Q1 2024 W. P. Carey Inc Earnings Call
Hello, and welcome to W. P. Carey's first quarter 2024 earnings Conference call. My name is Diego and I'll be your operator today.
Operator: Hello, and welcome to WP Carey's first quarter 2024 earnings conference call. My name is Diego, and I will be your operator today. All lines have been placed on mute to prevent any background noise.
All lines have been placed on mute to prevent any background noise. Please note that today's event is being recorded.
Operator: Please note that today's event is being recorded. After today's prepared remarks, we will be taking questions via the phone line. Instructions on how to do so will be given at the appropriate time. I will now turn today's program over to Peter Sands, Head of Investor Relations. Mr. Sands, please go ahead.
After today's prepared remarks, we will be taking questions via the phone line instructions on how to do so will be given at the appropriate time.
I will now turn today's program over to Peter Sands head of Investor Relations. Mr. Sands. Please go ahead.
Peter Sands: Good morning, everyone, and thank you for joining us this morning for our 2024 First Quarter Earnings Call. Before we begin, I would like to remind everyone that some of the statements made on this call are not historical facts and may be deemed forward-looking statements. Factors that could cause actual results to differ materially from WP 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 wpcarey.com, where it will be archived for approximately one year and where you can also find copies of our investor presentations and other related materials. And with that, I'll hand the call over to our Chief Executive Officer, Jason Fox.
Peter Sands: Good morning, everyone and thank you for joining us this morning for our 2024 first quarter earnings call before we begin I would like to remind everyone.
Peter Sands: Some of the statements made on the schools are not historic facts and may be deemed forward looking statements factors that could cause actual results to differ materially from W. P. Carey's expectations are provided in our FCC Sonics.
Peter Sands: An online replay of this conference call will be made available in the Investor Relations section of our website at W. P. Carey dot com, where it will be archived for approximately one year and where you can also find copies of our investor presentations and other related materials.
Peter Sands: That I'll hand, the call over to our Chief Executive Officer, Jason Fox.
Jason E. Fox: Thank you Peter and good morning, everyone.
Jason E. Fox: Thank you, Peter. Good morning, everyone.
Jason E. Fox: Today I'll focus my remarks on our recent investment activity and the current strength of our pipeline, as well as touch upon how we're positioned and her outlook. As usual, I'm joined by our CFO, Toni Sanzone, who will cover our first quarter results and balance sheet, as well as our recent asset management activities. We have John Park, our president, and Brooks Gordon, our head of asset management, on the call to take questions.
Jason E. Fox: Today I'll focus my remarks on our recent investment activity and the current strength of our pipeline.
Jason E. Fox: Well ill touch upon how we're positioned and our outlook.
Jason E. Fox: As usual I'm joined by our CFO, Tony <unk>, who will cover our first quarter results and balance sheet as well as our recent asset management activities.
Speaker Change: We have John Park, our President and Brooks Gordon head of asset management on the call to take questions.
Speaker Change: Starting with investment activity year to date, we've completed investments totaling $375 million the vast majority of which were industrial properties.
Jason E. Fox: Starting with investment activity. Year to date, we've completed investments totaling $375 million, the vast majority of which were industrial properties. This comprises $280 million of investments closed during the first quarter and a $94 million acquisition completed in early April of an approximately 1.2 million square foot distribution facility near Rickenbacker International Airport just outside of Columbus, Ohio. I'm pleased to say that in Europe, we've seen bid-ask spreads come in significantly, creating more opportunities in the region compared to last year. Year-to-date, about 70% of our investment volume has been in Europe
Speaker Change: This comprises $280 million of investments closed during the first quarter.
Brooks G. Gordon: And a $94 million acquisition completed in early April of an approximately $1 2 million square foot distribution facility near Rickenbacker International Airport, just outside of Columbus, Ohio.
Speaker Change: I'm pleased to say that in Europe, you've seen bid ask spreads come in significantly creating more opportunities in the region compared to last year.
Speaker Change: Year to date about 70% of our investment volume has been in Europe.
Jason E. Fox: Our European presence also gives us a cost-of-debt advantage, given our ability to issue Euro-denominated bonds. Currently, that advantage has moved closer to where we've seen it historically, at rates around 150 basis points tighter than where we could issue U.S. bonds.
Speaker Change: Our European presence also gives us a cost of that advantage given our ability to issue euro denominated bonds.
Speaker Change: That advantage has moved closer to where we've seen it historically at rates of around 150 basis points tighter than where we could issue U S bonds.
Speaker Change: With high yield debt and other financing alternatives remaining very expensive sale leasebacks continue to be an attractive source of capital and comprise the largest portion of our investments here.
Jason E. Fox: With high-yield debt and other financing alternatives remaining very expensive, sale leasebacks continue to be an attractive source of capital and comprise the largest portion of our investments here today. A key advantage of sale leasebacks is our ability to directly negotiate the lease structure, including rent escalation. As a result, we're uniquely positioned within the net lease sector with 99.6% of ABR generated by leases with built-in rent growth, which is currently just over 3% on a contractual same-store basis.
Speaker Change: A key advantage of sale leasebacks is our ability to directly negotiate the lease structure, including rent escalations.
Speaker Change: As a result, we're uniquely positioned within the net lease sector with 99, 6% of ABR generated by leases with built in rent growth, which is currently just over 3% on a contractual same store basis.
Speaker Change: Given the strength of our rent growth over long lease terms. We believe it's important to look both at initial cap rates and average yields relative to our cost of capital.
Jason E. Fox: Given the strength of our rent growth over long lease terms, we believe it's important to look both at initial cap rates and average yields relative to our cost of capital. Our investments year-to-date had a weighted average going-in cash cap rate of approximately 7.4%, providing initial accretion, and average yields around 9%, reflecting rent growth over the life of the leases. For average yield, we're assuming 2% inflation in line with the Fed and ECB targets, although that may prove to be conservative, with inflation running at over 2% for some time now, which is generally expected to continue.
Speaker Change: Our investments year to date had a weighted average going in cash cap rate of approximately 7.4%, providing initial accretion and average yields around 9%, reflecting rent growth over the life of the leases for average yield we're assuming 2% inflation in line with the fed and ECB Targa.
Speaker Change: Although that may prove to be conservative with inflation running at over 2% for some time now which is generally expected to continue.
Speaker Change: Well, we will continue investing across a range of cap rates for the full year, we expect to target initial cap rates, averaging in the mid sevens and average yields over the life of the leases in the nines.
Jason E. Fox: While we will continue investing across a range of cap rates, for the full year, we expect to target initial cap rates averaging in the mid-7s and average yields over the life of the leases in the 9s. We currently have a strong pipeline, totaling over $500 million of investments, including about $300 million at advanced stages that we expect to close over the next few months. Additionally, we have $66 million of capital investments and commitments scheduled for completion in 2024.
Speaker Change: We currently have a strong pipeline totaling over $500 million of investments, including about $300 million in advanced stages that we expect to close over the next few months.
Speaker Change: Additionally, we have $66 million of capital investments and commitments scheduled for completion in 2024.
Jason E. Fox: All told, that gives us clear visibility into over $700 million of investments so far in 2024 for deals that are either completed or viewed as imminent. And we have several hundred million dollars of other identified deals in the pipeline with longer timelines to close.
Speaker Change: All told that gives us clear visibility into over $700 million of investments. So far in 2024 for deals that are either completed or viewed as imminent and we have several hundred million dollars of other identified deals in the pipeline with longer timelines to close so we're making good progress towards the 1.52 billion.
Speaker Change: Of investment volume in our guidance.
Speaker Change: The significant liquidity, we built up gives us a distinct advantage executing on those transactions.
Jason E. Fox: So we're making good progress towards the $1.5 to $2 billion of investment volume in our guidance. The significant liquidity we've built up gives us a distinct advantage in executing on those transactions. Essentially, pre-funding our deal pipeline at a time when the outlook for interest rates has become increasingly uncertain, and net lease REITs generally have an unfavorable cost of equity. During the first quarter, we added to our liquidity, primarily through the State of Andalusia and U-Haul dispositions.
Speaker Change: Essentially pre funding our deal pipeline at a time when the outlook for interest rates has become increasingly uncertain and net lease Reits generally have an unfavorable cost of equity.
Speaker Change: During the first quarter, we added to our liquidity primarily through the state of Andalusia, and U haul dispositions.
Jason E. Fox: Toni will get into the specifics, but the main point I want to make is that even after funding new investments, we ended the first quarter with just over $1 billion in cash, and we're minimally drawn on our $2 billion revolver. While both are available to fund investments or repay near-term debt maturities, our strong bias over the short term remains to deploy that capital into new investments.
Speaker Change: Tony will get into the specifics, but the main point I want to make is that even after funding new investments. We ended the first quarter with just over $1 billion in cash and were minimally drawn on our $2 billion revolver.
Speaker Change: While both are available to fund investments or repay near term debt maturities, our strong bias over the short term remains to deploy that capital into new investments.
Speaker Change: Over the longer term the unique additional internal sources of capital available to us, including our equity stake in lineage and are operating self storage portfolio continued to be meaningful differentiators to other necessarily use rights, giving us a longer investment runway should the capital markets remain challenging over an extended period of time.
Jason E. Fox: Over the longer term, the unique additional internal sources of capital available to us, including our equity stake in Lineage and our operating self-storage portfolio, continue to be meaningful differentiators to other Nestle Eats REITs, giving us a longer investment runway should the capital markets remain challenging over an extended period of time, as well as additional flexibility in how and when we access the capital markets. Lastly, as we near the completion of our strategy to exit the office assets in our portfolio, it's a good time to review where we stand, including the near-term impacts on earnings versus how we are positioning the company for higher long-term growth.
Speaker Change: As well as additional flexibility in how and when we access the capital markets.
Speaker Change: Lastly, as we near the completion of our strategy to exit the office assets in our portfolio. It's a good time to review, where we stand including the near term impacts to earnings versus how we are positioning the company for higher long term growth.
Jason E. Fox: Given the office assets we spun off or sold, along with the exercise of the U-Haul purchase option, 2024 AFFO won't be comparable to prior periods, but instead sets a new baseline AFFO from which to grow going forward without the headwinds associated with deteriorating office fundamentals and without any purchase options on significant assets ahead of us. To a lesser extent, 2024 AFFO has also been impacted by certain tenant matters. We've made good progress working through them and do not expect any additional downside to that currently embedded in our guidance.
Speaker Change: Given the office asset to be spun off or sold along with the exercise of a U haul purchase option 2024 F O won't be comparable to prior periods, but instead sets a new baseline of F O from which to grow going forward without the headwinds associated with deteriorating office fundamentals and without any purchase options on significant assets ahead of.
Speaker Change: Yes.
Speaker Change: To a lesser extent 2024, <unk> has also been impacted by certain tenant matters.
Speaker Change: Made good progress working through them and do not expect any additional downside to that currently embedded in our guidance.
Speaker Change: Tony will review the specifics here too but in summary, the helbig restructuring was completed on the terms, we expected and the tenant is current on rent and on track with its turnaround plants.
Jason E. Fox: Toni will review the specifics here too, but in summary, the Helvig restructuring was completed on the terms we expected, and the tenant is current on rent and on track with its turnaround plans. The Primo Buona lease on four cold storage and packing facilities was rejected, as we talked about last quarter.
Speaker Change: The premium alone at lease on for Cold storage in packing facilities was rejected as we talked about last quarter. In April we successfully sold one of the facilities. We expect to complete the sale of a second smaller property over the next few weeks and we're actively working on the other two.
Toni Ann Sanzone: In April, we successfully sold one of the facilities. We expect to complete the sale of a second, smaller property over the next few weeks, and we're actively working on the other two. In addition, we completed the re-tenanting of the large vacant warehouse property we spoke about last quarter, both at a higher rent compared to the prior lease and to a stronger credit tenant, which was an excellent outcome. Since our last call, we've made some additional tenant disclosures, including details showing that 85 percent of our ABR comes from tenants where they or their parent company generate over $500 million in annual revenue. Or our government entities.
Speaker Change: In addition, we completed the returning of the large vacant warehouse property, we spoke about last quarter, both at a higher rent compared to the prior lease Andrew a stronger credit tenant which was an excellent outcome.
Speaker Change: Since our last call. We've made some additional tenant disclosures, including details showing that 85% of our E. D. R comes from tenants, where they or their parent company generate over $500 million in annual revenue or our government entities.
Toni Ann Sanzone: As a reminder, our investment approach is to invest in mission-critical properties favoring large companies. During the tougher periods of the economic cycle, large companies generally have better access to liquidity and are far more likely to continue operating in critical properties in the event of a restructuring compared to small companies, which have a higher risk of liquidation. We've also expanded the top tenant disclosure in our Supplement to show our 25 largest tenants, which are generally very large companies, including investment-grade and strong sub-investment-grade credits.
Speaker Change: As a reminder, our investment approach is to invest in mission critical properties favoring large companies.
Speaker Change: During the tougher periods of the economic cycle large companies generally have better access to liquidity and are far more likely to continue operating and critical properties in the event of a restructuring compared to small companies, which have a higher risk of liquidation.
Speaker Change: We've also expanded the top tenant disclosure in our supplemental to show our 25 largest tenants, which are generally very large companies, including investment grade and strong sub investment grade credits.
Speaker Change: Within those top 25 tenants, we're closely monitoring heart side, which is the largest contract food manufacturer in North America with around $4 billion in annual revenue and provides critical production capacity for a number of well known and long tenured blue chip customers.
Toni Ann Sanzone: Within those top 25 tenants, we're closely monitoring Hearthside, which is the largest contract food manufacturer in North America with around $4 billion in annual revenue and provides critical production capacity for a number of well-known and long-tenured blue chip customers. While it has experienced some credit deterioration, we do not expect any disruption to our rents, even in the event of a restructuring, given the highly critical nature of the properties we own, which comprise the large majority of Hearthside's two largest divisions, all of which were central to our original investment thesis on this portfolio.
Speaker Change: Well it has experienced some credit deterioration do you not expect any disruption to our rents even in the event of a restructuring given the highly critical nature of the properties, we own which comprise the large majority of hearth sides, two largest divisions all of which was central to our original investment thesis on this portfolio.
Toni Ann Sanzone: In closing, with the completion of our office exit strategy this year and the resolution of some recent tenant issues, we expect to end 2024 with an even stronger portfolio. We're making good progress towards our investment volume guidance, including a robust pipeline, which we're extremely well positioned to execute on, given the liquidity we've amassed. The full impact of deploying that capital will flow through next year, which, along with the strength of our rent escalations, gives us confidence that we will see a significant uptick in year-over-year growth in 2025.
Speaker Change: In closing with the completion of our office exit strategy. This year and resolution of some recent tenant issues. We expect to end 2024 with an even stronger portfolio, we're making good progress towards our investment volume guidance, including a robust pipeline, which we're extremely well positioned to execute on given the liquidity we've amassed the full.
Speaker Change: Impact of deploying that capital will flow through next year, which along with the strength of our rent Escalations gives us confidence that we will see a significant uptick in year over year growth in 2025 and is that growth is reflected in our cost of capital. We believe we will be well positioned to drive total shareholder returns over the long term in the low double digits through a combination.
Toni Ann Sanzone: And as that growth is reflected in our cost of capital, we believe we will be well positioned to drive total shareholder returns over the long term in the low double digits through a combination of earnings growth and our dividend yield. And with that, I'll pass the call over to Toni.
Speaker Change: <unk> of earnings growth, and our dividend yield and with that I'll pass the call over to Tony.
Tony: Thank you, Jason and good morning, everyone.
Toni Ann Sanzone: Thank you, Jason, and good morning, everyone. AFFO for the first quarter totaled $1.14 per share, with a decline from prior periods primarily reflecting the execution of our office exit strategy, as well as the impact of a three-month rent abatement under the Hellwig lease restructuring, which had about a three cents per share impact on our first quarter AFFO. Given our investment activity year-to-date, coupled with the strength of our pipeline, we remain on track to generate full-year AFFO in line with the midpoint of our guidance range.
Tony: So for the first quarter totaled $1 14 per share with a decline from prior periods, primarily reflecting the execution of our office exit strategy as well as the impact of a three month rent abatement under the Hell with lease restructuring, which had about a three cents per share impact on our first quarter a S. S L.
Speaker Change: Given our investment activity year to date, coupled with the strength of our pipeline we remain on track to generate full year a S. S. Though in line with the midpoint of our guidance range.
Toni Ann Sanzone: We completed the large majority of our anticipated 2024 disposition activity during the first quarter, including 72 properties sold under our office sale program for growth proceeds totaling $411 million, leaving us with just seven office assets, representing 1.3 percent of ABR, remaining to sell under the program. During the quarter, we also completed the disposition of our U-Haul portfolio under its purchase option for gross proceeds of $464 million and sold three additional assets totaling $15 million, bringing total dispositions in the first quarter to approximately $890 million.
Speaker Change: We completed the large majority of our anticipated 2020 for disposition activity during the first quarter, including 72 property sold under our office sale program for gross proceeds totaling $411 million.
Speaker Change: Leaving us with just seven office assets, representing one 3% of ABR remaining to sell under the program.
Speaker Change: During the quarter. We also completed the disposition of our U haul portfolio under its purchase option for gross proceeds of $464 million and sold three additional assets totaling $15 million.
Speaker Change: Total dispositions in the first quarter to approximately $890 million.
Speaker Change: First quarter re leasing activity included the completion of the Hell like lease restructure which resulted in a 14.6% rent reduction commencing on April 1st, bringing its a b or to $25 $2 million.
Toni Ann Sanzone: First quarter release activity included the completion of the Hellwig lease restructure, which resulted in a 14.6% rent reduction commencing on April 1st, bringing its ABR to $25.2 million. The lease term was also extended by seven years, and we provided a rent abatement for the first quarter. Excluding HILWG, releasing activity resulted in an overall rent recapture of 107 percent and added 3.4 years of incremental weighted average lease term on 40 basis points of ABR.
Speaker Change: The lease term was also extended by seven years, and we provided a rent abatement for the first quarter.
Speaker Change: Excluding helwig releasing activity resulted in overall rent recapture of 107% and added 3.4 years of incremental weighted average lease term on 40 basis points of ABR.
Speaker Change: As Jason mentioned Primo on average act it or at least in April and we disposed of one of the assets in that portfolio for gross proceeds of $9 million.
Toni Ann Sanzone: As Jason mentioned, Prima Wona rejected our lease in April, and we disposed of one of the assets in that portfolio for gross proceeds of $9 million. We're currently working through resolutions on the other three, one of which is close to being sold.
Speaker Change: We're currently working through resolutions on the other three one of which is close to being sold.
Toni Ann Sanzone: We collected rent on the portfolio for the full first quarter, and our guidance continues to assume no additional rent on these assets in 2024 as we work through a resolution and carry the properties vacant. Occupancy at the end of the first quarter increased 100 basis points to 99.1 percent, primarily reflecting the lease-up of a 1.6 million square foot warehouse property just outside Chicago. As Jason noted, we achieved a great outcome on this asset, signing a lease with the U.S. Logistics Division of Samsung for a 10-and-a-half-year term with attractive fixed rent escalation.
Speaker Change: We collected rent on the portfolio for the full first quarter and our guidance continues to assume no additional rent on these assets in 2024 as we've worked through a resolution and carry the property is vacant.
Speaker Change: Occupancy at the end of the first quarter increased 100 basis points to 99, 1%, primarily reflecting the lease up of $1 6 million square foot warehouse property just outside Chicago.
Speaker Change: As Jason noted, we achieved a great outcome on this asset signing a lease with the U S Logistics division of Samsung for 10, and a half year term with attractive fixed rent escalations.
Toni Ann Sanzone: The initial ABR of $6.4 million represents 102% of the prior in-place rent, with cash rent beginning in the first quarter of 2025. Now, turning to same-store rent growth. For the 2024 first quarter, contractual same-store rent growth was 3.1% year-over-year, which is expected to moderate and average around 2.7% for the full year. However, comprehensive same-store rent growth was negative 30 basis points year over year, as reported, largely reflecting the abatement of Helwig's first quarter rent.
Speaker Change: The initial ABR of $6 $4 million represents 102% of the prior in place rent with cash rent beginning in the first quarter of 2025.
Speaker Change: Turning to same store rent growth.
Speaker Change: For the 2024 first quarter contractual same store rent growth was three 1% year over year, which is expected to moderate in average around two 7% for the full year.
Speaker Change: Comprehensive same store rent growth was negative 30 basis points year over year as reported largely reflecting the abatement of helwig first quarter rent.
Toni Ann Sanzone: Excluding this abatement, First Quarter Comprehensive Same Store would have grown at just over 2% year over year. On a full year basis, we expect Comprehensive Same Store to be relatively flat, inclusive of the Helwig Impact. Other lease-related income was lower for the first quarter at $2.2 million, and based on current negotiations, lease-related settlements and recoveries are expected to run higher over the remaining three quarters of the year, with our current guidance assuming a total for the full year in the low-to-mid $20 million range.
Speaker Change: Excluding this abatement first quarter comprehensive same store would have grown at just over 2% year over year.
Speaker Change: On a full year basis, we expect comprehensive same store to be relatively flat inclusive of the helwig impact.
Speaker Change: Other lease related income was lower for the first quarter of $2.2 million and based on current negotiations lease related settlements and recoveries are expected to run higher over the remaining three quarters of the year with our current guidance assuming a total for the full year in the low to mid $20 million range.
Speaker Change: G&A expense totaled $27 $9 million for the first quarter, which we do not view as the run rate since first quarter G&A typically runs higher than the rest of the year due to the timing of certain payroll related items.
Toni Ann Sanzone: GNA expenses total $27.9 million for the first quarter, which we do not view as a run rate since first quarter GNA typically runs higher than the rest of the year due to the timing of certain payroll-related items. So for the full year, we continue to expect GNA to be between $100 and $103 million. Non-operating income during the first quarter was $15.5 million, which included $9.4 million of interest income on cash, $3.1 million of realized gains on currency hedges, and the $3 million Lineage Annual Dividend we received in January.
Speaker Change: So for the full year, we continue to expect G&A to be between 101 hundred $3 million.
Speaker Change: Nonoperating income during the first quarter was $15 $5 million, which includes $9 4 million of interest income on cash.
Speaker Change: $3 1 million of realized gains on currency hedges.
Speaker Change: And the 3 million dollar lineage annual dividend we received in January.
Toni Ann Sanzone: During the first quarter, cash earned interest income at a rate averaging around 5%, although we expect the amount of interest income to decline over the remaining quarters of the year as we deploy cash into new investments. For the full year, we expect non-operating income to total between $35 and $39 million.
Speaker Change: During the first quarter cash earned interest income at a rate averaging around 5%.
Speaker Change: Although we expect the amount of interest income to decline over the remaining quarters of the year as we deploy cash into new investments.
Speaker Change: For the full year, we expect nonoperating income to total between 35 and $39 million.
Speaker Change: Moving now to our balance sheet our.
Toni Ann Sanzone: Moving now to our balance sheet, our liquidity position increased during the first quarter, driven by proceeds from the office sale program and U-Haul disposition. We ended the quarter with liquidity totaling approximately $2.8 billion, including $1.7 billion of availability under our revolver, close to $800 million in cash, and $284 million of 1031 exchange proceeds, which are presented as restricted cash within other assets on our balance sheet. We continue to have a robust liquidity position, noting that very early in the second quarter, we repaid our $500 million U.S. dollar bonds at maturity using cash on hand.
Speaker Change: Our liquidity position increased during the first quarter driven by proceeds from the office sale program and U haul dispositions.
Speaker Change: We ended the quarter with liquidity totaling approximately $2 $8 billion, including $1 7 billion of availability under our revolver close to $800 million in cash and $284 million of 10, 31 exchange proceeds which are presented as restricted cash within other assets on our balance sheet.
Speaker Change: We continue to have a robust liquidity position, noting that very early in the second quarter, we repaid our 500 million U S dollar bonds at maturity using cash on hand.
Toni Ann Sanzone: Our debt maturity schedule for 2024 remains very manageable, with 500 million euro-denominated bonds maturing in July, along with some incremental mortgage debt coming due. Given the substantial cash we've built up, our revolver balance remained relatively low, reducing our exposure to floating rate debt. Our weighted average interest rate, therefore, remained at 3.2% for the first quarter and is expected to average in the low to mid 3% range for the rest of
Speaker Change: Our debt maturity schedule for 'twenty 'twenty four remains very manageable with 500 million Euro denominated bonds maturing in July along with some incremental mortgage debt coming due.
Speaker Change: Given the substantial cash we built up our revolver balance remained relatively low reducing our exposure to floating rate debt.
Speaker Change: Our weighted average interest rate. Therefore remained at three 2% for the first quarter and is expected to average in the low to mid 3% range for the rest of 2024.
Speaker Change: With ample capital to fund our pipeline, we continue to have a great deal of flexibility on how we approach the capital markets in 2024.
Toni Ann Sanzone: With ample capital to fund our pipeline, we continue to have a great deal of flexibility on how we approach the capital markets in 2024. We have a strong preference to deploy our current liquidity into new investments and expect to see some appropriate windows of opportunity to execute bond deals this year, both in Europe and the U.S. We ended the first quarter with debt to gross assets of 40.9% and net debt to EBITDA of 5.3 times, which is inclusive of 1031 exchange proceeds.
Speaker Change: We have a strong preference deploy our current liquidity into new investments and expect to see some appropriate windows of opportunity to execute bond deals. This year, both in Europe and the U S.
Speaker Change: We ended the first quarter with debt to gross assets of 49% and net debt to EBITDA at five three times, which is inclusive of 10 31 exchange proceeds.
Speaker Change: While net debt to EBITDA was below the low end of our target range of mid to high five times, we expect it to trend back into that range over the back half of the year as we deploy capital into new investments.
Toni Ann Sanzone: While net debt to EBITDA was below the low end of our target range of mid to high five times, we expect it to trend back into that range over the back half of the year as we deploy capital into new investments. Lastly, on the sustainability front, I'm pleased to say we've enrolled more than half of our portfolio in our Electricity Usage Reporting Program, a key step in making further progress towards quantifying and reducing our carbon footprint.
Speaker Change: Lastly on the sustainability front I'm pleased to say, we've enrolled more than half of our portfolio and our electricity usage reporting program a key step in making further progress towards quantifying and reducing our carbon footprint.
Toni Ann Sanzone: We continue to incorporate green lease provisions in our leases and currently have a quarter of our portfolio under leases that contain green lease provisions. We look forward to sharing further detail regarding our ESG objectives and progress in our sixth annual ESG report, which we plan to publish later this month. In closing, our first quarter AFFO and investment activity year-to-date keep us on track with our expectations for the full year. Deal activity is picking up, and given the capital we've amassed and additional liquidity available to us, we're well-positioned to execute on a strong pipeline of deals.
Speaker Change: We continue to incorporate green lease provisions in our leases and currently have a quarter of our portfolio under leases that contain green lease provisions.
Speaker Change: We look forward to sharing further details regarding our ESG objectives and progress in our sixth annual ESG report, which we're planning to publish later this month.
Speaker Change: In closing, our first quarter, a F O and investment activity year to date keeps us on track with our expectations for the full year.
Speaker Change: Deal activity has picked up and given the capital we've amassed an additional liquidity available to us, we're well positioned to execute on a strong pipeline of deals.
Toni Ann Sanzone: Within the portfolio, we've made good progress resolving some near-term tenant issues, and we're close to completing our office exit strategy. We believe all those factors, in conjunction with the strength of the rent growth built into our portfolio, position us for long-term growth.
Speaker Change: Within the portfolio, we've made good progress resolving some near term tenant issues and we're close to completing our office exit strategy.
Speaker Change: We believe all of those factors in conjunction with the strength of the rent growth built into our portfolio position us for long term growth.
Operator: And with that, I'll hand the call back to the operator for questions. Thank you. At this time, we will take questions. If you would like to ask a question, simply
Speaker Change: And with that I'll hand, the call back to the operator for questions.
Speaker Change: Thank you at this time, 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 press. The Star then the number two.
Operator: Thank you. At this time, we will take questions. If you would like to ask a question, simply press the star, then the number one on your telephone keypad. If you would like to withdraw your question, press the star, then the number two. Thank you.
Speaker Change: Thank you and our first question comes from Mitch Germain with citizens J M P.
Mitchell Bradley Germain: Please state your question.
Mitchell Bradley Germain: Thanks for taking my question. I'm just trying to gain some sense on the capital market strategy. I think, Toni-Ann, you said some planned note offerings in Europe and the U.S. this year, so it looks like you'll refi the July notes and then maybe try to pre-fund the February ones. Is that the way to think about it in the back part of the year?
Mitchell Bradley Germain: Thanks for taking my question I'm, just trying to gain some sense on the capital market strategy.
Mitchell Bradley Germain: I think Tony and you said some plan notes offerings in Europe and U S. This year. So it does it looks like Youll refi that July notes and then maybe try to pre fund. The February is that the way to think about it in the back part of the year.
Speaker Change: Yeah, I think you know we have those maturities in our line of sight and you know as we said we've seen some some positive movement in rates in Europe. So it's there's some interesting opportunities you know I think we still feel good about where the balance sheet sits now and don't necessarily have to hit the capital markets, but we would look to refinance those with bonds unlikely over the.
Toni Ann Sanzone: Yeah, I think, you know, we have those maturities in our line of sight. And, you know, as we said, we've seen some positive movement in rates in Europe. So there are some interesting opportunities. You know, I think we still feel good about where the balance sheet sits now and don't necessarily have to hit the capital markets. But we would look to refinance those with bonds, likely over the latter part of the year.
Speaker Change: The latter part of the year.
Speaker Change: Great and then maybe Jason I'm, just curious about the competitive landscape in terms of any capital you might be competing against in deals I'm curious in terms of you know how do you think it sits today versus maybe where we were in the back part of last year are you seeing more parties emerge or is it still kind of.
Jason E. Fox: Great. And then maybe, Jason, I'm just curious about the competitive landscape in terms of any capital you might be competing against in deals. I'm curious in terms of, you know, how it sits today versus, you know, maybe where we were in the back part of last year. Are you seeing more parties emerge, or is it still kind of scarce in terms of the deal pools? Yeah, look, I think so.
Speaker Change: Scarce in terms of the deal pools.
Jason E. Fox: Yeah look I think the private bid still remains thinned out I think buyers that rely on asset level debt such as C and B as you know there still remain constrained and may be unreliable I think sellers certainly value all cash buyers you know much more I think that gives us a big advantage.
Jason E. Fox: Yeah, look, I think the private bid still remains thinned out. I think buyers that rely on asset-level debt, such as CMBS, you know, they're, you know, still remaining constrained and maybe unreliable. I think sellers certainly value all cash buyers, you know, much more. I think that gives us a big advantage. You know, we generally don't run into public REITs all that much, so it's really the private, you know, bid that is more competitive.
Speaker Change: We generally don't run into the public Reits all that much. So it's really the private bid to that is it's more competitive but I think generally you know we sit in a pretty good position right now, especially given the liquidity position that we're in right. Now so you know the environments interesting as well.
Jason E. Fox: You know, but I think, generally, we sit in a pretty good position right now, especially given the liquidity position that we're in right now. So, you know, the environment's interesting as well. We talked about Europe earlier on the call, about how that's loosening up and we're seeing more opportunities there. So, it's shaping up to be an interesting transaction environment for us in 2024.
Speaker Change: About Europe.
Speaker Change: You earlier on the call about how that's loosening up and we're seeing more opportunities. There. So you know it's shaping up to be a interesting transaction environment for us in 2024.
Speaker Change: Great. Thank you so much.
Speaker Change: Thank you and our next question comes from Jim camera with Evercore ISI. Please state your question.
James Kammert: Thank you. And our next question comes from Jim Kammert with Evercore ISI. Please state your question.
Jason E. Fox: Good morning. Thank you. Jason, could you just clarify a little bit more about your comments on Hartside? Is it technically on your watch list, and I presume they're current on rent?
James Kammert: Good morning. Thank you Jason could you just clarify a little bit more about your comments on hearth side.
Jim: Is it technically on your watch list and I presume, they're current on rent.
Jason E. Fox: Yes, yeah. So yeah, we we mentioned Hearthside you know, they're a levered company and you know we talk about them because we think they could go through restructuring at some point, which is why we brought it up in the context of our top 25 disclosure very large company. They provide critical production capacity of their customer base.
Jason E. Fox: Yes, yes. So, yeah, we mentioned Hearthside. You know, they're a levered company. And, you know, we talk about them because we think they could go through restructuring at some point, which is why we brought it up in the context of our top 25 disclosure. Very large company. They provide critical production capacity, their customer base, and importantly, we own highly, highly critical real estate to the company's operation. So, you know, for that reason, we feel very good about our position.
Jason E. Fox: And importantly, we own highly highly critical real estate to the company's operations. So.
Jim: For that reason you know we feel very good about our position. They are current on rent right now.
Brooks G. Gordon: They are current on rent right now, but even in the event of a balance sheet restructure, you know, we don't expect any disruption in rents. We did add it to our watch list to be proactive. We're talking about it to be transparent, but we do expect them to continue to pay rent for the foreseeable future.
But even in the event of a balance sheet restructure you know we don't expect any disruption in rents. We did added to our watch list to be proactive.
Jim: We're talking about it to.
Jim: To be transparent, but but we do expect them to continue to pay rent for the foreseeable future.
Brooks G. Gordon: That's very helpful, and I mean it's obviously very premature. Let's assume, in the worst case, if they did not stay, where would you classify the rents on those properties relative to the market?
Speaker Change: That's very helpful and I mean, it's obviously very premature let's assuming the worst case, if they did not stay where would you classify the rents on those properties relative to market.
Brooks G. Gordon: Brooks, do you want to tackle this?
Jason E. Fox: Brooks do you want to you want to tackle that.
Brooks: Yes, I mean, I think the best way to think about it from a replacement cost perspective for the capacity I mean is highly critical capacity not only to the company, but also to along with Blue chip customers. So without that capacity there is.
Brooks G. Gordon: Yeah, I mean, I think the best way to think about it is from a replacement cost perspective for the capacity. I mean, it's highly critical capacity, not only to the company but also to a long list of their blue chip customers. So without that capacity, there's a huge disruption in the packaged food business. To replace this capacity would be orders of magnitude higher, at a higher cost than our facilities. Rents are under $5 a foot, so it's reasonable.
Speaker Change: A huge disruption.
Brooks G. Gordon: In that packaged food business.
Brooks G. Gordon: Place this capacity would be orders of magnitude higher higher costs than in our facilities.
Brooks G. Gordon: Rents are under $5 a foot so a reasonable but again I think the key takeaway here.
Brooks G. Gordon: But again, I think the key takeaway here is the mission criticality of this real estate for the company, as well as for their end customers. So, really, two layers of criticality there. And so we feel good about the situation. But, as Jason said, we want to be proactive with
Brooks G. Gordon: Is the mission criticality of of this real estate for the company as well as for.
Brooks G. Gordon: Their end customer.
Brooks G. Gordon: So really two layers of criticality, there and so we feel good about the situation, but as Jason said, we wanted to be proactive with it.
Jason E. Fox: What percentage of your private tenants do you receive some sort of entity-level financial or some sort of property-type information on? I realize they're not retail properties per se, but so you can, you know, you're proactively mentioning this one, for example, but just refresh us as to how much insight you get on an operating basis and a financial basis from your private tenants.
Speaker Change: Alright, good and just could you remind me I apologize what percentage of your private tenants here.
Brooks G. Gordon: Geez, you know some sort of entity level financial or some sort of property type information to realize on our retail properties per se, but so do you can you proactively mentioned this one for example, but just refresh us as to how much insight you get on an operating basis and financial basis from your private tenants.
Speaker Change: Yes, we got financials from materially every tenant.
Jason E. Fox: Yeah, we get financials from materially every tenant. So effectively 100%, 99 and change percent by ABR.
Brooks G. Gordon: So effectively 100% 99 and change percent by ABR.
Jason E. Fox: We get those typically on a quarterly basis, and then annual audits. There's a delay, you know; after the quarter ends, they prepare them and then send them to us. And we track those very, very closely. So we have very good visibility. And I think importantly, as we've discussed before, a key piece of our approach there is tenant engagement as well. So it's not just looking at the numbers, but we want to have a constant dialogue with the companies and their management teams. Terrific.
Brooks G. Gordon: When we get those on a particularly on a quarterly basis and an annual audits.
Peter Sands: A delay after the quarter ends they prepare them and then send them to us and we track those very very closely.
Brooks G. Gordon: So we have very good visibility and I think importantly as.
Brooks G. Gordon: We've discussed before a key piece of our approach there is that tenant engagement as well.
Brooks G. Gordon: Not just looking at the numbers, but also we want to have a constant dialogue with the companies and their management teams.
James Kammert: Terrific. I'll get off. Thank you very much.
Speaker Change: Terrific I'll get off thank you very much.
Welcome.
James Kammert: Thank you. Our next question comes from Anthony Pallone with J P. Morgan. Please state your question.
Anthony Paolone: Thank you. Our next question comes from Anthony Paolone with JP Morgan. Please state your question.
Toni Ann Sanzone: Thanks. Maybe, Toni, can you give us a sense as to where you think comprehensive revenue growth will shake out this year and what all you've included in it on the credit side, either that you've discussed already or just that maybe you didn't talk about? Sure, yeah.
Brooks G. Gordon: Thanks.
Toni Ann Sanzone: Maybe Tony can you give us a sense as to where you think comprehensive revenue growth will shake out this year and what all you've included it on the credit side, either that you've discussed already or or just that maybe you didn't talk about.
Toni Ann Sanzone: Sure, yeah. Right now, I think we mentioned comprehensive is about negative 30 basis points for the first quarter. That really has the front weighting of the Hellwig abatement built into it.
Toni: Sure Yeah, right now I think we mentioned comprehensive is about negative 30 basis points for the first quarter that really has the the front weighting of the helbig abatement built into it and you know as.
Toni Ann Sanzone: And, you know, as we mentioned, we have Prima vacant for the rest of the year, assuming we don't sell those assets. So, that's all baked into it. In addition to that, we have about 70 basis points of rent contingency, which we've not yet used at this point in the year. You know, we do expect, you know, in total, when you kind of look at all four quarters together, we run around flat, potentially slightly positive if we don't use that rent contingency.
Tony: As we mentioned we have premium running vacant for them the rest of the year, assuming we don't sell those assets. So that's all baked into it. In addition to that we have about 70 basis points of rent contingency, which we've not yet used at this point in the year. You know we do expect you know in total when you kind of look at all four quarters together.
Tony: Right around flat potentially slightly positive if we don't use that rent contingency.
Speaker Change: Okay, and any like any sense as to like what that does looking out to 'twenty five for like a full year impact or it sounds like a lot of the credit situations were more front end loaded for this year. So we get the bulk of it.
Toni Ann Sanzone: Okay, and any sense as to like what that does looking out the 25 for like a full year impact? Or it sounds like a lot of the credit situations were more front end loaded for this year. So we get the bulk of it.
Toni Ann Sanzone: That's right. I think we don't really have any line of sight into any, you know, material credit rent disruptions that we would expect to kind of go past this year at this point. It's early in the year, so I think we'll continue to monitor that. But, you know, I don't think there's any major impact to expect on the comprehensive side. You know, we've typically trended around 100 basis points below contractual historically. You know, I think that's, you know, it goes up or down any given quarter, but that's generally the run rate that we would expect on a long-term basis.
Speaker Change: That's right I think we don't really have any line of sight into any material credit rent disruptions you know that would that we would expect to kind of go past. This year at this point and it's early in the year I think we'll continue to monitor that but.
Speaker Change: But you know I don't think there's any major impact to expense that you expect on the comprehensive side. You know, we've typically trended around 100 basis points below contracts will historically you know I think that's you know it goes up or down any given quarter, but that's generally the you know the the run rate that we would expect on a long term basis.
Toni Ann Sanzone: Okay, and I guess on the credit side you talked about.
Toni Ann Sanzone: Okay, and I mean, on the credit side, you talked about, it sounds like there's nothing else really on your watch list at this point. And so just trying to understand, like, if that was just for the top 25, or, you know, the entire portfolio, because it just seems like you had a bit of a string here of credit matters, and so didn't know if that was coincidental, or if there's just other stuff that you're watching. So maybe a little bit more depth there would be helpful.
Speaker Change: It sounds like Theres nothing else really on your watch list at this point and so just trying to understand like if that was just for top 25 or.
Toni Ann Sanzone: You know the entire portfolio because it just seems like you had a bit of a string here of of credit matters and so didn't know if that was coincidental or if there's just other stuff that you're watching so maybe a little bit more depth there would be helpful.
Toni Ann Sanzone: Sure, yeah, we have it there. Sorry, I wanted to just maybe address that in the context of, you know, rental collections. And, you know, we have about, I would say about 90 basis points of what I call uncollected rent in the first quarter from cash basis tenants that we did not recognize in AFFO. The majority of that we do expect to collect, so we don't really view that as sort of a credit issue or long-term bad debt expense.
Speaker Change: Sure Yeah, we have not started.
Speaker Change: Sorry, I wanted to just maybe just address that in the context of you know rent collections and you know we have about I'd say about 90 basis points of what I call uncollected rent in the first quarter from from cash basis tenants that we did not recognize in a F. F. O. The majority of that we do expect to collect so we don't really view that as sort of you know credit issue or.
Toni Ann Sanzone: Long term bad debt expense, it's really more timing from our perspective, and so again, we don't really foresee meeting the full 70 basis points that I've outlined here, but I think you know, it's still kind of early in the year and want to kind of remain conservative.
Toni Ann Sanzone: It's really more timing from our perspective. So again, we don't really foresee needing the full 70 basis points that I've outlined here, but I think, you know, it's still kind of early in the year and want to kind of remain conservative.
Speaker Change: Yes, and then from a credit watch perspective, just just to clarify.
Toni Ann Sanzone: Yeah, and then from a CreditWatch perspective, just to clarify, you know, Jason mentioned Hearthside specifically, there are other tenants on our CreditWatch list. Relative to prior quarters, up somewhat, it's around 5% of ADR. Prior quarters were around four and a half, and really the delta is the addition of Hearthside.
Toni Ann Sanzone: Jason mentioned hearth side, specifically there are other tenants on our credit watch list relative to prior quarters up somewhat at around 5% of ABR.
Speaker Change: Prior quarters about four and a half and really the Delta is the addition of the parts side of your tenants actually came off the list as well.
Toni Ann Sanzone: A few tenants actually came off the list as well. You know, one was the retailer Joanne, which has emerged from bankruptcy with a much stronger balance sheet. And so they've come off of our CreditWatch list. But that's the extent of CreditWatch by ADR.
Toni Ann Sanzone: One was the.
Toni Ann Sanzone: Retailer Joanne which has emerged from bankruptcy.
Toni Ann Sanzone: With a much stronger balance sheet.
Toni Ann Sanzone: They've come off of our credit watch list.
Toni Ann Sanzone: But that's sort of the range of credit watch by Edr right now.
Anthony Paolone: Okay. And if I could just sneak one last one in,
Speaker Change: Okay, and if I could just sneak one last one in.
Speaker Change: You talked about I think mid sevens in the pipeline for the rest of the year and then there was a article about the Columbus deal that put it in the sixes and so just wondering if that was right or if there's just enough higher yielding stuff to get to that that mid sevens that youre looking at to offset that.
Anthony Paolone: Yeah, that's right our target is still in the mid seven some you know may be higher if rates stay where they are and we see some some cap rate expansion.
Jason E. Fox: Yeah, that's right. Our target is still in the mid-7s, you know, maybe higher if rates stay where they are and we see some cap rate expansion. But we do invest across a wide range of yields, with some deals, you know, above that target, you know, even well into the 8s. Others, you know, especially deals with higher quality real estate with strong rent bumps and maybe below market rents, we might get a little tighter on those, and they could even fall a little bit below that range. And yeah, the Hanes Brand deal falls into that category.
Jason E. Fox: You talked about, I think, mid-7s in the pipeline for the rest of the year. There was an article about the Columbus deal that put it in the 6s. And so I was wondering if that was right or if there's just enough higher yielding stuff to get to that mid-7s that you're looking at to offset that. Yeah, that's right.
Speaker Change: But we do invest across a wide range of yields with some deals you know above that target even in you know well into the eights, others, you know, especially deals with higher quality real estate with strong rent bumps and maybe below market rents, we might get a little tighter on those and they could even fall a little bit below the low end of that range and yeah hanesbrands.
Jason E. Fox: Deal falls into that category, it's class a newly built modern D. C below market rents importantly, it also has 3% annual rent increases, which I think that always needs to be factored in when comparing kind of going in cap rates.
Jason E. Fox: It's Class A, newly built, modern DC, with low market rents. Importantly, it also has 3% annual rent increases, which I think that always needs to be factored in when comparing kind of going in cap rates, you know, with other deals that we do or with some of our peers. But it's a well-located asset, Rickenbacker International Airport, which is one of the stronger industrial markets in the country. But yeah, there will be a range of cap rates, and we still would expect to be in that mid, even high 7s, you know, for the rest of the year.
Speaker Change: With other deals that we do or or with some of our peers.
Jason E. Fox: But it's a well located asset rickenbach or National Airport, which is one of the stronger.
Jason E. Fox: Industrial markets in the country, but but yeah. It it'll be a range of cap rates and we still would expect to be in that in that mid even high sevens for the rest of the year.
Speaker Change: Okay. Thank you.
Speaker Change: Youre welcome.
Speaker Change: Our next question comes from Greg Mcginniss with Scotiabank. Please state your question.
Greg Michael McGinniss: Our next question comes from Greg McGinnis with Scotia Bank. Please state your question.
Greg McGinnis: Hey, Jason just on that that cap rate color. You just gave mid to high Sevens, how does that work from a U S versus Europe standpoint.
Jason E. Fox: Hey, Jason, just on that cap rate color that you just gave mid to high sevens, how does that look from a U.S. versus Europe standpoint?
Greg McGinnis: Yeah. It's I mean, it's a good question in the U S. We started to see cap rates stabilize at the beginning of the year.
Jason E. Fox: Yeah, it's, I mean, it's a good question. In the US, we started to see cap rates stabilize at the beginning of the year, but now that interest rates are becoming a little bit more volatile and looking more like the Fed's going to kind of push rate cuts into the back half of the year, you know, if at all for that matter. So there could be a little bit of room for cap rate expansion in the U.S.
Jason E. Fox: Now that interest rates become a little bit more volatile and look more like the fed is going to kind of push rate cuts into the back half of the year, you know with at all for that matter.
Jason E. Fox: So there could be a little bit of room for cap rate expansion in the U S.
Jason E. Fox: I think the big difference right. Now is is the change that we've seen in Europe, it's been very dynamic over there.
Jason E. Fox: I think the big, you know, difference right now is the changes that we've seen in Europe. It's been, you know, very dynamic over there. You know, for the better part of the last 12 to 18 months, I think the transaction markets were relatively frozen over there. Interest rates had spiked, which we've seen now reverse course, and I mentioned earlier that our cost of borrowing in euros is now back to what I would call historical averages relative to where we can borrow in the U.S., about 150 basis points spread.
Jason E. Fox:
Jason E. Fox: For the better part of the last 12 to 18 months I think the transaction markets relatively frozen over there rates had spiked, which we've seen that now reversed course, and you had mentioned earlier that our cost of borrow in euro as is now back to what I would call historical averages relative to you know where we can borrow in the U S.
Jason E. Fox: About 150 basis point spread so yeah.
Jason E. Fox: So Yeah, so I think that what we've seen is that, you know, we can get a little bit more aggressive or tighter on cap rates in Europe, and what we've, you know, been looking at, and maybe relative to the US. And for that reason, we've seen more activity over there. It's been about, I think about 70% of our year-to-date deal volume has been in Europe, and our pipelines, probably 50-50.
Jason E. Fox: Yeah. So I think that what we've seen is that we can get a little bit more aggressive or tighter on cap rates in Europe, and what we've been looking at and maybe relative to the U S and for that reason, we've seen more activity over there. It's been about it's been about 70% of our year to date deal volume has been in Europe, and our pipeline is probably 50 50, but you know.
Jason E. Fox: But you know, the cap rates, they do range, I mean, range by country and property type deal. You know, Germany, for instance, is probably at the tighter end of the range that we're targeting. And, you know, countries like Italy might be on the higher end of the range. And again, it's always important to include or factor in rent increases when we're talking about cap rates. You know, when we are doing cap rates, initial cap rates in the sevens with, you know, bumps that have been averaging around 3% for us, that puts average yields, or the life of the lease, well into the nines. And that's a pretty interesting yield relative to the cost of capital right now.
Jason E. Fox: The cap rates, they do range I mean range by country property type deal.
Jason E. Fox: Germany for instance is probably at the tighter end of the range that we're targeting in countries like Italy might be on the higher end of the range and again, it's always important to include or factor in the rent increases when we're talking about cap rates.
Jason E. Fox: You know when we are doing cap rates initial cap rates in the sevens with bumps that have been averaging around 3% for us that puts average yields over the life of the lease you know well into the ninth in that that's a pretty interesting yield relative to our cost of capital right now.
Speaker Change: Right, Okay, I guess for the Europe, obviously, they've got a lot of liquidity right now and more dispositions for more cash for the Europe acquisitions should we expect that you'll be issuing euro denominated debt still given given that cost of debt there.
Jason E. Fox: Okay, I guess for Europe, obviously there's got a lot of liquidity right now and more dispositions for more cash, but for the European acquisitions, should we expect that you'll be issuing Euro denominated debt still, given that cost of debt there?
Jason E. Fox: Yeah, I mean, look, I think that, you know, if we were to issue bonds today, and I want to emphasize that we have a lot of flexibility given our liquidity, and we don't need to do anything in the capital markets for some time, but if we were to issue bonds today, yeah, we'd probably lean towards issuing in euros, you know, based on the quotes we've been getting in each market and observing But, you know, we do have flexibility. It's one of the benefits of having diversification and the ability to issue bonds in different markets that we can see where we can get the best execution, and so we'll continue to evaluate that.
Speaker Change: Yeah, I mean look I think that you know if we were to issue bonds today in and you don't want to emphasize that we have a lot of flexibility given our liquidity and we don't need to do anything in the capital markets.
Jason E. Fox: For some time, but if we were to issue bonds today, yeah, we probably leaned towards issuing are in euros. You know based on the quotes we've been getting in each market and and observing how are you know different bond deal executions have gone but.
Jason E. Fox: We do have flexibility, it's one of the benefits of having diversification and ability to issue bonds in different markets. As we can see where you can get back to execution and so we'll continue to evaluate that.
Brooks G. Gordon: Okay, and then given the tenant issues announced last quarter plus some issues you've had potentially with Harside or Casino and previously with Joanne, have you adjusted how you're underwriting acquisitions or evaluating ongoing tenant risk?
Jason E. Fox: Okay, and then given the tenant issues, an ounce last quarter plus some issues you've had potentially with car side or casino in previously Joann have you adjusted how you're underwriting acquisitions or evaluating ongoing tenant risk.
Jason E. Fox: Let me start. I can let Brooks jump in there on how we're evaluating going forward within the portfolio. But I think the short answer is no.
Speaker Change: Let me start I can let let brooks jump in there and how we're evaluating going forward you know within the portfolio.
Jason E. Fox: We're comfortable with our business model and underwriting process, which focuses on buying high-quality real estate. And importantly, with companies that we believe in from a credit standpoint, we do target just below investment grade. We think that's the sweet spot to invest in that lease. We can dictate terms, whether it's rent increases, lease terms, other provisions, or covenants within these leases. And then, you know, very importantly, we mentioned this with respect to Hearthside.
Jason E. Fox: The short answer is no we're comfortable with our business model and underwriting process. It focuses on buying high quality real estate and importantly, with companies that we believe in from a credit standpoint, we do target just below investment grade, we think that's the sweet spot to invest in that lease.
Jason E. Fox: Can dictate terms, whether its rent increases lease lease terms other provisions or covenants within these leases.
Jason E. Fox: And then you know very importantly, we mentioned this with respect to hearth side. It's also played in Chileans and.
Jason E. Fox: That did we buy highly critical real estate, it's very important to tenant operations and even if there is restructuring like.
Jason E. Fox: It's also played out, you know, with Joanne's and that we buy highly critical real estate. That's very important to tenant operations. And even if there is restructuring, like in the case of Joanne's, you know, our rent was continuing to be paid throughout, and they exited bankruptcy without any disruption. And, you know, that's our business model. We've done very well, and our portfolio has performed very well over decades and through numerous economic cycles.
Jason E. Fox: Like in the case of Joanne as you know our rent was continued to be paid throughout the and and they exited bankruptcy without any disruption in that.
Jason E. Fox: That's our business model, we've done very well in our portfolio has performed very well over decades and through numerous economic cycles.
Jason E. Fox: So so north I think that the approach is still the same but but yes. We were always very focused on credit and we spend I would say you know the majority of our time underwriting deals talking to the tenants understanding their market position in meeting with management.
Jason E. Fox: So, no, I think that the approach is still the same. But yes, we're always very focused on credit. And we spend, I would say, the majority of our time underwriting deals, talking to the tenants, understanding their market position, meeting with management. But yeah, we like our business model.
Jason E. Fox: Hum, but putting out we like our business model.
Brooks G. Gordon: Okay, sorry, just a final question more for our education. In terms of the lease renewal process, when does that tend to take place? I'm just looking at the top 10 disclosures, FM Logistics looks like it's firing at the end of next year. When does this happen, when would we typically, you know, see a renewal take place?
Jason E. Fox: Okay.
Speaker Change: Final question.
Brooks G. Gordon: More for our education in terms of the lease renewal process. When does that tend to take place I'm just looking at the top 10 schools or ethylene logistics looks like expiring at the end of next year.
Brooks G. Gordon: When do those when would we typically see a renewal be taking place.
Brooks G. Gordon: Brooks you would take that yet yeah. It really takes a few different.
Brooks G. Gordon: Brooks, you want to take this? Yeah, it really takes a few different approaches, and we pursue them all. So it takes anything from We could be as proactive as, say, five years in advance for certain situations where we pursue what they call a blend and extend transaction, and we're very proactive with that. We've taken that approach for many, many years. There are other situations where we either really like our position, or the tenant maybe has already signaled to us something where we might wait until later in the lease and not negotiate. You mentioned FM Logistics.
Speaker Change: Approaches and we pursue them all so it takes anything from.
Brooks G. Gordon: We could be as proactive as say five years in advance for certain situations, where we pursue what they call a blend and extend.
Brooks G. Gordon: Transaction and were very proactive with that we've we've taken that approach for many many years there are other situations where we.
Speaker Change: I really like our position or we.
Brooks G. Gordon: The tenant maybe has already signaled to us something where we might wait until later in the lease and not negotiate you referenced FM logistics.
Brooks G. Gordon: I think it's our 24th or 5th tenant. We're in active discussions on that, and I expect we'll renew them on the majority of that square footage. And so we take a very proactive approach. But I think a good rule of thumb is around three years in advance of lease expiration. On balance, that's kind of where we're most active in those discussions. And that's where you see a lot of the leasing activity in our quarterly disclosures.
Speaker Change: It's our 24th or fifth tenant.
Brooks G. Gordon: We're in active discussions on that.
Brooks G. Gordon: I expect we'll renew them on the on the majority of that square footage.
Brooks G. Gordon: And so we take a very proactive approach, but I think the good rule of thumb is around three years in advance of lease expiration on balance is kind of where we are most active in those discussions.
Brooks G. Gordon: And that's where you see a lot of the leasing activity in our in our quarterly.
Brooks G. Gordon: Disclosures.
Speaker Change: So when might we expect to see something on F N.
Brooks G. Gordon: So when might we expect to see something on FM? I'm
Brooks G. Gordon: Yeah.
Brooks G. Gordon: I can't comment on a specific transaction, but that's an active situation with them now. Okay, thank you. Our next question comes from Joshua Dennerlein.
Speaker Change: Can't comment on that specific transaction, but.
Joshua Dennerlein: In fact, the situation with them now.
Joshua Dennerlein: Okay. Thank you.
Joshua Dennerlein: Our next question comes from Joshua <unk> with Bank of America. Please state your question.
Joshua Dennerlein: Our next question comes from Joshua Dennerlein with Bank of America. Please state your question. Hi, this is Farrell Granath on behalf of Josh. I was wondering if you could give some color on the guy.
Farrell Granath: Hi, This is Paul granite on behalf of Josh I was wondering if you can give color on the guidance assumed as far as your operating assets.
Farrell Granath: Tony you want to take that sure.
Toni Ann Sanzone: You want to take it? Sure. Yeah.
Farrell Granath: Sure Yeah, the the midpoint of our guidance range assumes our self storage is generally flat to last year on a same store basis and.
Toni Ann Sanzone: The midpoint of our guidance range assumes our self-storage is generally flat to last year on a same-store basis. You know, in general, I think we gave guidance in a full range, which includes the few hotel operating assets that we continue to hold. We do expect to sell one of those this year, but on the whole, we expect about $85 to $90 million of operating NOI, and that's from the total portfolio. Unknown Attend
Toni Ann Sanzone: You know in general I think we gave guidance and our full range, which includes the the few hotel operating assets that we continue to hold them. When do you expect to sell one of those this year, but on whole, we expect about $85 million to $90 million of operating NOI and that's from the total portfolio.
Speaker Change: Okay and in terms of your the remaining office assets is there any kind of insight ease maybe closing still within that first half of this year that you had mentioned last quarter.
Speaker Change: Yes, so we're making really good progress there you know again to reiterate we've closed.
Toni Ann Sanzone: Yes, so we're making really good progress there. You know, again, to reiterate, we've closed at around 80% of expected proceeds. We're making very good progress on the balance. Another four of the larger transactions are under contract and in various stages of closing. That represents another, call it 17 or 18% by way of proceeds. On the very small amount that's outstanding beyond that, we're evaluating offers now. So we're making good progress. We think we are in line with what we discussed in the last several quarters in terms of total proceeds and pricing.
Toni Ann Sanzone: Around 80% by expected proceeds.
Toni Ann Sanzone: We're making very good progress on the balance another four of the larger transactions are under contract.
Toni Ann Sanzone: And in various stages of closing.
Toni Ann Sanzone: That represents another call it 17 or 18% by way of proceeds.
Toni Ann Sanzone: On the very small amount that's.
Toni Ann Sanzone: Outstanding beyond that we're evaluating offers now.
Toni Ann Sanzone: So we're making good progress we think we're in line with what we discussed in the last.
Toni Ann Sanzone: Several quarters in terms of.
Toni Ann Sanzone: Total proceeds and pricing.
Toni Ann Sanzone: So we think we'll get it done.
Toni Ann Sanzone: One or two transactions one transaction away.
Toni Ann Sanzone: So we think we'll get it done. One or two transactions. One transaction is awaiting a tax ruling. It's under a binding contract. So that's a little bit out of our control, but it's not material to guidance. But we do expect we're on track for that.
Toni Ann Sanzone: Awaiting a tax ruling under binding contract.
Toni Ann Sanzone: So that's a little bit out of our control, but it's not material to guidance, but we do expect that we're on track for that.
Speaker Change: Okay. Thank you.
Toni Ann Sanzone: Our next question comes from Eric Borden with BMO capital markets. Please state your question.
Eric Wolfe: Our next question comes from Eric Borden with BMO Capital Markets. Please state your question.
Brooks G. Gordon: Hey, good morning everyone. I was just hoping you could talk about the overall health and strength of your portfolio. Is there, just given your insight into, you know, the tenant financials, is there maybe a pool of tenants that have kind of moved lower but not hit that watch list criteria? And then, conversely, are you seeing signs of strength in any of your tenant industries?
Eric Wolfe: Hey, good morning, everyone. I was just hoping you could talk about the overall health and strength of your portfolio is there just given your insight into the tenant financials.
Brooks G. Gordon: Is there maybe a pool of tenants that have kind of moved lower but not hit that watch list criteria and then Conversely is there are you seeing signs of some signs of strength in any of your kind of industries.
Brooks G. Gordon: Okay.
Speaker Change: Yes, so to answer your question a few different ways I mean first I think overall credit quality is very consistent with where it's been in recent years.
Brooks G. Gordon: Yeah, so to answer your question in a few different ways, I mean, first of all, I think overall credit quality is very consistent with where it's been in recent years. You know, investment-grade ABR is about a quarter of the portfolio.
Brooks G. Gordon: Investment grade ABR is about a quarter of the portfolio as I mentioned the watch list is around 5%. So that's picked up a little bit and that's really concentrated in a few tenants that we've discussed.
Brooks G. Gordon: As I mentioned, the watch list is around 5%, so that's picked up a little bit, and that's really concentrated in a few tenants that we've discussed. You know, broadly speaking, the overall credit distribution of the portfolio has remained pretty constant, especially at portfolio scale. Certainly, credit for any given company can migrate over time up and down, you know, for example, something like half of our investment grade We're sub-investment grade when we acquired them. And so, you know, that credit migration can happen in both directions.
Brooks G. Gordon: Broadly speaking.
Brooks G. Gordon: The overall credit distribution of the portfolio has remained pretty pretty constant, especially our portfolio scale certainly credit for any given company.
Brooks G. Gordon: Is it.
Brooks G. Gordon: Can migrate over time up and down you know for example, something like half of our investment grade tenants, where sub investment grade when we acquired them in so that that credit migration can happen in both directions, and we would expect.
Brooks G. Gordon: And we would expect, there are a few tenants we're looking at on our watch list that we would expect to move off as they complete refinancing transactions. And, you know, there are others that, over time, will migrate onto the watch list. But, you know, I think the most important takeaway here is that, you know, our watch list has been demonstrably conservative for decades. So, the actual default experience out of that watch list is a very small portion of that.
Brooks G. Gordon: There are a few tenants were looking at on our watch list that we would expect to move off that as they can.
Brooks G. Gordon: <unk>.
Brooks G. Gordon: Refinancing transactions.
Brooks G. Gordon: And there are others that over time will migrate onto the watch list, but I think the most important takeaway there is that our watch list.
Brooks G. Gordon: Has been demonstrably conservative for decades, so the actual default experience out of that watch list is a very small portion of that.
Brooks G. Gordon: So while we want to.
Brooks G. Gordon: So, you know, while we want to monitor a subset of the tenants, that's by no means indicative of a percentage of ABR where we expect an actual default. In fact, much less than that actually occurs in our experience. So, you know, we're comfortable with the credit quality of the portfolio. It's something we monitor very closely. We certainly have talked about a few specific situations, but broadly speaking, it's very consistent.
Brooks G. Gordon: Monitor a subset of the tenants that's by no means indicative of Paris.
Brooks G. Gordon: Percentage of ABR, where we expect an actual default in fact much less than that actually occurs in our experience. So.
Brooks G. Gordon: We're comfortable with the credit quality of portfolio is something we monitor very closely.
Brooks G. Gordon: Certainly we've talked about a few specific situations, but broadly speaking it's.
Brooks G. Gordon: It's very consistent.
Brooks G. Gordon: That's helpful and then on the disposition front for this year outside of office and <unk>.
Eric Wolfe: That's helpful. And then on the disposition front for this year, you know, outside of office and, you know, the U-Haul transaction, what types of tenant assets or, you know, verticals are you looking to actively recycle today?
Eric Wolfe: U haul transaction what types of tenants.
Eric Wolfe: Assets are you know verticals or are you looking to actively recycle today.
Eric Wolfe: Yes, as you mentioned the vast majority of our disposition plan for 2024.
Brooks G. Gordon: Yes, as you mentioned, the vast majority of our disposition plan for 2024 is in the office sale program and the U-Haul transaction. We have a smaller bucket of what you could call normal course, $150 million to $350 million in that range.
Brooks G. Gordon: As in the office sale program in the U haul transaction.
Brooks G. Gordon: A smaller bucket of what you could call it normal course.
Brooks G. Gordon: Toni mentioned one, which was the last of the operating Marriotts that we intend to sell. As a reminder, there are three others, and we're in the process of working through redevelopment opportunities there. Broadly speaking, I'd say that the theme is managing residual risk where appropriate. Vacancy is a smaller part of the puzzle, a little under 10% of our total disposition, but it's a few of the buildings in that normal course bucket. So not broad thematic trends there outside of the office exit, which certainly is the major story there from a thematic part of the disposition plan.
Brooks G. Gordon: $150 million to $350 million in that in that range. Tom you mentioned, one which was the <unk>.
Brooks G. Gordon: Last of the operating Marriott's that we intend to sell as a reminder, there are three others, which we're in process of working through redevelopment opportunities there.
Brooks G. Gordon: Broadly speaking I would say that the.
Brooks G. Gordon: The theme is managing residual risk where appropriate.
Brooks G. Gordon: Vacancy the smaller part of the puzzle a little under 10% of our total disposition, but it's.
Brooks G. Gordon: A few of the buildings in that normal course bucket.
Brooks G. Gordon: So not broad thematic trends there outside of the office like that which certainly is that the major story there from us.
Brooks G. Gordon: Semiotic part of the disposition plan.
Speaker Change: Alright, Thanks, and then last one for me just for the model.
Eric Wolfe: Thanks. And then last one for me, just for the model. Toni, could you just provide an update on your income tax expense guidance for 2024? I think it was $38 to $42 million you talked about last quarter.
Eric Wolfe: Tony could you just provide an update on your income tax expense guidance for 2024, I think it was 38 to 42 million.
Toni: You talked about last quarter.
Toni Ann Sanzone: Yep, that's right, and I think we're holding that consistent. I think we were just about $10 million for the first quarter, and that seems really on par with what we would expect for the remainder of the year.
Toni: Yeah, that's right and I think we're holding that consistent I think we were just about $10 million for the first quarter and that seems really on par with what we would expect for the remainder of the year.
Speaker Change: Alright sounds good I'll leave it there thank you.
Eric Wolfe: Sounds good. I'll leave it there. Thank you.
Eric Wolfe: Yeah.
Eric Wolfe: Thank you and our next question comes from Nick Joseph with Citi. Please state your question.
Nick Joseph: Thank you. And our next question comes from Nick Joseph with Citi. Please state your question.
Jason E. Fox: Thanks. Yeah, just as you think about resetting rents for some of these restructured tenants, right, you did Helwig recently, how do you think about setting coverage levels to make sure that both you and the tenant are comfortable with the rent levels going forward, and it won't reoccur as an issue?
Nick Joseph: Thanks.
Jason E. Fox: You think about resetting rents for some of these restructured tenants right you did helwig.
Jason E. Fox: Recently, how do you think about setting coverage levels to make sure that both you and the tenant theyre comfortable with the rent levels going forward and it wont reoccur as an issue.
Jason E. Fox: Okay.
Speaker Change: Yes, that's a good question, it's certainly a balancing act.
Jason E. Fox: Yeah, I mean, that's a good question. It's certainly a balancing act. We want to preserve the economy, certainly. But at the same time, we want to put the company in question, in this case, Helwig, on a better footing.
Jason E. Fox: Want to preserve.
Jason E. Fox: Economics.
Jason E. Fox: You know, we think they're making good progress on their turnaround plan, both on the cost containment front, as well as improving sales efficiency. And we do expect them to grow back into that coverage. But, you know, as we discussed, it's suboptimal. So, you know, we're watching it closely. They'll remain on our watch list. But look, they've got the support of their landlords as well as their lenders. They're taking the right actions, but we want to see that be a sustained recovery process.
Jason E. Fox: Economics certainly.
Jason E. Fox: The same time, we want to put the.
Jason E. Fox: The company in question in this case it was how it.
Jason E. Fox: On a better footing.
Jason E. Fox: We think they're making good progress on their turnaround plan.
Jason E. Fox: Both on the cost containment front as well as improving sales efficiency and we do expect they will grow back into that coverage.
Jason E. Fox:
Jason E. Fox: But as we've discussed it's not it's suboptimal so.
Jason E. Fox: We're watching it closely they will remain on our watch list.
Jason E. Fox: But look that they've got the support of their landlords as well as their lenders, they're taking the right actions.
Jason E. Fox: But we want to see that be a sustained recovery process.
Jason E. Fox: So there's not a magic number in terms of a rule of thumb of where we would reset a rent from a coverage perspective. It's really a balance between what we perceive to be appropriate for the company to navigate a challenging period of time while preserving as much of the economics as we can. Thanks.
Jason E. Fox: So there's not a magic number.
Jason E. Fox: In terms of a rule of thumb with where we would reset of rent for from a coverage perspective.
Jason E. Fox: Really a balance between what we perceive to be appropriate for the company to navigate a challenging period of time, while preserving as much of the economics as we can.
Jason E. Fox: Thanks. How do you think about lease escalators and terms given the range of outcomes with the tenant that has struggled before?
Speaker Change: Thanks, and then how do you think about lease escalators in term given a range of outcomes with a tenant that are that have struggled before.
Jason E. Fox: Okay.
Speaker Change: From a exist.
Jason E. Fox: From an existing tenant perspective, we think term in many situations, not all, is extremely valuable for us. In this situation, we very much did think extending that lease was the right outcome. As Jason has mentioned numerous times, rent growth is a core tenet of our business model. So that's very important. We retain that rent growth in these leases.
Jason E. Fox: The existing tenant perspective.
Jason E. Fox: We think term in many situations muddle.
Jason E. Fox: It was extremely valuable for us.
Jason E. Fox: In this situation, we very much did think extending that lease was what the right outcome.
Jason E. Fox: As Jason mentioned numerous times rent growth as a core.
Jason E. Fox: Tenant of our business model and so that's very important we retain that rent growth in these leases.
Jason E. Fox: Yeah.
Jason E. Fox: And the only thing I'll add there as you know with these longer lease terms, especially as you have.
Jason E. Fox: And the only thing I'll add there is, you know, with these longer, you know, lease terms, you know, especially as you have, you know, perhaps M&A activity that could happen, you know, whether it's someone like Helbig or other tenants, you can get, you know, meaningful credit upgrades there. Brooks mentioned that about half of our.
Jason E. Fox: Perhaps M&A activity that could happen you know, whether it's someone like <unk> or other tenants.
Jason E. Fox: Can get.
Jason E. Fox: Meaningful credit upgrades, there Brooks mentioned that about half of our.
Jason E. Fox: Our investment-grade ABR is from upgrades over time. Some of that is business models improving; others are M&A transactions where the acquirer has an investment-grade rating. So when you add term to even something like Helbig, where the credit behind it is maybe weaker than we would like at this point in time, there is the potential for some real upside to the Accenture consolidation.
Jason E. Fox: Our investment create ABR is from upgrades over time some of that as business models, improving others does M&A transactions, where the acquirer has an investment grade rating. So when you've got term to even something like <unk>, where the credit behind it is is maybe weaker than we would like at this point in time, there is a potential for some real upside.
Jason E. Fox: These centers consolidation.
Speaker Change: I appreciate it thank you.
Nick Joseph: I appreciate it. Thank you.
Speaker Change: Youre welcome.
Speaker Change: Thank you and just a reminder to ask a question press star one on your telephone keypad to remove yourself from the queue Press star two.
Brendan Lynch: Thank you. Just a reminder, to ask a question, press star 1 on your telephone keypad. To remove yourself from the queue, press star 2. Our next question comes from Brendan Lynch with Barclays. Please state your question.
Brendan Lynch: Our next question comes from Brendan Lynch with Barclays. Please state your question.
Brendan Lynch: Good morning, Thanks for taking my question, if I heard you correctly, the Samsung lease has 6% escalators, maybe you could just provide some detail around.
Jason E. Fox: Morning, thanks for taking my question. Um, if I heard you correctly, the Samsung lease has a 6% escalator; maybe you could just provide some detail around that large escalator and any other considerations like the initial rate compared to the market that would allow you to dictate such terms.
Jason E. Fox: That large escalator and any other considerations like the initial rate compared to market that would allow you to dictate such.
Jason E. Fox: Such terms.
Jason E. Fox: Just to clarify, I'm not sure where the 6% is, but it's 3.5% bumps here.
Speaker Change: Just to clarify I'm not I'm not sure where this exercise about three 5% bumps there.
Jason E. Fox: Okay. All right. That makes more sense. And then maybe you could just provide some details on the buyers of the office assets. Were these primarily occupiers or office REITs or other net lease companies?
Speaker Change: Okay Alright.
Jason E. Fox: That makes more sense and then.
Jason E. Fox: Maybe you could just provide some details on the buyers of the office assets were these primarily occupiers or office Reits or other net lease companies.
Speaker Change: It's really been a mix. Each building is is very specific I mean, the bulk of what.
Brooks G. Gordon: It's really been a
Brooks G. Gordon: It's really been a mix. Each building is very specific. I mean, the bulk of what transacted in Q1 was a sale back to the tenant in the Spanish portfolio. But it's really been a mix.
Brooks G. Gordon: That was transacted in Q1 was the sale back to the tenant and in the Spanish portfolio.
Brooks G. Gordon: But it's really been a mix.
Brooks G. Gordon: We've seen virtually all types of buyers. I would say we haven't seen public REIT buyers. It's primarily private capital and or the tenant.
Brooks G. Gordon: We've seen.
Brooks G. Gordon: Virtually all.
Brooks G. Gordon: Types of buyers I would say, we haven't been public REIT buyers.
Brooks G. Gordon: It's primarily a private capital and or the tenant.
Speaker Change: Okay very good thank you.
Brooks G. Gordon: Our next question comes from harsh and money with Green Street. Please state your question.
Harsh Hemnani: Our next question comes from Harsh Hemnani with Green Street. Please state your question.
Harsh Hemnani: Oh, just and just thinking about the cap rate seems to have more balanced.
Jason E. Fox: Oh, just thinking about the cap rate seems to have moved down a little bit quarter over quarter, and it seems that it's going to stabilize there in the mid sevens for the rest of the year. Coupled with that, you know, acquisition volume has been a bit slow to start off the year, and your cost of equity hasn't been what it used to be. All given that backdrop, have you evaluated returning some of the capital in the form of a special dividend or a share buyback that you're getting back through these dispositions instead of deploying it in, maybe, an unforeseen capital market environment? Yeah, maybe.
Jason E. Fox: Quarter over quarter.
Jason E. Fox: They're difficult to stabilize that in the mid sevens.
Jason E. Fox: Oh.
Jason E. Fox: And with that application volume has been a bit slower to start off.
Jason E. Fox: For the year in your cost of equity hasn't been what it used to be given back backdrop have you evaluated.
Jason E. Fox: Joining some of the cap.
Jason E. Fox: And in the form of a special dividend or share buyback particular getting back to these dispositions instead of deploying them and maybe an uncertain.
Jason E. Fox: The market environment.
Jason E. Fox: Yeah, maybe I'll tackle the last point first and then kind of address, you know, some of the points you made in the first half of your question. I mean, look, we're always considering options when it comes to how we allocate or deploy capital, including, you know, buybacks or distributions, however you do it, to return capital. But right now, the best opportunity is still allocating capital to new investments. I mean, we can achieve cap rates, yeah, the year-to-date, we're kind of in the mid-7s, you know, depending on where rates go and the allocation between Europe and the U.S., you know, I would say mid- to high-7s, but it's hard to predict exactly what those cap rates will look like.
Speaker Change: Yeah, maybe maybe I'll I'll tackle the last 0.1st and then kind of address some of the points you made in the first half of your question I mean look we're always considering options when it comes to how we allocate or deploy capital you know, including buybacks or distributions. However, you do it to return capital but.
Jason E. Fox: But right now the best opportunity, you're still allocating capital in new investments I mean, we can achieve cap rates, yes. The year to date, we're kind of mid sevens.
Jason E. Fox: Depending on where rates go and the allocation between Europe and the U S. You know I would say mid to high sevens, but [noise].
Jason E. Fox: But hard to predict exactly what the cap rates look like but we think they will generate some interesting spreads.
Jason E. Fox: But we think that we'll generate some interesting spreads regardless, you know, especially since, you know, we're sitting on significant cash right now, and so, you know, where we can issue either equity or debt in the markets right now is important, and that certainly factors into how we price deals. But right now, we are sitting on a lot of cash that's earning 5%, so we're generating, you know, really good day-one That's not a hurdle for us by any stretch, but even if we were to issue new capital where we're trading now, we think that we can generate, you know, interesting spreads, especially because we're not totally focused on just going in-cap rate, average yield, or unlevered IRR somewhere in the nines.
Jason E. Fox: Regardless, you know, especially since you know where where we're sitting on significant cash right now and so.
Jason E. Fox: Where we can issue either equity or debt in the markets right. Now is is important and that certainly factors into how we price deals but.
Jason E. Fox: But right now you know we are.
Jason E. Fox: Are sitting on a lot of cash.
Jason E. Fox: You know that during 5%. So you were generating really good day one accretion.
Jason E. Fox: You may be significant accretion when you think about the 5% that's not a hurdle for us by any stretch.
Jason E. Fox: But even if we were to issue new capital, where we're trading now we think that we can generate interesting spreads, especially because we're not totally focused on just going in cap rate and we've mentioned it several times today, but the.
Jason E. Fox: Embedded increases built into our leases is really important when you factor you know call. It 3% bumps on you know mid to high Sevens cap rate that generates a average yield or unlevered IRR somewhere in the nines and you know even relative to where equity and debt is trading right now we think that probably generates.
Jason E. Fox: And, you know, even relative to where equity and debt are trading right now, we think that probably generates within the range that we've been historically, which is a two to 300 basis point spread to our cost of capital. So, you know, we're comfortable investing now. And, you know, I do think that if rates stay where they are in the US, we'll see some capital expansion in the West as well.
Jason E. Fox: Within the range that we've been historically, which is a two to 300 basis point spread to our cost of capital. So we're comfortable investing now and I do think that if rates stay where they are in the U S. We will see some some cap rate expansion in the west as well.
Speaker Change: Thanks for that.
Harsh Hemnani: Thanks for that. I'll leave it there.
Speaker Change: Thank you.
Speaker Change: Okay, you're welcome.
Speaker Change: Thank you.
Speaker Change: And at this time I'm not showing any further questions. Thank you for your interest in W. P. Carey.
Operator: And at this time, I am not showing any further questions. Thank you for your interest in WP Carey. If you have any additional questions, please call Investor Relations on 212-492-1110. And that concludes today's call. You may now disconnect.
Operator: If you have any additional questions. Please call Investor relations on two went to four nine to 1110.
Speaker Change: That concludes today's call you may now disconnect.