WP Carey Inc

NYSE:WPC

Earnings Call Transcript 2022-Q1

[Operator]

Hello, and welcome to W. P. Carey's First Quarter 2022 Earnings Conference Call. My name is Jesse, and I will be your operator today. [Operator Instructions]. I will now turn the program over to Peter Sands, Head of Investor Relations. Mr. Sands, please go ahead.

[Peter Sands, Executive Director & Head, IR]

Good morning, everyone. Thank you for joining us this morning for our 2022 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 1 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, CEO & Director]

Thank you, Peter, and good morning, everyone. The strong year-over-year AFFO growth we reported this morning reflects both our sustained higher investment activity and inflation beginning to more meaningfully flow through to our rents. Our CFO, Toni Sanzone, will cover our earnings in more detail and give an update on our portfolio, balance sheet and guidance.

It's been over a decade since we've seen any real upward pressure on cap rates. So I'll focus my remarks this morning on the current environment, including the impact of higher interest rates and inflation. I'll also review our recent investment activity and pipeline and give a brief update on our acquisition of CPA team as we move towards closing that transaction.

And in light of the conflict in Ukraine, I'll touch upon the continued strong performance of our European portfolio and expectations moving forward. Tony and I are joined this morning by John Park, our President; and Brooks Gordon, our Head of Asset Management, who are available to take questions.

Plenty to get through, so let's jump right in. Starting with the broader environment, particularly the impact of higher interest rates on cap rates and investment spreads. The 10-year treasury rates up about 100 basis points since early March and 150 basis points compared to much of 2021. The long-term cost of debt for all net lease REITs has moved meaningfully higher.

Cap rates, on the other hand, generally reacted rising rates on a lag, typically measured in quarters rather than weeks. While our cost of debt has undoubtedly move higher, there are several mitigating factors that benefit our overall cost of capital and allow us to continue investing at sufficient spreads.

First, it's important to remember that we were very active in the capital markets during 2021, raising almost $1.5 billion in debt capital, proactively prefunding almost all of our debt maturities through the end of 2023, locking in an attractive cost of debt on it significantly lower than current market interest rates. Second, our cost of equity has improved meaningfully since late February with our stock currently trading around its highest level since late 2019, before the onset of COVID.

Given our capital structure and commitment to running conservative leverage, a lower cost of equity is generally more impactful to our overall cost of capital and a higher cost of debt. Similarly, from a competitive standpoint, we expect higher interest rates to more negatively affect higher leveraged private equity buyers.

Third, as we've consistently said, the spreads we generate on new investments are not driven solely by initial billing and cap rates. The contribution to our earnings over time is better represented by the unlevered internal rate of return or average yields we generate on our investments, which factor in the favorable rent growth we typically achieve over long lease terms.

And because over 99% of our ABR comes from leases with embedded rent growth, the majority of which is tied to CPI. We continue to feel good about the all-in returns we are earning for our investors relative to our cost of capital. In fact, for investments with rent increases tied to CPI, higher expected rent growth in the near term may partly compensate for a higher cost of debt.

Finally, while we've always expected the changes in cap rates would lag interest rates, we are starting to see signs of upward pressure on cap rates. But it's important to remember that most of the movement in interest rates the transaction markets are reacting to happened relatively recently, really over the last 6 weeks.

And while deal cap rates will eventually respond to higher interest rates, it's too early to say exactly how much and over what time frame to reach an equilibrium. So far, we've seen cap rates move incrementally wider on new deals being priced and a handful of deals in the market being repriced. In some cases, this has resulted in them coming back to market or coming back to W. P. Carey. And today, we would also price them at wider cap rates.

During transitional periods in the market, like we're currently experiencing, sellers are more focused on execution risk. Our strong reputation for providing certainty of close, therefore, gives us a competitive edge and also tends to result in our transacting at better yields. With that as the market backdrop, I'll turn now to our recent investment activity.

Year-to-date, we completed investments totaling $415 million with a weighted average cap rate of 6% and a weighted average lease term of 21 years. Our investments were predominantly sale-leasebacks giving us the ability to directly negotiate lease terms, including rent escalations.

We continue to take a diversified approach, although we remain focused on warehouse and industrial, which represent about half of our portfolio. We're also maintaining our focus on essential retail in Europe as well as exploring segments of U.S. retail. Our office exposure continued to decline incrementally, a trajectory we expect to continue given our underweight stance towards this asset class.

Turning to our pipeline. In addition to the $415 million of investments we completed year-to-date, we continue to see strong deal momentum. Currently, we have over $400 million of deals in our pipeline at an advanced stage. And about $175 million of capital projects or other commitments scheduled to complete in 2022.

That gives us good visibility into about $1 billion of investment volume, still relatively early in the year. And we continue to add to our pipeline at a healthy pace, making excellent progress towards our guidance range of $1.5 billion to $2 billion for full year investment volume. Our expectations on full year deal volume are, of course, before the impact of our proposed $2.7 billion acquisition of CPA 18, which is expected to add about $2 billion of assets after approximately $700 million of anticipated dispositions.

Our announcement on CPA-18 was, in many ways, the most significant event of the first quarter. providing an excellent opportunity to add high-quality assets we know very well that are well aligned with our existing portfolio with minimal balance sheet impacts as well as essentially concluding our exit from investment management.

As we said at the time of our announcement, we expect it to be immediately accretive to our real estate AFFO by around 2%, largely offsetting the earnings we will lose from no longer managing CPA-18 with attractive embedded upside through its self-storage portfolio. Since announcing this transaction, it's been positively received by investors in our conversations with them, we are widely recognizing these benefits.

In terms of the progress update, I'm pleased to say the 30-day go-shop period ended at the end of March with no competing proposals. And we anticipate a closing date in early August, pending the approval of CPA-18 stockholders and other customary closing requirements. The contemplated $700 million of asset sales, primarily student housing and office assets also remain on track, both in terms of our timing and pricing expectations. The sales process is well underway.

Turning now to the more meaningful impact that inflation is having on our rents. We continue to believe we're better positioned than any other net lease REIT to capture higher inflation through rent growth. is 58% of our ABR having rent escalations tied to CPI. On an ABR basis, 40% of our assets with rent increases tied to CPI went through scheduled rent increases during the first quarter with an average increase of 4.5%.

It's important to keep in mind that the 4.5% is capturing the year-over-year impact of fourth quarter CPI. And with inflation currently running at around 8% in both the U.S. and Europe, we'd expect to see significantly higher rent growth in 2022 and even more significant impact in 2023. We view this as especially valuable in the current environment, perhaps underappreciated by REIT investors, given that it has no cost of capital associated with it and has the potential to provide a prolonged tailwind to earnings even after inflation begins to decline.

And of course, if inflation expectations continue to move higher and for longer, we would expect to capture additional upside. Lastly, we're closely tracking an implication of the war in Ukraine, both in terms of potential impacts on our tenants and the transaction market. From a portfolio perspective, we have very limited assets in Eastern Europe, which are entirely within NATO countries, and we have no properties in Ukraine itself or Russia for that matter.

Within Eastern Europe, our assets are largely in Poland, primarily OBI, one of Europe's largest yourself operators and a strong German-based multinational credit. To date, we've not really seen any impacts on our tenants' ability to pay rent, stemming from the Ukraine conflict either in Eastern Europe or Europe more broadly, whether from higher energy prices or supply chain disruptions.

That could change, however, if the war continues. If there are significant economic disruptions, which would likely have a global impact, we remain well positioned for them. We view our tenant experience during COVID, during which we remain the sector leader in rent collections as the best indicator of our expectations.

During the first quarter, we collected over 99.7% of rent due for the portfolio overall and 99.9% for Europe. Similarly, we have not yet seen any meaningful impacts on transaction activity in Europe.

Putting the business aspects to one side for a moment, I'm going to also say, we're committed to supporting these humanitarian relief factors in the region and have made a donation to the American Red Cross, which is giving much needed support to displaced Ukranian civilians. The W. P. Carey Foundation has also matched our donation 2:1 to help further its impact.

In closing, we believe we're set up very favorably for the current environment for several key reasons. We have a well-positioned investment-grade balance sheet with about $2 billion of total liquidity and proven access to capital and a cost of capital that we believe will continue to provide sufficient spread to our investment opportunities even as cap rates lag interest rates. Currently, both S&P and Moody's have us on positive outlook, which could provide incremental benefits to our cost of capital even in a challenging capital markets environment.

After a record investment volume in 2021, we continue to see strong deal momentum in an active growing pipeline with good visibility into about $1 billion of investments, including investments completed year-to-date. We're making excellent progress towards the $1.5 billion to $2 billion of deals embedded in our guidance. In addition, we are confident in closing our acquisition of CPA-18, which adds about $2 billion of assets that will be immediately accretive to our real estate AFFO with additional upside in its self-storage portfolio.

Strategically, this transaction also simplifies our business, including our exit from investment management. Finally, and perhaps most importantly, in the current environment, we believe we're the best positioned net lease read for inflation given our embedded rent growth and high proportion of ABR tied to inflation. We're achieving record same-store growth in 2022, which is expected to continue if inflation remains high.

And to the extent investors are concerned about uncertainty in the market in a possible recession, we also offer unique downside protection through our diversified approach and a roughly 5% dividend yield, supported by high-quality cash flows and sector-leading rent collections during COVID. And with that, I'll pass the call over to Toni.

[Toni Sanzone, MD & CFO]

Thank you, Jason, and good morning, everyone. This morning, we reported total AFFO for the first quarter of $1.35 per share, up $0.13 or 11% year-over-year. This included real estate AFFO of $1.31 per share, which was up $0.12 or 10% over the same period. Real estate revenues increased 12% year-over-year, driven primarily by the strength of our investment activity over the last 12 months, the impact of rent increases tied to inflation and strong performance across our portfolio.

Lease termination and other income totaled $14.1 million for the quarter, including an $8 million termination payment related to an asset which we subsequently sold in April. The termination payment was contemplated in our initial guidance range. And for the full year, we expect termination and other income to total around $20 million.

Within expenses, G&A totaled $23.1 million for the first quarter compared to $22.1 million for the prior year period. As is typically the case, G&A was slightly higher during the first quarter than we would expect on a run rate basis due primarily to the timing of payroll taxes. Our guidance continues to assume G&A for the full year will fall between $86 million and $89 million.

Property expenses, excluding reimbursable tenant costs, increased $2.9 million year-over-year to $13.8 million, resulting from an increase in carrying costs and costs to reposition certain assets. We expect to see quarterly property level costs remain at or just below this level for the remainder of the year. Interest expense declined $5.6 million year-over-year reflecting the interest cost savings we generated from the debt refinancings we completed early in 2021.

Lastly, nonoperating income included $5.2 million of cash dividends received during the first quarter, comprising a $4.3 million annual dividend on our Lineage Logistics common stock and a $900,000 final dividend on the preferred stock we held in Watermark Lodging Trust. As I mentioned on last quarter's call, our Watermark preferred stock was redeemed at par or $65 million in January. And as a result, we currently hold only common stock in the company from which we are not projecting to receive any dividends during 2022.

Turning now to our portfolio. As Jason discussed, on an ADR basis, 40% of assets with rent increases tied to CPI had rent bumps during the first quarter with an average increase of 4.5%. And the impact of which flowed through to our overall contractual and comprehensive same-store metrics. As a result, contractual same-store growth increased from 1.8% in the fourth quarter to 2.7% for the first quarter up almost 100 basis points. Within this, the uncapped CPI component increased 170 basis points to 3.3%, and the CPI-based component which includes leases tied to CPI, but with caps increased 70 basis points to 2.4%.

As a reminder, the increases in these metrics during the first quarter reflect fourth quarter CPI data given the timing lag inherent in lease escalations. We anticipate contractual same-store growth at or above 3% for the remainder of this year and expect to see that trend meaningfully higher throughout most of next year nearing 4% based on current inflation projections.

Leasing activity for the first quarter included lease extensions with 1 of our top 10 tenants, Pendragon, which is a portfolio of car dealerships we own in the U.K. We executed very attractive lease extensions on 30 sites, representing about $11 million of ABR, which added 11 years of lease term while recapturing 100% of the prior rent and keeping the existing rent bumps in place. 12 sites are expected to be sold over the next year with Pendragon continuing to pay substantially all rent until the assets are sold.

Upon completion of the remaining sales our Penn Dragon portfolio will comprise 57 assets with a weighted average lease term of 14.8 years, and total ABR reduced from 1.8% to 1.5%. We Disposition activity in the first quarter comprised 6 properties for total proceeds of $27 million. Moving now to our balance sheet and capital markets activity.

We remain very well positioned from a balance sheet perspective, both in terms of our debt maturity profile and our liquidity position. We have a well-laddered series of debt maturities, limited exposure to floating rate debt, primarily through our credit facility, and our next bond maturity is not until 2024.

At the end of the first quarter, debt outstanding had a weighted average interest rate of 2.5% and a weighted average maturity of 5.2 years. Our cash interest coverage ratio increased from 6 to 6.4x over the first quarter and remains among the strongest in the net lease peer group. We ended the first quarter with debt-to-gross assets at 39.7%, and net debt to EBITDA at 5.5x, both at the low end of our target ranges.

We expect to remain within our target leverage levels of low to mid-40s on debt-to-gross assets and mid- to high 5x on net debt to EBITDA. So far in 2022, our capital markets activity has comprised issuing equity under our ATM program and exercising the accordion feature on our credit facility. Specifically, we've issued 2.7 million shares year-to-date under our ATM, raising about $220 million in gross proceeds, sold at a weighted average price of $80.79 per share.

Earlier this month, we also exercised the accordion feature on our term loans for the equivalent of about USD 300 million, increasing our total liquidity from $1.8 billion at the end of the first quarter, over $2 billion with proceeds used to pay down our revolver balances, leaving us substantially undrawn on our revolver as a result. We, therefore, have ample liquidity to execute on our deal pipeline and flexibility in when we access capital markets, which is especially valuable in the current environment.

Lastly, I'll briefly recap our guidance. We're maintaining our AFFO guidance range of $5.18 to $5.30 per share, including real estate AFFO of between $5.03 and $5.15 per share. which continues to assume investment volume of between $1.5 billion and $2 billion and $250 million to $350 million of disposition. And as a reminder, our current guidance does not reflect the impact of our proposed merger with CPA-18. And with that, I'll hand the call back to the operator for questions.

[Operator]

[Operator Instructions]. Our first question comes from R.J. Milligan with Raymond James.

[Richard Milligan, Raymond James & Associates]

My first question is for Tony. I think previous guidance was for 2.5% to 3% of same-store rent growth for the year. So we saw the 2.7% increase in 1Q. And I think in your comments, you said that you expect that to trend higher, given higher inflation at or above 3% for the remainder of the year. So I'm just curious where do you expect that to shake out for the full year? Because I think the bulk of the increase was in the first quarter. So I'm just curious what the full year outlook looks like.

[Toni Sanzone, MD & CFO]

Yes. Thanks, RJ. I think you hit the nail on the head. I mean we raised from what we've seen based on the prints that we're coming through now. I will say with the first quarter at 2.7%, we do expect to see in the 3% range, potentially over 3% as we get later in the year. And I think what we've continued to highlight is kind of the lag in the leases. So while we're seeing that come through, I think the impact of what we've seen since we announced guidance of the raise in the inflation print is more likely to affect the back half of the year or really even closer to the fourth quarter and be much more impactful on 2023. And I think what we're also seeing is the curves and the expectations for it to be sustained longer. So potentially tailwinds into 2023 and into 2024 as opposed to a more meaningful impact on 2022.

[Richard Milligan, Raymond James & Associates]

Understood. And so just to clarify, I think in your comments, you said that you expect it to be near 4% internal growth or same-store rent growth for '23, just given what we've seen with the inflation numbers so far this year.

[Toni Sanzone, MD & CFO]

Yes, I think we could see certain quarters in '23 peak up to the high 3s closer to 4.

[Richard Milligan, Raymond James & Associates]

Okay. My second question is for -- just to comment on seeing signs of upward pressure on cap rates. So I'm just curious if there's any specific geographies or industries or sectors where you're starting to see a little bit of breaking in terms of cap rates.

[Jason Fox, CEO & Director]

No, it's really anecdotal at this point. And I think that makes sense. I mean, the spike in interest rates really only occurred over the last 6 to 8 weeks. So it's still pretty early. But there are some signs, and it's hard to quantify, maybe it's 25 basis points. I mean, some of the anecdotes we're seeing is deals getting repriced out in the market and in many cases, going back to market and sometimes back to us as a potential buyer. And when we look at those transactions a month, 2 months after we originally had looked at them, we may be raising our pricing on those by some factor, depending on obviously a lot of the specifics. But yes, it's more anecdotal than anything else. The designs are there. I would expect that if rates don't reverse course, then I think without a doubt, we'll see some widening by the end of the year. It's just hard to quantify at this point in time.

[Richard Milligan, Raymond James & Associates]

Just as a follow-up to that, Jason. Just curious, obviously, with fewer levered buyers out there in the market, I think the anticipation is that you might see a little bit better pricing, as you just mentioned. But curious how that impacts the disposition side of the $700 million of asset sales and whether or not you're seeing potentially less interest or fewer buyers for those assets given the move-in interest rates.

[Jason Fox, CEO & Director]

Yes. So the $700 million that we're disposing as part of the CPA transaction, about 60%, so a little over $400 million of that is the student housing portfolio that was under a purchase option that has since been exercised. So that's a fixed price. That won't be impacted at all by anything that's happening in the broader rate market. So I think the other 40%, those processes are well underway. It's one student housing asset in the U.S. It's UT-Austin as well as 3 European office assets. And preliminary indications would suggest that we're kind of on schedule, both in terms of timing and pricing, but we'll wait to see what happens when we can final execution.

[Operator]

Our next question is coming from the line of John Massocca with Ladenburg Thalmann.

[John Massocca, Ladenburg Thalmann & Co.]

So I know you kind of disclosed -- you disclosed the cap rate on kind of year-to-date acquisition activity. Was there any kind of bifurcation maybe between stuff that closed in 1Q '22 and the stuff closing subsequent or even stuff closing in kind of January, February and stuff closing in March, April, just in terms of the cap rate you're seeing on those transactions.

[Jason Fox, CEO & Director]

Yes. Look, there is -- we target a big range. It's a diverse portfolio, a diverse model. So we typically do transact within that 5% to 7% range that we talk about. So there is some dispersion. Some of it could be based on where rates have gone, but it's probably more a function of the asset mix. geographies. Europe, we're still seeing cap rates that are a little bit lower. And obviously, if we're buying logistics assets over, say, a manufacturing property. There's maybe some delta between those as well. So probably not much correlation that we're seeing because a lot of those deals were pricing in process 6 to 8 weeks ago, almost at the time of the interest rate increase, but there is some dispersion certainly.

[John Massocca, Ladenburg Thalmann & Co.]

Okay. And then the $400 million that's kind of in the tangible pipeline, what should we think about in terms of timing of close on those transactions? Is that stuff that it gets to the finish line would be in kind of a 6-month window? Is that maybe stuff that could close over the remainder of the year? Just any color there would be helpful.

[Jason Fox, CEO & Director]

Yes. No, these are more -- these are advanced stages. These are deals that we have under at least signed letters of intent or some type of contract. Now there's diligence left. So we won't say that these are done deals necessarily, especially when you're dealing with sale-leasebacks. But timing expectations are over the next 30 to 60 days for those transactions. Things could drag and the market is volatile. So it's hard to predict exactly what happens. But those are at advanced stages and we would expect to close them in the relatively near term, probably by the end of this quarter.

[John Massocca, Ladenburg Thalmann & Co.]

Okay. And then if I look at the comprehensive same-store growth disclosure, it seems like some of the strength in the uncapped CPI growth was offset a little bit by weaker increases in the fixed. Just any color on maybe what was driving that?

[Jason Fox, CEO & Director]

Brooks or Toni, if you have some insights into that.

[Toni Sanzone, MD & CFO]

I think just looking at the -- your question is on the fixed rate anchoring down the CPI base exactly.

[John Massocca, Ladenburg Thalmann & Co.]

In terms disclosure on comprehensive same-store growth, it seems like it was a little weaker in the quarter. It's going to be a small selection of assets, but...

[Toni Sanzone, MD & CFO]

Yes, I think that's likely. I mean, what we typically see comprehensive historically kind of pre-COVID is anywhere from 50 to 100 basis points lower than contractual I don't think there's anything specifically trending in any of the metrics this quarter. I think we are seeing still better results on the comprehensive side, but I don't think there's anything in particular that's weighing that down. I don't know, Brooks, if you had any specific details to add to that.

[Brooks Gordon, MD & Head, Asset Management]

No, I think it really just is kind of timing and anecdotal and what's in that specific quarter.

[Operator]

Our next question is coming from Joshua Dennerlein with Bank of America.

[Joshua Dennerlein, Bank of America Merrill Lynch]

I was just looking at Page 3 of the supplemental normalized pro rata cash NOI, it looks like it fell quarter-over-quarter. Is there -- what are the moving pieces there? I would have assumed just like in a it would have gone up in 1Q versus 4Q? Is there something skewing doing that.

[Toni Sanzone, MD & CFO]

Yes. Thanks for the question, Josh. I think there's a couple of components that skew that this quarter when you're looking at it compared to Q4. The first really is the movement in FX from last quarter. So this is on a constant currency basis. I think we've seen about a 2% decline in the average euro rate quarter-over-quarter. And so that's probably about a $2 million delta from last quarter. And the other piece of it, I mentioned in my remarks, which is just a higher property expense total for the quarter of about $2 million. So really the aggregate of those 2 things are really driving the offset to the acquisition volume in the same-store growth. .

[Joshua Dennerlein, Bank of America Merrill Lynch]

Okay. Okay. That makes sense. And then it looks like you entered kind of a new asset class roles in Spain. How do you get comfortable underwriting those types of assets and did you disclose the cap rate on that?

[Jason Fox, CEO & Director]

We don't disclose individual cap rates. I would say it's probably in the bottom half of the range that we typically target, and that's more of a function of the fact that it's in Spain and the bulk of the value is infill locations within Barcelona. So really high-quality locations, strong barriers to entry, not a lot of, obviously, space to develop and compete in terms of the industry or the transaction itself, look, it was an off-market transaction. It was a portfolio of 26 properties with the largest funeral service provider in Spain and Portugal. We've looked at this industry in the past. We like the industry, very stable. It's really unaffected by economic cycles. We like the fact that their tenant is market leader. It's also it's well capitalized. It's owned by Ontario teachers pension plan. And then the structure was good. Masterlease, very good site level coverage, 30-year lease with CPI increases. So there's a lot of like about it. And as I mentioned, is infill Barcelona and probably about half of the values in fill Barcelona and about half the portfolio is also been excellent rated. So I don't know if I called a new vertical. I think you referred to it as, but yes, maybe a new property type and if we can find some similar transactions that have similar characteristics of this 1 or maybe even some follow-on deals with the tenant itself. I think that we'd welcome that.

[Joshua Dennerlein, Bank of America Merrill Lynch]

Okay. Interesting.

[Brooks Gordon, MD & Head, Asset Management]

And then just one quick follow-up. I just missed it in the opening remarks. What was the rationale for selling down some of the Pendragon assets?

[Jason Fox, CEO & Director]

Brooks, do you want to take that?

[Brooks Gordon, MD & Head, Asset Management]

Yes, sure. This is Brooks. As Toni mentioned in the remarks, we extended 30 of those properties to 20 years, new fresh terms and created enormous value there, very attractive extension terms. As part of that extension, we're disposing 12 of the weaker assets. We've disposed 3 of those now. The subsequent and the remainder will happen this year, and that's all baked into our disposition guidance.

[Operator]

Our next question is coming from Greg McGinniss with Scotiabank.

[Greg McGinniss, Scotiabank]

Lease expiration questions here. So we noticed a new disclosure on the expirations page relating to a 2022 $16 million Marriott at least. Is there some concern that tenants not going to renew? Or why was that lease called out?

[Jason Fox, CEO & Director]

Sure. So as we've talked about before, we have [indiscernible] Yes, exactly. Yes. We have a portfolio of 18 Courtyard Marriotts. And really, the point of the additional disclosure was to make it clear, there's 2 tranches. So the first is 12 of those, which is $16 million in January in the second tranche of in 2027. So it was really just to distinguish as they're blended together in the top 10 list there. And so the first tranche, we do expect a likely outcome there as those transition to operating hotels. Those properties are recovering quite well. So it's not really a nonrenewal. There's an underlying business there and current are expectations that the underlying operations will actually exceed our in-place AFFO currently. But we just want to make that clear on disclosure.

[Greg McGinniss, Scotiabank]

Okay. And then the increase on, I believe, it was 2023l leases, ABR as well. Was that some short-term lease acquisitions that you guys made? Just trying to understand what that increase was driven by? And is there just -- was there some near-term opportunity that you're excited about? .

[Jason Fox, CEO & Director]

No, nothing on an acquisition front. That may have to do -- I think it's very slight, I don't have the change right in front of me, but that might have to do with the resetting of some of the Pendragon that we are in the process of disposing those 12 assets. There's also FX always flowing through that as well, but nothing notable there.

[Greg McGinniss, Scotiabank]

Okay. And a question -- a little speculative question for you. Jason, why do you think there were no other bids on CPA 18? We know that there's some private equity buyers out there looking for scale. And theoretically, CPA-18 could help achieve that goal.

[Jason Fox, CEO & Director]

Well, I mean, I think that we had a number of advantages that we've talked about in the past, certainly, first and foremost, we're the manager we assembled those portfolios. We know them extremely well, and therefore, can submit a strong, no diligence bid. There's also other frictional costs that another prospective buyer would have to incur such as mortgage assumption costs and in some of the back-end fees and carry that we would earn. So that's our guess. I mean it is a strong portfolio. I'm guessing that the advantage that we had probably serve somewhat as a deterrent to others. And look, the period in which the Go Shop occurred was a pretty volatile point in time. Interest rates shot up. There's a war in Ukraine, so there's a lot of things happening in the world that may have made it difficult for another party to make a bid on a pretty diverse portfolio that's got student housing, self-storage, net lease in both Europe and the U.S. So that's our guess, but we don't have a lot of insights. I think that the proxy has some details and color around the interest level that other bidders had. I think there were a number of them that had signed NDAs did some work, but there was no competing bids. .

[Operator]

Our next question is coming from the line of Brad Heffern with RBC Capital Markets.

Going back to some of the market commentary about cap rates going up and deals being repriced, -- are there fewer bidders showing up? Or are people just sort of repricing their expectations?

[Jason Fox, CEO & Director]

It might be a little bit of both. I mean, when cap rates are when interest rates jump as much as they have, I think buyers have something they can point to, to maybe get a little bit more yield on a particular deal. So I think that's happening some. But it does feel like to me -- and this is, again, more anecdotal than anything else. It's more of a gut feeling that the competition has thinned out a little bit. the higher-leverage buyers who are certainly more negatively impacted by the jump in rates. They seem like they could be on the sidelines a little bit or not as competitive and that's obviously a good thing for us. But it does feel like that there's a little bit of thinness in the processes or properties that we've been involved with, not necessary 1 is on, but in conversations with brokers, it does feel like it is a little bit less of a robust marketplace. And again, that's a good thing.

[Greg McGinniss, Scotiabank]

Yes. Okay. And maybe for Toni, going back to the conversation on the increase in same-store rent growth expectations, I understand it's probably biased towards the end of the year, but it still seems like going from to above 3% would be enough to move the guidance a little bit. So I'm just curious -- are you just waiting until later in the year to see how acquisitions play out? Or was there some sort of an offsetting factor that left the guidance unchanged this quarter.

[Toni Sanzone, MD & CFO]

Yes. I mean I think the specific change from when we went out with guidance inflation has probably a $0.02 impact overall. And so I think that's still well within the guidance range. I think there's a number of other moving parts that we've been talking about on this call, including kind of the impact on interest rates and how that might affect tighter cap rates. So I think all in that, that $0.02 is not as meaningful to this year in terms of where we are in relation to our guidance. I think we feel good about where we are. But there's certainly other moving parts within the range that would offset that. .

[Greg McGinniss, Scotiabank]

Yes. Okay. Got it. And then just a mantra question. If CPA 18 does indeed close during the third quarter, will that be reported as discontinued ops? Or will the fee income be included in FFO?

[Toni Sanzone, MD & CFO]

Sorry, the-CPA 18 dispositions don't close?

[Brooks Gordon, MD & Head, Asset Management]

No, sorry, a CPA does close, will the fee income be included in FFO? Or will it be reported as discontinued operations. .

[Toni Sanzone, MD & CFO]

Sorry about that. No, the -- there's no real concept of discontinued operations there. But I think what's important to note is we report real estate AFFO and investment management AFFO. And so you'll see kind of the shift over to the real with the acquired portfolio and then the investment management fee streams will just decline and essentially go away. Our next question is coming from Anthony Pallone with JPMorgan.

[Anthony Paolone, JPMorgan Chase & Co.]

My first one is just a 2-parter related to Europe. One, does the Ukraine situation change how you're thinking about allocating capital around the continent or even to the continent in general? And then the second part is just it relates to FX, what is sort of the bottom line exposure or hedging right now? Because I know you've got hedges and you got the local debt. And so just where does that all net out?

[Jason Fox, CEO & Director]

Yes, Tony. Let me take the first one, and I'll pass the second 1 along to Tony Sanzone. So does it affect our underwriting and how we're looking at Europe certainly, the world events are affecting our underwriting, but it's more on a -- I would say, specific to Europe, I mean we're looking at what are the consequences that could have on a global economy. How is that flowing through to supply chains and energy costs and how does that impact kenafcredits. So that's just part of the calculus that we're doing on any deal for that matter. I don't know if it's specific to Europe at this point in time. We're certainly keeping a close eye on it all. And maintaining the same level of diligence that we've always done on deals, but that's kind of how we're looking at it right now.

[Toni Sanzone, MD & CFO]

Ken, on your question on the FX and the hedging strategy, we talked about this a few times. I think the natural way that we do look to hedge, we obviously is through issuing foreign debt to offset the impact on the revenues. And then further, we go ahead and we have a hedging program that eliminates kind of any additional -- or a significant portion of the additional exposure. I think you're right to kind of look at where we are right now and the way rates are moving. But we definitely mitigate a significant portion of that. I think if you look at the overall net exposure of what remains for us. If you look at 2021 rates, we averaged about 118 on the euro. So we do expect about a 7% to 10% decline year-over-year. And that's baked into our guidance. I think that could result in year-over-year FX exposure of roughly $0.08. And that is 1 of the headwinds that we're seeing this year, but we do expect that our hedging strategy more than mitigates the majority of that.

[Anthony Paolone, JPMorgan Chase & Co.]

Okay. So the $0.08 is before incorporating the local debt and the hedging. So the actual effect of how you're thinking about FX for this year is a lot smaller than that.

[Toni Sanzone, MD & CFO]

No, the $0.08 is after hedging. So I think that's probably the largest exposure you'll ever see in terms of the rate movement we're seeing in any 1 year, but that's a full year-over-year decline the way that I'm describing that. So -- but it is after hedges. The way we think about it internally is every 10% change in the euro could result in about a 1.5% change in AFFO after hedges on a full year basis.

[Anthony Paolone, JPMorgan Chase & Co.]

Okay. Got it. And then, I guess, sticking with you and related to guidance. You had the last quarter, and maybe I missed this if you updated last quarter, you talked about lease term fees being, I think, $18 million to $20 million or something in that at it looks like you got the bulk of that in 1Q. So any change to the total number the year thinking there? And then also, was there anything outsized on the other income side in 1Q related to just working through CPA 18 or anything like that, that we should be mindful of?

[Toni Sanzone, MD & CFO]

Yes. I think on the first part of your question, we did -- we came out with an initial range on our expectation for other lease term income of about $15 million to $20 million. We're tracking towards the higher end of that now, as you highlighted, we're front-end weighted for sure. We have about $14 million in total in the first quarter, and we expected that, that would be front-end weighted. So that's all been contemplated in guidance. And in terms of the 1 more significant 1 in the first quarter that I highlighted, it was about $8 million, and we did dispose that asset subsequent to quarter end. So no real NOI impact there in terms of what we expect for the rest of the year, I think it will normalize based on what we see right now.

[Anthony Paolone, JPMorgan Chase & Co.]

Okay. And then just last question related to CPA 18. Any updated thoughts in terms of how you're thinking about the storage component of that portfolio? And how much to keep maybe operating versus net lease versus sale?

[Jason Fox, CEO & Director]

Yes. I would say still all on the table. I mean, we have probably 3 good options in the way I look at it. We have a long history of owning self-storage within our portfolio in this portfolio specifically, we assembled over the last 10 years in CPA-18. So we could continue to own those properties. They're currently managed by with Extra Space and Cube and that might be the right move for at least the near term given the high-growth expectations embedded into that asset class right now. But ultimately, we could put a net lease in place like we did with Extra Space. I think we have a good blueprint for that that we did back with the CPA-17 storage assets -- and then certainly, these assets will trade at pretty tight cap rates. So to the extent we think that it's the best way to fund new deals, then that's an option as well to sell all or maybe a portion of the properties. If that's a good use of capital or good allocation of capital at that point in time. But generally, I think we can be patient right now because we do know these assets well, and we are expecting some outsized growth within them.

[Operator]

Our next question is coming from John Kim with BMO Capital Markets.

[Unidentified Analyst]

It's Eric on for John. Just one quick one on CPI rents. Of the acquisitions closed year-to-date, did any of those have the CPI lease agreements baked in them?

[Jason Fox, CEO & Director]

What we've closed year-to-date, yes, it's about 50% of our year-to-date is looking for the number now just below 50% of our, as you know -- just above 50%, sorry, of the deals we've closed have CPI. That's a mix of both Europe. It's probably predominantly Europe, I think there's some U.S. in there as well and some have capped are uncapped. And our pipeline is very similar. It's actually just under 50% of the pipeline that we talked about in terms of the amount of base increases versus fixed increases. Maybe the other thing to note is even the fixed increases that we're getting, we are able to negotiate a little bit higher of an increase than what we've seen in the past. I mean I think typically in the past, it's probably been 2% on average, maybe even a little bit below that. I think now we're seeing fixed deals in the 2% to 3% range. So there's some upside there in the current market conditions.

[Emmanuel Korchman, Citigroup]

Okay. So those conversations aren't becoming more difficult kind of given the current inflationary environment?

[Jason Fox, CEO & Director]

Yes. I mean, look, they -- it's more of a conversation now certainly. In Europe, it is more standard or customary to have inflation. So we're continuing to get those. I think there's more discussions around floors and -- I'm sorry, for caps. And if we do caps, we typically require floors as well. in the U.S., fixed has historically been more standard, but it doesn't mean that we're not getting some of those. But yes, there's more discussion around it. And certainly, one of the benefits of sourcing most of our deals through sale leasebacks, we can dictate structure. And we certainly have an emphasis on inflation-based increases in our leases. So we're continuing to have some success.

[Operator]

Our next question is coming from Emmanuel Korchman with Citi.

[Emmanuel Korchman, Citigroup]

Just going back to the investment pipeline, just if you could share with us what you think the pace of closing those might be through the year?

[Jason Fox, CEO & Director]

Yes, I mentioned on the prior question, Manny, that the $400 million that are in advanced stages, obviously, the market is volatile, so it's hard to predict entirely, but our expectation is that we'll close [Technical Difficulty]. Clearly, the cost is higher on the debt side right now than it was a couple of months back and certainly over last year. But we're a lower leveraged buyer. So overall, our cost of capital is more impacted by our cost of equity, which has meaningfully improved since February. So we're feeling pretty good about our cost of capital. I think that when you think about cap rates, it's hard to predict where they're going to go. I think that they are -- we're seeing some signs of increases. But if we can find some good deals now, we want to continue to transact. And if rates rise throughout the year, then we'll be aggressive on those as well. And we're going to be mindful of our cost of capital all along, but we do feel good about the spreads we generate.

[Operator]

Our next question is coming from Harsh Hemnani with Green Street.

[Harsh Hemnani, Green Street]

My first question is around the 40% of leases in the portfolio linked to uncapped CPI. How much of that is coming from Europe versus the U.S.

[Jason Fox, CEO & Director]

Toni, you and Brooks have that. I want to say that it's about 50-50, but go ahead, Brooks.

[Brooks Gordon, MD & Head, Asset Management]

Sure. It's uncapped, as you said, around 40%. It's about 60-40, you're up to U.S. if you were to split that 40.

[Harsh Hemnani, Green Street]

That's helpful. And then you mentioned through the year, the NOI growth that you expect from these leases to increase. How much of that is from the U.S. versus [indiscernible].

[Toni Sanzone, MD & CFO]

I'm sorry, I didn't catch the end of that question. .

[Harsh Hemnani, Green Street]

So you mentioned the NOI growth from these leases moving up to 3% towards the end of the year. And how much of that is being driven by expectations that you're seeing already inflation from last year that will flow through into NOI. How much of that is coming from the U.S. versus Europe? And then looking forward at 2023 even, how are you expecting that moving?

[Toni Sanzone, MD & CFO]

Yes. I think we're looking at the curves that are out there right now for both the U.S. and various countries in Europe in which we operate. And I think it's really across the board. I would say that the curves in the -- in Europe have moved along with the U.S. in the most recent months. So when I highlighted earlier, about a $0.01 to $0.02 increase over the back half of this year in terms of what we've seen move in the last month or 2 since initial guidance, I think that's pretty fairly weighted between the U.S. and Europe. So it's definitely in both locations. .

[Harsh Hemnani, Green Street]

Got it. That's helpful. And then for my second question, I wanted to touch on about 2/3 of the acquisitions in the first quarter came from Europe. And I want to check, is this looks maybe you're seeing higher investment spread there right now relative to the U.S.? And how should we expect the trend for the rest of the year?

[Jason Fox, CEO & Director]

Yes, sure. Yes. We did have a higher amount of deals in the first quarter. I think year-to-date, it's about a 50-50 split between the 2 regions. So higher than we've had in the past. I think 2021 was about 1/3 of our investments and our ABR is allocated about 1/3 to Europe. So there's a little bit higher allocation right now. I think generally speaking, we were able to generate wider spreads in Europe. I think cap rates have compressed over the last year to 2 years inside of those in the U.S., but not enough to offset the cheaper borrowing costs that we see over there. So it's a good market for us. There's lots of reasons why we like to be there. Certainly, spreads is one, but just the quality of the real estate barriers to entry in the lack of competition or all things that are positive attributes. So we'll continue to hopefully find good investments there. And the pipeline is also a little bit weighted. I think it's about 50-50 Europe, U.S. as well. So a little bit of an elevated allocation relative to the existing portfolio.

[Operator]

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

[Sheila McGrath, Evercore ISI]

I guess, Jason, I was wondering if you could remind us based on your experience of closing the other funds. Is there short-term selling pressure as the retail investors get more liquidity? Or just how should we think about that dynamic? .

[Jason Fox, CEO & Director]

Yes. I think for the first couple of days, maybe a week or so, you'll see elevated trading, but it should moderate over time. In the past, prior CPAs, not CPA-17 actually, there were other CPA programs to reinvest into. So there might have been even more selling pressure back then. But I think over time, we've seen half maybe a little bit more than half of the shareholders stay in. But most of the selling pressure is pretty short term, and our expectation is they'll be institutional investors that will see it as the elevated trading volume as a way to maybe get a position in W. P. Carey and it should absorb a lot of the volatility.

[Sheila McGrath, Evercore ISI]

Okay. And then on the positive outlook from the rate agencies, is that driven in part by the additional diversification that you'll get on closing CPA 18, so we should wait for closings for any change or?

[Jason Fox, CEO & Director]

I don't think it's -- yes, it's not the additional diversification. I mean we're very well diversified and CPA is a diversified portfolio, but it's not adding that much, especially given the size of it relative to Parry's current size. I don't know, Toni, if you want to tick through any of the reasons. But generally speaking, our credit profile has continued to improve. And I think that's probably more of the reason in particular, our secured debt has come way down and leverage levels as well. So there's just a lot of positive momentum behind our credit profile.

[Toni Sanzone, MD & CFO]

Just adding to that, it's really -- we don't expect any material change in our metrics as a result of CPA-18. And so I think that's been positively by the rating agency.

[Sheila McGrath, Evercore ISI]

Okay. And last question, Tony, if hypothetically, if you were going to go into the unsecured 10-year bond market now, where do you think a range rough in the U.S. and in Europe would be? -- Just to help us .

[Toni Sanzone, MD & CFO]

Great question, Sheila. I think that's something that we're monitoring on a daily basis. But it really is a dynamic environment. I think we're aware, obviously, that rates have moved from where we've last issued and certainly, even in the last 6 weeks. I'd say it's moving by the day. It's really hard to pinpoint a number. We do expect that it has moved up in both the U.S. and in Europe in terms of where we could issue right now, but it's pretty challenging for us to pinpoint a number. And I think what's more important is that we don't really have a reason to transact at this point in time, given all the work that we've done on our balance sheet, how well positioned we are. So I did mention the term loans that we exercised the increase on our credit facility. So we have a lot of room there. We have a lot of dry powder on the equity side with the forward agreement that we still have outstanding. -- so we really don't expect to need to transact in this market where it stands right now.

[Operator]

[Operator Instructions]. Our next question is coming from Chris Lucas with Capital One Securities.

[Christopher Lucas, Capital One Securities]

Toni, just to stick with you for a second. Just going back to the term loan. What's the duration? And is there any prepayment penalties during the duration of term loan?

[Toni Sanzone, MD & CFO]

Yes. The credit facility for us matures in 2025. I think we'll certainly be looking to address it before that point in time. But in terms of the actual prepayments, they're fully flexible. So there's no prepayment penalty on that, which was 1 of the interesting components for us.

[Christopher Lucas, Capital One Securities]

Okay. And then, Jason, just kind of going back to the conversation about your flexibility and optionality with the self-storage assets. And then just thinking about the hotel export lease expiration. I guess sort of two parts. One is, what's your view or bias as it relates to what to do with the hotels once they roll off of the master lease? And then secondarily to that, is there a risk management profile that you want to keep in terms of limiting either by gross value of ABR exposure or as a percentage of overall ABR exposure, you're willing to have an operating assets versus fully pass-through triple net lease assets.

[Jason Fox, CEO & Director]

Yes. Those are good questions, Chris. On Marriott, I mean we would not expect to own those assets long term. I think that they would convert to franchise agreements to the extent they don't renew the leases, and we don't have to have an immediate sale. I think it's probably prudent to wait until those assets are more stabilized coming out of COVID. but I wouldn't expect us to hold them for very long. Hard to put an exact time line on what that stabilization would look like. But ultimately, we would certainly sell those. I think the self-storage is probably a little bit different. We the different cash flow profile, obviously, much more stable than the hotel industry.

So I don't think you see as much noise moving through the income statement or even on our expense side of things, holding self-storage. But it is a sizable amount. I mean it's not that big relative to the broader portfolio, but what we're adding is meaningful in size, and we certainly keep that in mind as we look at our options, which to mitigate that could be to convert to net lease, which we did with the prior portfolio or if we think that there are -- it's the right thing to sell and reinvest that into net lease assets, that's something we can consider as well. But you're right, that's part of the -- part of the consideration in what we do with these assets is how does that impact the stability of a net lease portfolio.

[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, IR]

Thanks, Jesse, and thank you to everyone on the call for joining us this morning. If anyone has additional questions, please call Investor Relations directly on 212-492-1110. And that concludes today's call. You may now disconnect.