Hey, everybody. Thanks for joining this session. I'm Brad Heffern. I'm the net lease analyst for RBC Capital Markets, and I'm pleased to be here with W. P. Carey today. We have to my left Jason Fox, CEO, and Jeremiah Gregory, Managing Director and Head of Capital Markets. Obviously, I have a list of questions prepared, but we'll leave time for Q&A at the end, or if you have something pressing, feel free to raise your hand as well. So Jason, for those not as familiar with W. P. Carey, can you just give a brief introduction of the company?
Yeah, certainly. And thank you all for attending today. So W. P. Carey, we're one of the largest public REITs with an enterprise value of approximately $20 billion and an equity market cap of a little over $12 billion. We've been investing primarily or almost exclusively in net lease for over 50 years at this point in time. We celebrated our 50th anniversary last year. We've been a public REIT since 2012. We currently own about 1,300 net lease properties that generate approximately $1.3 billion of ABR. We've always had a diversified approach, among only a few internationally diversified REITs. About two-thirds or, you know, call it 63% of our ABR is in North America, with the balance of the remainder spread across Northern and Western Europe.
We generally have a focus on generating earnings growth through a combination of both accretive investments as well as built-in rent escalations within our portfolio. We do invest in single-tenant, mission-critical, predominantly industrial and warehouse properties. That makes up a little under two-thirds of our ABR, as well as retail, which makes up a little bit over 20% of our ABR. You know, currently, we are on pace with a investment guidance of about $1.5 billion-$2 billion of deal volume for this year. I mentioned contractual increases also kinda help buoy our growth. We have among the highest contractual same-store rent growth within the net lease sector.
This year expected to be around 3% for the year, with about half or 54% of our ABR from leases tied to inflation or CPI-based increases, which is also a sector leader. Balance sheet, we're conservatively levered with ample liquidity. We'll talk about that, I'm sure, in some of our questions. Currently, investment-grade rated Baa1 by Moody's, BBB+ by S&P. These are recent upgrades over the past, you know, 12 months or so. So that's a nutshell, and happy to get into Q&A.
Yeah, perfect. So starting maybe with the investment environment, how do things look currently, and can you compare the environment in the U.S. compared to Europe?
Yeah, it's a good environment for us right now. I would say we are predominantly sourcing deals through sale-leasebacks. They're quite attractively priced today in the current market, and they're very attractive to corporates who are looking for, you know, pathways to raise capital. This is, you know, typically a hallmark of how we transact. I would say, you know, over the past three or four years, you know, upwards of 80% of our deal flow is through sale-leaseback. So good environment for that. You know, environment where there's been credit dislocation, I think that's beneficial for us as well. And so, you know, we're quite competitive right now.
In terms of Europe versus the U.S., you know, if you look back over the past, you know, I guess through 2023, back into 2022, we've been much more active in the U.S. I think we've seen some meaningful credit dislocation across Europe. Maybe that peaked in the fall of 2022, and you know, kind of a reference point for that. You know, credit spreads were quite wide, you know, base rates were quite wide, which you know led to a you know freezing of the transaction markets. You know, we were getting bond quotes at that point in time to issue Euro bonds around 7%. I think if you fast-forward to a couple weeks ago, and Jeremiah will go into some details on this, we did issue a Euro bond at 4.25%.
So you can kinda see the changes in the macro environment in Europe, which really has led to much more increased activity across Europe. I think it starts with sale-leaseback. That's maybe the first part of the market to come back when you think about real estate transaction activity, especially across the net lease space. You know, spreads have come in some. I think they're. That's led to a more dynamic market, where sellers that had been on the sidelines in Europe are now looking to transact. You know, the bid-ask spreads have come in quite a bit, and we've been very active. I think if you look at year to date through our earnings call, about 70% of our new investments were in Europe.
I think, adding to some recent deals that we announced, that's probably about 50% in Europe right now, and contrasted that with 2023, Europe was maybe, you know, 10%-20% of our total deal volume. So we're seeing much more activity there, interesting spreads, and the pricing's, you know, a good dynamic for us right now. I think maybe one data point to point to is, you know, that 4.25 bond that we issued, that's about 150 basis points inside of where we could issue U.S. bonds right now. Yet, initial cap rates or cash cap rates for European deals are roughly in line with what we're seeing in the U.S. So, you know, we are able to pick up meaningful spread in Europe relative to the U.S.
You know, I think that the market tends to be less competitive. Generally, we've always had more pricing power, but I think an environment like we're currently in right now, it's an interesting place to be.
Okay. And earlier this week, you gave an update on your volumes year to date. Can you talk through that as well as your, your overall expectations for 2024?
Yeah, sure. So we did issue a press release on Monday after the close, updating the market on our deal volume for the year. The headline number was $700 million of year-to-date deal activity. It's really comprised of three components. Deals that are fully closed at this point in time, including half of a portfolio of net lease assets that we recently went under a contract with Angelo Gordon to buy. So half we closed. The other half of the assets in that portfolio will close, I would say, imminently over the coming weeks. More just a processing question. So, you know, effectively, those are done deals. And on top of that, we have about $70 million of construction projects. These are namely build-to-suits or expansions kind of underway within our portfolio that we'll deliver this year.
You know, we include that in transaction activity or volume, you know, once the buildings are complete, and the rent begins. So you add all those up, and that's kind of the headline, $700 million year to date. On top of that, we characterize our pipeline as being greater than $300 million. You know, I would say the $300 million is deals that are at advanced stages that we have a high degree of confidence in, that'll close, you know, maybe over the coming quarter or so, and there's a pipeline beyond that as well.
But maybe the main kind of takeaway is that in total, we have visibility into about $1 billion of deal volume just five months into the year, which, you know, as I mentioned earlier, keeps us well on pace for the $1.5 billion-$2 billion of deal volume within our guidance this year. I think on top of that, our fourth quarter tends to be the most active of the year. It's not every year it happens, but most years we tend to do, you know, a disproportionate share of new investments in the fourth quarter as we approach year-end. So I think there's reasons to be optimistic. Again, we don't have the visibility into what's gonna happen at the end of the year, but we're on good pace right now.
And I think, you know, importantly, you know, cap rates have held up. I think we've generally been targeting cap rates in the sevens, both in the U.S. and Europe. I think that, you know, perhaps the pipeline is more in the top half of that range right now, so we are generating, you know, really interesting spreads relative to, to cost of capital. And I think the last point, and, and maybe we'll get into this some as well, is the liquidity position, and we're sitting on a lot of cash, which gives us, you know, we've effectively pre-funded our pipeline for the year and gives us a lot of confidence and ability to transact right now.
Okay. And what types of properties or what property types are you targeting, and is there a difference between Europe and the U.S.?
Yeah, it's, it's still predominantly, I would say, industrial. Sale-leasebacks are probably the biggest driver at this point in time. This is both logistics assets as well as light manufacturing. Things like food production may come into play as well. I think historically, you know, our retail allocation has mainly been in Europe, where we've seen, you know, better pricing dynamics, less competition, you know, better long-term fundamentals. There's a, you know, I think the, the stats that we've seen are there's eight or nine times more, retail square feet per capita in Europe than in the U.S. But there's, you know, really there's, there's fewer buyers, which adds to, to a better pricing dynamic. I think more recently, you know, we've, we've shifted some of that interest or maybe added to that interest in the U.S.
We've built a retail net lease team in the U.S. We expect to take some market share there. You know, I think that there's been some consolidation in the net lease space with some of the the M&A activity that's happened. I think also the 1031 market has slowed given, you know, fewer exits from, say, multifamily, you know, reinvesting or 1031ing into retail net lease. I think there's some better dynamics in the U.S. that may be just interesting. So while I would still expect industrial to be the, you know, the probably get equal weight or higher weighting, you know, relative to its kind of two-thirds mix in our current portfolio. I think there's opportunities to add some U.S. retail to that as well.
Okay. You mentioned cap rates briefly. How have they trended of late, and then what's your expectation for how they'll look for the balance of the year?
Yeah, I would say cap rates, you know, at the beginning of the year, our expectation is that they've stabilized, and I think that contributed to, you know, maybe transaction activity picking up again. You know, that was particularly the case in Europe, where things have been quite volatile. I referenced where our new issuance, bond yields would be as an indication that they've come in quite a bit. In the U.S., I think it's a little bit of a different story. We've seen more choppiness around 10-year Treasuries. Obviously, there's been some uncertainty around Fed cuts and the timing of that, if at all, for this calendar year. It feels like that while we had stabilization in the first quarter, you know, there's an argument... and maybe even some compression.
I think there's an argument that maybe they're staying where they are and maybe a slight uptick, depending on the property type. But, you know, I think generally speaking, you know, we're diversified. We're looking at a range of assets as well as geographies. You know, the cap rates do range. Our target remains in the 7%-8% range. There are some outliers above or below that. I think importantly, you know, what needs to be factored in or considered when you think about going-in cap rates is the bump structure. They're also part of these transactions. I think that's something that's always been very important to us.
So a going-in cap rate in the mid-7s for us typically also factors in either an inflation-based increase, which is maybe more prominent in Europe right now, or annual fixed increases. Historically, those fixed increases have been in and around 2%. I think since inflation has increased over the past couple of years, we've been able to push the fixed increases embedded in our leases to average in and around 3%. So pretty substantial, you know, contributor to the economics of the deal than just the going-in cap rates. And I know that, you know, typically, when we see spread comparisons from one REIT to the next, there's typically quotes around going-in cap rates.
But, you know, we certainly have a keen focus on the bump structures as well, which, you know, we still get good accretion in the first year, but importantly, we'll have ongoing built-in growth within the portfolio going forward. Which I would maybe characterize as higher quality growth than growth that you generate through external investments and spread investments, since that's, you know, a little bit less unknown. Okay.
You've built up a significant amount of liquidity through the recent office exit. So, how big of an advantage is that for you in the current environment, and then how do you plan to deploy that?
Yeah, maybe I'll start, and I'll pass to Jeremiah to talk about kind of sources and uses. Look, it's a big advantage, you know, from a transaction standpoint. We, you know, we typically have a cost of capital that's competitive, but because we have an execution history, and, you know, we can point to, you know, substantial liquidity, we're an all-cash buyer, that gives our counterparties great confidence that we can transact. And so, it's an intangible. I think it's really important, especially in a market in which capital availability and access to capital is, you know, is inconsistent at best. So I think it's an important component of how we win deals.
It also helps us give us confidence in continuing to invest in the current environment and have conviction that, you know, we're finding interesting deals in a choppy market. And, you know, for all practical purposes, we've pre-funded, you know, our pipeline for the year.
Yeah, I mean, just to add to what Jason's saying, I mean, at the, during the first quarter, we were at around $1 billion of cash on the balance sheet. You know, he's discussed a lot about, you know, our view of the investment climate. And so for us, the focus on deploying that capital is really into new investments. It does, you know, allow us to look, you know, really throughout this year and to, you know, hit our investment guidance without having to address the equity markets. As far as, you know, another thing that's been on, you know, certain investors' minds, is our debt maturities this year. And so we do, in the first quarter, we had two bonds that were maturing. One of those bonds we've already paid off.
We used cash on the balance sheet to pay it off, but we would expect to kind of replenish that cash through another issuance, later in the year. The other bond we have maturing is in July. It's a Euro bond. We've already been in the Euro bond market. Jason alluded to it. We recently did a EUR 650 million offering, and that accounts for, the EUR 500 million maturity we have, plus, plus some excess proceeds. So, you know, to kind of tie it back as far as the cash that we have on the balance sheet, that's primarily, you know, our thought for capital allocation, is that's going to new investments, and we think that that will be deployed this year.
Okay. And then, sir, were you gonna go? Oh, just moving the mic. Longer term, you have some additional unique sources of capital, like the stake in Lineage, as well as the operating self-storage portfolio. How do those play into your thinking?
Yeah, I mean, it you know, just provides alternative sources of capital and maybe less reliance on you know, the capital markets, and that's important in an environment like this. You mentioned Lineage. You know, that's an investment that you know, we helped seed the company you know, 10 years ago, and you know, as part of some original sale-leasebacks, we were able to you know, make an equity investment into the operating company. You know, that now stands at about a $400 million investment on the balance sheet. You know, kind of cashed in around $50 million. So it's been a good investment over the 10-year period. But maybe most importantly, it's a great source of capital for us right now. It is, it's currently paying a dividend of less than 1%.
Really, it's a tax dividend, if anything else. So you know, what that means is, it's a very accretive source of capital for us when we do have the opportunity to get in a liquidity event, which we expect, you know, sometime in the coming quarters. I think there's an expectation that Lineage will go public. That'll give us an opportunity to begin accessing that capital. When you think about the magnitude of the accretion we can generate, you know, if we're investing in the mid-sevens, ongoing in cap rates against a current dividend yield for that asset at less than 1%, we can pick up kind of 600-700 basis points of spread.
So quite meaningful growth embedded in our portfolio, embedded in that investment that, you know, should be realized over the coming years. You mentioned self-storage. We kind of think of that as a similar bucket in many regards. It's an asset class that we've been in for a long time. It's something that we've acquired as. It was investments that came through the CPA:18 merger that we did a couple of years ago. And we now own, I think it's 80-90 operating self-storage assets that generate approximately $70 million of NOI. So, you know, pick a number. It's something over $1 billion worth of asset value there. It's non-core to us.
I think if you look at over the past 10 years, at any point, self-storage cap rates have been, you know, lower, if not meaningfully lower than where net lease properties have traded, at least the ones that we are investing through sale-leaseback. So, that's the case now. We think we can pick up meaningful spread there if we think that's the best way to fund deals. There's nothing urgent to do there. I think that we again feel it as it gives us optionality. If we think that we don't like our stock price or the bond markets are choppy, this is just another pathway, you know, you know, to generate some liquidity. I think there's also options, Brad, to, you know, maintain ownership of those assets, but convert them into a net lease model.
We did that with Extra Space several years ago at this point. They're a top ten tenant of ours. I think there's a blueprint that we now have in place, and we can do that again. So I would say with that $1 billion-plus portfolio, there's lots of options. I don't think we need to do all of it at once or all of it in one direction. I think there's ways to be flexible with how we look at that. And there's other sources of capital that we think of that are beyond kind of the typical net lease capital source. I mentioned those two. We also have a construction loan at around $260 million on a development project in Las Vegas with a partner. It's complete, it's almost leased up.
It's been a very successful project. We'll have an option to buy into the equity of that project or some net lease units, you know, at our preference. But I think importantly, we'll also get refinanced out of that construction loan. When we did the deal back in 2021, a 6% interest rate was, you know, looked interesting relative to the 5 caps that we were investing in industrial assets. I think fast-forwarded to today, you know, 6%, when that gets refinanced, is gonna provide, you know, some good positive spread when we reinvest it, if we're finding deals into the mid-7s. That's another pocket of capital. I mean, there's a couple other things to talk about as well.
But all told, I think you can add those up to probably close to $2 billion of additional incremental capital that, if the need arises, we have a lot of flexibility.
Okay. You talked about the European or the euro-denominated bond offering at the 4.25% coupon. It's obviously meaningfully inside where you could get U.S. debt today. Can you just talk about how access to that European debt market plays into the cost of capital, and how you think about investment spreads on deals in Europe versus the U.S.?
Yeah. I mean, we've been issuing in Europe and the U.S. really for our entire history as an unsecured borrower, so that goes back about 10 years now. We have multiple bonds out in both markets, and, you know, we do have kind of a couple philosophical points about how we issue. We tend to over-lever, or we always do over-lever, or overweight, I would say, euros in our, in our debt structure. So if about a third of our assets, a third of our rents are European and euro-denominated, it's more like half of our debt is in Europe, and that provides us a hedge. It's a very efficient hedge, both on the asset level and also on our cash flows.
And importantly, over the last decade, that's also been, you know, it's been more attractively priced debt as well. So it's, you know, brought down our weighted average cost of debt and, and our weighted average cost of capital accordingly, if you think about kind of the, the cost that we're, we're taking for our overall investments. You know, historically, it's probably been around 100-200 basis points inside of U.S. debt, where we can do euros. That fluctuates. Certainly, in the last couple of years, there's been some periods of, of fairly meaningful distortion. There's even been periods where euro debt was, was more expensive than U.S. debt. But what we've seen, in the last quarter or two, is it's kind of settled into more of a, you know, what we would say is the long-term average.
We're back to about, you know, maybe right around 150 basis point differential for euro issuance versus U.S. issuance. So I think it's an important, you know, yet another kind of important channel we have for raising capital. It helps us keep our cost of debt down. It helps us, you know, be even more efficient and more opportunistic on the balance sheet. As far as spreads in Europe versus the U.S., you know, there's a wide range of cap rates that we do, both in the US and Europe. I think Jason's covered some of this. So it's, you know, maybe in some ways, it's more deal specific than region specific in terms of, you know, differences we see in cap rates.
So I think for the most part, at least in this environment, we're picking up almost all of that benefit on the debt side when we do euro deals. So you can imagine, we're doing deals to kind of similar yields and similar IRRs in Europe to the U.S., but we're funding that, in part with debt, and that debt is priced, you know, 150 basis points lower. So I think the spread environment in Europe right now is clearly even more attractive than in the U.S. and where we can generate the best spreads.
Okay. In recent years, you've undergone some significant strategic changes. You exited the asset management business. Most recently, you've exited office. Can you give an update on where you are with that office exit and what that looked like?
Yeah, sure. So, you know, as Brad mentioned, we did separate ourselves from office through both the spin as well as what we've characterized as an office sale program. These are office assets that we did not include in the spin, and instead, had a plan to sell those over the near term. And it was around an $800 million office sale program at the beginning. We're effectively all the way through it at this point in time. I think, you know, 95% of that, of those expected proceeds are either closed or under a binding contract to close, with the vast majority of it in that closed category. In that remaining 5% are assets, I think, that are almost all under contract and in kind of the diligence phase.
So for all practical purposes, you know, we've completed our exit from office, completed the office sale program as well. We got good execution. I think when we first announced this program back in September, I think the big round number that we you know disclosed was, we think it's around an $800 million sale program. I think since that time, the office market has deteriorated. You know, available financing has gotten worse, and I think expectations to the fundamentals continue to deteriorate. Yet, I think our execution is still gonna be within 2% or 3%, you know, of that target sale. It's kind of a high single-digit cap rate is where we guided to, and we think that's the execution. So it's been a successful program.
I think at this point in time, where we sit today, our office ABR is probably in around, you know, 1%. So, the office sales program is largely done, and I think that we're well positioned because of that.
Okay. And then I'll ask one more, and we'll go to Q&A from the audience. Because of the office exit, 2024 is a bit of a transition year for you, where you're sort of setting a new baseline. Can you talk about how you expect to be positioned going forward, post the exit?
Yeah. I mean, look, post-exit, our portfolio is clearly stronger. We're about two-thirds industrial. I think I mentioned before, 63% industrial, spread out between Europe and the U.S. The bulk of the majority of the remainder is retail, so these are mainstream, kind of what we view as very strong, high-quality net lease assets to own. We'll end the year in 2024 with a stronger portfolio. You know, we viewed 2024 as kind of the new baseline from which to grow, and we talk about our earnings guidance out there. We think that's the right number from which to start. There's been some ins and outs this year within the portfolio, but generally, that's a good baseline from where to start.
I talked earlier about the internal growth that we can generate. We also talked about the spread investing we can do on the external front. I think combined, you know, we see a pathway going forward to, you call it, mid-single digits earnings growth when you combine those two factors. And when you layer on top of that, you know, 6%+ dividend yield, you know, there's certainly a pathway, maybe an expectation that we can generate, you know, double digit, low double digit total shareholder return. And that's, you know, before any kind of multiple rerating, which we think we can get if we can show that kind of growth. So I think we're very well positioned, and as we mentioned earlier, lots of liquidity to execute on an external growth plan at the same time.
Okay. Any questions from the audience? Yes.
Of the deal volume you mentioned, if you were to ballpark, how much is from like sale-leasebacks with like simultaneous close to more like M&A acquisitions, if you were to ballpark, quantify that, and then for portfolio companies of like PE-backed, I guess, can you comment on like your visibility into their leverage onto the portfolio company?
Yeah, sure. So, I would say historically, simultaneously closes on M&A is a minority of our, you know, PE-backed sale-leasebacks. It does happen, and I think that when it is needed, and occasionally, depending on how, you know, big of a component the sale-leaseback is to the capitalization of the company, it may be an important component of a M&A deal. In those cases, you know, we have a lot of pricing power, because you can imagine the degree of execution and how important that is, is just at a different level than, you know, than a refi or something that's done in the ordinary course of business. So we welcome those opportunities, but it is another moving part, and sometimes it's not a big enough component to have it part of the transaction itself.
So, you know, when I think about our pipeline right now or the deals we've done to date, I think it's very few fall into that category. You know, we do have some PE-sponsored transactions. We think it's, you know, the PE firms tend to look to optimize capital structure, and we've always made the arguments that a company doesn't need to own their real estate. They can still maintain control of their core critical operating real estate through long lease terms, as well as, you know, renewal options, and the triple net lease structure really, you know, enables a company to maintain, you know, all operational control as well. So, you know, that's a part of the business model. I think maybe the context here is, you know, the leverage in the current environment.
So that's part of our sensitivities. I mean, I think that we, you know, certainly are very focused on what leverage levels look like, what coverages may be, you know, what their plan is to kind of grow out or to pay down debt over time. I think that's all part of the investment thesis. And I think maybe, you know, equally important is the downside protection in our lease structure. We tend to put assets on master leases. We tend to focus on highly critical real estate.
So, you know, balance sheet restructurings, we want to avoid, but when we have critical operating assets on master leases, you know, we tend to fare very well, you know, even with restructures, which is not a common element within our portfolio, but it's something that we certainly structure in case we run into those events.
Is your currency hedging mainly a function of the overexposure to the euro, and your debts that side? Do you do any other hedging, euro to the U.S. to the U.S. dollar?
Yeah, the question's around, hedging our FX exposure . Jeremiah, you want to take that?
So you're correct that the primary component or the first component of it is the overlevering and the or the overweighting of our debt. And that, like I mentioned, that gives us a hedge on the asset value as well as the sort of excess interest expense. So it's, you know, providing, you know, it's eroding kind of the net euro-denominated cash flow. So, you know, the way to think about that from a percentage standpoint, on NAV, if about a third of our assets and rents are coming in Europe, it's probably more like only 10-15% of an NAV value. So obviously, currency movements have much lower impact as a result on our NAV.
On the cash flow side, we do, in addition to kind of having that, that benefit effectively of the additional euro interest expense, we also do cash flow hedging on the net, the net cash flows. And so we do that out five years. It's very programmatic, meaning we're just sort of layering in every quarter, and we're going out five years.
You know, to put some kind of math around that as well, you know, based on our kind of analysis, if the FX, if the euro moved down 20%, and it did that in a day against the U.S. dollar, and then it stayed at that level for a full year, so a very radical move and one that persists throughout the year, we think with our hedges in place, that's maybe a 1%-2% impact on AFFO. So I think the intuition is if... You know, when the euro strengthens, that's a very mild tailwind to W. P. Carey earnings. If the euro is weakening, that's a very mild headwind to W. P. Carey earnings.
For the most part, you know, that's not even something that would be kind of picked up in our overall earnings, though, and even in these kind of larger moves, it's, you know, maybe pennies per share.