Hello, welcome to W. P. Carey second 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'll 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, Director of Institutional Investor Relations. Mr. Sands, please go ahead.
Good morning, everyone, thank you for joining us today for our 2018 second quarter earnings call. 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 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 will be archived for approximately one year, and where you can also find copies of our investor presentations. With that, I will pass the call over to our Chief Executive Officer, Jason Fox.
Thank you, Peter, good morning, everyone. I'm joined this morning by our CFO, Toni Sanzone, who will review our second quarter results, portfolio metrics, balance sheet, and guidance, as well as by our President, John Park, and our Head of Asset Management, Brooks Gordon, who are also available to answer questions. The most significant event of the second quarter was undoubtedly the announcement we made in June of our proposed acquisition of CPA:17 . I'll start with a quick update on that process and the benefits of the deal before talking about some of our recent investments. CPA:17 is a $6 billion non-traded REIT that we've managed for over 10 years and is primarily invested in a diversified portfolio of net lease real estate in the U.S. and Europe. It's an all-stock transaction with W. P.
Carey issuing 0.16 shares for each share of CPA:17 stock under a fixed exchange ratio. We're on schedule to close around the end of this year. The 30-day go-shop period ended with no competing bids. We filed an initial version of a joint proxy statement related to the transaction, which remains subject to SEC review. We'll distribute the final version of the proxy materials to shareholders as soon as possible after that review. Our acquisition of CPA:17 offers a number of compelling benefits. From a strategic standpoint, it improves earnings quality and further simplifies our business. Almost all of our earnings will be derived directly from more valuable lease revenues compared to finite life investment management income.
For our portfolio, it adds a high-quality, diversified pool of assets that fits nicely with our existing portfolio and will enhance its overall metrics, in particular, weighted average lease term and tenant and industry diversification. From a credit perspective, it enhances our profile. Earnings from real estate will cover a much larger percentage of our interest expense and dividends, and our business will be easier to analyze. It is also a deleveraging transaction on a consolidated debt to growth assets basis. We will also gain significant scale, enabling us to operate more efficiently with lower G&A expenses as a percentage of assets and rental revenues. Our increased size is expected to rank us among the largest REITs, both raising our prominence with investors and improving the liquidity of our stock.
The conversations we've had with investors since the announcement have been distinctly positive, during which they've recognized the benefits I just mentioned and how they create value for our shareholders. Turning now to our investment activity. In the U.S., which generates about two-thirds of our annualized base rent or ADR, cap rates remain under pressure, especially in the industrial sector, given the strength of the domestic economy. We are also seeing motivated sellers given where we are in the cycle. In Europe, capital inflows continue, and business activity remains strong. At the margin, we've seen increased appetite from corporations to transact, creating good deal flow and presenting more opportunities for us, especially given our 20-year on-the-ground presence in the region. On our last earnings call, I spoke about the strength of our pipeline in Europe, since then, we've seen several of those deals come to fruition.
Year to date through today, we've completed total investment volume of $605 million with a weighted average cap rate of approximately 7% and a weighted average lease term of approximately 20 years, driven primarily by two large transactions in Europe. In June, we completed our largest deal year to date, the $187 million acquisition of a portfolio of 14 logistics assets in the corporate headquarters of Danske Fragtmænd, which is the number 1 provider of business freight solutions in Denmark with a dominant 50% market share and a history dating back over 100 years. It fits nicely within our existing Nordic portfolio, a region we have been investing in since 2001. These are critical assets representing 90% of Danske Fragtmænd's logistics footprint in key metropolitan areas on long-term leases that have close to 18 years remaining and provides built-in rent growth through annual rent escalations tied to Danish CPI.
This was a unique and compelling opportunity for us to acquire highly sought-after logistics assets executed in a truly off-market transaction, demonstrating the strength and breadth of our relationships in Europe. In July, we announced the $178 million acquisition of a 36-property portfolio of retail assets in the Netherlands, triple net leased to Intergamma, which is the country's number 1 do-it-yourself retailer with about 40% market share and has an 85-year history. They are critical assets representing 80% of Intergamma's retail footprint on long-term triple net leases with a weighted average lease term of 15 years. It also includes annual inflation-based rent bumps tied to Dutch CPI. This transaction was linked to corporate M&A activity at the parent company level and is a good example of our ability to generate incremental yield by sourcing and structuring more complex transactions where we can provide greater certainty of close to the seller.
In addition, we've completed two smaller transactions since quarter end. The first was the $23 million acquisition of a warehouse facility in the Netherlands, net leased to the country's largest distributor of educational materials, with 17 years of lease term remaining and built-in rent growth tied to Dutch inflation. The second was the $9 million sale leaseback of a manufacturing and warehouse facility in Wisconsin on a 20-year net lease with 2% fixed bumps annually. From an asset management perspective, we continue to enhance our portfolio, and I'll touch on two such transactions where we've created value through existing assets. In June, we completed an $86 million asset swap and lease amendment within our portfolio of Forterra industrial assets.
Through this transaction, we were able to acquire one of Forterra's most valuable and best-performing facilities in exchange for a number of smaller properties in the U.S. and Canada in locations or product areas that the tenant sought to divest. This is a great example of the importance of lease structure and the value it can create, as well as our ability to realize portfolio-enhancing opportunities from within our existing asset base. Also in June, we entered into an expansion project with Nippon Express related to a very high-quality logistics facility we own in the Port of Rotterdam in the Netherlands, which is Europe's largest and most active logistics hub. The expansion will add close to 50% additional floor space for an investment of $20 million, and we expect construction to be completed in the third quarter of 2019.
Rent escalations are on an annual basis and tied to full Dutch CPI. This was a compelling opportunity to expand our investment in a Class A green certified facility at what we believe to be a substantial cap rate premium to where the asset would trade in the secondary market. In closing, we continue to find attractive investments both externally and from within our portfolio, driven by our focus on opportunities outside of the commodity segment of net lease, preferring more structured off-market portfolio transactions where we can create value and get better terms. Our deal volume year to date has been strong, and we continue to have an active acquisition pipeline, all of which puts us on pace with the full-year deal volume embedded in our AFFO guidance, which Toni will discuss in more detail. With that, I'll hand the call over to Toni.
Thanks, Jason. Good morning, everyone. This morning we announced AFFO per diluted share of $1.32 for the 2018 second quarter, with 82%, or $1.08 per diluted share, generated by our real estate segment. Net real estate revenues excluding reimbursable costs totaled $168 million for the second quarter, essentially in line with the prior year period. They do not yet reflect the impact of the larger portfolio acquisitions we closed either at or subsequent to quarter end. Investment volume for the second quarter totaled $289 million, which included the acquisitions that Jason discussed, as well as the completion of three capital investment projects totaling $17 million. The Danish logistics portfolio acquisition, which generates ADR of nearly $13 million, closed just before the end of the quarter and therefore did not have a meaningful impact on our second quarter results.
The three investments we closed after quarter end, totaling $210 million, bring our total deal volume year to date to $605 million. These third quarter transactions add almost $15 million of ADR to our portfolio, increasing total ADR to $708 million. Investment opportunities from within our existing portfolio continue to be a key element of our proactive asset management strategy, while also allowing us to deploy capital for attractive incremental yield. During the second quarter, we committed to fund one new capital investment project, and we completed three. At the end of June, our commitment to fund build-to-suit investments as well as expansion, renovation, and redevelopment projects totaled $145 million. Of this amount, we currently expect projects totaling $70 million to be completed in the second half of this year, and therefore, would be included in our 2018 investment volume.
Based on the investments we've closed year to date, as well as our current pipeline, we have raised the lower end of the range for our guidance assumption on investment volume for the full year, resulting in a revised range of $700 million to $1 billion. We are currently on track with our disposition plans for the year, having closed $164 million during the first six months. Included in this total is the asset swap transaction that Jason discussed and the sale of one of our two remaining operating hotels for $39 million. We continue to actively manage our portfolio and are maintaining our assumption for dispositions of between $300 million and $500 million for the full year. Turning now to our portfolio. At quarter end, our net lease portfolio consisted of 878 properties covering 87 million square feet net leased to 208 tenants.
The portfolio maintained close to full occupancy at 99.6%. The weighted average lease term of the portfolio was extended to 10 years, an increase of almost half a year from where it was a year ago. Same-store rent was 1.6% higher year-over-year on a constant currency basis. We continue to focus on achieving lease terms that include rent escalators tied to CPI, as was the case with the two large portfolio deals we recently closed, ensuring our portfolio remains well positioned for inflation and continued internal growth. Since the end of 2016, same-store growth tied to CPI has more than doubled from 0.7% to 1.6%, reflecting the pickup in inflation, particularly in the U.S.
At the end of the second quarter, 68% of ABR came from leases with rent bumps tied to inflation, and 22% represent leases with fixed rent increases, with a weighted average increase of about 2% per year. I'll move briefly to our Investment Management segment. We continue to expect one-time structuring revenues to decline on a year-over-year basis, given that new investments are now limited to capital recycling within our existing funds. With better visibility at this point in the year, for 2018, we currently expect to earn structuring revenue of between $15 million and $20 million based upon opportunistic recycling within our funds, and that redeployment of the capital now expected to occur in the back half of this year. Moving to expenses. During the second quarter, G&A expenses were $16 million, bringing the total for the first half of the year to $35 million.
This is in line with our full-year estimated range of between $65 million and $70 million, which is embedded in our AFFO guidance. Interest expense year-to-date declined by almost $5 million or 6% compared to 2017, in part reflecting a decline in our weighted average cost of debt through the replacement of higher rate mortgage debt with lower rate unsecured debt over the last year. On a year-to-date basis, we've reduced our weighted average interest rate from 3.7%-3.5%. Turning to our capitalization and balance sheet. Our balance sheet remains very well positioned in terms of liquidity, leverage, and a well-laddered series of maturities. At the end of the quarter, we had $1.2 billion of cash and available capacity on our revolver and only $82 million of debt maturing through the end of 2019.
We currently expect proceeds from our disposition pipeline will fund acquisitions for the remainder of this year, allowing us to remain opportunistic on the capital markets front. We have limited exposure to interest rate volatility as our floating rate debt is predominantly limited to the outstanding balance on our credit facility, which stood at $397 million at the end of the second quarter. Moving on to guidance. We announced this morning that we have narrowed our AFFO guidance for the year to between $5.40 and $5.50 per diluted share by raising the lower end of the range. This positive adjustment takes into account our completed acquisition volume year-to-date, as well as the visibility we currently have into our Investment Management structuring revenue. As Jason noted, we are focused on closing the acquisition of CPA:17, which we currently expect to complete around the end of this year.
Based on that timing, we have not reflected any impact of the CPA:17 acquisition in our 2018 AFFO guidance. At the midpoint of our revised guidance range, we expect year-over-year growth of almost 3% in 2018, driven largely by accretive net acquisition volume, which is expected to more than offset an approximate $15 million reduction in one-time structuring fees. We continue to see the quality of our earnings improve as it shifts towards higher valued real estate revenues. We look forward to accelerating that transformation upon closing the CPA:17 acquisition. With that, I will 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 star then the number 1 on your telephone keypad. If you'd like to withdraw your question, press star then the number 2. Once again, that is star one if you'd like to ask a question at this time. One moment, please, while we poll for questions. Our first question is coming from Nick Joseph from Citigroup. Your line is now live.
Thanks. I just want to better understand guidance. It sounds like the structuring revenues increased by about $0.07 per share versus your previous expectations, and then you increased investment spend guidance, which should also be a positive, I guess, depending on timing. What are the offsets given only a $0.05 increase to overall AFFO guidance?
I think that the timing does play a factor in terms of when we expect acquisitions and dispositions to close. You are seeing the impact of the acquisitions that'll hit in the front half of this year. In terms of timing for the back half of the year, that still remains to be determined as far as when the deals in our current pipeline would close. I think that does play a role in it. In terms of the structuring revenue, that does contribute partially to that increase, which is why we raised the lower end.
Okay. I guess relative to where guidance was with 1Q, the acquisitions are coming later than expected, which is offsetting the $0.07 benefit from additional structured revenues, which weren't previously in guidance.
That's right.
Okay. Just on re-leasing spreads, it looks like they're down 13% in the quarter, driven by industrial. I was just wondering if you can give some more color on what happened with those three industrial assets.
Sure. This is Brooks. Can give you some color on that. It's actually one tenant, it's three properties. It's a very unique situation. It's three auto manufacturing plants, representing private rent of about $6.9 million of ABR. What's important to note is about half of that rent was shifted from properties that we sold in a restructuring in 2009. The core rent really allocated to these three properties. We actually recovered 100% of that rent. The result was we extended the lease about 14 years. It's important to note that for the entire deal, the IRR from acquisition until today has been about 18.5%. A very unusual situation, now that's fully stabilized.
Thanks. Just finally, on the asset swap, is there any change to the rent that you'll collect between the asset that you took back versus the asset that you gave up?
This is Brooks again. Yes, there's a slight increase. I believe it's about $600K in total increase in ABR.
Thanks.
Thank you. As a reminder, that's star one to ask a question. Our next question is coming from Joshua Dennerlein from Bank of America Merrill Lynch. Your line is now live.
Hey, good morning, guys.
Good morning, Josh.
Good morning.
I was curious on CPA:17. I think in the past you've said that you own the stake in Lineage. How do you view that stake once the merger goes into effect, and is there any update you can give on maybe what kind of valuation you think it's worth versus like the book value at, I think it's $39 million?
Josh, this is Jason. We do own a stake in the operating company as well as, I should say, CPA:17 owns a stake in the operating company, as well as owns a number of assets leased to Lineage. That was really how we ended up with a stake in the operating company. I think you're right. The book value is around $39 million. Without putting any numbers on it, we think there has been substantial appreciation to book value. There's upside for W. P. Carey in that asset, once we acquire CPA:17. In terms of what we do with that, I think that's to be determined, and we'll update with you as we have more information.
Great. Thanks, Jason. I guess sticking with the topic of CPA:17, there's a lot of, I think, self-storage assets in that fund. Is it your expectation that you'll sell them off since they're operating and not net leased, or do you think you'll maybe keep them for a little bit, and what kind of cap rates you could kind of get on that?
You're right. The bulk of the non-net lease assets within CPA:17 are self-storage operating assets. That's beyond our core focus of being a pure play net lease REIT. With that being said, self-storage is an industry that we know quite well. We've been investing in that space since 2004, and through our funds have accumulated a pretty sizable portfolio. They're great assets, and as a portfolio, they likely command a cap rate that's well inside of the overall 7% cap rate at which we're acquiring CPA:17. We think they very well could be highly accretive sales if we choose to go that route. As you know, it's an asset class that's in very high demand. Those assets are very liquid.
When we choose to do something with them, whether at close or sometime in the future after that, we'll have lots of options to choose from.
Great. Thank you.
Welcome.
Thank you. As a reminder, ladies and gentlemen, that is star one to be placed into question queue. Our next question today is coming from Sheila McGrath from Evercore. Your line is now live.
Yes, good morning.
Hi, Sheila.
Morning, Jason. Any reason why most of the transactions are in Europe so far this year? Is pricing there more appealing, or is it just driven by the opportunities?
It's a little bit more the latter, but I think it does underscore the benefits of our diversified model. At different points in the cycle or different points in time, we can choose where to allocate our capital to those best risk-return opportunities. While cap rates in Europe have experienced meaningful compression, especially given the borrowing costs, while rising slightly, are still at historical lows. We're still able to generate great spreads there. Mainly, these are transactions that were unique to us. One was a purely off-market logistics deal, where we had relationships with The fund that had merged with a life insurance company and had a strategy to divest some of the funds that they manage. The other one was part of a sale leaseback as part of an M&A activity. Kind of the typical type of deal for us.
I think it's important to note, we're seeing and realizing great spreads in Europe. Those 2 deals were in the high sixes, low sevens. If you recall, our 9-year fixed rate Eurobond that we completed back in February was at 2.8%. Pretty substantial spreads, and I think for that reason, we're seeing some pretty attractive opportunities in Europe.
Just with these larger portfolio transactions, if you can just remind us on the underwriting. Do you look at the rent coverage, replacement cost? Just tell us about what you key in on these bigger portfolio transactions.
Certainly. This is consistent with how we look at every one of our transactions, and frankly, how we look at our portfolio and when we consider dispositions. These two deals were long-term leases. I think one was about 18 years, the other one had about a weighted average of 15 years. Credit underwriting is certainly important. If we can get comfort, which we did, on the creditworthiness of these tenants, then we'll lock in a good revenue stream with high visibility. Credit underwriting was important. We had great access to senior management, understand the business that they're in. Both of these companies are market leaders. I think one of them, which has around 50% market share, that's Danske Fragtmænd in the business-to-business freight industry within Denmark. Intergamma has about 40% market share for the do-it-yourself market in the Netherlands, number one market share.
Certainly credit was a key part of this. We also like the real estate. With the logistics portfolio, these are Class A logistics assets. We have several large hubs, but we also have smaller facilities that are closer in some of the population centers that serve more as last-mile facilities. It's really a combination of everything. Then finally, given the size of these portfolios relative to the operations of the company, we have their critical real estate. It really checks, in both of these cases, all the boxes for us.
One final question. On the pipeline both, if you could comment, if it's more U.S. versus Europe, just how the acquisition pipeline is looking. Then the second part of that question is also on the funds. CPA:17 is a huge transaction. Any indications you could give us on when there might be other liquidity events for the balance of the funds?
Right. Sure. Let me talk pipeline first. The substantial amount of the deals that were closed to date, those were in Europe. Our pipeline is still active. I would say at the beginning of the year, that pipeline was more heavily weighted to Europe, of course, because of those deals. Now it's a bit more in balance between the U.S. and Europe. Of course, opportunities come along at different points in time, and that could change. I think our pipeline, I think I'll note that it's still our typical pipeline. We're focused on sale leaseback and build-to-suit where we can control deal structure and where we feel we can generate higher than market yield. I think you'll see more of that as well. John, you want to talk CPA:17?
Sure.
The other funds, I should say.
Good morning, Sheila. This is John.
Good morning, John.
First of all, it's important to point out that post CPA:17 acquisition, all of our IM business, including CPA:18, will comprise 5% of our business. We're committed to delivering high level of service to those investors in the remaining funds, as we have done throughout our 45-year history. In terms of timing and method of liquidations will depend on a number of factors, including market conditions and other factors, some of which we control and some of which we don't. We'll work closely with the independent directors of those funds to optimize outcome.
Okay. Thank you.
Thank you. Our next question today is coming from John Massocca from Ladenburg Thalmann. Your line is now live.
Good morning, everyone.
Good morning, John.
Morning.
Morning, John.
It's not an asset you own at this time, I was wondering how the creditor agreement with Agrokor is going to affect CPA:17's properties leased to that tenant.
Hi, John. This is Brooks. Agrokor is a tenant within CPA:17 that is going through restructuring. We own a number of grocery stores as well as two distribution facilities. I think the most important thing to note is that number 1, the same team has been managing that portfolio as we'll manage it after the merger. Equally importantly, in our underwriting, we have fully reserved for approximately 50% of the rent. That's what's flowing through ABR. We think there's very little downside there and potentially some upside as we work through that restructure.
Has the July creditor agreement settlement changed your view on it at all? Or is it still kind of the same as it was at the time of merger announcement?
Still the same, and that's very much a work in progress as the restructuring kind of completes. It's a large company and a big restructuring. They're making progress, and we are very closely monitoring it.
Okay. Then another set of CPA:17 properties. The Bon-Ton assets, have you had any success either selling or re-leasing those properties?
That we're working on those presently. It's important to note that W. P. Carey owns a very high-quality location warehouse leased to Bon-Ton in Allentown. That's a kind of Class A premier market location where we see a lot of opportunity to increase rent. On the CPA:17 side, we own retail stores, and it's a little too early to comment on outcomes there. We're making good progress, and it's very active discussions for alternatives.
Understood. One little kind of detailed question. Other gains were up fairly sizably quarter-over-quarter. I know it's a line item that tends to have a lot of variable movement. What was driving that this quarter?
The most significant driver there was the movement in the foreign currency rates, and that's unrealized marks on various assets in the portfolio that run through that line item.
Understood. All right. That's it for me. Thank you guys very much.
Thanks, John.
Thank you, John.
Thank you. At this time, I'm not showing any further questions. I'll now turn the call back over to Mr. Sands.
Thanks everyone for your interest in W. P. Carey. For any additional questions, please feel free to call investor relations directly on 212-492-1110. That concludes today's call. You may now disconnect.