Q2 2023 W. P. Carey Inc Earnings Call
Hello, and welcome to W. P. Carey second quarter 2023 earnings Conference call. My name is Kevin and I'll be your operator today.
Or has it been placed on mute to prevent any background noise.
Please note that today's event is being recorded.
After today's prepared remarks, we'll be taking questions via the phone line.
She is on how to do so will be given at the appropriate time.
I will now turn the program over to Peter Sands head of Investor Relations.
Please go ahead.
Good morning, everyone. Thank you for joining us this morning for our 2023 second quarter earnings call.
Before we begin I would like to remind everyone that some of the statements made on the school are not historic facts and may be deemed forward looking statements.
Factors that could cause actual results to differ materially from W. P. Carey's expectations are provided in our SEC filings.
An online replay of this conference call will be made available in the Investor Relations section of our website at W. P. Carey dot com, where it'll be archived for approximately one year and where you can also find copies of our investor presentations and other related materials.
With that I'll pass the call over to our Chief Executive Officer, Jason Fox.
Yeah.
Thank you Peter and good morning.
Everyone.
We've made good progress during the second quarter closing a significant volume of accretive new investments in an environment that remains constructive for sale leasebacks, enabling us to apply upward pressure on cap rates.
Our contractual same store rent growth also remains among the best in the net lease sector.
Even though inflation is cooling we expect to continue leading the peer group on rent growth driven by the lagged impact of CPI and rents as well as the strength of our fixed rent increases.
This morning, I'll briefly recap our recent investment activity and talk a little about how we're uniquely positioned within the net lease sector through both our competitive position and the various sources of capital available to us, giving us confidence in our ability to continue investing in the second half of the year and manage our near term debt maturities, even if capital.
That's our constraint.
I'm joined this morning by our CFO , Tony Sand Zone will review, our second quarter results expectations for the full year and balance sheet positioning John Park, our President and Brooks Gordon our head of asset management are also on the call and available to take questions.
Transaction market conditions during the second quarter were generally a continuation of those we saw earlier in the year and Europe . There continues to be a slowdown in investment activity given the steep rise in interest rates in that region over the last 12 months, resulting in wider bid ask spreads although cap rates have lagged in Europe , we continue to find pockets of opportunity.
D, which we expect to play out over the next six to 12 months sellers adjusted to higher cap rate demand as buyers.
And we're well positioned to capitalize on them given our strong competitive position in that market and the capital we have to deploy.
In contrast cap rates remain more attractive than North America, which accounts for the large majority of our investment volume year to date, including the $468 million industrial sale leaseback with after tax we announced in April <unk>.
I discussed on our last earnings call as.
As I said then it serves as a good example of the attractive opportunities available to us by partnering with private equity sponsors using sale leasebacks as part of the capital stack and corporate acquisitions as well as the competitive advantage, we have by being able to fund transactions, including large ones entirely with our own balance sheet.
<unk> now ranks as our third largest tenant and further increases our overall allocation to warehouse and industrial.
Another notable second quarter transaction was the $98 million sale leaseback, we completed with a D. C technologies, a leading supplier to the global auto industry for a portfolio of nine industrial properties in North America.
A b C is an existing tenant and the transaction enabled us to also extend the lease term on the existing portfolio.
With our most recent investment in D. C. It also moves into our top 10 tenants.
Although end transactions, either with existing tenants, where with private equity sponsors that we've worked with before are an important source of captive deal flow there.
Current environment has allowed us to expand our sponsor relationships as private equity firms increasingly explore alternative sources of capital including sale leasebacks.
The majority of our investment volume year to date came from new sponsor relationships driven largely by after tax.
We completed investments totaling $761 million during the second quarter, bringing our investment volume for the first half of the year to $939 million at a weighted average cap rate of seven 3%, a 120 basis points above the average for the investments to be completed over the same period last year.
Cap rates in certain areas of the net lease market had been slow to move such as commodity.
We've been able to transact at more attractive cap rates, especially on warehouse and industrial sale leasebacks, which represent the large majority of our investment volume during the first half of the year.
And while net lease transaction markets have generally slowed over the last 12 months large corporate sellers with use of proceeds continue to actively explore sale leasebacks due to a lack of attractive funding alternatives given the tighter bank credit environment and more expensive corporate lending market. We've also seen fewer credible buyers chasing deals.
This dynamic coupled with the significant capital we have available to invest continues to strengthen our competitive position and ability to push cap rates higher.
We're also willing to forego deals with insufficient spread some of which we are seeing come back to the market with better terms.
Today, we're focused on deals with going in cash cap rates in the sevens, which translates to Unlevered IRR is in the eights and into the nines taking into account the rent growth, we were able to achieve over a long term leases.
New deals, we're achieving higher rent growth than we have historically for example deals with fixed rent bumps completed in the first half of 2023 had rent increases averaging just under 3% compared to historical averages around 2%.
Therefore continued to generate a comfortable spread to our cost of capital and have a positive outlook on our ability to win deals and deploy capital accretively over the second half of the year.
Moving now to capital raising in recent years, we've demonstrated our ability to raise well priced capital from diverse sources. The flexibility of our balance sheet is an important strength, particularly in an environment where capital markets can change quickly.
As we look ahead to our capital needs over the second half of 2023 and enter 2024, we feel very positive about how we're positioned.
We still have approximately $385 million of unsettled forward equity raise at an average price over $83 per share that equity along with proceeds from planned asset sales provides us with the capital required to fund the remaining investment volume contemplated by our guidance, while maintaining conservative leverage.
Our $1 8 billion dollar revolving credit facility provides us with significant liquidity and in combination with our two term loans represents a significant portion of the total debt we have maturing over the next two and a half years around one third gives.
Given the strong support we have from our bank group, we fully expect to extend the maturity on our credit facility through a standard recast towards the end of this year and because it is floating rate recent interest rate increases are already flowing through our interest expense on that portion of our maturing debt.
Our recent upgrades to triple B, plus and be double a one enhance our credit profile and although debt markets remain unsettled. We believe we'll continue to find windows of opportunity to issue new bonds. Both in the U S and Europe , where we maintain a strong market presence as a highly rated re fi.
Finally, it's important to note that we have several other internal sources of capital it helped mitigate our capital needs, especially useful given the current uncertainty in the capital markets and interest rate environment, and depending on how capital market conditions evolve. It has the potential to be a meaningful competitive advantage over the next few years.
As we previously discussed we have the proceeds from the U haul portfolio, which we currently estimate to be around $465 million coming back in the first quarter of next year, given the exercise of the repurchase option on those properties.
We also continue to explore various options for our substantial portfolio of operating self storage assets, including as a source of capital through asset sales operating self storage properties are among the more liquid real estate assets and in the current market. We believe our portfolio has a value approaching $1 $5 billion.
We also continue to hold a large investment in lineage logistics currently on our balance sheet at a fair value of around $400 million, which is presently not paying a dividend. This is a noncore holding that we expect to sell sometime after lineage becomes a public company, allowing us to reinvest the proceeds highly accretively.
We do not have any visibility into timing it has the potential to be another meaningful source of capital over the next few years in aggregate. These potential sources of capital total well over $2 billion, giving us confidence that we're well positioned to continue making investments and managing our upcoming debt maturities, even if traditional sources of capital are constrained and with that.
I'll pass the call over to Tony.
Thank you, Jason and good morning, everyone.
For the 2023 second quarter, we generated total ASO of $1 36 per diluted share.
Three 8% over the first quarter, primarily reflecting the accretive impact of recent investments and the continued strength of our rent growth.
We offset by higher interest expense.
The second quarter also included certain nonrecurring items within non Reimbursable property expenses and income taxes, largely offset one another which I'll come back to shortly.
As Jason discussed with cap rates remaining well above 2022 level, we continue to find accretive investments that brought investment volume over the first half of the year to $939 million.
We also continue to benefit from the strength of the rent escalations built into our portfolio with contractual same store rent growth remaining at a peak level of four 3% year over year.
130 basis points above where it was a year ago.
For leases with uncapped CPI rent Escalations contractual same store rent growth with seven 5% for the second quarter.
Collecting the lagged impact of CPI on rent and embedded tailwind to our growth.
We also expect our fixed rent increases to continue to trend upward given the higher fixed escalations, we've been achieving on new leases.
<unk> elevated same store rent growth as inflation decline.
As a result, we expect our internal growth to remain strong in the second half of the year with contractual thank for rent growth averaging around 4%.
To average around 3% in 2024 based on current inflation forecast.
Comprehensive same store rent growth for the second quarter, which is based on the net lease rent included in our ASO with three 9% year over year and includes the benefit of certain rent recoveries in the current period.
Over the long term, we continue to expect our comprehensive same store rent growth on average to run about 100 basis points below contractual thing.
In addition to strong same store growth, we also recaptured close to 100% of prior rent through our re leasing activity for the quarter on about 1.5% of ABR, which on average extended lease term about six years.
Also the investments we completed during the first half of the year had a weighted average lease term of 22 years, which in conjunction with the positive outcomes on our second quarter releasing activity extended the overall weighted average lease term of our portfolio to 11 two years.
Other lease related income for the second quarter totaled $5 million.
Bringing this line item to $18 4 million year to date.
We continue to expect other lease related income for the full year to remain in line with 2022.
Disposition activity during the second quarter with minimal comprising three properties for gross proceeds of $5 $5 million.
Bringing total decisions over the first half of the year to $48 million.
For the full year, our guidance continues to assume total dispositions of between 300 and $400 million, including the sale of nine of the 12 Marriott operating hotels, we currently own which represent about two thirds of the annualized NOI generated by our operating hotel portfolio.
The Marriott sales are progressing well with the majority of the properties currently under purchase and sale agreement.
We currently expect NOI from all operating properties to total approximately 90% to $95 million for 2023, primarily reflecting the timing of the Marriott itself, but also the impact of slightly slower growth with an operating self storage is that industry comes off its recent peak.
Turning to expenses interest expense totaled $75 $5 million for the second quarter with the increase over the first quarter driven by the funding of our investment activity.
Relative to the year ago quarter. The increase also reflects the impact of higher base rates.
Our weighted average interest rate was three 3% at the end of the second quarter, which is broadly in line with the first quarter, but up from two 6% for the year ago quarter.
Non reimbursed property expenses for the second quarter were $5 $4 million driven lower by a reversal of property tax accruals totaling $6 $3 million.
These are property taxes that we had previously been accruing due to attendance non payments over the past few years.
The tenant fully repaid those taxes directly, allowing us to reverse our accruals during the second quarter.
As a result, we expect this line item to return to a more normalized run rate of around $12 million per quarter for the remainder of 2023.
G&A expense totaled $25 million for the second quarter about $2 million lower than the first quarter, which typically trends higher given the timing of certain payroll related items.
For the full year, we continue to expect G&A to total between 97 and $100 million.
Tax expense on an <unk> basis totaled $12 8 million for the second quarter, which included $3 $3 million in incremental expense associated with the tax audit in Europe .
For the remainder of the year, we expect the quarterly run rate to be closer to $11 million.
Turning briefly to guidance.
We've narrowed our full year <unk> guidance range by four cents between $5 32, and $5.38 per share with the midpoint unchanged, which implies close to 3% year over year growth on real estate <unk> per share despite the headwind from rising interest rates.
Our guidance continues to assume investment volume totaling between 175 and $2 to $5 billion for the year.
And as I discussed earlier disposition totaling between 300 and $400 million.
Moving now to our capital markets activity and balance sheet positioning.
As discussed in our last earnings call. We closed on a new three year 500 million Euro unsecured term loan in April and concurrently executed an interest rate swap that fixes the interest rate at 4.3% through the end of 2024.
With proceeds primarily used to pay down our revolving credit facility.
We did not raise or settle any equity forward. During the second quarter will continue to have about $385 million of forward equity available to settle.
Turning to our key leverage and liquidity metrics at the end of the second quarter.
Debt to gross assets was 41, 3%.
And net debt to EBITDA was five seven times remaining well within our target leverage range at the low to mid Forty's on debt to gross assets and mid to high five times on net debt to EBITDA.
This does not reflect the pro forma impact of settling Undrawn equity forward, which would further reduce net debt to EBITDA to five four times.
We ended the second quarter of about $530 million drawn on our $1 8 billion revolving credit facility, maintaining a strong liquidity position totaling approximately $1 $9 billion.
Through the combination of unused capacity on our credit facility unsettled equity forward and anticipated disposition proceeds in the second half of the year, we're positioned to fund the remaining investment volumes embedded in our 2023 guidance on a leverage neutral basis without the need to raise additional capital this year.
We can therefore be opportunistic when we access the capital markets.
As Jason discussed we remain very comfortable with our near term debt maturities, given our liquidity position access to capital and the flexibility provided by the significant internal capital sources available to us over the next few years.
In closing we're pleased with the strong progress we made in the first half of the year towards the investment volume embedded in our guidance and.
And expect continued momentum in the second half given the competitiveness of sale leasebacks and the investment spreads we're achieving we.
We also expect our same store growth to continue to lead the net lease peer group.
And given the various forms of capital available to us including from internal sources, we're confident in our ability to fund our investments in the other capital needs over the remainder of this year and into 2024.
And with that I'll hand, the call back to the operator for questions.
Thank you, we'll now be conducting a question and answer session, if you'd like to be placed into the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing.
<unk> Star one.
One moment please poll for questions.
Our first question today is coming from Greg Mcginniss from Scotiabank. Your line is now live.
Yeah.
Hi, Thank you this is Eleanor Chan.
Greg Thanks for the time.
<unk> historically.
Hard assets in the $10 million to $20 million age with with S.
Leaseback, increasing we are.
Becoming more attractive.
Financing solution for operators in last few quarters due to increased cost of capital and the market cap.
Capital availability, how has competition in salaries back market trended, perhaps quarter to date I think you touched upon it in your in your remarks, a little bit and how does that compare across the north American geographies.
Also.
What have conversations been like with existing versus new clients, giving you acquired.
Year to date with mostly mostly new clients.
Yeah sure so good questions in there.
In terms of how has the sale leaseback market change this year I mean, it's been pretty stable for the year. This is especially in the U S. I think and when we think about larger transactions that you mentioned that.
You know we've seen larger transactions I would say this year and maybe beginning at the end of last year, a little more so historically I think historically, we've probably still targeted deal sizes that are in the <unk>.
50 million.
Million dollar range, plus or minus I think we're probably a little bit above that year to date, even excluding the alphatec deal maybe around $75 million.
And.
I think the themes are still the same the competition has thinned out for US I think that you know me.
Any of the private equity real estate peers that we've competed with previously they rely on mortgage financing and and that's become more expensive and less available and certainly the themes that are driving sale leasebacks, which is the.
Especially in the sub investment grade space private equity sponsors. It's the cost of alternative sources of capital high yield bonds are leveraged loans are still you know.
More expensive than where we're targeting our pricing on sale leasebacks.
And Thats across North America.
You you brought up North America, I mean, we've always really kind of thought of this as one market pretty much all of the deals that we do in North America are dollar denominated I think are maybe more driven by you know what's happening in the U S market. So I think there's some consistency there.
And it's still quite constructive and maybe not as strong as we've seen you know the sale leaseback market and in a long time.
I Wonder if I Miss any other questions in there.
Got it no that was very helpful. Thanks, Thanks for the color there and maybe just switching gears to.
To office since you sold a bunch of properties in Q1, but it didn't sell any assets this quarter.
And then haven't really acquire auctions for some time can you just remind us on your general views of that portfolio and how you think about maybe expirations that are coming due soon.
I know Wade who walks on the portfolio are a little bit less than portfolio average.
Sure.
Would be helpful. Yeah.
Yeah, I mean, I think broadly as you mentioned, we have not been buying any office anytime recently, probably over the past five years.
This exposure has come down significantly from over 30% five years ago to where it is now about 16%.
Excuse me.
That decline has occurred because we have not acquiring any we have you know over that period kind of sold more office as a percentage of our total sales and it really been over allocating new capital into industrial and warehouse and maybe retail to a lesser extent so the strategy around office.
Hey, it's consistent there I think ultimately you know we do expect to move our exposure to zero, but you know there's really no kind of specific timeframe. We're looking at that I don't know Brooks, if there's anything to add on specific explorations that you want to you include there.
No nothing specific I think it's pretty well staggered.
And really pretty skewed late in the decade and beyond.
Any given year, but we don't have kind of a constant lease roll or running major bumps there.
So it's manageable.
And we're quite focused on those office explorations for sure.
Yeah.
Fair enough thanks for the time.
Thank you. The next question today is coming from Joshua dinner line from Bank of America. Your line is now live.
Yeah. Thanks, guys I appreciate the time.
Just I know there was some color on the opening remarks, but just maybe if we can get into a little bit more detail on how we should expect.
Rent bumps to kind of evolve over the.
Just how inflation has been trending.
Thinking about the lags I think we've talked about in the past, but it'd be great to get a refresher.
Yeah, Tony do you want to touch on it.
Yeah I got that.
You know in terms of what we've seen to date I think we reported $4, 3% contractual same store in the first two quarters of this year. That's our peak level, we do see that lag continuing to play out and will sort of stay in the 4% range over the back half of this year with that declining into kind of a 3% average for all of 2002.
24, so still seeing some again higher than typical growth, resulting from the CPI playing through and also from just being able to get higher fixed rent increases in the you know in the more recent deals that we're doing that's sort of helping sustain that on a longer term basis, so 4% towards the back half of this year of three <unk>.
Sent into next year, and you know again, maybe some.
Upward movement from what we've seen historical levels beyond that.
Yes, Josh that assumes current forecast it clearly if things change if if.
I mean, we just had some Rosie GDP numbers come out the other day, so to the extent inflation you know reverses course, a little bit higher again, you know those numbers could could change as well, but but regardless I think still very attractive same store you know relative to the peer set in that lease.
Okay I appreciate that and then maybe just a follow up on the office exposure do you guys have any sublease activity in your portfolio.
Or is it all pretty much.
Direct tenants.
Brooks.
It's a mixed bag as primarily the direct tenants, but we don't property manage those specifically so that the master tenant is really our relationship.
But there is some sublease thing youre in there.
And that's pretty normal course, that's kind of always been the case.
So that's not particularly new.
But something we certainly are watching.
Yeah.
Okay.
By watching it hasn't increased or is that why youre watching it or just kind of.
Standard course of business, certainly always just trying to monitor what our tenants are up too.
Haven't seen a really material increase in sublease activity.
As with all companies utilization of the mixed bag by by company.
And in that.
That itself is a bit of a moving target.
And we've seen some positive trends there so.
Assembly, saying is certainly a part of.
Owning any single tenant asset.
And then as part of our office portfolio.
Got it thanks guys.
Welcome.
Thank you next question today is coming from Spenser <unk> from Green Street Advisors. Your line is now live.
Yeah. Thank you you provided a lot of color just on you know the U S landscape being more favorable right now I'm. Just curious has anything started to change thus far and three Q as it relates to the landscape in Europe and.
If not like what do you think kind of needs to change in order for you guys to see more.
Interesting or like opportunistic activity abroad.
Yeah, I mean, we're starting to see changes over there when you think about Europe .
The rate increases where the magnitude of the rate increases were more significant there. So sellers are really still adjusting.
To that sharp rate increase we are seeing a pickup in opportunities I think there is still bid ask spreads that are may be wider than.
We think they should be in order to get transactions done, but but I think the activity is increasing and that's you know look that's kind of how it felt like in the U S. Maybe going into Q4 last year, where there was more sellers engage even though we werent you know quite finding a meeting of the minds on pricing, but that process has started in Europe I think.
Sellers, especially those with use of proceeds in mind when he is gonna be sale leasebacks.
At some point become price takers, because their alternative sources of capital or maybe.
Maybe not as attractive as a sale leaseback. So I think it gives us some optimism that second half of the year there could be some some more meaningful activity in Europe .
Okay and I'm sure. There's a range are you able to quantify kind of like the bid ask spread that you guys are still seeing in Europe .
Yeah, I mean, it is a range of I would say it's.
Call. It 25 to 50 basis points I mean, whenever you know perfect to the basis point on how we price deals, but it just seems like theres a not a lot of transactions are happening. So we don't have a full sense for where sellers are but we do know is that there's not a.
There's not an acceptance of where we are bidding on things. So it feels like it's tightened and this may be in that range.
Okay. Thanks, and then Glen just didn't.
Order to hit the high end of your acquisition guidance I'm. Just curious do you guys. What do you need to see more opportunities out of Europe or do you think you could hit the high end you know given what you're seeing in the U S. I know you've been a little bit more selective as it comes.
Until like the U S retail industries, I know you've been targeting more of the industrial so just curious if you'd be able to hit the high end without much of Europe .
I mean look Europe would certainly be helpful. But we have seen larger deals as I mentioned, a few minutes ago.
In the U S. I think to the extent, we can see larger deals or more of them lookout protects that obviously is going to have a you know a big impact on where we finished within the guidance range. So it's possible, but it it's more helpful with with with Europe in play.
Clearly, we don't have visibility into Q4 transactions at this point. It does tend to be you know one of our most if not our most active quarter in most years. So I think that gives us maybe a reason to be optimistic but.
There's a lot of volatility out there and it's hard to predict so I think the range is appropriate at this point.
Okay. Thank you for the color.
Yes Youre welcome.
Thank you. Our next question today is coming from John Kim from BMO capital markets. Your line is now live.
Thank you.
Okay.
I guess the first question is on guidance. If you look at what you have.
For the year at the midpoint. It suggests the $1 34 run rate on a per BOE, which is essentially flat from what you had in the first half of the year.
Given the investment activity, you've had and the yield you've been able to achieve as well as the pipeline.
Surprise it hasn't gone up just wanted to get thoughts on that.
Tony you want to talk to you I think if you.
Theres a few things happening that I think are worth kind of recapping and some of those I mentioned in my remarks, if you look at kind of the second quarter, where we came out versus the rest of the year the material drivers and bringing the second quarter higher that we don't expect would recur in the back half of the year or the property tax accrual reversal that I mentioned around $6 million.
And we have some additional rent and recoveries this quarter as well, bringing up our comprehensive same store.
Can you offset that by the the income tax expense the incremental expenses I mentioned of about $3 million, you kind of normalize that out of the run rate for the back half of the year and then really taking into account just higher interest expense as well as the back half weighting of our dispositions those are really the material movers that get you to the midpoint of our guidance range.
On the subject of the comprehensive same store.
Mentioned that it's a 100 basis points.
Hello contractual long term.
So next year will be about 3%.
But I always thought that this.
The difference between the comprehensive and contractual was more of a lag or timing issue rather than a complete permanent drag.
Can you just elaborate on why that's.
It's going to be consistently lower than contractual.
Sure Yeah, I think there's a handful of items that run through comprehensive remember that's kind of what runs through a SFO as opposed to our contractual same store, which is a point in time. So some of that is timing as you referenced but they can see certainly play a role in that Delta and I think you've really made up probably the majority of the.
Delta between contractual and comprehensive kind of in recent history as well as any it goes both ways additional recoveries or disruption and rent collection sort of make up the bulk of that difference, but I would say vacancy is probably a material delta there.
Okay.
And Jason I, just wanted to understand your commentary on the.
Storage operating portfolio, you did buy a small operating portfolio this quarter.
But I was wondering if you talked about it as a potential use of funds I know you said that in the past.
I'm sorry, a potential source of fund you said that in the past, but are you more inclined to sell the operating portfolio today than you were.
In the past few quarters.
Yeah look I think that we've always looked at all the options that we have and we've talked about though certainly you know selling them as one option and.
And we don't have to do all one option, we could we could sell some we can convert some and maybe there is reason to continue to hold some as operating assets for future sales are conversions.
But we are taking a closer look at it right now I think that we're certainly mindful.
No in the current environment, it's good to be liquid I think storage is one of the more liquid asset classes out there and so we want to be prepared if that's a good way to fund deals better than maybe raising equity or other forms that that's on the table. So.
You know we're looking at it I think it's too early to share anything specific we may not sell anything at all but I think it's probably a little bit more.
Something that we're evaluating closer at this point and then you know.
A quarter or two back.
Okay, great. Thank you.
Yeah welcome.
Thank you. Our next question today is coming from Brad Heffern from RBC capital markets. Your line is that right.
Hey, good morning, everyone.
There was some decent sized moves in the portfolio stats this quarter that I thought were a little difficult to explain just given there are basically no dispositions and so I'm thinking of office exposure down 110 basis points <unk> exposure was down 170, and then CPI exposure was down 310.
Can you just maybe it's all the same thing, but can you talk through what's driving those names.
Yeah, I mean, I think high level.
The allocation to industrial is going to look down those other categories in industrial not investment grade, but Brooks I don't know if you have any other color you want to what I mentioned, there I think we did have a vacancy as well.
Yes, I mean, the biggest driver of it.
All of those is.
Acquiring all non office all of which was sub investment grade and so it's really the denominator effect, we'd have one office non.
Non renewal.
We're working on a sale for that asset so that's contributing to it as well.
The biggest piece of that is is really denominator effects.
Primarily the Canpotex investment we've discussed.
Okay got it and then can you get the collections percentage for the second quarter and also just walk through the watch list and any changes there.
Tony do you have do you have collections.
Yeah, I think on collections, we continue to track around and above 99%.
You know what did you take into account recoveries from prior quarters or probably closer to 100% this quarter.
And then and then on.
On the watch list.
Yes on the watch list front very stable watches is around 2%.
And again for context, the kind of Covid area era peak was around 4%.
It's actually down slightly from the prior quarter, we had one tenant which we upgraded.
They were able to restructure their balance sheet had no impact on our lease so good outcome there.
So I'd watch looks very much stable from quarter over quarter other than that one.
Okay. Thank you.
Thank you next question is coming from Anthony Pallone from J P. Morgan Your line is now live.
Great. Thank you I guess first one just on second quarter deal activity can you give us a.
Number for the cap rate on that I think we have like <unk>, but just how did it all shake out.
Yes, the year to date cap rate seven three I think for the quarter were probably in and around that to that number maybe slightly below that.
That's driven by the size of the architects deal. So we're still kind of range bound in the you know.
But we're targeting deals in the Sevens and I think that's where we're coming out.
Okay got it.
And then just as you start to look ahead I know you take out U haul from the explorations in 'twenty four but just any known move outs in the remaining three and a half points of revenue next year that we should be thinking about.
Brooks you might take that.
Sure.
As you mentioned lease explorations coming up are pretty light through 'twenty five is about 12%. So then when you back off.
U haul, it's maybe 9%.
Really not a whole lot remaining to go this year.
We do have one warehouse property in the Chicago area high quality building.
Where the tenant is relocating and so what we will seek to release that.
In 2024, we have about 6% of ABR again, a lot of that is U haul.
Most of the balances warehouse and industrial not a whole lot notable there.
And I mentioned, we had one.
Recent.
I'd move out which were which were working through on a sale right now.
Okay and then on the.
I guess warehousing industrial component of the portfolio I mean, that's where the bulk of your leasing was in <unk> and it's pretty pretty flattish renewal spreads like is there a mark to market that's positive across the portfolio overall or is that representative I mean, how would you characterize that.
The bulk of what happened in this quarter was actually that.
ABC transaction that Jason mentioned, we were able to extend our existing portfolio backed out to a fresh 20 year term. So thats really the bulk of the action.
In the industrial.
Segment, there one tiny little warehouse property, so I'm really not indicative broadly speaking I think in our warehouse properties. There is a mark to market opportunity. We don't have a constant lease roll we have long Walt so that's not as big a driver for us really the organic growth is the bigger driver.
But again, the industrial tends to exhibit very very high criticality.
Really good renewal probabilities there so it's a blend but I wouldn't really expect anything from a specific quarter per se ABC was really the big story in industrial.
Okay got it thank you.
Thank you as a reminder, that star one to be placed in the question queue. Our next question is coming from Eric Wolfe from Citi. Your line is now live.
Hey, good morning. Thanks.
A follow up on the self storage question I think you said in your remarks that.
Before it was around 1 billion and a half of value I'm, just curious sort of what cap rate youre using for that assumption and if you were to market.
You know the portfolio do you think you can get better pricing as a portfolio or just sort of breaking it up into individual properties or provisions.
Yeah.
I mentioned that it was approaching 1 billion and a half so it's probably not a 1 billion and a half, but it's probably somewhere between.
Between $1 1 billion and a half maybe closer to the top end of that range I think it depends on.
You know obviously the specific components and how we consider selling.
Selling it I think if we were to sell them.
I think there are lots of options I mean, we've seen some big trades, obviously out there for portfolios I think we can do sub portfolios that would be meaningfully smaller.
It wouldn't make a lot of sense to do you know one offs. So it's probably something in between you know again, if that's something that we consider to pursue its still little early to really give you know many specifics on it wasn't me do with the portfolio.
Understood and if I wanted to back into evaluation I mean is there any could I just basically take the numbers that you put on in terms of pro rata rental income in there I mean is that is that representative of the sort of income stream that would be getting capped or because you have some of these sort of like a triple net lease and other things there would be adjustments.
Committed.
Yeah, I mean look I think that we would expect it to price somewhere in the fives on a cap rate basis, Tony I don't know if our numbers are clean yet because we.
You know, it's not a full year and there certainly is some seasonality to storage better. If you have a comment on on the numbers that we disclose.
Yeah, I think if you look at the NOI run rate and kind of what was given in relation to guidance in our update there were probably in and around the $70 million range for self storage NOI on a full year basis.
Based on this year.
Got it that's helpful and then on <unk>.
You mentioned that you could source of funds when the IPO.
I guess is there sort of a private market. There are there other ways that you could sort of monetize it. If you. If you wanted to or do you. Just think you know waiting for them to go through the IPO process is probably the best way to maximize the amount of proceeds that you get.
Yeah look there probably is a private process that we could undertake if that was something that we really needed to do we don't need to do it we're in a very good position from a capital standpoint.
But we do like to pointed out that it's a it's out there. It's a source of really cheap capital, it's not paying a dividend right now so when we do have the.
The chance to liquidate it and will probably want to do it in the most efficient way, which would be part of a.
But you know an IPO of that company I think that's what we would do not a lot of visibility on timing I would imagine it's over the next couple of years.
If not sooner, but it's something that we do want to point out given how cheap that capitalists.
Got it alright, well thank you.
You're welcome.
Thank you next question is coming from Jim Cameron from Evercore. Your line is now live.
Good morning, Thank you Ah Tony hate to do this to you, but your comments were very constructive on the organic growth on a same property a b R.
Could you tell us what was it looked like just purely contractual basis for the portfolio or ballpark that so you take CPI out et cetera, what would that be it for the portfolio.
Sorry, if you take CPI out yeah.
I'm, sorry, I'm, sorry, so to say do you have uncapped CPI rent adjustments.
Some of those leases have a minimum growth rate and inflation were less than the fixed bump for example, or.
I'm trying to triangulate, what where the portfolio growth looked like.
And like a 2% inflationary market.
The contractual.
I think our historical same store growth has kind of been in the 1.5% to 2% range before inflation started to pick up kind of.
Reach its peak so you know.
As I said the fixed increases are starting to increase as well so that that's playing a part in that and maybe that would bring it to the top end of that range, but I think thats all looking more historically as opposed to what we would see going forward. It certainly dependent now on where inflation stabilizes them, both in Europe , and the U S and you know right now we're seeing that happen.
Or that the projections are looking like in the low 2% range in the U S and in the mid 2% range in Europe . So that's really how we're thinking about kind of the the growth going forward.
Okay. That's helpful. Thank you.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to Peter for any further or closing comments.
Alright, Thanks, Kevin and thanks, everybody for your interest in W. P. Carey if anyone has additional questions. Please call investor relations directly on to one to four nine to 1110 and that concludes today's school you may now disconnect. Thank you.