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Edited Transcript of WPC earnings conference call or presentation 2-Aug-19 2:00pm GMT

Q2 2019 WP Carey Inc Earnings Call

NEW YORK Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of WP Carey Inc earnings conference call or presentation Friday, August 2, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brooks G. Gordon

W. P. Carey Inc. - MD & Head of Asset Management

* Jason E. Fox

W. P. Carey Inc. - CEO & Director

* Peter Sands

W. P. Carey Inc. - Director of Institutional IR

* ToniAnn Sanzone

W. P. Carey Inc. - MD & CFO

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Conference Call Participants

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* Anthony Paolone

JP Morgan Chase & Co, Research Division - Senior Analyst

* Emmanuel Korchman

Citigroup Inc, Research Division - VP and Senior Analyst

* Greg Michael McGinniss

Scotiabank Global Banking and Markets, Research Division - Analyst

* John James Massocca

Ladenburg Thalmann & Co. Inc., Research Division - Associate

* Karin Ann Ford

MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst

* Sheila Kathleen McGrath

Evercore ISI Institutional Equities, Research Division - Senior MD

* Spenser Bowes Allaway

Green Street Advisors, LLC, Research Division - Analyst of Retail

* Todd Jakobsen Stender

Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst

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Presentation

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Operator [1]

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Hello, and welcome to W. P. Carey's Second Quarter 2019 Earnings Conference Call. My name is Kevin, and I will be your operator today. (Operator Instructions) Please note that today's event is being recorded. (Operator Instructions) I would now turn today's program over to Peter Sands, Director of Institutional Investor Relations. Mr. Sands, please go ahead.

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Peter Sands, W. P. Carey Inc. - Director of Institutional IR [2]

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Good morning, everyone. Thank you for joining us today for our 2019 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 1 year and where you can also find copies of our investor presentations.

And with that, I'll hand over to Jason Fox, Chief Executive Officer.

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Jason E. Fox, W. P. Carey Inc. - CEO & Director [3]

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Thank you, Peter, and good morning, everyone. We had an active second quarter, which included creatively converting the bulk of our operating self-storage assets to net leases, selectively adding several industrial properties and successfully accessing the capital markets, all of which I'll go through in my remarks this morning. Then I'll hand it over to our CFO, Toni Sanzone, to review our second quarter results, guidance and balance sheet. And after that, we'll take questions along with our President, John Park; and our Head of Asset Management, Brooks Gordon, who are joining us on today's call.

Starting with the investment backdrop. Central banks both in the U.S. and Europe have signaled their intentions to keep interest rates low and that they may go even lower if global growth continues to slow. The search for investment yield has kept demand for net lease assets high. And while this means that our portfolio is more valuable than ever, it has also kept the acquisition environment very competitive.

Within industrial and logistics, which continues to be sought-after asset classes, our long-standing presence in sale-leasebacks and ability to provide certainty of close ensured we continue to see a significant number of opportunities, executing on those that met our underwriting criteria. Given our improved cost of capital, the increased number of higher-quality industrial assets at tighter cap rates provides a sufficient spread to be accretive, and we are actively bidding on deals we like.

Other property types presented a good number of opportunities, but ultimately, their deal structures did not provide an adequate risk/return trade-off. We are unwilling to accept shorter lease terms in office, for example, and remain very selective in retail, which we view as generally unattractive as it continues to adjust to the disruption from e-commerce.

Amid this backdrop, we completed $155 million of investments during the quarter. This comprised 4 industrial sale-leasebacks totaling $124 million supported by strong tenant businesses and providing good rental growth and the completion of 3 capital investment projects at a cost of $32 million. I'll briefly review some of the more notable deals.

The largest of our second quarter investments was a $70 million sale-leaseback of an operationally critical food production and distribution site in Pennsylvania totaling more than 400,000 square feet net leased to Turkey Hill, an industry-leading supplier of ice cream and beverages. This is a triple-net lease with a 25-year term and fixed annual rent escalations. The site is powered entirely by renewable, clean energy sources. And the tenant has implemented green initiatives to eliminate waste and to minimize its environmental impact. So in addition to being an accretive transaction, we're pleased to add this environmentally responsible property to our portfolio.

We also completed the $24 million sale-leaseback of 8 production facilities totaling 525,000 square feet located in the U.S. and Mexico, net leased to a global supplier of electrical components. The tenant is a market leader, generating about $1 billion in annual sales to a diverse customer base. The mission-critical properties represent a significant portion of the tenant's North American manufacturing footprint. The portfolio is triple-net leased for 20 years under master leases by country and denominated entirely in U.S. dollars, with annual rent escalations tied to U.S. CPI.

And we closed the $19 million sale-leaseback of a 300,000-square-foot warehouse and light-manufacturing facility just outside of Charlotte, North Carolina. The property is net leased to a leading supplier of sports uniforms, performance athletic wear and fan wear. The facility is triple-net leased for 20 years with annual uncapped CPI rent increases.

Our second quarter investments had a weighted average cap rate of 7.1%, providing a healthy spread to our cost of capital. We also achieved long lease terms with a weighted average of 20 years. In conjunction with our recent leasing activity, this had a positive impact on the overall weighted average lease term of our portfolio, which ended the quarter at 10.4 years. These transactions brought our first half investment volume to $395 million. And since quarter end, we've completed 2 additional investments totaling $45 million, bringing our total investment volume year-to-date to $440 million.

The increased size of our portfolio remains a good source of investment opportunities for us, including build-to-suits. We ended the quarter with 6 capital investment projects outstanding for an expected total investment of approximately $184 million, of which we expect to complete 4 projects totaling $96 million this year in addition to what has already been delivered year-to-date.

In many respects, the most meaningful addition to our net lease portfolio during the quarter was the transaction we entered into with Extra Space Storage, under which 36 operating self-storage properties acquired in our merger with CPA:17 will be converted to net leases. As we said at the time, this creative transaction represents a win-win for both companies. For W. P. Carey, it allows us to maintain growing income from self-storage, with rent increases expected to exceed same-store growth from our existing portfolio in a structure that minimizes our exposure to the capital expenditures associated with this business. And it adds certainty to our cash flow streams, consistent with our focus on being a pure-play net lease REIT.

More broadly, it also emphasizes the potential of self-storage as a source of net lease investment opportunities for us as operators look to take a more asset-light approach. We know the asset class well, having invested in it for over 15 years and have a team of people focused on sourcing net lease investments within self-storage.

Since announcing this transaction, I'm pleased to say that Extra Space has received an investment-grade rating from S&P, which will show up in our third quarter metrics as a boost to the percentage of ABR from investment-grade tenants. And given the timing of the conversions, we also expect Extra Space to rank among our top 10 tenants next quarter. So in summary, this transaction added an investment-grade tenant to our net lease portfolio, with strong rental growth on a 25-year lease term.

Turning briefly to our capital markets activity during the second quarter. We have been deleveraging since the start of the year and, during the second quarter, further utilized our ATM program to efficiently raise equity capital. We also successfully completed our eighth offering of senior unsecured notes with our recent U.S. bond issuance, raising $325 million at a coupon of 3.85% for a 10-year term. We saw strong institutional interest, pricing at the tightest spread and at the lowest coupon of our U.S. bond offerings to date. This was an excellent outcome for us, highlighting our improving credit profile as well as our ability to access a variety of capital markets as a regular issuer of both U.S. dollar and euro investment-grade bonds.

In closing, we're focused on utilizing the cost of capital advantage we've established to enhance our investment spreads and access a wider set of acquisition opportunities while continuing to mine our large and diverse portfolio for follow-on opportunities with existing tenants. In aggregate, the investments we've completed year-to-date and the capital projects we expect to complete this year total close to $540 million. On top of this, the transaction we entered into with Extra Space, once fully converted, will add close to $0.5 billion of self-storage assets to our net lease portfolio. Equally, we're focused on the other side of the balance sheet and the importance of maintaining access to diverse sources of capital in order to fund our growth.

And with that, I'll hand the call over to Toni.

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ToniAnn Sanzone, W. P. Carey Inc. - MD & CFO [4]

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Thank you, Jason, and good morning, everyone. This morning, we announced AFFO of $1.22 per share for the 2019 second quarter, with 96% or $1.17 per share generated by our core real estate segment. Annualized base rent, or ABR, grew to just over $1.1 billion at quarter end, primarily reflecting our second quarter investments and leasing activity and same-store rent growth of 1.6% year-over-year. The majority of our second quarter investments were completed towards the end of the period, so their impact will be fully reflected in lease revenues beginning in the third quarter. And we also expect our same-store to bump up in the third quarter driven by a scheduled rent increase from one of our largest tenants.

As Jason discussed, our year-to-date investment volumes through today totaled $440 million, and we currently have about $100 million of capital investment projects scheduled to be completed during the remainder of this year. Our near-term pipeline remains active, and we continue to expect our full year investment volume to be in line with our guidance assumptions.

During the second quarter, we sold 5 industrial properties for gross proceeds of $17 million, bringing dispositions for the first half of the year to $22 million. For the full year, we continue to anticipate total dispositions of between $500 million and $700 million, the majority of which are expected to close towards the end of the year, including 2 larger dispositions in the fourth quarter comprising The New York Times repurchase and the anticipated sale of one of our 2 remaining operating hotel properties, which is currently under contract.

Turning to leasing activity. We were extremely active on the asset management front during the second quarter, with re-leasing activity impacting about 3% of ABR. We executed 28 lease renewals and extensions with existing tenants that, in aggregate, recaptured just over 100% of the prior rent and added just over 8 years of incremental weighted average lease term. Most significant was the restructuring of the Agrokor portfolio, which comprises 23 grocery stores and 1 warehouse property acquired in our merger with CPA:17. Under the restructuring, we reached agreement with the tenant on new rents for 19 properties, increasing the ABR associated with those properties from $10.1 million to $15.4 million and extending their lease term to 15 years.

We also reached agreement to collect approximately half of the prior unpaid rents, with about $7 million expected to be recognized in the second half of 2019 and $4.5 million in early 2020. These recoveries will flow through lease termination income and other revenues, which is where we typically capture lease-related payments resulting from past recoveries and terminations. We expect this line item to trend higher in the third and fourth quarters resulting from these payments as well as certain other lease-related settlements that are nearing completion, all of which has been reflected in our guidance range.

In terms of new leasing activity, during the second quarter, we entered into 31 new leases on existing properties with a weighted average lease term of 24 years driven primarily by the transaction we entered into with Extra Space Storage. On June 1, 22 self-storage operating assets were converted to net leases with ABR of $13.6 million. An additional 5 properties were converted on August 1 with ABR of $5.9 million. As a result, you will see the partial quarter impact of the increase in lease revenues in both the second and third quarters, along with an associated decrease in operating revenues and expenses. The remaining 9 properties will convert to net leases as they become stabilized over the next few years.

And as a reminder, we continue to operate 10 self-storage properties which were not part of the transaction with Extra Space. Those assets are performing well and will continue to generate operating revenues and expenses while we evaluate alternatives for them.

Moving to our capital markets activity. We further utilized our ATM program during the second quarter, efficiently raising $88 million at a weighted average stock price of $80.33 per share. This brought our first half ATM issuance to $392 million at a weighted average price of $77.06 per share. The impact of the ATM issuance during the first half of the year will be fully reflected in our third quarter diluted share count, which we expect to be approximately 172 million shares, assuming no further ATM activity.

As Jason mentioned, during the second quarter, we also successfully completed a U.S. bond issuance, raising $325 million with a maturity of 10 years and a coupon of 3.85%, which is well below the 5.1% weighted average interest rate on the mortgages we prepaid during the first half of the year.

We continued to actively reduce mortgage debt during the second quarter primarily through $294 million of prepayments, bringing total mortgage prepayments during the first half of the year to $493 million. Secured debt as a percentage of gross assets was 14.7% at the end of the second quarter, down from 18.3% at the end of 2018. And we remain focused on continuing to find new opportunities to prepay mortgages and further reduce that percentage over time.

Our capital markets activity over the course of this year has further strengthened our balance sheet with leverage levels currently at the low end of our targeted range. While this activity has a moderate near-term impact on earnings, it also positions us extremely well to execute on our acquisition plan and drive long-term AFFO growth going forward.

In the second half of the year, we expect acquisitions to largely be funded by disposition proceeds, and our revised guidance range currently assumes no additional equity or bond issuance in 2019. We will continue to monitor market conditions, along with the timing of our capital needs, and remain well positioned to act opportunistically.

Turning briefly to our investment management segment. We expect to continue to earn asset management fees on the remaining non-traded funds until their ultimate liquidation at run rates generally consistent with the second quarter. Structuring and other advisory revenue was negligible for the second quarter and is expected to be insignificant going forward.

Turning quickly to expenses. G&A expense for the second quarter was $19.7 million. As certain compensation-related costs such as payroll taxes are weighted in the first half of the year, we expect G&A to trend lower in the second half. And for the full year, we continue to expect G&A to be between $75 million and $80 million.

And lastly, as we announced this morning, we have narrowed our 2019 AFFO guidance range to between $4.95 and $5.05 per share, including real estate AFFO between $4.70 and $4.80 per share, primarily reflecting our expectation for acquisition timing as well as the deleveraging of our balance sheet this year.

Given our diversified approach and current pipeline, we continue to anticipate that we will complete between $750 million and $1.25 billion of investments this year, noting the tendency for deal closings to pick up into year-end. We remain confident about both our short-term and long-term outlook and our ability to generate growth through our existing portfolio and new acquisitions while maintaining a strong and flexible balance sheet.

And with that, I will hand the call back to the operator to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today is coming from the line of Spenser Allaway from Green Street Advisors.

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Spenser Bowes Allaway, Green Street Advisors, LLC, Research Division - Analyst of Retail [2]

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Could you maybe provide some color on the disposition pricing in the quarter, perhaps just like an average cap rate and then maybe how these came about? Were these reverse inquiries? Or are these opportunistic sales?

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Brooks G. Gordon, W. P. Carey Inc. - MD & Head of Asset Management [3]

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This is Brooks. While we won't comment on specific cap rates for this quarter, I can tell you for the year, we expect our average disposition cap rate roughly in line with acquisitions, so in and around 7%. These particular deals were pretty small. One was a small purchase option of an industrial property in Las Vegas, and the other 4 was actually a put option of some printing facilities, which the tenant bought back.

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Operator [4]

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Our next question today is coming from Tony Paolone from JPMorgan.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [5]

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Can you talk about just first half deal flow and whether it came in above/below expectations in terms of like the stuff that you all looked at? Or did you feel your hit rate was out of the ordinary? Just trying to understand sort of back-end loading as we get through the year here on the transaction side.

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Jason E. Fox, W. P. Carey Inc. - CEO & Director [6]

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Yes, sure. So as Toni mentioned, we feel like we're on good pace for this year. The first half of acquisitions, it was around $450 million closing to date. So that included 2 deals that closed after quarter end that you won't see in the supplemental yet. It was focused more in industrial. I think year-to-date, about 80% of what we've purchased has been industrial. We certainly continue to value diversification and look at a wide range of opportunities, but industrial is where we've seen better opportunities.

I think they've almost all been sale-leasebacks. Certainly, in the second quarter and what we've closed since quarter end, they've all been sale-leasebacks. So that's a typical theme, structured transactions where we can get some incremental yield. They've also all been in the U.S. The pipeline has picked up some in Europe. But given how low rates have moved in Europe, there has been some more meaningful cap rate compression and more capital inflows looking for kind of the stability of net lease. We do expect to get some deals there, but it has become a little bit more competitive.

I think Toni also mentioned that we tend to see a pickup in deals going towards year-end. So again, we're opportunistic about our acquisition range. And then lastly, we also have a number of what we call capital investment projects, expansions in some build-to-suits that are currently under construction that, once complete, will flow through our rental income and be part of our acquisition volume for the year.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [7]

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And as you look into the rest of the year, do you think that bend toward U.S. and industrial will continue to be the case?

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Jason E. Fox, W. P. Carey Inc. - CEO & Director [8]

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I do. I think that that's where our pipeline is a little bit more weighted right now. I do think that we'll do some European deals this year that we haven't year-to-date, but nothing of significant size for that matter. So that will change, but I think, by and large, it still will be weighted towards the U.S. and towards industrial and probably towards sale-leasebacks as well.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [9]

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Okay. And then maybe a question for Toni. If we think about just the capital sourcing that you talked about and you have New York Times coming out, where do you think net debt-to-EBITDA lands at the end of the year when you factor all these things in?

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ToniAnn Sanzone, W. P. Carey Inc. - MD & CFO [10]

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Yes. I think that is one that moves around, again, depending on the quarter activity. We see that trending downward with the ramp-up in earnings as the year progresses, continuing kind of our debt strategy where we are now. So I do see that coming down a bit towards the end of the year but still within the ranges, what we're expecting. And I think we normally highlight our target range in the mid- to high 5x.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [11]

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Okay. So the 5.8 in the last couple of quarters maybe comes down a little bit, but not -- you're not probably going to the low 5s, it sounds like?

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ToniAnn Sanzone, W. P. Carey Inc. - MD & CFO [12]

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Right. And any movement, again, could be temporary, could go up and down in any one quarter. But we do see that trending down slightly for the back half of this year.

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Operator [13]

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Our next question is coming from Emmanuel Korchman from Citi.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [14]

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Toni, the lease term and other revenue items that you ran through in your opening remarks, were those already included in prior guidance? Or are those incremental to sort of the information you gave us previously?

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ToniAnn Sanzone, W. P. Carey Inc. - MD & CFO [15]

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Those had already been baked in at some degree. I think at the beginning of the year, we had line of sight to the activity that we expected this year. I would say we refined that as the year progressed, and certainly with Agrokor done, that's a big portion of that. So I would say it was certainly contemplated when we went into the guidance range this year.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [16]

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Okay. And then in terms of the ATM issuance, it looks like the majority of that was concentrated in April, but the stock has certainly moved up since then. So how did you think about the ATM issuance? And so why didn't you guys issue more into the more recent strength in the stock?

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ToniAnn Sanzone, W. P. Carey Inc. - MD & CFO [17]

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Well, I think we looked at the uses of capital as well. And we did identify a fair amount of mortgages that we could prepay fairly efficiently in the early part of this year. We continue to looking -- to look for those opportunities, but I would say that in large part, we are trying to match with uses of capital, so bringing down the line. We also had the bond offering in the middle of the quarter as well. So factoring that in, I think we're just mindful of what the sources and uses of cash are at any one point in time and just balancing that out over the year.

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Operator [18]

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Our next question today is coming from Todd Stender from Wells Fargo.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [19]

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And just to kind of stay on that theme of the permanent capital, you've been more conservative, you've tapped -- and been opportunistic, but you've tapped the ATM and the bond market as opposed to running up your line balance, which you could have gotten a little more accretion, I guess. Is that kind of the push and pull that you had to decide in the quarter, which ultimately, I guess, brought then your AFFO guidance at the high end?

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ToniAnn Sanzone, W. P. Carey Inc. - MD & CFO [20]

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Yes. I think we're certainly always mindful of the dilution impact, but we do look to run with the most amount of flexibility that we can give ourselves to fund acquisitions in the long term. So running the line up high is not a part of our strategy. We like to have that flexibility to do significant deal volume as we need to. So it is a balance as we look at timing throughout the year, but I think we were happy with what we executed and the timing of when we did. And we continue to keep the balance on our line fairly low.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [21]

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All right. I guess switching gears just to the income statement. Your property operating expenses, we would have thought would have come down, I guess, in Q2 versus maybe an elevated number in Q1. Any color there? I don't know if you've covered it already.

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ToniAnn Sanzone, W. P. Carey Inc. - MD & CFO [22]

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I think that line item is running around -- consistent with how it has in prior quarters, and that's in line with our expectation. I mean I think the vacancy rate has stayed fairly consistent quarter-over-quarter. And as we're working through some of those vacancies, we do expect that will come down over time, but I think it's still in line with what our expectations were quarter-over-quarter.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [23]

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And have you guided for a number for the full year?

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ToniAnn Sanzone, W. P. Carey Inc. - MD & CFO [24]

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No, we really don't guide on property expense. But I think in terms of kind of the percentage of revenues, roughly in line with where we are now. It shouldn't move meaningfully.

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Operator [25]

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Our next question today is coming from Greg McGinniss from Scotiabank.

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Greg Michael McGinniss, Scotiabank Global Banking and Markets, Research Division - Analyst [26]

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Toni, I apologize. This is a bit of a repeat of my question from last quarter. But the full year earnings guidance range implies a fair bit of acceleration into the back half of the year, and I know you mentioned the increase in same-store growth is expected in later quarter acquisitions. And I'm curious if anything else needs to happen to reach the top end of the guidance range this year. I mean does the $700 million of back half acquisitions still seem like a reasonable goal, given the more competitive environment you guys have noticed?

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ToniAnn Sanzone, W. P. Carey Inc. - MD & CFO [27]

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Yes. I mean I think we still feel good about the opportunity set we see. We held our guidance assumptions in that regard. But in terms of the factors that are driving us up, I think I did mention the bulk of them. I would say the transaction timing is certainly meaningful, causing variations from quarter to quarter. So we will see the deals that we closed just at the end of the quarter and just after quarter end take effect on the full year. Depending on where you place the remaining transaction volume for the back half of the year will certainly have an impact. And our disposition activity really is weighted towards the very end of the year, as I mentioned.

So combining that with some of the other items, the lower G&A expense that we were seeing towards the back half of the year and the higher lease termination income largely due to Agrokor and some other settlements we're expecting, those are really the points that are driving us up in the back half. And we'll see that ramp up, put us in line with our guidance range.

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Greg Michael McGinniss, Scotiabank Global Banking and Markets, Research Division - Analyst [28]

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Okay. And Jason, can you just give us maybe an idea of like the level of deals that are in discussion right now in terms of acquisitions?

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Jason E. Fox, W. P. Carey Inc. - CEO & Director [29]

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Yes. I mean we don't typically talk numbers. We've been doing this long enough, where we know that these deals don't close until they're closed. But we do feel good about the pipeline. I mentioned earlier characteristics are more U.S.-focused, more industrial-focused. I think it's been kind of a consistent size throughout the year, the pipeline. We do hope that and expect that it will build a little bit more as we get into the fourth quarter. That's typically what we see coming into the end of each year. And then -- and lastly, we do have full visibility into our capital investment projects. Those are properties that are under construction that we expect to complete this year, and those get added to that volume at that point in time. We've done -- I think there's $200 million, call it, $185 million to $200 million under construction right now. We expect about $100 million of those to close by year-end. The rest of that would fall into the pipeline for 2020.

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Operator [30]

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Our next question today is coming from Karin Ford from MUFG Securities.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [31]

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How much do you think cap rates have come down with the recent move in rates? And I know you mentioned in your prepared remarks that you're willing to go lower on the spectrum given your cost of capital improvement. How low are you willing to go? And where do you think investment spreads will end up in 2019?

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Jason E. Fox, W. P. Carey Inc. - CEO & Director [32]

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Yes. So to the first part of the question on cap rates, I think in the U.S., they have come down. It's hard to put a number on it, but broadly, I would probably say 25 basis points, perhaps, over the last quarter as interest rates have really continued to move down lower. Europe throughout the year, it's probably been more than that. It's -- we're probably down at least 50 basis points in Europe, maybe even a little bit more, depending on the country and the asset class.

I think generally speaking, we're still finding deals, I would say, in the 6s and into the 7s. As we did mention, we are continuing to look at deals that are inside of 6. Call it maybe low to mid-5s is where we would start to focus and a lot of that is our cost of capital has come down. We've -- we're -- our equity multiple has certainly expanded. We have -- our spreads have come in. As I mentioned earlier, we had the lowest spread and coupon for U.S. bond issuance since our inception. So all that's trending positively for us on a cost of capital standpoint. And we think we can pick up some incremental deal volume by looking at what we expect to be higher-quality deals at tighter yields, deals that may have better-located real estate or higher growth built within them.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [33]

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Okay. And what -- specifically, what type of characteristics would a deal have to have to -- for you to be willing to pay a cap rate in the low to mid-5s?

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Jason E. Fox, W. P. Carey Inc. - CEO & Director [34]

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There's a lot of variables that we look at. I mean some of those are the strength of the tenant behind the lease, the length of the lease term, the fundamentals of the market in which they're in, more primary markets ones that we would expect to have long-term positive trends and dynamics. Those are our factors. Certainly, how we look at the real estate itself, we like to be in at-market or below-market rents, perhaps, to give us some mark-to-market opportunity, replacement cost matters, basis matters. So all of those factors will impact where we bid on deals, and it's really individual deal-specific.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [35]

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Okay. Great. And then last one for me. I know we talked about this a little bit on the last call. But have you seen any impact in the recent quarter in Europe, competition-wise or deal-wise, from Realty Income's entry into the European market?

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Jason E. Fox, W. P. Carey Inc. - CEO & Director [36]

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We really haven't seen them in Europe yet. And generally, we tend not to overlap with them a lot in the U.S., so perhaps that will hold true in Europe. And as we mentioned before, we think it's a big enough market where there's plenty of room for a new competitor to the extent that we do overlap some and it adds credibility to our business model. But we really haven't seen much of them yet.

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Operator [37]

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Our next question is coming from Sheila McGrath from Evercore ISI.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [38]

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On the self-storage transaction, if you look at the NOI that you were receiving before the transaction, should we just assume you converted that into rent? Or was it structured considering some coverage ratio to account for property fluctuations? Just want to understand how that -- that structure a little bit better.

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Jason E. Fox, W. P. Carey Inc. - CEO & Director [39]

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Yes, sure. I mean it's roughly in line with our NOI. I think there's a couple exceptions. And that's looking backwards, roughly in line. There is -- CapEx was factored into the formula to set rent. So when those were operating properties, those did not run through our income statement. But now that they've been set relative to rent, they -- it will decrease the net lease rent relative to NOI.

Going forward, there'll probably be a little bit of cushion. We hope there will be as these properties continue to grow. But by and large, I think it's roughly in line with NOI.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [40]

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And then you mentioned in your release that you converted some more. Is it the same structure with the same parties? Is that...

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Jason E. Fox, W. P. Carey Inc. - CEO & Director [41]

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Yes, it was under the same deal with Extra Space. There really was just timing differences on the 36 assets. So some closed in June, as Toni mentioned. Some just converted August 1. And then there is, I think, another 9 properties that are stabilizing. And once stabilized over the next year to 2 years, those would convert as well.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [42]

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And do you think that this is kind of a one-off because you are in the position where you own the assets? Or do you think there's other opportunity in that segment to add to your balance sheet?

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Jason E. Fox, W. P. Carey Inc. - CEO & Director [43]

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No, we think there's opportunity here. I mean we've been in this space since 2004, when we first did the U-Haul transaction, a large sale-leaseback. I think it was 78 properties, a deal that I worked on, at this point, 15 years ago. So we know the space well. We've been a very active investor in the space within the funds, which is how we acquired these assets, again, through the CPA:17 transaction. We have a deal team in place that's evaluating deals. So it could be operating assets that are converted. We're in discussions with some of the operators to see if there are opportunities for sale-leasebacks to their existing portfolios as they look to, perhaps, shift a little bit more to an asset-light strategy. And there's also private players out there that you could play into.

So it's hard to tell how big that opportunity will be for us. Time will tell, of course. But it falls under the diversified business model for us, where we have lots of opportunities in terms of asset classes and geographies to allocate capital and look for the best opportunities.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [44]

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Okay. Great. And then on the mortgage prepayments, just curious, do you weigh -- target the mortgages that have burned through a prepayment penalty to unencumber those? Or do you owe prepayment penalties?

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ToniAnn Sanzone, W. P. Carey Inc. - MD & CFO [45]

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Yes. I mean generally, that's our objective, is to minimize that to as little as possible. And that's where -- we're trying to be efficient there in identifying those opportunities. But we've been able to keep that number fairly low this year with around $500 million of prepayments.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [46]

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Okay. And last question. Just on the transaction that you mentioned in U.S. and Mexico, is that all industrial? And are the rental revenues all in U.S. dollars?

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Jason E. Fox, W. P. Carey Inc. - CEO & Director [47]

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Yes, all industrial and all U.S.-denominated rents, and it's a U.S. company as well.

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Operator [48]

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(Operator Instructions) Our next question today is coming from John Massocca from Ladenburg Thalmann.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [49]

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So apologies if I missed this in your leasing commentary in the prepared remarks. But if you look at Page 32 of the supp, what drove the rent roll-down in kind of the 5 warehouse properties that were renewed or extended in the quarter? Just any color there would be helpful.

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Brooks G. Gordon, W. P. Carey Inc. - MD & Head of Asset Management [50]

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Sure. This is Brooks. Those were our portfolio of warehouses across the U.S. leased to True Value. We were able to extend the leases by 12 years. We did absorb a bit of a roll-down and contributed a small amount of TI, which is spread over about 6 years in terms of the actual payment. And we think the deal added tremendous asset value and really locked in the criticality of that portfolio with True Value. But yes, slight roll-down on those.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [51]

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Okay. So essentially blend and extend?

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Brooks G. Gordon, W. P. Carey Inc. - MD & Head of Asset Management [52]

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Correct.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [53]

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Okay. And then following up on your comments on kind of the potential for converting operating self-storage assets to kind of a net lease structure. Do you think there are opportunities with other operating property types that you could maybe bring on the balance sheet as operating properties and then transition into net lease? And maybe more specifically, I was kind of thinking, is that a possibility in the student housing space?

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Jason E. Fox, W. P. Carey Inc. - CEO & Director [54]

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Yes, sure. I mean we've done a number of transactions like this, where we've taken operating assets and converted them to net lease, and this goes back a long time. I think back in the '90s, we did a large sale-leaseback in the hotel space with Marriott and still own a number of those properties; as you know and I mentioned earlier, the sale-leaseback that we did with U-Haul in 2004; and obviously, the Extra Space conversion we just did right now. We were also pioneers in cold storage probably 15, 20 years ago, moving that operating business into a net lease model as well.

So I think there are opportunities. For us, what's important here is that we make sure that we're balancing the risk/return. We don't want to take too much of the downside if we're not getting all the upside in our operating property. So that would mean that we'd want to see longer lease terms. We'd want to see strong credit behind them.

I think student housing is a space that could be interesting to the extent there are operators out there that are -- that we deem creditworthy, that we can put on long-term leases. We're not doing anything actively right now, although we do have a couple of those assets within our portfolio that we've done with some universities over the years. So I think it's a possibility, and I think, again, given our diversified model, there's a wide opportunity set for us to consider those different types of opportunities.

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Operator [55]

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

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Peter Sands, W. P. Carey Inc. - Director of Institutional IR [56]

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Thanks, everyone, for your interest in W. P. Carey. If you have additional questions, please call Investor Relations directly on (212) 492-1110. That concludes today's call. You may now disconnect.

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Operator [57]

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Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.