Hello, welcome to W. P. Carey's fourth quarter 2018 earnings conference call. My name is Kevin, and I'll 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 take 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, Director of Institutional Investor Relations. Mr. Sands, please go ahead.
Good morning, everyone, thank you for joining us today for our 2018 fourth quarter earnings call. I'd like to remind everyone that some of the statements on this call are not historic facts and may be deemed forward-looking statements. Factors that could cause actual results to differ materially from W. P. 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'll be archived for approximately one year, and where you can also find copies of our investor materials. With that, I will hand the call over to our Chief Executive Officer, Jason Fox.
Thank you, Peter, good morning, everyone. This morning I'm joined by our CFO, Toni Sanzone, who will discuss our earnings, guidance, and balance sheet, also touching upon the portfolio. I will focus on our recent transactions and the market environment, as well as making some high-level comments about where we are as a company. We're also joined this morning by our President, John Park, and our Head of Asset Management, Brooks Gordon, who are available to answer questions. For 2018, we were a net buyer at attractive spreads to our cost of capital.
In addition to the $5.9 billion of assets we acquired in our merger with CPA: 17 at around a 7% cap rate, we completed close to $1 billion of on-balance-sheet investments in 2018, primarily into industrial properties at a weighted average cap rate of 7.0%, and with a weighted average lease term of 20 years. Our 2018 acquisitions and completed capital investment projects spanned 88 properties, net leased to 20 tenants, operating in 12 different industries and located in seven countries, enhancing the diversity of our portfolio. In recent years, amid disruption to the retail sector, we've noticed net lease REITs have increasingly emphasized the breadth of their portfolios, the confirmation of our long-held belief that broad diversification is the best approach to net lease investing.
Having covered the strategic portfolio and balance sheet benefits of the CPA: 17 merger on prior calls, today I will focus more on our recent acquisitions. We had an active last quarter of the year, completing $248 million of investments, consisting of eight acquisitions for $211 million, along with the completion of three capital investment projects at a total cost of $37 million. Our fourth quarter investments were primarily into industrial assets and exemplify the types of investments we like to make, critical properties on long-term leases with built-in growth, leased to market-leading tenants with growing businesses, providing the potential for credit upgrades and future expansion opportunities. The first was a $33 million sale-leaseback of a six-property portfolio with Lakeshore Recycling Systems, the largest independent waste company in Illinois and Wisconsin.
The transaction included five industrial facilities as well as their corporate headquarters, all located in the greater Chicago area. The portfolio is under a master lease on a triple-net basis for a period of 25 years with annual CPI-based rent bumps. Second was a $31 million investment, also in the greater Chicago area, into two properties that house the distribution, warehouse, and global headquarters of Brake Parts Inc, a multinational manufacturer and distributor of aftermarket automotive products. The properties are triple-net leased with a remaining lease term of 11 years and fixed rent increases. Third, we completed a $41 million acquisition of a distribution facility in Texas leased to Orgill, the world's largest independent hardware distributor, which serves as its distribution center for the surrounding states. In addition, the transaction provides for a $14 million investment into the expansion of this facility, which we expect to complete in 2019.
This is a triple-net lease on a 25-year term that resets upon completion of the expansion. Fourth, we completed a $55 million cross-border investment in a three-property portfolio net leased to Faurecia, a global leader in automotive seating, interiors, and emissions control technology that equips one in four vehicles sold worldwide and has approximately $20 billion in annual sales. The transaction was comprised of a manufacturing facility in Mexico, an R&D facility just outside of Paris, and a warehouse facility in Poland. These are critical assets on long-term leases with lease terms of approximately 19 years for the Mexican site and 15 years for the European sites. They provide built-in rent growth with annual uncapped CPI rent escalations with rent payable in U.S. dollars for the facility in Mexico and euros for facilities in Europe.
In addition to acquisitions, a meaningful portion of our 2018 investment volume came from discretionary capital investment projects through follow-on transactions with existing tenants. During the fourth quarter, we completed three projects at a total cost of $37 million. This was primarily the completion of an additional $24 million build-to-suit expansion for Nord Anglia, a leading global operator of K through 12 private schools. Like the other build-to-suit expansions we completed with this tenant in 2018, the lease term on the existing property was reset to 25 years and includes annual uncapped CPI rent increases. Our larger pool of assets post-merger provides us a wider opportunity set from which to source follow-on transactions. We have an active pipeline of such opportunities.
At year-end, we had nine capital investment projects outstanding for an expected total investment of approximately $235 million, of which $160 million is currently expected to be completed during 2019, and is therefore included in our acquisition guidance. The $235 million total includes the build-to-suit transaction we announced earlier this week with Cuisine Solutions for a $75 million state-of-the-art food production facility in Texas, which we expect to complete in 2020. As part of the transaction, our existing lease with the tenant for its facility in Virginia will be incorporated into a new master lease covering both properties and extended to a term of 26.5 years with fixed annual rent increases. Turning to the market environment. In Europe, activity levels remain high, with many countries experiencing record deal volume in 2018.
Foreign capital inflows continue to put pressure on cap rates across all geographies, although interest rates have remained low and are not expected to move up rapidly, allowing sufficient investment spread. Industrial remains the favorite sector in Europe, with high levels of construction and the tightest yields. There has been a trend towards last mile and multi-level assets in proximity to large urban areas, and European retail is still attracting strong investor interest. Of course, Brexit continues to create uncertainty and therefore could generate opportunities, particularly where a tenant's business model is less impacted by Brexit or may even benefit from it. In the U.S., deal flow remains high and sentiment is positive, especially given the recent pullback in interest rates.
Increased M&A activity, which is forecast to further accelerate, is also creating more sale-leaseback opportunities, an area of the market in which we excel. The industrial sector has seen massive capital inflows, driving high demand and lower yields. Within industrial, we're focusing on sale-leasebacks, which generally allow a yield premium to market levels. For office, we're seeing pockets of opportunity, although we'd be very selective about where we would execute with conservative underwriting, we've generally not been excited about U.S. retail and continue to feel that way. Geographically, the momentum appears to be shifting back to the U.S. in terms of where we are seeing the better opportunities. Our pipeline is strong. The number of deals that fit our investment criteria has increased versus a year ago, we're also better positioned from a cost of capital perspective. I'll finish with some high-level remarks.
2018 marked an important milestone in the history of W. P. Carey, essentially completing the company's evolution from its origins as a manager of high-quality net lease real estate funds to a pure- play net lease REIT, a significant one at that, ranking as one of the largest REITs in the MSCI US REIT Index. Real estate ownership is, of course, a capital-intensive business that benefits from scale and efficiency, a cost of capital that provides an attractive investment spread. Since converting to a REIT in 2012, we've made a number of structural changes to improve the quality of our earnings and increase our operational efficiency. The total off-market opportunity for net lease investments remains vast, we have both the expertise and resources to capitalize on it, built on an investment process honed over nearly five decades.
Our increased size also means we can absorb larger single -asset or portfolio deals and M&A activity. We've added flexibility to our balance sheet and reduced leverage, putting us in a very strong position to support our 2019 acquisitions and continue to grow real estate AFFO per share. With that, I'll hand the call over to Toni to talk more about our balance sheet, earnings, and guidance.
Thank you, Jason, and good morning, everyone. This morning we announced AFFO per share of $1.33 for the fourth quarter and $5.39 for the 2018 full year. This represents a 1.7% increase over our full year results for the prior year. Real estate AFFO per share for 2018 increased 3.8% to $4.39, reflecting the accretive impact of our merger with CPA:17 over the last two months of the year, as well as the impact of our net acquisition volume and same-store growth. Investment management earnings declined for the year, due primarily to the elimination of advisory fees from CPA:17 in the last two months of the year, as well as lower structuring revenue. Jason covered our fourth quarter investment activity, which totaled $248 million at a weighted average cap rate of 7%.
This brought total investment volume for the year to $940 million, also at a weighted average cap rate of 7%, and with a weighted average lease term of 20 years. These are going in cap rates, so our expected yields will rise over time through attractive rent escalations, either from fixed rent bumps or increases tied to inflation. Disposition volume for the full year totaled $525 million, driven by $340 million of sales during the fourth quarter, primarily from two transactions, which helped reduce our top 10 tenant concentration and further refined our geographic focus while also achieving great execution, exiting the properties at a weighted average cap rate of 6.8%. First, we sold nine do-it-yourself retail properties in Germany for $180 million, which we discussed on our last earnings call, allowing us to harvest value created within the portfolio, while also proactively managing our overall diversification.
Second, we continue to execute on our strategy to focus the portfolio on the U.S. and Northern and Western Europe. Specifically, we sold a portfolio of 28 properties in Australia for $146 million, taking advantage of strong market conditions to opportunistically exit our Australian assets at a cap rate significantly tighter than where we purchased them. Same-store rent was 1.4% higher year-over-year on a constant currency basis. The definition of same-store properties excludes acquisitions and the properties we acquired in the CPA :17 merger, until we have owned them for 12 months. However, CPA:17 assets have rent escalators very similar to our existing portfolio, and once included, we fully expect our same-store rent growth on a combined basis to be in line with our pre-merger portfolio.
By investing outside of the commodity segment of net lease, we've assembled a portfolio with 99% of ABR coming from leases with built-in rent growth. At year-end, 64% of our ABR had rent escalators in the leases linked to CPI, while 32% had fixed increases. As we've discussed on prior calls, the assets we acquired in the CPA :17 merger are well-aligned with our existing portfolio, whether by geography, tenant industry, or property type, maintaining broad diversity. We ended 2018 with 63% of ABR coming from net lease properties in the U.S. and 35% in Europe. Industrial properties, including warehouse facilities, represented 44% of ABR at year-end. This is followed by office properties representing 26%, up very slightly as a result of the merger. Retail assets represented 18% of ABR at year-end, with the vast majority in Europe, and with tenants we view as less prone to disruption from e-commerce.
Europe continues to have significantly lower retail square foot per capita and higher barriers to development relative to the U.S. Our top 10 tenant concentration has been noticeably reduced as a result of the merger, representing 23.5% of total ABR at the end of 2018, compared to 30.7% just prior to closing the transaction. That's a meaningful decrease, enhancing our diversification and thereby lowering portfolio risk. It also positions us with one of the lowest top 10 concentrations in the net lease peer group. Moving to our capitalization and balance sheet. During 2018, we raised approximately $1.5 billion in long-term and permanent capital through our capital markets activities. This included two EUR 500 million-denominated bond offerings in March and October of 2018, with a weighted average coupon rate just under 2.2% and around an eight-and-a-half- year term.
Net proceeds partially funded our European acquisitions, thereby naturally hedging euro currency risk, as well as advancing our unsecured debt strategy. We utilized our ATM program during the fourth quarter and in the first quarter of this year to efficiently raise approximately $350 million of equity at a weighted average stock price of just under $70 per share. Our ATM activity, along with our merger, which was an all-stock transaction, had a de-leveraging impact on our balance sheet and enabled us to enter 2019 in a position of balance sheet strength. We ended the year with debt- to- gross assets at 42.8% and net debt- to- EBITDA at 5.8x . We have a well-laddered series of debt maturities with just $74 million of debt maturing in 2019 and limited floating rate debt relative to the size of our overall balance sheet. We remain committed to our unsecured debt strategy.
While secured debt as a percentage of gross assets increased moderately as a result of the mortgages on the CPA :17 properties we acquired, ending the year at 18.3%, we view this as temporary, as we have a clear path to reducing secured debt with minimal frictional costs by continuing to repay mortgages as they come due. We've conservatively managed our balance sheet to ensure ample liquidity, which at year-end stood just over $1.6 billion. In conjunction with our disposition pipeline, this ensures we're well positioned to execute on the acquisition volume in our guidance, while maintaining maximum flexibility to access the capital markets when it's advantageous to do so. Turning now to guidance. For 2019, we expect to generate total AFFO of between $4.95 and $5.15 per share, and real estate AFFO of between $4.70 and $4.90 per share.
At the midpoint of our guidance range, we expect real estate AFFO per share to increase almost 10% year-over-year, reflecting the full year impact of the merger with CPA: 17. Our guidance assumes investment volume of between $750 million and $1.25 billion, which includes capital investment projects such as expansions with existing tenants and build-to-suit. It also assumes dispositions of between $500 million and $700 million, including the $250 million New York Times repurchase during the fourth quarter. We expect G&A expense to increase moderately in 2019 to between $75 million and $80 million due to the elimination of expense reimbursements previously received from CPA :17.
While we lose the benefit of those reimbursements, we are operating much more efficiently on the same platform with a very scalable business model, as illustrated by the significant decline in G&A as a percentage of both assets and revenue compared to pre-merger levels. We anticipate our investment management business will represent approximately 5% of our 2019 total AFFO, reflecting both the full year impact of the CPA :17 merger on our advisory fees and our expectation that structuring revenue will have virtually no impact on our overall earnings. We're extremely pleased with the improvement we are seeing in the quality of our earnings, which we believe is being reflected in the expansion of our AFFO trading multiple, creating value for our shareholders and lowering our cost of capital.
This increases the spreads we can achieve and expands the pool of investment opportunities that are accretive to earnings, thereby enhancing our ability to grow real estate AFFO per share. With that, I'll hand the call back to the operator to take questions.
Thank you. At this time, we will take questions. If you'd like to ask a question, simply press the star key, then the number one on your telephone keypad. If you'd like to withdraw your question, press the star, then the number two. Our first question today is coming from Anthony Paolone from JPMorgan. Your line is now live.
Thank you. Good morning.
Tony.
My first question is as it relates to just the deal pipeline as you look into 2019, if you can comment on whether you're seeing more M&A type transactions or one-offs. Also similarly on the transaction side, can you give a sense as to how your acquisition volume, in your guidance for 2019 compares to what historically you've done when you combine both the fund business and the REIT balance sheet?
Right. Okay. Let me start with kind of pipeline and how we characterize it. I would say that it consists mostly of sale-leasebacks and build-to-suits, some of which are associated with M&A activity. We have seen out in the market increased M&A activity, and I think projections from various sources would suggest that that's going to accelerate throughout the year. While some of the sale-leasebacks in our portfolio or pipeline right now are M&A -related, I think you can expect more of that to happen throughout the year. In terms of geography, we're seeing a little bit more opportunity right now in the U.S. relative to years past. I think some of that could be attributed to a little bit of the slowdown in Europe, but I think it's more attributed to some of the growth dynamics that we're seeing in the U.S. right now.
Again, some of which is M&A activity, more of it is along the lines of growth with companies, whether through expansions, wanting to access capital through sale-leasebacks, and in build-to-suits in some cases as well. The last question about where our pipeline or where our guidance for that matter is relative to years past, especially when we've done some mergers. I'm not so certain it really correlates with the mergers at all. Our guidance and our pipeline for that matter, are stronger than they have been over the last several years. I think you probably have to go back to maybe 2014 and 2015, years in which across the W. P. Carey Group, we did about $3.5 billion of net lease transactions during that two-year period.
Okay. Then in the guidance, is there much impact assumed from currency? Also any thoughts on where leverage lands sort of at the end of 2019?
Sure. Let me start with the currency. In terms of what we're projecting now, we're looking at the current rates basically flowing through our guidance projections. With the euro at 1.13, expecting that to carry through, but I'll say that we are very well hedged and feel comfortable that any movement in the EUR would have a very minimal impact on our earnings at this point. I think you can kind of translate it to a 10% movement in the euro wouldn't move earnings by more than 1%. Then just in terms of your question on leverage, I'd say we were happy to be able to bring our leverage down with the ATM execution in the fourth quarter and earlier this year.
Our target leverage levels continue to be in the mid 40% range on debt- to- gross assets, and in the mid to high 5.0s on net debt- to- EBITDA. I think, again, we're comfortable at those levels, and we gave ourselves a little bit of room with the activity that we did on the ATM.
Okay, great. Thank you.
Thank you. Our next question today is coming from Todd Stender from Wells Fargo. Your line is now live.
Hi, thanks. I just wanted to flesh out the self-storage acquisition. Was this taking out a partner in a JV? I noticed the 90% not controlling interest. If you could just provide more color on that. Thanks.
Yeah, sure. This actually was the second component of a portfolio of self-storage assets that CPA :17 had bought earlier in the year prior to the merger. This was just the end of that transaction that closed post-merger, which is why it shows up as part of our acquisition volume in the fourth quarter. It was a 90/10 joint venture with Extra Space, who is our property manager as well.
Okay. Are they out and you own it wholly owned at this point?
They're still our JV partner.
Got it.
They still have a 10% interest. Correct.
Are they managing it as well?
They are.
Okay, got it. Thank you. Can you provide pricing on that? Are these stabilized assets?
Brooks, do you have any color on that?
These are not stabilized assets. They are in various stages of lease-up right now. We expect those to stabilize over the coming quarters.
Any yield expectations, any color you can provide around that?
Hard to say now. It really depends on how the lease-up goes, but it's going according to plan, and we're continuing to focus on the lease-up there.
Yeah. I think for a round number, it's in the 6s%. That's kind of our expectation on a stabilized cap rate basis.
Okay. Thank you. Just moving to dispositions, guidance could push up to $700 million. Where are these coming from? Are these CPA :17 assets? Maybe just some of the characteristics of what you are selling.
Sure. This is Brooks. Again, the guidance is $500 million-$700 million dispositions. That does include The New York Times at $250 million, so that's really the big chunk. In terms of deal type, about 50% of that at the low end is purchase option from The New York Times. Maybe 30% is what we would call non-core, some of which came over in CPA :17. For example, operating hotel as well as an asset in Japan. Those are really the main buckets. As Toni mentioned, the CPA: 17 portfolio fits very nicely with W. P. Carey's existing portfolio, so there's not a huge amount of required cleanup there.
Got it. Thank you.
Thank you. Our next question is coming from Manny Korchman from Citi. Your line is now live.
Thanks. Good morning.
Hey, Manny.
Jason, maybe you could help us just think about yield expectations on both the total pipeline of acquisitions and dispositions, especially in light of you discussing sort of competitive markets globally.
Right. Sure. I'll let Brooks touch on dispositions, but in terms of the acquisition, I think in the U.S., especially with our lower cost of capital, we're targeting deals in the low sixes and into the sevens. I would say in Europe, it's in that range, perhaps 25 basis points lower, given the lower borrowing costs, which still allow us to achieve meaningful spreads. If you look at us historically, I think 2018, our weighted average cap rate was in and around 7%. If you look back to the last couple of years, it's probably fallen within very close to that range as well. That's probably something that we would hope to expect this year and achieve. I think it all depends on market conditions.
On the disposition front, we expect the all-in execution to be roughly in line with where we're acquiring assets in that low 7% cap rate range. I'll just add that on the discretionary CapEx component of the investment volume, we have seen and continue to expect to see a meaningful premium to marketed investments from a cap rate perspective.
Thanks. Are there any other sort of pipeline deals similar to what you discussed with the storage assets that are built into either CPA :17 or the core portfolio that are sort of just lined up and waiting to close rather than you trying to find opportunities?
Well, I wouldn't say that they're related to the CPA :17 acquisition. I think that CPA :17 was fully invested in the self-storage portfolio that was transacted throughout the year, and 2018 was a bit unique. In terms of the pipeline, we do have an active pipeline. It's across geographies and asset classes. A lot of them, as I mentioned before, are build-to-suits. I should add to the cap rate question you asked that when we're doing these sale-leasebacks and build-to-suits, we're typically getting an average, call it 50 basis points - 100 basis points premium to where we think these assets would trade in the market. Want to give you a sense of what a 7% cap rate may look like in terms of the risk profile, especially given how that we source them.
Of course, our pipeline also includes expansion opportunities and other capital investment projects within the portfolio, some of which are part of CPA :17 acquired assets. I guess there is some correlation there. Again, those type of transactions, we tend to have a lot of leverage on structure in pricing, those tend to be higher-yielding investments all else being equal. We also tend to get the benefit of extended lease terms on the leases that are encumbering those existing assets. I think all positive.
Thanks, everyone.
Yep.
Thank you. Our next question is coming from Chris Lucas from Capital One Securities. Your line is now live.
Hey, good morning, guys.
Morning, Chris.
Just a couple of quick questions for you. Just Jason, maybe just touching on the acquisition perspective for 2019, do you have a sense as to how much potentially could come from existing customers versus new customers?
Our current active projects is a little under $250 million. I think about $160 million of that is expected to close this year and would be included in our acquisition volume for the year. Brooks, do you want to kind of talk more generally about what we're targeting and what you can expect from capital investment projects?
Sure. I think to emphasize one of the benefits of bringing on CPA :17 is that substantially opens up that pool of target opportunities. We're very focused on it, proactively meeting with tenants and identifying tenants that have a need to grow. We expect that to be a meaningful opportunity set over the next few years kind of in the range of the $200 million-ish range, which is currently in the discretionary CapEx. We expect that to be a good working number for the next few years.
Okay, great. Thanks. Jason, just maybe refresh my memory as it relates to how you guys are thinking about the self-storage portfolio from a core or non-core basis, and what your views are in terms of the holding period for it.
Yeah, sure. As we've talked about in the past, we are focused on being a pure -play net lease REIT. We're not long-term holders of operating properties like storage. It is an asset class that we know well. It's a high-quality portfolio. We're going to be patient with what we decide to do there. We are currently evaluating a number of options, but there's really nothing more to report at this point in time.
Toni, just on the debt maturity profile. There's certainly more mortgage debt today than pre-merger in terms of the overall pro rata share. There's also a fair amount of it due over the next several years. At rates look pretty reasonable in terms of a mark-to-market. I guess the question I have is, what sort of capacity do you have within the overall balance sheet from a refi perspective that would allow you to sort of refi that mortgage debt with euro bonds, which are obviously significantly lower cost right now?
Yeah. I think just starting with the mortgage debt in general. As you mentioned, it is maturing over a couple of years and even if we were to pay that down as they mature, we'd expect to bring our secured debt back in line with where it was pre-merger levels within a couple of years. In terms of opportunity to bring that forward, we're certainly always evaluating that. I think for us, we evaluate that against kind of the cost to break that at any point in time. In terms of the overall leverage euro versus U.S., we did see the CPA :17 merger coming on at the time that we did our last euro bond issuance in October. Certainly took that into account. We increased our euro leverage a bit there.
I think we're comfortable with the euro leverage levels we have now. There is still a bit more room should we choose to do that. Again, it would be certainly market -driven. As I mentioned, we need to have sort of a catalyst to want to bring forward that debt at that point in time.
Great. Thank you. That's all I have this morning.
Great. Thanks.
Thank you. Our next question today is coming from Greg McGinniss from Scotiabank. Your line is now live.
Hey, good morning.
Good morning, Greg.
Brooks, I just want to dig into your comment on the 30% dispositions focused on non-core assets a bit. Is the plan to hold on to the Eastern European assets from CPA :17? Could this geography potentially be an area of additional investments from WPC?
First of all, specifically to my comment, those assets are not baked into that number. That's a very small component of the whole. Important to note that those are high-quality properties with long-term leases and good credit tenants. I think that's about 3% of total ABR. While those aren't target markets from a new investment perspective, we're certainly comfortable holding those assets, and we do like the investments themselves. Over time, we can be opportunistic with those should we choose to exit those in the future. Those aren't in the 2019 disposition guidance.
Okay, thanks. Toni, as the stock continues to trade near all-time highs, how are you thinking about ATM usage in 2019? I know you spoke about this a bit, but I'm just trying to get a sense for your thoughts on leverage versus earnings dilution at this point. Also, are there any additional issuances baked into guidance?
Yeah, as I said, we're very happy with the equity we've raised on our ATM just since December. We were able to issue capital pretty attractively priced relative to where we can invest creatively. We also had the benefit of increased trading volume in our shares, which we'd hope to achieve as a result of the CPA :17 merger. Our ability to take advantage of that did a couple of things for us. It reduced our leverage, bringing our net debt- to- EBITDA back down to under 6x , which is well ahead of what we initially expected. It allowed us to refund some of our expected acquisition activity. Right now, our balance sheet strength leaves us well positioned with the flexibility to act opportunistically.
We don't necessarily need to have an issuance of additional capital this year, which is what our guidance assumes, but we'll continue to evaluate the opportunity relative to our capital needs.
Okay. Yeah, guidance is not assuming any additional issuances. Thank you. Jason, just a final question here. Could you just give a few details on the decline in occupancy since Q2? Was that related to a specific tenant? Are you looking to sell those vacant properties, or are they making good re-leasing opportunities?
Yeah. I'll let Brooks cover that.
Okay.
Sure. The pickup in vacancy really relates to a portfolio of former Bon-Ton locations, retail stores, which we do intend to sell.
Okay.
Important to note that one of those is a very high quality located warehouse in Allentown, Pennsylvania. We're in the process of working to redevelop that into a much larger facility, which would be a Class A warehouse facility, and we're working through the permitting process now. We expect that to be a very good outcome.
Great. Thank you.
Great. Thanks.
Thank you. Our next question today is coming from John Massocca from Ladenburg Thalmann. Your line is now live.
Good morning, guys.
Good morning, John.
Can you maybe provide some additional color on what drove the sale of the Australia assets leased to Inghams? It's just a little bit maybe curious because you only purchased those about four years ago, and I know you got kind of a decent return even when factoring in the TI dollars, or sorry, the CapEx dollars you spent there. Is that just a simplification of the story, or was it something where you felt like these assets were as valuable as they ever were going to get? Just maybe some color there would be helpful.
Sure. This is Brooks. Again, we did exit the Inghams portfolio, which completes our exit from Australia. There's certainly a simplification aspect to the deal itself. I will add it was a fantastic outcome. We realized on the order of 100 basis points or 250 basis points of cap rate compression over about a four- and- a- half- year hold. Fantastic performing asset for us. It's just Australia's not a target market of ours. We don't have scale there, and it's certainly much more difficult to manage from afar. That said, it was an opportunistic exit, and we're very satisfied with the deal itself.
Let me just add quickly, that deal was done, it was a sale-leaseback as part of an M&A transaction. I think it's a good example of how we're able to generate significant yield premium through the structuring of sale-leasebacks, especially alongside private equity firms and M&A transactions. That 250 basis point compression, I think some of that was on the upfront structuring. Some of it was the markets there got stronger. I think this tenant also improved its credit, and I think that's all part of our thesis on how we invest. The result was a great return, I mean, a very high returning asset, for a four- or five-year hold.
Do you have a general IRR on the hold?
That was about 15% unlevered IRR over that four- and- a- half- year hold period.
Okay. Then, looking at page 14 of the sup, tenant improvements in operating expenses were non-maintenance capital expenditures to operating properties were maybe a little high this quarter versus some past quarters, especially when it seems like not a lot of that was maybe tied to lease renewals and extensions done in the quarter. Maybe kind of what drove that?
Sure. There's a couple different buckets there. This is Brooks. On the non-discretionary CapEx piece, the TIs, about $4 million or thereabouts, was the actual funding of tenant improvement allowance from a deal we actually entered into in 2017 and was just funded in this particular quarter, an office, long-term new lease with a new tenant. On the non-maintenance front, there's another line item there which relates to one of our operating hotels that's going through a renovation. I believe that's about the $6.3 million number. That's one of the assets which we expect to sell this year, but we will complete the renovation as well. That's really the kind of noise in that number this quarter.
Makes sense. Lastly, given we're kind of getting to the point here where CWI 1 is kind of laid out as its target for potentially seeking a liquidity event. I know you guys do lay out kind of the exact terms of your back -end fees on page 43 of the sup, but have you started kind of formulating maybe kind of a range of what the financial benefit of a potential sale is to W. P. Carey? Or is it just too early for that right now?
I think at this point, as you mentioned, the process that the directors are running is one that they're focused on. We don't have a whole lot of involvement in the direction that that will take. I think it's certainly premature at this point to kind of put any dollar value, in terms of where we see that benefiting us. We've mentioned we wouldn't bring those assets on our balance sheet, given their lodging assets. I'm not sure there's much more there that we can assume at this point.
Makes sense. That's it for me. Thank you very much.
Thanks, John.
Thank you. Our next question is coming from Sheila McGrath from Evercore. Your line is now live.
Yes. I was just wondering if you could update us on if anything meaningful changed in the assumptions on the asset management aspect in terms of the winding down fees, if anything changed there.
In terms of the investment management business?
Exactly.
No, at this point, Sheila, I think somewhere in the supplemental in the back, we lay out the remaining four funds that we have. Our assumption is that we'll continue to manage those through 2019. That's what's reflected at guidance. As I mentioned, with the CPA :17 going away, that comes down to a much less meaningful portion of our total results, so about 5%. I think if you looked at even the Q4 totals, the asset management fees and our interest in the funds, that's probably a reasonable run rate for where we expect that to go for the rest of this year.
Okay, great. Could you update us on the tenant watch list? Are there any meaningful tenants or just update us on the current watch list? That would be great.
Sure. This is Brooks Gordon. Credit quality is very good right now. In fact, improves overall with the acquisition of CPA: 17. As you can see in the supplemental investment grade increases to 29%. From a watch list perspective, it's pretty stable. The primary tenant we have on there, which we've discussed in the past, is the Agrokor portfolio. We're making a lot of progress working through restructure with them, we expect that to come off the watch list soon. Too early to report any details, but we do expect to realize some upside relative to the 50% haircut we underwrote when acquiring the assets. That's fully baked into our guidance range.
Is the 50% that you closed on the asset at the 50% rental?
The $11.6 million that's flowing through ABR represents a 50% haircut and reserve to contract rent.
Okay.
We expect upside relative to that.
Perfect. Could you just remind us the exact closing date of The New York Times for modeling purposes?
December 1st.
Capital expenditure outlook in terms of TIs for this year kind of versus historical.
I think the way to think about TIs is it's certainly very deal specific. It's hard to handicap an exact number, because in certain deals we'll take a very capital- light approach, and in others we'll choose to invest a lot more capital. I hesitate to handicap that with a very specific number. I will, on the maintenance front, that will tick up somewhat with the addition of the operating properties, again, which Jason mentioned. In the long run, those aren't assets we will own as operating properties.
Okay, thank you.
Thank you. Once again, ladies and gentlemen, that is star one to ask a question at this time. Our next question is coming from John Massocca from Ladenburg Thalmann. Please proceed with your follow-up.
Sir, just a quick follow-up. I know it's fallen out of the top 10 here with the close of the merger with CPA :17. Universal Technical Institute, which was in the top 10 previously, has kind of talked about potentially restructuring how it views its real estate. I mean, is there any potential downside to your guys' holdings of them there, or do you think you have a pretty secure investment with those guys?
Well, we have a diversified portfolio of campuses with them. Again, as you noted, it is becoming a less meaningful part of our total and falling out of the top 10, and we're presently working through restructuring leases with them, kind of one by one. Nothing kind of material. We already did one of them and extended that, and working on the others. Each campus is different, but we're making good progress working with them.
Understood. Okay, that's it for me. Thank you.
Great. Thanks, John.
Thank you. At this time, I'm not showing any further questions. I'll hand the call back to Mr. Sands.
Thank you everyone for your interest in W. P. Carey. If anyone has additional questions, please call investor relations directly on (212) 492-1110 . That concludes today's call. You may now disconnect.