Hello, and welcome to W. P. Carey's 4th 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, and thank you for joining us today for our 2018 Q4 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 wpkerry.com, where it will be archived for approximately 1 year and where you can also find copies of our investor 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'm joined by our CFO, Tony Sanzone, who will discuss our earnings, guidance and balance sheet, also touching upon the portfolio. And I will focus on our recent transactions and the market environment as well as making 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 $5,900,000,000 of assets we acquired in our merger with CPA:seventeen at around a 7% cap rate, we completed close to $1,000,000,000 of on balance sheet investments in 2018, primarily into industrial properties at a weighted average cap rate of 7.0 percent 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 7 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:seventeen merger on prior calls, Today, I will focus more on our recent acquisitions. We had an active last quarter of the year, completing $248,000,000 of investments, consisting of 8 acquisitions for $211,000,000 along with the completion of 3 capital investment projects at a total cost of $37,000,000 Our 4th 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, lease to market leading tenants with growing businesses, providing the potential for credit upgrades and future expansion opportunities.
The first was a $33,000,000 sale leaseback of a 6 property portfolio with Lakeshore Recycling Systems, the largest independent waste company in Illinois and Wisconsin. The transaction included 5 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. 2nd was a $31,000,000 investment also in the Greater Chicago area into 2 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 the remaining lease term of 11 years and fixed rent increases.
3rd, we completed a $41,000,000 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 $14,000,000 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. And 4th, we completed a $55,000,000 cross border investment in a 3 property portfolio net leased to Faurecia, a global leader in automotive seating, interiors and emissions control technology that equips 1 in 4 vehicles sold worldwide and has approximately $20,000,000,000 in annual sales. The transaction was comprised of a manufacturing facility in Mexico, an R and 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 Q4, we completed 3 projects at a total cost of $37,000,000 This was primarily the completion of an additional $24,000,000 build to suit expansion for Nord Anglia, a leading global operator of K-twelve 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. And we have an active pipeline of such opportunities. At year end, we had 9 capital investment projects outstanding for an expected total investment of approximately $235,000,000 of which $160,000,000 is currently expected to be completed during 2019 and is therefore included in our acquisition guidance.
The $235,000,000 total includes the build to suit transaction we announced earlier this week with Cuisine Solutions for a $75,000,000 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, high levels of construction and the tightest yields. There has been a trend towards last mile and multilevel assets in proximity to large urban areas, and European retail is still attracting strong investor interest. There are indicators of an economic slowdown, however, and 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 and 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 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. And 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, and 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. D.
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 and a significant one at that, ranking as one of the largest REITs in the MSCI U. S. REIT Index. Real estate ownership is, of course, a capital intensive business that benefits from scale and efficiency and 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 market opportunity for net lease investments remains vast, and we have both the expertise and resources to capitalize on it, built on an investment process honed over nearly 5 decades. Our increased size also means we can absorb larger single asset or portfolio deals and M and 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. And 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 4th 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:seventeen over the last 2 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:seventeen in the last 2 months of the year, as well as lower structuring revenue.
Jason covered our 4th quarter investment activity, which totaled $248,000,000 at a weighted average cap rate of 7%. This brought total investment volume for the year to $940,000,000 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 $525,000,000 driven by $340,000,000 of sales during the 4th quarter, primarily from 2 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 9 do it yourself retail properties in Germany for $180,000,000 which we discussed on our last earnings call, allowing us to harvest value created within the portfolio, while also proactively managing our overall diversification.
2nd, 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 $146,000,000 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:seventeen merger until we have owned them for 12 months. However, CPA:seventeen 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 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:seventeen 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 concentrations 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 point $5,000,000,000 in long term and permanent capital through our capital markets activities. This included €500,000,000 denominated bond offerings in March October of 2018, with a weighted average coupon rate just under 2.2% and around an 8.5 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 Q4 and in the Q1 of this year to efficiently raise approximately $350,000,000 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 deleveraging 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 percent and net debt to EBITDA at 5.8 times. We have a well laddered series of debt maturities with just $74,000,000 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:seventeen properties we acquired, ending the year at 18.3 percent, 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 $1,600,000,000 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 $5.15 per share and real estate AFFO of between $4.70 $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:seventeen.
Our guidance assumes investment volume of between $750,000,000 $1,250,000,000 which includes capital investment projects such as expansions with existing tenants and build to suits. It also assumes dispositions of between 5 $100,000,000 $700,000,000 including the $250,000,000 New York Times repurchase during the Q4. We expect G and A expense to increase moderately in 2019 to between $75,000,000 $80,000,000 due to the elimination of expense reimbursements previously received from CPA:seventeen. 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 and 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:seventeen 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. And with that, I'll hand the call back to the operator to take questions.
Thank you. At this time, we will take Our first question today is coming from Anthony Paolone from JPMorgan. Your line is now live.
Thank you and good morning.
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 and A type transactions or one offs? And 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 rebalance 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 and A activity. And we have seen, out in the market, increased M and A activity.
And I think projections from various sources would suggest that that's going to accelerate throughout the year. So while some of the sale leasebacks in our portfolio or pipeline right now are M and 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 and A activity, but 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. But 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 2015 years in which across the W. P. Carey Group, we did about $3,500,000,000 of net lease transactions during that 2 year period.
Okay. And then in the guidance, is there much impact assumed from currency? And 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. So 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 euro 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%. And 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 Q4 and earlier this year. Our target leverage levels continue to be in the mid-forty percent range on debt to growth assets and in the mid to high 5s on net debt to EBITDA. So 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. Just wanted to flush out the Self Storage acquisition. Was this taking out a partner in a JV? I noticed the 90% non controlling interest, if you could just provide more color on that. Thanks.
Yes, sure. This actually was the second component of a portfolio of self storage assets that CPA:seventeen had bought earlier in the year prior to the merger. And so 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 Q4. And it was a ninety-ten joint venture with Extra Space, who is our property manager as well.
Okay. So are they out and you own it wholly owned at this point?
No, they're still our JV partner. 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 and are these stabilized assets?
Brooks, do you have any color on that?
These are not stabilized assets. So they are in various stages of lease up right now and we expect those to stabilize over the coming quarters.
Any yield expectations? Any color you can provide around that?
Hard to say now. I mean, 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.
Yes. And I think for round numbers in the 6s, that's kind of our expectation on a stabilized cap rate basis.
Okay. Thank you. And then just moving to dispositions guidance could push up to 700,000,000 dollars Where are these coming from? Are these CPA:seventeen assets? And maybe just some of the characteristics of what you are selling?
Sure. This is Brooks. Again, the guidance is $500,000,000 to $700,000,000 dispositions. That does include The New York Times at $250,000,000 So that's really the big chunk. In terms of deal type, about 50% of that at the low end is purchased option from New York Times.
Maybe 30% is what we would call non core, some of which came over in CPA:seventeen. So for example, operating hotel as well as an asset in Japan. And those are the really the main buckets. It's not as Tony mentioned, the CPA:seventeen portfolio fits very, very nicely with W. P.
Carey's existing portfolio. 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 and 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 6s and into the 7s, 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.
I mean, if you look at us historically, I think 2018, our weighted average cap rate was in and around 7%. And if you look back to the last couple of years, it's probably fallen within very close to that range as well. So that's probably something that we would hope to expect this year and achieve, but I think it all depends on market conditions.
And on the disposition front, we expect the all in execution to be roughly in line with where we're acquiring assets in that 7% low 7% cap rate range. And I'll just add that on the discretionary CapEx component of the investment volume, we have seen and you expect to see a meaningful premium to marketed investments from a cap rate perspective. Thanks. And then is there or are there any other sort of pipeline deals similar to what you discussed with the storage assets that are built into either CPA:seventeen or the core portfolio that are sort of just lined up and waiting to close rather than you trying to find opportunities?
Well, I mean, I wouldn't say that they're related to the CPA:seventeen acquisition. I think that CPA:seventeen was fully invested in the self storage portfolio that was transacted throughout the year in 2018 was a bit unique. But 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.
And 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 on average, call it 50 to 100 basis points premium to where these think where we think these assets would trade in the market. So I 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. And of course, our pipeline also includes expansion opportunities and other capital investment projects within the portfolio, some of which are part of CPA:seventeen acquired assets. I guess there is some correlation there. Again, those type of transactions, we tend to have a lot of leverage on structure and pricing.
So 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. So I think all positive.
Thanks everyone.
Thank you. Our next question is coming from Chris Lucas from Capital One Securities. Your line is now live.
Hey, good morning guys.
Good morning, Chris.
Just a couple of quick questions for you. Just, Jason, on the 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?
I mean, our pipeline right now of active projects is a little under or I shouldn't say pipeline. Our current active projects is a little under $250,000,000 I think about $160,000,000 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 mean, I think to emphasize the benefit one of the benefits of bringing on CPA:seventeen 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. So we expect that to be a meaningful opportunity set over the next few years, kind of in the range of the $200,000,000 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. And then, 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?
Yes, sure. As we've talked about in the past, I mean, we are focused on being a pure play net lease REIT. So we're not long term holders of operating properties like storage. But it is an asset class that we know well. It's a high quality portfolio.
So 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.
Okay. And then, Tony, 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, but at rates look pretty reasonable in terms of a mark to market. I guess the question I have is, 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?
Yes. I mean, 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.
But in terms of the overall leverage, euro versus U. S, we did see the CPA:seventeen merger coming on at the time that we did our last euro bond issuance in October and certainly took that into account. So we increased our euro leverage a bit there. I think we're comfortable with the euro leverage levels we have now, but there is still a bit more room should we choose to do that. Again, it would be certainly market driven.
And 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 percent dispositions focused on non core assets a bit. Is the plan to hold on to the Eastern European assets from CPA:seventeen? And could this geography potentially be an area of additional investments from WPC?
So 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. And so 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.
And over time, we can be opportunistic with those should we choose to exit those in the future. But those aren't in the 2019 disposition guidance.
Okay, thanks. And Tony, 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. And also are there any additional issuances baked into guidance?
Yes. As I said, we're very happy with the equity we've raised on our ATM since December. We were able to issue capital pretty attractively priced relative to where we can invest accretively. And we also had the benefit of increased trading volume in our shares, which we'd hoped to achieve as a result of the CPA:seventeen merger. Really, so 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, and it allowed us to refund some of our expected acquisition activity. So 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 a final question here. Could you
just give a few details on the decline in occupancy since 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? Are they making good re leasing opportunities?
Yes. I'll let Brooks cover that.
Okay. Sure. Yes. Those the pickup in vacancy really relates to a portfolio of former Bon Ton locations, retail stores, which we do intend to sell. Important to note that one of those is a very high quality located warehouse in Allentown, Pennsylvania.
And 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 4 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. But 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 or 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. So there's certainly a simplification aspect to the deal itself, but I will add it was a fantastic outcome. We realized on the order of 100 or 2.50 basis points of cap rate compression over about a 4.5 year hold.
So fantastic performing asset for us. It's just Australia is not a target market of ours. We don't have scale there and it's certainly much more difficult to manage from afar. But that said, it was an opportunistic exit and we're very satisfied with the deal itself.
And let me just add quickly. That deal was done it was a sale leaseback as part of an M and A transaction. So 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 and A transactions. And that 250 basis point compression, I think some of that was on the upfront structuring, some of it was the markets there got stronger. And I think this tenant also improved its credit.
I think that's all part of our thesis on how we invest. And the result was a great return, I mean, a very high returning asset for a 4, 5 year hold.
Do you have a general IRR on the hold?
That was about 15% unlevered IRR over that 4.5 year hold period.
Okay. And then looking at kind of Page 14 of this up, 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. So maybe kind of what drove that? Sure.
So there's a couple of different buckets there. This is Brooks. On the non discretionary CapEx piece, the TI is about $4,000,000 or thereabouts was the actual funding of tenant improvement allowance from a deal we actually entered into in 2017. It 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 $6,300,000 number. And that's one of the assets which we expect to sell this year, but we will complete the renovation as well. So that's really the kind of noise in that number this quarter.
Makes sense. And then lastly, given we're kind of getting to the point here where CWI-one is kind of laid out as its target for potentially seeking a liquidity event. And I know you guys do lay out kind of the exact terms of your back end fees on Page 43 of the stuff. 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?
Well, 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. So 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. And we've mentioned we wouldn't bring those assets on our balance sheet given they're lodging assets. But 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 we 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 in guidance. As I mentioned, with the CPA:seventeen going away, that comes down to a much less meaningful portion of our total results, so about 5%.
And I think if you looked at even the Q4, total, 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. And then, could you update us on if 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. Credit quality is very good right now. In fact improves overall with the acquisition of CPA:seventeen. 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 AgriCore portfolio. We're making a lot of progress working through restructure with them and 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, and that's fully baked into our guidance range.
Is the 50% that you closed on the asset at the 50% rental?
So the $11,600,000 that's flowing through ABR represents a 50% haircut and reserve to contract rent. So we expect upside relative to that.
Perfect. And then, could you just remind us the exact closing date of The New York Times for modeling purposes?
December 1. Okay.
And then 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. So I hesitate to handicap that with a very specific number. But I will on the maintenance front that will pick 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. Our next question is coming from John Massocca from Ladenburg Thalmann. Please proceed with your follow-up.
Just a quick follow-up. And I know it's fallen out of the top 10 here close of the merger with CPA:seventeen. But 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 it's 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 1 by 1. So nothing kind of material. We already did one of them and extended that, and working on the others.
So it's 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 4921-110. That concludes today's call.
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