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spk13: Hello, and welcome to WP Carey's first quarter 2022 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 the program over to Peter Sands, head of investor relations. Mr. Sands, please go ahead.
spk15: Good morning, everyone. Thank you for joining us this morning for our 2022 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 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.
spk16: Thank you, Peter, and good morning, everyone. The strong year-over-year AFFO growth we reported this morning reflects both our sustained higher investment activity and inflation beginning to more meaningfully flow through to our rents. Our CFO, Tony Sanzone, will cover our earnings in more detail and give an update on our portfolio, balance sheet, and guidance. It's been over a decade since we've seen any real upward pressure on cap rates, so I'll focus my remarks this morning on the current environment, including the impact of higher interest rates and inflation. I'll also review our recent investment activity and pipelines. and give a brief update on our acquisition of CPA 18 as we move towards closing that transaction. And in light of the conflict in Ukraine, I'll touch upon the continued strong performance of our European portfolio and expectations moving forward. Tony and I are joined this morning by John Park, our President, and Brooks Gordon, our Head of Asset Management, who are available to take questions. Plenty to get through, so let's jump right in, starting with the broader environment, particularly the impact of higher interest rates on cap rates and investment spreads. With 10-year Treasury rates up about 100 basis points since early March and 150 basis points compared to much of 2021, the long-term cost of debt for all net lease REITs has moved meaningfully higher. Cap rates, on the other hand, generally react to rising rates on a lag, typically measured in quarters rather than weeks. While our cost of debt has undoubtedly moved higher, there are several mitigating factors that benefit our overall cost of capital and allow us to continue investing at sufficient spreads. First, it's important to remember that we were very active in the capital markets during 2021, raising almost $1.5 billion in debt capital, proactively pre-funding almost all of our debt maturities through the end of 2023, locking in an attractive cost of debt when it's significantly lower than current market interest rates. Second, our cost of equity has improved meaningfully since late February, with our stock currently trading around its highest level since late 2019, before the onset of COVID. Given our capital structure and commitment to running conservative leverage, a lower cost of equity is generally more impactful to our overall cost of capital than a higher cost of debt. Similarly, from a competitive standpoint, we expect higher interest rates to more negatively affect higher leveraged private equity buyers. Third, As we've consistently said, the spreads we generate on new investments are not driven solely by initial going and cap rates. The contribution to our earnings over time is better represented by the unlevered internal rate of return or average yields we generate on our investments, which factor in the favorable rent growth we typically achieve over long lease terms. And because over 99% of our AVR comes from leases with embedded rent growth, the majority of which is tied to CPI, we continue to feel good about the all-in returns we are earning for our investors relative to our cost of capital. In fact, for investments with rent increases tied to CPI, higher expected rent growth in the near term may partly compensate for a higher cost of debt. Finally, while we've always expected that changes in cap rates would lag interest rates, we are starting to see signs of upward pressure on cap rates. But it's important to remember that most of the movement in interest rates that transaction markets are reacting to happened relatively recently, really over the last six weeks. And while deal cap rates will eventually respond to higher interest rates, it's too early to say exactly how much and over what timeframe to reach an equilibrium. So far, we've seen cap rates move incrementally wider on new deals being priced and a handful of deals in the market being repriced. In some cases, this has resulted in them coming back to market or coming back to WD carry. And today, we would also price them at wider cap rates. During transitional periods in the market, like we're currently experiencing, sellers are more focused on execution risk. Our strong reputation for providing certainty of close therefore gives us a competitive edge and also tends to result in our transacting at better yields. With that as the market backdrop, I'll turn now to our recent investment activity. Year-to-date, we've completed investments totaling $415 million, with a weighted average cap rate of 6%, and a weighted average lease term of 21 years. Our investments were predominantly sale-leasebacks, giving us the ability to directly negotiate lease terms, including rent escalations. We continue to take a diversified approach, although we remain focused on warehouse and industrial, which represent about half of our portfolio. We're also maintaining our focus on essential retail in Europe, as well as exploring segments of U.S. retail. Our office exposure continued to decline incrementally, trajectory we expect to continue given our underweight stance towards this asset class. Turning to our pipeline, in addition to the $415 million of investments we've completed year to date, we continue to see strong deal momentum. Currently, we have over $400 million of deals in our pipeline at an advanced stage and about $175 million of capital projects or other commitments scheduled to complete in 2022. That gives us good visibility into about $1 million of investment volume. still relatively early in the year, and we continue to add to our pipeline at a healthy pace, making excellent progress towards our guidance range of $1.5 to $2 billion for full-year investment volume. Our expectations on full-year deal volume are, of course, before the impact of our proposed $2.7 billion acquisition of CPA 18, which is expected to add about $2 billion of assets after approximately $700 million of anticipated dispositions. Our announcement on CPA 18 was, in many ways, the most significant event of the first quarter, providing an excellent opportunity to add high-quality assets we know very well that are well aligned with our existing portfolio, with minimal balance sheet impact, as well as essentially concluding our exit from investment management. As we said at the time of our announcement, we expect it to be immediately accretive to our real estate AFFO by around 2%, largely offsetting the earnings we will lose from no longer managing CPA 18. with attractive embedded upside through its self-storage portfolio. Since announcing this transaction, it's been positively received by investors in our conversations with them who are widely recognizing these benefits. In terms of the progress update, I'm pleased to say the 30-day go-shop period ended at the end of March with no competing proposals, and we anticipate a closing date in early August pending the approval of CP18 stockholders and other customary closing requirements. The contemplated $700 million of asset sales primarily student housing and office assets, also remain on track, both in terms of our timing and pricing expectations. The sales processes well underway. Turning now to the more meaningful impact that inflation is having on our rents. We continue to believe we're better positioned than any other net lease REIT to capture higher inflation through rent growth. It's 58% of our AVR having rent escalations tied to CPI. On an AVR basis, 40% of our assets with rent increases tied to CPI went through scheduled rent increases during the first quarter, with an average increase of 4.5%. It's important to keep in mind that the 4.5% is capturing the year-over-year impact of fourth quarter CPI. And with inflation currently running at around 8% in both the U.S. and Europe, we'd expect to see significantly higher rent growth in 2022 and even more significant impact in 2023. We view this as especially valuable in the current environment, perhaps underappreciated by REIT investors, given that it has no cost of capital associated with it and has the potential to provide a prolonged tailwind to earnings, even after inflation begins to decline. And of course, if inflation expectations continue to move higher and for longer, you would expect to capture additional upside. Lastly, we're closely tracking the implication of the war in Ukraine, both in terms of potential impacts on our tenants and the transaction market. From a portfolio perspective, we have very limited assets in Eastern Europe, which are entirely within NATO countries, and we have no properties in Ukraine itself, or Russia for that matter. Within Eastern Europe, our assets are largely in Poland, primarily OBI, one of Europe's largest do-it-yourself operators, and a strong German-based multinational credit. To date, we've not really seen any impacts on our tenants' ability to pay rent, stemming from the Ukraine conflict, either in Eastern Europe or Europe more broadly. whether from higher energy prices or supply chain disruptions. That could change, however, as the war continues. If there are significant economic disruptions, which would likely have a global impact, we remain well positioned for them. We view our tenant experience during COVID, during which we remain the sector leader in rent collections, as the best indicator of our expectations. During the first quarter, we collected over 99.7% of rent due for the portfolio overall and 99.9% for Europe. Similarly, we have not yet seen any meaningful impacts on transaction activity in Europe. Putting the business aspects to one side for a moment, I'm going to also say we're committed to supporting the humanitarian relief efforts in the region and have made a donation to the American Red Cross, which is giving much-needed support to displaced Ukrainian civilians. The WP Carey Foundation has also matched our donation two to one to help further its impact. In closing, We believe we're set up very favorably for the current environment for several key reasons. We have a well-positioned investment-grade balance sheet with about $2 billion of total liquidity and proven access to capital at a cost of capital that we believe will continue to provide sufficient spread to our investment opportunities, even as cap rates lag interest rates. Currently, both S&P and Moody's have us on positive outlook, which could provide incremental benefits to our cost of capital, even in a challenging capital markets environment. After a record investment volume in 2021, we continue to see strong deal momentum and an active growing pipeline with good visibility into about $1 billion of investments, including investments completed year to date. We're making excellent progress towards the $1.5 to $2 billion of deals embedded in our guidance. In addition, we are confident in closing our acquisition of CPA 18, which adds about $2 billion of assets that will be immediately accretive to our real estate AFFO. with additional upside in its self-storage portfolio. Strategically, this transaction also simplifies our business, concluding our exit from investment management. Finally, and perhaps most importantly in the current environment, we believe we're the best position NetLease reached for inflation, given our embedded rent growth and high proportion of ABR tied to inflation. We're achieving record same-store growth in 2022, which is expected to continue if inflation remains high. And to the extent investors are concerned about uncertainty in the market and a possible recession, we also offer unique downside protection through our diversified approach and a roughly 5% dividend yield, supported by high-quality cash flows and sector-leading rent collections during COVID. And with that, I'll pass the call over to Toni.
spk14: Thank you, Jason, and good morning, everyone. This morning, we reported total AFFO for the first quarter of $1.35 per share, up 13 cents or 11% year-over-year. This included real estate AFFO of $1.31 per share, which was up 12 cents or 10% over the same period. Real estate revenues increased 12% year-over-year, driven primarily by the strength of our investment activity over the last 12 months, the impact of rent increases tied to inflation, and strong performance across our portfolio. Lease termination and other income totaled $14.1 million for the quarter, including an $8 million termination payment related to an asset which we subsequently sold in April. The termination payment was contemplated in our initial guidance range, and for the full year, we expect termination and other income to total around $20 million. Within expenses, G&A totaled $23.1 million for the first quarter, compared to $22.1 million for the prior year period. As is typically the case, G&A was slightly higher during the first quarter than we would expect on a run rate basis, due primarily to the timing of payroll taxes. Our guidance continues to assume G&A for the full year will fall between $86 and $89 million. Property expenses, excluding reimbursable tenant costs, increased $2.9 million year-over-year to $13.8 million resulting from an increase in carrying costs and costs to reposition certain assets. We expect to see quarterly property level costs remain at or just below this level for the remainder of the year. Interest expense declined $5.6 million year over year, reflecting the interest cost savings we generated from the debt refinancing we completed early in 2021. Lastly, non-operating income included $5.2 million of cash dividends received during the first quarter, comprising a $4.3 million annual dividend on our lineage logistics common stock and a $900,000 final dividend on the preferred stock we held in Watermark Lodging Trust. As I mentioned on last quarter's call, our Watermark preferred stock was redeemed at par or $65 million in January. And as a result, we currently hold only common stock in the company, from which we are not projecting to receive any dividends during 2022. Turning now to our portfolio. As Jason discussed, on an ADR basis, 40% of assets with rent increases tied to CPI had rent bumps during the first quarter, with an average increase of 4.5%, the impact of which flowed through to our overall contractual and comprehensive same-store metrics. As a result, contractual same store growth increased from 1.8% in the fourth quarter to 2.7% for the first quarter, up almost 100 basis points. Within this, the uncapped CPI component increased 170 basis points to 3.3%, and the CPI-based component, which includes leases tied to CPI but with caps, increased 70 basis points to 2.4%. As a reminder, The increases in these metrics during the first quarter reflect fourth quarter CPI data, given the timing lag inherent in lease escalations. We anticipate contractual same-store growth at or above 3% for the remainder of this year and expect to see that trend meaningfully higher throughout most of next year, nearing 4% based on current inflation projections. Leasing activity for the first quarter included lease extensions with one of our top 10 tenants, Pendragon, which is a portfolio of car dealerships we own in the UK. We executed very attractive lease extensions on 30 sites, representing about $11 million of ABR, which added 11 years of lease term while recapturing 100% of the prior rent and keeping the existing rent bumps in place. 12 sites are expected to be sold over the next year, with Pendragon continuing to pay substantially all rent until the assets are sold. Upon completion of the remaining sales, Our Pendragon portfolio will comprise 57 assets with a weighted average lease term of 14.8 years and total ABR reduced from 1.8% to 1.5%. Disposition activity in the first quarter comprised six properties for total proceeds of $27 million. Moving now to our balance sheet and capital markets activity. We remain very well positioned from a balance sheet perspective, both in terms of our debt maturity profile and our liquidity position. We have a well-laddered series of debt maturities, limited exposure to floating rate debt, primarily through our credit facility, and our next bond maturity is not until 2024. At the end of the first quarter, debt outstanding had a weighted average interest rate of 2.5% and a weighted average maturity of 5.2 years. Our cash interest coverage ratio increased from six to 6.4 times over the first quarter and remains among the strongest in the net lease peer group. We ended the first quarter with debt to gross assets at 39.7% and net debt to EBITDA at 5.5 times, both at the low end of our target ranges. We expect to remain within our target leverage levels of low to mid 40s on debt to gross assets and mid to high five times on net debt to EBITDA. So far in 2022, our capital markets activity has comprised issuing equity under our ATM program and exercising the accordion feature on our credit facility. Specifically, we've issued 2.7 million shares year-to-date under our ATM, raising about $220 million in gross proceeds, sold at a weighted average price of $80.79 per share. Earlier this month, we also exercised the accordion feature on our term loans for the equivalent of about $300 million, increasing our total liquidity from $1.8 billion at the end of the first quarter to over $2 billion, with proceeds used to pay down our revolver balances, leaving us substantially undrawn on our revolver as a result. We therefore have ample liquidity to execute in our deal pipeline and flexibility in when we access capital markets, which is especially valuable in the current environment. Lastly, I'll briefly recap our guidance. We're maintaining our AFFO guidance range of $5.18 to $5.30 per share, including real estate AFFO of between $5.03 and $5.15 per share, which continues to assume investment volume of between $1.5 and $2 billion, and $250 to $350 million of disposition. And as a reminder, our current guidance does not reflect the impact of our proposed merger with CPA 18. And with that, I'll hand the call back to the operator for questions.
spk13: 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 comes from RJ Milligan with Raymond James. Please proceed with your question.
spk08: Thank you, and good morning. My first question is for Tony. I think previous guidance was for 2.5% to 3% of same-store rent growth for the year. So we saw the 2.7% increase in one Q, and I think in your comments you said that you expect that to trend higher given higher inflation at or above 3% for the remainder of the year. So I'm just curious, where do you expect that to shake out for the full year? Because I think the bulk of the increase was in the first quarter. So I'm just curious what the full year outlook looks like.
spk14: Yeah, thanks, RJ. I think you hit the nail on the head. I mean, we raised from what we've seen based on the prints that we're coming through now. I will say, you know, with the first quarter at 2.7%, we do expect to see you know, in the 3% range, potentially over 3% as we get later in the year. And I think what we've continued to highlight is kind of the lag in the leases. So while we're seeing that, you know, come through, I think the impact of what we've seen since we announced guidance to the raise in the inflation prints is more likely to affect the back half of the year, really even closer to the fourth quarter, and be much more impactful on 2023. And I think what we're also seeing is the
spk08: the you know the curves and the expectations for it to be sustained longer so potentially tailwinds into 2023 and into 2024 as opposed to a more meaningful impact on 2022. uh understood and so just to clarify i think you're in your comments you said that you expect it to be near four percent internal growth or same store rent growth for 23 just given what we've seen with the inflation numbers so far this year
spk14: Yeah, I think we could see certain quarters in 23 peak up to the high threes closer to four.
spk08: Okay, thanks. My second question is for just the comments on seeing signs of upward pressure and cap rates. I'm just curious if there's any specific geographies or industries or sectors where you're starting to see a little bit of breaking in terms of cap rates.
spk16: No, it's really anecdotal at this point, and I think that makes sense. I mean, the spike in interest rates really only occurred over the last six to eight weeks, so it's still pretty early. But there are some signs, and it's hard to quantify. Maybe it's 25 basis points. I mean, some of the anecdotes we're seeing is deals getting repriced out in the market and in many cases going back to market and sometimes back to us as a potential buyer. And when we look at those transactions, a month, Two months after we originally had looked at them, we may be raising our pricing on those by some factor, depending on obviously a lot of the specifics. But yeah, it's more anecdotal than anything else. The signs are there. I would expect that if rates don't reverse course, then I think we without a doubt will see some widening by the end of the year. It's just hard to quantify at this point in time.
spk08: Thanks. Just as a follow-up to that, Jason, just curious, obviously, you know, with fewer levered buyers out there in the market, I think the anticipation is that you might see, you know, a little bit better pricing, as you just mentioned. But curious how that impacts the disposition side of the $700 million of asset sales and whether or not, you know, you're seeing potentially less interest or fewer buyers for those assets given the moving interest rates.
spk16: Yeah, so the $700 million that we're disposing as part of the CP18 transaction, about 60%, so a little over $400 million of that, is the student housing portfolio that was under a purchase option that has since been exercised. That's a fixed price. That won't be impacted at all by anything that's happening in the broader rate markets. I think the other 40%, those processes are well underway. It's one student housing asset in the U.S. It's UT Austin, as well as three European office assets. And, you know, preliminary indications would suggest that we're kind of on schedule, both in terms of timing and pricing. But, you know, we'll wait to see what happens when we get final execution.
spk10: Great. Thank you, guys. Great.
spk13: Thank you. Our next question is coming from the line of John Masaka with Lattenberg Salmon. Please proceed with your question.
spk10: Good morning.
spk02: So I know you kind of disclosed the cap rate on kind of year-to-date acquisition activity. Was there any kind of bifurcation maybe between, you know, stuff that closed in 1Q22 and the stuff closing subsequent or even stuff closing in kind of January, February and stuff closing in March, April, just in terms of the cap rate you're seeing on those transactions?
spk16: Yeah, look, there is, you know, we target a big range. It's a diverse portfolio, a diverse model. So, you know, we typically do transact within that 5% to 7% range that we talk about. So there is some dispersion. Some of it could be, you know, based on where rates have gone, but it's probably more a function of, you know, the asset mix. Geographies, Europe, we're still seeing cap rates that are a little bit lower. And obviously if we're buying logistics, assets over, say, a manufacturing property, there's going to be some delta between those as well. So probably not much correlation that we're seeing because a lot of those deals were priced and in process six to eight weeks ago almost at the time of the interest rate increase. But there is some dispersion, certainly.
spk02: Okay. And then the $400 million that's kind of in the tangible pipeline, what should we think about in terms of timing of close on those transactions? Is that stuff that if it gets to the finish line would be in kind of a six-month window? Is that maybe stuff that can close over the remainder of the year? Just any color there would be helpful.
spk16: Yeah, no, these are more, these are advanced stages. These are deals that we have under, you know, at least signed letters of intent or some type of contract. Now there's diligence left, so we won't say that these are done deals necessarily, especially when you're dealing with sale leasebacks. But timing expectations are over the next 30 to 60 days for those transactions. Things could drag, and the market is volatile, so it's hard to predict exactly what happens. But those are at advanced stages, and we would expect to close them in the relatively near term, probably by the end of this quarter.
spk02: Okay. And then if we look at the comprehensive same-store growth, disclosure, it seems like some of the strength in the uncapped CPI growth was offset a little bit by, you know, weaker increases in the fixed. Do you think Colorado maybe was driving that?
spk10: You know, Brooks or Tony, if you have some insights into that.
spk09: Sorry, I was going to be there. Go ahead.
spk10: Go ahead, Tony.
spk14: I think just looking at the, your question is on the fixed rate anchoring down the CPI base.
spk02: In terms of disclosure on comprehensive, you know, same sort of growth, it seems like it was just a little weaker in the quarter. I know it's going to be a small selection of assets, but. Yeah, I think that's likely it.
spk14: I mean, what we typically see, you know, comprehensive historically kind of pre-COVID is, you know, anywhere from 50 to 100 basis points lower than contractual. I don't think there's anything specifically trending in any of the metrics this quarter. I think we are seeing still, you know, better results on the comprehensive side, but I don't think there's anything in particular that's weighing that down. I don't know, Brooks, if you had any specific detail to add to that.
spk07: No, I think it really just is kind of timing and anecdotal and what's in that specific quarter.
spk02: Okay. That's it for me. Thank you all very much.
spk10: Great. Thanks, Sean.
spk13: Thank you. Our next question is coming from Joshua Dennerlein with Bank of America. Please proceed with your question.
spk06: Yeah. Hey, everyone. Hope everyone's doing well. I was just looking at page three of the supplemental, the normalized pro rata cash NOI. It looks like it fell quarter over quarter. Is there What are the moving pieces there? I would have assumed just like given acquisitions, it would have gone up in 1Q versus 4Q. Is there something skewing doing that?
spk14: Yeah, thanks for the question, Josh. I think there's a couple of components that skew that this quarter when you're looking at it compared to Q4. The first really is the movement in FX from last quarter. So, you know, this isn't on a constant currency basis. I think we've seen about a 2% decline in the average euro rate quarter over quarter. And so that's probably about a $2 million Delta, um, from last quarter. And the other piece of it, um, I mentioned in my remarks, which is just a higher, uh, property expense total for the quarter, um, of about 2 million. So really the aggregated, those two things are really driving at the offset to the acquisition volume in the same store growth.
spk06: Okay. Okay. That makes sense. Um, and then it looks like you entered kind of a new asset class, funeral homes in Spain. How did you get comfortable underwriting those types of assets? And did you disclose a cap rate on that?
spk16: We don't disclose individual cap rates. You know, I would say it's probably in the bottom half of the range that we typically target. And, you know, that's more of a function of the fact that it's in Spain and the bulk of the value is in fill locations, you know, within Barcelona. So really high quality assets. location, strong barriers to entry, not a lot of space to develop and compete. In terms of the industry or the transaction itself, it was an off-market transaction. It was a portfolio of 26 properties with the largest funeral service provider in Spain and Portugal. We've looked at this industry in the past. We like the industry, very stable. It's really unaffected by economic cycles. We like the fact that our tenant is a market leader. It's also It's well capitalized. It's owned by Ontario Teachers Pension Plan. And then the structure was good. Master lease, very good site-level coverage, 30-year lease with CPI increases, so there's a lot to like about it. And as I mentioned, it's infilled Barcelona, probably about half of the value is infilled Barcelona, and about half the portfolio is also green, excellent rated. So I don't know if I'd call it a new vertical. I think you referred to it as, but maybe a new property type and if we can find some similar transactions that have similar characteristics to this one or maybe even some follow-on deals with the tenant itself, I think that we'd welcome that.
spk06: Okay, interesting. And then just one quick follow-up. I just missed it in the opening remarks. What was the rationale for selling down some of the Pendragon assets? Brooks, you want to take that?
spk07: Yeah, sure. This is Brooks. As Tony mentioned in the remarks, we extended 30 of those properties to 20 years new fresh terms and created enormous value they're very attractive extension terms as part of that extension we're disposing 12 of the weaker assets we've disposed three of those now three subsequent and the remainder will happen this year and that's all baked into our disposition guidance awesome all right thank you great thanks josh
spk13: Thank you. Our next question is coming from Greg McInnis with Scotiabank. Please proceed with your question.
spk04: Hey, good morning. Just a couple of lease expiration questions here. We noticed a new disclosure on the expirations page relating to a 2022 $16 million Marriott lease. Is there some concern that tenants not going to renew or why was that lease called out?
spk07: Sure. So as we've talked about before, we have a portfolio of 18 courtyard Marriotts. And really the point of the additional disclosure was to make it clear there's two tranches. So the first is 12 of those, which is $16 million in January of 2023. And the second tranche is in 2027. So it's really just to distinguish as they're blended together in the top 10 list there. And so the first tranche, we do expect a likely outcome there as those transition to operating hotels. Those properties are recovering quite well. So it's not really a non-renewal. There's an underlying business there. And current expectations are that the underlying operations will actually exceed our in-place AFSO currently. But we just want to make that clear in disclosure.
spk04: Okay. Thank you. And then the increase on... I believe it was 2023 leases, ABR as well. Was that some short-term lease acquisitions that you guys made? Just trying to understand what that increase was driven by and was there some near-term opportunity that you're excited about?
spk07: No, nothing on an acquisition front. That may have to do – I think it's very slight. I don't have the change right in front of me. But that might have to do with the resetting of some of the Pendrag and that we are in process of disposing of those 12 assets. There's also FX always flowing through that as well, but nothing notable there.
spk04: Okay, thanks. And a question, a little speculative question for you. Jason, why do you think there were no other bids on CPA 18? You know, we know that there's some private equity buyers out there looking for scale, and theoretically, CPA 18 could help achieve that goal.
spk16: Well, I mean, I think that we've had a number of advantages that we've talked about in the past. Certainly, first and foremost, where, you know, the manager, we assembled those portfolios. We know them extremely well, and therefore... can submit a strong no diligence bid. There's also other frictional costs that another prospective buyer would have to incur, such as mortgage assumption costs and some of the back end fees and carry that we would earn. So that's our guess. I mean, it is a strong portfolio. I'm guessing that the advantage that we had probably serve somewhat as a deterrent to others. And look, the period in which the GoShop occurred was a pretty volatile point in time. Interest rates shot up. There's a war in Ukraine, so there's a lot of things happening in the world that may have made it difficult for another party to make a bid on a pretty diverse portfolio that's got student housing, self-storage, net lease in both Europe and the U.S. So that's our guess, but we don't have A lot of insights. I think that the proxy has some details and color around the interest level that other bidders had. I think there were a number of them that had signed NDAs and did some work, but there was no competing bids.
spk10: All right. Thank you, guys. You're welcome.
spk13: Thank you. Our next question is coming from the line of Brad Heffern with RBC Capital Markets. Please proceed with your question.
spk03: Hey, good morning, everyone. Going back to some of the market commentary about cap rates going up and deals being repriced, are there fewer bidders showing up or are people just sort of repricing their expectations?
spk16: You know, it might be a little bit of both. I mean, you know, when cap rates or when interest rates jump as much as they have, I think buyers have, you know, something they can point to to maybe get a little bit more yield on a particular deal. So I think that's happening some But it does feel like to me, and this is, again, more anecdotal than anything else, it's more of a gut feeling that the competition has thinned out a little bit. The higher leverage buyers who are certainly more negatively impacted by the jump in rates, they seem like they could be on the sidelines a little bit or not as competitive. And that's obviously a good thing for us. But it does feel like that there's a little bit of thinness in some of the processes or or properties that we've been involved with. Not necessarily one that we've won, but in conversations with brokers, it does feel like that there's a little bit less of a robust marketplace. And again, that's a good thing.
spk03: Yeah, okay. And maybe for Tony, you know, going back to the conversation on the increase in same-store rent growth expectations, I understand it's probably biased towards the end of the year, but it still seems like going from, you know, to above 3% would be enough to move the guidance a little bit. So, I'm just curious, are you just waiting until later in the year to see how acquisitions play out, or was there some sort of offsetting factor that left the guidance unchanged this quarter?
spk14: specific change from when we went out with guidance to inflation has probably a two cent impact overall. You know, and so I think that's still well within the guidance range. I think there's a number of other moving parts that we've been talking about on this call, including kind of the impact on interest rates and how that might affect higher cap rates. So, you know, I think all in that, that two cents is not as meaningful to this year in terms of where we are in relation to our guidance. I think we feel good about where we are. But there's, you know, there's certainly other moving parts within the range that would offset that.
spk03: Yeah, okay, got it. And then just an administrative question. If CPA 18 doesn't be closed during the third quarter, will that be reported as discontinued ops or will the fee income be included in FFO?
spk14: Sorry, if the CPA 18 dispositions don't close?
spk03: No, sorry, if CPA 18 does close, Will the fee income be included in FFO or will it be reported as discontinued operations?
spk14: Oh, sorry about that. No, there's no real concept of discontinued operations there, but I think what's important to note is we report real estate AFFO and investment management AFFO, and so you'll see kind of the shift over to the real estate with the acquired portfolio, and then the investment management fee streams will just decline and essentially go away.
spk10: Okay, thank you.
spk13: Thank you. Our next question is coming from Anthony Pallone with JP Morgan. Please proceed with your question.
spk11: Yeah, thank you. My first one is just a two-parter related to Europe. One, does the Ukraine situation change how you're thinking about allocating capital around the continent or even to the continent in general? And then the second part is just as it relates to FX, what is sort of the bottom line exposure or hedging situation? because I know you've got hedges and you've got the local debt, and so just where is that all met out?
spk16: Yeah, Tony, let me take the first one, and I'll pass the second one along to Tony Sanzone. So does it affect our underwriting on how we're looking at Europe? You know, certainly the world events are affecting our underwriting, but it's more on a – I would say specific to Europe. I mean, we're looking at what are the consequences that could have on a global economy, You know, how is that flowing through to supply chains and energy costs? And how does that impact kind of credits? So that's just part of the calculus that we're doing on any deal for that matter. I don't know if it's specific to Europe at this point in time. We're certainly keeping a close eye on it all and, you know, maintaining the same level of diligence that we've always done on deals. But that's kind of how we're looking at it right now.
spk14: Yeah, and on your question on the FX and the hedging strategy, you know, we talked about this a few times. I think the, you know, the natural way that we do look to hedge, we obviously is through issuing foreign debt to offset the impact on the revenues. And then further, we go ahead and we have a hedging program that eliminates kind of any additional or the significant portion of the additional exposure. I think, you know, you're right to kind of look at where we are right now and the way rates are moving. But we definitely mitigate a significant portion of that. I think if you look at the overall net exposure of what remains for us, if you look at 2021 rates, we averaged about, you know, 118 on the Euro. So we do expect about, you know, a 7 to 10% decline year over year. And that's baked into our guidance. I think that, you know, that could result in year over year FX exposure of roughly 8 cents. And, you know, that is one of the headwinds that we're seeing this year. But we do expect that our hedging strategy more than mitigates the majority of that.
spk11: Okay, so the $0.08 is before incorporating the local debt and the hedging. So the actual effect of how you're thinking about FX for this year is a lot smaller than that.
spk14: No, the $0.08 is after hedging, so I think that's probably the largest exposure you'll ever see in terms of the rate movement we're seeing in any one year. But that's a full year-over-year decline, the way that I'm describing that. But it is after hedges. I think the way we think about it internally is every 10% change in the euro could result in about a 1.5% change in ASFO after hedges on a full-year basis.
spk11: Okay, got it. Thank you. And then I guess sticking with you and related to guidance, you had the last quarter, and maybe I missed this if you updated it, last quarter you talked about lease term fees being, I think, $18 to $20 million or something in that ballpark, and it looks like you got the bulk of that in one queue. So any change to the total number for the year, thinking there, and then also was there anything outsized on the other income side in one queue related to just working through CPA 18 or anything like that that we should be mindful of?
spk14: Yeah, I think on the first part of your question, we came out with an initial range on our expectation for other lease term income of about $15 to $20 million. I think we're tracking towards the higher end of that now. As you highlighted, we're front end weighted for sure. We have about $14 million in total in the first quarter, and we expected that that would be front end weighted. So that's all been contemplated in guidance. You know, and in terms of the one more significant one in the first quarter that I highlighted, it was about $8 million, and we did dispose that asset subsequent to quarter end. So no real NOI impact there. You know, in terms of what we expect for the rest of the year, I think it'll normalize based on what we see right now.
spk11: Okay. And then just last question related to CPA 18, any updated thoughts in terms of how you're thinking about the storage component of that portfolio and how much to keep maybe operating versus net lease versus sale?
spk16: Yeah. I would say it's still all on the table. I mean, we have probably three good options in the way I look at it. We have a long history of owning self-sorge within our portfolio, and this portfolio specifically. We assembled it over the last 10 years in CPA 18. So we could continue to own those properties. They're currently managed by both Extra Space and Cube. And that might be the right move for at least the near term, given the high growth expectations embedded into that asset class right now. But ultimately, we could put a net lease in place like we did with Extra Space. I think we have a good blueprint. for that that we did back with the CPA 17 storage assets. And then certainly these assets will trade a pretty tight cap rate. So to the extent we think that it's the best way to fund new deals, then that's an option as well to sell all or maybe a portion of the properties if that's a good use of capital or a good allocation of capital at that point in time. But generally, I think we can be patient right now because we do know these assets well. and we are expecting some outsized growth within them.
spk11: Okay, thanks for the time. Yep, you're welcome.
spk13: Thank you. Our next question is coming from John Kim with BMO Capital Markets. Please proceed with your question.
spk17: Hey, good morning, guys. It's Eric on for John. Just one quick one on CPI rents. You know, of the acquisitions closed year-to-date, did any of those have the CPI lease agreements baked in them?
spk16: Of what we've closed year-to-date? Yeah, it's about... I think it's about 50% of our year-to-date, looking for the number right now, just below 50% of our, actually no, just above 50%, sorry, of the deals we've closed have CPI. It's a mix of both Europe, it's probably predominantly Europe, but I think there's some U.S. in there as well, and some have caps and some are uncapped. And our pipeline is very similar. It's actually just under 50% of the pipeline that we talked about in terms of the amount of CPI base increases versus fixed increases. Maybe the other thing to note is even the fixed increases that we're getting, we are able to negotiate a little bit higher of an increase than what we've seen in the past. I mean, I think typically in the past it's probably been 2% on average, maybe even a little bit below that. I think now we're seeing fixed deals in the 2% to 3% range. So there's some upside there given the current market conditions.
spk17: Okay, so those conversations aren't becoming more difficult kind of given the current inflationary environment?
spk16: Yeah, I mean, look, it's more of a conversation now, certainly. In Europe, it is more standard or customary to have inflation. So we're continuing to get those. I think there's more discussions around floors. I'm sorry, for caps. And if we do caps, we typically require floors as well. In the U.S., fixed has historically been more standard. But it doesn't mean that we're not getting some of those. But, yeah, there's more discussion around it. And, you know, certainly one of the benefits of sourcing most of our deals through sale leasebacks, we can dictate structure. And we certainly have an emphasis on inflation-based increases in our leases.
spk10: So we're continuing to have some success. Okay, perfect. Thank you. You're welcome.
spk13: Thank you. Our next question is coming from Emmanuel Corchman with Citi. Please proceed with your question.
spk18: Hey, everyone. Just going back to the investment pipeline, if you could share with us what you think the pace of closing those might be through the year.
spk16: Yeah, I mentioned on a prior question, Manny, that the $400 million that are in advanced stages, obviously the markets are volatile, so it's hard to predict entirely, but our expectation is that we'll close most of those during the second quarter. I think the remainder of our kind of pipeline um you know it's hard to predict i think that's going to be further out in the year and obviously anything that we would close in the fourth quarter is likely not even in a pipeline at this point in time the fourth quarter historically has been our most active quarter so it sounds like for modeling purposes you're looking for how to pace things out and maybe the only thing i can say is that you know second quarter should be active and um and we would expect the fourth quarter to continue to be active and we're hoping that the uh the third quarter follows suit i guess
spk18: And then, Jason, just following up on that, given cap rates are potentially moving upward, do you have any desire or do you even think about pausing things and saying, hey, look, we don't have to do this as quickly as we wanted to? Maybe it's to our benefit to wait, or is there something else weighing against that? And how do you kind of think about that environment right now?
spk16: Yeah, I mean, look, from my perspective, if we're able to generate sufficient spreads to our cost of capital, you know, then we want to stay active in the market. We have good access to capital. You know, we're in a really good place from a balance sheet standpoint right now. Tony mentioned that we raised, well, yeah, we raised a billion and a half of bonds last year. We have expanded our exercise, our accordion feature on our term loan. So we have, you know, close to $2 billion, maybe a little over $2 billion in liquidity. So we feel very good from a capital availability standpoint. And we do like our spreads. I think clearly the cost is higher on the debt side right now than it was a couple months back and certainly over last year. But we're a lower leveraged buyer, so overall our cost of capital is more impacted by our cost of equity, which has meaningfully improved since February. So we're feeling pretty good about our cost of capital. I think that when you think about cap rates, it's hard to predict where they're going to go. I think that they are We're seeing some signs of increases, but, you know, if we can find some good deals now, we want to continue to transact. And if rates rise throughout the year, then we'll be aggressive on those as well. And we're going to be mindful of our cost of capital all along, but we do feel good about the spreads we're able to generate.
spk10: Great. Thanks very much. Yep, you're welcome.
spk13: Thank you. Our next question is coming from Harsh Hemnani with Green Street. Please proceed with your question.
spk00: Hey, my first question is around the 40% of leases in the portfolio linked to uncapped CBI. How much of that is coming from Europe versus the U.S.?
spk10: Tony, do you or Brooks have that?
spk07: I want to say that it's about 50-50, but go ahead, Brooks. Sure, it's uncapped, as you said, around 40%. It's about 60-40 Europe to U.S. if you were to split that 40.
spk00: That's absolutely. And then, you know, you mentioned through the year the NOI growth that you expect from these leases to increase. How much of that is from the U.S.
spk10: versus Europe?
spk09: I'm sorry, I didn't catch the end of that question.
spk00: So you mentioned the NOI growth from these leases moving up to 3% towards the end of the year. And how much of that is being driven by expectations that you're seeing already? Inflation from last year, that will flow through into NOI. How much of that is coming from the US versus Europe? And then looking forward at 2023 even, how are you expecting that moving?
spk14: Yeah, I think we're looking at the curves that are out there right now for both the U.S. and the various countries in Europe in which we operate. And I think it's really across the board. I would say that the curves in Europe have moved along with the U.S. in the most recent months. So when I highlighted earlier about a one to two cent increase over the back half of this year in terms of what we've seen move in the last month or two since initial guidance, I think that's you know, pretty fairly weighted between the U.S. and Europe. So it's definitely in both locations.
spk00: Got it. That's helpful. And then for my second question, I want to touch on about two-thirds of the acquisitions in the first quarter came from Europe. And I want to check, is this because maybe you're seeing higher investment spread there right now relative to the U.S.? And how should we expect this to trend for the rest of the year?
spk16: Yeah, sure. Yeah, we did have a higher amount of deals in the first quarter. I think year to date, it's about a 50-50 split between the two regions. So higher than we've had in the past. I think 2021 was about a third of our investments and our ABR is allocated about a third to Europe. So there's a little bit higher allocation right now. I think generally speaking, we were able to generate wider spreads in Europe. I think cap rates have, you know, compressed over the last year to two years inside of those in the U.S., but not enough to offset the cheaper borrowing costs that we see over there. So, yeah, it's a good market for us. There's lots of reasons why we like to be there. Certainly spreads is one, but just the quality of the real estate barriers to entry, you know, and the lack of competition are all things that are positive attributes. So we continue to hopefully find good investments there. And the pipeline is also a little bit weighted there. I think it's about 50-50 Europe-US as well. It's a little bit of an elevated allocation relative to the existing portfolio.
spk10: Sounds good. Thank you. You're welcome.
spk13: Thank you. Our next question is coming from Sheila McGrath with Evercore ISI. Please proceed with your question.
spk12: Yes. Good morning. Jason, I was wondering if you could remind us, based on your experience of closing the other CPA funds, is there short-term selling pressure as the retail investors get more liquidity, or just how should we think about that dynamic?
spk16: Yeah, I think for the first couple days, maybe a week or so, you'll see elevated trading, but it should moderate over time. In the past, prior CPAs, not CPA 17 actually, there were other CPA programs to reinvest into, so there might have been more selling pressure back then. But I think over time, we've seen half, maybe a little bit more than half of the shareholders stay in, but most of the selling pressure is pretty short-term, and our expectation is that the institutional investors will see it as the elevated trading volume as a way to maybe get a position in WP Carey, and it should absorb a lot of the volatility.
spk12: Okay, and then on the positive outlook from the rating agencies, is that driven in part by the additional diversification that you'll get on closing CPA 18, so we should wait for closing for any change?
spk16: No, I don't think it's the, yeah, it's not the additional diversification. I mean, we're very well diversified, and, you know, CP18 is a diversified portfolio, but it's not adding, you know, that much, especially given the size of it relative to, WP Carey's current size. I don't know, Tony, if you want to tick through any of the reasons, but generally speaking, our credit profile has continued to improve, and I think that's probably more the reason. In particular, our secured debt has come way down in leverage levels as well, so there's just a lot of positive momentum behind our credit profile.
spk14: Yeah, so I think just adding to that, it's really, you know, we don't expect any material change in our metrics as a result of CPA 18. And so I think, you know, that's viewed positively by the rating agencies.
spk12: Okay, and last question. Tony, hypothetically, if you were going to go into the unsecured 10-year bond market now, where do you think a range, Ross, in the U.S. and in Europe would be? Just to help us.
spk14: That's a great question, Sheila. I think that's something that we're, you know, monitoring on a daily basis, but it really is a dynamic environment. You know, I think we're aware, obviously, that rates have moved from, you know, where we've last issued and certainly even in the last six weeks. I'd say, you know, it's moving by the day. It's really hard to pinpoint a number. You know, we do expect that it's moved up in both the U.S. and in Europe, you know, in terms of where we could issue right now. But it's pretty challenging for us to pinpoint a number. And I think what's more important is that We don't really have a reason to transact at this point in time, given all the work that we've done on our balance sheet and how well positioned we are. So, you know, I did mention the term loans that we exercise, the increase on our credit facility. So we have a lot of room there. We have a lot of dry powder on the equity side with the forward agreement that we still have outstanding. And so we really don't expect a need to transact in this market where it stands right now.
spk09: Okay, great. Thank you.
spk13: Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad at this time. Our next question is coming from Chris Lucas with Capital One Securities. Please proceed with your question.
spk05: Hey, good morning, everybody. Hey, Tony, just to stick with you for a second, just going back to the term loan, what's the duration and is there any prepayment penalties during the duration of a term loan?
spk14: Yeah, the credit facility for us matures in 2025. I think we'll certainly be looking to address it before that point in time. But in terms of the actual prepayments, they're fully flexible. So there's no prepayment penalty on that, which was one of the interesting components for us.
spk05: Okay. And then, Jason, just kind of going back to the conversation about, you know, your flexibility and optionality with this self-storage assets, And then just thinking about the hotel lease expiration, I guess sort of two parts. One is what's your view or bias as it relates to what to do with the hotels once they roll off of the master lease? And then secondarily to that, is there a risk management profile that you want to keep in terms of limiting either by, you know, gross value of ABR exposure or, you know, as a percentage of overall ABR exposure you're willing to have in operating assets versus, you know, fully. pass through triple net lease assets?
spk16: Yeah, those are good questions, Chris. On Marriott, we would not expect to own those assets long term. I think that they would convert to franchise agreements to the extent they don't renew the leases. And we don't have to have an immediate sale. I think it's probably prudent to wait until those assets are more stabilized coming out of COVID. but I wouldn't expect us to hold them for very long. It's hard to put an exact timeline on what that stabilization would look like, but ultimately we would certainly sell those. I think the self-storage is probably a little bit different. They're a different cash flow profile, obviously much more stable than the hotel industry. So I don't think you'd see as much noise moving through the income statement or even on our expense side of things. um, you know, holding the self storage, but it is a sizable amount. I mean, it's not that big relative to the broader portfolio, but you know, we're, what we're adding is, is meaningful in size. And we certainly keep that in mind as we look at our options, um, which, you know, to mitigate that could be to convert to net lease, which we did with the prior portfolio. Or if we think that there are, um, it's the right thing to sell and reinvest that into, into net lease assets, you know, that's something we can consider as well. But, but, but you're right. That's part of the, the, um, Part of the consideration in what we do with these assets is how does that impact the stability of a net lease portfolio.
spk10: Great, thank you. That's all I had this morning. Okay, great. Thanks, Chris.
spk13: Thank you. At this time, I am not showing any further questions. I'll now hand the call back to Mr. Sands.
spk15: Thanks, Jessie, and thank you to everyone on the call for joining us this morning. If anyone has additional questions, please call Investor Relations directly on 212-492-1110. And that concludes today's call.
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