W.P. Carey Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
July 30, 2025

Key Takeaways

  • Positive Sentiment: Raised full-year AFFO growth outlook to 4.5% at the midpoint after a strong first half, reflecting confidence in sustained momentum.
  • Positive Sentiment: Completed over $1 billion of new investments year-to-date at mid-7% cap rates with a $700 million pipeline, leading to an upward revision of investment guidance.
  • Positive Sentiment: Accretively sold 15 self-storage properties at sub-6% cap rates, targeting spreads over 100 basis points between dispositions and new investments to fund growth.
  • Positive Sentiment: Lowered the rent loss reserve by $5 million thanks to stable tenant credit and no tariff disruptions, underscoring portfolio resilience.
  • Positive Sentiment: Enhanced liquidity and balance sheet strength by issuing $400 million of five-year bonds at 4.65%, maintaining a 3.1% weighted average cost of debt and $1.7 billion in liquidity.
AI Generated. May Contain Errors.
Earnings Conference Call
W.P. Carey Q2 2025
00:00 / 00:00

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Operator

Hello, and welcome to W. P. Carey's Second Quarter twenty twenty five 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.

Operator

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
Head - IR at W. P. Carey

Good morning, everyone, and thank you for joining us for our twenty twenty five second quarter earnings call. Before we begin, I'd 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.

Peter Sands
Head - IR at W. P. Carey

An online replay of this conference call will be made available in the Investor Relations section of our website at wpcarry.com, where it will be archived for approximately one year and where you can also find copies of our investor presentation and other related material. And with that, I'll pass the call over to Jason Fox, Chief Executive Officer.

Jason Fox
CEO, President & Director at W. P. Carey

Thank you, Peter, and good morning, everyone. Our second quarter results highlight a very strong first half of the year, tracking ahead of our initial expectations on a variety of fronts. As a result, we're raising our outlook for full year AFFO growth to 4.5% at the midpoint of our revised guidance range. To date, we've closed over $1,000,000,000 of new investments at initial cap rates averaging in the mid-7s, primarily with fixed rent escalations approaching three percent. We've made excellent progress with asset sales, including the first batch of self storage operating properties, executed at attractive pricing and a significant spread to where we're reinvesting the proceeds.

Jason Fox
CEO, President & Director at W. P. Carey

While we haven't needed to access the capital markets this year to achieve our investment goals, earlier in July, we opportunistically issued bonds that enhanced our liquidity and further strengthened our balance sheet. While there's lingering uncertainty over the broader economy, to date, we've not experienced any unforeseen disruptions in our business, neither tenant credit events or tariffs. Accordingly, we're reducing our reserve for estimated potential rent loss. This morning, I'll review our progress over the first half of the year and our confidence in sustaining that momentum. Tony Sanzone, our CFO, will focus on our results and guidance raise as well as touch upon aspects of our portfolio and balance sheet.

Jason Fox
CEO, President & Director at W. P. Carey

Tony and I are joined by Brooks Gordon, our Head of Asset Management to take questions. Starting with investments. Supported by favorable market conditions, we maintained strong investment volume throughout the first half of the year, building on the increased level of activity we achieved in the 2024. Year to date, we've completed over $1,000,000,000 of investments, including the approximately $550,000,000 of deals we closed during the second quarter at an initial weighted average cap rate of 7.5% and a weighted average lease term of nineteen years. Factoring in rent escalations over those long lease terms, that translates to an average yield in the mid-nine percent range, which we believe is one of the highest average yields in the net lease sector and one that provides a very attractive spread to our cost of capital.

Jason Fox
CEO, President & Director at W. P. Carey

We've already closed about $230,000,000 of investments in the third quarter and our pipeline remains strong, dollars 700,000,000 of deals at advanced stages, some of which we expect to close in the next few weeks. So at just over the halfway point in the year, we've surpassed our initial expectations and are therefore raising our investment guidance, which Tony will review in detail. Looking ahead, we believe there's still potential to be towards the top end of the new range if the transaction environment remains favorable in the second half of the year, and we have a strong fourth quarter for deal closings, as is often the case. We've also continued to build out our pipeline of capital projects, which includes build to suits, expansions and redevelopments, areas of investment where we have always been relatively active. Currently, we have nearly $300,000,000 of projects underway and scheduled for completion over the next eighteen months or so, which add to our pipeline and help support future growth.

Jason Fox
CEO, President & Director at W. P. Carey

In terms of property type, virtually all of our second quarter investments were warehouse and industrial, which also represent the vast majority of our investments year to date as well as the bulk of our pipeline. The strength of our internal growth continues to be supported not only by inflation linked rent escalations, but also by our ability to structure leases with attractive fixed rent bumps, which have averaged 2.8% on our investments year to date. Geographically, our second quarter investments were concentrated in The U. S, where we continued to identify and evaluate many compelling opportunities, especially in Industrial. Investment spreads have generally remained wider in Europe, which represents the bulk of the deal volume we've completed so far in the third quarter as well as a significant portion of our near term pipeline.

Jason Fox
CEO, President & Director at W. P. Carey

But our expectation is to continue to see and close attractively priced and structured deals in both regions over the remainder of the year. Turning to our sources of capital. In parallel with our first half investments, we've also made good progress with our funding strategy, which we outlined at the start of the year and is centered on accretive sales of non core assets. We recently sold an initial tranche of 15 self storage operating properties for $175,000,000 executed at a sub-six percent cap rate. 10 properties closed during the second quarter for $112,000,000 with the remaining sales completed in July.

Jason Fox
CEO, President & Director at W. P. Carey

Currently, we have two additional storage portfolios totaling 17 properties under contract with closings expected in August, keeping us on track with our initial projections for storage sales this year and ahead of our original expectations on disposition cap rates. We remain confident that this year will achieve well over 100 basis points of spread between our overall asset sales and our new investments, with the potential to be closer to 150 basis points by the end of the year. In line with higher anticipated investment volume, we're also raising our expectations for full year dispositions, which could include additional tranches of storage assets. Even if investment volume exceeds the upper end of our guidance range, we're confident we can fund it with dispositions that generate strong accretion and AFFO growth. While we believe we're generating attractive spreads to our spot cost of capital, which we're keeping in mind when we evaluate new deals, the spreads we're generating are particularly attractive when we factor in the average yields over the life of the leases and when considering our actual source of funding, which is non core dispositions at tight cap rates.

Jason Fox
CEO, President & Director at W. P. Carey

Turning now to our portfolio. Amid an environment of broader economic uncertainty, we started the year with an appropriately conservative view on the potential for credit events within our portfolio. Seven months into the year, we're lowering our estimate of potential rent loss by $5,000,000 Part of what's left in our rent reserve reflects ongoing caution towards Heldig, which remains current on rent, but is still navigating its turnaround plan. We've made good progress with our strategy of re tenanting and selling Helvet stores, further reducing our exposure and keeping us on track to move it out of our top 10 tenants this year and out of our top 25 next year. While there has been some recent progress on U.

Jason Fox
CEO, President & Director at W. P. Carey

S. Trade policy, especially with Europe, many issues remain unresolved. We continue to see no direct impacts in our portfolio, however, and we're confident that our rent reserve can cover any potential impacts over the second half of the year. That said, we'll continue to monitor for further developments. With that, I'll pause and hand the call over to Toni to discuss our results and guidance.

Toni Sanzone
MD & CEO at W. P. Carey

Thanks, Jason. Starting with earnings, AFFO per share was $1.28 for the second quarter, which represents an $0.11 or 9.4% increase compared to the second quarter of last year, driven by accretive investment activity along with our sector leading rent growth. As compared to the first quarter, the increase in AFFO per share was also primarily the result of net investment activity and rent escalations as well as certain timing impacts such as higher expenses in the first quarter and higher other lease related income in the second quarter. Given our strong first half results and visibility into the second half of the year, we have raised our full year AFFO guidance range to between $4.87 and $4.95 per share, which implies 4.5% year over year growth at the midpoint. As outlined in our earnings release, our revised outlook is based on higher expected investment volume of $1,400,000,000 to $1,800,000,000 mostly funded by higher expected dispositions of $900,000,000 to $1,300,000,000 As Jason discussed, we continue to expect to fund our investments accretively with proceeds from dispositions of operating and noncore assets generating spreads averaging well over 100 basis points.

Toni Sanzone
MD & CEO at W. P. Carey

Contractual same store rent growth for the second quarter was 2.3% year over year, comprised of CPI linked rent escalations averaging 2.6% for the quarter, while fixed rent increases averaged 2.1%. For the full year, we expect contractual same store rent growth to average in the mid-two percent range, which is also in line with our longer term expectations, assuming inflation remains around current levels. Comprehensive same store rent growth for the quarter was 4% year over year, reflecting the impacts of rent collections, including the recovery of some past due rent this quarter, as well as leasing activity and vacancies. Historically, our comprehensive same store growth has typically tracked around 100 basis points below contractual. However, based on our current estimates, we expect it to track in line to slightly higher than contractual for the full year.

Toni Sanzone
MD & CEO at W. P. Carey

Our portfolio continues to perform well with no significant new tenant credit events during the quarter. Therefore, we've lowered the potential rent loss assumption embedded in our AFFO guidance to between $10,000,000 and $15,000,000 down from our previous estimate of $15,000,000 to $20,000,000 Within that range, we currently have visibility into identified rent loss of about 4,000,000 to $5,000,000 or onethree at the current midpoint, which includes downtime on the Helwig stores we're taking back. We continue to believe the balance of our rent loss assumption should conservatively cover any incremental tenant issues over the back half of the year. Other lease related income totaled $9,600,000 for the second quarter, bringing the total for the first half to $12,800,000 While the timing of these payments can vary from quarter to quarter, we continue to expect other lease related income to total between 20,000,000 and $25,000,000 for the full year, which is unchanged from our prior estimate. Turning briefly to our operating properties.

Toni Sanzone
MD & CEO at W. P. Carey

Taking into account the self storage properties we sold during the second quarter plus those already sold or expected to be sold in the third quarter, we estimate that our operating property NOI for 2025 will fall between 55,000,000 and $60,000,000 including the four hotel and two student housing properties in our portfolio. Given the possibility of additional operating asset sales this year, we'll continue to update that estimate as needed. Moving to expenses and nonoperating income. At the halfway point of the year, we've refined our guidance assumptions for expenses, slightly lowering our expectations for G and A expense, which we anticipate will fall between 99,000,000 and $102,000,000 for the full year. As mentioned on our last call, G and A tends to run higher in the first quarter due to timing, with the second quarter reflecting more of a run rate for the remainder of the year.

Toni Sanzone
MD & CEO at W. P. Carey

Non reimbursed property expenses are expected to total between 50,000,000 and $54,000,000 for the full year, with the remaining quarters anticipated to be in line with the second quarter. Tax expense on an AFFO basis, which primarily reflects foreign taxes on our European assets, is now expected to fall between 42,000,000 and $46,000,000 for the full year. Our expectations for both non reimbursed property expenses and income tax expense have marginally increased due in part to the stronger euro. Non operating income is expected to total around $20,000,000 for the full year, primarily comprised of the quarterly dividend we receive on our equity stake in Lineage, which totaled $2,800,000 for the quarter and is assumed to remain at that level for the remainder of the year. Foreign currency hedging gains are expected to be negligible for the remainder of the year, given the strengthening of the euro relative to the U.

Toni Sanzone
MD & CEO at W. P. Carey

S. Dollar. As a reminder, despite lower realized FX hedging gains and marginally higher expenses, a stronger euro positively impacts our European cash flows and therefore AFFO, with the benefit primarily flowing through as higher lease revenue. Moving now to our balance sheet. We continue to proactively manage our balance sheet, leaving us well positioned with ample liquidity and very manageable near term debt maturities.

Toni Sanzone
MD & CEO at W. P. Carey

Earlier in July, we opportunistically issued $400,000,000 of five year U. S. Bonds, achieving excellent execution, pricing at a coupon rate of 4.65%. Our overall weighted average cost of debt remains low at 3.1% and is expected to stay around that level for the remainder of the year. We ended the second quarter with liquidity totaling about $1,700,000,000 comprised primarily of the availability on our credit facility.

Toni Sanzone
MD & CEO at W. P. Carey

At quarter end, we were about $660,000,000 drawn on our revolver. And early in July, we used the proceeds from our bond offering to partially pay that down, giving us additional flexibility as we execute on new investments over the remainder of the year. We have less than $50,000,000 of mortgage debt maturing over the remainder of 2025, and our next bond maturity is not until April 2026, leaving us a substantial amount of flexibility in how and when we access the capital markets. We ended the quarter with our key leverage metrics within our target ranges, with debt to gross assets at 43.2 and net debt to adjusted EBITDA at 5.8 times. We continue to expect both of these leverage metrics to remain within our target ranges.

Toni Sanzone
MD & CEO at W. P. Carey

Lastly, we continue to grow our dividend. During the second quarter, we declared a dividend of $0.90 per share or $3.6 annualized, representing a 3.4% increase over the prior year. Our dividend is well supported by our earnings growth with our year to date payout ratio at approximately 73% of AFFO per share. And with that, I'll hand the call back to Jason.

Jason Fox
CEO, President & Director at W. P. Carey

Thanks, Tony. As we pass the midpoint of the year, we're pleased with the momentum we've built across our business. Our investment activity and pipeline remains strong and we're on track with our funding strategy, achieving very good results on dispositions and reinvesting the proceeds at compelling spreads. Disciplined execution combined with stable tenant credit and no discernible tariff related impacts positions us very well for the second half of the year, and we continue to see a path to the high end of our revised guidance ranges for both investments and earnings. Our updated AFFO guidance reflects growth that's a meaningful step up from recent years.

Jason Fox
CEO, President & Director at W. P. Carey

Combined with a well covered dividend yield that's remained in the mid to high 5% range, we believe we're well on our way to delivering a double digit total shareholder return for 2025. Furthermore, we're confident that the foundation we've built this year positions us well to maintain that level of growth in the coming years and deliver long term value creation for our shareholders. That concludes our prepared remarks. I'll hand the call back to the operator for questions.

Operator

Thank you. At this time, we will take questions. Our first question comes from John Kim with BMO Capital Markets. Please state your question. Thank you.

John Kim
John Kim
MD - U.S. Real Estate at BMO Capital Markets

For the second straight quarter, your comprehensive income was pretty meaningfully above contractual. And, Tony, you reminded us that typically it's a 100 basis points below. So for the second half of the year, do you expect it to be back to that historical level, a 100 basis points below, or would it be lower just given the outperformance this year?

Toni Sanzone
MD & CEO at W. P. Carey

Thanks, John. Yeah. I would say if you look at it on a full year basis, we are expecting that to normalize a bit in the back half of the year, and there's a there's a couple of things behind that. First, if you think about how we've described our rent loss reserve, we've got about 12 and a half million dollars at the midpoint in the revised range, and that assumption right now, we haven't had any real disruption in the first half of the year. So our guidance assumption on comprehensive same store, I'll assume that the 12 and a half million is taken in the third and fourth quarters.

Toni Sanzone
MD & CEO at W. P. Carey

That could prove conservative, and we could outperform that. So that's something that we're we're monitoring as well. And then I would just note that maybe the first half of the year was also impacted by some of the tailwinds associated with some of the headwinds we had in the portfolio last year. So, you know, it's a little uneven in the first half to the second half, but there could be some upside relative to the full year estimate that I described, which would track probably just north of the contractual in the mid 2% range.

John Kim
John Kim
MD - U.S. Real Estate at BMO Capital Markets

Okay. And my second question is on your self storage operating portfolio. You provided a bit of an update on the income. But I was wondering, you've sold the first tranche. You transitioned some assets.

John Kim
John Kim
MD - U.S. Real Estate at BMO Capital Markets

Do you expect to transition more to the triple net lease structure? And then as far as the buyers of the first tranche, I mean, reportedly, it's not an operator of those assets. I'm wondering if a buyer can come in and and cancel the third party management contract.

Jason Fox
CEO, President & Director at W. P. Carey

Yeah. Sure. So in terms of the the first question, we have kind of lots of flexibility on what we do with the remaining portion of our operating self storage portfolio. You noted last year, we did take a sub portfolio and put under net lease with extra space, and that's always been the goal for some portion of the portfolio. We thought the timing was right.

Jason Fox
CEO, President & Director at W. P. Carey

And then this year, obviously, we're clearly selling a substantial portion of it, we think that's the best way to fund new investments. So kind of looking forward, what we do with the rest of the portfolio, well, that will depend on deal volume for the second half of the year and the next year, what our capital needs are, what our other funding options are. But, I would expect that we could lean into some more sales in the second half of the year, since execution has been strong. But I also think that we could convert some portion of it to net lease as well. And, you know, it's likely gonna be a combination of the two.

Jason Fox
CEO, President & Director at W. P. Carey

So either way, you know, I think that probably by this time next year, we're out of the operating, storage business, but but we have some options between what we do between now and then. And in terms of the the the the portfolio that we did sell, yeah, I I think the way those contracts work, the management agreements, they're typically cancelable upon thirty days notice. So there's not a lot of of, you know, hurdles you have to overcome when you're selling, assets to a different operator.

John Kim
John Kim
MD - U.S. Real Estate at BMO Capital Markets

That's great. Thank you.

Jason Fox
CEO, President & Director at W. P. Carey

Yep. Welcome.

Operator

Your next question comes from Greg McGinnis with Scotiabank. Please state your question.

Greg Mcginniss
Director at Scotiobank

Hey, good morning. Tony, I'm just trying to better understand on the AFFO guidance. It seems to imply back half quarter results falling from where we were in q two. Now aside from the lower lease termination income and, I guess, a potential how we credit event, are there any other headwinds that are being anticipated?

Jason Fox
CEO, President & Director at W. P. Carey

I'm not sure what the issue is, but on the back of the laptop, you can take a paper clip and reset the power. There's, like, a little pin. Was not on excuse me. Something's not the now. Show you. Yeah.

Jason Fox
CEO, President & Director at W. P. Carey

Mute. Are you able to mute that person? I'm not sure if that's

Greg Mcginniss
Director at Scotiobank

Yep. Sorry. I see it. See it soon. See it.

Jason Fox
CEO, President & Director at W. P. Carey

Okay.

Toni Sanzone
MD & CEO at W. P. Carey

Yeah. So, Greg, I'll just maybe highlight you you were there, really, the two points that I think are worth thinking about as we get into the second half. So when you look at the second quarter relative to the outlook for the remainder of the year, the other lease related income is the probably the biggest driver in terms of second quarter being elevated. You know, maybe worth noting, we didn't update our full year guidance on that. This is really just more of a timing, and it is you know, these types of payments don't lend themselves really to a run rate from one quarter to the next.

Toni Sanzone
MD & CEO at W. P. Carey

But if you really take the balance of our full year guidance over the back half of the year, that would normalize out about 3¢ in each of the third and fourth quarters. And then on the rent reserve side, as I mentioned on the comprehensive income question, you know, the 12 and a half million reserve is assumed all be taken in the third and fourth quarter. So you got another roughly 3¢ in each of those quarters as well. So, you know, I think those are really the anomalies from there. We do expect to grow our AFFO.

Toni Sanzone
MD & CEO at W. P. Carey

There's certainly a path where we could see outperformance relative to the not needing the full rent contingency that we've discussed. And, you know, again, as we continue to see the pipeline investments grow, that growth is gonna continue to play through the third and fourth quarters as well.

Greg Mcginniss
Director at Scotiobank

Okay. Thank you. That's really helpful. Jason, I was hoping you could touch on, you know, some of the acquisitions that you guys do are not necessarily brand names that we're all familiar with. In terms of the the credit of the the tenants that you're doing sale leasebacks with or financing expansions for, whatever it happens to be, you know, how are you getting comfortable with those transactions and the credit quality considering some of the the troubles that have happened over the last year with certain tenants?

Jason Fox
CEO, President & Director at W. P. Carey

Yeah. Sure. I mean, we we've always targeted sub investment grade tenants. We think that's the sweet spot in at least investing, and we typically focus on large companies with operationally critical real estate. So, you know, nothing new there.

Jason Fox
CEO, President & Director at W. P. Carey

You know, really, our our approach hasn't changed a lot. We'd be focused on value, the criticality, kind of credit underwriting. It's something that we've we're good at. We've done that for a long time. We think we can underwrite and structure around risk really well, and and and that's part of the model.

Jason Fox
CEO, President & Director at W. P. Carey

So it's it's really a range of credits. I mean but I think one of the themes that we've talked about before, while it's just below investment grade, I think the large companies do make a big difference.

Greg Mcginniss
Director at Scotiobank

And is there is there something happening now that's bringing more of these companies to market, or are you just doing more deals, now that you have the capacity to do so?

Jason Fox
CEO, President & Director at W. P. Carey

Yeah. I mean, look, the market, you know, feels quite strong and constructive right now. There are lots of opportunities. I think some of this is driven by, what feels like a relatively stable interest rate environment. It's probably been the case now for several quarters, which is always a key ingredient in kind of the increase in transaction activity.

Jason Fox
CEO, President & Director at W. P. Carey

So that's despite changing expectations throughout the year around tariffs. If you look at treasury yields, they've been mostly range bound in the low to mid fours for most of this year, even dating back to the fourth quarter of last year. That creates stability. Think you see transaction activity increase, bid ask spreads have come in, and we're taking advantage of that. I think we've had a really strong first half of the year.

Jason Fox
CEO, President & Director at W. P. Carey

We're tracking ahead of our initial expectations a good healthy pipeline. So I think some of it's market driven, but a lot of it is who we are as a company. We've doing this for a long time. We have a lot of relationships, In an environment where maybe there's stability, but there's still this overlaying uncertainty, I think execution really comes into play, and we're going to fare quite well for competing on deals. Execution is a strength of ours.

Jason Fox
CEO, President & Director at W. P. Carey

I think it's really a combination of all of those things, but generally, it's a good environment right now for us.

Greg Mcginniss
Director at Scotiobank

Great. Thank you.

Operator

And your next question comes from John Kieliczewski with Wells Fargo. Please state your question.

John Kilichowski
John Kilichowski
VP - Equity Research at Wells Fargo

Good morning. Thank you. In your initial remarks, you touched on it, but, you know, we've we've had a a lot in news flow recently around our conversations between The US and the EU on on trade discussions and tariffs. I know in our last quarter's earnings, you know, you mentioned that there really hasn't been an impact to your numbers. It sounded like a more of the same here.

John Kilichowski
John Kilichowski
VP - Equity Research at Wells Fargo

I I'm curious if you've spoken to your operators and if they've started to give any sort of opinion on what they're hearing out of the government and if they they think it'll affect the you know, their business at all or if maybe there's some tailwinds that we're not considering.

Jason Fox
CEO, President & Director at W. P. Carey

Yeah. I mean, look. I think uncertainty is still an underlying theme. But to date, yeah, we don't think there's been much of an impact that it flowed through to the economy, think, generally. Mean, have been a big part of the news, but they really haven't been implemented.

Jason Fox
CEO, President & Director at W. P. Carey

Certainly with the way companies have been trying to get ahead on inventories, it hasn't really flowed through the economy at this point in time. And that's similar with our portfolio. We we haven't seen impacts. We haven't seen a a lot of, new commentary from our tenants, and it really hasn't impacted investment activity as well. And I think there's probably reasons to think that given the more moderate nature kind of the tariffs that are being discussed right now, why there wouldn't be big impacts, at least on us and our tenants' abilities to pay rent going forward.

Jason Fox
CEO, President & Director at W. P. Carey

But certainly it's something that we keep monitoring, and we'll see where everything lands.

John Kilichowski
John Kilichowski
VP - Equity Research at Wells Fargo

Got it. And then maybe on the opportunity set, it sounded like you highlighted in the opening remarks that Europe was providing better spreads. I'm curious just what's the primary drivers of that?

Jason Fox
CEO, President & Director at W. P. Carey

In terms of better spreads, well, mean, the biggest driver is the cost to borrow in Europe. We can borrow probably 125 to 150 basis points inside of where we could issue US bonds, yet cap rates are in the similar zip code, maybe a little bit tighter depending on the country. And in Europe, the cap rates kind of range fairly widely given the different markets. But that's the biggest driver is our ability to borrow cheaper in euros than we can in US dollars. And we've talked about this before, but we think that is something that is sometimes overlooked or at least underappreciated in our model, that we do have access to very cheap capital in Europe.

John Kilichowski
John Kilichowski
VP - Equity Research at Wells Fargo

Got it. Thank you.

Jason Fox
CEO, President & Director at W. P. Carey

Welcome.

Operator

Your next question comes from Michael Goldsmith with UBS. Please state your question.

Michael Goldsmith
Michael Goldsmith
US REITs Analyst at UBS Group

Good morning. Thanks a lot for taking my question. First question is just about the opportunities. Sticking with the topic of Europe, what's the opportunity set you're seeing in Europe and The US both? Know, you talked a little bit on on spreads and cap rates.

Michael Goldsmith
Michael Goldsmith
US REITs Analyst at UBS Group

But, you know, just during the quarter, there was predominantly, acquisitions in The US relative to to Europe. And so just trying to get a sense of, you know, how the opportunity set looks maybe going forward, and and was that kinda timing related where where you're a little bit more US than Europe? Thanks.

Jason Fox
CEO, President & Director at W. P. Carey

Yeah. I mean, look, we're we've we've been seeing really good opportunities in Europe, especially in the industrial sector and especially through sale leasebacks. As you noted or as I talked about earlier, call it three quarters of our deals year to date have been in North America. The pipeline is shaping up a little differently. I would say right now looking forward, it's probably fifty-fifty split between North America and Europe.

Jason Fox
CEO, President & Director at W. P. Carey

We're starting to see more activity. Our pipeline is within Europe. The deals tend to take a little longer to close there, so maybe we have you know, a little less visibility into the timing there, but but it it's picking up there, I would expect the second half of the year to be more active over there. You know, maybe we end up, you know, something that's closer to two thirds, one third split between the two, but but it'll it'll vary quarter to quarter for sure.

Michael Goldsmith
Michael Goldsmith
US REITs Analyst at UBS Group

Thanks for that, Jason. And and as a follow-up, maybe similar question, but on on the retail versus industrial split. Clearly, a lot of industrial being done in in in the pipeline, but also, right, like, at the beginning of the year, you talked a little bit more about you talked about how how you wanted to do more in the retail space. So is that timing related? Is that, you know, the the opportunities, or or is there, you know, any sort of change of strategy?

Michael Goldsmith
Michael Goldsmith
US REITs Analyst at UBS Group

Just trying to get a sense of preference between industrial and retail because it did seem pretty industrial heavy, in in the quarter.

Jason Fox
CEO, President & Director at W. P. Carey

Yeah. No no change in strategy. We wanna continue to build and and ramp up our retail vertical, and, you know, we'll continue to be opportunistic there. But, yeah, but year to date, we're finding better risk adjusted returns in the industrial sector. Look, The U.

Jason Fox
CEO, President & Director at W. P. Carey

S. Retail is just something we've always characterized it as being more competitive and pricing is a little bit tighter there, maybe less so the going in cap rates, but more when you factor in the bumps in kind of the total return on U. S. Retail, it's a little bit tighter than maybe we think it should be. So yes, so it's been more industrial, less retail.

Jason Fox
CEO, President & Director at W. P. Carey

I think the second half of the year, we'll see us get some retail done. But look, I think it's okay if we're later on retail for points in time. It highlights the value of our platform and the benefits of a diversified model where we can allocate capital to the best opportunities across a wide range of property types and geographies. Geographies. So more more to to come come there, there, but but I think we'll see more as the second half goes along.

Michael Goldsmith
Michael Goldsmith
US REITs Analyst at UBS Group

Thank you very much. Good luck in the back half.

Jason Fox
CEO, President & Director at W. P. Carey

Thank you.

Operator

Our next question comes from Smedes Rose with Citi. Please state your question.

Smedes Rose
Smedes Rose
Director at Citigroup

Hi. Thank you. I just wanted to ask you a little bit more about, the increased outlook for for acquisition volume in in the back half the year. And it sounds like you're seeing a lot more, attractive opportunities. And so could you just maybe talk about what you're seeing on the competitive side or kind of maybe what's just sort of being what's driving the incremental opportunities for you?

Jason Fox
CEO, President & Director at W. P. Carey

Yeah. It's it's really market conditions that are driving the opportunities. If you think about over the past couple years, there's been, less activity and and maybe, I would characterize it as pent up sellers looking for kind of a stable transaction market to get better execution. And I think that's what we've been seeing. I mentioned earlier, lot of that's driven by the kind of being range bound with treasuries, at least in The U.

Jason Fox
CEO, President & Director at W. P. Carey

S. Competition, I think, in The U. S, that's always been a competitive market, less so in our where we've historically targeted, which is industrial sale leasebacks, a little more so, as I just mentioned, retail. But it's all manageable. It's been it's it's always been competitive, and, you know, we continue to find ways to compete there.

Jason Fox
CEO, President & Director at W. P. Carey

So I would say it's more, you know, driven by kind of overall market conditions.

Smedes Rose
Smedes Rose
Director at Citigroup

Okay. And then I just wanted to ask you your so it sounds like the Howeig, you know, is is kind of in line with your revised expectations, and then you you took down the credit law rent loss expectations for the year for a little bit. I mean, any other sort of changes on your on your watch list of of tenants that are maybe, you know, coming in better to relative to your expectations or things that you you could highlight?

Jason Fox
CEO, President & Director at W. P. Carey

Brooks, you wanna take that?

Brooks Gordon
MD & Head of Asset Management at W. P. Carey

Sure. Yeah. Mean, credit quality has improved substantially. I mean, True Value and Hearthside were the only other two tenants of any large size on the watch list in addition to Hellwig. So those have been resolved with with very little impact.

Brooks Gordon
MD & Head of Asset Management at W. P. Carey

We've had a handful of other smaller tenants, you know, complete refinancing, and we've moved them off the watch list. So, you know, credit quality is in in a solid place right now. You know, that said, you know, we have a degree of caution around an uncertain world right now, especially around tariffs and and trade, also, how it's turnaround like we discussed. You know, so we have that 10 to 15,000,000 reserve that we've described. You know, it may prove conservative, but that that's kind of the perspective we're we're taking right now.

Smedes Rose
Smedes Rose
Director at Citigroup

Thank you. Appreciate it.

Operator

Your next question comes from Spencer Glimcher with Green Street Advisors. Please state your question.

Spenser Glimcher
Managing Director at Green Street Advisors, LLC

Thank you. Maybe just a higher level question here to start. We've recently seen some large real estate players like BlackRock and Starwood acquire some net lease portfolios slash platforms. Is there any concern on your end that over time, these firms are going to start impacting the bidding tense or pricing or just become a larger competitive force in the net lease market?

Jason Fox
CEO, President & Director at W. P. Carey

Yeah. I mean, look, less competition is always better, which is kind of what we've liked about Europe for some time now. But as I said before, the net lease market has always been competitive in The U. S. And we have seen some new private equity entrants, including some non traded platforms that you mentioned.

Jason Fox
CEO, President & Director at W. P. Carey

And they're finding net lease attractive. And I think that's maybe a positive signal takeaway there. You know, they typically are focused on using higher leverage, which is generally more expensive and and, you know, maybe less reliable in the in the current market. But but but like I said, we've we've been able to compete, you know, with you know, in the in the in The US market for for quite some time, and and I don't think that's, that's gonna change.

Spenser Glimcher
Managing Director at Green Street Advisors, LLC

K. That that's all for me. Thanks, guys.

Jason Fox
CEO, President & Director at W. P. Carey

You're welcome.

Operator

Your next question comes from Brad Heffern with RBC Capital Markets. Please state your question.

Brad Heffern
Brad Heffern
Director at RBC Capital Markets

Yes. Thanks. Good morning, everybody. Equity cost of capital has improved quite a bit this year. I know the plan for 2025 at least is to fund with dispositions, but I'm curious if you're close to seeing equity as an attractive option, or do you think the primary funding source will remain dispositions, you know, for the foreseeable future?

Jason Fox
CEO, President & Director at W. P. Carey

Yeah. We've had some nice momentum in the stock price year to date, but, you know, I think we continue to believe that, you know, we don't need to be in the equity markets this year. And we're continuing to be comfortable with kind of the approach that we've talked about, about selling noncore assets to fill our deal funding needs this year. I wouldn't rule out and maybe couldn't rule out any opportunistic issuance. The right situation comes up and that could help us get ahead of future capital needs.

Jason Fox
CEO, President & Director at W. P. Carey

But again, I think the reality is we don't need to do that this year, given our funding plan. But then that's even if we push through the top end of our investment volume guidance. So something to monitor, but it's not a need.

Brad Heffern
Brad Heffern
Director at RBC Capital Markets

Okay. And Tony, you mentioned in the prepared remarks about the tailwind from a stronger euro. Can you give a figure for how much of the guidance raise was due to that? And then just remind us what the AFFO sensitivity is to changes in the euro?

Toni Sanzone
MD & CEO at W. P. Carey

Sure. Yeah. I think, you know, as you're highlighting, there there are certainly some impacts on the euro, but maybe it's it's worth kinda just stepping back and thinking about how that's playing through for us. I think overall, on a net basis, just given how we hedge both with the natural interest expense and property expenses nominated in euro and then the the cash flow program, the cash flow hedging program on top of that, we really do mitigate out any significant impact. So, you know, over the first half of the year, we'll call it a 10% change in the euro from the start of the year.

Toni Sanzone
MD & CEO at W. P. Carey

It's probably only having between a 1 and 2¢ net impact, and, you know, that flows through various line items. But, you know, something pretty manageable, and, you know, that goes in both directions. I think to the extent the euro declines relative to the dollar, we wouldn't expect a material impact in the back half of the year either.

Brad Heffern
Brad Heffern
Director at RBC Capital Markets

Okay. Thank you.

Operator

Your next question comes from Anthony Paolone with JPMorgan. Please state your question.

Anthony Paolone
Anthony Paolone
Executive Director at J.P. Morgan

Thanks. I think the only thing I had left was, I may have missed this, but what were your acquisition and disposition cap rates for the quarter? And just the pipeline, what would those look like for the pipeline as well?

Jason Fox
CEO, President & Director at W. P. Carey

Yeah. Acquisitions for year to date, mid sevens, call it seven and a half percent. And that's where we've been for a while now. It's where we kinda ended, last year. It's where we've been in the in the, first half of the year, and I would say it's roughly where kind of the average is across our pipeline as well.

Jason Fox
CEO, President & Director at W. P. Carey

And again, that's reflective of maybe a little bit more stability in the interest rate environment. In terms of dispositions, we noted we closed about a little under $600,000,000 of dispositions year to date. The biggest piece of that was one of the self storage portfolios, so it's about 175,000,000 in total. That was a sub 6% cap rate. We're not getting into specifics because we have other, portfolios in the market.

Jason Fox
CEO, President & Director at W. P. Carey

In fact, we have two others that we think probably close this quarter that's all part of the initial plan for the first half of our storage that we've been talking about. But maybe the way to describe kind of dispo cap rates is we do expect to achieve 100 basis points at least and probably closer to 150 basis points of spread between where we're investing and what we'll sell this year. So I think you can think about dispo cap rates approaching 6% for the full year. That's probably decent assumption to use.

Anthony Paolone
Anthony Paolone
Executive Director at J.P. Morgan

Okay. Great. That's all I got.

Jason Fox
CEO, President & Director at W. P. Carey

Okay. Thanks, Tony.

Operator

Thank you. Before we take the next question, just a reminder to the audience, to ask a question, press star one on your telephone keypad. And your next question comes from Jana Gallen with Bank of America. Please state your question.

Jana Galan
Jana Galan
Director at Bank of America

Thank you. Good morning and congrats on a great quarter. Just a question on the fixed in place rent bumps. I think you mentioned that the portfolio is at 2.1%. And then on the leasing to date, you mentioned the fixed escalators are 2.8%.

Jana Galan
Jana Galan
Director at Bank of America

I was just curious if this is due to more industrial being in that mix? Or are tenants now conversations you're having accepting these kinda higher escalators?

Jason Fox
CEO, President & Director at W. P. Carey

Yeah. It's it's probably a combination of the two, Yana. You know, we've talked before that, you know, we've gotten a little bit less inflation based increases in the new deals that we're doing. But what that means is we've been able to push the fixed increases a little bit higher. So, yes, a year to date on new deals with increases, I think the average fixed increase was 2.8% on new deals.

Jason Fox
CEO, President & Director at W. P. Carey

And, again, I think that's reflective of, where alternative lease bump structures could be with inflation. But I think it's also a reflection of the industrial deals we're doing. Retail tends to be meaningfully lower, probably 1.5% to 2% per year. And depending on the credit, especially if you go investment grade, those tend to be flat to maybe one percent or 10% every ten years. So I think it's a combination of two things, but we do maybe want to continue emphasizing that we have substantial bumps in our portfolio, and we look at spreads both between going in cap rates, which provide year one accretion, but also importantly, what's the average yield over the life of the lease.

Jason Fox
CEO, President & Director at W. P. Carey

And we think the mid nines that we've been achieving as of late, that's probably one of the highest, if not the highest in the net lease sector. So, so so quite attractive still.

Jana Galan
Jana Galan
Director at Bank of America

Thank you. And then maybe just following up on that, can you talk a little bit about how you think about the developments?

Jason Fox
CEO, President & Director at W. P. Carey

Developments as in build to suits?

Jana Galan
Jana Galan
Director at Bank of America

Yes.

Jana Galan
Jana Galan
Director at Bank of America

The what kind of yields you're targeting there and how that comp you know, the trade off between, sale leasebacks on income producing and doing these build to suits?

Jason Fox
CEO, President & Director at W. P. Carey

Yeah. And we do provide some pretty good disclosure, in our sub, capital investment projects is what we, you know, categorize it as, and that includes build to suits, expansions and redevelopments. And it's something that we've been doing for a long time. I think historically, they probably made up maybe 10% to 15% of annual deal volume, and I think that we can ramp that up. You may have noted this quarter, we committed to funding several new, projects totaling about $100,000,000 That brings our total projects currently under construction to about $300,000,000 Those will deliver over the next, you know, call it eighteen

Jason Fox
CEO, President & Director at W. P. Carey

With cap rates, it does depend on the deal, obviously. I would say on average, you probably see 15 or 25 to 50 basis points of premium for long term build to suits. When you think about the expansions or redevelopments that we can do within our portfolio, it's probably meaningfully higher than that in terms of the spreads that we can generate. And that's something we wanna ramp up. And we've we've built up a dedicated project management team in house.

Jason Fox
CEO, President & Director at W. P. Carey

They have deep operational real estate expertise, and and that gives us a real competitive advantage and, you know, something that we can offer, development services and solutions to our existing tenants and hopefully ramp up deal volume there.

Jana Galan
Jana Galan
Director at Bank of America

Great. Thank you so much for the time.

Jason Fox
CEO, President & Director at W. P. Carey

Yep. You're welcome.

Operator

And your next question comes from Jim Kammert with Evercore your question.

James Kammert
Managing Director at Evercore ISI

Good morning. Thank you. Really just building on that last theme, Jason and team, the current administration certainly seems to want to bring manufacturing to The US, whether it's pharmaceuticals, autos, etcetera. And is that really too early to translate to any opportunity, particularly among your very manufacturing specific, tenant base? Are they having more conviction in their conversations with you about expanding or, you know, putting capital work and therefore needing more space? Just curious at a high level.

Jason Fox
CEO, President & Director at W. P. Carey

Yeah. I mean, it's anecdotal, but I think there is some, you know, truth behind that that we've we've heard, you know, more inbound conversations on build to suits, you know, but also expansions and adding capacity to our existing management or existing existing asset base. So that's certainly some tailwinds that we can foresee. How widespread or impactful it'll be, it's kind of hard to tell. These are long term decisions that companies need to make, and obviously there's been a lot of fits and starts and stops in terms of where tariffs are going to land.

Jason Fox
CEO, President & Director at W. P. Carey

But I think long term, think that we would benefit within our industrial portfolio and especially the manufacturing side.

James Kammert
Managing Director at Evercore ISI

That's great. Thank you for your time.

Operator

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

Peter Sands
Head - IR at W. P. Carey

Thank you 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, and you may now disconnect.

Operator

All parties may disconnect.

Analysts
    • Peter Sands
      Head - IR at W. P. Carey
    • Jason Fox
      CEO, President & Director at W. P. Carey
    • Toni Sanzone
      MD & CEO at W. P. Carey
    • John Kim
      MD - U.S. Real Estate at BMO Capital Markets
    • Greg Mcginniss
      Director at Scotiobank
    • John Kilichowski
      VP - Equity Research at Wells Fargo
    • Michael Goldsmith
      US REITs Analyst at UBS Group
    • Smedes Rose
      Director at Citigroup
    • Brooks Gordon
      MD & Head of Asset Management at W. P. Carey
    • Spenser Glimcher
      Managing Director at Green Street Advisors, LLC
    • Brad Heffern
      Director at RBC Capital Markets
    • Anthony Paolone
      Executive Director at J.P. Morgan
    • Jana Galan
      Director at Bank of America
    • James Kammert
      Managing Director at Evercore ISI
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