Q3 2023 WP Carey Inc Earnings Call
[music].
Hello, and welcome to W. P. Carey's third quarter 2023 earnings Conference call. My name is John 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 and instructions on how to do so will be given at the appropriate time.
And I will now turn today's program over to Peter Sands head of Investor Relations.
Thank you Mr sense. Please go ahead.
Good morning, everyone and thank you for joining us this morning for our 2023 third quarter earnings call.
Before we begin I would like to remind everyone that some.
Statements made on this call are not historic facts and may be deemed forward looking statements factors that could cause actual results to differ materially 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, but it'll be archived for approximately one year and where you can also find copies alright, that's sufficient patients and other related materials and with that I'll hand, the call over to our Chief Executive Officer, Jason Fox.
Thank you Peter and good morning, everyone.
This earnings call. In addition to discussing our third quarter results I want to take the opportunity to provide an update on our recently announced strategic plan to exit office, including the progress we've made over the last six weeks, how will it be better positioned for growth going forward.
I'll also discuss how the significant amount of liquidity coming back to us puts us in an exceptionally strong capital position and touch upon what we're seeing in the transaction market and how we're approaching new investment opportunities as a result.
I'm joined this morning by our CFO, Tony <unk>, who will review the third quarter and our expectations for the remainder of 2023 as well as our preliminary expectations for 2024. He has the south and the resetting of our dividend to reflect our strategic exit from office.
John Park, our President and Brooks Gordon head of asset management are also in the call to take questions.
Starting with our strategic exit from office, which accelerates the approach we've been taking over the last eight years or so to reduce our office exposure.
Effectively take it down to zero over the next few months.
I'm pleased to say that in November 1st we completed the spin off of net lease office properties, which we refer to as N. A little P. On this call.
As a result assets representing about two thirds of our office a b R. R.
Hello Pete.
W. P. Carey has no ownership interest in <unk> and as a separate publicly traded company and Hello people make its own public disclosures, including updates on its progress with asset sales.
We're also making good progress selling the office assets remain on our balance sheet, which we are referring to the office sale program. So far we've completed sales of four office assets under this program totaling $143 million in gross proceeds, including the Telefonica assets sold during the third quarter, we have signed.
<unk> on another roughly $500 million.
<unk>, our largest office assets at least at the Spanish government, which remains on track to close in January and a sale back to the tenant for approximately $350 million.
In total we have closed or have transactions in place and over 90% of assets in the program based on gross proceeds giving us confidence that the vast majority of on balance sheet office sales will be completed by early 2024, we're.
We're pleased with the progress we've made to date, particularly given the remaining 10%, which we are actively working on selling represents less than 1% of our total ABR.
As a result I early 2024, we will have a higher quality portfolio with some of the strongest metrics in the net lease sector.
Just over 60% of ABR will come from warehouse and industrial assets.
The weighted average lease term will remain over 11 years and our portfolio maintaining strong geographic diversification with over half of ABR generated by assets with rent escalations tied to inflation.
We will continue to have among the strongest same store rent growth in our peer group.
CPI linked leases and higher fixed rent escalations.
Proactively exiting our office exposure over a short period of time also ensures we won't face a drag in our earnings over multiple years, where the risks associated with large lease expirations and increased vacancies driven by declining demand for office.
Our view is that the leasing market financing market and investment sales market for the office sector will all remain under pressure and that office assets will see worst outcomes going forward than they've seen in the past.
Which will be particularly impactful on a single tenant office portfolio with a declining weighted average lease term fees.
These factors all contributed to our conviction in dressing office more proactively.
Bill has a reasonable amount of the lease term remaining.
And it provide investors a cleaner and clearer path for earnings growth on our core portfolio.
As I look ahead.
P Carey will be better positioned for growth the quality of our cash flows will be enhanced through better and if these outcomes, including fewer vacancies.
Overall, releasing spreads reduced downtime, some carrying costs and lower capex requirements.
Existing office will also enable our sector, leading internal growth they have a greater impact on our overall <unk> growth.
In addition, the significant amount of capital that has and will continue to come back to us over the next several months uniquely positions us with you the net lease space in aggregate the combination of settling their equity forwards. The cash distribution received the execution of the spin off asset sales under the office sales program along with the upcoming.
Is it a U haul purchase option and other dispositions.
Back to generate around $2 billion of liquidity.
We will also start retaining more cash as a result of resetting our dividend.
Based on our revised investment volume expectations for the remainder of 2023 and our current assumptions for 2024, we don't expect to need to issue new capital in the near term it could potentially go to the end of 2024 without having to access the capital markets. If they remain unfavorable even if we temporarily repaid our 2024 debt maturing.
He's with cash.
The significant pool of dry powder, we have gives us a meaningful competitive advantage on new deals, especially versus net lease peers. They may become capital constrained if they are unable to access the capital markets, where their cost of capital remains too high.
Looking further ahead, we have additional sources of capital such as our investment in lineage logistics and potential operating property sales, which could provide even more of a runway to fund accretive investments should capital market conditions remain unattractive or for an extended period of time.
Turning now to the transaction environment, and how we're approaching new investments as a result.
The current environment for sale leasebacks continues to be one of the most interesting I've seen in my career high yield debt and other financing alternatives are constrained generally very expensive.
Sale leasebacks, the most attractive source of capital.
In addition, the capital market backdrop remains volatile.
Creating uncertainty over the pool of buyers able to raise and deploy capital Accretively.
Competition to stand out, especially from buyers using mortgage financing, we are seeing less capital chasing deals.
Coming out of summer, we had a substantial pipeline with around $500 million of new investments in various stages of execution.
Cap rates generally in the low to mid sentence.
After steadily rising over the summer interest rates moved sharply higher in late September bringing deal pricing even born to focus we began more actively exerting our pricing power pushing cap rates higher to better reflect the current capital market environment.
Specifically, we repriced most of our large deals to cap rates in the mid to high standards and even into the eights, providing unleveraged returns in the high single digits into the low double digits deals are therefore, taking longer to negotiate and close our salaries, either adjust to where I'm willing to accept higher pricing.
That translated to a very slow third quarter with investment volume totaling just $40 million and lower expectations for overall 2023 investment volume.
Looking ahead, we have a strong bias towards deploying capital into new investments. Although we are taking a balanced approach recognizing that macro factors, including the trajectory of interest rates also matter.
Sale leasebacks in particular, where sellers are motivated to transact through a specific use of proceeds and face a lack of attractive alternatives, we believe pricing will adjust quicker than in other parts of the net lease market.
As transaction cap rates gradually move higher.
Okay capital when we see appropriately priced opportunities.
We will continue to press for higher cap rates milling, we're exceptionally well positioned to deploy more capital and sellers adjust their expectations and for the types of transactions. We focus on we would be competing against a shrinking pool of buyers, who can raise and deploy capital currently our pipeline stands at over $400 million with many deals back on track heading towards closing.
Most of which we expect to close around year. At Additionally, we had a handful of large portfolio deals at relatively early stages and with that I'll pass the call over to Tony.
Thank you, Jason and good morning, everyone.
So the 2023 third quarter, we generated total <unk> of $1 32 per diluted share.
<unk> declined versus the second quarter, primarily reflects certain nonrecurring items, which added to our E. S. S. I went to prior period.
Contractual same store rent growth was 4.2% for the third quarter 80 basis points above where it was a year ago and it's expected to remain around 4% during the fourth quarter as we continue to see the lagging CPI linked rent increases flowing through our leases.
Comprehensive same store rent growth for the third quarter was three 5%.
During the third quarter rent recapture on re leasing activity was 81% overall, primarily driven by restructurings on three of our four movie theater properties, which fall within the other category and comprise an insignificant proportion of our overall portfolio.
The one office asset that renewed during the quarter is now part of N L O P.
Going forward, we expect to see improved rent recapture metrics driven by our exit from office, although it can vary from quarter to quarter with limited re leasing activity.
Turning to our 2023 guidance.
We've lowered and narrowed our <unk> guidance range to between $5.17 and $5.23 per share based on full year investment volume of between 1.3, and 1.5 billion, having closed almost $1 billion of investments year to date.
As a reminder, when we announced our strategic exit from office in late September we reset our 2023 O F O guidance range to reflect the expected impact.
The updated guidance, we've announced today lowers the midpoint of that range by two cents to $5.20, mostly to reflect greater uncertainty over the timing of deal closings as we push for higher cap rates on the active deals in our pipeline as Jason discussed.
We disposed of six properties during the third quarter for gross proceeds of $148 million, bringing dispositions for the first nine months of the year to 196 million.
Disposition volume for 2023 is anticipated to total between 450 and $550 million, including up to $300 million of sales under the office cell program.
A b R totaled $1.46 billion at the end of the third quarter.
With the completion of the N L O P spin off our ABR was reduced to 1.31 billion and is expected to be further reduced to 1.25 billion. Upon completion of the office sale program in early 2024.
Operating NOI for the third quarter totaled $24 million, mostly comprising $17 million from our operating self storage portfolio and $6 million from our remaining operating hotel properties.
During the third quarter, our disposition activity included sales of three Marriott operating hotels for $49 million with another three sales completed in October totaling $46 million.
We currently expect NOI from all operating properties to total between 91 and $94 million for 2023, taking into account the timing of the sales of the operating hotel properties and slower NOI growth within our operating self storage portfolio.
Other lease related income totaled $2.3 million for the third quarter, bringing it to about $21 million year to date.
For the full year, we expect this line item to total between 22 and $25 million, which has been adjusted to exclude expected termination income on assets that are now part of N O O P.
Moving to expenses.
Unreimbursed property expenses totaled $13 million for third quarter and $31 million year to date.
As a reminder, during the second quarter, we recognized a one time benefit from the reversal of a property tax accrual totaling $6 $3 million.
For the full year 2023, we expect non reimbursed property expenses to total between 41 and $43 million.
Tax expense, which primarily relates to foreign taxes on our European portfolio was $9 4 million for the third quarter and $33 million year to date on an <unk> basis and includes a one time expense of $3.3 million in the second quarter, resulting from a tax audit in Europe.
For 2023, we expect cash basis taxes to total between 43 and $45 million.
G&A was $23 million for the third quarter and is expected to total between 96 and $98 million for 2023, a reduction of 1.5 million from the midpoint of our previous range, which reflects better visibility on the timing of certain expenses, given where we are in the year.
We will receive season reimbursements from L. O P for acting as its external manager specifically asset management fees will start at an initial annual rate of $7.5 million declining as an L. A P as assets are sold and.
And a 4 million dollar annual administrative reimbursement, which will remain flat over time.
For the fourth quarter, we expect to receive asset management fees and reimbursements totaling approximately $2 million, both of which will be reflected as revenue with no impact on our G&A expense line item.
Interest expense totaled $77 million for the third quarter and our weighted average interest rate remained at three 3% at quarter end.
Interest expense is expected to decline by $8 million to $10 million in the fourth quarter, reflecting the impact of the N. L O P spin off and our office cell program.
This is driven by the cash proceeds we received from the MLP distribution the settlement of equity forwards and asset sales.
We've assumed any excess cash after reducing our revolver and funding new investments earn interest income at a rate of almost 5% over the near term.
Turning now to 'twenty 'twenty four.
This morning, we announced preliminary 2024 S. F O guidance of between $4 60, and $4 80 per share, reflecting the full year impact of the N. L. O P spin off and the estimated impact from the expected completion of our office cell program early in the year combined with a preliminary outlook on the overall invest.
[noise] environment disposition activity and our liquidity positioning.
Starting with the spin off.
The impact of the assets that were contributed to N. L. O. P is about a 50 cent per share decline in E. S. S. Though on a full year basis based on their a b or less property expenses mortgage interest expense and income taxes.
Similarly, the completion of asset sales under the office sale program. Early next year is expected to result in an approximate 27% decline in our 2024 <unk> per share.
During 2024, we also expect to receive a total of approximately four cents per share and asset management fees and reimbursements for managing N L O P.
When thinking about 'twenty 'twenty four earnings it's important to also take into consideration our cash positioning in the deployment of the various sources of capital we've received and expect to receive in the coming months, which will serve as a meaningful offset to the decline in E. S. F O associated with our exit from office and should therefore be viewed along with our.
<unk> net investment activity and capital markets activity in 2024.
Specifically, our current projections assume investment volume of $1.5 billion for 2024 weighted more towards the back half of the year.
We view this as a very preliminary estimate for directional purposes as opposed to a target given the dynamic environment and expect to have a more refined view in formal range. When we issue guidance in February.
Expected dispositions during 2020 for fall into four main buckets.
First the remaining roughly $500 million of office asset sales under the office sale program, the bulk of which comprises the Spanish government portfolio sale, which is under contract and expected to close in January.
Secondly, exercise of the U haul purchase option in the first quarter, which we currently estimate will generate about $470 million in gross proceeds.
Rent from the U haul portfolio in 2024 prior to its sale is expected to be $9 $7 million.
Third potential noncore operating property dispositions of up to $100 million, including one Marriott hotel sale and the possibility of selling a student housing operating asset.
And lastly, going forward, we expect normal course, net lease dispositions of between 100 and $300 million annually.
Given the timing of the U haul and Spanish government transactions 'twenty 'twenty four disposition volume is heavily weighted to the first quarter of the year.
It's important to note that our preliminary 2024 guidance makes certain simplifying assumptions and the specific timing of both acquisitions and dispositions over the course of the year may have a meaningful impact on our S. S O.
We have two bonds totaling $1 billion maturing in 2024, as well as approximately $220 million of mortgage debt.
Taking into account the estimated $2 billion of capital inflows, we expect our guidance assumes we have sufficient capital and liquidity to fund our anticipated investment activity and to repay our 2024 debt maturities without needing to access the debt markets until late in the year and that we may not need to raise equity capital at all in 2024.
In terms of other assumptions I want to reiterate that we expect contractual same store rent growth to remain strong in 'twenty 'twenty four.
Averaging about 3% for the full year.
So the bulk of the remaining line items impacting F O beyond the impact of N. L. O P spin off and completion of the office sale program. Our preliminary 2024 guidance assumptions are relatively in line with 2023.
We expect to provide additional color and details with our fourth quarter earnings in February when we announce our formal guidance for the year.
Moving now to our capital markets activity and balance sheet positioning.
In conjunction with an L. O P spin off we settled our remaining equity forwards in October issuing $4 7 million shares generating aggregate proceeds of $384 million.
This was equity we originally raised at a gross price of over $83 per share, which for technical and legal reasons, we decided to settle ahead of the spin off.
As Jason discussed with around $2 billion of capital expected to come back to us through early 2024, we remain exceptionally well positioned to fund acquisitions and manage our upcoming debt maturities.
We therefore continue to have significant flexibility and when and how we access the capital markets, enabling us to look for favorable windows of opportunity to do so.
We are maintaining our leverage targets of low to mid forty's on debt to gross assets in mid to high five times on net debt to EBITDA, Although we do expect to be in the low fives on net debt to EBITDA going into 'twenty, 'twenty, four and potentially for much of the year.
As we deploy capital into new investments, we expect leverage to gradually increase back into our target range.
I also wanted to note that we remain on track to recast our $1 8 billion dollar credit facility by the end of this year pushing out the maturity on a significant portion of the total debt we have maturing over the next couple of years.
The final topic I wanted to discuss this morning is our dividend on our office exited announcement call. A few weeks ago. We noted that after spinning off N. L. O P. We intended to reset our dividend, reflecting both the impact of exiting office on our S. F O and a lower targeted ASO payout ratio, enabling us to retain higher cash.
So going forward, which can be accretively reinvested to further drive <unk> growth.
We anticipate a one time dividend reset during the fourth quarter to achieve these goals subject to our board's approval.
Our dividend is expected to reflect a payout ratio in the low to mid 70% range more in line with that of our peer group and helping contribute to an improvement in our cost of capital.
We expect that to translate to a one time reduction of approximately 20% in the fourth quarter compared to our most recently declared dividend.
From there the intention is to grow the dividend in line with our F O growth, which we anticipate will result in higher dividend growth than in recent years.
In closing, having completed the antelope spin off and making strong progress selling the remaining office assets on our balance sheet. We're confident we will have exited the vast majority of our office exposure by early 2020 for better positioning us for growth.
It was roughly $2 billion of capital coming back to US. We believe we're exceptionally well positioned to continue investing through 'twenty 'twenty, four, especially if cap rates continue to move higher and capital market conditions remain unfavorable.
With that I'll hand, the call back to the operator for questions.
Thank you at this time and we will take questions. If you would like to ask a question simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press Star then the number two.
One moment, while we poll for questions.
And the first question comes from the line of Eric Wolfe with Citi. Please proceed with your question.
Hey, good morning.
So the 'twenty 'twenty four guidance it sounds like there is some dilution associated with the timing lag between when you sell the properties and reinvest the proceeds just given the back half weighting that you mentioned in terms of investments. So I was hoping you could quantify it just so we can understand what it looks like more of a run rate basis. After you redeploy the proceeds.
Yeah. Thanks for the question Eric I think you know, we really do view 2024, as a new baseline for US I think you highlighted the timing of the dispositions, that's really weighted really towards the very front part of the year and so we will see some impact in Q1, maybe a slightly higher Q1, there, but I think the expectation is really to deploy that capital from there and to grow.
On that baseline I would say that you know with that vast majority of the office sales and U haul for that matter being out of that run rate really gets reestablished early in the year. So this this is effectively how we're viewing that from from which we can grow going forward.
Okay.
So does that mean that that the sort of the estimate that you put out would imply that you know so we're trying to model in 2025, you can model a more normal.
So right off the bat not a sort of more.
Slightly growth rate, if you will just because as you redeploy the proceeds maybe a holding something in cash as you sell it at 5% you redeploy it at seven eight you would expect that there'd be a little bit of improvement in growth I would think for the year, but it sounds like youre, saying that this is sort of a normal.
Baseline from which we can then grow in the 23 five.
That's the right way to think about it I think we do expect that you know growth in 2025 and beyond to be more normalized and that that is coming off of the 'twenty 'twenty four base here, which again has some ins and outs from a timing perspective, but for all intents and purposes is our new baseline.
Okay. Thank you and then the second question just on the 500 million that's under contract today that will likely close I think you said in the early part of next year. Just curious if there are any sort of conditions that need to be met before these clothes are there certain contingency financing financing contingencies, you know they have to achieve a certain level of financing at a certain rate.
Just wondering what needs to happen before before that 500 million can close.
Brooks you would take that yeah sure. This is business Brooklyn, the bulk of it has been talking about.
Transaction of the Spanish government portfolio, that's under binding contract. Several other assets also under binding contract. So it's a mix, but when you look at closed transactions plus with under binding that's about 65% of the total.
Plan and then there was an incremental chunk under contract and transactions in progress and it as Tony mentioned that there's a small stub piece, we're still working on.
But over 90% of that is.
As transactions in progress.
Okay all right. Thank you.
And the next question comes from the line of Greg Mcginniss with Deutsche Bank. Please proceed with your question.
Hey.
As Greg with Scotia.
[noise], Jason how much are you hoping to get a how much of what you're hoping to see cap rates expand from here what do you consider appropriately priced and what would you need to see in order to start maybe increasing 2020 for investment guidance is that more a function of cap rates or transaction availability.
I mean, it's a little bit of both I think they certainly you know go together I mean, we've seen cap rates come up you know over the last.
Call to last quarter.
To where to where we're comfortable transacting I would call. It mid sevens into the high Sevens I think that feels comfortable for us right now.
Yeah, Theres not a lot of market comps out there looking backwards. So it's hard to peg where the market is right now it feels like it's probably come up 50 basis points and that's a pretty comfortable place for us to invest but it's also I mean look we you go back a month and it was a pretty sharp increase up until three days ago and now we're seeing a bit of a rally in.
Treasury. So it's it's hard to predict of course, but we have a lot of liquidity, we're sitting on $2 billion of capital that's coming in the door.
Over the near term and so there is a bias to put the money to work and we think where we're seeing cap rates right now, especially in conjunction with sale leasebacks, where we have some pricing power. We think that's a good place to be.
I'm sorry, so are you expecting further cap rate expansion from here.
No.
As of a couple of days ago, I would say, yes, we would have expected to see some increasing cap rates over time and look I think the dynamics with cap rates. It's you know on the way up the cap rate movements tend to lag interest rates and obviously, we had a pretty meaningful move over a short period of time, but notwithstanding this week.
So disciplined buyers like us tend to push for higher yields and sellers hold out hope.
Ultimately that leads to bid ask spreads kind of widening and the pattern. We've seen this year is it sellers ultimately move and I think that's what we'll continue to see going into next year, but with this recent recent rate moving back downward.
Hard to predict of course, I think if treasury settle.
At the levels. They are today and maybe gradually move lower I think there's a sustainable slower then I don't think we'll see increases next year, but we may not need to in order to do more deals. So that's the case.
Uh-huh. So then just to follow up on that so are you not in terms of the deal.
Decreased two acquisitions guidance. This year is that just a function of them.
Maybe deals that you had been looking at in Q2 that arent seeing their cap rates moved where youre comfortable transacting or those deals fully out of the market.
Just curious any color you say an in increase to our guidance just Europe I missed the first part of that none of the decreased acquisition guidance. This year.
Trying to understand the key drivers there with cap rates haven't moved up already.
Yeah, I think the key driver was the third quarter I mean heading.
Kind of end of summer call. It August on our last earnings call and that's really the last time, we gave an update to the market.
We were sitting on about $1 billion of deals closed year to date.
You know some capital projects that were scheduled to deliver later this year and we had a pipeline of over 400 million at that time and so we felt.
Pretty good it of you know the.
The $2 billion number at that point in time, but with rate movements. We did decide to reprice deals and deal volume you can get the big picture, it's not about deal volume, it's about how those how that translates into earnings growth and so that's what we're focused on but we did push pricing higher I think a lot of what was in our pipeline early in the summer that slow down in some case.
Just went away and is now back for that matter.
You know it is what we hope to close this year and and maybe bleeding a little bit into January, but but that's kind of environment for US right now it's kind of reset back to what we were looking at over the summer and we feel pretty good with the prospects going forward as well given the kind of the longer term pipeline is starting to build too.
Alright, Thank you Jason.
Youre welcome.
And the next question comes from the line of Conor Seversky with Wells Fargo. Please proceed with your question.
Great. Thank you this is actually Jamie Feldman here with Conor.
I guess just to start so the $1 5 billion of investments you have in your guidance I know you said, that's kind of a placeholder, but can you just give more color on you know.
Where you are on any of that I mean is there stuff that maybe just handicap, if you could maybe bucket and into like this is stuff. We're actually working on this is stuff. We think is on the come and then also any talk any kind of thoughts on yield for those different buckets.
Yeah. The one 5 billion for next year I mean, that's an assumption right now I wouldn't quite call. It a placeholder I think that we've historically been able to put money to work in all different types of environment. So.
I think that's a good starting point, we're hoping to update that in February maybe depending on the markets you know with some upside to that.
But where we sit right now we don't have a lot of visibility into 24, I think deals typically take you know for me first start seeing them until they close typically at several months. So maybe some of the deals that we're currently working on right now.
It could be January type closes I think the early stage pipelines or some larger transactions.
Especially in Europe, where we're seeing some opportunities again pretty wide bid ask spreads, but these are sale leasebacks or our uses of proceeds we do think that the sellers will likely transact.
But they do take some time, so I would say we have some green shoots of deal opportunities, but but not.
So far enough, along where we have a comfort level to say.
We have a chunk of that $1 5 billion done, but you know look I think over the years, we've we've been able to get deals done in different environments and I think importantly, right now we're sitting on a lot of dry powder that we mentioned the $2 billion debt that either has come in or is coming in over the next.
A couple of months, that's going to provide us with a real competitive advantage and we do have a bias to put that to work.
Okay. Thank you that's helpful.
And then you know to your point, you're you are sitting on a lot of dry powder Ah theres, probably a lot of real estate, that's going to need to be recapitalized, assuming rates don't pulling too much and bailed people out.
I know you had mentioned kind of industrial warehouse being a target, but you know as you sit back and think about the future of this company. You. Just made are you just kind of exited office.
In one fell swoop I mean.
How do you think about other property types that might work for WPC overtime.
Maybe you know most people aren't thinking about or do you feel like you know your messaging today is this is where we're gonna grow. These are the types of assets, we're going to put in the portfolio, we're not going to veer from that at all.
No look we're a diversified net lease REIT I mean, we've always been open to adding more diversification and in new verticals and I think we've shown that we've done that I think you recently have you done a little bit more retail. This year, we just medical schools with some really strong market leaders earlier in the year and you know the bulk of what we've been doing call. It 70.
Plus percent over the last several years has been industrial and warehouse, but even within those categories.
There are some diversification there as cold storage and there's food production and processing.
Some R&D.
Clearly, we also own self storage, both as a net lease and and in some cases operating assets I think theres opportunities to convert more of that to net lease over time too. So you know we're pretty diversified as is which I think gives us the opportunity to see a wide.
What kind of opportunity set to do to kind of get to look at where we want better capital to work. So I think that's gonna change.
So maybe a better way to ask it is if you look at your portfolio composition as a percentage of NOI.
The office sales I mean, do you think that that Pie chart would change meaningfully after you put a lot of this capital to work or do you think it's going to be in the last couple.
Yes. The last couple of years are any indication I can see industrial warehouse drifting up a little bit I mean, right now pro forma for the separation of office. Once the office sale program is complete it will be a little over 60% industrial and warehouse, maybe that drift up but I think we do.
You don't want to maintain diversification.
And I think the other.
Verticals that I mentioned are all opportunities that it we'll see but I think that the bulk probably still flows into into industrial.
Okay alright, thank you.
Yeah Youre welcome.
Yeah.
And our next question comes from the line of John Kim with BMO Capital markets. Please proceed with your question.
Thank you.
Tony in your prepared remarks, you mentioned the improved rent recapture with the exit of office.
Does that mean, the comprehensive income will more closely align with contractual rent increases I think in the past you've said it was 100 basis point leakage and I was wondering if that leakage improves.
Yeah, I think that's our expectation going forward and you know the 100 basis points is really over an extended period of time and you know I think maybe even with some line of sight to what's coming in 2024, we do see that marginally improving I you know it certainly could go either way in any one quarter just given the amount of leases we have rolling at any one time, but I think we do more.
And I expect some improvement from the 100 basis point drag that we've seen against our contractual.
Yeah.
Okay, and then can we clarify what the $2 billion of proceeds you expect are coming to you.
Some of this might be timing related but in the past you've said $465 million from you. All you have to obviously all program at 643 million and then with N. L. P and the equity forward 735, I just wanted to make sure that was in that $2 billion and lineage was not and if theres anything that I'm missing in that number.
Yeah, I think you hauls about for 17 now in the office sale program. We're looking at a total of 800 I think what you.
Classified there is what we see kind of in the the current state closing before the end of the year. So we've got 800, there the 470 from U haul them as well as kind of our normal course dispositions next year, which we said would be in the range of one to 300 million as well as some additional operating properties that could make up another hundred.
And so those were the components. There in addition to the equity that we settled as well as the Antelope. He distribution that we just received.
Yeah, and it does not include anything with lineage.
Cool Thanks, a lot.
Youre welcome.
And the next question comes from the line of Brad Heffern with RBC capital markets. Please proceed with your question.
Yeah. Thanks, Jason you mentioned, a number of large portfolio deals in the early stages does that represent a shift in the type of deal flow that you've been seeing is there any additional color you can give on what the composition of those portfolios.
Yeah, I don't think it's any different shift these are sale leasebacks, there they're generally with.
Sponsored backed companies as they consider you know the best way to capitalize either their current portfolio of companies or as you look at making new acquisitions and in some cases add on acquisitions.
So sale leasebacks of industrial companies and.
You know kind of varying degrees of size, but I don't think it's any different than that than we've seen maybe the difference is that theres a little bit more of these in Europe right now that we're seeing in Europe has been pretty slow over the last 12 to 18 months that there was kind of more adjusting that needed to happen to steeper rate increases there than there had been in the U S. So maybe that's the.
That's the kind of the new difference here.
Yeah.
Okay got it and then Tony how are you guys treating the the biggest construction loan in the 'twenty 'twenty four garden.
In the 2024 guidance, we're just assuming we fund the total commitment there and it continues to earn them based on its current rate at 6%.
Okay. Thank you.
Yeah, and I think Brad importantly, and maybe this is what you are highlighting at some point in time that loan will get repaid and as Tony mentioned, that's a 6% coupon.
So that could be some more cheap capital that we get access to and can you know reinvest in higher yielding at least I think when we when we did that loan a couple of years ago, 6%. It was a fairly interesting rate relative to where we were investing in net lease in and obviously that's changed because that that's going to be some pretty cheap capital or access to over the next maybe year or two.
If not sooner.
Great. Thanks.
Yeah.
And the next question comes from the line of Jim Cameron with Evercore. Please proceed with your question.
Thank you good morning, Ah Tony if I could you were very helpful. In talking about how the third quarter recoveries, obviously, a very small subset portfolio, but what historically has been really W. P. Carey's towards typical 90% recovery 95, I'm just curious if you had any trend data there on the re leasing.
Yeah Brooks do you want to jump in on that I know you have shared more of the details.
Yes, as you noted any given quarter and especially one with not a lot of activity.
Can move around a little bit, but we really like to think about it on a trailing eight quarter basis.
On that basis for the last several years we've been.
We're covering about 100%.
The expiring rent in our leasing table and.
And importantly, the Ti and leasing commission component of that so the capital intensity is very very low around $2 50 fish per square foot expiring. So that's kind of the world we have been and we do expect.
Post office like that that are our leasing outcomes in the long run will improve as well.
Thanks, Brooks that makes sense and then stepping back just a second question have you ever disclose that as a company what percentage of your annual base rent is.
Covered by reporting tenants, where you get either parent or unit level any form of financial reporting regarding your assets.
Yeah I mean.
<unk>, it's a it's a little bit different than I would say a typical.
Retail REIT I think historical components here I think number one with with financial reporting for the tenant or the guarantor I would say probably close to all of our tenants. The high 90% range of ABR provides us with annual audits and quarterly updates I think you know.
In addition to that a number of our tenants will provide site level coverage to the extent that's relevant I think for some of the the retail operating assets that clearly would be self storage and things like that and even in our case you know many of our light manufacturing were there our P&L at the property level, we will get that so we can understand coverages.
And and how that translates to our view on criticality.
Contribution from those properties to the parent things like that I think are important to us but yeah.
But high level, it's high Ninety's report to us with with our audits and quarterly financials for the tenants themselves.
Great No, that's where it's heading and that's great.
Sorry, that's what I was looking for thank you.
You're welcome.
And the next question comes from the line of Joshua <unk> with Bank of America. Please proceed with your question.
Hi, This is for all granite on behalf of Josh.
And so I wanted to touch on I know he's now been speaking a lot about dry powder and acquisition guidance for 2024, I'm curious if you could touch on any more color of other key drivers for internal growth into next year.
Yes, I think so.
Tony why don't I start high level and why don't you jump in with some of the details I think from a just from a macro perspective certainly.
External deal volume is a driver of growth for any net lease REIT I think what's maybe a bit unique for us is the the magnitude of our built in rent increases within our leases, especially the amount that's tied to inflation. So that's going to be a big driver for us as well we were at 4% for most of.
2024 in terms of maybe a little over 4% from a same store.
Contractual basis with.
With inflation monitoring a little bit next year, I think we will expect to be around 3%, but it'll still be meaningful. So Tony don't know if you want to add any color on some of the details, but that's kind of high level Big picture I.
I think that's the the driving component is really on a same store basis and as I just highlighted in a previous answer that you know the the drag that we would expect some contractual to comprehensive is expected to diminish from kind of our previous history. So I would throw that in.
Right and.
Also I wanted to ask about compared to lessen.
Ah the announcement with the strategic assets are the office sales was there a change in either just the timing or volume coming out of three Q4 Q. I believe you had mentioned he was the cap rate that maybe were a driver of changing in timing, but curious if you can eat.
Detail on is this a change changing in timing on an office sales or do you mean, just normal course investments that we're doing on the office sales, Yes, Brooks do you want to you want to touch on that.
No I would say our office.
Sale program on balance sheet is going pretty much according to plan.
Potentially even a little bit ahead of plan.
We're making good progress there.
Certainly.
A choppy market, but I think where we are right now we feel very good about it so.
That is materially in line with when we made the announcement.
Great. Thank you for that.
Youre welcome.
And the next question comes from the line of harsh and money with Green Street. Please proceed with your question.
Thank you.
Jason as you mentioned since the time you announced the also sense program yields have moved quite a bit.
So you just have moved up quite a bit.
Are you seeing you know some of those acquisitions. Some excuse me some of the dispositions on the off the same program that might be under contract.
I'll be coming back trying to renegotiate on that and then can you talk about the 10% of sales better than or you know it could be negotiated or how confident do you feel in getting the pricing that you guys have outlined on that piece.
Yeah, Brooks do you want to tackle that.
Sure. So I think overall our confidence level is good I mean, I think in this market nothing is closed until we receive the funds and that's our mindset.
But we have a very clear path to get this done as expected.
Theres a.
Two thirds of it is either closed or under binding contracts that do not have wiggle room to re trade.
And we feel like the balance.
Really those deals were negotiated post rise in interest rates.
And really that's baked into People's thinking and so we're certainly cautious and cognizant of a volatile market but.
Every deal we've negotiated with that in mind and so we feel optimistic that we can get this done according to plan. So.
We'll certainly keep everybody posted but that's currently where we are on track.
That's helpful and then on the acquisition side. So you mentioned back from the third quarter to the fourth quarter seller expectations have adjusted the bid ask spread is now coming in or are you seeing this in and in Europe.
And you know how is the dynamic that's sitting there.
Yeah, I mean, your Europe as I mentioned earlier, that's been slower to adjust I think that where maybe we're finally starting to bridge.
That gap a bit as yields have come in.
So the pipeline I would say right now is weighted about 50 50 between the U S and Europe and that's in contrast to year to date deal volume of you know probably closer to 90 10, North America and in Europe. So we expect to see some contributions from Europe going forward I think what's helpful over there as we've seen.
<unk>.
Our cost of borrowing euros also come down when you look back over the summer and there's a point in time in which there probably was not a lot of difference between.
Our borrowing costs in U S dollars versus euros, and we are starting to trend back to maybe what's been more of the historical norm, which is cost of euro debt.
It is inside of the U S and it's maybe you know 50 to 100 basis points, maybe even a little bit more if we were to do some cross currency swaps as opposed to direct euro issuances. So I think that's helping you.
Especially because cap rates, probably maybe are in line or similar maybe slightly below if anything to the U S. Maybe there's an opportunity to generate some better spreads in Europe going forward similar to what we've done in the past.
Got it thank you.
And ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad.
Our next question is a follow up from Eric Wolfe with Citi. Please proceed.
Hey, I appreciate you taking the follow up.
I thought I heard you say that one to 2024, so guidance or not guidance, but the actual number would be the highest next year because.
Because I would think it would be the lowest or maybe two to be the lowest giving you hall option, but I guess right.
I'm trying to understand what the cadence of how we should be.
Through the year I would think that second half of your associate ramp but is that not the right way to think about it.
No that is the right way to think about it I think I want to caution that we you know typically don't get into kind of quarterly run rates, especially this early in advance of 'twenty 'twenty four but we do expect kind of a U haul and office sale program to fall off at the end of the first quarter and then the ramp from there I think what I said in my remarks was that we do have our expectation is that the majority of the.
1.5 billion the assumption that we have in our 2024 guidance is weighted towards the back half of the year, so that ramp will come and whether that happens in the third quarter or more in the fourth quarter kind of time will tell for us and we'll refine that as we get a better line of sight, but I think that is the right way to think about it.
Right because when you talked about $2 billion of capital inflows of $3 50 is coming from L. L. P. Right now 800 million from office sales by early one to $4 70 from you all I think that's March.
And then another 100 million from Marriott sales by by year end. So that's like $1 7 billion of capital I'm coming to you by <unk>. So I mean are you just assuming that.
Like I guess what level of cash are you assuming through the first half of the year. It's just earning 5% because you have a lot of capital coming to you in any short period of time, just trying to understand what the assumption is around how you're deploying that before you ended up reinvesting into other acquisitions.
Yeah look I think cash is fungible as we all know and you know, we don't really want to get into too much of the specifics around the timing of deployment in 2024, given where we stand but as you know we have we have a bond maturity. That's due in April and another in July. So we can certainly put that capital to work there our bias is towards putting it into our investments.
And potentially you know we'd like to be in the capital markets and need to do more in next year, but I think that really does all come down to the plan coming together and having better line of sight into timing and 24. So we'll give a lot more color on that I think as we get into February.
Okay. Thanks for taking the follow ups.
And at this time I'm not showing any further questions I'll now hand, the call back to Mr Sands.
Great. 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 cool implemented now disconnect.
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