W. P. Carey Inc. REIT

Hello, and welcome to WP Carey's third quarter 2024 earnings conference call. My name is Diego, 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.

Good morning, everyone, and thank you for joining us this morning for our 2004 Third 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 wpcarey.com, where it will be archived for approximately one year, where you can also find copies of our investor presentations and other related materials. And with that, I will hand the call over to our Chief Executive Officer, Jason Fox.

Thank you, Peter, and good morning, everyone. This morning, I'll briefly cover several topics, starting with the transaction environment, the investment volume we've completed to date, and the strength of our deal pipeline. I'll also cover tenant credit, including an update on some of our top tenants. I'm joined by Tony Sanzone, our CFO, who will cover the details of our third quarter results, guidance, and balance sheet, as well as Brooks Gordon, our head of asset management, who will take questions. Starting with the transaction environment, Since the end of summer, we've seen a solid increase in overall transaction activity and have been getting greater traction on deals, keeping us very much on track to achieve the midpoint of our full year investment volume guidance. During the third quarter, we completed $167 million of new investments, reflecting the slowdown in activity we often see in late summer. Since then, however, we've closed an additional $231 million of investments which brings our year-to-date deal volume to approximately $1 billion. While the transaction market does appear to have opened up more, we've also seen an incremental increase in competition, along with lingering expectations from sellers that rates will move lower than where they've been for most of 2024. So we're also seeing some signs of pressure on cap rates, notwithstanding the very recent upward movement in interest rates. We continue to see deals averaging in the mid-7s compared to earlier in the year when we were generally seeing deals averaging in the high 7s. Year-to-date, our closed investments reflect a 7.6% weighted average going in cap rate and an average yield above 9% when factoring in our rent bumps, although we continue to evaluate deals across a range of cap rates given our diversified approach. I'm pleased to say our pipeline is currently very active with identified deals totaling over $500 million. compared to the two prior quarters for executing or evaluating more deals in both North America and Europe, although the large majority of our identified pipeline is currently in North America. Given the visibility we have today, we're confident that we're on track to achieve the $1.5 billion midpoint of our full-year investment volume guidance. And depending on the ultimate timing of deal closings, we see a path to being in the top half of our $1.25 to $1.75 billion range. We're encouraged by the current strength of our pipeline, and regardless of which side of year-end the deals ultimately close, they'll positively contribute to our AFFO growth in 2025. Average cap rates and average yields for the identified deals in our pipeline are relatively consistent with what we've closed year-to-date, so we don't expect to see a meaningful change in our overall weighted average cap rate for the full year. The majority of the deals we've closed this year are consistent with those we've done in the past, with a focus on industrial and warehouse assets. We're also looking to generate additional deal volume in U.S. retail through our dedicated team focused on that asset class. U.S. retail is clearly one of the biggest pieces of the net lease market, and we believe that we can drive incremental deal volume in that area with investments that fit our return profile and underwriting requirements. Adding more retail to our portfolio will help us further diversify and, importantly, increase the pool of investment opportunities available to us. We have the advantage of currently not having a particularly large exposure to U.S. retail tenants or concepts, and we're noticing that retailers and developers are increasingly looking to expand their buyer pool in an effort to diversify away from current landlords, something we're well-placed to take advantage of. In addition to that, we expect retail to be an area of the net lease market where a greater proportion of deals are in the form of acquiring existing leases, which generally benefit from shorter timelines to close than sale leasebacks, adding predictability to our deal timing. Turning now to our capital needs, an important point I'd like to highlight is that we don't need to raise equity or need to go above our long-term target ranges for leverage to fund our pipeline of investments this year and potentially all of next year. At the end of the third quarter, we had a little over $800 million of cash on our balance sheet and expect to generate additional disposition proceeds during the fourth quarter. We also have a $2 billion revolver that's minimally drawn, and we're still below our long-term leverage targets, particularly our net debt to EBITDA target of mid to high five times. Looking ahead to next year, while retained cash flow and regular dispositions will fund a portion of our 2025 investments in any scenario, there are a number of other capital sources we can access without needing to raise equity until 2026. For example, we have two student housing operating properties and a sizable portfolio of self-storage operating assets from previous mergers with our managed funds. We believe those assets would sell for cap rates well inside of where we're investing in net lease, and as a source of funding, would therefore be accretive to AFFO, as well as helping further simplify our earnings profile going forward. Furthermore, we have the ability to generate additional capital when a permanent refinancing of our Las Vegas construction loan occurs. And our capital needs could be further reduced next year if we get back any proceeds from our lineage investment, which is currently yielding below 3%. Before handing the call over to Tony, I would like to talk about tenant credit, starting with three top 25 tenants that we're focused on from a credit perspective. Helvig, Harside, and most recently, True Value. which in aggregate account for 4.7% of our ABR. Helvig remains current on rent as it executes its turnaround plan, although it still faces a challenging demand environment. Should there be additional weakness in its business in 2025, we're confident that our stores have good underlying demand. Other operators have expressed concrete interest in our stores at rents that are broadly in line with current rents in the event we need to re-tenant any properties. We're also exploring the disposition of several properties to further reduce our exposure in the near term. While we fully support Helvig and the actions they're taking to improve their business, the interest in our portfolio from other operators gives us comfort that we'll be able to proactively mitigate any future rent disruption. For Hearthside, there have been no meaningful developments, and given the highly critical nature of the properties we own, we continue to expect no rent disruption, even in the event of a restructuring although we continue to closely monitor the situation. A few weeks ago, we filed an 8K stating that True Value had filed for Chapter 11 bankruptcy. True Value is a wholesale hardware distributor, and it's important to note that the independent retail stores it sells to were not part of the bankruptcy filing. Along with its bankruptcy announcement, True Value announced its sale to Do It Best, a larger member-owned hardware cooperative. We own a national portfolio of eight warehouses and one paint manufacturing facility, net lease to True Value, which generate 1.4% of our ABR. True Value remains current on rent, having paid substantially all rent owed through the end of the year. We therefore don't expect any meaningful impact on our fourth quarter or full year AFFO for 2024. Looking ahead to 2025, it's too early for us to say specifically how the situation will play out as True Value and its secured lenders are currently in bankruptcy court and engaged in active negotiations on the path forward. In the coming days or weeks, we expect the parties and the court to determine whether the proposed sale to Do It Best should proceed, in which case we believe Do It Best is likely to require some portion of our buildings, while also needing a transition period to vacate buildings that are not part of its long-term plan. Absent an agreement with secured lenders, it's possible that the proposed sale could instead convert to being a liquidation, which could result in our leases being rejected and a faster process. Although even then, true value may still require the use of our properties for a period of time in liquidation. While it's too soon to have any degree of certainty over which scenario will play out, we're already actively working with brokers and options to re-tenant or dispose of the properties, with a focus on mitigating the potential disruption to our earnings. Once we have clarity on the bankruptcy proceedings, and the likely outcomes for our properties, including better visibility into the timing and specific cash flow impacts, we will of course update the market. Stepping back for 2024, we do not expect any additional lost rent from these or other tenants with credit concerns. Looking ahead to 2025, while it's too soon to give formal guidance, our preliminary view is that rent loss from credit events within our portfolio, net of recoveries, could total approximately 100 basis points. excluding the potential impact of true value, given the uncertainty of that situation. We view this as the most useful information in the current environment, providing a direct estimate of total potential rent loss, which we will continue to refine as new information becomes available. In closing, notwithstanding the potential impacts of tenant credit issues, there are several factors that should help support our growth next year. Having a strong finish in 2024 for investment volume will flow through to our 2025 earnings. We will continue to generate sector-leading rent growth from leases, despite the weaker tailwind from inflation compared to recent years. We will get a full year of rent from our warehouse asset in Chicago that was recently leased to the U.S. Logistics Division of Samsung. We will get a full year of dividends from our lineage investment, and we expect to continue putting capital to work next year without needing to issue new equity, funding investments through accretive asset sales. And with that, I will turn the call over to Tony.

Thank you, Jason, and good morning, everyone. AFFO for the 2024 third quarter totaled $1.18 per share, with the penny increase over the second quarter primarily reflecting the accretive impact of net investment activity and rent growth being mostly offset by the net impact of higher interest rates. We remain on track to fall within our full-year AFFO guidance range. We've narrowed the range to between $4.65 and $4.71, which maintains the midpoint and reflects the net impact of additional dividend income from lineage being offset by lower anticipated other lease-related income and the timing of transaction closings pushing later in the year. We're also affirming our expectation that investment volume will fall between 1.25 and 1.75 billion for the year. As Jason noted, we see a path to being in the top half of that range, depending on the ultimate timing of deal closings, which would support 2025 growth but not contribute meaningfully to 2024 AFFO, given that the large majority of deals in our pipeline are expected to close towards the end of the year. During the third quarter, we disposed of seven properties for gross proceeds of $82 million. For the full year, we expect to complete dispositions totaling between 1.3 and 1.4 billion, slightly raising the bottom end of the range. As a reminder, 2024 is an unusually high year for disposition volume, given the execution of the office sale program and the exercise of the U-Haul purchase option. Turning to our portfolio, starting with same-store rent growth. Contractual same-store rent growth for the third quarter was 2.8% year-over-year, which is also where we expect the full year average to be. Over the longer term, we expect contractual same-store growth to trend around a mid-2% range. Comprehensive same-store rent growth was 20 basis points year-over-year, and is expected to be marginally positive for the full year, as the second half of the year improves from the impacts of the Hellwig lease restructure and the rent downtime during the build-out period ahead of the Samsung warehouse lease. As a reminder, rent on the Samsung warehouse commences in the first quarter of 2025. Historically, our comprehensive same-store growth has averaged about 100 basis points lower than contractual, since comprehensive reflects the impacts of vacancies, leasing, restructures, and rent collections. As Jason mentioned, for the remainder of 2024, our guidance continues to assume no significant rent disruptions. Our fourth quarter results are expected to benefit from rent recoveries received in October, totaling approximately $0.04 of AFFO, which had been previously factored into our guidance. Turning to releasing, our overall releasing spreads continue to trend positively during the third quarter, in part due to the completion of our office exit, recapturing 103% of the prior rents overall, including positive releasing spreads on industrial, retail, and self-storage, and adding 7.2 years of incremental weighted average lease term. Releasing activity impacted 2.9% of ABR, which is significantly above what is typical for a quarter, driven by the transaction we entered into with extra space, which I want to take a moment to review. The transaction comprised converting 16 operating self-storage properties to net leases, buying out the remaining 10% joint venture interest in some of these properties, and resetting the rents and lease terms on our existing extra space net lease portfolio. At the beginning of September, we converted 12 self-storage operating properties to net leases with a 25-year term, with another four properties that will convert to net leases in 2025. Once completed, we will have converted approximately 20% of this year's annualized operating storage NOI into long-term net lease revenue with an investment-grade tenant. Furthermore, in connection with the transaction, we amended our existing portfolio of 27 extra space net lease properties, resetting the rents higher and extending the term by over five years to 25 years. Overall, given where initial rents were set relative to operating NOI, the transaction is expected to have no meaningful impact on our 2024 AFFO. As of the end of the quarter, extra space was our largest tenant with 39 properties on 25-year net leases, generating $36 million, or 2.7% of ABR. The weighted average lease term across our entire net lease portfolio ended the quarter at 12.2 years, and occupancy remained high at 98.8%. Other lease-related income was $7.7 million for the third quarter, bringing this line item to $19 million through the first nine months of the year. Based on the current visibility we have through to the end of the year, our guidance assumes we received no further payments that would meaningfully impact this line item. Non-operating income during the third quarter was $13.7 million, comprising $9.9 million of interest income, $2.1 million in dividends from our equity stake and lineage, and $1.6 million from realized gains on currency hedges. Within this line item, interest income increased over the second quarter, driven primarily by the timing of our bond refinancings this year and the resulting cash on our balance sheet. Excess cash currently earns interest at an average rate slightly below 5% in the U.S., mostly offsetting the interest expense incurred on the U.S. dollar bonds we issued in June until it's deployed. The lineage dividend comprises the cash dividend it declared during the third quarter, which was prorated for the period from its IPO in July to the end of the quarter. Our AFFO guidance assumes a fourth quarter dividend of approximately $2.9 million, in line with the latest annualized dividend rate disclosed by lineage on the 5.5 million shares we own. For modeling purposes, please note that we recognize lineage dividends in the quarter they are declared. In the fourth quarter, we currently expect non-operating income to reset lower to around $10 million, reflecting lower interest income as rates decline and we deploy the remaining excess cash into new investments. Operating property NOI totaled $20.7 million for the third quarter, down $1.1 million from the second quarter, driven primarily by the conversion of self-storage operating properties to net leases that I just discussed, along with the disposition of Marriott Operating Hotel, which closed at the end of the second quarter. Operating self-storage NOI growth over the prior year period on a same-store basis and excluding the assets converted to net leases was negative 4.1% for the third quarter, which showed some incremental improvement compared to earlier in the year. We currently expect NOI from operating properties to total about $80 million for 2024, factoring in the storage assets we converted to net leases. Moving to expenses, interest expense totaled $72.5 million for the third quarter, with the increase over the second quarter primarily reflecting the full quarter impact of the $1.1 billion of bonds we refinanced during the first half of the year. Overall, the weighted average interest rate on our debt was 3.4% for the third quarter, compared to 3.1% for the second quarter. G&A expense totaled $22.7 million for the third quarter. We slightly lowered the top end of the range on our expectations for full-year G&A and currently anticipate that it will fall between $98 and $100 million. Non-reimbursed property expenses for the third quarter totaled $11 million with a decline from the second quarter, primarily reflecting reduced carrying costs on vacant properties, given the sales of three of the four vacant PrimaLona facilities and Samsung's assumption of carrying costs during the build-out period on that warehouse property. We currently expect the fourth quarter to be in line with the third quarter. Tax expense on an AFFO basis totaled $10.6 million, which primarily relates to foreign taxes on a rent from our European portfolio. This represents a return to a more normalized quarterly run rate compared to the second quarter, which was lowered through certain one-time benefits associated with the settlement of tax-related matters. Moving now to our capital markets activity and balance sheet positioning. Having refinanced just over $1 billion of maturing bonds during the first half of the year, and given the significant liquidity we've built up, we did not need to raise any capital during the third quarter. Our debt maturity profile remains very manageable with no further bonds maturing in 2024 and one $450 million U.S. bond due in 2025. Similarly, we have no material mortgage debt due in the fourth quarter of this year and about $240 million due in 2025. We ended the third quarter with total liquidity of approximately $2.6 billion, including being minimally drawn on our $2 billion revolver and a cash position of just over $800 million. As Jason discussed, we have sufficient liquidity, including expected disposition proceeds and retained operating cash flow, to fund the investments in our pipeline during the fourth quarter and into 2025 without the need to issue equity. Leverage ended the third quarter at similar levels to those during the first half of the year. Debt to gross assets was 41.1%, which remained well within our target range of low to mid 40s. And net debt to EBITDA was 5.4 times, which remained below the low end of our target range of mid to high five times, although we continue to expect it to trend back into that range during the fourth quarter as we deploy further capital into new investments. Lastly, regarding our credit facility, I wanted to briefly mention that during the quarter, We executed a sustainability-linked amendment, which may allow us to benefit from slightly lower interest rates and fees on the facility and related term loans if certain emissions reduction targets are met. And with that, I'll hand the call back to the operator for questions.

At this time, we will take questions. If you would like to ask a question, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the star, then the number two.

And our first question comes from Michael Goldsmith with UBS.

Please state your question.

Good morning. Thanks a lot for taking my question. My first question is on the decision to go into retail a little bit harder. So it sounds like, you know, you... You moved out of office, now you're moving into retail. How do you think about just the mix of your portfolio going forward? Is there a certain cap of how much exposure you want to retail? And just kind of talk through the framework that you're thinking about for where the portfolio looks like going forward.

Yeah, sure, Michael. So retail currently makes up about 25% of the portfolio. The bulk of that, probably close to three-quarters of that, is in Europe. So we've invested in the U.S. before, but it's been more opportunistic as opposed to a core focus of ours. And we've been ramping up the U.S. retail effort with several dedicated investment officers. They have lots of experience acquiring retail net lease and, importantly, have lots of deep relationships with tenants and the brokerage community as well. Given our size and reputation, we think it makes a lot of sense. I think also at this point in time, there are some fewer competitors given some of the consolidation over the last couple of years. As I mentioned earlier, conversations with developers and brokers and tenants, they've all indicated that we'd be a welcome participant to help diversify some of their capital partners. We think this is a good time to lean in. Year to date, we've done I think it's about 15%, so a little lighter than maybe we would target, and that's both in the U.S. and Europe. Our pipeline is a little bit more. It makes up about 40% total retail does, and again, that's split between the U.S. and Europe, although I think the bulk of the pipeline is in the U.S., and it'll ebb and flow. I think over time, maybe I'd like to see 30%, 40% of our annual deal volume be in retail, and maybe much of that would be in the U.S., But we're big right now, and as I mentioned, 25% of our portfolio is retail, over 60% is industrial. So it would take a pretty significant over-allocation to really move that needle a lot, but we'd be comfortable going higher than the 25% we are right now. And I could see that ultimately getting to over 30%, but that'll probably take some time. And in terms of the approach, I would say it's not going to be a lot different from what we do in other property types. We're going to look across the sector. There's certainly some that we'll be more focused on and others that we won't do at all. I think we're going to look for deals with long lease terms and the types of yields and IRRs that fit overall what we've been doing. Underrating the tenants will be obviously important, unit level economics, site coverage, things like that. That's what we'll be looking at. So far, we've done some deals in car washes. That was probably earlier in the year. Some fitness, some experiential retail. We're looking at dollar stores and discount retail, C-stores, some automotive service, maybe some additional experiential retail as well. Potentially grocery, probably more likely in Europe than the U.S., but we'll rise open. But that's kind of the general approach. And like I said, I think this is a good time to lean in.

And just as a follow-up question, just on True Value, can you kind of walk through the expectations or the range of outcomes as you see for 2025? And then also, do you have any exposure to American Tire, which recently filed for bankruptcy?

Yeah, so on True Value, I mean, we're right in the middle of the bankruptcy process, and we're getting updates every know daily for that matter we think that process will work through you know maybe over the next you know a couple days or a couple weeks but it's it's very fluid which is why it's a little bit more difficult you know to kind of pinpoint our expectations for next year i think we outlined some of the broad parameters but brooks you want to you know add any color to that sure yeah i would echo that you know it's premature to predict really a specific outcome for 2025

The parties are currently negotiating the details of how the sale to do it best should proceed. We're optimistic they'll get there, but have to caution that bankruptcy is fluid and it's not finalized. So if the sale proceeds as planned, we expect they'll require all of the buildings for a transition period. Hard to predict the exact timing of that, but that could extend well into 2025, substantially muting any impacts to next year. Long term, our view is they'll require a subset of our buildings. They're still working through finalizing their plans on that. In any outcome, we expect they're going to require our buildings in the near term to execute whichever path is decided. And in parallel to all of that, we're proactively working with brokers on all these assets.

We expect a lot better clarity in the coming weeks and towards the end of this year. Thank you.

And our next question comes from Mitch Germain with Citizens JMP. Please state your question.

Thank you. Jason, just with regards to the retail deals, obviously they tend to be a little bit smaller in size. So is the thought around that doing more portfolios there?

Yeah, I think mainly it's going to be portfolio transactions. I think where we've seen Some interesting deal flow is takeouts for developers. So some of the retailers that are well capitalized and they're looking to expand. I think the developers, given just the volatility in the rate markets, probably have a little less appetite to hold on to their portfolios longer or hold on the portfolios and sell them one by one into the 1031 market. I think clearly they can you know, get tighter cap rates and good execution if they go that route, but that adds some risk given the volatility. So I think you're right. I think it's going to be mainly portfolios, but I think our team is prepared to kind of roll up their sleeves and dig in and, you know, perhaps, you know, doing some one-off deals can lead to tenant relationships or developer relationships that can expand into larger transactions.

Got you. And maybe just some consideration around your

discussion around credit reserve next year versus this year i think it's you know i think 100 versus 50 basis points so maybe just discuss kind of what your overall thinking is regarding making that commentary yeah look there's you know in in this environment um you know there have been some operational headwinds in certain sectors i think particularly sectors where there's been some pull forward of demand during covet and now you know we're seeing a bit of a void resulting from pullbacks from customers. I think inflation and higher prices have also impacted consumer demand and at the same time margins for a lot of companies. And there's also businesses that are still being impacted by the lack of housing mobility. So the 100 basis points, that's a number that it's obviously early to provide that for next year. We don't have visibility into anything specific that would be included in that number. But we think directionally it's a big round number and it makes sense for us to start at that level and then adjust it up or down, you know, depending on, you know, what we see. And I think importantly, we mentioned this earlier, that true value is not included in that number. I think Brooks at least gave some color, not obviously specific outcomes or even estimates for what that could mean for next year. So the plan would be to update that, you know, once we have a little bit more clarity so we can make an estimate there as well.

Thank you.

You're welcome.

Our next question comes from John Kalachowski with Wells Fargo. Please state your question.

Hi, this is Cheryl on behalf of John Kalachowski. Thank you for taking my question. One on U.S. versus European transactions. We came into the year with two-thirds U.S. and one-third Europe. followed by a slowdown in European-focused activity in last quarter. So how do you think seller expectations have changed since then, and how do you see spreads trending in Europe versus the U.S.?

Yeah, sure. Yeah, so year-to-date activity, we're roughly split two-thirds U.S., one-third Europe, which is in line with kind of the broader portfolio targets. Europe makes up a little – kind of a lower allocation for the pipeline. It's about one quarter of the pipeline right now, so it's lagging North America a little bit. I wouldn't say significantly, but it is lagging some. We have seen activities levels pick up after a summer that was even slower than what's typical for Europe, but we do like the backdrop. I think borrowing costs in euros are probably 100 to 150 basis points inside of where we could borrow in the U.S. Cap rates are not a lot different. Obviously, Europe is a is a broad market, and I think there's a range of cap rates depending on the country and certainly the specific deal. But I think on average, maybe European cap rates are a little bit inside of the U.S., but what that means is that I think our expectation is we'll see attractive opportunities in Europe. They'll have wider spreads, and we hope to add to our pipeline. And we're seeing it built. It's hard to predict much past the end of the year, but I think it's a good market for us and one that will allocate capital.

Thank you. And then one on American Tire. I think they recently filed Chapter 11. Just curious to know how much exposure do you have there?

Yeah, sure. And I think Michael asked that, and I failed to answer. It's very small. It's less than 20 basis points. I think it's probably closer to 15 basis points of EBRs and two properties. Brooks, I don't know if you want to give a little bit of color. I mean, it's kind of a non-event for us, given the circumstance, but why don't you provide a little bit of background?

Sure. Yeah, I apologize. I forgot to respond to that in the prior response. Yeah, it's two buildings, one of which is very tiny. The other one's about 270,000 square foot warehouse. It's fully utilized. It's in the Charlotte MSA. Good quality building, but again, very, very small actual rent exposure for us.

Thank you. I appreciate the additional color. That's it for me.

Okay. Thank you.

Our next question comes from Anthony Paolone with J.P. Morgan. Please state your question.

Thanks. So I just want to go back to the internal growth brackets for 2025. I think Tony mentioned usually the starting point is about 2%, and you'll typically lose a point. And so the 100 basis points, Jason, that you called out, is that on top of the typical – you know, one. And so you're looking at flat before true value, or I guess I'm just gotten, I've gotten lost a little bit in that, in that construct.

No, that, that, that's part of the number. Again, it excludes true value, but it's part of, you know, I think historically we've talked about that, you know, over the last number of years, our same store growth, contractual same store growth has been, you know, maybe around 300 basis points and, or 3%. And, and, You know, I think a long-term average is we've had about 100 basis points spread between the contractual and the comprehensive. And built within that 100 basis points spread includes credit. It could be credit. It could be vacancies. It could be releasing. I think if you look at, again, over a long period of time, probably about half of that has been credit. So that number is a little bit wider. I think it's a It's a big round number as a placeholder for right now, and as I mentioned, we'll dial that in once we have a little bit more visibility into next year and we get closer to some potential outcomes, but it's really a placeholder right now.

Okay, so again, just to make sure I understand, three is the historic contractual type level. Usually you lose a point for a variety of reasons, but maybe that's a little bit bigger next year because – the bad debt piece of that, your starting point's a full point as opposed to maybe it being half of that one previously? Yeah, I think that's right.

I think that's a good way to look at it.

Okay. And then, I mean, just on the growth point, as we all kind of, I think, focus a lot on 25 at this point, it seems like you got a lot of confidence in returning to growth next year. I mean, maybe, you know, does that basically all come down to at this point the deal pipeline and accretive investments or, you know, fewer dispositions that may be dilutive like you had in, you know, this year or just maybe some of the other brackets around your confidence and growth in 25 be helpful?

Yeah, sure. I mean, that, yeah, those are, you know, the big moving parts, certainly the deal volume. I think importantly, and we've emphasized this, that we have enough liquidity currently with the $800 million of cash, a mostly undrawn revolver, I think in total it's about $2.6 billion in liquidity, certainly to fund with the cash the remainder of this year's deal volume, and it's 2025. And as we look to 2025 and how to fund deals, we've talked about our operating properties, the student housing assets that we own and the bigger portfolios, the self-storage. We think we can fund you know, our typical annual deal volume, which we're clearly not giving any guidance on that right now, you know, for the entire 2025. We don't like our equity price, so it's not dependent on issuing equity at these levels, certainly. You know, on top of that, you know, we have the contractual rent increases, which are substantial. They tend to be sector-leading. We also have a full year of rent from Samsung. lease that we've talked about before, and also full year of dividends from lineage. So all that will also provide additional growth from the existing portfolio. You mentioned the delta between contractual and comprehensive, so certainly that's part of the building block right there. But those are the big moving parts, and it's hard to provide full details. Obviously, we don't have an outcome for True Value at this point, but I think we're set up well for growth, assuming we can mitigate those losses, and I think we can.

Okay. And if I could just ask one question on the XR and self-storage side. Was there certain magic to doing the number of properties that you did? Was there a desire on either side to do more or less? And just what should we expect from here on that front?

Yeah, look, it's a good question. I mean, we've been talking about the optionality we have within the storage portfolio for a while now. You know, we didn't think we'd be selling all the assets. We didn't think we'd be converting all the assets. And, you know, given all the cash that we've been sitting on this year, we thought it made sense to maybe take a subportfolio and put it under net lease. A little bit of a, you know, dollar cost averaging type strategy, not doing it all at once and doing subportfolios. So, you know, we thought that was the right thing to do at this time. But we also, you know, I think next year would more than likely lean more into asset sales, obviously, depending on deal activity and other alternative sources to capital. But that's looking like a pretty good one right now. So I think that's probably, you know, the likely path, at least for 2025 at this point in time. It was about, what we just did was about 20% of the operating portfolio. So, you know, a good size chunk, but certainly not, you know, the majority of or anything overly substantial.

Okay. Thank you. Yep.

You're welcome, Tony.

Our next question comes from Jim Kammer with Evercore. Please state your question.

Good morning. Thank you. Don't kill me. I'm following up on Tony's line of questioning because if I use page 26 and 27 of the supplement, I'm really just trying to better understand your sort of preliminary expectation for organic growth next year. If I'm not mistaken, about 53% of the overall rent is CPI linked, another 43% or so is 2% contractual. Are you saying that perhaps the overall top line would be about 2% next year before credit issues?

Tony, I'll let you dig into the details, but it's probably a little bit higher than that. I think it all depends on where inflation settles at. Go ahead, Tony. I'll let you kind of give some of the details.

Yeah, I think just based on our current views on both the U.S. and European CPI, we do see stabilization in the low to mid-2% range for us throughout all of next year on a long-term basis. So really kind of factoring that in with really what's been a higher fixed increase lately as we've kind of seen we've gotten better execution on fixed bumps through kind of the inflationary environment as well. So I think the mid-2% range is really that top line that we're looking at.

Okay, that makes more sense because otherwise – And then just thinking about some of the earlier comments, Jason, you were saying, you know, maybe a tilt here towards a little bit more retail, obviously a gradual approach, but what would be the representative sort of escalators that you would want to seek on retail investments compared to what I think are, if I'm not mistaken, fairly stout 3% type manual escalators on the industrial side? How do you compensate for that, or can you get that type of organic growth, you think, on transactions on the retail side? Thank you.

Yeah, it's a good question, Jim, and something that we do think about. I think at least over the last, call it five years, maybe even a little bit longer than that, we have been able to negotiate more meaningful rent increases in our industrial deals, both manufacturing and the warehouse assets. It's probably averaged for a number of years now in and around 3%. I think what's more typical on retail is probably something closer to 2%. And then certainly there are some concepts or tenants that are even lower than that. They might be you know, one to one and a half percent a year, you know, maybe it's 5% every five years, but it's going to be a different, you know, bump structure. And it's probably something that's worth highlighting about, you know, not all cap rates, not all going in cap rates are equal. I think what we've been able to achieve, you know, this year and in years past, but this year, kind of the mid sevens cap rate with bumps that have been averaging around 3% for the fixed increases and, Those that have CPI increases, a lot of them have caps, but those caps are over 4% now. So I think that going in cap rates are important to look at, but I think as you're correctly focused on, the bumps are really impactful as well, and that's something that we'll look at as we look at retail deals. We'll maybe get a little bit more accretion on some of those deals in the first year, but the ongoing accretion will be slightly less than what our typical portfolio or typical investments have been.

Fair enough. Thank you. Thank you. And our next question comes from Greg McGinnis with Scotiabank. Please state your question. Greg McGinnis, you may have yourself muted. Can't hear you. Hi, Greg. All right, we'll move on.

Could you hear us?

Hello?

Hello? You're up for the question, please. Sorry about that.

Yeah. So, Jason, I think one of the more interesting aspects of the WP Carey story has been the ability to source and close on unique sale leasebacks with industrial operators. Has there been any change to the competitive landscape that's making sourcing enough opportunities with that group of assets or tenants less tenable? Or is the goal just trying to find more deals to source in general requiring you to you know, strike out more into retail territory. We're just trying to better understand this pivot. When some of your public competition has taken, sorry, just a little bit more on the question. Some of your competition over the last few years has taken the opposite approach in going towards industrial. And if you could touch on the achievable cap rates, I know we talked on escalators, that'd be appreciated as well.

Yeah, sure. It's more the latter. It's not because we're seeing limited opportunities in the industrial sale leaseback segment. I think competition does ebb and flow there. I think over the last number of years, when our competition is probably more just because there's not that many industrial REITs that focus on industrial net lease REITs that focus on retail or on industrial, the competition has more been from private equity. I think they've been mainly on the sidelines given their inability to find mortgage financing or at pricing levels that make deals work. So there's probably some incremental competition that comes back into that space as the kind of asset level capital market comes back. And that's slowly happening. But that's really it. It's more about expanding the opportunity set. We're focused on growth. We're a large net lease REIT. And so we want to the expander opportunity set, clearly retail, U.S. retail is the biggest part of the net lease market and we think with some focus we can take some market share and help drive deal volume. In terms of cap rates, I think it ranges for the concepts, it ranges for the location and the quality and the credit. I think we all know that. The main answer is it depends. But what we've seen is it's generally within our target cap rate range, which is in the sevens. And I think that, you know, that's what we're going to focus within that market.

Okay. Thanks. And then, and looking at the kind of current $500 million pipeline you talked about, are those deals you've basically approved from your standpoint, you're going through final negotiations, or how should we be thinking about the likelihood, timing, and maybe cap rates on those as well?

Yeah.

Whether the deals are up.

Yeah, it's a range. I mentioned earlier that I think that most, certainly many, but probably most of that will close before year-end. And I say it's over $500 million, so we do have some cushion to kind of bridge where we currently are in terms of deal volume to get to the midpoint. A lot of those are sale-leasebacks, which typically are sign-and-close type deals where you're negotiating – lease and the important elements of a purchase agreement. And so there's always some moving parts that happen on those. But also a good portion of these are existing leases. And so those you have a little bit more visibility into timing. And I think maybe the main point is we do have a level of confidence that we're going to get to that. But there always are some unknowns. Look, if something doesn't close in December, It probably closes in January, so the real impact on 2025 earnings is probably minimal, but we're focused on putting as much capital and putting teal behind the table for the remainder of the year as we can.

Okay. Thank you.

You're welcome. Our next question comes from John Kim with BMO Capital Markets. Please state your question.

Good morning. I wanted to ask about the storage assets that were converted. if you could provide some color on how you determine the APR of those assets and maybe compare it to the NOI that they achieved, and also what the fixed annual rent escalators are in that portfolio.

Yeah, sure. On the escalators, we're not disclosing the details. I would say that the fixed component is in line with what we've done historically. It's not at the 3% level that we've done more recently on industrial, but it's in line with kind of our portfolio, so call it greater than 2%, but it's not at the 3% level. And then there is the percentage rent so that we can still participate in much of the upside from the growth if that happens. And obviously, we have downside protection to the extent there's any more negative years. In terms of how we set the ABR, I mean, the goal is to have these mainly earnings neutral off the bat. So we are looking at doing effectively a 1-0 coverage. And there's some nuance to that where you assume an effective management fee that's typically paid when you go from owning an operating asset to a net lease portfolio. We no longer have CapEx exposure. So there is some adjustment for what the right CapEx assumption is. And that just moves the geography a tiny bit. But it's generally the goal is to do it at a 1.0. And there's probably a little bit of cushion in there on top of that. So call it a little bit above 1.0, but that's kind of the goal.

And Jason, can you remind us, do you have any other operating assets managed by Extra Space? And how comfortable do you feel expanding that relationship if you do?

Yeah, Extra Space has always been our largest operator. Historically, it's been about maybe two-thirds or maybe 60% or so. I don't have the updated stat now that we've converted some of the exercise managed properties to net lease. It's still going to be the majority, but the split will have come down. Yeah, it's a little over 50%. Okay, a little over 50%, yeah, so it's come down some.

You mentioned a couple times on this call that you're going to have the full-year dividend of lineage. Should we take from that that you're inclined to hold your position now? for all of 2025?

Well, it's a good question. I mean, we've talked about this before where now that they're public, the pre-IPO investors are subject to a lockout or a lockup, I should say, that has an outside date of three years from the time they went public, so call it close to three years still. Any distributions we get during that three-year period will be at the sponsor's discretion. So we don't have you know, good visibility into that. We don't know what their other capital needs are. And so for now, I think that's our assumption that we, you know, won't get any capital back next year. Although I will say, you know, looking at the base case, you know, maybe a good way to do it is, you know, kind of think about it being coming back over that three-year period equally. In the meantime, we will get the three or just below 3% dividend yield And if we do get it back, I think you can think about a reinvestment into net lease that's going to be seven plus percent. So a lot of accretion there. But for modeling purposes, I don't think we've given any guidance on that yet. We'll do that in February. But either way, it's about a penny a quarter, I think, Tony, right, is what the current run rate is?

Yeah, next year's contribution is about five cents.

Yeah, yeah. So a little over a penny a quarter in our AFFO is how that would work.

That's helpful, thank you. You're welcome.

Our next question comes from Smides Rose with Citi. Please state your question.

Thanks, it's Nick Joseph here with Smides. Just one question. You'd mentioned acquiring more of these existing leases. I'm just curious how those leases compare to the leases that WP Carey writes. Are there any key terms that are important that we need to keep an eye out for just given this kind of pivot more into retail?

Yeah, I mean, look, it's going to depend. I don't think they're all quite the same. I would say, generally speaking, they're probably not quite as comprehensive as our leases. We've been doing this for a long time, and we feel like we have the ability to do that. So, you know, look, that's the benefit of doing a sale-leaseback. We can dictate terms, and that includes a lot of the individual provisions, you know, lease length, the bump structures. you know, specific covenants or requirements at the corporate level, you know, those are the benefits. But what we found is they do take longer to close. They can be unpredictable, you know, especially when a sale leaseback is done in conjunction with, you know, a broader transaction like an M&A deal or recap of the company. So, you know, there's a lot of benefits to a sale leaseback, but there's also, you know, some downsides and there's real benefits to the existing leases where we can shorten the timelines. And, you know, I would say typically to maybe 30 to 60 days. And, you know, there's no lease negotiations, so there's less complexity in the deal. We can move through, you know, more quickly. But we're not going to take material and more risk. I think on the margin, some will have less protections and will have to rely more on the underlying real estate. And I think you can do that on retail deals. And it's more of a kind of comprehensive view of the deal on how much, you know, change or difference in a lease that we're willing to accept.

Thank you.

Our next question comes from Brad Heffern with RBC. Please state your question.

Yeah, thanks. Hi, everybody. It seems like there have been a number of credit issues recently for companies that were not on the watch list. Can you just give an update on where the watch list stands now and if you're considering expanding the definition?

Yeah, sure. Let me start and I'll pass it over to Brooks. Yeah, so last quarter we discussed a number in the fives. And now that we have true value on it and a few smaller tenants that have gone on, plus a couple that have come off. So it's directionally increased currently in the sixes, which, you know, that's a number that has some meaning. But I think it's important for the market, you know, that they don't view credit in a way that's purely binary. It doesn't mean that a tenant not on the watch list means no risk. It's more of a spectrum issue. And so on top of that, there's probably a couple additional percentage points for these type of tenants, all outside the top 25 right now, ones that we're closely tracking, but don't view that they have risen to the level of any kind of imminent default. So those gray areas certainly exist, and obviously we've experienced those over the last year, and that's why we think it makes it difficult to translate a watch list into an earnings impact. So I think there's more we can do to be helpful to investors. I think there's two things in particular that we're thinking about. Number one, we want to be more proactive on giving commentary around big tenants, those within our top 25 that may be experiencing some risk of default or facing some kind of rent disruption in the near term. We understand that investors are particularly sensitive to the tenants who could have the biggest impact on earnings. So I think that's what we're going to do more. around our top 25, similar to what I just did with Helvig, Hearthside, and True Value during the prepared remarks. So we'll do that on a regular basis. And I think number two, and this is also something we just talked about, we want to provide you with an estimate of actual expected rent loss. It's clearly an estimate. It's a forecast that we have, and that would cover our estimate for expected outcomes across the whole portfolio. And we think that should be more useful to investors and could be maybe the best tool that we can provide that helps look forward on how the portfolio can be impacted over the next year. That's the 100 basis points we talked about earlier.

Okay, got it.

I don't know if there's anything to add to the process or maybe that covers it, unless there's any follow-ups.

Okay, got it. And then on Hellwig, the commentary and the prepared remarks, it sounded like the company is still struggling even with the rent cut. I guess, did I interpret that correctly? And then is there any fruit that you're seeing from the turnaround plan and how far along is that?

Yeah, Brooks, you want to give some color?

Sure. I think the main takeaway is there's not a huge update on their progress. I mean, I think they're still working through a turnaround. I think they're taking the right actions, especially around creating incremental liquidity, containing costs. They were able to push out maturities out to 2027. So those are all positive steps. I think our commentary is just meant to be balanced. that we're still watching it very closely, that we have confidence in the underlying portfolio and demand at rents in line with our current rents. So that's really the main update there. They still are facing headwinds in the environment, but I think they're taking the right actions to achieve their turnaround.

Okay. Thank you. You're welcome.

Our next question comes from Joshua Dennerlein with Bank of America. Please state your question.

Hi, this is Farrell Granath on behalf of Josh Dennerlein. I just had a quick question. In terms of guidance, I know last quarter you had mentioned a three to four cent AFFO being assumed for recoveries of other tenants, as well as the lineage dividend not being included in the guidance numbers. And during your opening remarks, I know you mentioned that now guidance does include lineage with other related lease incomes and transaction timing. I was just wondering if you could kind of review maybe the offsetting factors of increase from lineage, maybe decrease from transaction timings, and an update on the related incomes.

Tony, you want to take that? I've got that. Yep. The lineage dividends add about two cents of AFFO for Q3 and Q4. And really the offsets there are both driven by timing, both in terms of our investment activity, expected to close a little later in the year, as well as a reduction in our estimate for other lease-related income in Q4, so on this side of the year. You know, again, those timings, it's always a little challenge to predict that, but those are each about a penny each of the offsetting impact of the two-cent increase for lineage, and there's really been no change on the The rent contingency side, we kind of, you know, I mentioned in my remarks, we did collect the recovery that you mentioned in October. So there's really no adjustment to guidance for that.

Okay. Thank you.

Thank you. And just a reminder to the audience, to ask a question at this time, press star 1 on your telephone keypad. To remove yourself from the queue, press star 2. Our next question comes from Spencer Alloway with Green Street. Please say your question.

Thank you. Can you just talk about what assets have been included in the increased disposition guidance and the strategic rationale? Does that include any of the HLWG assets I know you mentioned are being considered for sale?

Brooks, you want to take that?

Sure. No major changes for this year. I think we're just effectively reaffirming the range. You know, we may have one asset that closes on this side of the year versus next, and that accounts for a slight increase in that range for this year. We are evaluating a handful of the Helbig properties. That would fall into 2025, and so we haven't guided on that amount yet, but those wouldn't be in 2024. Those would be kind of early in 2025.

I think we pulled up the bottom end a little bit, so I think the midpoint probably went up by $50 million. Maybe that's what you're referring to, Spencer. It's pretty minimal, and it's more just about having, as Brooke said, visibility into you know, what will close this side of the end of the calendar year.

Yeah, no, the timing makes sense. Thanks for the color. And then a few times you guys have mentioned the increased competition you're seeing. I was just hoping maybe you could just elaborate on that just a little bit. Is that in both the U.S. and European geographies? And are there any notable trends in terms of interest levels in the bidding tents across the various property types or industries you guys are underwriting?

Yeah, it's more in the U.S., I would say, and I think a lot of it is starting to see some of the private equity funds who maybe we've competed with more directly over the years kind of creep back in the market. I think it's partly driven by some new funds that have been raised, and it's partly driven by maybe the asset-level financing market starting to become a little bit more liquid. I think that's the main commentary. Again, that would – apply to the U.S. industrial market where we've enjoyed, I would say, less broad competition. I think the U.S. retail, I mean, in some ways, there's a little bit less competition for certain tenants or certain property types. I think we've seen a lot of REITs have commentary around their exposure to a lot of the names, make a lot of the big growth Tenants are the top tenants on many of our peers. So maybe that's an area where there could be some opportunity because there's a bit of a void in the buyers for those reasons. Europe, it's always been thinly. The competition has been thinner. Nothing, I would say, notable or meaningful in terms of increased competition. I think what we're waiting on is for activity to continue to increase. We've seen that coming out of the summer. There's more activity coming into the year end, but we'd still like to see levels get back to a more run rate that allows us to put more money to work there.

That's all very helpful. Thank you.

Great. Welcome, Spencer.

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

Thanks, Diego, and thank you to everyone on the line for your interest in WP Carey. If you have additional questions, please call Investor Relations directly on 212-492-1110. That concludes today's call.