Operator: Hello, and welcome to WP Carey's Q3 2026 earnings conference call. My name is Donna, and I will be your operator today. All lines have been placed on mute to prevent any background noise. Please note that today's event is being recorded. After today's prepared remarks, we will be taking questions via the phone line. Instructions on how to do so will be given at the appropriate time. I will now turn the call'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 today for our 2026 Q3 earnings call. Before we begin, I would like to remind everyone that some of the statements made on this call are not historic facts and may be deemed forward-looking statements. Factors that could cause actual results to differ materially 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. With that, I will pass the call over to WP Carey's Chief Executive Officer, Jason Fox.
Jason Fox: Good morning, everyone, and thank you for joining us. We have continued to execute at a high level throughout 2026, enabling us to further raise our outlook for AFFO per share growth, which we believe will be among the strongest in the net lease sector this year. Importantly, our growth has been supported by broad-based momentum across the business. Year-to-date investment activity has continued to exceed our initial expectations, enabling us to raise the low end of our full-year guidance range for investment volume. While the recent sharp rise in long-term interest rates has made the outlook for Q4 activity harder to predict, we continue to see a path to the top half of the range. Our AFFO growth also continues to be supported by the strength of our rent escalations, providing a meaningful source of earnings growth independent of transaction activity.
Jason Fox: Our portfolio is performing well, reducing our outlook for rent loss for the remainder of 2026. As we look further ahead to 2027, we are pleased with the early signs of repricing we are seeing. With the significant amount of capital we have raised this year, we are very well positioned to continue investing if attractive opportunities remain available. With only one bond scheduled to mature in each of 2027 and 2028, our exposure to refinancing headwinds should be manageable even if interest rates remain elevated. This morning, I will briefly review our progress so far this year and how we are thinking about the transaction market outlook for Q4 and into 2027. Our CFO, Toni Sanzone, will focus on our results and guidance and touch upon aspects of our portfolio and balance sheet. We are joined by Brooks Gordon, our Head of Asset Management, to answer your questions.
Jason Fox: Starting with our investment activity. Year to date, we have completed approximately $1.6 billion of investments at a weighted average initial cash cap rate of 7.5%. Cap rates have moved incrementally higher compared to the H1 of the year. The investments we closed during Q3 and those we expect to close in Q4 have cap rates averaging in the mid to high sevens. That translates to average yields well into the nines and approaching double digits in some cases. We continue to invest across a range of property types and cap rates, with most of our investment volume so far this year going into warehouse and industrial properties, consistent with what we have done in recent years. Similarly, from a geographic perspective, the mix between the US and Europe has remained broadly in line with what we have done historically.
Jason Fox: Our existing portfolio remains a meaningful source of investment opportunities, including expansions, build-to-suits, and redevelopment projects. Supported by our Carey Tenant Solutions initiative, these projects allow us to deepen tenant relationships while deploying capital at attractive returns. Currently, we have 11 projects underway that will add approximately $325 million to our investment volume over the next 12 to 24 months, including about $95 million scheduled to deliver during Q4. We continue to find these projects have higher cap rates and longer lease terms than traditionally sourced investments. Turning our attention to Q4 investment activity specifically. As the broader transaction market continues to adjust to higher rates, it has added some uncertainty around Q4 deal timing, particularly for deals in our pipeline tied to broader corporate transactions that may take longer to close in the current environment.
Jason Fox: If those transactions remain on their anticipated timelines, we could see a path to the top half of our investment volume guidance range. Until we have greater visibility, however, we are maintaining a measured outlook for the remainder of the year and only moderately raising the low end, resulting in an overall range of $1.8 to $2.1 billion. Moving to our sources of capital. Our balance sheet remains in exceptional shape with ample liquidity, including about $540 million of forward equity available for settlement, and leverage at the low end of our target ranges. As we look further ahead to next year, we expect to generate approximately $300 million of annual retained cash flow from our real estate portfolio, providing another meaningful source of equity capital. We also retain the flexibility to pursue accretive asset sales in addition to ordinary course dispositions.
Jason Fox: Depending on investment activity and relative pricing, we can lean further into that source of capital if needed. Beginning in H2 2027, our Lineage shares will provide another source of liquidity. Together, these sources position us very well to continue deploying capital accretively throughout 2027 without needing to access the equity capital markets. With our funding needs well covered and limited refinancing requirements, we are approaching 2027 from a position of strength. The key remaining questions, therefore, are how quickly will sellers adjust to the higher rate environment, and what will that mean for investment activity? While we have started to see cap rates on comparable deals move higher, not all sellers will alter their expectations immediately, which can create a period where bid-ask spreads widen and transaction activity slows.
Jason Fox: If long-term rates remain elevated, however, we would expect to see the upward pressure on cap rates to continue next year. Ultimately, that should create more opportunities to transact at initial cap rates in the high 7s and in some cases into the 8s. In the meantime, we are continuing to pursue attractive opportunities while pushing for yields and returns that reflect current market conditions, taking into consideration both our spot cost of capital and the more favorable pricing achieved on the capital we have already raised. Given our diversified approach across property types and geographies, we expect to see a wide range of cap rates and believe we are well equipped to find opportunities where pricing has adjusted appropriately and spreads remain attractive. It is also worth remembering that most of our investment activity comes from sale-leasebacks, which are often driven by a company's capital needs.
Jason Fox: Frequently, there is a specific use of proceeds, whether that is funding growth, pursuing M&A, or strengthening their balance sheet. As a result, many of these companies need to access capital within a defined timeframe, which we believe should continue to support attractive investment opportunities in 2027. Our focus on sale-leasebacks also gives us greater pricing power, and our expectation is that we will see pricing move faster than in other areas of the net lease market, particularly those focused on smaller investment-grade commodity retail. In addition to external growth, a meaningful portion of next year's earnings growth is already embedded in our portfolio. We expect contractual same store growth in 2027 to be slightly above the mid 2% range we anticipate for this year, reflecting current inflation forecasts and the fact that almost half of our rent escalations are tied to CPI.
Jason Fox: Combined with our relatively high rent bumps, that gives us a unique profile amongst our net lease peers, providing a more predictable source of growth, a hedge against rising inflation, and making us less dependent overall on transaction market conditions to drive earnings growth. Let me pause there and hand the call over to Toni to discuss our results, guidance, and balance sheet in more detail.
Toni Sanzone: Thank you, Jason, and good morning, everyone. Before I get started, I would like to quickly note our new investor presentation. We have updated and expanded it to provide a more comprehensive overview of our portfolio, strategy, and the key drivers of our growth, and you can find it posted to the investor relations section of our website. Starting now with earnings and guidance. AFFO per share for the Q3 was $1.33, up $0.08 or 6.4% year over year, driven by the continued strength of both our investment activity and rent growth, partly offset by the impact of settling forward equity. The $0.01 decline in AFFO per share compared to the Q2 was mainly a function of timing for other lease-related income, which was higher in the Q2, as anticipated and built into our initial guidance.
Toni Sanzone: For the full year, we further raised and narrowed our expectations for 2026 AFFO per share to between $5.23 and $5.29, increasing the midpoint by $0.03 and implying year over year growth of 5.8%. As Jason mentioned, we believe the AFFO per share growth we will deliver this year will be among the strongest in the net lease sector. While the underlying drivers of our growth remain strong, our AFFO guidance implies a lower Q4, partly reflecting the impact of rent abatements associated with certain re-leasing activity, which I will come back to in a moment. Our portfolio continues to perform well, with strong tenant collections and no new rent disruption from credit events. During the Q3, we collected rent for the full period from Hellweg and received its previously outstanding June rent payment, contributing to those unexpected rent collections.
Toni Sanzone: As a result, we are lowering our estimated potential rent loss from tenant credit events to between $3 million and $5 million, or 25 basis points of ABR at the midpoint, down from our prior estimate of $7 million to $10 million. We have made good progress reducing our overall Hellweg exposure this year, moving it out of our top 25 tenants by the end of the Q3. This included executing new leases with stronger operators, recapturing close to 100% of the prior rent, with rent scheduled to commence between late 2026 and mid-2027, following Hellweg's remaining lease terminations at the end of November. We expect to complete the sales of the other Hellweg stores over the remainder of this year and into early 2027.
Toni Sanzone: Other lease-related income for the full year is expected to total in the mid-$30 million range, inclusive of the proceeds from the Hellweg bank guarantees, which we expect to draw upon in Q4. Our Q3 results continued to benefit from the strength of our internal growth built into the portfolio, with contractual same-store rent growth of 2.6% year over year, reflecting the impact of higher inflation on lease revenues, as well as certain multi-year rent escalations occurring this year. With nearly half of our rent coming from leases tied to CPI, we expect inflation to remain a tailwind to contractual same-store rent growth, trending slightly higher over the next few quarters and remaining in the mid to high 2% range throughout next year, supporting what we believe will be the strongest embedded internal growth in the net lease sector.
Toni Sanzone: Comprehensive same-store rent growth for Q3 was 2.2%, benefiting from improving occupancy and a strong quarter of rent collections. As we've noted on prior calls, comprehensive same-store rent growth can fluctuate from period to period due to certain impacts in a quarter which are more one time in nature. Over the long term, however, we continue to expect comprehensive same-store growth to trail contractual in line with our historic average of about 100 basis points. We had another strong quarter on the re-leasing front, recapturing about 105% of prior rents and adding about nine years of incremental weighted average lease term on just under 1% of total ABR. Our Q3 re-leasing activity included a 10-year lease extension on a property leased to one of our top tenants, Nord Anglia, completed in conjunction with an expansion project.
Toni Sanzone: This is a good example of how we work closely with our tenants to support their growth while enhancing the value of our real estate. The transaction also provided for a one-time rent abatement that will primarily flow through Q4. Occupancy increased by 10 basis points to 98.6% at the end of Q3, reflecting our Q3 disposition activity, which was mainly comprised of vacant asset sales. During the quarter, we completed asset sales totaling $27 million, bringing total dispositions for the first nine months of the year to $273 million. Based on our current visibility, we've tightened our expected dispositions for the full year to between $350 and $450 million. Moving to expenses and non-operating income. Property expenses were lower in Q3, reflecting the timing of demolition costs, which we had previously anticipated would be higher in H1.
Toni Sanzone: Additionally, during Q3, we had lower property tax expenses as a result of tenant payment of amounts we were previously accruing. For the full year, we have reduced our expectation for property expenses to between $54 and $57 million. We've also lowered our full year expectation for tax expense to total between $40 and $43 million, resulting from international leasing activity, tax structuring optimization, and our current visibility into the composition of our investment activity. G&A expense for the full year is now expected to total between $104 and $106 million, representing a slight increase from our previous guidance. Non-operating income totaled $4.7 million for Q3, which is also a reasonable quarterly run rate for Q4.
Toni Sanzone: This line item includes the $2.8 million quarterly dividend on our equity stake in Lineage, interest income on cash deposits, and realized gains and losses on foreign currency hedges. As a reminder, hedging impacts are generally offset by changes in foreign denominated revenues and expenses, resulting in no material impact on our AFFO. Moving to our balance sheet and capital markets activity. We remain well ahead of our capital needs after raising substantial debt and equity capital during the H1 of the year to pre-fund our investment activity and prepay our October bond maturity. That execution has left us very well positioned, particularly given the current capital market backdrop. The weighted average interest rate on our debt was 3.3% during the Q3, increasing marginally versus the Q2 as expected, reflecting the bond refinancings we completed earlier this year.
Toni Sanzone: We expect interest expense to increase further in the Q4 and into next year as those higher rates continue to flow through. Looking ahead, our bond refinancing needs remain very manageable, with only one bond maturity in each of 2027 and 2028, both denominated in euro. Consistent with our prior approach, we would expect to refinance these maturities in the same currency, allowing us to continue benefiting from the lower cost of debt in Europe. On the equity side, we settled 2.3 million shares under forward sale agreements during the Q3 for net proceeds totaling approximately $150 million, leaving us with about $540 million of forward equity available to settle, which was raised at around a $73 stock price.
Toni Sanzone: At the end of the Q3, net debt to adjusted EBITDA was 5.5x, excluding the impact of unsettled forward equity, which is at the low end of our target range. Inclusive of unsettled forward equity net debt to adjusted EBITDA was 5.2x. Our liquidity position also remained strong, ending the Q3 at $2.6 billion, including almost full availability on our $2 billion credit facility. We therefore continue to have ample runway to fund our investment activity for the remainder of the year and throughout 2027 without the need to raise additional equity capital. Lastly, turning to our dividend. In September, we raised our quarterly dividend 4.4% year over year to $0.95 per share, or $3.80 annualized, while maintaining a healthy payout ratio of 71%.
Toni Sanzone: At our current stock price, that equates to an attractive dividend yield of around 6%. With that, I will hand the call back to Jason.
Jason Fox: Thanks, Toni. Despite the uncertainty around interest rates and how that will flow through to net lease investments in the broader REIT market, 2026 is shaping up to be a very strong year for WP Carey. We expect to have one of the highest levels of earnings growth in the net lease sector, with AFFO growth approaching 6%, exceeding last year's already strong year-over-year results. We expect to maintain healthy deal volume, supported by attractively priced capital that we raised in H1 2026. Our portfolio performance has remained steady, with our rent loss numbers trending lower throughout the year.
Jason Fox: While it's too early to set specific expectations for 2027, we're encouraged by early signs of repricing we're seeing in the market, as well as our ability to move cap rates higher on transactions in our pipeline, particularly on sale-leasebacks driven by sellers with defined capital needs and timelines. If that trend continues, we expect to see increasingly attractive opportunities next year to put the capital we've raised to work. We're confident that we can fund deals in 2027 without needing to raise new equity through a combination of the forward equity dry powder we have, retain cash flow, ordinary course dispositions, and accretive reinvestment for our Lineage position. We also see a meaningful portion of next year's earnings growth already embedded in our portfolio through rent escalations that have upside if inflation runs higher.
Jason Fox: Taken together, we believe the building blocks remain firmly in place to continue delivering durable and competitive returns for our shareholders through a combination of our earnings growth and our attractive and well-covered dividend yield. That concludes our prepared remarks, so I'll hand the call back to the operator for questions.
Operator: Thank you. At this time, we will be taking questions. If you would like to ask a question, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press star then the number 2. Again, that's star 1 to register a question at this time. Today's first question is coming from Brad Heffern of RBC Capital Markets. Please go ahead.
Brad Heffern: Yeah. Hey, everybody. Thanks for the question. Jason, maybe just following up on your last comment there about 2027. Post all the business transformations you have talked about mid-single digit AFFO growth and the double-digit TSR. Is there any reason that we shouldn't expect that next year, either just because the cost of capital has gone higher or cap rates maybe not adjusting? Any other reasons that you can think about?
Jason Fox: Yeah. It's a good question. It's a bit early to talk about details for 2027, but some of the things that you mentioned are in play. There are higher rates. That's going to be a headwind for everyone. Higher financing costs mean more interest expense and maybe tighter spreads too, and it probably brings some uncertainty around in the transaction markets. That's something that really the REIT industry is going to have to navigate next year. As I also mentioned, we think we have a lot of factors that position us very well to still generate interesting and competitive growth next year. Talked about the type of deals that we do and our ability to push cap rates higher. We have already seen that. Toni went through the details on the capital that we have already raised at attractive pricing. That's going to continue to allow us to invest accretively.
Jason Fox: Our bumps. We have a portfolio with high same store contractual rent increases. A large percentage of those are indexed to inflation, so that could provide some offsets to higher interest expense. We do think that we will be competitive in terms of growth relative to the peers in the sector. I think that looking at the dividend yield is important as well. Combining those two, we should be able to continue to deliver some interesting returns to our shareholders.
Brad Heffern: Okay. Thanks for that. You walked through some of the funding options for 2027 without raising equity. You didn't bring up the Vegas construction loan. I know it matures mid 2027. There's a couple of extensions there as well. Would you expect to get that back and that potentially to be a source of capital, or would you expect that to stay in place?
Jason Fox: Potentially H2 of the year, I would say. No real updates right now. We have mentioned before that our development partner controls the refinancing decision. There is a little bit of leasing to do, I think. It is probably 90% leased right now, and there is one unit that once that gets leased and there is a lease negotiation in place now, I think that the developer could go to market. Obviously not a great time to be looking at the financing market. I think you know that the
Jason Fox: coupon on the loan that we have, it is 6% right now, but it is worth noting that that ratchets up to 8% starting in January. So there is potential for upside for us as keeping that loan in place, and obviously if it is refinanced, that will provide some more liquidity.
Brad Heffern: Okay. Thank you.
Jason Fox: Yep.
Operator: Thank you. The next question is coming from John Kim of BMO Capital Markets. Please go ahead.
John Kim: Thank you. You talked about pricing adjusting quicker on sale-leasebacks. I am wondering if you are seeing the same thing on build-to-suit developments, and if you could just comment overall on the investment spreads you expect, just given your cost of capital changes and where you see cap rates moving.
Jason Fox: Yeah. Certainly, on sale-leasebacks where there are defined proceeds earmarked for the seller. They are also more complex, so that tends to reduce the buyer pool some, and we certainly stand out from an execution standpoint. I think some of those carry over to build-to-suits, where you have an added layer of complexity. We can come in and purchase land and fund construction from the get-go. There is a forward component to build-to-suits as well, in a rising interest rate environment, that tends to give you some pricing power also. So we have not added a lot of build-to-suits over the last quarter, so I cannot say that it is flowing through into our pipeline or into our closed deals right now. But we anticipate as we see more build-to-suits, that there will be some ability to continue to pass higher rates through. I think you had a last question there.
Jason Fox: What was the final question you asked?
John Kim: Yeah, just investment spreads. Where you see that.
Jason Fox: Yeah. It is a bit of a nuanced question when we think about spreads. Certainly cost of capital has gotten more expensive and spreads have gotten tighter across the REIT sector. But for us, how we look at it right now, given our liquidity position and ability to fund deals with pre-raised equity or free cash flow and dispositions if needed, that allows us to really continue to invest accretively next year without having to access the equity market. So when we think about spreads that capital matters. We do not solely tie new deals to where our spot cost of capital is. Obviously, that is a factor that we consider, and it is part of our underwriting and pricing. But the actual increase we will generate is really based on the previous capital that we use to fund new investments, and that is much cheaper than where we can raise capital right now.
Jason Fox: Spreads are interesting, especially as we push cap rates higher. We will have to see where the equilibrium is once we see a more stable place in rates as well.
John Kim: Okay. My second question is on the interest rate environment and how you are seeing refinancing headwinds in 2027. I know a lot of your swaps and maturities, some of that is back-end loaded next year. But if you can comment at all on what kind of earnings impact you are seeing from that.
Jason Fox: Yeah. Toni, do you want to talk about that?
Toni Sanzone: Yeah. I think we addressed all of our 2026 maturities earlier this year. As we look into 2027, we have one Eurobond, EUR 500 million, maturing in April. That is our biggest refinancing risk, if you will. I think as we have said before, we still believe that we can replace Eurobonds with Eurobonds, and that those are trading probably 100 to 150 basis points, maybe right now at the lower end of that, inside of where the US bonds are trading. We still expect to see some spread to the coupon on the maturity that is in April, but we do think that that is manageable. It certainly will contribute to some of the headwind next year, but we do agree that will be manageable for us.
John Kim: Thank you.
Jason Fox: You are welcome.
Operator: Thank you. The next question is coming from Greg McGinniss of Scotiabank. Please go ahead.
Greg McGinniss: Hey, good morning. On those projected Q4 acquisitions, an additional $330 million or so at this point, are you already seeing the high 7% cap rates on those deals? Does that level of volume, maybe the $500 million for the quarter, whatever it happens to be, feel like a fair minimum for quarterly acquisitions as cap rates continue to adjust, seeing enough at that kind of high 7%, 8% bogey?
Jason Fox: Yeah. We have been able to move cap rates higher. If you look at the H1 of the year, we were transacting in the low to mid 7s, and what we've closed since then, a little bit in the Q3 and the beginning of the Q4, those have averaged in the mid to high 7s. So we are seeing some movement. That's, again, both closed deals, but it's also reflective of the pricing that's in our pipeline right now. So kind of think mid to high 7s. Look, we hope to continue to be able to push cap rates higher if rates stay at or above 5% on the 10-year Treasury. The pipeline is interesting right now. I would reference $200 million to $300 million of deals that are in process.
Jason Fox: We do have some larger deals at earlier stage at the top of the funnel that could materialize, but some of those are part of broader corporate transactions, so unclear exactly on timing or execution's a little less predictable. But we are seeing activity, and the activity is at this higher pricing level that we referenced earlier.
Greg McGinniss: Okay. Thank you. With the rent abatement on Nord, should we just think about that as kind of a quarter of free rent or maybe 4 months of free rent? How should we think about that in relation to how it's going to impact Q4 and what we should be pulling out of the model?
Jason Fox: Toni, you want to tackle that?
Toni Sanzone: Yeah, that is right. On the Nord transaction that I specifically referenced, we have 4 months of free rent there on just the one property. That is about $3 million, $3.5 million. In exchange, we extended the lease term by 10 years, had rent recapture there of over 100%. That is all done in connection with an expansion with an attractive yield on newly invested capital. So that free rent specifically, a little bit in Q3, the majority in Q4, then really baked into our guidance. I mentioned that we are active on the re-leasing front. There is potentially one or two transactions that would also have rent abatement baked into Q4. In total, could be a 2 to 3 cent impact in Q4, that is part of the dip that you are seeing between Q3 and Q4.
Toni Sanzone: Again, really depends on whether the transactions close as we expect them to, but that is what we have embedded in our guidance.
Jason Fox: Okay. Toni, is there anything else notable in Q4 assumptions that we should be aware of that is creating that range?
Toni Sanzone: Nothing outside of the assumptions that we provided. I think you will look at some of the midpoints of the expense ranges. There is a little bit of seasonality in there. I think if you factor that in with the rent abatements, it is probably reasonable not to look at Q4 as a run rate or a starting point for 2027 growth. I think if you look at Q3, that is probably a better jumping off point from which to grow for 2027.
Greg McGinniss: Okay, great. Thank you.
Operator: Thank you. The next question is coming from Smedes Rose of Citi. Please go ahead.
Smedes Rose: Hi, thanks. I guess I just wanted to follow up on the rent abatements as you look into 2027. Is it fairly typical if someone re-ups for the lease that you would give them a certain amount of free rent, and is that something that might come into play across the course of 2027 for you?
Jason Fox: Brooks, you want to tackle that?
Brooks Gordon: Sure. It is not atypical, but it is not something that we do particularly often. It is one of a number of levers we have in a lease negotiation. Rental rate potential, some rent abatement, TIs, et cetera. So it is just another tool in our toolbox in these particular deals that emerged as the preferred one in the negotiation. But I would not expect that to be a trend.
Smedes Rose: Okay. You mentioned that cap rates are adjusting, something we are hearing from other companies. I was just wondering, as you look out across potential investment opportunities, are there any areas where cap rates are maybe changing more quickly outside of your core food groups, if you will, or anything there you can share?
Jason Fox: Yeah, sure. We mentioned on sale-leasebacks, especially where we target sub-investment grade industrial properties. That is where we have had the most pricing power at this point in time for the reasons that I mentioned earlier. Probably on the other end of the spectrum, it is going to be retail. In particular investment grade credits, we can see adjustments or changing cap rates to take a little bit longer there. There is more capital chasing those, and I think investment grade retailers tend to have more capital options than, say, a company that is looking to do a sale-leaseback.
Smedes Rose: Okay. Thank you.
Operator: Thank you. The next question is coming from Jason Wayne of Barclays. Please go ahead.
Jason Wayne: Morning. Thanks for the question. Just on the rent loss assumption proved to be conservative pretty much every quarter this year. Just wondering if you could walk through your tenant credit watch list at this point, and if you are seeing any change in tenant credit trends recently.
Jason Fox: Want to take that, Brooks?
Brooks Gordon: Yeah, sure. Overall credit risk has improved. Several companies have come off our watch list. Hellweg comes off completely in Q4, as Toni Sanzone mentioned. We've, as you said, consistently reduced our rent loss assumption over the course of the year. We started from a conservative place there intentionally. One tenant we've previously discussed is Cornerstone, around 60 basis points. Another we've recently added is Hertz. It's also about 60 basis points. Everything else is much smaller in the credit watch list. Maybe just quickly on Hertz, we own three of their most important sites, serving airports at SFO, Newark, and Logan. It's possible they'll seek to restructure their balance sheet, but very similar to Cornerstone, we wouldn't expect any impacts on us and our leases. Should either of those restructure, expect to have improved credit on the other side of that.
Brooks Gordon: Broadly speaking, credit watch has come down, and will come down further as Hellweg comes off the list in Q4.
Jason Wayne: All right. Got it. Thank you.
Operator: Thank you. The next question is coming from Michael Goldsmith of UBS. Please go ahead.
Michael Goldsmith: Good morning. Thanks a lot for taking my question. It seems like you have already moved from low to mid 7% cap rates in the H1 to mid to high in the current pipeline. You kind of mentioned visibility or potential for cap rates to move to the high 7s and even into 8%. I guess, how quickly would you expect that to play out? Then also if cap rates do start to get to 8%, is that back to a business as usual type environment? Thanks.
Jason Fox: Yeah. Timing is hard to predict, and maybe stating the obvious. A lot of it is going to depend on where and when interest rates settle, and that is obviously very complicated. Lots of different factors influencing rates. I think we first need to see some stability in long-term yields, and we do not have that right now. Maybe a hypothetical is if we see a month or 2 of stable rates, say around 5%, then I think we can say that maybe the real estate market will settle around what the right pricing is. In our world, that probably means somewhere in the high 7s on average. If you think about it where we are right now, we are still in the period of volatility, so it is hard to predict exactly how quickly that could happen.
Jason Fox: Maybe it is worth noting again, we do think the types of deals that we target, in particular sale-leasebacks, pricing there will adjust fastest and maybe other areas of retail, for instance, may take a little bit longer. If things do settle into the high 7s or in around 8%, I think you are right. It is maybe business as usual. Keep in mind, we have raised a lot of capital at this point in time, and we are going to be comfortable and confident investing through 2027 without the need to raise any new equity capital. What we are going to pick and choose and continue to put capital to work. It will be measured, the approach we take. In some ways, if we have a rising rate environment, we can think of it as dollar cost averaging into it.
Jason Fox: We have well-priced capital that we can invest, and I think that gives us ability to continue to grow next year.
Michael Goldsmith: Got it. As a follow-up, what was I going to ask? Just to clarify, of those that are doing it at an 8x cap, are you actually having discussions right now at around 8x, or is that just more your expectation of where it ultimately settles if rate remains here?
Jason Fox: Yeah. Pipeline is mid to high 7x on average. I think there is always a range in what we do. I would say the range across the 7x into the 8x, depending on the deals. Certainly, the deal specifics matter. The rent bumps are really important. Maybe that is worth emphasizing when we are talking about mid to high 7x on initial cap rates, year one cap rates. With the bump structures, we are able to negotiate both inflation and/or kind of high and interesting fixed rate increases. That translates or generates average yields over the life of the lease well into the 9x. That is still generating spreads that are within our historical target range of 200 to 300 basis points over a spot cost of capital. Obviously, it is going to be more if we are factoring in the price at which we raised our forward equity.
Jason Fox: So yeah, there are discussions happening right now in that ZIP code, and depending on the deal and the bump structure, it could vary a little bit, but that is where the averages are right now.
Michael Goldsmith: Got it. Now I remember what I was going to ask is just Q3 investment volume was a little bit slow. I know Q3 is kind of like a seasonally slow period for you, but did any deals that were set to close in Q3 get repriced and have potential to close now in Q4?
Jason Fox: Yeah. I think the way you characterize that is right, and that Q3 can be slow for us. It is not that unusual, especially in Europe for the summer to be quite a bit slower. We had one deal, about a $100 million deal that closed on 1 October. So that, I guess, could have just easily have been 30 September, and fallen into Q3 as opposed to Q4. What is in our pipeline right now, call it $200 to $300 million. I would not suggest those are deals that are holdovers from Q3. Most of them kind of came into the top of our funnel during Q3 or perhaps early Q4. I do not think there was an expectation that the ones in our pipeline now could have or should have closed earlier.
Michael Goldsmith: Thank you very much. Good luck in Q4.
Jason Fox: Yeah. Thank you.
Operator: Thank you. Our next question is coming from Jana Galan of Bank of America. Please go ahead.
Jana Galan: Thank you. Good morning, and congrats on a strong Q3. I know still a lot of unknowns in the transaction market, but curious if you are seeing a difference in volume or willingness to negotiate in Europe versus the US.
Jason Fox: Yeah, in many ways, the Europe environment kind of mirrors what we are seeing and talking about in the US. Again, headlines are similar. Increased rates, volatility, higher inflation, higher energy prices. All of those things like they have done in the US have added a degree of uncertainty. So yeah, there is wider bid-ask spreads over there. Europe has been choppy over the last couple of years, so I would not say that is anything new. But we are still finding pockets of activity. Year to date, about 30% of our deal volume has been in Europe. I think the pipeline is at similar levels. And most of what we are doing, I think pretty much all of what we are doing over there are sale-leasebacks. And we are seeing those at cap rates that are kind of in line with the cap rates in the US.
Jason Fox: Those can still generate maybe wider, more attractive spreads given the lower borrowing cost that we still enjoy in Europe. So I would not say there are big differences, but we are seeing activity over there with similar dynamics to what we are seeing in the US.
Jana Galan: Thank you. I just wanted to ask, there were press reports of WP Carey acquiring an education asset from another REIT. Just curious if there is anything you would want to comment on why that was attractive to you guys and growing in the education space.
Jason Fox: Yeah, sure. The asset we bought is one of the schools run by Nord Anglia. They are a current tenant of ours. I think they are now maybe number 4 in our top 25 list. We like the company. They are one of the largest, I think maybe the largest international K through 12 private school operator in the world, with close to 100 schools across 30 countries. We particularly like the schools that we own. We have four of them now. One in Orlando, one in Miami, one in Houston, and the most recent deal we bought was in Chicago. We like the schools. They are highly respected in their markets. But also you think about the operational performance. They have very attractive site level coverage as well. This was just a tenant that we knew well. We had comfort with them.
Jason Fox: We know the management team well, and we think we executed a good deal, and we like doing follow-on deals with our tenant base as well. Brooks mentioned earlier that we have done some expansions and some releasing with them as well. So it is a very good relationship and perhaps there will be more opportunities there.
Jana Galan: Thanks, Jason. Appreciate the detail.
Jason Fox: Yeah, you are welcome.
Operator: Thank you. Our next question is coming from Jamie Feldman of Wells Fargo. Please go ahead.
Jamie Feldman: Great. Thank you. I was hoping you could talk a little bit more about your disposition guidance and the change to it, and just are deals falling out of bed? Are you just not getting the pricing you wanted? Do you just want to wait and see what changes here? Just maybe a little bit more color around the types of assets you were thinking about selling and why things have changed.
Brooks Gordon: Yeah. Overall, as we've discussed in previous several calls, we retained a lot of flexibility, and that was indicative in our wide disposition guidance range. It's really just a matter of we've been simplifying that down and refining it as we go through the year. So it's not that deals have fallen out of bed, it's just we've decided to narrow that, the size there. We have ample capital, as Jason Fox described. In 2027, as Jason Fox alluded to in his remarks, we retain a lot of optionality. There's a number of different levers we can pull on to generate incremental accretive capital. But we'll evaluate the market conditions at the time, the pipeline at the time, and our overall amount of capital we've raised to make and inform that range going into 2027. But I wouldn't read too much into the range.
Brooks Gordon: It was just quite a wide range starting the year that we've continuously narrowed.
Jamie Feldman: Okay. Thank you for that. Then, I guess, just thinking about your capital sources before you raise equity. Can you frame the magnitude? I know you talked about multiple buckets there, but let's just say a ton comes your way. What would that look like in terms of buying power when you think about all the options you discussed?
Jason Fox: Yeah. We have, call it $540 million of unsettled forward equity, raised at around $73 a share. We generate about $300 million of annual free cash flow. I think the expectation is that next year we'll refine it, obviously, when we issue guidance, but we'll generate call it several hundred million dollars of proceeds from normal course dispositions. In the next year in particular, we also have this Lineage stake that will unlock. So that's another, depending on where their stock price is, $150 to $200 million of capital. So you take all that together, you factor in the largely undrawn revolver, the fact that we're right now at the low end of our target range for leverage.
Jason Fox: So, we feel that we can invest at similar levels to what we did last year, and what we expect to do this year in 2027, without the need to raise any equity. I think that gives us a lot of comfort and confidence to continue to invest. Of course, we're going to push on pricing and certainly monitor where spot cost of capital is, and that'll inform us on how we price deals. But we're pretty well set up to execute the business plan next year without the need to raise equity.
Jamie Feldman: Okay, great. Thank you for that.
Operator: Thank you. The next question is coming from Anthony Paolone of JPMorgan. Please go ahead.
Anthony Paolone: Thank you. My question is looking out into 2027 and trying to just think through what you talked about with limited debt refinancing, different things like that. Is it fair that there's no greater headwinds in 2027 as you sit now than there were in 2026? Do they seem pretty comparable? I guess where I'm going with that is, 6% growth this year is pretty strong, and I'm trying to think whether there's anything in the way of that other than the deal activity for 2027.
Jason Fox: Yeah. Certainly deal activity and spreads are going to have a big impact. Obviously, what's built into the portfolio right now in terms of the rent bumps, that's going to be a meaningful driver and also help offset, especially the inflation component of our rent increases, help offset at least some of the rising interest expense. The other details, I think a lot of the details will matter. We'll get into those when we issue guidance in February. But we think we're well positioned. We'll have some leasing activity that we'll do as well next year, and all that flows through to our comprehensive same store. But we think the drivers are in place to have another year that'll generate certainly interesting growth relative to what we're seeing and maybe expecting from the peers. But too early to get into any details on all the drivers.
Anthony Paolone: Okay. Got it. Then just my second one. I think, Jason, in the past, when you've been asked about competition in the market from the various PE shops and asset managers that have gone into net lease, you've said it's been limited. Just can you update us on your thoughts there now? Also, we've been hearing more about just the bonus depreciation being a driver behind some deals, and whether that's something you see or whether it has any implications in the market from your point of view.
Jason Fox: Yeah. In terms of competition, a lot of the competition that we see, and we see from time to time, I wouldn't say that they're any more active than they've been over the last year or 2 since a number of these funds have formed or some of the larger asset managers had bought smaller fund operators. Most of them are private equity. I wouldn't say we run into them any more so than we have in the past. Maybe one thing that has changed a little bit is that private equity funds do tend to underwrite the higher leverage, so the higher rate environment is likely to be more impactful to their model. We'll see how that impacts things. But it doesn't feel like the competitive environment is any different than it has been over the last year or 2 from a new capital standpoint.
Jason Fox: We've competed well up to this point, and there's probably not a lot of reason to think that could change. In terms of bonus depreciation, I think for certain property types, that has become a bit of a driver around pricing, and obviously not all real estate will qualify for bonus depreciation. Things like we've seen some one-offs in car washes and C-stores that should qualify for bonus depreciation, at least the vast majority of the purchase price. I think when those trade in smaller chunks, especially individual assets, I think we've seen or heard about some fairly aggressive pricing around that. But it doesn't really impact or flow through to the bulk of what we're doing, which are big industrial sale-leasebacks and portfolio deals.
Anthony Paolone: Okay. Thank you.
Jason Fox: Yep, you're welcome.
Operator: Thank you. The next question is coming from Spenser Glimcher of Green Street Advisors. Please go ahead.
Spenser Glimcher: Thank you. I know you guys obviously haven't issued 2027 guidance. It is too early to talk numbers, but just curious your higher level thoughts on dispositions in the current environment. So even with cap rates moving higher, if you cannot find the same opportunistic divestment opportunities, how important is pruning the portfolio just from an asset management standpoint, regardless of executing at better prices for you guys?
Jason Fox: Yeah. Brooks, do you want to tackle that?
Brooks Gordon: Sure. We have navigated strategic portfolio dispositions through every sort of cycle, so I think we are very well set up to accomplish that. From a capital creation perspective, if we choose to increase the disposition cadence to create incremental accretive capital, in many cases, those are situational, where maybe a tenant really wants to buy back a property or a portfolio of properties, and we can drive pricing, which is a little less tied to kind of the market interest rate dynamics. So there is a lot of different types of disposition transactions. I would say many of ours are not your kind of true investment sales. They are very situationally specific and so have a little less exposure to directly the kind of the ups and downs of interest rate markets. But it is a fair observation, something we certainly watch closely.
Brooks Gordon: But I think we have a lot of flexibility to certainly close out 2026 and then into 2027 to have a number of options at our disposal.
Jason Fox: Yeah. The only thing I will mention, Spenser.
Spenser Glimcher: Okay.
Jason Fox: The heavy lifting in terms of shifting the composition of the portfolio, that is in the past. A lot of that was the self-storage operating assets that we sold. And if you go back a couple of years, obviously there was a lot of office sales there as well. So pruning the portfolio is more around the margins, and as Brooks mentioned, there will be opportunities for us to pick and choose which ones to do. But I do not think it is going to have a big impact on how we prune and kind of manage for risk.
Spenser Glimcher: Okay, great. Thank you for all that color. And then maybe just one follow-up on the Nord Anglia. Can you just update us on your thesis in general for childhood education, just beyond this one operator? And how large of a concentration would you be comfortable for that segment?
Jason Fox: Yeah. The vast majority, maybe almost all of it at this point that we own in K through 12 education is Nord Anglia. We like the operator, and in particular, we like the schools that we are in. I think it is a case by case. We want to underwrite strong operators, site level coverage. It makes a lot of sense, and we want to be in markets where we think there is demand and kind of the right supply balance at the same time. So I think we will pick and choose. I would not say it is a strategy where we are trying to expand our educational portfolio. It is more opportunistic at this point. Maybe it is worth noting we do have some higher ed as well with medical schools, which we believe that supply-demand dynamic is under supplied. So that was a bit of a thesis that we backed there.
Jason Fox: Perhaps there is some more deals to do down the road there, but nothing specific at this point in time.
Spenser Glimcher: Okay. Thank you.
Jason Fox: You are welcome.
Operator: Thank you. The next question is coming from Jim Kammert of Evercore ISI. Please go ahead.
James Kammert: Good morning. Thank you. Just one quickly, please. Is it safe to assume that given it's a very competitive transaction market, clearly, but is it reasonable to assume that WP Carey is really focused on really even pushing escalators further in terms of your lease negotiations on new deals, particularly the sale-leasebacks? Can you get that today?
Jason Fox: Yeah. That's an important component of the terms in our deals. When you think about the economics of a sale-leaseback, there's the going-in cap rate, which is obviously very important, but the bumps are also very important. Flat leases, we should be able to demand much higher going-in cap rates if we chose to go that route. Instead, there is a focus for us to make sure that we can drive a fair amount of growth. Through, we'll call it internal growth through the portfolio, so that as we get larger, we won't have as much of an issue of having to put up more and more deal volume. So it's certainly a focus of ours. We've been very successful doing it. I think generally speaking, we do want to set rents or the bumps that are in line with market rents.
Jason Fox: I think to the extent we can get CPI, we've been doing that. And on average, I would say it's mid to high 2s right now in our fixed increases. And then CPI is CPI, and obviously the expectations what those bumps look like will depend on a lot of factors, in particular the region in which we're operating.
James Kammert: Appreciate it. Thank you.
Jason Fox: You're welcome.
Operator: Once again, ladies and gentlemen, that's star one to register a question. Our next question is coming from Greg McGinniss of Scotiabank. Please go ahead.
Greg McGinniss: Yeah, just one more from me. Is the expectation that the Lineage shares will be sold right when they unlock? It's a 6.9% cost to equity. Just thinking how you guys compare that to your forwards that are slightly more expensive.
Jason Fox: Yeah. I wouldn't say that the day that they're available to trade, we're going to hit the sell button. I think that we will make sure that we're not selling into some bad trading environment or dynamic, I should say, because they do have a lot of capital locked up. Probably safe to say over a quarter or two, we would look to liquidate that and reinvest into core net lease. All we're recognizing right now is their dividend yield. We'll have a step up. It'll be accretive capital at almost any price at this point in time or any expected price.
Greg McGinniss: Great. That's it for me. Thank you.
Jason Fox: Okay. You're welcome.
Operator: Thank you. I'm showing no further questions. I'll now turn the call back over to Mr. Sands.
Peter Sands: Thanks, Donna. Thanks everyone for joining us and for your interest in WP Carey. If anyone has additional questions, please call investor relations directly on 212-492-1110. That concludes today's call, so you may now disconnect.
