generating close to $100 million in proceeds.
This occurred towards the end of the quarter and will therefore be fully reflected in our fourth quarter diluted share count.
We also further strengthened our balance sheet positioning selling an additional one 9 million shares in the form of equity forward through our ATM program locking in the ability to fund future investments with an additional roughly $160 million of equity raised at an average price over $86 per share.
In conjunction with the unsettled portion of previous previously sold equity forwards. We therefore have approximately $650 million of dry powder currently available to us from unsettled equity forwards raise at an average price around $83 per share.
From a liquidity standpoint, we ended the third quarter about $460 million drawn on our $1 8 billion dollar revolving credit facility, which in conjunction with our Undrawn equity forwards maintains an exceptionally strong liquidity position totaling over $2 billion.
Looking to our next significant debt maturities, we have about $400 million of mortgages due in 'twenty, two 'twenty, three and no bonds maturing until 'twenty 'twenty, four which we view as very manageable.
Our leverage metrics remained very healthy.
At quarter end debt to gross assets was 40%, which is at the low end of our target range of mid to low forty's.
Similarly, net debt to EBITDA was five six times well within our target range of mid to high five times and.
And cash interest coverage of six seven times continues to be among the strongest in the net lease peer group.
In conjunction with the merger, we assumed approximately $795 million of mortgage debt, which had a weighted average interest rate of four 5%.
Overall, our debt outstanding had a weighted average interest rate of 3% at quarter end, reflecting the well timed debt refinancings, we've completed in recent years.
Our recent ratings upgrade by Moody's incrementally benefits, our borrowing costs, including the spreads on our revolving credit facility.
Which represents the vast majority of our floating rate debt.
Moving now to guidance.
We're pleased to announce that we've increased our <unk> guidance by two cents per share at the midpoint, implying year over year growth of 5% on total as F O per share and just over 6% on real estate as I felt for sure.
The increase was driven by a number of factors, including strong portfolio performance and lease related outcomes as well as the successful execution of our third quarter debt issuance.
We also narrowed our <unk> guidance range and for the full year, we expect total F O of between $5 25, and $5.31 per share, including real estate a S F O of between $5.16 and $5.22 per share.
We are revising our investment volume range to between 1.5, and $2 billion, reflecting a transaction environment and which cap rates are slowly adjusting to higher funding costs as Jason discussed.
Of course, given where we are in the year investments closed during the fourth quarter will not meaningfully impact our full year 2022, a S F O per share.
In closing, we continue to see positive momentum in our business with sector, leading rent growth and a balance sheet that puts us in the best possible position for externally driven growth as cap rates begin to move higher and spreads widened.
And with that I'll hand, the call back to the operator for questions.
Thank you well now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad other consideration for others. Please try to limit your questions to return to the queue. If you have further once again that is star one to be placed in the question queue.
The consideration for others. Please try to limit your questions to return to the queue. If you have any further questions. Our first question today is coming from RJ Milligan from Raymond James Your line is now live.
Hey, Good morning, everybody. My first question is for Tony you guys did $1.26 of basketball and three Q in guidance for <unk> implies about 24 to a Buck 30, I think you mentioned that you weren't getting full credit for three few acquisitions, which would imply a higher co op.
For Q, but you also mentioned some benefit from lease term fees higher share count I was just wondering if you could maybe give some more clarity on on the pieces that walk you down to the 128 at the midpoint for <unk>.
Sure Yeah. Good question RJ I think there's a handful of things going on here a mix of a number of items some of which have kind of are occurring nature and some that are really more onetime in nature and I'll take you a couple of those I think you know firstly, we've talked about interest rates and we're expecting to see that really flow through.
In the fourth quarter more as it relates to our variable rate debt, which is.
It's limited to our credit facility, but I think the the increase in base rates. There, we're seeing flow through our fourth quarter and you know if you think about it on our credit facilities. We have term loan balances there that are denominated in euro and pound and really before September we had negative base rates. There. So we're seeing the impact in base rates.
Drive up there and and that's really going to have kind of an impact on the quarter to the tune of about two cents in the fourth quarter I would say.
We also talked about FX, which I think you know we've highlighted the impact of our hedging strategy I think quarter over quarter, you'll see about a one cent decline there.
You know in terms of kind of that you know the impact as it relates to where rates are today and our expectation for where they'll stay for the rest of the year. So you know those are kind of in the more recurring type items and I think there were some one offs in there as well when you look at kind of Q3 to Q4 I'm a couple of them we have a foreign tax adjustment that we're at.
And then comes through in the fourth quarter that could push out beyond year end it could not happen at all if we get a favorable outcome. There. So you know that's something that we're tracking that you know if it doesn't happen could push us above the mid point potentially closer to the top end and there were some recoveries in the third quarter around a crew dangerous.
No longer feasible in a handful of other smaller things, but really aggregated to kind of build on that delta quarter over quarter, but you know I think that some of the more material items that went through there.
That's helpful. Thanks for that clarity and then I guess, a bigger picture question for Jason.
There's a wide range of acquisitions in four Q implied by guidance and I think in your opening comments.
And that you are comfortable at the low end, but could do more and I'm. Just curious you know sitting here with only two months left in the quarter, what what would have to happen for you guys to hit sort of the midpoint or the higher end of that that implied guidance range for Q.
Yeah sure RJ you know look it's.
It's a difficult market market to predict right now, it's it's really where we are and our best guess on where we might end up on deal volume for the end of the year.
No transaction activity is actually quite robust as active or perhaps even more active than a typical end of the year period I think the big question and what remains to be seen is how many of those transactions that are out in the market are part of a price discovery process. As you know not many are getting done and they're kind of getting repriced and kicked down the road.
We do have several hundred million dollars of deals that we're actively pursuing many of which I would characterize as relationship deals. So we're you know feel we're the best positioned as the buyer who can meet.
Timing and underwriting requirements, but you know theres still our gaps and pricing expectations and we're not sure if we'll get.
Get to a point, where we transact by year end and we're very focused on making sure that we're achieving appropriate yields and returns given the current levels in the debt markets.
You know maybe the the Big picture answer is investment volume is really going to depend a lot on the seller's expectations their willingness to transact at what we view as reasonable pricing.
And we'll have to factor in any change to our cost of capital as well.
That's helpful. And then is there any particular category, whether it be U S versus international or property types, where you're seeing the most amount of cap rate movement and I think you mentioned, you're seeing you expect to see a little bit more movement in sale leasebacks, but curious where else you're seeing a little bit more expansion.
Yeah. It's you know it's it's it's gonna be in sale leasebacks, and that's a theme for us over the years, where we can.
You don't have a little bit more pricing power I think that there are fewer competitors that target that space and in many of those that that had in the past are you more levered or the private equity buyers that rely on an asset level debt and you know theyre, mostly out of the market. So I think sale leasebacks, we're continuing to see expansion in and really when you think about a sale leaseback.
Those are driven by a use of proceeds so I think there's you know less sensitivity around you know rising rates because they have a use of or a need for capital.
That you know we are seeing movement in Europe , there are some.
Open ended funds that have some liquidity issues that may create some opportunities and you know my guess is that is the case they'll be more motivated sellers that can translate through.
I think on the low end of of the movement U S. Retail, we still track all of that and we do look at that market is a big part of net lease of course, but those cap rates have proven stickier and they probably have adjusted the lease although they were up as well, but not as much as you know what we're seeing in industrial sale leasebacks.
Great. Thank you guys.
Welcome.
Thank you next question today is coming from John Kim from BMO capital markets. Your line is now live.
Thanks, Good morning, Jason.
Jason You mentioned you have several options with your storage assets. They provided a nice boost to performance this quarter and of course that can always reverse in future quarters, but given your history with these assets are you more inclined to retain them as operating assets or.
Has your view changed at all since.
You know since you acquired assets outright.
Yeah, No no new update on our plans for the the operating self storage assets, we do have a long history of owning them in operating them.
You know.
You know we've been in that space since 2004 in many ways. So we still have a lot of options with these we could continue to own we could convert to net lease like we've previously done with some of the assets, we could even sell some attractive prices and reinvest them at least if we think that's the way to optimize value or it could be some combination of the three it's on the table.
Al I think are very good alternatives, you know, we'll be patient with whatever path, we choose and yeah. In the meantime, while same store growth is probably not going to be what it was in 'twenty. Two next year, but we still think there'll be no attractive NOI grow with them certainly relative to 10 at least.
Yeah.
And with a courtyard Marriott our assets are you more inclined to either convert those to a net lease structure or.
Or sell them in other words, not retain them as operating assets.
Yeah, I think that's fair Brooks do you want to kind of give a little bit of color around around the area.
Sure and as Tony mentioned the outcome for the 12 courtyards that expires in January of 'twenty three of those will convert to operating hotels that'll be a seamless transition Marriott will continue to operate and manage those.
And as Tony mentioned, the underlying economics are expected to be roughly in line with the net lease economics are no real earnings impact from a disposition perspective.
There's three of those assets, which we view as having really attractive.
Upside redevelopment opportunities that will likely retain those while we investigate those opportunities further.
The balance so nine asset will likely exit those or work at the appropriate time.
So those aren't likely to be long term holds.
Okay and one last one for me you mentioned and office lease termination and conversion.
Turning to lab space as well.
If you could provide more color as to where the asset is located in the capital spend and development yields do you expect to get on it.
Sure. So this is appears on our Capex table in our supplemental that's unchanged labs in Pleasanton, California.
Location.
Right next to the bar to stop the train stop and have some room for expansion on the site as well.
So we received a termination payment from the from the prior tenant and effectively simultaneously entered into a long term lease with the.
<unk> labs, which is a.
Fast growing medical research toolmaker.
So you know the rent will be on the order of 15% to 20% higher than the prior rent a much better bumps long term very high criticality.
So we really like that outcome creates a lot of.
Value for that asset.
Thanks, a lot.
The next question is coming from Anthony <unk> from JP Morgan. Your line is now live.
Oh, great. Thank you Tony Thanks for the the the items and talking through the bridge from three to four Q, but I guess just to kind of bottom line and as we look to 'twenty to 'twenty. Three is should we think about the run rate is being closer to the 136 are the one.
26 implied by the midpoint for four to you.
Yeah, I think you know I I tried to give kind of some color there as it gets into the end of the year I think we're a little too soon for us to be getting into next year's guidance. At this point, you know and we're hesitant really to kind of look at any one quarter. There is always kind of a handful of volatility due to varying items in recoveries as we've talked about.
Termination and otherwise so I wouldn't suggest that you know there is a good run rate in there for you to extrapolate from Q4, but I think you know what we'll look to give more guidance on my fourth quarter earnings call I would suspect that you know we'll continue to see same store growth. That's the one item that you know we have kind of a clear.
Picture on in terms of more certainty given where we are right now and the time lag in how things flow through to our leases. So yeah. I think we highlighted those in a comment in my remarks, there, but you know we we would continue to see that trend upwards above the four to four 5% range and that's probably the only assumption at this point that we can give you some level.
With clarity on without getting into any more detail on guidance.
Okay.
I understand.
And then I know Jason.
As you guys just do more sale leasebacks than anything else and you mentioned a lot of the sellers have heavy use of proceeds so just wondering like what other financing.
Financing alternatives are they more are willing to you know to act on more quickly when they think about either selling the real estate or are they more willing to go get that because the credit markets seem like those are pretty straightforward and how those have moved and so I guess, what's the hesitancy to maybe go to the real estate route Indra.
Their feet on deals and are there other elements of the sale leaseback that that can get folks over the hump like proceeds and stuffed since you can control some of those things.
Yeah, and those are all good questions and you know in terms of alternatives I think this is what sneaking the opportunity. So I'm. So interesting right now is that the alternatives for.
To a sale leaseback as typically you can issue equity.
Jackson equity, if it's a private company or looks at the debt markets and you know many of the companies that we target or just below investment grade called the double b.
Type rated companies and you know that's a market where the high yield debt has really moved significantly.
Much further than we've seen a investment grade bonds and in cap rates as well. So it gives us some pricing power. There I think that's an alternative they think about and you're right. There are levers we can pull on to.
You know it makes the deals more interesting whether it's.
For US you know master leases mm interesting bumps you know for the sellers. We can focus on proceeds but you know we're really zeroing in on market rents and how we structure. These deals so theres, maybe some limits to that but but he was attractive opportunity set for US right now and we think that'll continue into 2023.
Okay. Thank you.
You're welcome.
Thank you. Our next question is coming from Spenser I'll away from Green Street. Your line is now live.
Yeah. Thank you guys.
Thanks for the commentary you provided on tenant health as it relates to the European energy costs. So I understand you guys don't have any concern at this moment and it sounds like there hasn't been any explicit communication by tenants on the topic, but I was hoping you could maybe just comment broadly on rent coverage and whether you've seen any changes in recent months.
Brooks you wouldn't have picked up.
Sure. So you know as Tony mentioned, we have thus far not seen any specific impact coming out of Europe , particularly around the energy cost spikes I think it's important to note that the majority of our European ABR comes from really kind of central businesses food retail DIY government Finance Telecom energy.
E.
And so the impacts are really most directly felt I didn't expect and more of the manufacturing type operations.
Those have the highest power usage for example, and put that in context and in Europe .
Our manufacturing assets only represent about 3% of our global total ABR and among that and it kind of heavier manufacturing is really only around 1% or maybe it's a reasonably contained exposure and that said when we underwrite. These industrial types of industrial manufacturing assets were typically going in with coverages in the high single or.
Or double digit.
Type coverage, it's a very different than before the retail coverage.
Elsewhere in Europe .
Impacts would be much less direct certainly some pressure on margins.
But thus far that the impacts have been largely passed on to customers. So you know, we really do fall back on our fundamentals of long leases with big companies they have to schedule adapt and critical real estate.
And diversification so.
We think we're set up pretty well to absorb these challenges and thus far the types of dunhill.
Okay, Great. That's really helpful color and then maybe just circling back to cap rates for a second at a high level, we've heard that European cap rates have been slower to adjust that have moved in a ballpark of about 100 basis points well below of our you know the loves as seen in 'twenty one.
Curious is that kind of a range is that consistent with what you guys have observed thus far in 'twenty two.
Yeah, that's that's probably fair I mean, they have adjusted I mean, that's a meaningful movement, but but I agree relative to how much the cost of debt has moved in Europe , It's probably I'm still not at equilibrium I think more broadly.
You know we've seen cap rates you know from the beginning of the year, we talked in July about this we saw them from the beginning of the year to the last earnings call around 50 to 100 basis point movement I think since mid September around the time, we saw the sharper increases in base rates and debt spreads, we've probably seen another 25 to 50 basis points up and that's that's broad U S.
And Europe , but but I think Europe is probably lagging a little bit certainly relative to the to the magnitude of the movement in the cost of debt over there.
Thank you so much.
You're welcome thank.
Thank you. Your next question is coming from Nick Joseph from Citi. Your line is now live.
Thanks.
I'm curious if you're seeing any changes in your negotiations on the sale leaseback lease terms, just given higher CPI is there pushback on including that and in do lease.
In terms of lease terms with CPI is that the question. Yeah. In terms of just gave them more C. P. I have today is there more pushback you're signing a new lease today did include a CPI lease escalator.
Yeah. He is.
It's not impacting the length of the leases that were able to sign and again, we're mainly.
Sourcing needs through sale leasebacks, or we can dictate terms I think our our weighted average lease term for new deals Q3 was around around 20 years, maybe even for the year slightly above 20 years in terms of CPI look it's it's it it does vary a little bit between the U S and Europe in Europe CPI linked leases.
Or standard you know more customary.
And you know uncapped, which was very common you know prior to this.
You know jumping inflation that we've seen so you know I would say CPI caps and floors are now Oh now, we're a little bit more part of the conversation, but it's still you know customary it's something that we can.
They were focusing on in can get I think in the U S. Fixed is still more standard, but again on sale leasebacks, it's something that we focus on and push for them and we are achieving them probably not at the same amount as we had in the past. So you know there's some change there, but but it's not just the CPI increases that are impacted by.
Inflation, our fixed increases that we're getting in our typical deal now I think historically, it's probably been in and around 2%. We're seeing fixed increases now you know in the 2% to 3% range with with many of them in the top half of that range and some even above that so yeah. So it's kind of flowing through in all different places.
Thanks, That's helpful. And then you walked through the difference of the same store ABR in the comprehensive same store revenue.
Would you expect those to converge them going forward and into 2023 or are there still some noise that could keep the delta between the two.
Yeah, I think the the knowing that we would expect to see there. It is really still driven by some of the timing.
Timing of recoveries went recoveries that are coming through and when the disruption happens. So you know we saw some recovery in 2021, which you know kind of the the baseline for the comparison of this year and you know we've continued to see some recoveries happened. This year. So it really will vary from quarter to quarter, depending on which period we saw.
Any any sense of disruption in which period, we had the recovery come in so you know by in large part I think we do expect to see that the contractual continue to drive the overall comprehensive same store growth, but there will be some variability there.
Thank you.
Thank you next question is coming from Brad Heffern from RBC capital markets. Your line is now live.
Hey, everybody. It sounded like you were more focused on the U S. This quarter and part of that is the pricing moving faster in the U S. I'm curious you know is.
Is there also a component of that that's related to either the.
Most of the assets that youre seeing in Europe , or just the general economic backdrop over there.
I think it's more of the economic backdrop and the types of spreads we're targeting them.
There are deals where we're pursuing over there I think that theres still maybe a little bit bigger gap between sellers'.
Sellers' expectations, and where we think deal should be priced based on them, you know where that costs have gone in India more generally our cost of capital. So it's it's it's not the quality or the types of deals we're seeing I think it's more against sellers' expectations.
Okay got it.
And then on collections I know that they're still very healthy, but there was a 30 basis point decline quarter over quarter. I'm curious is that just lumpiness or is there is there anything you can point to there that's causing that to be a little bit wider.
Yeah no material.
It looks like you have the detail on that book.
Sure. It's I would characterize this all just kind of normal course.
Most of that's been subsequently collected.
So I wouldn't.
Point to any real trends there.
Okay got it thank you.
Thank you next question today is coming from Greg Mcginniss from Scotiabank. Your line is now live.
Hey, good morning, I'm, just trying to get a better understanding for how much the transaction market has softened compared to prior quarters I'm. So Jason what are you seeing regarding total investment opportunities and if you could talk about the impact from companies with maybe fewer of their own investment options during a more challenging economic environment, there aren't looking for sale.
Backs are or how much of the market is made up of sellers that are just not adjusted their cap rate expectations.
Yeah, and I think some of this is is that the last point you made there I mean, the transaction activity is quite strong and we're looking and reviewing lots of deals on a weekly basis lots of deals that are getting increasingly more interesting.
You know these are sale leasebacks. These are you know in some cases in Europe . Some distress sellers. These are portfolio transactions from some U S funds as well so it's kind of a wide range of deals I would say predominantly sale leasebacks, though.
To your last point I'm not sure.
The percentage of deals that are transacting relative to quarters or years past is probably significantly lower at this point in time, I think theres still you know a.
Full price discovery.
Process, that's that's ongoing and I'm you know, it's it's clear where where that costs have gone and I think many sellers are still reluctant to lock in a higher pricing, but but theyre getting there because the alternatives are are you know, perhaps more expensive, especially when you consider sale leasebacks and I think there.
Just a lot of uncertainty whether you know costs are continuing to move up and now it might be a better time in the future to walk in so hard to predict not great visibility, but there is a lot of activity. It's just a matter of how much of that flows through to two two.
Two actual transactions right.
Okay. That's fair and then maybe as another way to frame out what you're seeing regarding market cap rates I mean, how do you view your current cost of capital and what are you actually targeting on cap rates for acquisitions, maybe just to simplify assuming that.
Underlying credit is similar to what you already own.
Yeah sure I mean look there's there's a you know various ways to look at cost of capital for US you know for instance, taking into account the equity forwards that we raised this year or in our ability to issue debt by swapping into euros, maybe factoring in bank debt and some free cash flow that we generate and that could put our cost of capital.
Oh in the fives and on the other hand, if we look at cost of capital exclusively with our current equity trading price and assuming we can only do 10 year bonds through direct issuances either in the U S or Europe , and maybe not accounting for any free cash flow for bank debt, you know that probably puts our cost of capital clearly in the sixes.
And you know higher or lower in the sixes is more dependent on where we're trading on any given day.
So a lot of ways to look at but maybe what's more important is our view and expectation around putting capital to work and you know this goes to your question I think our perspective is that when we are looking at deals now we want them to reflect the wider pricing that we're seeing in the debt markets. Today. So we would expect cap rates to continue.
And wider for any deals that were where were targeting or executing in the near term you know when we think about spreads where you know.
We're really looking at spreads to our cost of capital versus the average yields or unlevered IRR given the the bumps that are built into our leases so right.
Right now we're targeting cap rates, you know I would say the range has moved up from 5% to 7% in the past, 6% to 8% now and I was going back just to be probably more likely in the midpoint of that range in the high sixes and sevens and that would generate average yields after factoring in rent bumps somewhere you know clearly in the eights and maybe <unk>.
For inflation. These leases so that's kind of the ZIP code, we're thinking about but you know there's a lot of moving parts here and you know on the margin you know, we do have a very well priced equity forwards to use and to the extent there are some interesting deals with higher quality that we can lean into you know maybe there's no reason to get a little more aggressive, but I think generally we're gonna be focused in that kind of.
The midpoint of that range I mentioned.
Yes. Thank you Jason that that's a that's definitely helpful. If I could just throw in one more for Tony I'm, just curious about how much bad debt has been included in 2022 results given comps.
Complicated economic environment, how you're thinking about 'twenty, three and maybe just touch on the tenant watch list as well.
Yeah, I think 2022 has you know there's been as we've just talked about kind of the collection rate has trended near 100%. So yeah, we really haven't seen any material impact that's flowing through our numbers. This year. You know I think you know less than 50 basis points on a b or if that you know in terms of next year I think you know what.
We continue to evaluate the portfolio as we're getting into guidance I think you know we start the year with kind of a more conservative view and you know, we'll adjust that over the years, we're continuing to see tenants pay but in our experience has been really good our portfolio continues to hold up and perform well. So I don't think there's any reason for us to expect any major change.
In our assumptions going into next year.
Alright, thank you so much.
The next question is coming from Chris Lucas from capital One Securities. Your line is now live.
Hey, good morning, everybody I'm, Jason just a kind of a quick recap on CPA 18, I think when the deal was announced you talked about $2 $4 billion transaction net to the company was going to be too.
You're I think of $2 2 billion of added assets and I know there was some office dispositions planned as part of that are those dispositions still planned or are.
Are you complete with those or where do you stand.
Brooks do you want us can you give some color around that.
Sure. We've closed the majority of that so one or two items, where we're working on some of that may slip into 2023.
But it's it largely stabilized at this point from a perspective of what we wanted to transact on you know the biggest piece of that with our student housing assets.
And see the 18, which which have all been sold.
Brookfield the European student housing, we continue to own one student housing property in the U S. In Austin, It's very high quality property will evaluate options for that at the right time as well.
Hey, Tony then so as a follow up did that sort of holdover asset I'm, making.
<unk> contribution to sort of third quarter results.
No I would say you know we.
We by and large have that all factored in and I don't think there's been any any material movement from disposition flipping them that has kind of shifted as I'd say within the range of where we are obviously moved up Ah and narrowed our range at the end of the year, but I don't think there was a material impact from those dispositions.
Okay, and then last question for me Tony sticking with Us.
On the mortgages that are maturing next year, how should we be thinking about the timing and how should we be thinking about how you were looking at refinancing that.
And is there a split between domestic.
Domestic and non domestic you know currencies.
Well you know in terms of the mortgage debt I think we continue to take the view that we will you know the place secured debt with unsecured borrowings and you know that hasn't changed for US. So you know, we'll look at the timing and the the markets around us in terms of how and when we take that out but I would expect that we will continue to pay those that mature.
30, which occurs over the course of the majority of next year that number in total is pretty insignificant in the Grand scheme of the size of our balance sheet. At a you know just about a 400 plus million as maturities into next year. So I think it's pretty manageable and we have a lot of optionality in terms of how we would do that you know with.
With the liquidity, we have on our credit facility. It gives us some some time and some flexibility in terms of where we want to access the markets in terms of the split between U S and Europe I don't have that in front of me, but I think it's it's probably.
Similar to the overall portfolio breakdown as well and you know again it will look at kind of the markets, where we are in Europe , and where that is relative to the U S markets and see where the best opportunities are for us.
Okay. Thank you.
As a reminder, that star one to be placed in good question queue. Our next question is coming from John the social from Ladenburg Thalmann. Your line is now live.
Good morning.
Good morning.
Okay.
Quick one just a quick one for me on the balance sheet and we think about the kind of forward equity you have outstanding.
Over a longer term maybe into 2023 years and beyond I mean, how much do you kind of want to keep outstanding at any given time, just given the optionality that provides you potentially in a.
You know if equity markets or capital markets become dislocated, but theres still.
The attractive investment opportunities out there.
Yeah. It's a good question and I think you you you highlight you know what we like about the equity forwards and you know we can do those through the ATM like we've been doing we also did a larger issuance you know last year as well we liked the flexibility. So I don't know if I can quantify a number I think a lot of it's going to depend on you know the.
A number of factors.
You know.
Mainly probably the transaction market how were.
Using up our dry powder in and really what we think about the equity markets at any point in time I mean, if they're good deals to do with good spreads in the market. We may stay in front of the.
The funding for those deals and and and you know continue to issue equity forwards.
You know if there's not we could probably take a pause, but I think it's really going be dictated by what the markets look like.
But I guess, maybe if capital remains kind of available at relatively attractive rates. We should assume you maintain if not a similar balance at least some kind of yep.
But relatively high balance.
Yeah again, I think that's fair, but I think a lot of it's going to depend on our perspective on where cap rates have moved what our cost of capital is and how actively we can deploy that capital, but but I think that's probably a fair comment that you made.
Okay. That's it for me thank you very much.
You're welcome.
Thank you we reached end of our question and answer session I would like to turn the floor back over to management for any further or closing cost.
Great. Thank you everyone for your interest in W. P. Carey. This morning, if you have additional questions. Please call investor relations directly on to one to four nine to 1110.
Concludes today at school you May now disconnect.
Okay.
Okay.