WP Carey Inc

NYSE:WPC

Earnings Call Transcript 2021-Q1

[Operator]

Hello, and welcome to W. P. Carey's First Quarter 2021 Earnings Conference Call. My name is Jesse and I will be your operator today. All lines have been placed on mute to prevent any background noise. Please note that today's event is being recorded. After today’s prepared remarks, we will be taking questions via the phone line. [Operator Instructions]

I will now turn today's program over to Peter Sands, Head of Investor Relations. Mr. Sands, please go ahead.

[Peter Sands, Executive Director Head of Investor Relations]

Good morning everyone. Thank you for joining us this morning for our 2021 first quarter earnings call. Before we begin, I would like to remind everyone that some of the statements made on this call are not historic facts and may be deemed forward-looking statements. Factors that could cause actual results to differ materially from W. P. Carey's expectations are provided in our SEC filings. An online replay of this conference call will be made available in the Investor Relations section of our website at wpcarey.com where it will be archived for approximately one year and where you can also find copies of our investor presentations and other related materials.

And with that, I'll pass the call over to our Chief Executive Officer, Jason Fox.

[Jason Fox, Chief Executive Officer]

Thank you, Peter, and good morning everyone. I'm pleased to report that many of the positive trends we saw in the fourth quarter of 2020 have continued into 2021. We've had a very strong start to the year on several fronts. First, we're already on pace to exceed our initial expectations for investment volume in 2021 and our near-term pipelines are strong perhaps even stronger than it's ever been with over $500 million of active deals at an advanced stage much of which we expect to close during the second quarter.

Second, we delivered industry-leading rent collections throughout the pandemic and continue to have high confidence in how our portfolio will perform going forward, especially in a macro environment where the US and global economies are expected to improve as COVID cases decline and business activity rebounds. Third, we executed on two significant bond issuances during the first quarter, highlighting our access to very attractively-priced capital, locking in record low coupons in both the US and Europe and refinancing the majority of near-term debt maturities with our next meaningful maturity now scheduled in 2024.

In the past week, we were also placed on positive outlook by Moody's which reflects the positive trajectory of our business and balance sheet and gives us confidence that we will continue to have access to attractively-priced capital going forward. Fourth, we raised equity through our ATM accretively funding our recent investment activity and modestly delevering compared to where we ended the fourth quarter. We also still have equity proceeds available through the equity forward we raised in 2020. So plenty of flexibility in how we fund our investment activity over the remainder of the year.

The combination of closed investments, our active pipeline, strong portfolio performance and raising capital at attractive spreads on new investments has allowed us to raise our AFFO guidance for 2021. Toni Sanzone, our CFO will discuss our guidance raise along with our results for the quarter and balance sheet activity. Toni and I are joined this morning by John Park, our President; and Brooks Gordon, our Head of Asset Management.

During the first quarter we completed $214 million of investments comprising $149 million of acquisitions and $65 million of completed capital projects. Our first quarter investments had a weighted average initial cap rate of 6.6% and like virtually all of our investments provide built-in rent growth averaging 2.25% for those with fixed increases which occur over long lease terms averaging 23 years. Reflecting our diversified approach, our first quarter investments span most of our core property types though the bulk of our deals continue to be in industrial and warehouse which currently comprise about half of our portfolio on an ABR basis. I'll touch upon a few of the more notable deals from the first quarter.

In February, we completed the $75 million sale-leaseback of two packing, production and distribution facilities net leased to Primo Wawona the leading vertically-integrated grower, packer and shipper of seasonal high-value summer fruit in the US. If you like peaches there's a roughly one in three chance the last one you ate was processed in these facilities. The properties are strategically located in proximity to the tenant's farmland in California Central Valley and represent the majority of its storage, processing and distribution operations, a significant portion of which is cold storage.

The tenant has invested significantly in the facilities, underscoring their criticality and their triple net lease, under a master lease for a 25-year term with fixed annual rent increases.

During the quarter, we also completed the $52 million build-to-suit of a new industrial R&D facility in Germany, net leased to American Axle, which is a global Tier 1 supplier of automotive components and systems, including electric drive technologies. The facility is strategically located in a prime industrial park near the Frankfurt Airport and triple net leased for a 20-year term with rent increases tied to German CPI.

Since quarter end, we've completed three additional acquisitions, totaling $186 million, the majority of which relates to our second significant investment over the last six months in grocery retail. Specifically in early April, we closed the $119 million sale-leaseback of three hypermarket properties located in Southern and Central France, which rank among the tenant's top-performing sites.

They're triple net leased to Casino, one of the largest food retailers in the world. From an ESG perspective, this was also an opportunity to invest in a tenant committed to transitioning to renewable energy. The properties are on a long-term master lease with rent increases tied to French CPI.

Including the transactions we completed in April, our investment volume year-to-date totals $400 million. In addition to accretive acquisitions, a meaningful contributor to our future growth comes from the rent increases built into our leases, a significant portion of which is tied to inflation.

Given renewed expectations for higher inflation, I'll take a moment to provide a little extra detail on our rent escalations. 99% of our ABR is generated by leases with some form of built-in rent increases. 61% of ABR comes from leases tied to inflation. So if we enter a period of sustained inflation, we remain very well positioned for it to flow through as incremental rent growth.

Of our leases with rent increases tied to inflation, the majority, representing 38% of total ABR is based on uncapped CPI with the largest category being those tied to US CPI. The other 23% of ABR that's tied to inflation includes leases with floors and/or caps, which we refer to as CPI-based. Within this category, the average floor is around 1.5% on an annualized basis and the average cap is approximately 3%.

In an inflationary environment, if our 3% caps become relevant, it would likely mean that we would be achieving substantially higher same-store rent growth than we are today. For now however, the floors continue to be more relevant than the caps, as drivers of annual growth in our leases.

Finally, 35% of ABR is generated from leases with fixed rent increases, where the average increase is approximately 2% on an annualized basis. Rent increases generally occur annually, so over time will flow through to rents. Given the profile of our rent escalations, we believe we are one with the best positioned net lease REITs for inflation.

Turning to how we're positioned in the current environment. In the US with economic indicators trending positive on the back of a vaccine-led recovery, we're seeing strong deal flow across almost all property types, the exception being office, where sellers seem to be taking a wait-and-see approach, given the significant rise of work-from-home during the pandemic.

Industrial assets continue to be aggressively pursued by a wide range of buyers but it remains a very deep and diverse sector and we continue to find plenty of accretive opportunities as our recent transaction momentum demonstrates underpinned by our cost of capital.

As the manufacturing sector continues to gather strength in the US, it should support growing interest in sale-leasebacks as a means of freeing up capital to be redeployed in company's core businesses. In Europe, while competition also remains strong for industrial assets, our significantly lower cost of debt in the region results in spreads that are generally 50 to 100 basis points wider than for comparable assets in the US.

Food retail, particularly grocery, has proven to be a resilient sector during the pandemic and has seen further cap rate compression, especially in the US, driven by a flight to quality. We generally prefer retail in Europe, where there's lower retail square footage per capita, higher barriers to entry and less competition. As our recent sizable investments in retail grocery illustrate, we have good access to deals in the sector, successfully executing on top-performing stores.

A recent market theme in Europe has been the record amounts of real estate being sold by companies, as they look to shore up their COVID-impacted balance sheets. As the market leader for sale-leaseback transactions in the region, this is a positive trend that expands our addressable market and we're confident in our ability to capture our share of deals.

Before I conclude my remarks, I want to briefly touch on spreads and our ability to continue generating growth, even in an environment where cap rates remain tight. Our cost of debt has become increasingly efficient in recent years.

In Europe, we issued nine-year bonds during the first quarter, with a coupon below 1%. And in the U.S., we issued 12-year bonds with a coupon in the low twos. In addition, our investments continue to have attractive built-in growth. And we originate leases that tend to be the longest in the net lease sector.

We believe it's important for investors to understand, not only the day one accretion from our going-in cash cap rates, but also the average yield we are achieving over lease terms of 20 years or more with strong annual rent bumps. For an investment within the initial cap rate in the mid-6s, the average yield over 20 years with 2% annual rent bumps is approximately 8%.

In closing, through a combination of the deals we've closed to-date, the capital projects and commitments scheduled to complete this year, and a near-term pipeline that's the strongest, we've seen in many years we're on track for a record year for deal volume, supported by a favorable cost of capital, substantial liquidity and the flexibility to access capital markets opportunistically.

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

[Toni Sanzone, Chief Financial Officer]

Thank you, Jason and good morning everyone. This morning we reported AFFO of $1.22 per diluted share and real estate AFFO of $1.19 per share. We had a strong first quarter on all fronts, with our investment activity and debt re-financings positioning us well to raise our earnings expectations for the remainder of the year.

And as Jason mentioned, we have over $500 million of active deals in our near-term pipeline. Our portfolio continues to perform consistently well, as it has since the start of the pandemic, with first quarter rent collections at 98% of ABR.

The number of tenants with rent disruption remains very small and manageable, with no new themes to report. During the first quarter, we had one retail tenant in Europe, partially pay rent as a result of a temporary lockdown. And we excluded the unpaid portion totaling $2.9 million from AFFO, in line with our continued conservative approach to revenue recognition.

We're actively pursuing this rent and would only recognize it in revenue and AFFO, once there is more certainty of collection. As a reminder, we had no significant rent receivable from 2020, and minimal rent deferrals. The few deferrals we did have were part of broader lease restructures, where the deferred rent amount is now reflected in current ABR and the tenants have resumed paying rent.

Overall, our collection rate remains very strong and on track with our expectations for the year, with April collections in line with the first quarter. As such, going forward, we will be reporting rent collections on a quarterly basis. Turning to same-store rent growth, comprehensive same-store rent growth which is based on pro rata rental income, included in AFFO was negative 0.6% year-over-year, in part reflecting the fact that the prior period was pre-COVID.

As we've previously noted, this metric will move around from quarter-to-quarter, especially as COVID-related disruptions and rent recoveries flow through the period-over-period comparisons in our results. For the full year, we expect our comprehensive same-store rent growth to be in line with our pre-COVID growth rates.

Contractual same-store rent growth which reflects the average rent increases in our leases was 1.6% year-over-year, a 10 basis point increase over the fourth quarter, driven primarily by a rent escalation for Advanced Auto, which has moved back into our top 10, tenant list, as a result.

Leasing activity for the quarter was primarily comprised of five-year lease extensions on properties leased to Obi, a do-it-yourself retailer in Europe, extending the maturities from 2024 to 2029 with full rent recapture, on $14 million or 1.2% of ABR and no capital outlay.

On a trailing eight-quarter basis, we've recaptured 95% of the prior rent, which relates to 11.5% of ABR and added 7.2 years of incremental lease-term, while spending just $1.44 per square foot on tenant improvements and leasing commissions.

Moving on to our balance sheet activity, the first quarter was a busy quarter for our capital markets activity, raising over $1 billion in well-priced, long-term and permanent capital.

In February, we issued $425 million of 12-year senior unsecured notes, at a coupon of 2.25%, representing a 108 basis point spread to the benchmark treasury. Also in February, we issued €525 million of nine-year unsecured notes, at a coupon of 0.95%, representing a 110 basis point spread to the benchmark.

I'm pleased to say both of these bond issuances were executed at our tightest spreads and lowest coupons to date, demonstrating continued strengthening of our credit profile. Proceeds from these offerings were primarily used to prepay approximately $400 million of mortgages with a weighted average interest rate just over 5% and for the early redemption of €500 million bond, which carried a 2% coupon and was scheduled to mature in 2023.

In addition to taking advantage of favorable market conditions and getting ahead of a rising interest rate environment, we effectively reduced refinancing risk by addressing the majority of our debt due before 2024, while extending our weighted average debt maturity from 4.8 to 5.9 years.

In addition, we further advanced our unsecured debt strategy, reducing secured debt as a percentage of gross assets to 4.6%, down from 7.2% at the end of the fourth quarter and increasing our unencumbered ABR to 87%.

Locking in these long-term rates also resulted in an overall reduction to our weighted average cost of debt by 20 basis points to 2.7%, which is expected to generate annualized interest savings of approximately $17 million. Since the debt repayments occurred closer to the end of the first quarter, we expect to see the interest savings start to flow through earnings more meaningfully beginning in the second quarter.

On the equity side, during the first quarter we tapped into our ATM program issuing just over two million shares of common stock at a weighted average price of $70.26 per share, raising net proceeds of $140 million. So far in the second quarter, we've issued just over 443,000 shares at a weighted average price of $71.67 per share, raising additional net proceeds of approximately $31 million. We continue to have the flexibility to settle approximately 2.5 million shares under forward agreements in 2021 for anticipated net proceeds of approximately $160 million.

From a leverage perspective, we ended the first quarter with debt-to-gross assets of 41.2% and net debt to adjusted EBITDA of 5.9 times, which does not factor in the additional equity we have available to issue under forward agreements. We continue to target debt-to-gross assets in the low to mid-40% range and net debt to adjusted EBITDA in the mid to high five times.

Our successful execution raising capital this quarter has bolstered our already strong balance sheet with over $1.8 billion credit facility virtually undrawn at the end of the quarter, ensuring we remain extremely well-positioned to execute on our investment pipeline and retain significant flexibility on when we decide to access the capital markets.

Turning now to our 2021 guidance. As announced this morning, we've raised our AFFO guidance range by $0.06 at the midpoint, driven primarily by the strong momentum in our investment activity year-to-date both in terms of volume and pace as well as by the interest savings we will generate from the debt refinancing activity I discussed earlier. We've increased our investment volume range to between $1.25 billion and $1.75 billion, which always includes capital investments and commitments scheduled to complete this year. Our expectations for disposition activity remain unchanged at between $250 million and $350 million for the year. Year-to-date disposition activity has generated about $93 million in proceeds including $79 million that closed in the second quarter.

Our guidance continues to assume uncollected rents of between 1% and 2% of ABR. We continue to expect G&A expense for the full year to fall within our original range of $79 million to $83 million. And I'll note that our first quarter G&A generally trends higher than other quarters due to the timing of payroll related taxes and is therefore not a run rate for the rest of the year.

Embedded in our AFFO guidance is $9.7 million of cash dividends generated by other real estate investments, which we spoke about on our last earnings call. In January, we received a $6.4 million dividend on our common equity investment in Lineage Logistics, which we assume will be the only distribution we receive from Lineage this year. And in April, we received $3.3 million of preferred stock dividends on our investment in Watermark Lodging Trust, reflecting the amount due for the prior four quarters. These dividends will be the primary components of a new line item on our income statement called non-operating income.

Taking all of this together, for the full year, we currently expect total AFFO of between $4.87 and $4.97 per share, including real estate AFFO of between $4.74 and $4.84 per share.

In closing, we remain focused on growth. Our strong start to the year and robust pipeline put us on a path to deliver our highest annual investment volume since converting to a REIT. Furthermore, our balance sheet is well positioned for rising rates, with no significant maturities until 2024, and we have one of the best positioned net lease portfolios with embedded rent growth especially for an inflationary environment.

And with that, I'll hand the call back to the operator for questions.

[Operator]

Thank you. [Operator Instructions] Our first question is coming from the line of Harsh Hemnani with Green Street. Please proceed with your question.

[Harsh Hemnani, Green Street]

Thank you. I just wanted to ask in light of yesterday's deal of Realty Income acquiring VEREIT, do you feel like the competitive landscape will change with Realty Income entering continental Europe and whether that will make it more difficult or competitive for you to get deals there?

[Jason Fox, Chief Executive Officer]

Hey, good morning. Yes. I don't think it really changes anything. This is -- certainly, they're now a larger net lease REIT, but they've been making progress moving towards Europe, the UK first and based on what we read that they say Europe next. And it's a big market over there. It's as large if not larger than the United States, and is actually a higher percentage of owner-occupied real estate so the sale-leaseback market is even deeper.

Generally, we don't compete directly with them in the US. There's probably a little bit more overlap what we do in Europe, but I don't think this changes things. And if anything I'll say that anything that brings attention to the net lease space maybe in particular a diversified model within the net lease space and one that includes geographic diversification, I think that's a positive from my point of view.

[Harsh Hemnani, Green Street]

Thank you. And then another one for me. Can you talk about the occupancy declines on a sequential basis in the past two quarters? What is driving this? And then can you talk about what you're expecting going forward? I know you don't provide guidance on this but just your outlook would be helpful.

[Jason Fox, Chief Executive Officer]

Yes. Brooks, you want to take that one?

[Brooks Gordon]

Sure. Vacancy did tick up slightly. It's a few properties, I think, five over that period that have come off lease. Not really any trends in there pretty anecdotal. We do expect occupancy will tick back up to in the 99% range. Over the course of this year, there's a lot of activity in process active deals on roughly 30% of that vacant square footage and good prospects on the balance. So that will go up and down in any given quarter, but we would expect it to remain in that 99% range in the long run.

[Harsh Hemnani, Green Street]

Okay. Thank you.

[Brooks Gordon]

You’re welcome.

[Operator]

Thank you. Our next question is coming from the line of Joshua Dennerlein with Bank of America. Please proceed with your question.

[Joshua Dennerlein, Bank of America]

Yes. Hey, guys. Hope everyone’s well.

[Jason Fox, Chief Executive Officer]

Hey, Good morning, Josh.

[Joshua Dennerlein, Bank of America]

A question on the inflation front. What inflation metric are your leases based on? And then maybe what's the lag between when we see inflation and how that hits your P&L?

[Jason Fox, Chief Executive Officer]

Sorry, Josh, I didn't hear the very first part. You said what's the metrics?

[Joshua Dennerlein, Bank of America]

Yes, the inflation metric like is it a core CPI, CPI or some other metric?

[Jason Fox, Chief Executive Officer]

Yes. It depends on the region clearly. Brooks, do you have the details on kind of driving into the type of CPI?

[Brooks Gordon]

Sure. Yes as Jason said it's really a mixed bag. But on balance the majority are on a headline basis. In Europe, there's a bit more diversity in terms of country-specific or whether it's more of a producer measure or not. But on the whole, it's largely a headline type metric.

And then from a timing perspective, CPI itself has a bit of a lag just inherently as actual price increases flow through the year-over-year metric. From our lease perspective it really just depends on when the actual bump occurs. The frequency of our bumps is it's generally annually. It's on a weighted average basis I think about 1.5 years. So it will flow through our revenues for sure, but there is a bit of a lag there.

[Joshua Dennerlein, Bank of America]

Okay. Interesting. Cool. And then on the...

[Jason Fox, Chief Executive Officer]

And then Josh as I think you know we do have close to 2/3 of our leases tied to CPI which is why you're asking the question of course. So we think there could be some real upside in our same-stores going forward.

[Joshua Dennerlein, Bank of America]

Yes, I know. And it's nice that it's probably the headline inflation too. It seems like it's a kind of a little bit more juice than core. So nice work. And then on the -- press upon the euro debt issuance below 1%. Do you think you'll kind of continue to kind of increase your leverage in Europe to kind of continue to enhance your spreads, or is there some kind of governor that you would limit yourself to over there?

[Jason Fox, Chief Executive Officer]

Yes. I think it's more of a hedging mechanism certainly. But Toni why don't you dig into some of the details?

[Toni Sanzone, Chief Financial Officer]

Yes. We certainly do look to kind of increase and over-lever in Europe to protect ourselves on the foreign currency side. I don't expect that we would take that up significantly higher than where we are from a leverage perspective. I think we'll by and large keep the balance. And where we stand now, I don't think we're looking to find a mix to really artificially create any arbitrage there.

[Joshua Dennerlein, Bank of America]

Thanks guys. Appreciate it.

[Jason Fox, Chief Executive Officer]

Thanks Josh.

[Operator]

Our next question comes from Sheila McGrath with Evercore. Please proceed with your question.

[Sheila McGrath, Evercore]

Yes, good morning. Jason you mentioned new opportunities emerging in manufacturing. In general is pricing of these assets are they at a meaningful yield premium to more traditional warehouses? And just some more color on how you're sourcing these opportunities. Are they widely marketed or relationship-driven?

[Jason Fox, Chief Executive Officer]

Yes. I mean the -- I'll take the first part of the question first. Certainly the headlines that we all read about for logistics assets when we hear about them trading in the 4s or even sub-4s on occasion. And a lot of that is driven by the type of real estate at the location, but also the fact that these are shorter-term leases in many cases multi-tenant and there's a real mark-to-market opportunity when those leases expire, so that the stabilized yields might be meaningfully higher.

What we're behind are stabilized assets. So the zip code in which our cap rates would range for logistics themselves are probably more in the low 5s and up into the 6s depending on a number of factors.

You talked about sourcing. Much of what we do are sale-leasebacks so there's inherently a more limited universe of buyers that participate in that market. So we think we do have some pricing power in addition to the benefits that we get on structuring and underwriting given that our tenant is also our counterparty on the sale.

Digging a little deeper, we do see that industrial is a really deep and diverse sector. It's not just logistics assets as you pointed out. There's also manufacturing particularly light manufacturing that we do a meaningful amount in food production, cold storage we've talked about, R&D all property types we've had success targeting and properties that tend to have a meaningful yield premium just given the fewer buyers targeting those assets.

Generally for cap rates, I would say our targets are from 5% to 7% and we've averaged in the mid-6s over the last 18 months maybe a little longer. And I think that will continue going forward. Perhaps it dips down a little bit depending on the mix of assets and what we see trending in the market. But we feel pretty good about our ability to find these deals in many cases off-market and in some cases very limited marketing given the structuring of the transaction.

[Sheila McGrath, Evercore]

Okay great. And one more question for me. You do have lower investment-grade revenues versus your peers and that might be some of the reason that you traded lower multiple. Can you just outline for us how you don't necessarily think your strategy is more risky, despite this differentiation either like over historic context on collection losses or underwriting losses? Just to give people the perception of the risk inherent in your strategy?

[Jason Fox, Chief Executive Officer]

Yes sure. I mean we do have perhaps a little bit lower investment-grade rents compared to some of our peers. It still stands around 30% so it's a meaningful portion and obviously those cash flows are quite strong. And where we do focus the reason why it's 30% and not higher perhaps is because we do focus in the just-below investment-grade credit spectrum, an area that we think is -- there's much less capital flow. It requires more underwriting expertise where our deal team can really differentiate themselves, the long history of deep credit underwriting and structuring capabilities that I think really provides a competitive advantage for us. And, of course, we're also going to get some incremental better yields there.

We also get better structuring. We get longer lease terms. We get better bumps. We get -- occasionally get covenants there. And it doesn't necessarily lead to any difference in performance. I think, our collections throughout the pandemic reflects that from the very beginning. We were in the mid-90s trended quickly as we got into summer to the high 90s and we remain in that area. And it's mainly because when we're targeting sub-investment grade, we're also focusing on larger companies, companies with balance sheets that can withstand some economic disruption. They have access to institutional capital. And we think that's really the sweet spot for investing in that lease.

[Sheila McGrath, Evercore]

Thank you. One quick question for Toni. On the non-operating income you said no more Lineage distributions. Is that the case also for Watermark so that line item goes to zero?

[Toni Sanzone, Chief Financial Officer]

That's our assumption right now. The Watermark preferred their quarterly payments they can pay it quarterly or annually. We're currently assuming we just collected the last four quarters that we don't see anything else for the rest of this year in guidance.

[Sheila McGrath, Evercore]

Okay. Thank you.

[Jason Fox, Chief Executive Officer]

Thanks, Sheila.

[Operator]

Thank you. Our next question comes from the line of Manny Korchman with Citi. Please proceed with your question.

[Manny Korchman, Citi]

Hi. Good morning, everyone. Jason, you talked about a pipeline I think of $500 million with most expected to close in 2Q. Can you just give us a rough breakdown of the types of properties within that near-term pipeline?

[Jason Fox, Chief Executive Officer]

Yes, sure. I'll just recap quickly what we've done for the year so far. I mean we feel like we've had great momentum coming out of Q2 and the beginning -- of Q4 and the beginning of Q1. It's about $400 million of deals completed another $130 million of capital project. These are under-construction properties that are fully leased that we expect to complete in 2021 and therefore commence rent. So there's about $530 million locked in.

And then yes, I did reference I would call it over $500 million of deals in advance stages and much of that we think will close in the second quarter and the pipeline continues to build as well. Year-to-date just to give you some comparison, year-to-date it's about what we've closed is about 55% industrial, I think 30% retail which is predominantly in Europe. The split between US and Europe is about 50-50. It's -- call it 55-45 US to Europe.

And then the pipeline is trending more towards industrial. It's 80-plus percent industrial at this point in time. The remaining amount is really retail. And again it's slightly higher weighted towards the US call it 60-40, but that pipeline is changing and building so the components of that will change as well. And of course it's -- what we've done year-to-date is almost entirely sale-leasebacks, build-to-suits or expansions of our existing portfolio. I think all but one transaction at this point year-to-date falls in those categories. So we're still having a lot of success sourcing through those channels and putting meaningful amount of dollars to work.

[Manny Korchman, Citi]

Great. And then if we look at your overall pipeline for the year you, obviously, increased your acquisition guidance. How have you changed your pricing expectations on that increased pipeline if at all?

[Jason Fox, Chief Executive Officer]

Well I mean given our diversified approach we really target a wide range of cap rates. I'd say generally speaking we've talked about this before probably it's from 5% to 7% with some outliers above and below those ranges depending on the specific details of a particular transaction.

Year-to-date, I think, we're at mid-6 cap rate. I do think that probably trends down a little bit maybe into the low to mid-6s. But a lot of it will depend on the mix of properties in particular, Europe. Cap rates might be a little bit lower in Europe call it 50 basis points lower. But our borrowing costs are still at least 50 basis points probably more like 100 basis points cheaper there. So we're still generating better spreads despite the lower cap rates.

I think the other thing to note is that, we talk about going-in cap rates, but I think you really got to factor in the bump structure that we have. And I mentioned that at the beginning of the call, that our leases have meaningful bumps and the going-in cap rates maybe are less relevant. And the average yield or unlevered IRR in many cases it's more important in how we look at deals and how we evaluate their spread to our cost of capital.

[Manny Korchman, Citi]

Thanks, Jason.

[Jason Fox, Chief Executive Officer]

Yeah. Welcome, Manny.

[Operator]

Thank you. Our next question comes from Greg McGinniss with Scotiabank. Please proceed with your question.

[Greg McGinniss, Scotiabank]

Hi. Good morning. In regards to the pipeline, I guess just transactions in general have you changed your internal approach, or are there some external factors that may be contributing to the improved pipeline? And does this potentially point to a longer-term trend of increasing investment expectations in future years?

[Jason Fox, Chief Executive Officer]

Yes. It's a good question Greg. We've gotten that question in some individual meetings as well and I think there's a couple of things to talk about here. And we understand the perception because the last number of years we've hovered around the $1 billion mark. So it's probably helpful just to provide some context here on why maybe that's not a good run rate for us and it's something higher.

If you look back over the last number of years, there are some macro forces or really strategic events at W. P. Carey that are important to note. For one, we closed CPA:17 merger at the end of 2018. And then from there we continued the process of winding down the investment management platform. So as a result our cost of capital has improved since 2018 and that's really expanded our funnel. We began putting that into practice in call it 2019 especially by the end of that year and into the beginning of 2020. I think at that time, we've closed probably about $500 million of deals in that fourth quarter and maybe the first couple of weeks of January. So we were really beginning to hit our stride.

And in fact last March, we were sitting on a very sizable pipeline probably something that feels a lot similar to what it is right now. And then of course, we got derailed by COVID, which clearly none of us could have ever predicted. But I think what you're seeing now in 2021 is really just a combination of having a clear runway, free of all distractions from some of our prior strategic changes and really a cost of capital that works quite well. Certainly our diversified approach helps. We can generate a pretty wide opportunity set across property types and geographies and as I mentioned a few minutes ago broad range of cap rates. And then our improved cost of capital has also allowed us to expand that range to include probably more in that lower-yielding, bottom end of that range, but what we think are higher-quality industrial assets maybe ones that have higher embedded growth or better market dynamics.

And then lastly, you've seen us continue to ramp up sale-leasebacks and the availability of sale-leasebacks really continues to increase. We feel bit of a permanent shift in how corporates view owning versus leasing real estate. And as the market leader in sale-leasebacks, I think this is really a good trend for us. So all of this is now being reflected in 2021. I mentioned, year-to-date about $400 million deals done to date another $130 million under construction and then the pipeline of call it $0.5 billion and really growing. So we feel like that's a sustainable trajectory for us and kind of there's no reason to think that won't continue going forward.

[Greg McGinniss, Scotiabank]

Okay great. Thanks for the color. And then a quick funding question. So on the forward equity offering, do you actually need to settle that? Does it maybe make sense to let it expire and just using the ATM at $73 a share versus the 463?

[Toni Sanzone, Chief Financial Officer]

No. I think we would have to settle that sometime this year. I don't think we have to, but I do think our expectation is that we like that capital still. We like having the flexibility of having it out there. As you mentioned, we did tap the ATM at pretty accretive pricing compared to our investment activity. But I think you would expect us to continue to do that as well as to potentially draw that the remaining proceeds perhaps even as soon as the end of the second quarter. I think we'll just keep an eye on the investment volume. But the point is, we have a significant amount of activity ahead of us that we need to fund. And we like our opportunity set and where we can fund that from I think the -- both avenues are attractive to us.

[Greg McGinniss, Scotiabank]

All right. Thanks, Toni.

[Operator]

Thank you. [Operator Instructions] Our next question comes from the line of Frank Lee with BMO. Please proceed with your question.

[Frank Lee, BMO]

Hi, good morning everyone. Jason, just curious if you also took a look at the -- just curious if you also took a look at the VEREIT deal, and does that transaction make it more imperative for you to do a similar deal given their combined market cap and the advantages that it brings?

[Jason Fox, Chief Executive Officer]

Yes. I mean, it's a high-profile transaction and we're digesting that announcement in details that were provided. But we probably can't talk too much about it specifically. I don't think it changes anything from how we're motivated. We still are looking at everything, whether it's portfolios, individual acquisitions and potentially M&A as well. I don't think that changes. Realty Income, as I mentioned earlier, they were the largest. They're a little bit larger now. So I think its business as usual for us.

[Frank Lee, BMO]

Okay. Thanks. And then, you mentioned the majority of the $500 million of active deals will likely close in the second quarter. So that puts you close to $1 billion for the year, if you include the capital investment projects. Is it safe to assume that there could be some upside to your investment guidance range given that the acquisitions tend to be back-end weighted?

[Jason Fox, Chief Executive Officer]

Yes. It's hard to predict what happens for the rest of the year. We don't have a lot of visibility into more than the next three months. But the trends are quite positive. And I think, if we continue at the pace that we're on right now, I think you could probably expect something that could put us in the top half of that range or maybe even above the range. And we're talking next in the end of July. Perhaps, we're talking about a further increase. But it's hard to predict. And as you know, our transactions tend to be a little bit lumpier, so maybe even less visibility into them. But we like our pace right now. We like the market opportunity. We like our cost of capital and liquidity. So, we're feeling quite positive about it.

[Frank Lee, BMO]

Okay. And then just one more. And then, if we look at your capital investment pipeline, you added a lab project. I think, this is the first one in this property type. Can you talk about the opportunity there and potential for additional similar projects?

[Jason Fox, Chief Executive Officer]

Yes. I mean, we're certainly as diversified -- with our diversified approach with -- we feel that R&D is kind of a hybrid between industrial and office in some ways, but this -- it's a specific use. The tenant tends to have a high investment into the property as well. We kind of do these on long lease terms which is the case here. And you get some incremental cap rate, given that it's a little bit outside of the core focus of most industrial buyers who focus on warehouse. So, we like a lot about R&D. We think there are more opportunities. There are some in our pipeline that we're looking at right now. And so, again, as a diversified net lease investor, we have the benefits to look across a broad range of property types and we'll continue to do them.

[Frank Lee, BMO]

Okay, great. Thanks, Jason.

[Jason Fox, Chief Executive Officer]

Yes, you’re welcome.

[Operator]

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

[Peter Sands, Executive Director Head of Investor Relations]

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