W. P. Carey - Q2 2023

Transcript

Operator (participant)

Hello, and welcome to W. P. Carey's second quarter 2023 earnings conference call. My name is Kevin, and I'll be your operator today. All lines have been placed on mute to prevent any background noise. Please note that today's event is being recorded. After today's prepared remarks, we 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 the program over to Peter Sands, Head of Investor Relations. Mr. Sands, please go ahead.

Peter Sands (Head of Investor Relations)

Good morning, everyone. Thank you for joining us this morning for our 2023 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 at 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. With that, I'll pass the call over to our Chief Executive Officer, Jason Fox.

Jason Fox (CEO)

Thank you, Peter. Good morning, everyone. We made good progress during the second quarter, closing a significant volume of accretive new investments in an environment that remains constructive for sale-leasebacks, enabling us to apply upward pressure on cap rates. Our contractual same-store rent growth also remains among the best in the net lease sector. Even though inflation is cooling, we expect to continue leading the peer group on rent growth, driven by the lagged impact of CPI on rents, as well as the strength of our fixed rent increases.

This morning, I'll briefly recap our recent investment activity and talk a little about how we're uniquely positioned within the net lease sector through both our competitive position and the various sources of capital available to us, giving us confidence in our ability to continue investing in the second half of the year and manage our near-term debt maturities, even if capital markets are constrained. I'm joined this morning by our CFO, Toni Sanzone, who will review our second quarter results, expectations for the full year, and balance sheet positioning. John Park, our President, and Brooks Gordon, our Head of Asset Management, are also on the call and available to take questions. Transaction market conditions during the second quarter were generally a continuation of those we saw earlier in the year.

In Europe, there continues to be a slowdown in investment activity, given the steep rise in interest rates in that region over the last 12 months, resulting in wide bid-ask spreads. Although cap rates have lagged in Europe, we continue to find pockets of opportunity, which we expect to play out over the next 6 to 12 months as sellers adjust to the higher cap rate demands of buyers. We're well positioned to capitalize on them, given our strong competitive position in that market and the capital we have to deploy. In contrast, cap rates remain more attractive in North America, which accounts for the large majority of our investment volume year to date, including the $468 million industrial sale-leaseback with APOTEX we announced in April, and I discussed on our last earnings call.

As I said then, it serves as a good example of the attractive opportunities available to us by partnering with private equity sponsors using sale-leasebacks as part of the capital stack in corporate acquisitions, as well as the competitive advantage we have by being able to fund transactions, including large ones, entirely with our own balance sheet. APOTEX now ranks as our third-largest tenant and further increases our overall allocation to warehouse and industrial. Another notable second quarter transaction was the $98 million sale-leaseback we completed with ABC Technologies, a leading supplier to the global auto industry, for a portfolio of nine industrial properties in North America. The transaction enabled us to also extend the lease term on an existing portfolio. With our most recent investment in ABC, it also moves into our top 10 tenants.

Follow-on transactions, either with existing tenants or with private equity sponsors we've worked with before, are an important source of captive deal flow. The current environment has allowed us to expand our sponsor relationships as private equity firms increasingly explore alternative sources of capital, including sale-leasebacks. Majority of our investment volume year to date came from new sponsor relationships, driven largely by APOTEX. We completed investments totaling $761 million during the second quarter, bringing our investment volume for the first half of the year, $939 million, at a weighted average cap rate of 7.3%, 120 basis points above the average for the investments we completed over the same period last year.

While cap rates in certain areas of the net lease market have been slow to move, such as commodity retail, we've been able to transact at more attractive cap rates, especially on warehouse and industrial sale-leasebacks, which represent the large majority of our investment volume during the first half of the year. While net lease transaction markets have generally slowed over the last 12 months, large corporate sellers with the use of proceeds continue to actively explore sale-leasebacks due to a lack of attractive funding alternatives, given the tighter bank credit environment and more expensive corporate lending market. We've also seen fewer credible buyers chasing deals. This dynamic, coupled with the significant capital we have available to invest, continues to strengthen our competitive position and ability to push cap rates higher.

We are also willing to forgo deals with insufficient spread, some of which we are seeing come back to the market with better terms. Today, we're focused on deals with going-in cash cap rates in the 7s, which translates to unlevered IRRs in the 8s and into the 9s, taking into account the rent growth we're able to achieve over long-term leases. On new deals, we're achieving higher rent growth than we have historically. For example, deals with fixed rent bumps completed in the first half of 2023 had rent increases averaging just under 3%, compared to historical averages around 2%. We therefore continue to generate a comfortable spread to our cost of capital and have a positive outlook on our ability to win deals and deploy capital accretively over the second half of the year. Moving now to capital raising.

In recent years, we've demonstrated our ability to raise well-priced capital from diverse sources. The flexibility of our balance sheet is an important strength, particularly in an environment where capital markets can change quickly. As we look ahead to our capital needs over the second half of 2023 and into 2024, we feel very positive about how we're positioned. We still have approximately $385 million of unsettled forward equity, raised at an average price over $83 per share. That equity, along with proceeds from planned asset sales, provides us with the capital required to fund the remaining investment volume contemplated by our guidance, while maintaining conservative leverage.

Our $1.8 billion revolving credit facility provides us with significant liquidity, and in combination with our 2 term loans, represents a significant portion of the total debt we have maturing over the next 2.5 years, around one-third. Given the strong support we have from our bank group, we fully expect to extend the maturity on our credit facility through a standard recast towards the end of this year. Because it is floating rate, recent interest rate increases are already flowing through our interest expense on that portion of our maturing debt. Our recent upgrades to BBB+ and Baa1 enhance our credit profile. Although debt markets remain unsettled, we believe we'll continue to find windows of opportunity to issue new bonds, both in the U.S. and Europe, where we maintain a strong market presence as a highly rated REIT.

Finally, it's important to note that we have several other internal sources of capital that help mitigate our capital needs, especially useful given the current uncertainty in the capital markets and interest rate environment. Depending on how capital market conditions evolve, it has the potential to be a meaningful competitive advantage over the next few years. As we previously discussed, we have the proceeds from the U-Haul portfolio, which we currently estimate to be around $465 million, coming back in the first quarter of next year, given the exercise of the repurchase option on those properties. We also continue to explore various options for our substantial portfolio of operating self-storage assets, including as a source of capital through asset sales.

Operating self-storage properties are among the more liquid real estate assets, and in the current market, we believe our portfolio has a value approaching $1.5 billion. We also continue to hold a large investment in Lineage Logistics, currently on our balance sheet at a fair value of around $400 million, which is presently not paying a dividend. This is a non-core holding that we expect to sell sometime after Lineage becomes a public company, allowing us to reinvest the proceeds highly accretively. While we do not have any visibility into timing, it has the potential to be another meaningful source of capital over the next few years. In aggregate, these potential sources of capital total well over $2 billion, giving us confidence that we're well positioned to continue making investments and managing our upcoming debt maturities, even if traditional sources of capital are constrained.

With that, I'll pass the call over to Toni.

Toni Sanzone (CFO)

Thank you, Jason, and good morning, everyone. For the 2023 second quarter, we generated total AFFO of $1.36 per diluted share, up 3.8% over the first quarter, primarily reflecting the accretive impact of recent investments and the continued strength of our rent growth, partly offset by higher interest expense. The second quarter also included certain non-recurring items within non-reimbursable property expenses and income taxes that largely offset one another, which I'll come back to shortly. As Jason discussed, with cap rates remaining well above 2022 levels, we continued to find accretive investments that brought investment volume over the first half of the year to $939 million.

We also continue to benefit from the strength of the rent escalations built into our portfolio, with contractual same-store rent growth remaining at a peak level of 4.3% year-over-year, 130 basis points above where it was a year ago. For leases with uncapped CPI rent escalations, contractual same-store rent growth was 7.5% for the second quarter, reflecting the lagged impact of CPI on rents and embedded tailwind to our growth. We also expect our fixed rent increases to continue to trend upwards, given the higher fixed escalations we've been achieving on new leases, helping sustain elevated same-store rent growth as inflation declines.

As a result, we expect our internal growth to remain strong in the second half of the year, with contractual same-store rent growth averaging around 4%, and to average around 3% in 2024, based on current inflation forecasts. Comprehensive same-store rent growth for the second quarter, which is based on the net lease rent included in our AFFO, was 3.9% year-over-year and includes the benefit of certain rent recoveries in the current period. Over the long term, we continue to expect our comprehensive same-store rent growth, on average, to run about 100 basis points below contractual same-store. In addition to strong same-store growth, we also recaptured close to 100% of prior rents through our re-leasing activity for the quarter on about 1.5% of ABR, which on average extended lease term about six years.

The investments we completed during the first half of the year had a weighted average lease term of 22 years, which, in conjunction with the positive outcomes on our second quarter re-leasing activity, extended the overall weighted average lease term of our portfolio to 11.2 years. Other lease-related income for the second quarter totaled $5 million, bringing this line item to $18.4 million year to date. We continue to expect other lease-related income for the full year to remain in line with 2022. Disposition activity during the second quarter was minimal, comprising three properties for gross proceeds of $5.5 million, bringing total positions over the first half of the year to $48 million.

For the full year, our guidance continues to assume total dispositions of between $300 million and $400 million, including the sale of 9 of the 12 Marriott operating hotels we currently own, which represent about two-thirds of the annualized NOI generated by our operating hotel portfolio. The Marriott sales are progressing well, with the majority of the properties currently under purchase and sale agreement. We currently expect NOI from all operating properties to total approximately $90 million-$95 million for 2023, primarily reflecting the timing of the Marriott sales, also the impact of slightly slower growth within operating self-storage as that industry comes off its recent peak. Turning to expenses. Interest expense totaled $75.5 million for the second quarter, with the increase over the first quarter, driven by the funding of our investment activity.

Relative to the year ago quarter, the increase also reflects the impact of higher base rates. Our weighted average interest rate was 3.3% at the end of the second quarter, which is broadly in line with the first quarter, but up from 2.6% for the year ago quarter. Non-reimbursed property expenses for the second quarter were $5.4 million, driven lower by a reversal of property tax accruals totaling $6.3 million. These are property taxes that we had previously been accruing due to a tenant's non-payment over the past few years. The tenant fully repaid those taxes directly, allowing us to reverse our accruals during the second quarter. As a result, we expect this line item to return to a more normalized run rate of around $12 million per quarter for the remainder of 2023.

G&A expense totaled $25 million for the second quarter, about $2 million lower than the first quarter, which typically trends higher given the timing of certain payroll-related items. For the full year, we continue to expect G&A to total between $97 million and $100 million. Tax expense on an AFFO basis totaled $12.8 million for the second quarter, which included $3.3 million of incremental expense associated with the tax audit in Europe. For the remainder of the year, we expect the quarterly run rate to be closer to $11 million. Turning briefly to guidance.

We've narrowed our full-year AFFO guidance range by $0.04 to between $5.32 and $5.38 per share, with the midpoint unchanged, which implies close to 3% year-over-year growth on real estate AFFO per share, despite the headwind from rising interest rates. Our guidance continues to assume investment volume totaling between $1.75 billion and $2.25 billion for the year. As I discussed earlier, dispositions totaling between $300 million and $400 million. Moving now to our capital markets activity and balance sheet positioning.

As discussed in our last earnings call, we closed on a new three-year, EUR 500 million unsecured term loan in April, concurrently executed an interest rate swap that fixed the interest rate at 4.3% through the end of 2024, with proceeds primarily used to pay down our revolving credit facility. We did not raise or settle any equity forwards during the second quarter, continue to have about $385 million of forward equity available to settle. Turning to our key leverage and liquidity metrics at the end of the second quarter. Debt to gross assets was 41.3%, net debt to EBITDA was 5.7 times, remaining well within our target leverage ranges of low to mid-forties on debt to gross assets and mid to high five times on net debt to EBITDA.

This does not reflect the pro forma impact of settling undrawn equity forwards, which would further reduce net debt to EBITDA to 5.4 times. We ended the second quarter about $530 million drawn on our $1.8 billion revolving credit facility, maintaining a strong liquidity position totaling approximately $1.9 billion. Through the combination of unused capacity on our credit facility, unsettled equity forwards, and anticipated disposition proceeds in the second half of the year, we're positioned to fund the remaining investment volume embedded in our 2023 guidance on a leverage neutral basis, without the need to raise additional capital this year. We can therefore be opportunistic when we access the capital markets.

As Jason discussed, we remain very comfortable with our near-term debt maturities, given our liquidity position, access to capital, and the flexibility provided by the significant internal capital sources available to us over the next few years. In closing, we're pleased with the strong progress we made in the first half of the year towards the investment volume embedded in our guidance and expect continued momentum in the second half, given the competitiveness of sale-leaseback and the investment spreads we're achieving. We also expect our same-store growth to continue to lead the Net lease peer group. Given the various forms of capital available to us, including from internal sources, we're confident in our ability to fund our investments and the other capital needs over the remainder of this year and into 2024. With that, I'll hand the call back to the operator for questions.

Operator (participant)

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed into question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing Star one. One moment please, while we pull for questions. Our first question today is coming from Greg McGinniss from Scotiabank. Your line is now live.

Elmer Chang (Equity Research Associate)

Hi, thank you. This is Elmer Chang, on with Greg. Thanks for the time. You've historically acquired assets in the $10 million-$20 million range. With sale-leasebacks increasingly becoming more attractive, financing solution for operators in the last few quarters due to increased cost of capital and lack of capital availability, how has competition in the sale-leaseback market trended perhaps quarter to date? I think you touched upon in, in your, in your remarks a little bit. How does that compare across North American geographies? Also, what have conversations been like with existing versus new clients, given you acquired year-to-date with mostly, mostly new clients?

Jason Fox (CEO)

Yeah, sure. So good questions in there. In, in terms of how has the sale-leaseback market changed this year, I mean, it's, it's been pretty stable for the year. This is especially in the US. I think, when we think about larger transactions that you mentioned, that, you know, we've seen larger transactions, I would say, this year and, and maybe beginning at the end of last year, a little more so historically. I think historically, we've probably still targeted deal sizes that are in the, you know, $50 million range, ±. I think we're probably a little bit above that year to date, even excluding the APOTEX deal, maybe around $75 million. Look, I, I think the themes are still the same. The competition has thinned out for us.

I think that, you know, many of the private equity real estate, peers that we've competed with previously, they rely on mortgage financing, and that's become, you know, more expensive and less available. Certainly the themes that are driving sale-leasebacks, which is the, you know, especially in the sub-investment grade space, private equity sponsors, it's the cost of alternative sources of capital. High-yield bonds or leverage loans are still, you know, much more expensive than where we're targeting our pricing on sale-leasebacks. That's across North America. I mean, as you, you, you brought up North America. I mean, we've always really kind of thought of this as, as one market.

You know, pretty much all the deals that we do in North America are dollar denominated, and I think are maybe more driven by, you know, what's happening in the US market. I think there's some consistency there. And it's still, you know, quite constructive and, and maybe about as strong as we've seen, you know, the sale-leaseback market in, in a long time. I don't know if I missed any other questions in there.

Elmer Chang (Equity Research Associate)

Got it. No, that, that was very helpful. Thanks, thanks for the color there. Maybe just switching gears to to office since you, you sold a bunch of properties in Q1, but didn't sell any assets this quarter, and haven't really acquired office for some time. Can you just remind us on your general views of that portfolio and how you think about maybe expirations that are coming due soon? I know WALTs on the portfolio are a little bit less than portfolio average. Yeah, just any comments there would be helpful.

Jason Fox (CEO)

Yeah, I mean, I think broadly, you know, as you mentioned, we have not been buying any office anytime recently, probably over the past five years. Our office exposure has come down significantly, from over 30%, five years ago, to where it is now, about 16%. Excuse me. That decline has, you know, occurred because we have not acquiring any. We have, you know, over that period, kind of sold more office, as a percentage of our total sales. Really, we've been over-allocating, you know, new capital into industrial warehouse and, and maybe retail to a lesser extent. The strategy around office, you know, I would say is consistent there.

I think ultimately, you know, we do expect to move our exposure to zero, but, you know, there's really no, you know, kind of specific timeframe we're looking at that. I don't know, Brooks, if there's anything to add on specific expirations that you want to, you know, include there.

Elmer Chang (Equity Research Associate)

No, nothing specific. I mean, it's, it's pretty well staggered, and really pretty skewed late in the decade and beyond. You know, it's, it's any given year, but we don't have kind of a constant lease roll or any major bumps there. It's manageable, and we're quite focused on those office expirations for sure. Fair enough. Thank you. Thanks for the time.

Operator (participant)

Thank you. Next question today is coming from Joshua Dennerlein from Bank of America. Your line is now live.

Joshua Dennerlein (Equity Research Analyst)

Yeah. Thanks, guys. Appreciate the time. Just, I know there was some color on the opening remarks, but just maybe if we can get into a little bit more detail on how we should expect rent bumps to kind of evolve over the, just how inflation's been trending. Just kind of thinking about the lags. I think we've talked about in the past, but it'd be great to get a refresher.

Jason Fox (CEO)

Yeah. Toni, do you want to touch on that?

Toni Sanzone (CFO)

Sure. Yep, I got that. just, you know, in terms of what we've seen to date, I think we reported 4.3% contractual same store in the first 2 quarters of this year. That's our peak level. We do see that lag continuing to play out, and we'll sort of stay in the 4% range, over the back half of this year, with that declining into kind of the 3% average for all of 2024. Still seeing some, you know, again, higher than typical growth resulting from the CPI playing through, and also from just being able to get higher fixed rent increases in the, you know, in the more recent deals that we're doing. That's sort of helping sustain that on a longer-term basis.

You know, 4% towards the back half of this year, 3% into next year, and, you know, again, maybe some upward movement from what we've seen historical levels beyond that.

Jason Fox (CEO)

Yeah, and, and Josh, that assumes current forecasts. Clearly, if, if things change, if, if you know, we just had some rosy GDP numbers come out the other day. You know, to the extent inflation, y- you know, reverses course a little bit higher again, then, you know, those numbers could, could change as well. Regardless, I think still very attractive same store, y- you know, relative to the peer set in net lease.

Joshua Dennerlein (Equity Research Analyst)

Okay. appreciate that. Then maybe just a, a follow-up on the office exposure. Do you guys have any, like, sublease activity in your portfolio, or is it all just pretty much the, the direct tenants? Brooks?

Brooks Gordon (Head of Asset Management)

It, it's a mixed bag. It's primarily the direct tenants, we don't property manage those specifically. The, you know, the master tenant is really our relationship. You know, there's some subleasing here and there, that's pretty normal course. That's, that's kind of always been the case. That's not particularly new, something we, we certainly are watching.

Joshua Dennerlein (Equity Research Analyst)

Okay. By watching, has it increased, or is that why you're watching it, or, or just kind of a standard course of business?

Brooks Gordon (Head of Asset Management)

Certainly, always just trying to monitor what our tenants are, are up to. I haven't seen a really material increase in sublease activity. You know, as with all companies, utilization is a mixed bag by company. And that in and of itself is a bit of a moving target, and we've seen some positive trends there. You know, subleasing is certainly a part of owning any single-tenant asset, and is part of our office portfolio.

Joshua Dennerlein (Equity Research Analyst)

Got it. Thanks, guys.

Brooks Gordon (Head of Asset Management)

You're welcome.

Toni Sanzone (CFO)

Thank you. Next question today is coming from Spenser Allaway from Green Street Advisors. Your line is now live.

Spenser Allaway (Senior Analyst)

Yeah, thank you. You provided a lot of color just on, you know, the U.S. landscape being more favorable right now. I'm just curious, has anything started to change thus far in 3Q as it relates to the landscape in Europe? If not, like, what do you think kind of needs to change in order for you guys to see more interesting or, like, opportunistic activity abroad?

Jason Fox (CEO)

Yeah, I mean, we're starting to see changes over there. When you think about Europe, the magnitude of the rate increases were more significant there. Sellers are really still adjusting to that sharp rate increase. We are seeing a pickup in opportunities. I think there is still bid-ask spreads that are maybe wider than we think they should be in order to get transactions done. I think the activity is increasing, and that's. That's kind of how it felt like in, in the US, maybe going into Q4 last year, where there was more sellers engaged, even though we weren't quite finding a meeting of the minds on pricing. That process has started in Europe.

I think sellers, especially those with, you know, use of proceeds in mind, and these are going to be sale-leasebacks, you know, at some point become price takers because their alternative sources of capital are, you know, maybe not as attractive as a sale-leaseback. I think it gives us some optimism that second half of the year, you know, there could be some, you know, some more meaningful activity in Europe.

Spenser Allaway (Senior Analyst)

Okay. I'm sure there's a range. Are you able to quantify kind of like the bid-ask spread that you guys are still seeing in Europe?

Jason Fox (CEO)

Yeah. I mean, it is a range. I would say it's, you know, call it 25-50 basis points. I mean, we're never, you know, perfect to the basis point on how we price deals, but, you know, it just seems like there's a... and not a lot of transactions are happening, so we don't have a full sense for where sellers are. What we do know is that, you know, there's not a, you know, there's not an acceptance of where we're bidding on things. It feels like it's tightened, and it's maybe in that range.

Spenser Allaway (Senior Analyst)

Okay, thanks. Last one. Just in order to hit the high end of your acquisition guidance, I'm just curious, would you need to see more opportunities out of Europe, or, like, do you think you could hit the high end, you know, given what you're seeing in the US? I just know you've been a little bit more selective as it comes, to, like, the US retail industries. I know you've been targeting more of the industrial. Just curious, if you'd be able to hit the high end without much of Europe.

Jason Fox (CEO)

Yeah. I mean, look, Europe would certainly be helpful. We have seen larger deals, as I mentioned a few minutes ago. You know, in the U.S., I think to the extent we can see larger deals or more of them, like APOTEX, that obviously is gonna have a, you know, a big impact on where we, we finish within the guidance range. It's possible, but it's more helpful with Europe in play. You know, clearly, we don't have visibility into Q4 transactions at this point. It does tend to be, you know, one of our most, if not, our most active quarter in most years. I think that gives us maybe reason to be optimistic, but, you know, a lot of volatility out there, and it's hard to predict.

I, I, I think the range is appropriate at this point.

Spenser Allaway (Senior Analyst)

Thank you for the color.

Jason Fox (CEO)

Yep, you're welcome.

Toni Sanzone (CFO)

Thank you. Our next question today is coming from John Kim from BMO Capital Markets. Your line is now live.

Brooks Gordon (Head of Asset Management)

Thank you. I guess the first question is on guidance. If you look at what you have for the year at the midpoint, it suggests a $1.34 run rate on AFFO, which is essentially flat from what you had in the first half of the year. Just given the investment activity you've had and the yields you've been able to achieve, as well as the pipeline, I'm just surprised it hasn't gone up and just wondering your thoughts on that.

Jason Fox (CEO)

Tony, you want to talk about that?

Toni Sanzone (CFO)

Sure. Yeah. I think if you... There's a few things happening that I think are worth kind of recapping, and some of those I mentioned in my remarks. If you look at kind of the second quarter, where we came out versus the rest of the year, the material drivers in bringing the second quarter higher that we don't expect would recur in the back half of the year are the property tax accrual reversal that I mentioned, around $6 million. We have some additional rent recoveries this quarter as well, bringing up our comprehensive same store.

If you offset that by the, the income tax expense, the incremental expense I mentioned of about $3 million, you kind of have to normalize that out of the run rate for the back half of the year, and then really taking into account just higher interest expense, as well as the back half weighting of our dispositions. Those are really the material movers that get you to the midpoint of our guidance range.

John Kim (Analyst)

On the subject of the comprehensive same store, you mentioned that it's 100 basis points below contractual long term, and contractual next year will be about 3%. I always thought that this difference between comprehensive and contractual was more of a lag or timing issue rather than a complete permanent drag. Can you just elaborate on why it's going to be consistently lower than contractual?

Toni Sanzone (CFO)

Sure. Yeah, I think there's, you know, a handful of items that run through comprehensive. Remember, that's kind of what runs through AFFO, as opposed to our contractual same store, which is an ABR or point in time. Some of that is timing, as you referenced, but vacancy certainly play a role in, in that delta. I think you've really made up probably the majority of the delta between contractual and comprehensive kind of in, in recent history, as well as, you know, It goes both ways. Additional rent recoveries or disruption in rent collection sort of make up the bulk of that difference. I would say vacancy is probably the material delta there.

John Kim (Analyst)

Okay. Jason, I just wanted to understand your, your commentary on the storage operating portfolio. You did buy a small operating portfolio this quarter. I was wondering if you talked about it as a potential use of funds. I know you said that in the past. Sorry, a potential source of funds. You said that in the past. Are you more inclined to sell the operating portfolio today than you were in the past few quarters?

Jason Fox (CEO)

Yeah, look, I think we've always looked at all the options that we have, and we've talked about those. Certainly, you know, selling them is one option, and, you know, and we don't have to do all one option. We could, we could sell some, we can convert some, and, and maybe there's reason to continue to hold some as operating assets for, you know, future sales or conversions. You know, we are taking a closer look at it right now. I think that we're certainly mindful, you know, in the current environment, it's good to be liquid. I think storage is one of the more liquid asset classes out there, and so we want to be prepared if that's a, a good way to fund deals, you know, better than maybe raising equity or, or other forms that, that's on the table.

You know, we, we're looking at it. I think it's too early to share anything specific. We may not sell anything at all, but I think it's probably a little bit more, something that we're evaluating, you know, closer at this point than, than, you know, a quarter or two back.

John Kim (Analyst)

Okay, great. Thank you.

Jason Fox (CEO)

Yep, welcome.

Operator (participant)

Thank you. Our next question today is coming from Brad Heffern from RBC Capital Markets. Your line is now live.

Brad Heffern (Analyst)

Hey, good morning, everyone. There were some decent-sized moves in the portfolio stats this quarter that I thought were a little difficult to explain, just given there were basically no dispositions. I'm thinking of office ex-exposure down 110 basis points. IG exposure is down 170, and then CPI exposure is down 310. Can you maybe it's all the same thing, but can you talk through what's driving those moves?

Jason Fox (CEO)

Yeah, I mean, I think high level, you know, the allocation to industrial is going to dilute down those other categories and, and industrial, non-investment grade. Brooks, I don't know if you have any other color you want to, want to mention there. I think we did have a, a vacancy as well.

Brooks Gordon (Head of Asset Management)

Yeah, I mean, the biggest driver of pretty much all of those is acquiring all non-office, all of which was sub-investment grade. It's really the denominator effect. We have 1 office, non-renewal. We're working on a sale for that asset, so that's contributing to it as well. The biggest piece of that is, is really denominator effects, primarily the APOTEX investment we've discussed.

Brad Heffern (Analyst)

Okay, got it. Then can you give the collections percentage for the second quarter and also just walk through the, the watchlist and any changes there?

Jason Fox (CEO)

Toni, do you have, do you have collections?

Toni Sanzone (CFO)

Yeah, I think on collections, we continue to track around, at above 99%. You know, with the take into account recoveries from prior quarters, we're probably closer to 100% this quarter.

Jason Fox (CEO)

And then-

Brooks Gordon (Head of Asset Management)

Then on the, on the watchlist.

Jason Fox (CEO)

Watchlist.

Brooks Gordon (Head of Asset Management)

Yeah, on the watchlist front, very stable. Watchlist is around 2% of ABR. Again, for context, the kind of COVID era, era peak was around 4%. It's actually down slightly from the prior quarter. We had 1 tenant, which we upgraded. They were able to restructure their balance sheet at no impact on our lease, so good outcome there. The watchlist is very much stable from quarter over quarter other than that 1.

Brad Heffern (Analyst)

Okay, thank you.

Operator (participant)

Thank you. Next question is coming from Anthony Paolone from J.P. Morgan. Your line is now live.

Anthony Paolone (Analyst)

Great, thank you. I guess first one, just on second quarter deal activity, can you give us a number for the cap rate on that? I think we had, like, Apotex, but just how did it all shake out?

Jason Fox (CEO)

Yeah, I mean, our. The year-to-date cap rate is 7.3%. I think for the quarter, we're probably in and around that, that number, maybe slightly below that. A lot of that's driven by the size of the APOTEX deal. We're still kind of range bound in the, you know, we're targeting deals in the 7s, and I think that's where we're coming out.

Anthony Paolone (Analyst)

Okay, got it. Then just as you start to look ahead, I know we take out U-Haul from the expirations in 2024, but just any known move-outs in the remaining 3.5 points of revenue next year that we should be thinking about?

Jason Fox (CEO)

Brooks, you want to take that?

Brooks Gordon (Head of Asset Management)

Sure. You know, as, as you mentioned, lease expirations coming up are, are pretty light. Through 2025, it's about 12%. Then when you back off U-Haul, it's maybe 9%. Really not a whole lot remaining to go this year. We do have one warehouse property in the Chicago area, high-quality building, where the tenant is relocating, so we'll, we'll seek to re-lease that. In 2024, we have about 6% of ABR. Again, a lot of that is U-Haul. Most of the balance is warehouse and industrial. Not a whole lot notable there. I mentioned we had one, you know, recent move out, which we're, which we're working through on a sale right now.

Anthony Paolone (Analyst)

Okay. Then on the, I guess, warehouse and industrial component of the portfolio, I mean, that's where the bulk of your leasing was in 2Q, and is pretty, pretty flattish renewal spreads. Like, is there a, a mark to market that's positive across the portfolio overall, or is that representative? I mean, how would you characterize that?

Brooks Gordon (Head of Asset Management)

Well, the bulk of what happened in this quarter was actually the, the ABC transaction that, that Jason mentioned. We were able to extend our existing portfolio back out to a fresh 20-year term. That's really the bulk of the action in the industrial segment there. One tiny little warehouse property, so really not indicative. Broadly speaking, I think in our warehouse properties, there is a mark-to-market opportunity. We don't have a constant lease roll. We have long WALTs, that's not as big a driver for us. Really, the organic growth is, is a bigger driver. But again, the industrial tents exhibit very, very high criticality. Really good renewal probabilities there. It's a blend, but I wouldn't really extract anything from a specific quarter per se. ABC was really the big story in industrial.

Anthony Paolone (Analyst)

Okay. Got it. Thank you.

Operator (participant)

Thank you. As a reminder, that's star one to be placed in the question queue. Our next question is coming from Eric Wolfe from Citi. Your line is now live.

Eric Wolfe (Analyst)

Hey, good morning, thanks. Just to follow up on the, on the self-storage question. I think you said in your remarks that the portfolio is around $1.5 billion of value. Just curious, sort of what cap rate you're using for that assumption. If you were to market, the, you know, the portfolio, do you think you get better pricing as a portfolio or just sort of breaking it up into individual properties or, or regions?

Jason Fox (CEO)

Yeah, I mentioned that it was, you know, approaching $1.5 billion, so it's probably not $1.5 billion, but it's probably somewhere, you know, between $1 billion and $1.5 billion, maybe closer to the, to the top end of that range. I think it depends on, you know, obviously, the, the specific components and, and how we consider, you know, selling it. I, I think if we were to sell, I think there are lots of options. I mean, we've seen some big trades obviously out there for portfolios. I think we can do sub-portfolios that would be, you know, meaningfully smaller. Probably wouldn't make a lot of sense to do, you know, one-offs, so it's probably something in between.

You know, again, if, if that's something that we consider to pursue, it's still a little early to, to really give, you know, many specifics on what we may do with the portfolio.

Eric Wolfe (Analyst)

Understood. If I wanted to back into valuation, I mean, could I just basically take the numbers that you, you put in terms of pro rata rental income in there? I mean, is that, is that representative of the sort of income stream that would be getting capped, or because you have some of these sort of, like, triple net lease and other things, there'd be adjustments that need to be made?

Jason Fox (CEO)

Yeah, I mean, look, I, I think that we would expect it to, to price somewhere in the 5s on a cap rate basis. Tony, I don't know if our numbers are clean yet because we, you know, it's not a full year, and there certainly is some seasonality to storage, but I don't know if you have a comment on, on the numbers that we disclose.

Brooks Gordon (Head of Asset Management)

Yeah, I think as, if you look at the NOI run rate and kind of what was given in relation to guidance and our update there, we're probably in and around the $70 million range for self-storage NOI on a full year basis, based on this year.

Eric Wolfe (Analyst)

Got it. That's helpful. On Lineage, you mentioned that, you know, be a good source of funds when they IPO. I guess, is there sort of a private market there? Are there other ways that you could sort of monetize it if you, if you wanted to, or do you just think, you know, waiting for them to go through the IPO process is probably the best way to maximize the amount of proceeds that you get?

Jason Fox (CEO)

Yeah, look, there probably is a private process that we could undertake if, if that was, you know, something that we really needed to do. We, we don't need to do it. We're in a very good position from a capital standpoint. We do like to point it out that it's out there. It's a source of really cheap capital. It's not paying a dividend right now. When we do have the chance to liquidate it, and we'll probably want to do it in the most efficient way, which would be, you know, part of, you know, an IPO of that company, I think that's what we would do. Not a lot of visibility on timing.

I would imagine it's over the next couple of years, you know, if not sooner, but it's, it's something that we, you know, do want to point out, given how cheap that capital is.

Eric Wolfe (Analyst)

Got it. All right, well, thank you.

Jason Fox (CEO)

You're welcome.

Operator (participant)

Thank you. Next question is coming from James Kammert from Evercore. Your line is now live.

James Kammert (Managing Director and Analyst)

Good morning. Thank you. Toni, hate to do this to you, but your, your comments were very constructive on the, organic growth on the same property, ABR. Could you tell us what would it look like just on a purely contractual basis for the portfolio, or ballpark that? You take CPI out, et cetera. What would that be for the portfolio?

Brooks Gordon (Head of Asset Management)

Sorry, if you take CPI out?

James Kammert (Managing Director and Analyst)

Yeah, I'm saying... I'm sorry. Say you have uncapped CPI rent adjustments, so presume some of those leases have a minimum growth rate if inflation were less than the fixed bump, for example, or, you know, I'm trying to triangulate. What would the portfolio growth look like, you know, say, in, like, a 2% inflationary market? What, what's really the contractual growth?

Brooks Gordon (Head of Asset Management)

Yeah, I think our historical same store growth has kind of been in the 1.5%-2% range before inflation started to pick up kind of, you know, and reach its peak. You know, as I said, the fixed increases are starting to increase as well, so that's, that's playing a part in that. You know, maybe that would bring it to the top end of that range, but I think that's all looking more historically as opposed to what we would see going forward. It's certainly dependent now on where inflation stabilizes, both in Europe and the US. You know, right now we're seeing that happen, or the, the projections are looking like in the, the low 2% range in the US and in the mid-2% range in Europe.

That's really how we're thinking about kind of the, the growth going forward.

James Kammert (Managing Director and Analyst)

Okay, that's helpful. Thank you.

Operator (participant)

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Peter for any further closing comments.

Anthony Paolone (Analyst)

Great. Thanks, Kevin. Thanks everybody for your interest in W. P. Carey. If anyone has additional questions, please call investor relations directly on 212-492-1110. That concludes today's call. You may now disconnect. Thank you.