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spk06: Hello and welcome to WP Carey's first quarter 2021 earnings conference call. My name is Jessie 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 today's program over to Peter Sands, head of investor relations. Mr. Sands, please go ahead.
spk08: Good morning, everyone. Thank you for joining us this morning for our 2021 first quarter 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 WPKerry.com, where it will be archived for approximately one year and where you can also find copies of our investor presentations and other related materials. And with that, I'll pass the call over to our chief executive officer, Jason Fox.
spk12: Thank you, Peter, and good morning, everyone. I'm pleased to report that many of the positive trends we saw in the fourth quarter of 2020 have continued into 2021. We've had a very strong start to the year on several fronts. First, we've already on pace to exceed our initial expectations for investment volume in 2021. And our near-term pipeline is as strong, perhaps even stronger, than it's ever been, with over $500 million of active deals at an advanced stage, much of which we expect to close during the second quarter. Second, we've delivered industry-leading rent collections throughout the pandemic and continue to have high confidence in how our portfolio will will perform going forward, especially in a macro environment where the U.S. and global economies are expected to improve as COVID cases decline and business activity rebounds. Third, we executed on two significant bond issuances during the first quarter, highlighting our access to very attractively priced capital, locking in record low coupons in both the U.S. and Europe, and refinancing the majority of near-term debt maturities with our next meaningful maturity now scheduled in 2024. In the past week, we were also placed on positive outlook by Moody's, which reflects the positive trajectory of our business and balance sheet and gives us confidence that we will continue to have access to attractively priced capital going forward. Fourth, we raised equity through our ATM, creatively funding our recent investment activity and modestly delivering compared to where we ended the fourth quarter. We also still have equity proceeds available through the equity forward we raised in 2020, So plenty of flexibility in how we fund our investment activity over the remainder of the year. The combination of closed investments, our active pipeline, strong portfolio performance, and raising capital at attractive spreads on new investments has allowed us to raise our AFFO guidance for 2021. Tony Sanzone, our CFO, discussed our guidance raise along with our results for the quarter and balance sheet activity. Tony and I are joined this morning by John Park, our president, and Brooks Gordon, our head of asset management. During the first quarter, we completed $214 million of investments, comprising $149 million of acquisitions and $65 million of completed capital projects. Our first quarter investments had a weighted average initial cap rate of 6.6%, and like virtually all of our investments, provide built-in rent growth, averaging 2.25% for those with fixed increases, which occur over long lease terms, averaging 23 years. Reflecting our diversified approach, our first quarter investments spanned most of our core property types, though the bulk of our deals continued to be in industrial and warehouse, which currently comprise about half of our portfolio on an ADR basis. I'll touch upon a few of the more notable deals from the first quarter. In February, we completed the $75 million sale leaseback of two packing, production, and distribution facilities, net lease to Prima Wawona, the leading vertically integrated grower, packer, and shipper of seasonal high-value summer fruit in the U.S. If you like peaches, there's a roughly one in three chance the last one you ate is processed in these facilities. The properties are strategically located in proximity to the tenants' farmland in California's Central Valley and represent the majority of its storage, processing, and distribution operations. a significant portion of which is cold storage. The tenant has invested significantly in the facilities, underscoring their criticality, and their triple net lease under a master lease for a 25-year term with fixed annual rent increases. During the quarter, we also completed the $52 million build-to-suit of a new industrial R&D facility in Germany, net lease to American Axle, which is a global Tier 1 supplier of automotive components and systems. including electric drive technologies. The facility is strategically located in a prime industrial park near the Frankfurt Airport and triple net lease for a 20-year term with rent increases tied to German CPI. Since quarter end, we've completed three additional acquisitions totaling $186 million, the majority of which relates to our second significant investment over the last six months in grocery retail. Specifically, in early April, We closed the $119 million sale leaseback of three hypermarket properties located in southern and central France, which rank among the tenants' top performing sites. Their triple net lease to Casino, one of the largest food retailers in the world. From an ESG perspective, this was also an opportunity to invest in a tenant committed to transitioning to renewable energy. The properties are on a long-term master lease with rent increases tied to French CPI. Including the transactions we completed in April, our investment volume year-to-date totals $400 million. In addition to accretive acquisitions, a meaningful contributor to our future growth comes from the rent increases built into our leases, a significant portion of which is tied to inflation. Given renewed expectations for higher inflation, I'll take a moment to provide a little extra detail on our rent escalations. 99% of our ABR is generated by leases with some form of built-in rent increases. 61% of ABR comes from leases tied to inflation. So if you enter a period of sustained inflation, we remain very well positioned for it to flow through as incremental rent growth. Of our leases with rent increases tied to inflation, the majority, representing 38% of total ABR, is based on uncapped CPI, with the largest category being those tied to US CPI. The other 23% of ABR that's tied to inflation includes leases with floors and or caps, which we refer to as CPI-based. Within this category, the average floor is around 1.5% on an annualized basis, and the average cap is approximately 3%. In an inflationary environment, if our 3% caps become relevant, it would likely mean that we would be achieving substantially higher same-store rent growth than we are today. For now, however, the floors continue to be more relevant than the caps, as drivers of annual growth in our leases. Finally, 35% of ABR is generated from leases with fixed rent increases, where the average increase is approximately 2% on an annualized basis. Rent increases generally occur annually, so over time will flow through to rents. Given the profile of our rent escalations, we believe we are one of the best positioned net lease REITs for inflation. Turning to how we're positioned in the current environment, in the U.S., With economic indicators trending positive on the back of a vaccine-led recovery, we're seeing strong deal flow across almost all property types, the exception being office, where sellers seem to be taking a wait-and-see approach, given the significant rise of work from home during the pandemic. Industrial assets continue to be aggressively pursued by a wide range of buyers, but it remains a very deep and diverse sector, and we continue to find plenty of accretive opportunities, as our recent transaction momentum demonstrates. underpinned by our cost of capital. As the manufacturing sector continues to gather strength in the U.S., it should support growing interest in sale leasebacks as a means of freeing up capital to be redeployed in companies' core businesses. In Europe, while competition also remains strong for industrial assets, our significantly lower cost of debt in the region results in spreads that are generally 50 to 100 basis points wider than for comparable assets in the U.S. particularly grocery, has proven to be a resilient sector during the pandemic and has seen further cap rate compression, especially in the U.S., driven by a flight to quality. We generally prefer retail in Europe where there is lower retail square footage per capita, higher barriers to entry, and less competition. As our recent sizable investments in retail grocery illustrate, we have good access to deals in this sector, successfully executing on top performing stores. The recent market theme in Europe has been the record amounts of real estate being sold by companies as they look to shore up their COVID-impacted balance sheets. As the market leader for sale leaseback transactions in the region, this is a positive trend that expands our addressable market, and we're confident in our ability to capture our share of deals. Before I conclude my remarks, I want to briefly touch on spreads and our ability to continue generating growth, even in an environment where cap rates remain tight. Our cost of debt has become increasingly efficient in recent years. In Europe, we issued nine-year bonds during the first quarter with a coupon below 1%. And in the U.S., we issued 12-year bonds with a coupon in the low twos. In addition, our investments continue to have attractive built-in growth, and we originate leases that tend to be the longest in the net lease sector. We believe it's important for investors to understand not only the day-one accretion from our going-in cash cap rates, but also the average yield we are achieving over lease terms of 20 years or more with strong annual rent bumps. For an investment with an initial cap rate in the mid-sixes, the average yield over 20 years with 2% annual rent bumps is approximately 8%. In closing, through a combination of the deals we've closed to date, the capital projects and commitments scheduled to complete this year, and a near-term pipeline that's the strongest we've seen in many years, We're on track for a record year for deal volume, supported by a favorable cost of capital, substantial liquidity, and the flexibility to access capital markets opportunistically. And with that, I'll pass the call over to Tony.
spk05: Thank you, Jason, and good morning, everyone. This morning, we reported ASFO of $1.22 per diluted share and real estate ASFO of $1.19 per share. We had a strong first quarter on all fronts. with our investment activity and debt refinancings positioning us well to raise our earnings expectations for the remainder of the year. And as Jason mentioned, we have over $500 million of active deals in our near-term pipeline. Our portfolio continues to perform consistently well, as it has since the start of the pandemic, with first quarter rent collections at 98% of ABR. The number of tenants with rent disruption remains very small and manageable, with no new themes to report. During the first quarter, we had one retail tenant in Europe partially pay rent as a result of a temporary lockdown, and we excluded the unpaid portion, totaling $2.9 million from AFFO, in line with our continued conservative approach to revenue recognition. We are actively pursuing this rent and would only recognize it in revenue and AFFO once there is more certainty of collection. As a reminder, we had no significant rent receivables from 2020 and minimal rent deferrals. The few deferrals we did have were part of broader lease restructures where the deferred rent amount is now reflected in current ABR and the tenants have resumed paying rent. Overall, our collection rate remains very strong and on track with our expectations for the year with April collections in line with the first quarter. As such, going forward, we will be reporting rent collections on a quarterly basis. Turning to same-store rent growth. Comprehensive same-store rent growth which is based on pro rata rental income included in ASFO, was negative 0.6% year-over-year, in part reflecting the fact that the prior period was pre-COVID. As we've previously noted, this metric will move around from quarter to quarter, especially as COVID-related disruptions and rent recoveries flow through the period-over-period comparisons in our results. For the full year, we expect our comprehensive same-store rent growth to be in line with our pre-COVID growth rate. Contractual same-store rent growth, which reflects the average rent increases in our leases, was 1.6% year-over-year, a 10 basis point increase over the fourth quarter, driven primarily by a rent escalation for Advance Auto, which has moved back into our top 10 tenant list as a result. Leasing activity for the quarter was primarily comprised of five-year lease extensions on properties leased to OBIE, a do-it-yourself retailer in Europe, extending the maturities from 2024 to 2029 with full rent recapture on $14 million or 1.2% of ABR and no capital outlay. On a trailing eight-quarter basis, we've recaptured 95% of the prior rent, which relates to 11.5% of ABR and added 7.2 years of incremental lease term while spending just $1.44 per square foot on tenant improvements and leasing commissions. Moving on to our balance sheet activity. The first quarter was a busy quarter for our capital markets activity, raising over $1 billion in well-priced long-term and permanent capital. In February, we issued $425 million of 12-year senior unsecured notes at a coupon of 2.25%, representing a 108 basis points spread to the benchmark treasury. Also in February, we issued 525 million euro of nine-year unsecured notes at a coupon of 0.95%, representing a 110 basis point spread to the benchmark. I'm pleased to say both of these bond issuances were executed at our tightest spread and lowest coupons to date, demonstrating the continued strengthening of our credit profile. Proceeds from these offerings were primarily used to prepay approximately $400 million of mortgages with a weighted average interest rate just over 5%. and for the early redemption of 500 million euro bonds, which carried a 2% coupon and was scheduled to mature in 2023. In addition to taking advantage of favorable market conditions and getting ahead of a rising interest rate environment, we effectively reduced refinancing risk by addressing the majority of our debt due before 2024, while extending our weighted average debt maturity from 4.8 to 5.9 years, In addition, we further advanced our unsecured debt strategy, reducing secured debt as a percentage of gross assets to 4.6%, down from 7.2% at the end of the fourth quarter, and increasing our unencumbered ABR to 87%. Blocking in these long-term rates also resulted in an overall reduction to our weighted average cost of debt by 20 basis points to 2.7%, which is expected to generate annualized interest savings of approximately $17 million. Since the debt repayments occurred closer to the end of the first quarter, we expect to see the interest savings start to flow through earnings more meaningfully beginning in the second quarter. On the equity side, during the first quarter we tapped into our ATM program, issuing just over 2 million shares of common stock at a weighted average price of $70.26 per share, raising net proceeds of $140 million. So far in the second quarter, we've issued just over 443,000 shares at a weighted average price of $71.67 per share, raising additional net proceeds of approximately $31 million. We continue to have the flexibility to settle approximately 2.5 million shares under forward agreements in 2021 for anticipated net proceeds of approximately $160 million. From a leverage perspective, we ended the first quarter with debt to gross assets of 41.2% and net debt to adjusted EBITDA of 5.9 times, which does not factor in the additional equity we have available to issue under forward agreement. We continue to target debt to gross assets in the low to mid 40% range and net debt to adjusted EBITDA in the mid to high five times. Our successful execution raising capital this quarter has bolstered our already strong balance sheet with over $1.8 billion credit facility virtually undrawn at the end of the quarter, ensuring we remain extremely well positioned to execute on our investment pipeline and retain significant flexibility on when we decide to access the capital markets. Turning now to our 2021 guidance. As announced this morning, we've raised our ASFO guidance range by six cents at the midpoint. driven primarily by the strong momentum in our investment activity year to date, both in terms of volume and pace, as well as by the interest savings we will generate from the debt refinancing activity I discussed earlier. We've increased our investment volume range to between $1.25 and $1.75 billion, which as always includes capital investments and commitments scheduled to complete this year. Our expectations for disposition activity remain unchanged at between $250 and $350 million for the year. Year-to-date disposition activity has generated about $93 million in proceeds, including $79 million that closed in the second quarter. Our guidance continues to assume uncollected rents of between 1% and 2% of ABR. We continue to expect G&A expense for the full year to fall within our original range of $79 to $83 million, And I'll note that our first quarter G&A generally trends higher than other quarters due to the timing of payroll related taxes and is therefore not a run rate for the rest of the year. Embedded in our ASFO guidance is $9.7 million of cash dividends generated by other real estate investments, which we spoke about on our last earnings call. In January, we received a $6.4 million dividend on our common equity investment in lineage logistics. which we assume will be the only distribution we receive from Lineage this year. And in April, we received $3.3 million of preferred stock dividends on our investment in Watermark Lodging Trust, reflecting the amount due for the prior four quarters. These dividends will be the primary components of the new line item on our income statement called non-operating income. Taking all of this together, for the full year, we currently expect total ASFO of between $4.87 and $4.97 per share, including real estate AFFO of between $4.74 and $4.84 per share. In closing, we remain focused on growth. Our strong start to the year and robust pipeline put us on a path to deliver our highest annual investment volume since converting to a REIT. Furthermore, our balance sheet is well positioned for rising rates with no significant maturities until 2024, And we have one of the best positioned net lease portfolios with embedded rent growth, especially for an inflationary environment. And with that, I'll hand the call back to the operator for questions.
spk06: 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 star then the number two. Our first question is coming from the line of Harsh Hanani with Green Street. Please proceed with your question.
spk07: Thank you. I just wanted to ask, in light of yesterday's deal of realty income acquiring relief, do you feel like the competitive landscape will change with realty income entering continental Europe and whether that will make it more difficult to or competitive for you to get deals there?
spk12: Yeah, good morning. You know, I don't think it really changes anything. You know, this is certainly they're now a larger net lease REIT, but they've been, you know, making progress moving towards Europe, the UK first. And, you know, based on, you know, what we read that they say, Europe next. And, you know, it's a big market over there. It's as large, if not larger than the United States. Um, and there's actually a higher percentage of owner occupied real estate. So the sale lease back market is even deeper. Um, you know, generally we don't compete directly with them in the U S there's probably a little bit more overlap than what we do in Europe, but I don't think this changes things. And, you know, if, if anything, I'll say that, you know, anything that brings attention to the net lease space, maybe in particular, a diversified model within the net lease space and one that includes. geographic diversification, I think that's a positive from my point of view.
spk07: Thank you. And then another one from me. Can you talk about the occupancy declines on a sequential basis in the past two quarters? What is driving this? And then can you talk about what you're expecting going forward? I know you don't provide guidance on this, but just your outlook would be helpful. Yeah, Brooks, you want to take that one?
spk11: Sure. Vacancy did tick up slightly. It's a few properties, I think five over that period that have come off lease. Not really any trends in there. Pretty anecdotal. We do expect occupancy will tick back up to in the 99% range over the course of this year. There's a lot of activity in process. Active deals on roughly 30% of that vacant square footage and good prospects on the balance. That will go up and down in any given quarter, but we would expect it to remain in that 99% range in the long run.
spk07: Thank you.
spk02: You're welcome.
spk06: Thank you. Our next question is coming from the line of Joshua Dennerlein with Bank of America. Please proceed with your question.
spk10: Yeah. Hey, guys. I hope everyone's well. Good morning, Josh. Question on the inflation front. What inflation metric are your leases based on? And then maybe what's the lag between when we see inflation and how that hits your P&L? Sorry, Josh, I didn't hear the very first part. You said what's the metric? Yeah, the inflation metric. Like is it a core CPI or some other metric?
spk12: Yeah, it depends on the region, you know, clearly. Brooks, do you have the details on kind of driving into the type of CPI? Sure.
spk11: Yeah, as Jason said, it's really a mixed bag. But on balance, the majority are on the headline basis. You know, in Europe, there's a bit more diversity in terms of country-specific or whether it's more of a producer measure or not. But, you know, on the whole, it's largely a headline-type metric. And then from a timing perspective, you know, CPI itself has a bit of a lag just inherently as actual price increases flow through the year-over-year metric. And from our lease perspective, it really just depends on when the actual bump occurs. You know, the frequency of our bumps is generally annually. It's on a weighted average basis, I think, about one and a half years. So it will flow through our our revenues for sure, but there is a bit of a lag there. Okay. Okay. Interesting. Cool.
spk12: And then, Josh, as I think you know, we do have close to two-thirds of our leases tied to CPI, which is why you're asking the question, of course. So we think there could be some real upside in our same stores going forward. Yeah, I know.
spk10: And it's nice that it applied to headline inflation, too. It always seems like it's got a little bit more juice than core. Nice work. And then on the – impressive on the Euro debt issuance below 1%, do you think you'll kind of continue to kind of increase your leverage in Europe to kind of continue to enhance your spreads, or is there some kind of governor that you would limit yourself to over there?
spk12: Yeah, I mean, it's more of a hedging mechanism, certainly, but, Tony, why don't you dig into some of the details? Sure.
spk05: Yeah, we certainly do look to kind of, you know, increase and over-lever in Europe to protect ourselves on the foreign currency side. You know, I don't expect that we would take that up significantly higher than where we are from a leverage perspective. I think we'll, you know, by and large keep the balance of where we stand now. I don't think, you know, we're looking to, you know, find a mix to really artificially create any arbitrage there.
spk02: Awesome. Thanks, guys. Appreciate it. Thanks, Josh.
spk06: Thank you. Our next question comes from Sheila McGrath with Evercore. Please proceed with your question.
spk01: Yes, good morning. Jason, you mentioned new opportunities emerging in manufacturing. In general, is pricing of these assets, are they at a meaningful yield premium to more traditional warehouses? And just some more color on how you're sourcing these opportunities. Are they widely marketed or relationship-driven?
spk12: Yeah, I mean, I'll take the first part of the question first. You know, certainly the headlines that we all read about are for logistics assets when we hear about them trading, you know, in the fours or even sub-fours, you know, on occasion. And a lot of that is driven by the type of real estate, the location, but also the fact that these are, you know, shorter-term leases, in many cases multi-tenant, and there's a real mark-to-market opportunity when those leases expire so that the stabilized yields, you know, might be meaningfully higher. you know, what we're behind are stabilized assets. So the zip code in which the R cap rates would range for logistics themselves are probably more in the low fives and up into the sixes, depending on a number of factors. We talk about sourcing, you know, much of what we do are sale-leaseback. So there's, you know, inherently a more limited universe of buyers that participate in that market. So, you know, we think we do have some pricing power in addition to the benefits that we get on structuring and underwriting given that our tenant is also our counterparty on the sale. Digging a little deeper, we do see that industrial is a really deep and diverse sector. It's not just logistics assets, as you pointed out. There's also manufacturing, particularly light manufacturing that we do a meaningful amount in, food production, cold storage we've talked about, R&D, all property types we've had success targeting. And, you know, properties that, that tend to have a meaningful yield premium, um, just given the, the, the fewer buyers targeting those assets, you know, generally for cap rates, I would say our targets are, you know, from five to 7%. Um, and we've averaged in the, you know, in the mid sixes, you know, over the last, uh, you know, 18 months, um, maybe the longer, and I think that'll continue going forward. Perhaps it, it dips down a little bit, depending on the mix of assets and what we see trending in the market. but we feel pretty good about our ability to find these deals, many cases off market, in some cases very limited marketing given the structuring of the transaction.
spk01: Okay, great. And one more question for me. You do have lower investment grade revenues versus your peers, and that might be some of the reason that you traded lower multiple. Can you just outline for us how you don't necessarily think your strategy is more risky despite this different differentiation, either like over historic context on, you know, collection losses or underwriting losses, just to give people the perception of the risk inherent in your strategy.
spk12: Yeah, sure. I mean, we do have perhaps a little bit lower investment grade rents compared to some of our peers. It still stands around 30%. So it's a meaningful portion. And obviously those those cash flows are quite strong. And where we do focus, the reason why it's 30% and not higher perhaps is because we do focus in the just below investment grade credit spectrum, an area that we think is there's much less capital flow. It requires more underwriting expertise where our deal team can really differentiate themselves. We have a long history of deep credit underwriting and structuring capabilities that I think really provides you know, a competitive advantage for us. And of course, you're also going to get some incremental better yields there. You also get better structuring. We get longer lease terms. We get better bumps. You know, we get, you know, occasionally get covenants there. And it doesn't necessarily lead to, you know, any difference in performance. I think our collections throughout the pandemic reflects that. You know, from the very beginning, you know, we were in the Mid-90s trended quickly once we got into summer to the high 90s, and we remained in that area. And it's mainly because when we're targeting sub-investment grade, we're also focusing on larger companies, companies with balance sheets that can withstand some economic disruption. They have access to institutional capital, and we think that's really the sweet spot for investing in that lease.
spk01: Thank you. One quick question for Tony. The non-operating income, you said no more lineage distributions. Is that the case also for Watermark, so that line item goes to zero?
spk05: That's our assumption right now. The Watermark preferreds, you know, their quarterly payments, they can pay it quarterly or annually. We're currently assuming we just collected the last four quarters that we don't see anything else for the rest of this year in guidance.
spk01: Okay, thank you. Thanks, Sheila.
spk06: Thank you. Our next question comes from the line of Manny Korchman with Citi. Please proceed with your question.
spk03: Hey, good morning, everyone. Jason, you talked about a pipeline, I think, of $500 million with most expected to close in Q2. Can you just give us a rough breakdown of the types of properties within that near-term pipeline?
spk12: Yeah, sure. And I'll just recap quickly what we've done for the year so far. I mean, we feel like we've had great momentum coming out of Q2 or Q4 in the beginning of of Q1, that's about $400 million of deals completed, another $130 million of capital projects. These are under construction properties that are fully leased that we expect to complete in 2021 and therefore commence rent. So there's about 530 locked in. And then, yes, I did reference, I would call it over $500 million of deals in advanced stages. And much of that we think will close in the second quarter and the pipeline continues to build as well. Um, you know, year to date, just to give you some, some, uh, uh, some comparison year to date, it's about, uh, what we've closed is about 55% industrial, I think 30% retail, which is predominantly in Europe. Um, you know, the split between us and Europe is about 50, 50, it's call it 55, 45, uh, us to Europe. Um, and then the pipeline is trending more towards industrial. Um, it's 80 plus percent industrial at this point in time. The remaining amount is really retail. And again, it's slightly higher weighted towards the US. We'll call it 60-40. But that pipeline is changing and building. So the components of that will change as well. And of course, what we've done year to date is almost entirely sale leasebacks, build-to-suits, or expansions of our existing portfolio. I think all but one transaction at this point year to date falls in those categories. So we're still having a lot of success sourcing through those channels and putting meaningful amount of dollars to work.
spk03: Great. And then if we look at your overall pipeline for the year, you obviously increased your acquisition guidance. How have you changed your pricing expectations on that increased pipeline, if at all?
spk12: Well, I mean, given our diversified approach, we really target a wide range of cap rates. I'd say generally speaking, we talked about this before, Probably it's from 5% to 7% with some outliers above and below those ranges, depending on the specific details of a particular transaction. Year-to-date, I think we're mid-six cap rate. I do think that probably trends down a little bit, maybe into the low to mid-sixes, but a lot of it will depend on the mix of properties, in particular Europe. Cap rates might be a little bit lower in Europe, call it, you know, 50 basis points lower, but our borrowing costs are still, you know, at least 50 basis points, probably more like 100 basis points cheaper there. So we're still generating, you know, better spreads despite, you know, the lower cap rates. I think the other thing to note is that, you know, we talk about going in cap rates, but, you know, I think you really got to factor in the bump structure that we have. And I mentioned that at the beginning of the call that, you know, our leases have, you know, meaningful bumps and you know, the going in cap rates maybe are less relevant and the average yield or unlevered IRR in many cases is more important in how we look at deals and how we evaluate their spread to our cost of capital.
spk02: Thanks, Jake. Yep, welcome, Andy.
spk06: Thank you. Our next question comes from Greg McInnis with Scotiabank. Pleased to see with your question.
spk04: Hey, good morning. regards to the pipeline i guess just transactions in general have you changed your internal approach or are there some external factors that may be contributing to the improved pipeline and does this potentially point to a longer term trend of increasing investment expectations in future years yeah it's a good question greg and we've you know we've we've gotten that question in some individual meetings as well and i think there's a couple things to talk about here and we understand the perception because the last
spk12: you know, number of years we've hovered around, you know, the billion dollar mark. So it's probably helpful just to provide some context here on why, you know, maybe that's not a good run rate for us and it's something higher. You know, if you look back over the last number of years, there are some macro forces or, you know, really strategic events at WP Carey that are important to note. For one, we closed CPA 17 merger at the end of 2018. And then from there, we continued the process of winding down the investment management platform. So as a result, our cost of capital has improved since 2018, and that's really expanded our funnel. We began putting that into practice in, you know, call it 2019, especially by the end of that year and into the beginning of 2020. You know, I think at that time, we had closed probably about $500 million of deals in that fourth quarter, maybe the first couple weeks of January. So we were really beginning to hit our stride. And in fact, last March, we were sitting on a very sizable pipeline, probably something that feels a lot similar to what it is right now. And then, of course, we got derailed by COVID, which clearly none of us could have predicted. But I think what you're seeing now in 2021 is really just a combination of having a clear runway, you know, free of all distractions from some of our prior strategic changes, and really a cost of capital that works quite well. Certainly our diversified approach helps, you know, we can generate a pretty wide opportunity set across property types and geographies, and as I mentioned a few minutes ago, broad range of cap rates. And then our improved cost of capital has also allowed us to expand that range to include probably more in that lower yielding, bottom end of that range, but what we think are higher quality industrial assets, maybe ones that have higher embedded growth or better market dynamics. And then lastly, you've seen us continue to ramp up sale lease backs and the availability of sale lease backs really continues to increase. We feel a bit of a permanent shift in how corporates view owning versus leasing real estate. And as the market leader in sale lease backs, I think this is really a good trend for us. So all of this is now being reflected in 2021. I mentioned year to date, about 400 million deals done to date, another 130 under construction. and then the pipeline of, you know, call it half a billion and really growing. So, you know, we feel like that that's a sustainable trajectory for us, and kind of there's no reason to think that that, you know, won't continue going forward.
spk04: Okay. Great. Thanks for the color. And then a quick funding question. So on the forward equity offering, do you actually need to settle that? Does it maybe make sense to let it expire and just keep using the ATM at $73 a share versus the $463?
spk05: No, I think we would have to settle that sometime this year. I don't think we have to, but I do think our expectation is that we like that capital still. We like having the flexibility of having it out there. As you mentioned, we did tap the ATM at pretty accretive pricing compared to our investment activity. But I think you would expect us to continue to do that as well as to potentially draw the remaining proceeds, perhaps even as soon as the end of the second quarter. I think we'll just keep an eye on the investment volume, but I think the point is we have a significant amount of activity ahead of us that we need to fund, and we like our opportunity set and where we can fund that from. I think both avenues are attractive to us.
spk02: All right. Thanks, Toni.
spk06: Thank you. As a reminder, if you would like to ask a question at this time, please press star 1 on your telephone keypad. Our next question comes from the line of Frank Lee with BMO. Please proceed with your question.
spk09: Hi, morning, everyone. Jason, just curious if you also took a look at the – Hi, Jason. Just curious if you also took a look at the bear rate deal, and does that transaction make it more imperative for you to do a similar deal given their combined market cap and the advantages that brings?
spk12: Yeah, I mean, it's a high-profile transaction, and we're digesting that announcement and the details that were provided, but we probably can't talk too much about it specifically. I don't think it changes anything from how we're motivated. We still are looking at everything, whether it's portfolios, individual acquisitions, and potentially M&A as well. I don't think that changes. Realty, as I mentioned earlier, they were the largest. They're a little bit larger now. So, you know, I think it's business as usual for us.
spk09: Okay, thanks. And then you mentioned the majority of the $500 million of active deals will likely close in the second quarter. So that puts you close to a billion for the year if you include the capital investment projects. Is it safe to assume that there could be some upside to your investment guidance range given that the acquisitions tend to be back-end weighted?
spk12: Yeah, it's hard to predict what happens for the rest of the year. We don't have a lot of visibility into more than the next three months, but the trends are quite positive. And I think if we continue, you know, at the pace that we're on right now, um, you know, I think you could probably expect, um, you know, something that could put us in the top half of that range or maybe even above the range. And, and we're talking next in the end of July, perhaps we're, we're, we're talking about a further increase, but it's hard to predict. Um, and as you know, our transactions tend to be a little lumpier. So maybe even, um, you know, less visibility to them. But we like our pace right now. We like the market opportunity. We like our cost of capital and liquidity. So, you know, we're feeling quite positive about it.
spk09: Okay. Just one more. And then if we look at your capital investment pipeline, you added a lab project. I think this is the first one in this property type. Can you talk about the opportunity there and potential for additional similar projects?
spk12: Yeah, I mean, we're certainly, you know, as a diversified, with our diversified approach, you know, we feel that R&D is kind of a hybrid between, you know, industrial and office in some ways. But this specific use, the tenant tends to have high investment into the property as well. We tend to do these on long lease terms, which is the case here. And, you know, you get some incremental cap rate given that it's a little bit outside of the core focus of most industrial buyers who focus on warehouse. So we like a lot about R&D. We think there are more opportunities. There are some in our pipeline that we're looking at right now. And so, again, as a diversified net lease investor, we have the benefits to look across a broad range of property types, and we'll continue to do that.
spk02: Okay, great. Thanks, Jason. Yep, you're welcome.
spk06: Thank you. At this time, I am not showing any further questions. I'll now hand the call back to Mr. Sands. Great.
spk08: Thank you, everyone, 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. You may now disconnect.
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