Q4 2022 WP Carey Inc Earnings Call
Hello, and welcome to W. P. Carey's fourth quarter and full year 2022 earnings Conference call. My name is Donna 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 will be taking questions via the phone line instructions on how to do so will be given at the appropriate time.
I will now turn today's program over to Peter Sands head of Investor Relations. Mr. Sam. Please go ahead.
Good morning, everyone. Thank you for joining us this morning for our 2022 fourth quarter earnings call before.
Before we begin I would like to remind everyone that some of the statements made on this cool are not historic facts and may be deemed forward looking statements.
Factors that could cause actual results to differ materially from W. P. Carey's expectations are provided in our FCC conflicts.
An online replay of this call for school will be made available in the Investor Relations section of our website at W. P. Carey dot com, where it will be archived for approximately one year and where you can also find copies of our investor presentations and other related materials and with that I'll pass the call over to Jason Fox Chief Executive Officer.
Thank you Peter and good morning, everyone.
2023 marks several anniversaries for W. P Carey.
It was 50 years ago, Bill Carey founded the company.
25 years ago that we became a public company. It was also 25 years ago, we began investing in Europe , or we pioneered sale leasebacks.
Company has evolved considerably over the last 50 years. The most recent development being our exit from the non traded REIT business.
And eating in our merger with CPA 18.
The completion of our transition to a pure play net lease REIT in 2022 reflects our focus on real estate <unk> growth driven by accretive investments and rent escalations.
And despite the challenging market backdrop in 2022, we generated real estate assets saw growth of 6.3% per share for the year.
This morning, I'll focus my remarks on our recent investment activity and outlook Toni Sanzone, our CFO will cover our results for 2023 guidance, we announced this morning, and our balance sheet positioning.
We also have our president John Park, and our head of asset management Brooks Gordon on the line to take questions.
Starting with externally driven growth.
Over the course of 2020 to the U S 10 year Treasury rate rose over 200 basis points, while cap rates lagged well behind our sellers were slow to adjust their expectations by.
Iris fought to preserve spread transactions, often taken longer to negotiate and close, especially sale leasebacks tied to corporate M&A.
Overall, our investment volume for the year totaled $1 $4 billion at a weighted average cap rate of six 3% and a weighted average lease term of 20 years. In addition to the more than $2 billion of real estate, we added at a cap rate in the mid sixes through the CPA 18 merger.
With interest rates moving another leg higher in October we actively exerted our pricing power during the fourth quarter, requiring higher yields and willing to be patient as cap rates began to move creating opportunities to transact at more attractive spreads.
As a result, I'm pleased to say, we executed investments at meaningfully higher cap rates during the fourth quarter, although on investment volume. It was lighter than we anticipated totaling $159 million overall these investments blended to a weighted average cap rate of six 8%, primarily reflecting warehouse and industrial investments with <unk>.
And cap rates in the high sixes and into the Sevens.
While interest rates are falling somewhat since the fourth quarter. The large majority of the investment opportunities. We are evaluating today also have cap rates in the high sixes and into the sevens, resulting in investment spreads there considerably more attractive than they were for most of 2022 and at levels, where we are comfortable transacting.
Looking ahead, we are well positioned to take advantage of the current market environment.
Our diversified approach gives us the ability to invest across property types. Both in the USA and Europe and ensures we have the widest possible funnel of opportunities with companies across a variety of industries.
And while we currently see more actionable opportunities in the U S where cap rates have adjusted more quickly we do expect cap rates in Europe to catch up with higher interest rates.
Furthermore, the environment for sale leasebacks is as favorable as we've ever seen it as high yield debt and leveraged loans remained very expensive companies are increasingly exploring alternative sources of capital, including sale leasebacks in fact private equity firms that we previously never saw you sale leasebacks are now looking at it as a source of capital Naval.
<unk> also developed new sponsor relationships.
We expect these market conditions to continue for the foreseeable future and that we will be the major beneficiary of the increased deal flow as the market leader in sale leasebacks and.
Of course, the strength of our balance sheet, including significant liquidity gives us a competitive advantage with sellers, who remain concerned about execution risk.
Our competitive position is especially compelling compared to bidders, who rely on asset level debt, which is either become prohibitively expensive run available, particularly for tenants just below investment grade that we target.
Currently we have a strong near term pipeline with over $500 million of investments at advanced stages or under letters of intent. This in conjunction with about $156 million of capital investments or commitments scheduled to complete in 2023 and the deals we've closed year to date gives us visibility into at least 700 million.
A deal volume a little over a month into the year.
Overall, given what we're seeing today, we expect to close meaningfully higher investment volume in 2023 totaling roughly $2 billion at higher cap rates and wider spreads.
Moving to our capital markets activities.
Despite sharply higher interest rates and a turbulent capital markets backdrop throughout much of 2022, our stock price held up extremely well we ended the year as one of the top performing Reits the.
The relative strength of our stock has enabled us to raise well priced equity capital.
We currently have about $560 million of equity available for settlement under forward sale agreements raise at an average price of about $84 per share.
On the debt side, we were one of the relatively small group of reach to issue attractively price debt in 2022, with our inaugural 350 million Euro private placement bond offering in September at an interest rate in the mid threes.
And I'm pleased to say that the improvement in our credit profile was recognized by the rating agencies with Moody's upgrading us to be double a one in September followed by S&P upgrading us to Triple B plus a few weeks ago. These.
These upgrades incrementally improve both our access to debt and cost of debt, which is currently among the best priced in the net lease sector.
Our ability to raise well priced capital in 2022 in conjunction with our revolving credit facility has ensured we've entered 2023 exceptionally well positioned with more than enough dry powder to execute on our near term pipeline on a leverage neutral basis.
Given where this capital was raised we are very comfortable with our ability to deploy it accretively to the deals currently in our pipeline and into new investments given the transaction cap rates appear to be stabilizing around current levels.
We are also comfortable with our ability to continue investing accretively at tighter cap rates that are current targets. If we see interesting opportunities given where we expect to be able to raise capital in 2023.
Lastly, I want to touch briefly upon the quality of our portfolio amid concerns about inflation and the potential for at least a mild recession.
We remain uniquely positioned within that lease with best in class rent growth and proven resiliency b.
You're on a well diversified portfolio of critical real estate lease to large companies on long term leases with a weighted average lease term of just under 11 years. It also remains healthy with occupancy at 98, 8% fourth quarter rent collections of over 99% and a benign watchlist.
Before I hand over to Tony I'd like to take this opportunity to thank our employees past and present, who have helped shape W. P. Carey over the past 50 years into the company. It is today.
All of the milestones we're celebrating this year and the solid results, we've achieved would not be possible without our dedicated and talented team and I'm proud that we've been included in the Bloomberg gender equality index for the third year in a row one of only a handful of reef selected this year, highlighting our long standing commitment to gender equality, and an inclusive culture and with that.
I'll pass the call over to Tony.
Thank you, Jason and good morning, everyone.
This morning, we reported a S F O per share of $1 29 for the fourth quarter, bringing full year, a F O per share to $5.29 and real estate a S. S O per share to $5 20.
An increase of six 3% over the prior year.
Flipping the accretive impact of both new investments and our merger with CPA 18, which closed in August as well as the strength of our rent growth.
During the fourth quarter, we continued to benefit from inflation protection built into our portfolio.
Overall contractual same store rent growth remained at a record three 4% year over year, which is up 160 basis points versus the year ago quarter.
Given the timing lag on which are inflation based leases escalate, we expect contractual same store rent growth to remain elevated throughout 2023 and well into 2024, even if inflation comes down.
We estimate that it will increase to around 4% in the first quarter when roughly 40% of ABR with rent increases tied to inflation will go through scheduled rent bumps and remain around 4% for the full year.
Comprehensive same store rent growth for the fourth quarter, which is based on the pro rata net lease rent included in our E. S. S. Though was 1% year over year, primarily reflecting elevated rent recoveries in the prior year period.
Normalizing for these recoveries brings comprehensive same store above 2%, which is about 100 basis points below our contractual same store and in line with historical trends.
Comprehensive same store in the 2022 fourth quarter also included downtime on vacant assets. The large majority of which are in the process of being repositioned or expected to be sold during the first half of this year.
Fourth quarter leasing activity comprised nine renewals or extensions and overall, we continue to achieve positive rent recapture totaling 110% over the prior rents driven by warehouse and industrial and adding 8.3 years of weighted average lease term.
Other lease related income for the fourth quarter included the $5 million settlement of a claim on the guarantor of a prior lease the timing of which was accelerated bringing the full year total for this line item to $33 million just above our expectations for the year.
For 2023, we are currently assuming that other lease related income remains relatively consistent with 2022 levels.
Nonoperating income for the fourth quarter, primarily comprised realized gains from currency hedges totaling $6 million down from almost $9 million for the third quarter.
For the full year, non operating income totaled $30 million, including $24 million unrealized gains from currency hedges.
Our 2023 guidance assumes currency rates remain at or around their current levels, which would result in expected gains from currency hedges of approximately $15 million.
As a reminder, a strengthening euro would positively impact our cash flows and earnings with lower hedging gains as an offset.
Nonoperating income in 2022 also included $4 million in dividends received from our equity interest in lineage logistics, we've not received and do not expect to receive a dividend from our investment in 2023.
<unk> continues to perform well and our investment now totals just over $400 million, including a $39 million mark to market gain during the fourth quarter based on its most recent offering valuation.
Disposition activity during the fourth quarter comprised six properties for gross proceeds of $68 million, bringing total disposition proceeds for the year to 244 million a large portion of which were legacy CPA 18 assets, whose disposition was contemplated in conjunction with the transaction.
Operating properties generated NOI of $17 million during the fourth quarter up from 12 million for the third quarter with the increase primarily reflecting a full quarter contribution from the operating self storage portfolio, we acquired as part of the CPA 18 merger.
At year end, our operating assets comprised 84 self storage properties, two student housing properties and one hotel.
Separately in January of this year 12 of the Marriott hotels, we own which were previously net leased converted to operating properties upon expiration of their master lease.
Maryann will continue to operate and manage these hotels under long term franchise agreements and we expect their NOI contribution to be marginally higher than the $16 million of ABR. They generated in 2020 two as net lease assets.
These are noncore assets that we plan to sell with the exception of three for which we are pursuing very attractive redevelopment opportunities.
We will provide updates as we make progress with the Marriott itself, but for purposes of our 2023 guidance. We are assuming they occurred late in the year recognizing they have the potential to move into 2020 four.
For 2020 three we expect NOI from all operating properties to total around $100 million with roughly three quarters of that coming from self storage, which is expected to achieve NOI growth in the mid to high single digits as compared to 2022.
As a reminder, the same store metrics I discussed earlier reflect the only net lease assets and non operating properties.
Turning now to expenses interest expense totaled $68 million for the fourth quarter, bringing the full year total to $219 million up 11% over the prior year.
The weighted average interest rate on our debt was 3% for the fourth quarter and two 7% for the full year.
Guidance currently assumes higher base rates will result in a weighted average cost of debt approaching the mid threes. Although this is dependent on the specific timing and execution of capital markets activity as.
As well as further interest rate movements.
Non reimbursed property expenses were $14 million for the fourth quarter, bringing the full year total to $51 million.
The amounts for both periods were elevated as a result of higher vacant asset carrying costs higher maintenance and legal expenses as well as real estate tax accruals.
For 2023, we currently expect non reimbursed property expenses to decline to between 43 and $47 million for the full year as a result of anticipated vacant asset sales and lease up.
The resolution of certain tenant related back taxes, and the timing of asset sales could move us to either end of that range.
G&A expense was $23 million for the fourth quarter, bringing the full year amount to 89 million in line with our guidance range.
For 2023, we expect G&A to be between 97 and $100 million, which includes the loss of reimbursements from CPA 18, and reflects our larger asset base as well as inflationary increases.
Tax expense totaled $10 million for the fourth quarter on an a F O basis, which is mainly comprised of foreign taxes on our European portfolio.
We expect tax expense to total between 40 and $44 million for 2023, driven by the inflationary impact on foreign rents as well as the addition of assets acquired in the CPA 18 merger.
Turning now to the 20th twenty-three guidance, we announced this morning.
We expect to generate a F F O of between $5 30, and $5 40 per share all of which will come from real estate given our exit from the non traded REIT business, implying about 3% growth on real estate a S. F O at the midpoint.
This is based on an expected investment volume of between 1.75 and $2.25 billion and as Jason discussed. We currently have good visibility into at least $700 million of that.
For now we are assuming investment volume of cruise relatively evenly throughout the year.
Dispositions activity for the year is currently assumed to total between 300 and $400 million.
With the majority assumed to occur late in the year, reflecting our anticipated timing for the Marriott operating hotel sales, which I covered earlier.
Moving to our capital markets activity and balance sheet positioning.
We remain in a very strong capital position with significant dry powder ample liquidity and moderate use of leverage which is further supported by our capital raising activity.
Towards the end of the fourth quarter, we settled just under $2 6 million shares of our outstanding equity forwards.
Which will therefore be fully reflected in our first quarter diluted share count.
We also issued additional equity forwards through our ATM program during the 2022 fourth quarter and in January of this year.
In conjunction with the existing equity forward. We therefore currently have about $560 million authority equity available to settle.
We ended 2022 with $276 million drawn on our $1 8 billion dollar revolving credit facility, which in conjunction with our Undrawn equity forwards maintains an excellent liquidity position totaling just over $2.2 billion, providing ample liquidity to execute on our near term pipeline on a leverage noon.
Fuel basis, and ensuring we continue to have significant flexibility and when we access capital markets.
We currently have $430 million of mortgages due in 2023, a portion of which will be retired as part of our disposition plans and no bonds maturing until 2024, all of which we continue to view as very manageable, especially given the improving debt capital markets and our proven ability to access capital even during turbulent markets.
As was the case in 2022.
At year end, our leverage metrics remained within our target ranges.
Gross assets was 39, 8% at the low end of our target range of mid to low forty's.
And net debt to EBITDA was five seven times relative to our target range of mid to high five times.
Cash interest expense coverage was six three times, which moderated compared to the six seven times for the third quarter, largely reflecting rising interest rates.
Lastly, we continue to provide stockholders with growing well covered dividend income with a payout ratio of 82% for the year and an attractive dividend yield currently around 5.2%.
In closing despite the challenging market backdrop, we produced solid full year results, primarily reflecting the accretive impact of new investments and our merger with CPA 18, as well as the strength of our rent Escalations and as we look ahead, we have a strong near term pipeline, which we are well positioned to execute on given the strength of our balance sheet.
And with that I'll hand, the call back to the operator for questions.
Yeah.
Thank you at this time, we will be taking questions. If you would like to ask a question simply press. The Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press Star then two once again Thats Star One to register a question at this time.
Our first question today is coming from John Kim of BMO capital markets. Please go ahead.
Hey, guys its Eric on for John I was just curious if you could kind of walk us through the puts and takes a day a proposed guidance what's the per share impact from.
Facts and then from interest expense. Thanks.
Tony do you want to take that one yeah I've got that one thanks, John So yeah, I think we've highlighted a number of factors on the call I think just to kind of summarize you know we are seeing a fair amount of growth from the investment activity and from the embedded CPI based increases in our portfolio, but we are seeing a number of offsetting fat.
<unk> on the interest expense you know I think that's that's really are the biggest headwind that we're seeing and that's that's roughly about 3% growth on the offset them on the FX side I'd say, it's less less so and in terms of what we're projecting for 2023, just given kind of where rates are now and where they settled in over the the last part of the.
A year, so I would say FX, you know potentially could have a tailwind for us as opposed to the way it worked against US in 2022, and so I definitely would say the largest drivers on the interest expense side, but in addition to that I highlighted some other points, which included some leakage that we would expect from vacancy or downtime in certain assets in that.
A few smaller items, which are the dividend payments that were not receiving from lineage and Walt that we received prior year as well as some higher G&A and tax expenses. So you know all of that really aggregates them against the the growth that we're seeing gets us to about 3% for the year.
I appreciate that and then I appreciate the color on cap rates kind of widening out.
As we move into the <unk>.
First quarter of the year can you just kind of walk through what the different cap rates are amongst the sectors and geographies.
Whereas whereas the biggest spreads you're seeing today.
Yeah sure Yeah.
Yeah. So we think that that cap rates kind of finally reached a bit of an equilibrium in the fourth quarter and that has carried over to this year fourth quarter cap rates was about six 8%, which was 50 basis points higher on average are higher than the full year average I should say.
And you know I think that's flowing through to the transaction market as well in terms of of.
<unk>.
U S and in Europe cap rates I would say there there may.
Maybe similar ZIP codes at this point in time I think the U S is maybe stabilized a little bit more I think given where the cost to borrowers in Europe , we could probably.
It would probably want to see a little bit more cap rate increases to to generate the type of spreads that we think we want to transact at in Europe , and then across property types I would say on the maybe the low end of the increases is probably in U S. Retail that has proven to be a little bit stickier and maybe that makes sense, it's a bit more crowded in terms.
Competition within that lease and maybe theres still some.
10, 31 treats a lingering I think on the high end, it's where we've seen cap rates move would be in the industrial segment in particular.
Sale Leasebacks I think when you think about corporate and private equity firms utilizing sale leasebacks are really looking at what are their alternative sources of capital and that would be mainly either.
The leveraged loan market or the high yield debt markets and if those are still largely dislocated. So I think we have some pricing power right now.
Within that market and cap rates are reflecting that.
Alright, Thanks, guys I appreciate the time you're.
Youre welcome.
Thank you. Our next question is coming from Greg Mcginniss Scotiabank. Please go ahead.
Hey, good morning, congrats on the anniversary them.
Thank you and thank you for the very robust opening remarks leave me with many of my questions I was going to ask but I do still have a couple of them reserve here.
So wanted to Jason if you could just touch on the types of assets in the pipeline right now where you're seeing the most success in terms of assets with a more reasonable cap rates from a tenant and property type perspective.
Yeah sure so just to kind of.
He will go through the the.
It kind of the the visibility and the deal volume that we have I mentioned over $700 million and that's comprised of about $500 million of pipeline that we call investments at advanced stages. The rest of it is either deals that have closed already year to date or these capital projects and other commitments that we have.
Each year that are scheduled to complete in 2023, that's probably about $150 million of that 700.
You know in terms of you know the the.
The types of deals in our pipeline, it's more weighted towards towards the U S. Right now and maybe North America more broadly it seems to be a source of more actionable deals as I mentioned earlier transaction markets in Europe are still a little bit left to room to go to adjust to the sharper rate increases we saw on.
Europe .
So a little bit more weighted towards the U S and North America property type is consistent with what we've been buying in the past. It's you know 2022, I think 70% of our deals were industrial.
Both warehouse and manufacturing and some R&D and I think the remainder was probably retail.
That's true for the pipeline as well, it's gonna be predominantly industrial.
R&D warehouse production.
And then we do have some retail both in the U S and Europe that we're looking at.
And I should say.
Bulk of what we're doing again, our sale leasebacks the larger transactions. In this pipeline are are private equity backed deals and really in support of M&A activities. So there's a little bit of uncertainty on how the timing works more moving parts when you're closing transactions concurrently with the buyout, but of course execution plays a role.
<unk> risk is something that the sellers are much more focused on and I think for that reason you know we're a great partner in and it's reflected in the pricing we can get from those deals.
Okay. Thank you very much for the color there just a couple of quick questions on lease explorations.
First is the three 9% that's expiring in 2023 include the 1% for Marriott and then our recent rent recapture has been fairly strong, especially on the industrial assets can we view this as maybe more of a new normal for those warehouse and industrial.
<unk>.
Brooks you want take that.
Sure. So the three 9% does include Marriott's, if you if you back that off it's about.
Two 8%.
Another call it 50 basis points.
Is it sort of already been resolved and so that leaves about two 3% of ABR expiring in 2023, so quite manageable.
With respect to your question on the the actual.
Actual leasing metrics.
We've had a good run of results there and we're quite encouraged by that.
Extrapolate any specific quarter or even a couple of quarters, we really like to look at more of a trailing eight number.
In and around 102% recapture.
So hard to extrapolate a given quarter its very transaction specific but but I agree that there are some tailwind, especially in our warehouse and industrial assets that have been benefiting us and we look to keep capturing that.
Okay. Thank you.
Okay.
Thank you. The next question is coming from Josh Centerline of Bank of America. Please go ahead.
Hello. This is Dan beyond the just I don't want it.
Okay.
My question is what are your expectations for same store in 2023 and any additional commentary on what's driving you guys would be appreciated. Thank you.
Yeah.
You were talking about that you're on the same store side. The you know their status.
I could get some comments there we are expecting to continue to see inflation pushed through just given the lag in our leases. So we do expect that to tick up to about 4% and remained right around that level for the full year and that's on the contractual same store side.
I didn't catch the second part of the question.
Just any type of Theres no commentary on what's driving the provided guidance.
Okay.
I'm, sorry, you're driving the.
<unk> got a guide advisors.
Yeah.
In terms of the growth for the full year.
Yes.
Yeah, I think I did just mention a little bit of the headwinds that we're experiencing in the upcoming years you know the our interest expense being the largest factor as I mentioned and then Theres really just an aggregation of a number of other smaller items that you know I highlighted being tax expense G&A expense and some of the dividend that we would have received this in.
2022 from lineage M from Walter wont occur next year. So you know those things are aggregating. In addition to some leakage that we're seeing on vacancy and some downside on certain assets downtime.
Awesome. Thank you.
Thank you. The next question is coming from Spenser I'll away of Green Street. Please go ahead.
Yeah. Thank you just on the Marriott assets I understand that you're going to provide more color as you go along but just curious if you can just comment at a high level and how that how the market looks currently for these assets.
Okay.
Sure so.
Yes, as we noted the <unk>.
12 of those assets converted to operating in January .
That's a very seamless transition Marriott continuing to operate those and they're operating well.
Hard to gauge in terms of exact timing and execution, but we think interest is going to be pretty strong and we were looking to sell nine of those assets.
We're in our guidance assuming that closes at year end.
But again hard to specifically pegged down.
Timing.
We wouldn't comment on pricing at this point.
Three of the assets, which we will retain our really excellent development opportunities one as a industrial opportunity in Newark.
Another is.
Really well located potential lab opportunity in San Diego and then the third is in Irvine, California, and again those will we'll operate seamlessly in the meantime, as we pursue those opportunities, but but very good redevelopment sites there.
Okay. Thanks, and then maybe just more broadly on the transaction market can you guys. Just provide some color on how total deal volume that you've sourced so far in the year in both the U S and Europe compared to last year.
You mean at this point in the year compared to this point last year is that the question Spencer.
Yeah, just just trying to get a sense of how the overall market.
Maybe not on everything that you're seriously underwriting, but just in terms of like a total deal volume just out there being sourced yeah look I mean, it's it's.
As I mentioned earlier I think that the sale leaseback market right now is probably as strong as we've ever seen it and Theres a number of factors leading to that.
One of which as you know.
Private equity firms and how they capitalize their businesses I think the alternatives are just not as competitive cost wise, mainly high yield debt or leverage loans.
The second factor at least in how we compete within the sale leaseback market is that.
Mortgage availability really is still not all of that.
Strong or the execution is a little bit uncertain. So a lot of the traditional real estate private equity buyers that we compete with I would say they are still largely on the sidelines. So I think those two factors are really kind of coming together to it not to mention the fact that that that that you.
Your debt rates have stabilized a little bit which has led to maybe a tightening of the bid ask spread between buyers and sellers for deals.
I think all of that combined has really set us up well for a transaction market compared to this time last year I mean look when we started last year, we were quite bullish and obviously the sharp interest rate increases in the first quarter, you know kind of change the trajectory of of kind of the pipeline from last year, but you know where we sit right. Now this is a strong.
Is it beginning of the year pipeline as we've had in a long time.
You know theres, some chunkier deals in there as I mentioned earlier.
All of those are supporting M&A activity, so that timing can be a little bit uncertain, but.
We feel good about where we sit right now and and you know so I think it's a good market and we'll see how the year progresses of course, but but it's quite favorable right now.
Thank you.
Youre welcome.
Thank you. The next question is coming from Mitch Germain of JMP Securities. Please go ahead.
Okay.
Your line is live. Please go ahead and make sure. Your line is not muted on your end.
Sorry about that sorry, I guess, it's only about 5% of your debt that's coming due this year, what's the strategy for for that mortgage debt.
Yeah.
Yeah, that's right I think to about four a little over $400 million of mortgages maturing. This year I think you know in the context of the size of our balance sheet and really our positioning we really see that as being pretty manageable I think we have a lot of optionality, we have over $1 $5 billion outstand of capacity on our credit facility and about $560 million of equity forward.
You know, we're sitting kind of on the balance sheet waiting to take out. So you know I think we have a lot of options in terms of how we address that you know you'll expect to see us in the market on the debt side given some of the you know the size of the pipeline and the deals. All you know we'd expect this year, but you know I think that we're in a good position with that 430 million being really manageable for us.
Right and Jason has anything evolved in your thinking on the operating storage portfolio.
Yeah, I mean look we're still evaluating it it's.
Property types that we've to be like we've owned it for a long time, we have good property managers supporting us and extra space in cube smart.
So I wouldn't say that they're thinking has evolved.
Considering all the options we can continue to own these.
Can convert some were all to net lease we can also look at selling some of them at attractive prices. If we think that's the best way to fund.
New transactions. So it certainly could be a combination of all of the above but.
Nothing biggest change I think in the meantime, we like the fundamentals.
Growth has maybe slowed from the industry's peak of 2022, but we're still expecting you know really strong.
Same store growth for this portfolio this year I think.
You know based on our property level budgets were probably in the mid to high single digits for this portfolio. So I think that we can be patient and continues to rise some of the increases in overall, it's a nice complement to our net lease portfolio. So I'm. So I think it will just be more opportunistic on what path we choose here.
Thank you.
Welcome.
Okay.
Thank you. The next question is coming from Anthony Pallone of J P. Morgan. Please go ahead.
Thank you.
First one is just on lineage I think you marked it up but you talked about not getting like a dividend. This year. Just wondering if you could reconcile that what's happening there.
Yeah, I think we received the dividend from lineage and the January of 2022, which we believe was reflective of kind of their taxable income positioning them. You know we didn't get that same dividend in January of this year, but I think you know as you highlighted it's really the value of the investment is what we're looking at and it continues to appreciate we've marked it up.
And offering that they did this year and worried about $400 million. So we really think there theyre performing continue really well, but the cashflow them that they're generating off of the investment is probably somewhat variable from year to year.
Okay.
Understand and then.
Tony address the gap between the same store sort of bumps year over year versus the comprehensive same store in 2022, so as we're thinking about twenty-three, though that 4% that you outlined do you think that's the number that converts down to a F. F O R.
Like is the comprehensive same store or do you think theres some drags to that.
I think if you write the 2022 and even 'twenty 'twenty. One there was somewhat of a you know kind of a lot of moving parts in comprehensive with rental recoveries and that sort of thing. So it didn't move from period to period I would say pre pandemic and you know kind of historically for us were seeing usually about 100 basis point drag or so from the.
The top line kind of contractual same store and I think that's a reasonable expectation for us into the future is that you know there will always be kind of some some offsets that run through there, but that 100 basis point drag against the the top line is probably a good expectation for us.
Okay, and so I think I guess just to make sure I understand it. So if we're thinking about a build you can start with the four maybe there's a 100 basis points of drag and then we make whatever FX assumptions, we want I guess would be on top of that it's kind of think through what what really flows down that.
That sounds right Yep.
Okay, and then just last one just to clarify I think you said $100 million and operating property NOI for 'twenty, three and I didn't catch if you said. This that include 11 months of the Marriott properties or does that not include the Marriott stuff that does include the marriott's there embedded in that 100 million.
Okay got it thank you.
Thank you. Our next question is coming from Brad Heffern RBC capital markets. Please go ahead.
Yeah, Hey, everybody, Jason you talked about the sale leaseback market being really robust I guess im curious if youre seeing any better lease terms. In addition to the higher volumes and cap rates things like higher escalators longer duration.
Better lease protections anything like that.
Yeah, I I think I would say all of the above I mean, that's one of the benefits of sale leasebacks as we you know writer on leases negotiate around leases I should say and and you know to some extent we can dictate the terms that are important to us.
<unk> has been want to be focused on for 2022, our weighted average lease term I think it was $19 nine years for for new deals, which is in line with where we've been I would expect that to be in line for 2023 would be in line with that as well, but you know we do focus on that I think.
In addition to cap rates, we still are seeing some upward pressures on the type of bumps that we get I think we're getting some pushback on inflation linked increases as you can imagine.
But our our caps that we put in place from time to time and that's maybe more of the conversation now those are higher than where they've been historically and some of that has flowed through to the fixed rate increases as well I think historically, we've probably been around 2% fixed increases on average and we're gonna be a little bit above that and my expectation this year.
We're above that for the leases that are fixed increases for 2022.
So look I think that we have maybe a little bit more.
Negotiating leverage in some of these deals given that there's fewer alternatives for firms to raise capital I think sale leasebacks are a really good opportunity right now there's fewer competition that.
Target sale leaseback and theres, even fewer that habit.
None that have a history as long as ours in terms of execution. So I think all of those factors lead us to having incremental.
You know the structuring.
Structuring abilities, and well kind of measure.
What's important to us and what we got.
Okay. Thanks for that and then I was wondering if you could talk to the watch list.
Has it expanded or contracted and I guess is there anything that we need to be keeping an eye on that maybe isn't obvious from the 18% of ABR that you did close disclose the tenants work.
This is brook, you've got credit quality overall is quite good you know again reiterate about 32% of ABR.
He is the best in grade.
We're largely dealing with with large companies with that with great access to capital.
And collecting materially all of our rent.
The watch list perspective, it's in and around 2.5% of ABR.
That in the context, maybe the Covid peak was just over 4%.
So you know credit quality has improved since then.
That said, we're certainly watching closely both macroeconomic and industry specific headwinds.
There's not really any trends or themes in the watch list is very anecdotal and tenant specific.
But certainly at this point in the cycle, we want to be very very close attention.
And we're doing that so that's.
That's kind of the status of the watch list then you know I wouldn't characterize it as anything different.
Different per se than.
In recent quarters.
Okay. Thank you.
Okay.
Thank you. The next question is coming from John <unk> of Ladenburg Thalmann. Please go ahead.
Yeah.
Thank you.
Nagel them back to the acquisition side of things and sale leasebacks. In particular are you seeing a divergence in terms of pricing between investment grade rated tenants and kind of non investment grade rated tenants I know the latter is kind of where you tend to do deals most often but just kind of.
Has there been changed in terms of pricing expectations for those two different buckets of potential tenants.
You know John we're not I would say, we're not really seeing many investment grade.
<unk> lease backs and as you mentioned, that's typically not where we've focused I think the real opportunity here, where we're I suspect there is a pretty big divergence. The real opportunity here is just below investment grade where those companies in those credits have much fewer alternatives to.
To access capital I'm, sorry, I think you know.
Again did not not that tuned into where investment grade sale leasebacks are but I'm guessing that's been much more stable and probably hasn't increased as much just like the you know the the investment grade bond markets haven't moved as much as the high yield markets I think that's reflected in the pricing on sale leasebacks as well.
Okay.
And then in terms of your own balance sheet. How are you thinking about leverage today. It sounded like guidance kind of implies relatively flat leverage versus where you are <unk>, but maybe given where equity pricing is.
Especially relative to that pricing does it makes sense.
Longer term to kind of bring leverage down just because the pricing differential is pretty attractive particularly versus historically.
Yeah look we're not there yet.
I know that you can jump in yeah, I think that you know we are still looking at kind of our target leverage levels. You know in that mid to high five times range. I think you know we have leaned into our equity our equity pricing has been pretty favorable as as a source of our cost of capital and you know I don't think we view kind of the the future environment in terms of where we can issue that is keeping us out.
The market long term and so you know I think we will continue to kind of stay in a in the range that we're in right now so somewhat leveraged neutral kind of what you're seeing there, but I agree we are definitely leaning into the equity given how well priced it's Ben.
But I have no philosophical change in that you know maybe.
Mid four to five is the new kind of target range, just because of an opportunity set here in the current environment.
No I would say, we continue to kind of look at the existing target range and I. You know look I think our a credit profile was just reaffirmed with the upgrades we got from the rating agencies, though I think we're comfortable with the target ranges that we have in place now.
Okay.
That's it for me. Thank you very much thanks, Sean.
Once again, ladies and gentlemen that is star one if you would like to register a question at this time the.
The next question is coming from Greg Mcginniss Scotiabank. Please go ahead.
Hey, sorry, just one quick follow up Tony I appreciate the color on the expected income from the operating properties I'm just curious on a looking at the kind of normalized pro rata cash NOI for self storage operating properties that saw that dropped this quarter from last quarter.
I was just wondering what's going on there.
Yeah, there's really nothing of.
Of note kind of going from quarter to quarter. There I think you know we continue to see the the storage performed well I highlighted sort of what our expectations are for the upcoming year and you know we think that mid to high single digit growth on storage you know, there's probably some seasonality in there we have one hotel portfolio and over one hotel asset rather than the portfolio that runs through that.
So annualizing that is probably picking that number down a bit but I would say just to to look more to what we're projecting on a full year basis, which is for all of that portfolio of $100 million.
Okay. Thanks, that's it for me.
Okay.
Thank you at this time I'd like to turn the floor back over to Mr. Sands for closing comments.
Thanks, Todd and thanks, everybody on the line for your interest in W. P. Carey if you have additional questions. Please call investor relations directly on to one to four nine to 1110 that concludes today's call you may now disconnect.
Okay.
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Yes.