Good morning. Thank you all for joining us. My name is John Kilichowski. I'm the lead analyst at Wells Fargo for net lease REITs, and today I'm joined by Jason Fox, CEO of W. P. Carey, and Jeremiah Gregory, Head of Strategy for W. P. Carey. Gentlemen, thank you very much for joining us. Today, during any point during this conversation, please feel free to raise your hand. We'll call on you for Q&A, or you could just wait till the end of prepared questions, so we can get to you as well. Just to get started here. On your last earnings call, you raised your 2026 AFFO per share guidance to $15, or excuse me, $5.16 to $5.26.
$15 would be good, but yeah.
Heck of a year. Since then you've announced another $400 million of investments. Can you talk a little bit about how the year is progressing and the key drivers behind your guidance raise?
Yeah, sure. There were really two main drivers for that earnings increase, and they're high-quality drivers. Number one is the strength of our investment activity. I think we are ahead of schedule in volume. Ahead of pace and deal size. Importantly with good cap rates and interesting spreads that will flow through. That did allow us to raise our full-year investment volume guidance about $250 million at the midpoint, so we're now at $1.5 billion to $2 billion is the assumption for deal volume for this year. That was one of the drivers. I think the other main driver is the more favorable outlook that we have for our estimated, or maybe it's better put, assumed rent loss that's embedded into our guidance.
We've taken the tactic where we've assumed a cushion on credit loss to start the year, one that I may view as being conservative, with the idea being that it can accommodate a wide range of scenarios that aren't entirely visible at the beginning of the year. As we have more visibility into the year and see actual outcomes, we can refine that range, which is what we did. We lowered it from $10 million-$15 million, to $8 million-$12 million, which is about 50 basis points-75 basis points of ABR. Again, we think that that can accommodate a wide range of scenarios for this year and ones we think could be conservative as well.
I think if you look at us historically, we've been in the 30 basis points-50 basis point range for credit loss as a percentage of ABR, and I think there's certainly a pathway where we could be back in that range at the end of this year, like we were last year.
Mm-hmm. In the press release announcing the $400 million transaction with GardenCore, you also noted that you currently have visibility into about $1.5 billion of investment volume, which already puts you at the low end of your full year guidance of $1.5 billion to $2 billion. Can you talk a little bit about the GardenCore acquisition, as well as the momentum you're seeing in the transaction environment, and where you're seeing the most compelling opportunities, both in terms of property type, whether it be industrial, warehouse, retail, as well as region?
Yeah, sure. For those that follow us know that many, if not most of the transactions we complete are sale-leasebacks, where we're buying corporate-owned real estate from companies and leasing back to them over long periods of time. The sale-leaseback is a source of capital. Sometimes that's direct with companies, sometimes that's in conjunction with larger transactions. This particular deal that we closed in May, it was a $400 million sale-leaseback for 43 manufacturing properties spread across the eastern half of the U.S. It was done with a company called GardenCore, which is one of the largest U.S. manufacturers of lawn and garden consumables. Think of bagged mulch, bagged soil, lime products and other rocks that you may find at Lowe's or Home Depot or Walmart for that matter. High-quality company, very strong tenant base, been around for a long time.
Either the number one or number two market share in their product lines that I mentioned earlier. triple net lease, 20-year term. I think importantly, this deal was done in conjunction with the carve-out of this business from a much larger company that a private equity firm, Pacific Avenue Capital, purchased. We were a big source of their acquisition financing. Which in those scenarios, our counterparty, our partner on this deal, they're most focused on execution. I think that's reflected in pricing and structure. Good transaction for us. $400 million, it's going to be one of our top tenants now. May think about it as production lines plus laydown yards or IOS, industrial outdoor storage space, is kind of the format of these properties. In terms of the deal volume that you mentioned.
We had talked about being, with that transaction, $1.1 billion of deals completed year to date, with visibility into another $400 million. About half of that are construction projects, build-to-suits or expansions that we're doing within our portfolio that we'll deliver this year. The other half is called the pipeline, and now it's a advanced stage pipeline where much of that will close over the coming weeks or over the next month or two as well. I think the trajectory is good. You mentioned our guidance range of $1.5 billion-$2 billion. We obviously have visibility to the lower end of that range. I think to the extent we continue to see opportunities that make sense for us, the top end of that guidance range is probably in play, but I think it's difficult to predict at this point.
We don't have really visibility into what we're going to transact in the second half of the year, and particularly the fourth quarter, which tends to be the largest for us. I'm happy to go into some details on what we've been buying and what the pipeline looks like. Predominantly is industrial. It's a mix of both manufacturing and warehouse. That's kind of reflected in the deals we closed in Q1. About 60% of them were in that category. About three-quarters of that were warehouse properties. I think once you add in the $400 million GardenCore portfolio, that equates to about three-quarters of our year-to-date deal volume is in the industrial space, which has always been a core part of our investment target. Picking up. Okay, great. I'll get a little closer to the microphone.
We obviously did some retail in Canada, which we're happy to talk about as well. I would say the pipeline looking forward is going to be more weighted towards industrial as well. In terms of geography, I think those that follow us know that we are diversified across geographies as well, with a platform based in Europe. About a third of our ABR is based in Europe. That's a source of good deal volume for us. Europe continues to show good opportunities for us, especially over the last year, we've seen it ramp up. I think year to date, about a third of the deals have been in Europe. The pipeline is probably closer to half right now, activities are increasing there.
One of the big benefits of targeting Europe is our borrowing costs are quite low there relative to the U.S., yet cap rates are in similar zip codes, so we're generating wider spreads there, which flow through to earnings growth for us.
Speaking of different geographies, a meaningful proportion of your 1Q investment volume was in Canada through the Go Auto acquisition. Can you talk through your history and the opportunity for investing in that market, and how deals and cap rates there compare to the U.S. and Europe?
Yeah, sure. We've been investing in Canada for probably several decades at this point in time. I wouldn't say it was in scale for most of that period of time. Many of the deals we had done in Canada were part of multi-country sale-leasebacks where there was a portion of the deal was based in the U.S. and some of it was in Canada. Many of those were U.S.-based companies, and I would say the bulk of those deals were U.S. dollar denominated, both the U.S. piece as well as the Canadian piece, since these were U.S.-based companies. Over the last couple of years, we've had more focus there. We have a Canadian on our investment team that spends a decent amount of time sourcing deals north of the border.
We did a large deal with a company called Apotex a couple of years ago, the largest generic drug producer in Canada. Most recently, we did a large car dealership portfolio called Go Auto with high-quality real estate, very strong locations, a concentration in the greater Vancouver market, which is going to be, between that and Toronto, the two strongest markets within Canada. These deals were CAD denominated since these were Canadian companies. It allows us to add some CAD-denominated debt into our balance sheet as well. I think overall, you asked about cap rates. I think cap rates are similar to the U.S., maybe slightly tighter. Our borrowing costs are better there or cheaper, so we are able to generate wider spreads.
You answered my next question, so I'll move along. You've previously mentioned capital projects becoming a larger proportion of your investment volume, particularly given the launch of your Carey Tenant Solutions platform. What percentage of annual deal volume do you see that becoming in 2027- 2028?
Yeah. Carey Tenant Solutions is something that we've been placing more emphasis on recently, and that was really the catalyst to rebrand something that we've done for a long time. We've been doing build-to-suit and expansions within our portfolio, and redevelopments for that matter, for the better part of a couple of decades. We typically have call it $200 million on average that would deliver per year. I think this new emphasis on this where we are kind of systemizing and doing a more holistic approach to our tenants and others that can bring opportunities to us, the tenant reps, corporations that may be growing, more systematic outreach that we think can generate more of this. One of the benefits of scale, and we're one of the larger net lease companies, is we have a dedicated project management team on staff that oversees these type of projects.
Very capable. We think that these construction projects are some of the best deals we can do. Think build-to-suit and expansions, effectively leases in place. There's also opportunities to work with our tenants on buildings that may be in very strong locations with buildings that are showing some obsolescence, and we can redevelop those into A+ buildings in strong locations. We think there's opportunities to do that as well. You think about it, if we've done $200 million of this on average historically, could we see a pathway to doing maybe $300 million or $350 million per year, which is added to the deal volume? I think that's kind of the goal ultimately.
Maybe back to some of your earlier comments on the investment volume guidance. Given the strong pace on investments year to date, is there potential for further raise in that volume guidance?
Similar to the commentary I had around tenant credit and our assumptions for guidance around credit loss, we take a similar approach to deal volume. We started the year with $1.25 billion-$1.75 billion, a number that still supported an earnings growth that was in the low four's, which we think was attractive relative to many of our peers with the idea that as we saw or had more visibility into our transaction pipeline and closed deals, that we would adjust that volume as we've gone. We have. We've increased it to $1.5 billion to $2 billion. As I mentioned earlier, up about $250 million at the midpoint. I think that we are trending towards the top end of the guidance without providing any full updates. We're kind of ahead of pace from where we started the year.
This is a similar approach we took to last year. I think last year we completed $2.1 billion for the year at very attractive cap rates and very attractive spreads to our funding cost, and we would expect to do something similar this year.
Mm-hmm. Could you talk about the geographical construction of what those numbers would be?
In terms of?
Just the guidance range as you look at the low and the high end, if you think about the U.S., Canada.
Okay. Yeah. I mean, we're agnostic to where we're investing. I think overall within our portfolio, we have targets to be roughly split two-thirds North America, with the bulk of that being in the U.S., and the remaining one-third in Europe. I think on any given quarter or given year, it really is dependent on opportunities. I think this year, maybe coincidentally, the pipeline plus the deals that have closed are roughly in that two-third, one-third split, two-thirds North America, one-third in Europe. We are seeing good opportunities in Europe, and I think there's better spread opportunities there. To the extent there's more deals there and we can overweight at this point in time towards Europe relative to our portfolio allocation, I think we'd be open to that.
Also going back to an earlier comment you made on tenant credit, your portfolio appears to have continued to perform so far this year, and on your last earnings call, you lowered your rent loss assumption to $8 million-$12 million from $10 million-$15 million. What were the main factors enabling you to bring this down?
Yeah. I think it's quite simple. We have better visibility into more of the year, and I've talked about the range of scenarios that we think that our initial guidance could accommodate. Those have tightened. We think that there are a narrower group of scenarios that could lead to credit loss. We're seeing a macro environment that certainly has headlines on a day-to-day basis and swings in oil prices that flows through to the indices and rates. I think overall within our portfolio, if you think about how we're constructed, we generally have large companies, 80+% of our ABRs with companies that have more than a half a billion of sales. Large companies tend to be able to absorb some of the impacts of either higher inflation or increased energy costs.
I think the thing to watch, and this is what we read about all the time, is the consumer and how stressed the consumer is getting from oil prices and other increases. We don't have a lot of exposure to consumer-oriented businesses in the U.S., certainly relative to many of our U.S. retail peers where, whether it's casual dining or family entertainment or other areas like that, our exposure is more towards larger industrial companies that we think can absorb changes in economic conditions, and I think that's reflected in o ur credit loss assumptions.
Does lowering your Hellweg exposure factor into this?
Yeah. Certainly. Again, those who have followed us for a couple of years have heard us talk about Hellweg on a regular basis. They're a large DIY retailer in Germany that we restructured 2.5 years ago. We continue to update the market on their health and our exposure to them. The goal here has primarily been to continue to decrease our exposure. We've taken them out of our top 10 list through asset sales as well as proactive lease terminations. We think they'll be out of our top 25 by the end of this quarter and in all likelihood out of our top 50 by the end of this year. Where we've been successful terminating some leases, we have alternative DIY or home improvement operators.
You can think of a Lowe's or a Home Depot in Germany that can replace them. We've done that at or around the same rents that Hellweg has been paying. These are good real estate. To the extent we can diversify our exposure away from Hellweg, I think that's a positive, and we've been doing that. Look, I think that's one of the drivers here of lowering our guidance. We started the year kind of assuming a wide range of scenarios with Hellweg, and they continue to pay us rent, which is a good thing.
Cornerstone was mentioned on the earnings call as well. Anything to note there?
Yeah. Cornerstone. The goal is to provide as much transparency as we can around credit events within our portfolio. Cornerstone is a large building supply company, about $5 billion in sales. They are not a top 25 tenant. They're probably somewhere in our top 50. We have about 60 basis points of our ABR leased to them. The message that we talked about is that they are over-levered. We can expect a restructure in all likelihood at some point this year, we think. We wanted to deliver the message that we own critical operating assets for the company. It's a large company. They will restructure, and we think they need our properties, which means they're going to continue to pay our rent with really no disruption. That's kind of the bottom line here is some distress on the balance sheet side, but no impact to our rents.
Maybe that's a theme. We think about in how we structure transactions, really focusing on downside protection. It's not often that we have credit events, but we think about and structure deals as if we could. One of the main things that we look for are the critical nature of assets that we own relative to the company's overall operations, and we have critical operating assets, and there are restructurings. We tend to fare quite well, which we will here.
Beyond those two tenants, are there any others that we should be aware of?
No. Beyond that, you'd have to go down to 20 basis points to 25 basis points in terms of scale. It's kind of de minimis. We have a portfolio of 1,700 properties, over 400 tenants, so there's always going to be some tenant that we're looking at. We're in the business of taking risks, but there's nothing of scale or of significance that would be impactful to earnings. Certainly, nothing that's not well covered by this credit loss assumption built into our guidance.
Maybe if we could pivot to the internal growth of the business. W. P. Carey has a high proportion of leases with rent bumps tied to inflation. Given the potential inflationary impact of the Iran conflict is having on energy prices, can you just remind us how your portfolio is positioned from a rent growth standpoint?
About half, maybe slightly above half of our portfolio, by ABR, has rents leases indexed to inflation. I think we have what I would view as positive exposure to inflation. It's probably a little bit higher proportion of our European ABR has inflation. It's more customary in those markets to structure deals with inflation-based increases. I think the point is, to the extent we see higher inflation and it's correlated with higher interest rates, which it typically is, we do have some offsets to anything that may flow on the interest rate side, I think that's a bit unique to us. When we don't have inflation increases, we do have strong fixed increases that typically average in the mid-two's. This is one area that I think is quite unique to W. P. Carey.
A big portion of our growth, of our earnings growth, is generated through same store or internal growth, as we put it, which is a bit different than many, if not most, of our net lease peers who are maybe exclusively or certainly more weighted towards growing through external investments, which you have less control over. I look at internal growth, that portion of our earnings growth as being more certain with more visibility and therefore higher quality. Having inflation as well as our fixed increase is a big part of that.
Are you still able to get inflation-linked bumps on your new investments? How should we think about that mix going forward?
In Europe, as I mentioned, it's more customary, so I think those are part of the transactions. I would say what has changed, and again, we're structuring sale-leaseback, so all the elements are certainly the economics of a transaction are part of the negotiation, and the bumps are a big part of that. I think in Europe, we still are getting CPI where there is more of a negotiation, it might be around instituting caps into the equation. I think when we're open and willing to include a cap in our CPI lease, we tend to get floors as well. Think about caps in the 4%-5% range and floors in the 1%-2% range. We feel well-protected. I may argue over a 20-year lease that 2% floor may come into play more often than the 5% cap.
We think all in all, these are still strong leases, and even with caps, they give good inflation protection. I think the U.S., it's less customary, it's more of a negotiation. We still are getting deals. In fact, the Go Auto deal in Canada, that was a CPI base increase there. Again, when we're not getting CPI, it's flowing through to higher fixed rent increases. Historically, if you look back 5 years to 10 years ago, most new deals with fixed increases were probably in and around 2% on average. More recently, it's been 2.5%-3.5%. Some of that is the environment, some of that is the increased focus on industrial assets where market rents tend to grow at a higher pace, and our bumps tend to reflect that.
Just pivoting to the balance sheet. Based on the capital you've raised this far, you've effectively pre-funded your investments for 2026. How are you thinking about funding going forward?
Yeah. Jeremiah, you want to talk through that?
Yeah. Like you said, we've kind of addressed most of our needs this year already. We did a large bond raise and an equity raise in the first quarter. We're in a good position, and really most of our needs are addressed. Just to talk it through, in terms of the equity, we're sitting as of the end of the first quarter on approximately $650 million of forward equity. That we believe can take us through the rest of this year in terms of our guidance range on investments or even through the high end of our guidance range. In addition to the equity, we also have free cash flow and a handful of dispositions, which we can talk about if that's helpful.
In terms of debt, we would expect to continue to fund our debt capital needs with a mix of U.S. dollar and euro-denominated unsecured debt. All else equal, we have a bias when a refinancing comes up, we're just going to keep it in the same currency. The only additional maturity we have this year is a $ 350 million maturity that's in October. That's a very small amount of refinancing for us. We have an almost fully undrawn $2 billion revolver, so there's no question about the liquidity to take out that bond maturity. I think in all likelihood, we'll find a window of opportunity here sometime in the second half of the year to do another bond issuance and take that out in USD.
Mm-hmm. Could you talk more about dispositions as a lever here?
Yeah. Like I said, we do have a guidance range of $250 million-$750 million for potential dispositions. I think that range is intentionally wide. Part of what we were signaling to the market is that we have the flexibility if we feel like there's good opportunities to do more dispositions and to have that be a source of capital. I think where we sit today with the forward equity we've raised, with the bond issuance we've already done, I think we're more likely to be in the lower half of that range.
If you see us going into the higher half of the range, I think it just means that there's really just great opportunities for dispositions that we want to take advantage of, and all of that will just serve to, I think, further kind of bolster our position or extend the runway that we have to make investments on a leverage-neutral basis into 2027, perhaps well into 2027.
Are there any assets in particular that you're thinking of or subsets that we can think of on the disposition front?
Yeah. The story on the disposition side, those of you who follow us know that in recent years, we've gone through some larger disposition programs. We got out of office and we're selling some office several years ago. Last year, a part of our story was liquidating the operating self-storage assets we had on the balance sheet. The headline is that there's no major disposition program like some of these ones we've done in the past, nothing that we're looking at this year, and really nothing that we could see in the foreseeable future that we'd be targeting. The dispositions we do today, they're more one-off dispositions, single assets.
There are still a handful of one-off assets that we think can be good accretive sources of capital and also, I guess even though they're small, serve a bit of a strategic purpose. This year, we did sell, we had one asset left in Asia. This was a legacy investment we made when we were in the fund management business years ago and looking at assets in that region. This was our last asset in Asia. It was in Japan. We sold it. It was only $30 million or $40 million. It simplifies our story a bit. It was an accretive source of capital. We have a single student housing asset left. That's one that we'll target for disposition. Again, it's probably a $40 million or $50 million asset.
None of these assets by themselves are meaningful, but that would be accretive as well and, again, help with the story. We have several hotel operating assets. For those of you, again, who have followed us, you know we had a net lease with Marriott, a very long-term lease, and that lease matured recently. When it matured, those assets converted effectively to assets that were managed by Marriott instead of leased to Marriott. We now own the hotels Marriott manages. These are Courtyard by Marriott brands. We've sold most of those. We have three left. Those are redevelopment opportunities for us. One that we may do ourselves, the other two probably to sell to developers.
I guess it's all to say the main point, there's no major kind of programmatic asset disposition going on anymore, but there are one-off deals that we think make sense to sell and that we think will be a good source of capital.
Maybe if we could just wrap up with valuation here. At the end of your last earnings call, you mentioned that you continue to execute and expect your stock multiple to expand further. What is the case for further expansion of WPC's multiple?
Yeah. Look, we appreciate the question as always because you probably won't have any CEO up here ever think they're fairly valued, and I'll fall into that category. Look, I think our story is quite interesting right now if you look at over the last number of years, this point in time in particular. We've had a number of strategic initiatives over the last, call it eight or nine years during the time that I've been in the seat. We've wound down our fund management business, and many of those funds were net leased that we acquired under our balance sheet.
As Jeremiah mentioned that we exited office through a spin and an asset sale program 3 years ago at this point in time. Most recently, we sold down operating storage assets. Very strong business, but maybe not necessarily one that fits perfectly within a net lease portfolio. Those were very attractive dispositions kind of in and around six caps that allowed us to reinvest in net lease.
Where we sit today, if you look, maybe go back one year, 2025 is the first base year in which we've had a clean story after all these strategic initiatives, and I think the results speak for themselves. We put up a record deal volume, which was over $2 billion, earnings growth at just under 6%. I think we're set up very well to continue that progress into 2026. Investment activity is strong. We mentioned where we are deal volume to date. We've mentioned raising our guidance there. We're very well-positioned from a funding perspective. Jeremiah had just gone through this. We think we can fund through the top end of our deal volume without having to get into the capital markets at all. I think we can maintain an opportunistic stance. We're well-funded to fund any needs or foreseeable needs for this year.
Our portfolio continues to perform, both from a credit perspective with continuing lowered assumptions around credit loss and, of course, the same sort of growth within our portfolio is a meaningful component of our growth that many of our peers don't have. When you kind of combine those factors there, I think we have a profile that we think can generate mid-single-digit earnings growth on a go-forward basis.
When combined with a dividend yield that's in and around 5%, that gets you to a low double-digit total shareholder return before any multiple expansion that we think is going to be attractive to net lease investors. Of course, in net lease, once you get the cost of capital and you get into this flywheel spinning and you're into the algorithm, you can really grow. We have a long history of acquiring and structuring net lease assets, and we think we're really well-suited for growth going forward.
We have about a minute left if there's any questions from the audience. Yes.
Do you have a target leverage ratio?
Go ahead, Jeremiah.
We target mid to high fives on net debt to EBITDA. We also look at debt to gross assets, call it low 40s. We've been operating in that zone really for a long period of time. That's probably been our target for the last five to 10 years, and we expect to stay there. If there's any bias, it's maybe to the lower end. We think REITs in general get the best cost of capital by running conservative balance sheets, but we think the target is appropriately conservative for our profile.
Maybe first in the front, then second behind.
Appreciate the guidance revision in the market in terms of the bad debt or less pressure on the blocks, I suppose. Europe specifically, with everything going on with Iran, the higher oil prices there, higher gas prices. Are you seeing any tenant stress? Acknowledging that you're a bit above average in terms of general out there, but in terms of like forward multiple rent coverage in Europe, care to disclose?
Yeah. Nothing discernible or thematic. We mentioned that we generally focus on large companies, some of that may be impacting their margins and kind of the equity values of these companies, but not their ability to pay rent at this point in time. You think about it, we went through a case study of this a couple of years ago when Russia invaded Ukraine, and we saw a spike in energy prices and gas prices in particular at that point in time. I think we made it through that scenario relatively unscathed, relative to those pressures.
One more question in the back.
Are the Japanese yen debt markets an option for funding at a lower cost of capital versus some other alternative funding solutions?
No. As Jeremiah mentioned, we exited the Japanese market. We had one asset, legacy asset from 15 years ago that we finally sold. We're out of the business and focused on Europe and North America.
Okay. I was thinking about if the corporate funding lever W. P. Carey.
Yeah. The short answer is we wouldn't do that. When we do go into these other debt markets, it's reflecting the business platforms that we have there. We're not just sort of going around the world kind of borrowing currencies. We're matching currencies. We get the benefit in Europe, and we will believe we get that benefit in Canada. It's good to be able to access those markets and blend into lower costs of debt. We can even overweight in those currencies. That's part of our hedging approach. We wouldn't go do Japanese yen without having a business there. We have no expectation. We just exited, so we don't expect to be in that market.
Yeah. Well, Jason, Jeremiah, thank you very much for joining us and telling us the W. P. Carey story, and thank you all for coming.
Yeah. Thanks, everyone.