W. P. Carey Inc. (NYSE:WPC) Q2 2024 Earnings Call Transcript

W. P. Carey Inc. (NYSE:WPC) Q2 2024 Earnings Call Transcript July 31, 2024

Operator: Hello. And welcome to W. P. Carey’s Second Quarter 2024 Earnings Conference Call. My name is Diego, and I will be your operator today. All lines have been placed on mute to prevent any background noise. Please note that today’s event is being recorded. After today’s prepared remarks, we will be taking questions via the phone line. Instructions on how to do so will be given at the appropriate time. I will now turn today’s program over to Peter Sands, Head of Investor Relations. Mr. Sands, please go ahead.

Peter Sands: Good morning, everyone. And thank you for joining us this morning for our 2024 second quarter earnings call. Before we begin, I would like to remind everyone that some of the statements made on this call are not historic facts and may be deemed forward looking statements. Factors that could cause actual results to differ materially from W. P. Carey’s expectations are provided in our SEC filings. An online replay of this conference call will be made available in the Investor Relations section of our website, wpcarey.com, where it will be archived for approximately one year and where you can also find copies of our investor presentations and other related materials. And with that, I’ll pass the call over to our Chief Executive Officer, Jason Fox.

Jason Fox: Thank you, Peter, and good morning, everyone. This morning, I’ll provide a brief update on some recent events, but will focus my remarks on our investment activity and where we stand relative to our revised guidance. I’m joined this morning by our CFO, Toni Sanzone, who will cover the details of our second quarter results, guidance and balance sheet. John Park, our President; and Brooks Gordon, our Head of Asset Management, are also on the call to take questions. Before we jump into the call, I wanted to take this opportunity to acknowledge the departure of our President, colleague and friend, John Park, who is leaving W. P. Carey after 37 years. John has been an integral member of our management team, and his insights and creativity have played a pivotal role in shaping W.

P. Carey into the leading net lease REIT it is today. Yesterday, we reported AFFO per share of $1.17 for the second quarter, which increased over the first quarter and is expected to further increase over the second half of the year as we continue to deploy cash into new investments. Currently, all of the properties within our Office Sale Program have now been sold, except for one final asset, which is under a binding contract and scheduled to close in December. With the conclusion of this program, I’m pleased to say we achieved pricing consistent with the blended average cap rate in the high single digits and generated total gross proceeds just under $800 million, both of which are in line with the expectation that we set when we announced our office exit strategy.

During the second quarter, we addressed both of our 2024 bond maturities, raising over $1 million of new unsecured debt through bond issuances in both Europe and the U.S., achieving tight spreads over their benchmark rates and attractive yields relative to where bond pricing has been over the last few years. Pricing for both bond deals was also attractive relative to the yields we’ve been seeing on new investment opportunities. Our liquidity position is at an all-time high, with an almost entirely undrawn $2 billion revolver, plus the cash generated from the NLOP Spin-Off, unbalanced sheet office sales and the U-Haul disposition. Deploying the substantial capital, we’ve built up into new investments remains our top priority, although we will continue to earn a relatively high return on our cash in the meantime.

Starting in the third quarter, the accretive impacts on AFFO of redeploying that cash into new investments will be much cleaner, without the impact of office asset sales and having reset our interest expense following our recent bond refinancings. A longer-term source of liquidity is our equity stake in Lineage, which, as many of you know, recently priced its IPO. We’re one of its larger investors, which came about through several sale leasebacks that we did with Lineage when it was just getting started. At its current stock price, our equity stake is currently valued at just under $400 million, net of promote. The successful pricing of their IPO highlights that we will have a very unique and highly accretive source of capital that we would expect to redeploy over the next few years, subject to Lineage’s decision on timing for settling pre-IPO investors.

In the meantime, we expect Lineage to start paying more regular cash dividends, which will flow through to our AFFO. Moving to investment activity, while the deal environment presented some compelling opportunities during the first half of the year, transaction activity has recently felt somewhat muted, with sellers increasingly focused on potential rate cuts as a catalyst to bring new sale leasebacks to market or looking to alternatives in the financing markets in anticipation that rates will come down. Some deals have moved to the sidelines at current pricing, with sellers that don’t have an immediate need for the capital often electing to wait. We continue to see new investment opportunities across a range of cap rates, focusing on transactions with going-in cash cap rates in the 7s, and in some cases, into the 8s.

With the attractive bumps we’re able to achieve over long lease terms, that translates to average yields in unlevered IRRs well into the 9s, which is sufficiently above our spot cost of capital to transact, even though we don’t need to raise any new debt or equity to fund deals this year. Year-to-date, we’ve completed investments totaling $641 million at an initial weighted average cash cap rate of 7.7% and an average yield of just over 9%. Our first half investment volume included $293 million of deals closed during the second quarter at similar weighted average cap rates and average yields. The vast majority of investments over both periods were warehouse and industrial properties. Investments closed during the second quarter were almost entirely located in North America, resulting in a relatively even split between North America and Europe for deals closed over the first half of the year.

We continue to achieve favorable rent escalations. About 60% of the investment volume we closed over the first six months had rent bumps tied to inflation, the vast majority of which comprised CPI-capped rent escalations, with the average CPI cap set at around 4.5%. About 40% of our first half investment volume had fixed rent bumps, averaging approximately 3% annually. The slight majority of the deal volume we closed during the first half comprised acquisitions of existing leases driven by the closed portion of the portfolio deal with Angela Gordon. Typically, sale leasebacks comprise the vast majority of our deals. However, we will acquire portfolios of existing leases when their structures and terms align with our standards. This portfolio was a good example of that and is a source of investment volume we’re looking to do more of.

Our pipeline currently totals over $200 million of investments, half of which we expect to close within the next 30 days to 60 days, including the remaining portion of the portfolio acquisition I just mentioned. Two of the larger transactions we were pursuing this year, totaling over $300 million, recently fell out of our near-term pipeline. This is unusual, and we’re disappointed by it, especially given the timing. However, we uncovered critical issues during diligence that couldn’t be resolved. While new deals continue to be added, it creates a drag in our investment pace as we enter the late summer period, which is typically slower for transaction activity. As I noted earlier, on margin, some sellers are looking for greater visibility on rate cuts before moving forward with sale leasebacks.

If the Fed lowers rates during the third quarter, it will likely spur them to act, adding to what is traditionally a strong fourth quarter and there is also some evidence that there has been a recent increase in brokers conducting BOVs or broker opinions of value, which we find is typically a leading indicator for deals coming to market. So while we’re cautiously optimistic the deal activity will pick up, it’s very hard to predict the specific timing, which clearly affects the volume of deals that will be completed over the remainder of the year. We’re therefore lowering our expectations for investment volume, which flows through to our full year guidance, as Toni will discuss in more detail. And with that, I’ll pass the call over to Toni.

Toni Sanzone: Thank you, Jason, and good morning, everyone. AFFO for the 2024 second quarter totaled $1.17 per share, with the increase over the first quarter primarily reflecting lower G&A expense, the completion of the first quarter rent abatement for Hellweg, and higher other lease-related income, partly offset by our first half disposition activity, which included the sale of the U-Haul portfolio, our former top tenant. Dispositions over the first half of the year totaled just over $1 billion, with $152 million completed during the second quarter, including the last of the Marriott operating hotels earmarked for sale. We sold two additional office assets in July and have one asset representing just 45 basis points of ABR, under a binding contract and scheduled to close by December, which will be the final asset sale under our Office Sale Program.

We’ve also completed sales of three of the four vacant Prima Wawona assets, one of which closed in July. Turning to our portfolio, starting with same-store rent growth. Contractual same-store rent growth for the second quarter was 2.9% year-over-year, including leases with CPI-linked rent escalations still tracking in the mid-3% range and those with fixed rent escalations just above 2%. For the full year, we expect contractual same-store rent growth to average around 2.8%. Comprehensive same-store rent growth was negative 40 basis points year-over-year, with the variance to contractual primarily reflecting the current quarter impact of the assets we discussed in our last earnings call, specifically the Prima Wawona lease rejection, the build-out period ahead of the Samsung lease commencement and the restructured rent from Hellweg, which started in the second quarter.

The impacts of these will continue to run through our comprehensive same-store growth, although to a lesser degree in the back half of the year, resulting in our expectation that same-store growth will be flat for the full year. Our watch list remains around 5% of ABR and is largely the same as it was on our last earnings call, with no significant tenants added or taken off. Rent collections total just over 99% for both the second quarter and the first half of the year, with no material changes in our cash basis tenants. And the bad debt assumption within our AFFO guidance continues to cover uncollected rents. We have a small number of current and prior tenants with rent outstanding, which we continue to pursue. Based on current progress and expected timing, our guidance assumes recoveries totaling approximately $0.03 to $0.04 of AFFO in the back half of the year.

Second quarter re-leasing activity resulted in overall rent recapture of 116% and added 6.5 years of incremental weighted average lease term on 50 basis points of ABR, driven by positive re-leasing spreads across industrial and retail assets. The weighted average lease term of the overall portfolio ended the quarter at 12 years, which remains among the highest in the net lease sector and our occupancy remained high at 98.8%. Other lease-related income was $9.1 million for the second quarter, primarily comprising deferred maintenance and other settlement payments. Our current guidance continues to assume this line item falls in the low-to-mid $20 million range. Non-operating income during the second quarter was $9.2 million, which includes $5.9 million of interest income on cash and $3.3 million of realized gains on currency hedges, bringing the total for non-operating income over the first half of the year to $24.7 million.

Our cash on hand in the U.S. currently earns interest at an average rate of approximately 5.3%, generally offsetting the interest expense incurred on our newly issued U.S. bonds until that cash is deployed into new investments. For the full year, we currently expect non-operating income to total between $45 million and $50 million, based on our expectations for the timing of cash deployment. Operating property NOI totaled $21.8 million for the second quarter, up $1.5 million from the first quarter, bringing total operating property NOI for the first half to $42.1 million on an AFFO basis. On a year-over-year same-store basis, operating self-storage NOI has declined 4.2% through the first six months and on a full year basis is assumed to decline by 5% to 6%, which is down from our initial guidance assumption that it would be relatively flat year-over-year.

After factoring in the completed sale of the Marriott property I mentioned earlier, NOI from all operating properties is now expected to total between $81 million and $85 million for 2024. Moving to expenses, G&A expense totaled $24.2 million for the second quarter, down $3.7 million from the first quarter, due primarily to timing, bringing the total for the first half of the year to $52 million. We’ve lowered our expectation for full year G&A expense and currently anticipate that it will total between $98 million and $101 million. Non-reimbursed property expenses for the second quarter totaled $13.9 million, which included carrying costs on vacant properties prior to sale and the Samsung asset prior to its lease commencement. For the full year, we expect non-reimbursed property expenses to total between $44 million and $48 million.

Tax expense on an AFFO basis totaled $7.6 million, which included certain one-time benefits associated with the settlement of tax-related matters. For the full year, we expect tax expense on an AFFO basis to total between $37 million and $41 million. Turning now to guidance. As Jason discussed, we’re lowering our expectations for full year investment volume and now expect it to fall between $1.25 billion and $1.75 billion, and we’re also anticipating lower NOI from our operating self-storage portfolio. As a result, we’re lowering our AFFO guidance range by $0.02 at the midpoint to between $4.63 per share and $4.73 per share. If Lineage declares any dividends in the second half of 2024, that would have the potential to offset some or all of the reduction that we are currently seeing to our AFFO guidance.

For now, we aren’t considering any additional dividends from Lineage in our 2024 AFFO guidance. We will look for more color on their dividend policy going forward and provide any updates to our AFFO expectations accordingly. Moving now to our capital markets activity and balance sheet positioning. We had an active second quarter on the capital markets front, issuing approximately $1.1 billion in unsecured notes. In May, we completed a €650 million eurobond issuance with a coupon rate of 4.25%, taking advantage of the lower interest rate environment in Europe. And in June, we issued $400 million of U.S. dollar bonds at a 5.375% coupon. We’re pleased with the execution of these bond issuances, which priced at spreads of 160 basis points and 130 basis points, respectively, over their applicable benchmark rates.

Since the end of the first quarter, we’ve repaid $1 billion in maturing bonds, comprising a $500 million U.S. bond repaid in April and a €500 million eurobond repaid in July. We have no further bonds maturing in 2024 and only $61 million of mortgage debt coming due in the second half of the year. The bond issuances and repayments completed so far this year have extended the weighted average maturity of our debt by nearly a year and ensure we continue to have a well-laddered series of maturities. Our liquidity position further increased during the second quarter, ending the period at $3.2 billion, including a virtually undrawn revolver with $2 billion of availability and over $1 billion in cash. Although, as I mentioned earlier, we subsequently used some of that liquidity to repay the bond that matured in July.

Our weighted average interest rate remained relatively low for the second quarter at 3.1% and is expected to average in the low-to-mid 3% range over the remainder of the year. The refinancing of our matured bonds is expected to increase interest expense in the back half of the year, partially offset by higher interest income, which will be worked down as we deploy the capital into new investments. Leverage ended the second quarter at similar levels to those at the end of the first quarter. Debt-to-growth assets was 41.7%, which remained well within our target range of low-to-mid 40s. Net debt-to-EBITDA was 5.4 times, which remained below the low end of the target range of mid-to-high 5 times, although we continue to expect it to trend back into that range over the second half of the year as we deploy further capital into new investments.

And with that, I’ll hand the call back to the Operator for questions.

Operator: Thank you. [Operator Instructions] Our first question comes from Michael Goldsmith with UBS. Please state your question.

Q&A Session

Michael Goldsmith: Good morning. Thanks a lot for taking my question. My question is on the two deals falling out of the pipeline. Can you talk a little bit about what are the factors that had you interested in them and then what were the kind of critical issues that made it kind of fall out of the pipeline, just trying to better understand the dynamics around the transaction environment and some of the risks or other factors that may influence the ability to get deals done? Thanks.

Jason Fox: Yeah. Sure. Yeah. And clearly that’s the biggest change from where we were in June when we last talked about pipeline and guidance and the biggest impact on modifying a range. So those two deals were originally over $300 million combined. I think for the larger of the two deals, we uncovered what I would call a critical issue in the late stages of diligence. The owner was unaware of it and it couldn’t be timely resolved. So something like this happens. I would call it rare and they’re out of our control. I would say it’s most unusual for it to happen when we have deals that are this far along. So, certainly we’re disappointed that they didn’t get over the finish line and now we’re in the process of replenishing our pipeline with new opportunities.

But I don’t think it’s a read-through into anything structurally wrong with the transaction markets. These we viewed as, again, unusual for this kind of stage of the transaction and I’d call them isolated.

Michael Goldsmith: Got it. And then as a follow-up, as you sit here today, you’ve made a lot of progress on the dispositions, whether it’s office and some of the other categories, and now the acquisition volume guidance has been taken down. But does the strategy now shift to the offense in terms of finding deals, being aggressive with deals and just kind of putting that capital that you have to work? I can just try to get a sense of the narrative shift and the strategy shift as we sit today and what we should expect over the coming quarters?

Jason Fox: Yeah. Absolutely. I think it’s — that’s how we would characterize it. We’ve done some of the heavy lifting on the strategic front with the office spin last year. That is — the Office Sale Program is done at this point, and obviously, the U-Haul transaction is a big capital source, but it was also a drag to sell off a portfolio that large. And now we’ve also repaid our two bond maturities this year and reset our interest expense. So, yeah, we’re in a good position now. We’re certainly on the offense in terms of looking for new opportunities. We’re in a very strong liquidity position, which that will help us lean into deals and so now we need to see the transaction activity pick up. And where we are right now, kind of late summer, this is the summer law.

It’s especially pronounced in Europe, so we don’t have as much visibility into the transaction markets and kind of the dynamics of that right now. But we’ll know more at the end of summer, in September and certainly October, what the end of the year looks like.

Michael Goldsmith: Thank you very much. Good luck in the back half.

Jason Fox: Yeah. You’re welcome. Thank you.

Operator: Our next question comes from Spenser Allaway with Green Street Advisors. Please state your question.

Spenser Allaway: Thank you. You noted that there have been fewer willing sellers because folks are kind of waiting for interest rate cuts, but can you provide some color on how competition for deals has trended in both U.S. and Europe, and where do you expect to see more competition in the second half of the year?

Jason Fox: Yeah. So, yeah, I think, transaction markets have been a bit muted recently. I think we can attribute that maybe to some pausing happening around expectations of Fed rate cuts. We’ve seen competition, I would say, incrementally pick up both in the U.S. and Europe, probably, a little bit more so in the U.S. I think that’s putting some downward pressure on cap rates. And again, maybe that’s a little bit more in the U.S. than in Europe, although, I will expect maybe a little bit of that in Europe as well, especially given where borrowing costs have gone. So, yeah, I think, more competition will push cap rates down. We can lean into pricing that a little bit. We mentioned that we’re sitting on a lot of liquidity.

While that does earn 5% in cash, we’re motivated to put that to work and we can certainly generate some accretion relative to cash but also relative to where we can kind of issue capital right now. So, competition is there, it always has been, and I expect it maybe will pick up a little bit once cost of capital kind of resets with where the Fed ends up.

Spenser Allaway: Okay. And then in regards to the investment you made for the storage space expansion, I know it’s a really small investment, but can you just provide some color on how you got comfortable with the underwriting, just given the challenges the storage industry has been facing on the rental rate front and maybe just some broader thoughts on how you’re thinking about the industry in general?

Jason Fox: Yeah. I have to think about what — it was small. I’m trying to think if that was an expansion of an existing asset or a tuck-in deal. But I think importantly, the storage deals kind of go through the same, underwriting process that we do for net lease. They need to generate the right spreads to our cost of capital. I think, we can expect probably long-term growth that’s higher than what we would see in net lease, but they still need to have kind of underlying kind of return fundamentals that work for us. I don’t remember the exact specifics on that deal, but I think it was either an expansion of existing asset or a tuck-in for properties in a market that we’re already in.

Spenser Allaway: Okay. Great. Thank you so much.

Jason Fox: Yeah. You’re welcome, Spenser.

Operator: Our next question comes from Anthony Paolone with JPMorgan. Please state your question.

Anthony Paolone: Yeah. Thanks. So, I guess, Jason, just want to make sure I understand some of the comments about it. It sounds like, some of the sellers are waiting for rates to come down and you mentioned maybe even being able to lean into price a bit. So, you talked about cap rates mid-7s, I guess, even up into the 8 range. Should we think about those going forward as being lower, like maybe low 7s or in order to get things to clear, I mean, how should we think about that?

Jason Fox: Yeah. It’s a good question and it’s certainly dynamic. I mean, right now we’re broadly targeting cap rates into these cash cap rates in the 7s, which given our bump structures would typically equate to an average yield in the 9s. So that kind of pricing works for us. I think, while we’re sitting on as much liquidity as we are right now, I think for the right deal, we can probably dip below that range. Especially, we tend to transact across a broad range of cap rates, so there’ll be some higher than that range as well. But I think we’re comfortable for the right asset, especially ones that have higher growth embedded into the leases to get a little bit more aggressive than maybe the 7.7 average cash cap rate that reported this quarter or year-to-date, I should say.

Anthony Paolone: Okay. Thanks. And then just to follow up, the 5% of ABR on the watch list, is any of that from any of the top 25 tenants that you could help us call out?

Jason Fox: Yeah. Brooks, you want to take that?

Brooks Gordon: Sure. Yeah. As Toni mentioned, the watch list is very consistent quarter-over-quarter, and as we discussed in some prior calls, the bulk of that is Hellweg and Hearthside, which we’ve discussed in prior conversations. That’s about two-thirds of the watch list, and those are top 25 tenants. But those are the only two and the remainder of the list is very consistent, again, around 5% of ABR.

Anthony Paolone: But Hellweg and Hearthside are in the 5%?

Brooks Gordon: Correct. And they were prior quarter as well.

Anthony Paolone: Yeah. Okay. Got it. That’s what I thought. Thank you.

Jason Fox: Thanks, Tony.

Operator: Our next question comes from Brad Heffern with RBC Capital Markets. Please state your question.

Brad Heffern: Yeah. Hi, everybody. Thanks. So, for deal volumes, you’re roughly halfway to the low end of the guide as of the end of the second quarter. Then you obviously said third quarter has a low. Sellers are waiting. There’s more competition. So, I guess, I’m wondering why not take down the guide more? I guess what gives you confidence in hitting the midpoint of this range just given what you’ve closed year-to-date?

Jason Fox: Yeah. Sure. Yeah. So, maybe I’ll just recap quickly. So, we’re roughly at, now I would say, $700 million of deal volume after you factor in the remaining capital projects that are expected to close this year. That’s probably like $40 million or so. And then we have a pipeline that I’d call over $200 million. There are various stages. I think we expect the majority of that, probably at least half of that, to close in August and September. So that gives us visibility into, I’d say close to a $1 billion of investments right now. At least that’s where we’re at right now. And that’s certainly lower than where we’d like to be and I think we know that it’s mainly because of those two deals that I mentioned earlier that dropped out of our pipeline.

So, yeah, there’s some work to do at the second half of the year. We are sitting on a ton of liquidity. We do have a bias to put capital to work. I just mentioned that we can lean into pricing on the right deals. I think there’s signs that the market activity will pick up coming out of summer. I mentioned that BOV activity has picked up and that’s typically a bit of a precursor to deal activity. I think Fed rate cuts may have some of that effect as well. And on top of that, keep in mind our fourth quarter tends to be our largest and our most active. I think on average, looking back over around 10 years, about 35% of annual deal volume does occur in the fourth quarter. So we don’t have visibility into year-end deals yet and that’ll come more focused in September and October.

But, yeah, I think we think that’s the right range. It is a range. It’s relatively wide, given the uncertainty, but we think it’s the appropriate range and we’ll keep on finding ways to put capital to work.

Brad Heffern: Okay. Got it. And then on Lineage, it sounded from your comments like you don’t really have visibility on when you might be able to actually monetize that. Is that the correct interpretation and then when might you have visibility on that?

Jason Fox: Yeah. I think that’s a fair characterization. There are lockups in place. There is an outside date of three years, but we do expect that, there’ll be kind of periodic or maybe regular opportunities for liquidity throughout the settlement period. But it’s mostly at the sponsor’s discretion, so we don’t have full visibility into that. I think that they’re motivated in all likelihood to remove any overhang there, but we don’t have a lot of visibility into that. I think that’s fair.

Brad Heffern: Okay. Thank you.

Operator: Our next question comes from John Kilichowski with Wells Fargo. Please state your question.

John Kilichowski: Hi. Thank you. You mentioned the 5% of ABR that’s on the watch list, but could you talk about the quarter-over-quarter performance of the rest of the portfolio? Like, are you seeing a weaker, lower-end consumer impacting these businesses more generally?

Jason Fox: Brooks, anything you.

Brooks Gordon: No. Not any major trends that I would point to. I mean, I think the watch list is a good indicator of where we see more acute risk. Again, I’ll remind people that, it’s not an indicator of what we expect to default, but just those tenants where we want to pay even more close attention. Certainly some challenges to consumer in various regions, but we haven’t seen that flowing through to our tenant base other than the tenants we’ve identified on the watch list.

John Kilichowski: Okay. Thank you. And then second, maybe just jumping back to the operating self-storage portfolio, you took down the guide to negative 5% to negative 6% year-over-year versus flat last time we spoke. I feel like the weakness in self-storage has been understood, so curious what kept the guide from getting taken down earlier, what changed quarter-over-quarter?

Jason Fox: Toni, any thoughts on that?

Toni Sanzone: Yeah. I would say, in terms of kind of the performance over the first half of the year, we’ve been looking month-after-month at how the portfolio has tracked and I think it’s continued to show softening. There’s been signs of optimism generally out there in the market with potential interest rate cuts. We just aren’t seeing that come through as of right now. So, at this point, I think, our guide is really based on what we’re seeing come through our portfolio at this moment in time. I think there’s still some optimism out there in the back half of the year, generally, as it relates to self-storage and we hope that would be some upside for us relative to where we’ve marked it, but I think, we feel good about what we’ve marked it to at this point in the year.

Jason Fox: Yeah. And those numbers generally are part of budgets that we get from our operators as well. So that’s certainly a big input in how we look at, what we’re modeling and including in our guidance.

John Kilichowski: Understood. Thank you.

Jason Fox: Yeah. You’re welcome.

Operator: Our next question comes from John Kim with BMO Capital Markets. Please state your question.

John Kim: Thank you. I just wanted to clarify on the two deals that fell apart this quarter and the issues that you found. Were those issues tenants or lease-related or real estate-related? And were these transactions something that you’d be willing to reprice?

Jason Fox: Yeah. I don’t want to get into too many of the details. The larger of the two, that was a sale-leaseback, and it was related to be completed in conjunction with a broader company refinancing. And when we hit the roadblock that we uncovered during due diligence, this was a real estate diligence issue. The tenant had to move forward with their Plan B, which was an alternative capital source in order to get their refinancing done by their deadline. So that was the biggest driver here is, this was part of a bigger transaction that was scheduled to close. And it wasn’t possible to kind of ensure or kind of accelerate any resolution on the issues that we came up with. Maybe there’s a chance that that deal could come back.

Likely it would be smaller. But the company doesn’t have specific use of proceeds in mind right now. So, we have a good relationship there and I think that we’ll stay in touch, but I’m not expecting or including a restart of that deal anytime soon, if at all.

John Kim: I appreciate the color. I wanted to also follow up on Lineage. You mentioned that as a source of capital. There are some unrealized gains in the investment. It could be an investment where the dividend growth is pretty attractive. So, how do you balance that aspect, that it could be a higher growth vehicle or investment versus reinvesting with a higher yield, but potentially lower growth going forward?

Jason Fox: Yeah. Look, this was a very unique investment that we made, and we did it, I don’t know, probably 10 years, 12 years ago now, when Lineage first got their start. We helped seed the business with some sale leasebacks and took a meaningful equity stake at the time. So, I wouldn’t say it’s our business, and I’m assuming that investors wouldn’t say it’s our business to own publicly traded securities. So, we will look for liquidity options when they’re offered and reinvest that capital into our core business, which is net lease, of course. The investment has performed extremely well. So, yeah, there are meaningful gains and potentially outsized taxable income that we’ll have to manage, but we’re pretty big.

The liquidity likely comes in over a multiyear period given the lockup structure. So we feel pretty comfortable that we’re going to be able to manage those gains and taxable income with our normal kind of course distributions. So I don’t think that’s a factor. In other words, I think that we’re looking forward to reinvesting that capital into net lease. It’s going to be highly, highly accretive. I do think that they will start paying a dividend likely in the second half of the year. We don’t have good timing on that or the magnitude of that. But regardless of what the growth prospects of that dividend are, I think, we want to get reinvested in net lease. Like I said, it’ll be highly accretive.

John Kim: Thanks, Jason.

Jason Fox: You’re welcome.

Operator: Our next question comes from Mitch Germain with Citizens JMP. Please state your question.

Mitch Germain: Thank you. Jason, any potential decision to maybe modify the way that you come up with a guide, I guess, what I’d say is maybe guide your deployment in 2025? I think it’s been a couple times where you’ve had to kind of switch things up. Is there maybe any change in philosophy that you might adopt?

Jason Fox: Yeah. It’s something for us to think about. I mean, the deal of volume, maybe more so than anything else is hard to predict. It’s very dependent on market forces, things like, macro, things like interest rate environment, obviously, cost of capital and competition play a role there. So it’s not the easiest to predict. I think that we certainly have a range that we include within our corporate model that will flow through and provide guidance. And we recognize that it’s — I don’t think everyone does it, but it’s more common to provide guidance around deal volume than not. But I think your point is well taken. We’re going to continue to look at what’s the best way to provide those assumptions at the beginning of the year and how we think about updating those along the way.

Mitch Germain: Got you. And then I think somebody else had mentioned maybe the kind, broadly speaking, the way that you’re looking at your storage portfolio. I think, I don’t know, maybe about a year ago or so. So, obviously, not a fresh number, but I think you’d thrown out evaluation of about $1.5 billion. I mean, how strategic is that portfolio today in your mind if you’re looking at another potential liquidity source?

Jason Fox: Yeah. Sure. It’s a little under maybe $70 million, maybe $65 million to $70 million of NOI associated with the portfolio. So I think we’ve probably characterized it as over a $1 billion in value. That’s probably a good number and it’s somewhere above that, but we don’t have an exact valuation. We continue to like the industry long-term despite the fact that 2024 has been a challenging year. We’ve talked a lot about the various options we have for that portfolio. One of the things was we could potentially replicate that prior net lease conversion that we did a couple of years back. I’d say we’re spending a little more time exploring that right now, maybe for a portion of the portfolio, but certainly, we would have the ability to sell some portion of the properties as well.

If we think that’s the best way to fund new net lease purchases, we’d view it like anything else, another accretive source of internal capital and we think we can make some pretty sizable spreads, trading out of storage and into net lease. But we know we are sitting on a ton of liquidity right now. So I would say it’s not high on the priority list to create more capital by selling storage, but it’s certainly option. And I think maybe the broad message is or the main point is that, we have a lot of flexibility in the way we look at portfolio and we’ll continue to evaluate all the different options.

Mitch Germain: Thank you.

Jason Fox: Yeah. You’re welcome.

Operator: Our next question comes from Joshua Dennerlein with Bank of America. Please state your question.

Farrell Granath: Hi. Good morning or afternoon. This is Farrell Granath on behalf of Josh. I just wanted to circle back on some of your comments that you had laid out some of the recoveries that you’re expecting from tenants at $0.03 to $0.04 in the back half of the year. I was wondering if you could give a little bit more color or walk through the elements of that, if those are tenants who are on the watch list currently or if it’s a majority from one.

Jason Fox: Toni, you want to dig into that?

Toni Sanzone: Sure. Yeah. I’m happy to just give a little bit of color there. I think we have a small handful of tenants. I think it’s roughly about five tenants, smaller in size, all on the watch list. None of them are our top 25 and they’ve been somewhat sporadic rent payers. So I think, we’ve consistently had them on a cash basis and we tend to only recognize the AFFO there when the cash comes in. So we do have line of sight to collecting about $0.03 to $0.04 worth of that past due rent and some of that’s current rent and some of that’s rent from prior years. Just based on negotiations and where we are in the year, that’s all been factored into guidance and it has been, but we do have kind of clear line of sight and I think it’ll just — we provided that context to help bridge the gap to get from kind of the first half to the second half of the year.

Farrell Granath: Okay. Great. Thank you. And also if I just get a little more color on the $9.1 million additional revenue or other revenue, I know that you had laid out, it was mixed between settlements and I missed the first word that you had said, but I was curious if you could give a little bit more color because I know quarter-over-quarter is a little higher.

Toni Sanzone: Sure. Yeah. That line will tend to fluctuate. It’s typically when what I referenced were deferred maintenance payments. So at the end of any lease kind of scheduled, we’ll recoup some recoveries around any maintenance or repairs that need to be done at a facility or we’ll settle sort of any other obligations at the end of the lease. It was a little bit higher this quarter and I think there was another settlement in there related to the Prima lease rejection. So we did get some recovery on that and so that made up the bulk of this quarter.

Farrell Granath: Okay. Thank you so much.

Operator: Thank you. [Operator Instructions] Our next question comes from Smedes Rose with Citi. Please state your question.

Smedes Rose: Hi. Thank you. I just wanted to ask you a little bit about the acquisition activity that you completed in the quarter. You mentioned it sounded like the bulk of it was in North America. And I was just wondering because it seemed like maybe a month or so ago there was more sort of optimism about opportunities in Europe and I was just curious if something specifically sort of changed there or if you would expect international opportunities to kind of pick up as you move through the balance of the year, given that I know there’s probably a low right now with summer, but just sort of in general?

Jason Fox: Yeah. Sure. Yeah. Yeah. We did do, I would say, since the end of Q1, most of the transactions have been in the U.S. I think post Q2, the year-to-date, we have done a little bit more in Europe and I would say, the pipeline is probably close to half in Europe. So there is activity that we would expect closing over the next 30 days to 60 days there and then we also expect once you get out of the summer law, that activity will pick up. It’s hard to entirely predict, but I think there’s reasons to think that that activity will pick up. And as I mentioned earlier, we have the — a low cost of borrowing in euros. It’s about 150 basis points inside of where we can borrow on the U.S. dollar. So, spreads have been better in Europe. I think we can lean into pricing a little bit more to the extent that’s going to help bring some deal flow in, but I think we need to see the activity and we’re hopeful and maybe expecting to see that pick up come September.

Smedes Rose: Okay. And I wanted to ask you too, just with inflation coming down, what sort of — just sort of like the minimum kind of rent bouncer seems to rent growth that you would kind of expect across your portfolio. If the — if it comes in — if inflation comes down to kind of the ranges that the Fed has been targeting for some time now?

Jason Fox: Yeah. Sure. So not on new deals, but what the existing portfolio is going to do. Toni, do you have any insight into that, maybe Brooks.

Toni Sanzone: Yeah. I think we continue to see kind of…

Brooks Gordon: I think we look at that on a four basis.

Toni Sanzone: The inflation, as you’ve said, it’s moderating now. I think we’re approaching kind of that sort of stabilized level at the back half of this year in terms of how it’s flowing through our metrics. So, we’re looking at kind of mid-2% and that includes both inflation based leases, as well as fixed rent increases, which we’ve been pretty successful in increasing the fixed bumps over the last few years as well. So I’d say kind of the mid-2% range for contractual same store.

Smedes Rose: Great. Okay. Thank you.

Jason Fox: You are welcome.

Operator: Our next question comes from Greg McGinniss with Scotiabank. Please state your question.

Greg McGinniss: Hey. Good afternoon. So same-store NOI growth for the self-storage REIT is expected around minus 2% this year. Are you seeing any particularly geography — any particular geographies facing more headwinds or what’s driving the underperformance in your operating portfolio?

Jason Fox: Yeah. I mean, it’s a relatively diverse portfolio, obviously, much smaller than the big publics. But I think it’s the typical dynamics. I think there’s obviously a big drag on street rates or new moving rates. I think ECRIs are helping to offset some of that. I think our occupancy has slipped slightly, maybe by a percentage point or so. But as Toni mentioned, I think a lot of, what we’re reporting and forecasting is based on what we’re seeing on the ground and maybe more so influenced by the budgets that we’re getting from our operators. Those are a little bit on a lag. So to the extent there might be some more optimism starting to flow into the market into the end of the year. As Toni mentioned, maybe there’s a little bit upside there, but I think for now, that’s our assumption. But I don’t think there’s any read through or any other dynamics coming into play here.

Greg McGinniss: Okay. And then the positive rent recapture on the retail assets that include the fairly substantial TI package with, I think, it was like a six-year payback period. Could you provide some color on the type of tenant taking that space, why they needed that package, whether this level of spend might be required going forward to support re-leasing and maybe the expected IRR on that lease?

Jason Fox: Brooks, do you have any of that detail?

Brooks Gordon: Yeah. That — sure. Yeah. That one relates to Dick’s Sporting Goods and we’re converting it to their state-of-the-art house of sport concept. So reasonably capital intensive, I’d say that’s a bit of an outlier. But we won’t hesitate to do those when we think they create a lot of value. In this case, we certainly do. I think the incremental yield on capital is kind of low-single digits, but it’s a long-term lease with good bumps, excellent credit. This will be expected to be a top tier performing store. So net value creation, very strong, but agree that, capital intensive up front for that particular one. Again, I wouldn’t read through that to a trend per se. That’s a very specific conversion to a different concept for Dick’s Sporting Goods.

Greg McGinniss: Okay. Thank you.

Operator: Thank you. And our next question comes from Jamie Feldman with Wells Fargo. Please state your question.

Jamie Feldman: Great. Thank you for taking the question. I just wanted to think bigger picture here. You’ve got the election coming to pretty different candidates. Just what are your thoughts on just the global transaction market investment landscape, as you think about what the political environment might look like starting next year. Are there certain markets you think are more interesting, less interesting? Are there certain asset types you think are more interesting, less interesting? It would just be great to hear your thoughts on all of that?

Jason Fox: Yeah. Sure. I mean, I think for starters, I don’t know if the elections directly, we think are going to have a big impact on transaction activity. It’s going to be more Fed rate decisions and kind of the direction of the economy. I think the strength of the consumer is going to matter obviously a lot when it comes to retail, something that we’ve talked about some in Europe and maybe specifically in Germany. So I think it’s going to be more kind of macro driven as opposed to elections, whether it’s in the U.S. or U.K. or France, that that’s our perspective. I think we’re still seeing on-shoring and maybe there can be a catalyst with the election this fall for more of that in the U.S. that’s helping.

On the build-to-suit side, it’s helping on critical natures of our real estate. I think we’re seeing it in underlying demand and maybe in the rents for manufacturing as well. So I think that’s a positive and that’s an area that I think you’ll continue to see us over allocate capital.

Jamie Feldman: Okay. And I mean, along the big picture lines, I mean, what do you think the biggest risks are here as you’re putting fresh capital to work?

Jason Fox: Well, I think, for starters, I think, we want to make sure that we are finding enough good opportunities. As I’ve mentioned, the markets are a little bit muted right now. We think that’s probably mostly just due to the timing of the seasonal nature of what typically happens in the summer. So, for our business and maybe for net lease generally, we want to make sure we’re finding enough transaction activity, but we also want to see the right pricing and structures with those deals. So there could be some more competition, but I think it listed a lot of the reasons why we feel optimistic about coming into the end of the year. And we’re really well set up from a balance sheet and liquidity standpoint to continue to lean into deals and provide some growth going forward.

But that’s something that, that we think about. I think our portfolio itself, I mean the question was asked earlier to Brooks about any trends in credit. Our watch list has been stable. We feel good about our portfolio. Even if there is weakness at some point, we very much focus on critical operating real estate when we’re requiring real estate and it’s something that we monitor on a regular basis within the portfolio. We’re very proactive about making changes and using that information to manage the portfolio. So, even if there’s a slowdown, we think that we’re pretty well protected given the critical nature of our real estate and the length of our leases and the size of our companies all factor into that.

Jamie Feldman: Okay. Great. Thank you for your thoughts.

Jason Fox: Yeah. You’re welcome.

Operator: At this time, I’m not showing any further questions. I’ll now hand the call back to Mr. Sands.

Peter Sands: Great. Thanks everyone for joining the call and for your interest in W. P. Carey. If anyone has additional questions, please feel free to call Investor Relations directly on 212-492-1110. That concludes today’s call. Thank you.

Operator: Thank you. All parties may now disconnect.