Good morning, all, and welcome to the W. P. Carey General Session. I'm Jim Cameron with Evercore ISI, and I'm pleased to have the opportunity to moderate today's General Session for W. P. Carey. Just to make sure, I'm sure they'll introduce themselves and tell you a little bit more about a preamble of the company. To my immediate left is Jason Fox, CEO of W. P. Carey, and to his left is Jeremiah Gregory, Head of Capital Markets and Strategy for the company. Maybe, I don't know, Jason, do you want to give a quick overview of Carey and then we can get into the Q&A? Obviously, if you have questions, please come to one of the mics and we invite your participation.
Yeah, yeah, sure. Thanks, Jim, for moderating today, and thank you all for joining us this morning. Hopefully, many of you, or maybe all of you, know a little bit about W. P. Carey. We're the second largest net lease REIT, ranking in the top 25 of all REITs in the RMZ by market cap. Our current market cap is about $14 billion, with an enterprise value of about $22 billion. We've been investing in net lease for over 50 years at this point in time, founded back in 1973, and we've been investing in Europe now for over 25 years as well. We primarily invest in single-tenant net lease properties, industrial and warehouse, as well as retail properties. These are all triple-net lease to a variety of tenants in a variety of industries, with a target for very long-term leases.
We do have a diversified approach, which is a bit unique to us. This is by tenant, by industry, property type, and geography, as I mentioned. This does offer good downside protection that has proven out over many cycles over the last 50-plus years. It also provides a wide funnel of investment opportunities from which we can grow. As I mentioned, we are in both the U.S. and Europe. About two-thirds of our portfolio is in North America, with the vast majority of that in the U.S., and the remaining one-third is in Europe. This is predominantly in the developed countries in Northern and Western Europe. We feel we offer investors a unique combination of both growth and downside protection.
I know we'll get into this some with Jim, but our AFFO growth comes from really two drivers, and this is also a bit unique given the percentage of our growth that can come from same-store bumps. Obviously, as a net lease REIT, we also drive growth through spread investing, investing externally. All this is supported by an investment-grade balance sheet. We're rated BBB+ by S&P, Baa1 on stable outlook from Moody's, well-laddered debt maturities, our next bonds not due until 2026. We've taken care of the maturities this year. Importantly, and something that we've, I'm sure, we'll talk about and emphasized on recent calls, we do not need to access any capital markets this year to fund our investment program. We have a big non-core portfolio of assets that we plan to sell this year.
It's predominantly operating self-storage, which is not core to our net lease platform. Let me pause there, Jim, and let you kind of dig into some of the details.
Great. Thank you for the overview. Maybe going back, Jason, you notice obviously you're a diversified global footprint, and you have a pretty broad investment appetite. Maybe you could just spend a little time telling us where you are for Carey in terms of your pace this year and where you're seeing the opportunities and perhaps the type of returns you're seeing on those various buckets.
Yeah, I mean, the investment market is quite strong right now for us. I think that there's been expectations as we've come into this year and into the first quarter that tariffs could have an impact on investment activity. I still think that's possible. There's certainly the potential that the uncertainty around tariffs could slow things down. As of now, we've seen very little impact on deal activity. In fact, we feel things are accelerating as we get into the summer. A lot of that is driven by companies' needs for sale-leasebacks, and we can talk about some of that as well. We are targeting deals in terms of pricing that you asked about across the sevens, a relatively wide range, but we do have a diversified approach.
Generally speaking, we expect to be in the mid-sevens on an average cap rate basis, which is roughly where we were last year. It's where we are year to date. It's also roughly where our pipeline is. Despite the uncertainty in the world and a little bit of volatility in the bond markets, we've seen some stability on cap rates, which does help deal activity for sure.
What would that translate to? I know you put out a range of guidance for anticipated investment for the year, but how is that trending? If you have any updates there, it might be helpful for the audience.
Yeah, sure. As of our last earnings call, we had announced $450 million of deals done year to date, and that was through the end of April. On top of that, we also have a little over $100 million, $120 million of what we call construction in process that we will deliver this year. Once it delivers and begins generating rent, we will count that towards our deal volume. In total, we have visibility at this point in the year into $570 million of deal volume. That is against a guidance, initial guidance to start the year between $1 billion and $1.5 billion. We are trending quite well. If you look at annualizing the year-to-date components, we are probably certainly in the top half of our guidance range, perhaps even at the top of the range.
I think there's reason to be optimistic that if we continue to see activity at levels that we're currently experiencing, I think there's a good chance that we can be even above our range. We will talk about that as we get closer to our next earnings call at the end of July and look at that more closely. We like the activity levels, and we think that's going to help drive the growth this year.
Great. One point you made was you're targeting initial, that's initial cash yields in the mid-sevens. Let's call it for poops and giggles. With your escalators on your long-term leases, what does that translate to in terms of a gap or average return?
Yeah, it's a good question and one that every opportunity I like to emphasize because I think we're quite unique in the net lease space given the size of the bumps that we have built within our portfolio, the contractual increases that are embedded into all of our leases. When you factor in our going in cap rates in the mid-7s plus bumps that tend to be in the mid to high 2s, and in many cases, as in the current environment, above 3%, that's on a fixed side. We're also getting still substantial, I would say the majority of what we're doing in Europe are CPI-based increases. When you factor all that in, we look at it as an unlevered IRR or an average yield through the life of the leases in the 9s. Quite substantial.
When we think about spreads, we look at both year-one accretion, but it's also very important that we think about what these average yields over the life of the lease are compared to cost of capital or how we're funding deals. This is important. I mean, we see if you want to compare it to kind of across the space, you can think of this a bit of a gap cap rate. Our gap cap rate, not technically gap because inflation is treated differently under gap, but effectively gap cap rate is something north of 9%, which is quite substantial. That's what helped drive the internal growth that I mentioned at the very beginning.
Right. Maybe we put Jeremiah on the spot, but you just mentioned also your cost of capital, thinking about how you can borrow in Europe as well as in the U.S. Obviously we can kind of all do the math on the implied cap rate of the equity, but your implied equity for our modeling is below the mid-sevens. That is accretive, but maybe a little more amplification on the debt side too because I think that is a little unique for Carey in terms of their flexibility and access to debt.
Yeah, I mean, we invest in both the U.S. and Europe, and accordingly we've funded that with bonds in both the U.S. and Europe. We do overweight euro bonds in our capital structure, which is relatively consistent with what other international REITs have been doing. Even though about a third of our investments are in Europe, it's probably more like half of our debt. Euro debt has for the most part been 100-200 basis points cheaper than U.S. debt. The impact that that's had, if you look at our weighted average cost of debt, it's right around 3%. We think that's the lowest or certainly one of the lowest in the entire net lease sector on a blended basis.
If you look at what we could do new deals on, we could do maybe mid-fives in the U.S., but it's probably closer to 4% in Europe right now. Even funding new deals, you can see how that kind of average blends us down to a cheaper cost of debt than if we were just funding in the U.S.
Right.
Yeah, and it's an important point to note the advantages we have to be able to invest in multiple markets. This past year, there was a lot more activity in the U.S. I think Europe is still kind of recovering from a lot of the volatility. Going back to 2021 when rates were effectively zero and they rose even more sharply than they did in the U.S., bid-ask spreads had been wide for buyers and sellers on the things that we've been looking at in Europe for probably the last couple of years, and Europe has been underweighted. That has been the case to start the year. About 80% of our deals to start the year have been in the U.S. or North America and 20% in Europe. As we look forward to our pipeline, we're starting to see a lot more activity in Europe.
I'd say the pipeline, depending on how far out we go, we're seeing as much as at least 50%, maybe as much as two-thirds of our portfolio or of our pipeline right now is in Europe. We'll see how that plays out, but I think that's interesting to see, especially since when you think about what Jeremiah mentioned about how cheaply we can borrow in euros relative to U.S. dollars, we're generating wider spreads. Cap rates in Europe, going in cap rates are roughly in line with what we're seeing in the U.S., maybe a little bit inside depending on the market. Again, it's a wide range given the number of countries we're investing in. Our cost of borrow is probably 150 basis points inside of where we can borrow in U.S. dollars, which means we're generating meaningful spreads over there.
As someone who's been investing in Europe for the past 25 years, we have a real distinctive advantage. We have a team of 50 people on the ground in Amsterdam that run our operations. We have a real platform there: tax, accounting, cash management, compliance, asset management, all the functions that you would typically see in a REIT we have on the ground in Europe. We're staffed by Europeans who know the countries, the cultures, the markets, and that's important. In London, we have our investments team closer to the capital markets, which are going to be more prominent in London and sourcing deals. They too are staffed by Europeans and speak probably a dozen languages amongst the group. That is a big advantage for us given how long we've been there.
Right. And we've touched upon it in both your investing and then the organic growth, but can you just provide just a little bit more clarity on what are your representative escalators per your because you really have two main themes, industrial/manufacturing assets, and then that's about 60% of the assets, if I'm not mistaken, another 20% is retail. How would those organic or escalators compare just to give folks a general sense? And you're probably going to sort of invest in those ratios prospectively, so yeah.
Yeah. I mean, historically, we've always experienced higher bumps in our deals. I think there's a good reason for that. We source most of our transactions through sale-leasebacks, which means that we can kind of write the terms of the lease. We can add downside protections in there. We can cherry-pick assets within a portfolio. We can structure with master leases. All these things have great benefits for downside protection. On the growth side, we can also dictate the type of bumps we want to have. It's part of the broader economic.
You might have a little bit of a lower going in cap rate in exchange for higher bumps, but that's important to us that we continue to have growth within the portfolio so that we're a little bit less reliant on external growth, something that we don't always control given the volatility and the transaction activity. Historically, we've probably been in the low twos. More recently, over the last three or four years since inflation has ticked up, we've seen an increase in the types of bumps that we can negotiate when we're completing sale-leasebacks. A lot of that is clearly driven by inflation. We do have inflation increases in the U.S. They're more difficult to get now, as you would expect. Instead of getting inflation, we're able to negotiate higher fixed increases. Historically, it was in the 2%-2.5% per year range.
Over the last couple of years, it's been more in the 2.5%-3.5% range with average fixed bumps over the last couple of years on new deals around 3%. That really drives these average yields growth over the long term. I think the portfolio as a whole, we're expecting kind of low to mid-2% for contractual increases this year. When you think about adding a little bit of leverage within the model, that's going to provide probably half of the growth that we target to generate on an annual basis, which is going to be significantly more than probably all of my peers.
Right. I would agree. Looking at our net lease coverage, one thing you mentioned caught my attention was downside protection. That's great. You get 2%-3% escalators, but are you concerned that your rents outpace the profitability or the economics of the property for the occupant? Maybe you talk about coverage ratios or endemic in your portfolio. Give the audience a sense of that.
Yeah, I mean, we're generally targeting bumps that correspond to our expectations for market increases for that particular asset in that particular market. For instance, in some of the stronger markets on the West Coast, that's where we've been getting the 3.5% and even 4% increases. The industrial properties we bought in the Toronto market, which is perhaps the strongest industrial market in North America, those also have higher bumps. We think the market is going to track those bumps. That's the goal. We want to be within the realm of markets so that at the end of lease terms or if there's scenarios where we need to retend the building, we can go to a market tenant if we have to and maintain those levels of cash flows. What was the second half?
I was just saying, so what are the coverage ratios? And then also don't a lot of your tenants put a fairly decent amount of their own capital in that kind of gives you comfort that they'll be around here for their lease term?
Yeah, they're both very good points, especially on the manufacturing side. There's significant tenant investment in our buildings. We're buying the base building at a typical basis for an investor for an industrial building. Tenants tend to have a lot of investment. They may have overhead cranes that have significant value, but that's something that the tenant had put in for higher power, maybe higher floor loads to the extent it's a food production. You have clean room space. You may have cold storage space or boxes within boxes. These could be multiples. Tenant investment could be multiples of what we put in the building. A lot of this, you ask about can our rents become bigger than maybe the tenant would like given the bumps that are embedded in our leases.
One of the things, one of the big benefits of doing sale-leasebacks is we can really dig into the underwriting. Our counterparty on the sale is also going to be our long-term creditor, our long-term tenant, which allows us to dig in during underwriting. When we're looking at manufacturing facilities, one of the criteria we look at to help assess criticality is what is the site-level contribution of EBITDA. Most companies do track and report, at least internally, P&Ls on a production plant level. We do not get it in all of our deals, but I say most of the underwriting we do, and in many of them, we're also getting ongoing reporting. It's a big range depending on the business, but on average, it's typically called 5-15 times and probably on average closer to double digits.
This is going to be the coverage that the facility produces in terms of EBITDA relative to our rents. Said differently, the rents are a pretty small input into the broader scheme of the tenant's operations. However, they are the most critical. Without our real estate that has all of their expensive equipment that has been invested, without that, they cannot operate. In many cases, we view ourselves as the senior most creditor for these companies with good collateral.
Very good. We're going to take a pause. I'd like to get into some sources of capital discussion, but do we have any questions from the audience that people would like to pose?
I guess. Interesting how the rents are 1.5%, 2.5%, typical term for a few leases, and then maybe 95% after lease.
Yeah, sure. On sale-leasebacks, one of the other benefits is we can dictate long lease terms. Tenants are usually more than happy to provide longer lease terms, especially if there is an economic benefit to them, which there can be. We may be willing to price things a little bit more aggressively for longer lease terms, but they also, maybe more importantly, want to make sure they can control these properties for a long time given how important they are. I would say typical lease terms for us on sale-leasebacks and build-to-suits are 15-25 years. If I look back over the last five years, I would say most of these deals are probably at least 20 years. We are able to get that. We have probably averaged a little bit over 20 years in terms of lease terms.
As a lot of visibility into our cash flows going forward, as a lot of downside protection, one of the questions we get asked a lot is industrial market. For instance, a market like L.A. that has some difficulties, are you guys feeling that? We do own some properties in that market, but we have very long lease terms. While there might be cycles in which there are dips and rents have dropped and occupancies have come down, we do not feel those because we ride right through them with our long-term leases. In terms of the underwriting, in practice, we have perpetual capital. Generally speaking, when we like our assets, we are not selling them. On an underwriting basis, we are typically using some kind of spread to our going in cap rates, and I would say it is maybe around 100 basis points.
It's maybe more of a kind of a DCF of kind of the lease term going out, and that's going to be the long lease term. That's going to be the bigger driver than some residual cap rate.
Thank you for the question. Any others before we? Great. You have a nice pipeline. You're getting nice organic growth. For Toni, she's not here, your CFO, how are you going to pay for all this? What are some of your primary sources of capital this year? You mentioned on the intro that you felt you're well positioned for 2025 in particular from a capital sourcing, no need for equity issuance.
Yeah, we're very well positioned this year. I mean, we've talked about this pretty regularly over the past couple of quarters. We have, through some legacy M&A, a substantial portfolio of operating self-storage assets. Currently, right now, that portfolio generates, call it $50 million-$55 million of NOI, so a substantial size portfolio. Our expectation, our plan for this year is to fund our investment activity with the sale of what we're calling our non-core operating assets. It's predominantly self-storage. It's not entirely self-storage, but that's what we plan to do. We look at historically, certainly probably over the last 10 years, maybe longer, self-storage has always traded well inside of where net lease cap rates are, certainly where we've been buying net lease. There is an expectation this year that we can sell non-core operating assets.
By the way, which also simplifies our business, operating self-storage is not something that we've expected to hold long term. It's been a bit of a rainy day pocket for us. We think this is a good time to lean into sales to help fund our deals. We do expect to generate at least 100 basis points of spread between where we sell our non-core assets and where we're reinvesting into net lease. And I say at least, that's the number we're talking about. I think we have expectations to do better than that. Let's see how the markets shake out. For us, that's going to be some of the cheaper capital within the net lease space to invest. If we think about it, maybe it's around 6, maybe it's inside of that.
Again, it's going to be at least 100 basis points from where we expect to reinvest. I think that's an important piece to emphasize. It's not just the self-storage also. To the extent we continue to think that funding new investments with asset sales is the best way to do it, and our equity is not far off, and Jeremiah can talk about that, but we do think that these non-core asset sales are a better way to go. We have other pockets of money as well. We have a construction loan that we sourced back in 2021 that's yielding 6%. That's likely going to get repaid this year. It's a $260 million loan on a highly, highly successful development in Las Vegas. That's also very cheap capital to get back. We can go into it if it's interesting. We also own a chunk of Lineage.
We helped seed that company back in 2010 with some sale-leasebacks and at one point owned 9.9% of the operating company. Our stake in that company is worth about $250 million right now, which is down from where it was for those of you that follow Lineage, but it's still a substantial stake. Paying a dividend in the mid-4%. Again, very cheap capital to reinvest. Selling something that's yielding in the mid-4%, reinvesting into the mid-7%, it's going to generate a lot of accretion for us going forward.
I think one thing, and Jason, on the self-storage, what's a reasonable bandwidth of total proceeds? I don't think we went over just so because you have a guidance of $500 million-$1 billion of asset sales or capital recycling as total dollar proceeds. You talk about the construction loan, it's $260 million, just trying to put bookends on that piece.
Yeah, investment guidance is $1 billion-$1.5 billion. Disposition guidance right now is $500 million-$1 billion, which is a pretty big range, of course, especially for disposition guidance within the net lease space. We have a lot of assets we can choose from. We will size our dispositions based on our needs from the investment side. I mentioned that self-storage, we have $50 million-$55 million of NOI associated with that portfolio. We currently have half of that in the market right now. Call it $25 million-$27 million of NOI that is in the market. We have grouped it into three sub-portfolios. We think sizing it, call it big round numbers, $150 million for each portfolio. We think that is sized appropriately to attract the deepest pool of reputable buyers. These buyers will span from some of the public REITs have expressed interest.
Some of the private platforms that have scale are interested in even some of the players who have raised dedicated self-storage funds and they utilize third-party management platforms have also had interest. It would not surprise me if we see some combination of those types of buyers buying these pools. It is a deep pool. To the extent our investment volume increases, we can lean into more self-storage sales if we like. We also have those sources that I mentioned earlier between the construction loan that could be refinanced this year. We are not anticipating that Lineage is something that we have liquidity this year, maybe not even next year. There is a pre-IPO investor like us. There is a lockup until 2027. It is still a pocket of capital that we know at some point will become liquid.
By the way, we also generate $250 million of free cash flow per year. We feel pretty confident that even as we go up through the top end of our guidance range on investments, we have plenty of capital, access to plenty of capital to support that investment activity.
Great. Other opportunity questions from the audience? Please.
Yeah. When you say lease back, would you get? Is that a market that's urgent? Would you impact free up cash or this monetization of some of the real estate assets that kind of sit there?
Yeah. The question was, do we do any sale-leasebacks in Japan? Our focus right now is our two platforms with North America and Europe. Japan is not something, and Asia is not something that we're targeting right now. I think there probably are opportunities there, but we want to focus our efforts where we have a platform on the ground. We're not considering opening up a platform in Asia at this point.
Great. We all see there's a lot of good news, but we do have to address on occasion you have some tenant hiccups. Maybe you could refresh or bring us up to speed. You kind of dealt with two of the three that were sort of the known problem children, if you will, this year, and maybe an update on the third, which is kind of ongoing.
Yeah, sure. I mean, one of the things that we've been doing over the past probably six quarters is we've provided a lot more disclosure around our portfolio. I think we're the only net lease REIT that has expanded the top tenant list to 25. We used to disclose the top 10 list. Now we disclose the top 25 list. We want to make sure that we provide updates on any changes to the tenant quality, especially within that top 25, since that's going to have the biggest impact on the portfolio. Over the last year, we have been talking about three tenants, Jim, as you mentioned. Let me touch on the first two quickly because those are pretty easy.
The Parkside, which is a very large, kind of the largest contract snack food manufacturer in North America, they've experienced some credit weakness, inflation, some other headwinds on labor costs, etc. They've been a leveraged company. They went through a bankruptcy about a year ago is when they entered bankruptcy. They recently exited. Our thesis on that investment from the very beginning, which held true, is that we held their most important operating assets with very high site-level coverage, as we talked about earlier, that made up a majority of their production and their sales. All of this held on a master lease, predominantly one master lease, that provides also rent protection. As we expected, they needed our facilities. They paid rent on time throughout the bankruptcy process.
When they exited bankruptcy, they continued to pay rent at 100% and affirmed the leases for all the facilities. It is a bit of a test case, a case study on our model. We do not have defaults that often, but when we own a critical operating asset and we have a default, this is the outcome. We tend to get 100% of our rents because the company needs to continue. It is a big company, $5 billion in sales. They have a blue-chip customer list, all the big consumer packaging companies like Procter & Gamble and Kraft Heinz, etc. This was an outcome that was not surprising to us, but it was a technical default given the bankruptcy, so we did not talk about it pretty substantially. The second one is a company called True Value, which I am sure all of you know from the branding on the hardware space.
They went through a difficult period. A lot of it was the pull forward from demand coming out of COVID and then the void that left when all that demand was pulled forward. They restructured and sold themselves to a company called Do It Best, which is a competitor of theirs in the hardware store distribution network. To be clear, Do It Best and True Value, they're not retailers. They do not own stores. They own distribution, and they sell into or they distribute into many of the independent hardware stores. Do It Best took over six of our leases, six of the nine warehouses that we had leased to True Value at 100% rents with a staggered maturity of around seven years. Good assets with a good credit paying rent at 100% of the rents we had previously.
The three that they needed less, we're allowing them to terminate those leases at the end of this month of June. We think we have good leasing prospects for that. It may take a little bit of time. We do have good buyers for those. It is likely that we'll sell those assets relatively quickly, but they're paying 100% of rent on those assets until those leases expire, and then we'll reposition them. That situation is resolved. All of that had been baked into our guidance for the year, so there's really no impact on earnings. Lastly, Hellweg is a big do-it-yourself retailer in Germany who has had financial struggles as well. They continue to. The German economy is not as strong as they or we would like it to be. We have approached this where we want to reduce our exposure to Hellweg.
I think this is something that I'm really impressed about at the speed and execution we've seen out of our asset management team. We've sold four assets out of our 35. We've agreed to take back stores, which we want to do from Hellweg, and re-tenant those with competitors who will be of a lot of interest. We feel that by the end of this year, we'll have them out of our top 10 list. By the end of next year, with continued lease terminations and re-tenanting with competitors who really want the spaces as well as some asset sales, we think we'll have them out of our top 25.
Great. That's very well done to Lily to the last second. I think our 30 minutes is up unless anyone has any last minute. I would just want to thank the audience. Oh, it's John.
Sorry. I'm in Europe. In the sale-leaseback log, the spread between the mortgage cost and the cap rate may be back then under 50. Is it still true that the late hike left people?
I mean, we do not use secured debt, but we can talk about kind of the relationship there. I mean, the typical math would be we are executing deals in the mid-sevens. I think mortgage financing is probably, it could be close to a 200 basis point spread. If you think about mortgage borrowing costs, it is probably in the low sixes. As Jeremiah mentioned, we are not funding our deals with mortgage financing. We are using bonds. We can borrow much cheaper than that. We are probably generating from a spread to where our kind of weighted average cost of debt is. It is probably more like 250 basis points. That is different. I think our competitors are probably inside of 150, the number you mentioned. Yes.
One follow-up question on that. With that in play, the W. P. Carey's cost of funding is superior to the private strategy you have there as a big alternative.
Yes. Yeah. Yep, absolutely. Which is a competitive advantage. Look, the other part of that is we do not rely on mortgage financing, which adds another kind of moving part to a transaction. We are an all-cash buyer, so we can be quite competitive in the markets right now relative to a lot of the private buyers that we are in debt.
Great. Thank you, Jason. Thank you, Jeremiah. And thank you for your questions, audience. Take care.
Thanks, Jim.