W. P. Carey Inc. REIT

Hello, and welcome to WP Carey's second 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. And now I will turn the program over to Peter Sands, head of investor relations. Mr. Sands, please go ahead.

Good morning, everyone. Thank you for joining us this morning for our 2021 Second 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 FCC filings. An online replay of this conference call will be made available in the Investor Relations section of our website at wpcary.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.

Thank you, Peter, and good morning, everyone. Having proved the resilience of our portfolio throughout the pandemic, the first half of 2021 has been characterised by an acceleration in growth driven primarily by record deal volume, enabling us to further increase our investment expectations for the year and raise our AFFO guidance. We continue to see a high level of deal activity, with several hundred million dollars of deals currently in our pipeline. And with inflation taking center stage with investors, WBCary is well positioned to generate additional upside, with 60% of our AVR coming from leases that have rents tied to CPI. I'll focus my remarks this morning on these two growth drivers, the creative investments and the rent escalations embedded in our leases, after which I'll hand the call over to our CFO, Tony Sanzone, who will focus on our results, guidance, and balance sheet. And as usual, we're joined by our President, John Park, and our Head of Asset Management, Brooks Gordon. Starting with our growth through acquisitions, for the second quarter, investment volume was $780 million. driven primarily by the completion of 11 acquisitions. Our net lease investments had a weighted average cap rate of 5.6%, reflecting the mix and quality of the assets we acquired amid a competitive market environment. For example, about 40% of our second quarter investment volume was in Class A warehouse, including a $195 million investment in a newly constructed logistics facility in the UK, which is expected to receive a BREEAM Very Good Environmental rating and is net leased to Jaguar Land Rover for a 30-year term. Also, about 40% of our second quarter investment volume came from Europe, where cap rates tend to be lower, although spreads remain attractive given our ability to issue Euro-denominated debt, which is currently over 100 basis points cheaper than where we can issue U.S. bonds. A differentiating factor from other net lease REITs is our ability to achieve attractive rent increases over long lease terms. In recent years, We believe we've been originating leases that are among the longest in the net lease sector. Our second quarter investments had a weighted average lease term of 21 years with increases averaging 2.2% for those with either fixed rent increases or floors. The profile of our investments results in an average yield that's meaningfully more attractive than peers who are originating shorter term leases with lower or even no rent increases. Initial going and cap rates taken in isolation do not tell the whole story of the prolonged accretion we achieve. For example, a lease with a 6% going in cap rate and 2.5% annual rent increases over a 20-year term has an average annual yield of over 7.5%. Turning now to our growth through rent escalations and how we're positioned for inflation. 99.5% of our AVR comes from leases with built-in rent growth, which includes 60% from leases tied to inflation. The majority of that, representing 37% of total ABR, comes from leases tied to uncapped CPI, which is split roughly 60-40 between Europe and the U.S. 23% of our ABR comes from leases tied to CPI that have floors and or caps, where the average floor is approximately 1.5% on an annualized basis, and the average cap is approximately 3%. And lastly, Leases with fixed rent bumps represent 35% of ADR and have average annualized increases of around 2%. Because inflation generally flows through to rents with a lag, we expect our contractual same-store rent growth to increase about 100 basis points, from 1.5% to about 2.5% over the next 12 months. Based on current economic forecasts, holding all other factors constant, this assumes inflation over the remainder of 2021 about 3.5% in the U.S. and averaging 2.75% across Europe, which then stabilizes in 2022 to around 2% in both regions. Of course, if actual inflation runs higher than currently predicted, we would expect our contractual same-store growth to ultimately be above 2.5%. While this gives a sense of the impact of inflation on our rent growth about a year from now, the impact on ABR is of course cumulative, and the effect of compounding can be powerful over longer timeframes. Turning now to the internal and external factors contributing to the sustainability of our increased investment activity. With $1 billion of investments completed in the first half of the year, $122 million of capital investment projects scheduled to complete in the second half of the year, and the several hundred million dollars of deals in our pipeline, we expect 2021 to be a record year for deal volume. We also expect to maintain a high volume of deals through a combination of factors. From an internal perspective, with the simplification of the company largely complete, we're now singularly focused on investing for our balance sheet and feel we're benefiting from deeper relationships and market expertise, as well as from a more streamlined investment process. From a macro perspective, sale leasebacks continue to gain popularity with corporations as part of an overall trend of leasing rather than owning real estate. And M&A activity has picked up, driving net lease deal flow as companies seek to optimize their balance sheets and private equity firms monetize assets to drive returns. We also benefit from the scale of our portfolio, with about 30% of our second quarter investment volume coming from follow-on deals, originated through our existing tenant and sponsor relationships. While our diversified approach ultimately provides a vast and deep addressable market over two continents, from a top-down perspective, Our core focus remains on industrial and warehouse assets, which comprised about 70% of our second quarter deal volume. Within these sectors, we've recently expanded into attractive subsectors, like R&D and lab space, and industries like food processing and production, which are all well-suited for sale leasebacks. We've also been investing in essential retail properties in Europe, especially stores with strong unit-level performance. completing investments in grocery portfolios in Spain and France over the last nine months. In addition to our core focus, we create incremental deal volume and growth through more opportunistic investments. A very recent example of our ability to put additional money to work in this way is the construction loan we entered into during the second quarter related to a retail complex currently under development on the Las Vegas Strip. We funded an initial $85 million draw in June, and expect to find additional draws over the next 12 to 18 months, up to $225 million. The drawn amounts earn 6% interest, and upon completion, there's the option to convert part of the loan into ownership of net lease retail assets at an extremely desirable location at very attractive cap rates. In closing, given all these factors, coupled with the cost of capital that allows us to consistently make accretive investments, we're confident that we can maintain a strong pace of investments in the second half of the year, and we've raised the investment volume in our 2021 guidance to reflect that. Lastly, while the worst of the COVID pandemic seems to be behind us, the recent surge in Delta variant case numbers serves as an important reminder that in addition to investment volume, underwriting and portfolio quality still matter, and that the proven performance of our portfolio continues to differentiate WP Carey from other net lease REITs. And with that, I'll pass the call over to Toni.

Thank you, Jason, and good morning, everyone. I'm pleased to say that we exceeded expectations with our second quarter results, completing a strong first half of the year and positioning us to again raise our full year guidance. For the quarter, we generated total AFFO of $1.27 per share and real estate AFFO of $1.23, which increased 12% year over year, reflecting the accelerated pace of our investment activity year to date and the continued strength of our rent collections, which were 99% for the quarter. We are raising our full year AFFO guidance, increasing it 6 cents at the midpoint. We currently expect to generate total AFFO of between $4.94 and $5.02 per share for the full year, including real estate AFFO of between $4.82 and $4.90 per share, representing over 5% year-over-year growth at the midpoint. We've raised our full year expectations for investment volume to a range of $1.5 to $2 billion, including capital investments and commitments scheduled to complete this year. Also included in our investment volume is the construction funding of the Las Vegas retail complex Jason discussed. Earnings from this investment are expected to add about $3 million to AFFO this year, which will be reflected in earnings from equity method investments. Disposition activity during the second quarter totaled $86 million, bringing dispositions for the first half of the year to $100 million. Based on our current visibility into the timing of certain sales, we've lowered our expectations for total disposition activity for the year to between $150 to $250 million. Comprehensive same-store rent growth, which is based on pro rata rental income included in ASFO, was 2% year-over-year. On a full year basis, we expect our comprehensive same-store rent growth to exceed our recent pre-COVID growth rates, driven by sustained collections of 99%, as well as certain COVID-related rent recoveries we assume will occur in the back half of the year. During the second quarter, we resumed collecting substantially all quarterly rent due from a retail tenant in Europe that had made partial rent payments in prior quarters due to lockdowns. Our ASFO guidance range, now assumes that during the second half of 2021, we recover most, if not all, of the $4.5 million of outstanding rent due from this tenant. Lease termination and other revenues increased during the second quarter due primarily to the receipt of $4.4 million in lease-related settlements. We currently assume no significant additional payments of this nature in the back half of the year. For G&A expense, we've raised and narrowed our guidance outlook for the full year to fall within a range of $82 to $84 million, up moderately from our prior expectations. On last quarter's call, I noted that in April we received preferred stock dividends totaling $3.3 million from our investment in Watermark Lodging Trust, representing the amount due for the prior four quarters, which was the primary driver of our non-operating income line item for the 2021 second quarter. Going forward, we expect to receive preferred dividends of approximately $800,000 on a quarterly basis, which is embedded in our full-year guidance. Moving now to our capital markets activity and balance sheet. Following an active first quarter, during which we issued bonds at our tightest spreads and lowest coupons to date, we raised well-priced equity during the second quarter. In June, we completed an equity forward offering for just over 6 million shares locking in our ability to match fund acquisitions with $455 million of equity raised at a gross price of $75.30 per share. We settled a portion of these latest forward agreements during the second quarter, as well as the remaining forward agreements from those we put in place last year. We also issued shares under our ATM program. In aggregate, we issued 6.7 million shares during the second quarter, raising $472 million in net proceeds. The majority of our share issuances occurred later in the quarter and will therefore be fully reflected in our third quarter weighted average share count. At quarter end, our weighted average interest rate was 2.6%, a significant decline from 3.2% a year ago, reflecting the continued improvement in our cost of debt. Interest expense for the second quarter totaled $49.3 million, which declined 6% year over year, primarily reflecting the full quarter impact of the interest cost savings generated by our first quarter debt prepayments and refinancings. From a leverage perspective, debt to gross assets remains at the low end of our target range, ending the second quarter at 41.1%. Net debt to adjusted EBITDA was six times at the end of the quarter and 5.8 times when factoring in the remaining shares available under our latest equity forwards. Our liquidity position remains very strong, ensuring we're well positioned to fund new acquisitions and continue accessing capital markets opportunistically. We ended the second quarter with total liquidity of approximately $2 billion, including cash, the available capacity on our $1.8 billion credit facility, and our ability to settle 4 million shares remaining under forward agreements by the end of 2022 for anticipated net proceeds of approximately $300 million. In closing, building on the recent momentum in our deal volume, which is expected to continue in the second half of the year, we anticipate a record year for acquisitions, supported by strong liquidity, capital markets flexibility, and a favorable cost of capital. In addition to the proven downside protection our portfolio provides, with sustained higher inflation, we'd also expect it to generate additional upside to our growth over the longer term. And with that, I'll hand the call back to the operative questions.

Thank you. At this time, we will take questions. If you would like to ask a question, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the star, then the number two. Please hold what we pull for questions. Thank you. Our first question is coming from Sheila McGrath with Evercore. Please proceed with your question.

Yes, good morning. Good morning. big investment quarter pipelines larger can you help us understand how the volume has picked up so much is it have you added new personnel have you broadened the initial yields criteria because your cost of capital has improved or is there just more product for sale maybe as a result of increasing m a yeah i mean i think it's a little bit of of all of those things i mean certainly

With the simplification of our business largely complete after the CPA merger and the continued wind down of our investment management business, there's more of a singular focus on growth for us. Their cost of capital continues to work really well and obviously the diversified approach doesn't hurt either. It offers us a wide opportunity set that's both clearly in the U.S. and Europe and we can compete at a broad range of cap rates as you mentioned. We've expanded that target cap rate range some and I think that allows us to buy higher quality you know, probably mainly industrial assets, which is contributing to the increased deal volume. But to your point, M&A, you know, that's led to more sale-leasebacks in our mind, and it seems more and maybe more of a permanent shift in how corporates view owning versus leasing their real estate. And, of course, as the market leader in sale-leaseback, this is, you know, clearly favorable to us as well. So, you know, lots of changes. I think there are some more incremental changes we made within our investment process and within the team as well. And I think all that has led to what we view as more sustained deal activity. And where we sit today, the opportunities have been there, and there's really no reason for us to believe that level of transaction activity won't continue into the future. So we feel good about where we are.

Okay, that's great. One more question. I think it was helpful highlighting how much of your leases are tied to, like, uncapped CPI. Just wondering if you could explain how that works. Like, is it an annual adjustment for, you know, as you look back over the past year? And, you know, I would guess that CPI is tracking across the different countries where you have assets, you know, pretty significantly. Just wondering if that's an annual adjustment every five years or how it works.

Yeah, each lease is going to be unique. I would say the majority of our leases have annual increases, but there certainly are leases that would bump every two years or every five years as well. Those will be in the portfolio. There is a lag effect, I think, as you pointed out, because the leases are more in this annual cadence. For some of them, it may take 12 months before that fully flows through to our ABR. And then you're right. I mean, the U.S. leases are predominantly based on CPI. And then in Europe, it depends. Some of them are Eurozone inflation based. Some of them are more specific to a country, you know, German CPI or Dutch CPI or UK RPI. So it's really deal specific. But I think, you know, generally speaking, you know, we like this exposure to inflation. I think it's one of the differentiators in our portfolio.

Thank you.

You're welcome.

Thank you. Our next question comes from Spencer Allaway with Green Street. Please proceed with your question.

Thank you. Just on the construction loan, I was wondering if you guys could provide a little bit of color on the expected risk-adjusted yields that you guys are expecting on these relative to more traditional acquisitions and capital investment projects?

Yeah, sure. I mean, look, our core focus is still on acquiring industrial and warehouse properties in the U.S. and Europe, and also retail in Europe for that matter as well. And when we think about retail in the U.S., we typically are taking a more opportunistic approach. And I think this transaction falls into that category. For now, it's a construction loan. We talk about that it's going to earn during the construction period 6% interest, which we think is a pretty healthy rate, especially relative to where cap rates have trended. It's a phenomenal location. I'd call it one of the best development parcels on the entire Las Vegas Strip, if you know the market at all, at the intersection of Las Vegas Boulevard and Harmon. It's at the southern end of the pedestrian bridge that links the Cosmopolitan Hotel to City Center and Crystal's Mall. From our analysis, it's a location with some of the highest foot traffic in the entire United States. For us, in terms of risk-adjusted returns, We actually completed a very similar project to this across the street probably six or seven years ago. It was very, very successful. It's with the same operating partner, so we have lots of confidence in our ability to execute here. As I said, we think it's a good risk-adjusted return for the loan. For now, it is a loan, but ultimately we'll have the opportunity through some purchase options to buy some longer-term net leases. We can talk about specifics of that if it were to happen down the road when construction is complete.

Okay, great. And then realizing you guys have been focusing on industrial, like you mentioned in your prepared remarks, and I understand you don't have a crystal ball for everything in 22 yet, but, you know, just looking forward, how optimistic or, you know, do you have a sense of the addressable market really in Europe, you know, remaining related to that property type?

Specifically industrial in Europe was the question? Or just generally about how we see our ability to keep on ramping up transaction volume.

Both would be great, but more specifically as it relates to industrial, that's where you've been focused.

Yeah, and it is both in the U.S. and Europe. I mean, look, it's clear to everyone that industrial has been the focus of many investors, and it's had tremendous capital inflows I mean, what we're not doing is competing on the shorter-term, multi-let industrial assets that are hitting the headlines that we're seeing. It was in the fours, and now it's probably the threes in terms of going in cap rates. Those are trading at those levels because there's a perception that they have, and it's probably real, that they have good mark-to-market opportunities. We're focused more on Longer term, 15, 20 plus year leases with good industrial assets. This can be logistics, could be high quality like the JLR deal that we purchased earlier this year. We're also focused on light manufacturing, food production, R&D, all which also fall under our industrial category. And we have a very good track record of sourcing those, predominantly through sale leasebacks. And I think that's a big reason why we're able to acquire these with those structures in place. and what we feel are higher than market cap rates as well. So, look, it's hard to predict what's going to happen in 2022, but we think we're set up very well, as I mentioned earlier on Sheila's question, to continue to show the momentum that we've had on the acquisition front.

Great. Thanks for the color.

You're welcome.

Thank you. Our next question is coming from the line of Anthony Paoloni with J.P. Morgan. Please proceed with your question.

Great. Thank you. I don't know if I missed this, but can you comment on just your current pipeline and the skew between Europe and the U.S. and also just how yields might look compared to the 5.6 that you mentioned in the second quarter?

Yeah, sure. So, yeah, so pipeline is strong, as we've talked about. You know, year to date at this point, just to recap, we've closed about a billion dollars of deals, including the $780 million in the second quarter. We also have $122 million of capital projects, you know, expansions and build-a-suits that are expected to complete in 2021. At that point, they get added to our volume, our rent roll. You know, so we have kind of $1.1 billion locked in at this point in time. And our pipeline remains strong. You know, there's over $300 million of deals in advanced stages right now, which we believe, you know, much of that will close during the third quarter. And then beyond that, you know, we still have a couple hundred million dollars more of identified deals that are earlier stages, but advancing through the diligence and closing process. And, of course, our fourth quarter, you know, as we've talked about in the past, tends to be our most active quarter of the year. We don't have visibility into that now, but it does tend to be the most active year. I think a lot of that has led to our our guidance raise. We feel good about that midpoint and maybe with the potential to get into the top half of that range as well. So there's really no reason to think that anything is going to slow down here, assuming market conditions don't change substantially. You asked about U.S. versus Europe. Year to date, it's been about 60-40 U.S. to Europe. Europe has slowed a little bit, but that's typical this time of year. I think current pipeline is probably more call it three quarters U.S., a quarter Europe. We would expect that to pick up as we get a little further into the year. I think the last part of your question was about cap rates. We look at a pretty wide range of cap rates, part of the benefits of a diversified approach. I would say we target deals into this 5% to 7% cap rate range. You pointed out that the quarter was a 5.6 weighted average cap rate. Year to date, it's around 5.8 weighted average cap rate. And then this is the going in cap rate. I think that's important to note. A lot of that I think you can attribute to market compression. But I think also we talked about the mix of assets that we're acquiring and higher quality warehouse is just going to trade a little bit lower. But we think we're getting good risk adjusted returns from where we'll acquire them. And you also mentioned Europe. And Europe does have lower cap rates. That's driving that some also. And as you know, our cost of borrowing in Europe is meaningfully lower. So while we might be doing some tighter going in cap rates in Europe, they still generate even the same or maybe even better spreads. I think the last thing to note here is that from an accretion standpoint, we're not overly focused on going in cap rates. If you think about especially how we structure our transactions, virtually all of our leases have built-in bumps. You know, many of them, as we talk about, are based on inflation. The ones that are fixed are probably in the 2% range. And these are long leases. So over a 20-year period, you know, with interesting bumps, the average yield is significantly higher. And I think that'll be the case, you know, for all the deals that we've purchased in this year.

And just appreciate the context on the duration side of your deals. Is it something that... you know, when a deal comes to you, the duration's there and you either, you know, take it or leave it, or is it something that you want longer duration and so you make other concessions to get it, or how does that work?

Well, most of the deals that we source are through sale leasebacks and build-a-suits. So, you know, the entire structure is a negotiation, and there's you know, give and take throughout that process. But, you know, certainly lease term is important to us. You know, the types of bumps that we have, that's important to us, especially, you know, inflation. So I think it's all on the table and there are trade-offs, especially in a competitive market. But, you know, as you can see, we've been successful and, you know, transacting with very long lease terms, very interesting bump profiles, and still maintaining an attractive, you know, initial cap rate and spread direct cost of capital.

Great. And just one last maybe detailed question. It seemed like lease termination income in the quarter was a bit elevated. Any color around that and whether that does anything to the NOI run rate we should think about going forward? Tony, you want to take that one?

Yep, I've got that one. Thanks. Thanks, Jason. No, I think that we did mention that this quarter specifically included a couple of larger payments from tenants. It totaled about four, four and a half million dollars in the small bankruptcy settlement in that amount as well. You know, I think there are, there's a recurring portion of this line item that runs through every quarter. And then, you know, sort of this, these one-off amounts that do tend to recur from time to time during the year. I'd say on average, we're looking at about $12 million for the full year, you know, which is in line with where it was last year. So I don't think we're really expecting anything or we don't have anything in our line of sight right now for the remainder of this year. I think this quarter was certainly an uptick.

Okay, but the payments didn't tie to us having to take like a piece of your, you know, run rate revenue out because something big was terminated or anything?

No, these were end of lease payments. Typically to restore the premises, you know, we'll settle with a tenant on their way out. So nothing, you know, in terms of recurring NOI there. but certainly an economic part of the lease that we enforce.

Got it. I understand. Thank you.

Thank you. Our next question comes from the line of Elvis Rodriguez with Bank of America. Please proceed with your question.

Hi. Thanks, y'all. Thanks for taking the call. Just a couple questions. So one, you mentioned the increased interest on sale leasebacks. In particular, what sectors or property types are you seeing this more in today versus perhaps two years ago? And then on that question, if you could just update us on the lab office or interest in lab, lab R&D space. Like, what are you seeing there? What markets? Is it the mega clusters that some of the other public REITs own in, or is these, you know, secondary markets? Thanks.

Yeah, sure. So, to say the least, Bex, I would say it's more broadly increasing as you know, corporates, perhaps, you know, a result of some of the liquidity crunches that they had during COVID. You know, corporates, I think, are, you know, moving more towards leasing rather than owning their real estate. And that includes critical, you know, critical operating real estate that are good candidates for sale leasebacks and long-term leases. And that's where we've been targeting. You know, and it's, you know, we talk about industrial being a broad asset class for us. There's certainly you know, a lot of warehouse deals that we're doing. But, you know, within that, we're also doing, as you mentioned, R&D, you know, cold storage, food processing and production. So, you know, I think all those lend themselves well to sale leasebacks, again, because of the criticality of the assets, which lends themselves well to corporates being willing to sign very long-term leases. You know, your specific question on lab, I mean, we're not – primarily focused on lab. I think it's going to be more incremental deal volume when there are opportunities to do sale leasebacks. It's not going to be competing with the Alexandries of the world in Cambridge and San Diego. So it's just a little different approach for us.

Great. And then just a question. So at the end of 4Q20, You had about 9.5% of your leases of your ABR rolling in 2024, and now you only have about 8%. Is that a function of, you know, bringing leases up, selling assets? How should we think about, you know, the role that's occurring in the portfolio over the next few years and, you know, what retention can look like? Thanks.

Brooks, you want to take that one? Sure. So with respect to 2024, it's really just ongoing growth. leasing activity that has occurred. So that's not really disposition activity. So we are very focused always on reducing that next five-year lease roll percentage, and we're making good progress on that. You know, in the next three years, we have a very manageable lease expiration outlook, you know, less than, say, 8% through 2023. 2024 and 2025, certainly larger years, but that's pretty typical at this point in time. And so we're focused on all of those years right now, and that's really our approach. It's kind of five years out, really taking a proactive approach to those. You know, I'll note in 2024, the biggest piece of that is the U-Haul lease expiration, and that's one where they have a purchase option in 2024. So when you back that out, it's really only about 5% of APR expiring in 2024.

At this point, to the best of your knowledge, do you expect them to exercise that option?

We do.

Great. Thank you very much.

Thank you. Our next question is coming from Manny Korchman with Citigroup. Pleased to see with your question.

Good morning, everyone. Good morning. So as I went through your presentation, I noticed that the percentage of income from investment-grade tenants ticked down this quarter. Was that Anything specific, just a mix of new acquisitions and dispositions, something you've done on purpose, or is it just a stat that's maybe less relevant for what's actually happening in the portfolio?

Yeah, I think it's probably more of a function of the latter. What we have been buying have not been investment-grade, and maybe it's important to... kind of touching that a little bit, we've talked about it in the past that we feel the sweet spot in net lease is just below investment grade. There's much less capital chasing deals. And not only does that help us generate higher yields, but we also get better lease structures, whether those are rent bumps, the duration of the leases, or really even specific lease provisions. And maybe more importantly, are the results. While our portfolio may have a lower percentage of investment grade, ABR, You know, we've outperformed all of our peers during the stress test that was the pandemic, and that includes these peers with higher investment grade rated or ABRB. So, I think it's about underwriting, it's about portfolio construction, and I think track record matters.

Great. Thank you. Just going to dispositions for a second, you sold a portfolio of Hellwig stores. Was that just a tenant concentration issue? Was it just opportunity to sell or give us some color on why you sold those?

Sure. Yeah, we exited seven Hellwig stores in the quarter. It's really an opportunistic sale. There's an aspect of managing diversification as well there. But we created a lot of value when we extended that portfolio a few years ago, extended the lease there. So, this was a pretty targeted opportunity to reduce some of the weakest stores in the portfolio with good execution, but we wouldn't expect to see more of those in the Hellweg assets.

And then, Jason, just on the construction loan for another second, was that something you guys were actively in the market looking for to lend on a project like that? And are you looking at other deals like that? Or maybe just give us a little bit of backstory as how you ended up investing in there to begin with.

Yeah, we're doing this transaction with a really trusted partner of ours that we've probably done, I don't know, four or five construction projects with a lot of downside protection structured in, which is consistent with how we look at the world. And perhaps some upside, especially in this case, with the potential of do exercise purchase options to own it. I wouldn't say it's a new vertical, but we like the risk return profile of this investment, and again, we have a proven track record in partnership with our operating partner. We'll see if there's more to come, but it's a meaningful size of a capital put to work, and we like finding ways to do that. Thanks very much. Welcome.

Thank you. Our next question comes from the line of Chris Lucas with Capital One Securities. Please proceed with your question.

Good morning, everybody. Just kind of following up on the last question, Jason, just maybe give some risk parameters. What's the expected loan to cost on that construction loan?

Well, the way this is structured is, We're funding the vast majority of the capital going in with some downside protections put in place. I don't want to go into all the specifics of what that is, but there's a really strong collateral package behind that, which gives us a lot of comfort, especially given the location. As I mentioned earlier, we think it's one of the best development parcels on the entire strip and probably one of the better ones across the country, if that matters, for retail. You know, it's got some of the highest foot traffic counts in the entire country at this point. So, you know, we like the risk-return profile, especially with the structure that we have in place, but, you know, for several reasons. I can't get into the specifics.

Okay. And then is it related to just sort of the participation or equity conversion or risk? Is it a portion by converting your loan into an equity piece or is it a first right offer or something along those lines?

No, it's an option to purchase into really two components. Some of the net lease units as well as into the full project, a minority interest if that's what we prefer as well. I would say that we'll have more color and disclosure on that. If that happens, it is just an option, but we can go into some more details, you know, down the road.

And what's the general timeframe for when sort of you started funding? So when's the project expected to be completed and stabilized?

You know, it's probably a 12 to 18 month period. So perhaps, you know, this time next year, Q3, Q4 of 2022 is my expectation.

And then, Toni, just on the guidance bump to G&A, was that cash or non-cash bump that's primarily driving that bump?

We're giving guidance on the cash G&A expense, so that's really, you know, on the cash side.

And what is driving that increase?

You know, we narrowed the range based on where we are in the year, and the increase is driven predominantly by the portion of compensation that's tied to our results for the year, given we're tracking above target.

Okay, perfect. Thank you. That's all I have this morning.

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 is coming from Frank Lee with BMO. Please proceed with your question.

Hi, morning, everyone. Jason, you mentioned the potential benefits from higher rent bonds tied to inflation. Just curious if any of the benefits are factored into your current guidance, or does the lagging effect push this entirely to 22? Tony, do you want to talk about the components of that?

Yeah, I think, you know, if you look at kind of the same store results for this quarter, there's certainly no impact from the current inflation flowing through. I think Jason gave the example of you know, how that would flow through. And I think we'd expect it to be seen more fully a full year from now. So call it the 12 months from now, second quarter of next year, potentially 100 basis point increase in our same store growth at the current level. But we do expect kind of a gradual increase there. And, you know, the curve that Jason mentioned in his example are what we have baked into our guidance. So you'll see, you know, a small piece of that in the back half of this year, but more fully by the middle of next year.

Okay, thanks. I just want to ask about CPA 18. We're coming up on the seven-year anniversary. Are you starting to have any conversations? I just want to get a sense on how we should think about timing.

Yeah, there's really nothing new to update there. The CPA team hasn't reached its liquidity timetable yet based on the guidelines and the perspectives. And there's flexibility in that. We've talked about that in the past. But it's really up to the independent directors and their discretion on on when to consider options. So, other than that, there's really nothing new to update.

Okay. Thank you. You're welcome.

Thank you. At this time, I am not showing any further questions. I'll now hand the call back to Mr. Sands.

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