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spk07: Hello and welcome to WP Carey's first quarter 2023 earnings conference call. My name is Jessie and I will be your operator today. All lines have been placed on mute to prevent any background noise. Please note that today's event is being recorded. After today's prepared remarks, we will be taking questions via the phone line. Instructions on how to do so will be given at the appropriate time. I will now turn today's program over to Peter Sands, Head of Investor Relations. Mr. Sands, please go ahead.
spk13: Good morning everyone. Thank you for joining us this morning for our 2023 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 where it will be archived for approximately one year and where you can also find copies of our investor presentations and other related materials. And with that, I'll hand the call over to our Chief Executive Officer, Jason Fox.
spk10: Thanks, Peter, and good morning, everyone. I'm pleased to say we've made a strong start to the year through our investment activity. We've also continued to generate the highest contractual rent growth in the net lease sector. We expect to average around 4% for 2023, even with inflation coming off its peak, and to remain elevated in 2024. This morning, I'll briefly review our recent investment and capital raising activities. And Tony Sanzone, our CFO, will cover the details of our results, guidance, and balance sheet positioning. John Park, our president, Brooks Gordon, our head of asset management, are also on the call to take questions. Starting with external growth. Investment volume year-to-date totals $743 million, comprising $178 million closed during the first quarter and $566 million so far in the second quarter. Our investments year-to-date were completed at a weighted average cap rate of 7.2% and a weighted average lease term of 21 years. In line with our core focus, virtually all were industrial sale leasebacks, including three industrial portfolios, each over $50 million. in addition, of course, to the Apitex transaction, as the single largest driver at $468 million. Apitex was a sizable sale-leaseback, so I'll briefly recap that transaction, which is an excellent example of our ability to partner with private equity sponsors, utilizing sale-leasebacks as part of the capital stack in corporate acquisitions. It also demonstrates our ability to source and execute large deals, as well as the competitive advantage we have by being able to fund transactions especially large ones, entirely with our own balance sheet. In fact, we believe very few of the net lease buyers we compete against could close a transaction of this size, and even fewer without using asset-level debt, something that is generally uneconomical or unavailable in the current environment. Pennant is a global pharmaceutical company and the largest generic drug manufacturer in Canada. The portfolio comprises 11 properties, over four pharmaceutical R&D companies, and advanced manufacturing campuses, primarily located in attractive infill locations in Toronto, where vacancy rates for industrial real estate are in the low single digits. And the facilities are mission critical to the tenant's business, representing the vast majority of its global operations. This was an accretive transaction in line with others we've executed this year and structured as a triple net master lease with rent payable in U.S. dollars and 3% fixed rent escalations over a 20-year term. The transaction closed concurrently with the private equity buyout of Apotex, and it was funded on March 31st, but closed on April 3rd. Given the timing, Apotex did not therefore appear in our first quarter supplemental portfolio metrics. However, on a pro forma basis, it ranks as our third largest tenant, representing just over 2% of ABR. And along with another industrial portfolio investment we've completed so far in the second quarter, increases our overall exposure to warehouse and industrial to approximately 53% of AVR. Turning to the investment environment, in the U.S., the backdrop largely remains the same as it was on our last earnings call in February, with cap rates on our investments year-to-date averaging about 40 basis points higher compared to the investments we closed during the fourth quarter. Within the opportunity set we target, we've continued to see the best opportunities in industrial, where cap rates have increased the most. In Europe, we've seen a pickup in longer-range opportunities since the fourth quarter, driven by higher interest rates. In many respects, the current transaction backdrop in Europe is similar to that in the U.S. at the start of the fourth quarter of last year, and we expect it to follow a similar trajectory, providing a growing number of interesting opportunities as the year progresses, driven by the increasing competitiveness of sale leasebacks versus sellers funding alternatives. The large majority of the investment opportunities we're evaluating in both regions continue to span a range of cap rates in the mid to high sixes and up into the sevens. Cap rates in this range continue to provide a comfortable spread to our cost of capital, and we're confident in our ability to execute given the strength of our balance sheet. However, if capital markets remain unsettled or borrowing costs move higher, we would expect to see additional upward pressure on cap rates in the second half of the year. While corporate M&A has slowed, we are seeing an increase in the proportion of transactions where sellers are considering sale leasebacks, including corporate refinancings. The overall environment for sale leasebacks remains favorable, with high-yield debt and leveraged loans continuing to be expensive, driving more and more companies and private equity sponsors to explore sale leasebacks. And as the market leader in this type of transaction, we expect to remain the major beneficiary of that trend. We also continue to have a competitive advantage with sellers concerned about execution risk, given the strength of our balance sheet and ability to close deals without relying on asset-level debt, which is particularly relevant for the tenants just below investment grade that we target. Overall, the investment environment remains constructive, and we're on track to close meaningfully higher investment volume relative to last year. We have an active pipeline, including several hundred million dollars of investments at various stages, with a handful of early-stage opportunities in Europe. Our internal growth also remains very strong, given the high proportion of leases with rent escalations tied to inflation. Even though there is evidence that inflation is beginning to cool, the inherent lag on which it flows through to rents keep our contractual same-store rent growth at around 4% in 2023 and over 3% in 2024. Keep in mind, this is based on projections of inflation returning to around 2% by the end of next year. So to the extent inflation remains above 2%, our same-store rent growth will also remain elevated. Moving to capital raising, we continue to utilize our access to a variety of capital sources. Tony will cover the details, but at a high level, first quarter activity was driven by equity capital raising, ending the quarter with significant forward equity available to settle, issued at prices well above current levels. Earlier this week, we completed a 500 million euro three-year term loan with the potential to go up to 750 million euro through its accordion feature. We therefore continue to have capital to put to work and remain well-positioned to fund the investment volume embedded in our guidance. Lastly, with the odds of a recession in the second half of this year increasing, I want to reiterate that we have a well-diversified portfolio of critical real estate leased to large companies on long-term leases. Our portfolio has proven resiliency with the stability of our cash flows demonstrated over numerous economic cycles and throughout the COVID stress test. Occupancy remains very high, as do rent collections, and we have a benign watch list with no particular themes in terms of tenant industry or property type. In addition to downside protection, we also pay a well-covered growing dividend currently yielding around 6%. In closing, we're pleased with the progress we're making in 2023, which sets us apart from most other net lease REITs in the current environment, particularly the strength of our investment volume, supported by a well-positioned balance sheet and access to various forms of capital, as well as the sector-leading rent growth we're achieving. And with that, I'll pass the call over to Toni.
spk01: Thank you, Jason, and good morning, everyone. For the 2023 first quarter, we generated total AFFO of $1.31 per diluted share, up 1.6% from the prior quarter, and flat compared to real estate AFFO per share for the same period last year. As Jason discussed, Investment volume has been strong year-to-date at $743 million. The large majority closed subsequent to quarter end, adding about $40 million of ABR early in the second quarter. Our first quarter results continued to benefit from the strength of the rent escalations built into our portfolio, as we've reported record contractual same-store rent growth of 4.3% year-over-year, which is 90 basis points higher than it was for the fourth quarter, and 160 basis points above the year-ago quarter. During the first quarter, approximately 45% of CPI-linked ABR went through rent increases at rates that were the highest we've seen to date, averaging 7.2% for leases with uncapped CPI rent escalations. This was largely driven by the timing lag on which our inflation-linked leases escalate. As a result of this lag, we expect our contractual same-store rent growth to average about 4% for 2023 and to remain elevated above historical levels at around 3% in 2024, even with inflation beginning to moderate. Comprehensive same-store rent growth for the first quarter, which is based on the pro-rat and net lease rent included in our ASFO, was 3.3% year-over-year. And we ended the quarter with 99.2% occupancy in our portfolio, up from 98.8%, at the end of the year. Disposition activity during the first quarter comprised five properties for gross proceeds of $43 million. Additionally, for two of our dispositions, we negotiated and received early lease termination payments totaling $11.4 million, which were contingent on the sales of those properties and were recognized during the first quarter in other lease-related income. For the 2023 full year, we continue to expect other lease-related income to remain in line with 2022. As anticipated, we received notice during the first quarter from U-Haul of its intention to exercise the purchase option on our portfolio of 78 net lease self-storage facilities. This notice triggered certain accounting reclassifications, both of the asset on our balance sheet and the rent on our income statement. and resulted in the recognition of a $176 million gain on sale during the first quarter. However, these have no impact on our ASFO, ABR, or portfolio metrics. Currently, we estimate that we will receive approximately $470 million in disposition proceeds, which is calculated based on CPI and expected to occur around the end of the 2024 first quarter, resulting in a disposition cap rate around 8.2%. Notably, we do not have any other significant purchase options in our portfolio. Non-operating income for the first quarter primarily comprised realized gains from foreign currency hedges totaling $4.1 million. Our guidance continues to assume currency rates remain at or around first quarter levels, resulting in quarterly gains from currency hedges in line with those generated during the first quarter. If the euro continues to strengthen, it will positively impact our net euro cash flows, partly offset by lower hedging gains. Operating properties, in aggregate, generated NOI totaling $21 million during the first quarter, primarily from our self-storage operating portfolio and two months of operating NOI from the 12 Marriott hotels that converted from net lease to operating properties in January of this year. The Marriott operating assets remain non-core. Nine properties are targeted for sale and we continue to pursue attractive redevelopment opportunities for the other three. Until these hotels are sold or redeveloped, Marriott will continue to operate and manage them under long-term franchise agreements. We will provide updates as we make progress, but for purposes of our guidance, we continue to assume the vast majority will remain on our balance sheet until late in the year. And as a result, we continue to expect NOI from all operating properties to total approximately $100 million for 2023. Turning to expenses, interest expense totaled $67 million for the first quarter, flat with the prior quarter, and up $21 million from the same period in the prior year. Our weighted average interest rate was 3.1% for the quarter, which was in line with the fourth quarter, but up from 2.5% for the year-ago quarter, given higher base rates. Non-reimbursed property expenses were $12.8 million for the first quarter, declining 8% from the fourth quarter and 7% from the year-ago quarter. As I mentioned earlier, portfolio occupancy increased versus last quarter, which factors into our expectation that non-reimbursed property expenses will continue to decline over the course of 2023. G&A expense was $26.4 million for the first quarter, reflecting higher compensation costs and an increase in professional fees as a result of the CPA 18 merger. As a reminder, G&A expense typically trends higher in the first quarter than the rest of the year, due primarily to the timing of certain payroll-related items. For the full year, we continue to expect G&A to fall between $97 and $100 million. Tax expense totaled $11 million for the first quarter on an ASFO basis, up from both the fourth quarter and the same period last year, primarily as a result of the impact of CPI-linked increases on foreign rents. The year-over-year increase also reflects the addition of assets acquired in the CPA 18 merger. Turning briefly to our guidance, we're maintaining our full-year AFFO guidance range of $5.30 to $5.40 per share, which at the midpoint implies almost 3% year-over-year growth on real estate AFFO per share. Our guidance continues to assume investment volume between $1.75 and $2.25 billion for the year, and disposition volume of $300 to $400 million. Moving now to our capital markets activity and balance sheet positioning. We continue to utilize our access to a variety of capital sources. First quarter activity was driven by equity capital raising, followed more recently by the term loan we announced earlier this week. For equity, we settled 3.1 million shares under outstanding equity forwards at the end of the first quarter raising $250 million. Given the timing, the shares will be fully reflected in our second quarter diluted share count. During the first quarter, we also sold additional equity forwards through our ATM program for anticipated net proceeds of $104 million. In conjunction with prior unsettled equity forwards, we therefore ended the quarter with about $385 million of forward equity available to settle. For our key leverage and liquidity metrics, debt to gross assets ended the first quarter at 40.3%. Net debt to EBITDA was 5.8 times as we funded approximately $470 million for our investment in Apotex on the last day of the quarter, with the EBITDA from that investment commencing at the start of the second quarter. I want to highlight that our leverage metrics do not reflect the pro forma impact of settling undrawn equity forwards, which would bring our net debt to EBITDA to the low end of our target range. We currently expect to remain well within our target leverage ranges of low to mid 40s on debt to gross assets and mid to high five times on net debt to EBITDA. We maintained a strong liquidity position, totaling approximately $1.7 billion, including undrawn equity forwards, despite being $670 million drawn on our $1.8 billion revolving credit facility at quarter end. again due primarily to the funding of the Apotex transaction. As Jason noted, earlier this week we completed a 500 million euro three-year unsecured term loan and executed an interest rate swap fixing the rate at 4.3% through the end of 2024. The term loan was fully drawn at closing and the proceeds were primarily used to pay down our revolving credit facility. The combination of availability on our credit facility Unsettled equity forwards raised at over $83 per share and expected disposition proceeds mean we are well positioned to fund the remaining investment volume embedded in our 2023 guidance on a leverage neutral basis without the need to return to the capital markets this year, enabling us to remain opportunistic when we raise capital. Lastly, our near-term debt maturities remain manageable. We have just over $300 million of mortgages due in 2023. a portion of which will be retired as part of our disposition plans, and no bonds maturing until April 2024. In closing, we're focused on building on our strong start to the year in a transaction environment that remains favorable for sale leasebacks and an inflationary environment that continues to drive superior rent growth. And with that, I'll hand the call back to the operator for questions.
spk07: 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 number two. Our first question is coming from the line of Spencer Alloway with Green Street. Please proceed with your question.
spk00: Yeah, thank you. Can you provide some additional color on the transaction market in both the U.S. and Europe? What industries are you seeing being marketed most heavily? And then can you provide a rough split of the deal source between the U.S. and Europe?
spk10: Yeah, sure. I mean, the backdrop, I would say, remains very similar to where it was at the beginning of the year. I think in the U.S. we've seen cap rates continue to adjust and maybe reach more of an equilibrium than we've seen in Europe. I think Europe is a little bit earlier stage, I'd kind of characterize it similar to how the U.S. was at the beginning of the fourth quarter when sellers started to adjust more to the current industry environment. And that's reflected in our deal flow. I think that for the U.S., that's where more of the deals are. We've seen cap rates come up to levels that really work for us right now. I think in Europe, right now, I think the pipeline is probably about 25% Europe, so we're seeing some activity, but it's still going to be more weighted towards the U.S. right now.
spk00: Okay, and then you guys divested several office assets in the quarter, so this is a property type that's been unfavorable, I would say, for some time, but just curious which was the decision to sell the properties in this quarter, and then if you could provide a little color on the few office leases that you guys extended in the quarter as well, that would be helpful.
spk10: Yeah, Brooks, do you want to give any color on the office dispositions?
spk02: Sure.
spk11: Yeah, I think in context, as we've noted in prior calls, we remain underweight office, and that will be overweight in our dispositions. These particular deals were deal-specific, and as Tony noted, were tied to pretty sizable lease termination payments as well, so that really should be included in the overall value there. In terms of Sorry, was the second part of your question?
spk00: Sorry, I was just asking about the decision just to kind of like divest the office assets in the first quarter, just given it's been an unfavorable asset for some time.
spk11: Got it. So, yeah, in this particular quarter, it's really deal specific. The execution was quite strong. You know, note the largest of those was A property in Chicago where we had executed a much larger termination payment in a prior quarter, which you may recall, about $41 million. So kind of the total economics from the sales plus those terminations is a pretty sizable amount. So good execution on these particular properties, but really deal specific in terms of timing.
spk04: Great. Thank you, guys. Thank you.
spk07: Our next question is coming from Brad Heffern with RBC. Please proceed with your question.
spk12: Hey, good morning, everyone. You talked about the over 3% figure for contractual rent growth in 24. How much of that is baked at this point, and how much of it is dependent on what the trajectory of inflation is between now and then?
spk10: Yeah, Tony, do you have some details around that?
spk01: Yep, I can cover that. Good morning. I think the large majority is, we talked about the same story for this year. certainly fully baked given kind of where the rent escalations are and the timing in our leases. I'd say the 3% that we're referencing into next year largely assumes that the CPI starts to stabilize more towards the end of 2024. So I think, you know, it certainly could move from there, but I think that's all factored into roughly the 3% that we're expecting to see next year.
spk12: Okay, got it. And then on the APOTEX deal, I think you said it had 3% annual escalations. That obviously seems higher than what you would typically see for fixed escalators. So I'm curious how much of that is the environment that we're in and how much of it is just the specific situation?
spk10: Yeah, look, I think a lot of it has to do with the environment. We are still focused on CPI-based increases in our leases, but of course it's more of a conversation now and maybe a little bit more difficult to get. I think it's still customary in Europe, but maybe in the U.S. and Canada as well. It's something that we need to negotiate with a little bit more. And when we're not getting inflation-based increases, it is flowing through to our fixed increase. And I think that Apotex is an example of that, where as an alternative to CPI, that was part of the negotiation. I think what also factors in here is the specific markets that we're investing in. These are infill, Toronto, industrial properties, very strong markets, low single-digit vacancies. And, you know, when we structure our deals, we do want our lease bumps to, you know, reflect what we expect market rents to do. And these are really strong markets that we think, you know, certainly could grow at 3% a year over a long period of time.
spk12: Okay, got it. And then obviously the U-Haul option will be diluted next year, but I think in the past you've talked about the lineage shares potentially being an offset to that. I guess, can you walk through how you see that math and the potential for that to be an offset in 2024?
spk10: Yeah, look, the U-Haul transaction, you know, we've been kind of talking about that for a number of quarters, maybe even a number of years at this point in time where it's been expected. I think the purchase option price has gone up meaningfully with inflation. And I think the reinvestment cap rate has also gone up given with the market. So I think the spread or the dilution on selling that asset has come down meaningfully and and won't be all that material. You mentioned lineage. I think that's an offset that we do at times like the couple with U-Haul. It's a similar size asset lineage. I think our mark right now is around $400 million. We don't have good visibility into the timing on that. I think that there's probably a liquidity event sometime in the next couple of years, but we don't have visibility into it. But when it does offer us in exit, we would be selling that $400 million asset that's currently not paying any dividend at all and then using that capital to accretively reinvest. You can kind of think about it if we're reinvesting at seven caps, going from zero to seven on $400 million is pretty significant and wildly offsets any dilution we would see of selling the U-Haul portfolio and kind of the low eights and, again, reinvesting around a seven cap. So timing may not line up perfectly, but I think that there's been less focus on lineage and it's a pretty valuable asset that we're holding.
spk02: Thank you. You're welcome.
spk07: Thank you. Our next question is coming from the line of Anthony Paoloni with JP Morgan. Please proceed with your question.
spk08: Great, thanks. Jason, I guess first one for you. Can you update us on just your thinking around the operating self-storage assets? It seems like that market or that business is starting to see deceleration and growth, but yet private market cap rates still seem to be pretty strong. So just any updated thoughts on how you're thinking about that segment of the business?
spk10: Yeah, sure, Tony. Yeah, it's something that we're continuing to evaluate. I think we still have those – you know, the three broad options that we talk about, which is continue to own as operating assets. We could convert, you know, the operating assets to net lease, similar to the transaction we did a couple of years ago. And then to your point, we can also sell these at likely, you know, attractive cap rates and reinvest them in a net lease. I think all good options, and we're always considering all the options, and we'll continue to do that. I think in the meantime, while same store has decelerated You know, we still like the mid-single-digit growth we are seeing in our portfolio. We also like self-storage's resiliency in the event of, you know, recession. And, you know, frankly, it's a nice complement to our net lease portfolio. So I think there's something to do there, and we'll continue to evaluate, but nothing, I would say, imminent right now.
spk08: Okay, thanks. And then I guess just, again, starting to look out to 24 with some of these items that we're starting to get some color on. You have the Las Vegas retail loan. How should we think about what happens with that next year?
spk10: Yeah, sure. So just as a quick reminder, that was a loan that we originated in, I think it was June of 2021. It was a construction loan for a retail development on a prime, prime location on the Las Vegas Strip. You can argue one of the best locations on the Strip. It was a maximum of commitment around $260 million. and I think it's about 80% funded right now. All's going well. I think we're on budget. We're on schedule. I think we do expect that to complete at the end of the fourth quarter of this year, and lease-up's gone really, really well. I would suspect that our partner would look at refinancing that at some point, but there's also the possibility that our loan stays in place for a little bit longer, just given the the broader capital markets. I also want to remind you that we do have purchase options on some of the net lease units, which we'll consider upon completion. We don't have to exercise those right away. So that's kind of the update, but I think the broader message also is it's kind of going as planned and going quite well.
spk08: Okay. But I mean, I'm just trying to think, should we think about it as something where the the outcome is more additive from an earnings point of view because maybe you either reinvest at a higher rate or you take it out and exercise the purchase option or the other way, I guess.
spk10: Yeah, look, there's going to be some ins and outs. I think that the loan could get repaid at some point in time, but I think the offset to that being repaid is that we can reinvest in the net lease units and we also have an option to buy into the broader market. the broader portfolio or the broader development, which I think could be highly accretive. So more to come on that. We don't have to make any decisions right now on those options. But I think to your point, I think there are some meaningful offsets to the loan repayment when that happens.
spk02: Okay, great. Thank you. You're welcome.
spk07: Thank you. The next question is from Eric Wolf with Citi. Please proceed with your question.
spk05: Thanks, and good morning. You noted in your commentary that contractual growth should be 4% this year, over 3% next year. I'm just curious whether sort of the commentary before about comprehensive same-store growth just being about 100 basis points less than that should also hold through this year, and then to the extent you have insight into next year at this point, whether that would hold as well.
spk01: Yeah, I can cover that. I think, you know, typically we do see the comprehensive move around from one quarter to the next, but the 100 basis point lag that you're seeing this quarter between contractual and comprehensive is about in line with what our, you know, long-term expectation is there. So I think that's a reasonable assumption.
spk05: Okay. And now with the Apotex deal, could you just talk about sort of if that tenant ever were to go dark and not seeing that they – they're going to go dark, but if they ever did, your ability to sort of backfill them, I guess the concern is that it's such a specialized sort of piece of real estate for them that it might not be applicable for others. Just talk about that and then maybe in the context of how you look at the sort of fungibility for your industrial assets in general.
spk10: Yeah, sure. I mean, the Apotex deal, you know, there is some specialized nature to it, but I think the a couple important things to emphasize here. One is our basis. We're meaningfully below replacement cost, I think, number one, for that type of advanced manufacturing. I think, number two, these are pretty critical kind of production assets for generic pharmaceuticals, especially in Canada, something that I think the Canadian government would certainly want to keep in operation. So we do think there's alternative users. There's capacity that that would be needed and our facilities in the event Apotex, you know, something were to happen, you know, we think there'd be a lot of demand for that. But, you know, I think maybe the more important thing here is that Apotex is a big company. They've been around for a long time. It's a good credit. They have great market share in Canada. They also have exports certainly into the U.S. and other markets as well. So, you know, we're, you know, quite confident and feel good about that credit and don't think that's an event we need to consider anytime soon.
spk05: I understand. And just this last question, you said in your remarks that the cap rates for industrial assets have expanded more than the other asset classes you're looking at. Why do you think that's the case? I guess it's the opposite of what I would expect, just given some more noise in other sectors.
spk10: Yeah, the biggest reason is the way we're sourcing these transactions. The bulk, and I would say almost everything that we've been doing over the last number of quarters, have been sale-leasebacks. So, you know, sale-leasebacks tend to... be good options for companies that own industrial real estate. And this is maybe more, I would say it's a combination of both warehouse and manufacturing. And so it's more about how we're sourcing it and the alternatives that those corporates or private equity sponsors have to fund their capital needs. The high yield debt markets, leverage loans, those have all gotten quite expensive if available at all. So I think that's probably the biggest driver in the cap rates for our industrial deals that we're doing.
spk02: Got it. Thank you. You're welcome.
spk07: Thank you. Our next question is coming from Jim Kamert with Evercore ISI. Please proceed with your question.
spk06: Thank you. Good morning. Obviously, the portfolio is basically top-taking occupancy here. Just curious, though, not to be a pill, but what does the watch list look like today, if you could, on the number of tenants and perhaps the ABR associated with them?
spk11: Yeah, Brooks, you want to take that? Sure. As Jason mentioned in his remarks, the watch list is pretty benign. I mean, it's about 2.5% of ABR for context. You know, that peaked out around 4% during COVID, and that's in line with last quarter. Not really any industry or geographic concentrations there. It's really a tenant-specific story. And, you know, I think important to note that only a very small portion historically of our watch list has ever really matured into an actual default situation. And there's a few tenants on there which are in process of completing balance sheet restructures, and our critical real estate has stood up to that. And when they complete those, those likely come off the watch list. Those will be much better balance sheets. So thus far, watch list is in a very stable place.
spk06: Okay, terrific. And then just circling back a little bit on the office, You've clearly been purposefully reducing your exposure. Just curious, you know, it looks like you've had about $15 average rent on the existing remaining office portfolio. And I'm just curious, what is your longer, maybe two- to three-year plan in terms of whittling down the total exposure? And are you seeing any headaches or roadblocks coming up in terms of some of the next renewals or next two to three years on the office side?
spk10: Maybe I'll start there, and I'll hand it over to Brooks. I mean, I think the broader message here is, yeah, the office exposure has come down meaningfully. I think we were over 30% five or six years ago. Now we're at 17%, and I think that even goes lower once you factor in the post-quarter closed transactions in Apotex and a couple other industrial deals. And that downward trajectory will continue. We really haven't bought any office. And as Brooks mentioned earlier, we are overweighting office and our disposition. So that will all continue. I don't know if, Brooks, there's anything to add on. on anything, any specifics. But, you know, I think generally the, you know, our office portfolio is different than what you think of as an office. We just don't have a lot of leases maturing on a regular basis. You can look at our top 10 list and our largest office exposure is the state of Andalusia, investment grade credit with, you know, over 10 years of lease term remaining. So it's a little different scenario, but certainly we understand, you know, the fundamentals have changed there. And, you know, there is a, you know, a conscious effort to continue to move lower in office.
spk03: Terrific. Thank you very much. You're welcome.
spk07: Thank you. Our next question is coming from the line of Josh Dennerlein with Bank of America. Please proceed with your question.
spk09: Yeah. Good morning, everyone. Jason, last time we spoke, you mentioned there were some maybe larger portfolios in your pipeline. but sellers were maybe dragging their feet a bit on going through with the transactions. I guess really two questions. Just one, are those portfolios still in the pipeline? And then are you seeing any kind of increased urgency from sellers versus like at the end of the year when we kind of had that conversation?
spk10: Yeah, sure. I mean, clearly one of the large portfolios we were referring to was Zapotec's deal on that. not recently closed. I think there's still some other, and there were some new deals, not that size, but still, you know, larger than our average deal that has also closed. And, and there's some more that we're looking at. So, you know, the pipeline kind of remains active. And I think the themes that, you know, we talked about in the past and to your question, you know, there still are, you know, a lot of important drivers for sale leasebacks and namely it's, it's the, you know, the broader capital markets and the alternative financing options for corporates just aren't as attractive or as price competitive. So I think we're seeing more and more companies, you know, look to sale leasebacks as an alternative. You know, that trend is continuing, especially for corporate refinancings. I think, you know, that's an area that is an important thing for us to focus on. I think we'll see some good opportunities there as companies, you know, have debt coming due and they prefer to look for a cheaper alternative like a sale leaseback.
spk09: Okay, thanks for that. And then I just want to touch on 2024 maturities, it looks like, or lease expirations, rather. It looks like 6.4% for the SUP, and then I think a little less than half of that is U-Haul. What else is coming up for expiration next year, and just kind of what's kind of the latest dialogue with those tenants?
spk11: Brooks, you want to handle that? Yeah, sure. Yeah, as you mentioned, U-Haul is you know, almost half of that that's expiring. So it's a big chunk of that is U-Haul. The store is really dominated by U-Haul and then warehouse and industrial. It's pretty well mixed with other property types beyond that. You know, conversations going well is a little too early to project outcomes, but we tend to really begin those conversations in earnest around two to three years in advance. You know, sometimes it's not earlier. So, you know, we're making a lot of progress there and feel pretty good about it.
spk02: Okay. Thanks, Brooks.
spk07: Thank you. As a reminder, if you would like to ask a question at this time, please press star, then the number one on your telephone keypad. Our next question is from John Kim with BMO Capital Markets. Please proceed.
spk14: Thanks. Good morning. I was wondering if you could just clarify the ABR and the Apotex deal, because I think you mentioned that Transactions post-quarter were $40 million, but when you look at your top tenant list, if they're the third largest tenant, it'd be close to $30 million. So I just wanted to clarify that.
spk10: Yeah, I think it's going to come in as our number three tenant on the top 10 list. I mean, we're not disclosing specific ABR or cap rates for maybe competitive reasons right now, but the cap rate was within the range that we're targeting, which is kind of mid to high sixes into the sevens. And we did mention that the weighted average cap rate for the year to date, 7.2%. And obviously, Apotex is a meaningful component of the deal volume for the year. So maybe the short answer is it'll be a number three tenant until U-Haul comes off. But it's effectively ABR based on a cap rate within that range that I mentioned earlier.
spk14: Okay, that's enough pieces of the puzzle. Jason, you also mentioned that they are taking the FX risk, paying the rent in U.S. dollars. Is that unique for an international portfolio or tenant? And does Apotex have a lot of U.S. sales to pretty much cover that?
spk10: Yeah, it's not unique for Canadian deals. Those tend to be in U.S. dollars. There's clearly a much deeper pool of buyers. you know, for U.S. dollar denominated leases. That's part of the equation. But the second part of your question is important as well. I mean, they do have, you know, meaningful U.S. dollar revenue. And if they didn't, that would be maybe another concern. But they do. They have meaningful U.S. dollar revenue. And so that's a nice hedge or alignment with the lease being denominated U.S. dollars.
spk14: Okay. And then final question is on the Marriott portfolio and the three assets that you've identified for redevelopment. I was wondering what stage they're in, if you started to put capital into those assets. And if you could remind us, you know, what kind of redevelopment projects you're looking to do.
spk10: Brooks, you want to take that one?
spk11: Sure. Yeah. So there's three properties. We have not started to point capital. They're in planning phases. And as Tony mentioned, they will continue operating as hotels in the meantime. One is in Newark near the airport. It's a prime industrial location. We're working through planning as we speak. That's probably a 2024 project, maybe later in that year. Then there's two properties in California, one in San Diego and one in Irvine. The San Diego property will be very well suited for life sciences over kind of the medium term. And there's some upzoning going on in that area. which will create a lot of value for us. So that's a little bit later, maybe kind of 25, 26. And then Irvine, that one's still a little bit more in flux. Fantastic location, has a lot of upside, either from a warehouse or resi perspective. In either case, we could evaluate a sale of the development site, and that certainly would be likely in a residential situation, but more in that 2025 timeframe. But all excellent sites. really constrained locations and will continue operating as quality hotels in the meantime.
spk02: Thanks for the update.
spk07: Thank you. At this time, I am not showing any further questions. I'll now hand the call back to Mr. Sands.
spk13: Thanks, Jesse, and thanks, everybody, on the line for your interest in WP Carey. If you have additional questions, please call Investor Relations at 212-492-1110. That concludes today's call. You may now disconnect.
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