WP Carey Inc

NYSE:WPC

Earnings Call Transcript 2023-Q2

[Operator]

Hello, and welcome to W. P. Carey's Second Quarter 2023 Earnings Conference Call. My name is Kevin, and I'll be your operator today. [Operator Instructions]. Please note that today's event is being recorded. [Operator Instructions].

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

[Peter Sands, Head, Investor Relations]

Good morning, everyone. Thank you for joining us this morning for our 2023 second quarter earnings call.

Before we begin, I would like to remind everyone that some of the statements made on this call are not historic facts and may be deemed forward-looking statements. Factors that could cause actual results to differ materially and 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. We made good progress during the second quarter, closing a significant volume of accretive new investments in an environment that remains construct for sale leasebacks, enabling us to apply upward pressure on cap rates.

Our contractual same-store rent growth also remains among the best in the net lease sector. And even though inflation is cooling, we expect to continue leading the peer group on rent growth, driven by the lagged impact of CPI and rents as well as the strength of our fixed rent increases.

This morning, I'll briefly recap our recent investment activity and talk a little about how we're uniquely positioned within the net lease sector through both our competitive position and the various sources of capital available to us, giving us confidence in our ability to continue investing in the second half of the year and manage our near-term debt maturities, even if capital markets are constrained.

I'm joined this morning by our CFO, Toni Sanzone, who will review our second quarter results, expectations for the full year, and balance sheet positioning. John Park, our President; and Brooks Gordon, our Head of Asset Management; are also on the call and available to take questions.

Transaction market conditions during the second quarter were generally a continuation of those we saw earlier in the year. In Europe, there continues to be a slowdown in investment activity given the steep rise in interest rates in that region over the last 12 months, resulting in wide bid-ask spreads. Although cap rates have lagged in Europe, we continue to find pockets of opportunity, which we expect to play out over the next six to 12 months as sellers adjust to the higher cap rate demands of buyers, and we're well positioned to capitalize on them given our strong competitive position in that market and the capital we have to deploy.

In contrast, cap rates are more attractive in North America, which accounts for the large majority of our investment volume year-to-date, including the $468 million industrial sale leaseback with Apotex we announced in April, and I discussed on our last earnings call. As I said then, it serves as a good example of the attractive opportunities available to us by partnering with private equity sponsors using sale-leasebacks as part of the capital stack and corporate acquisitions as well as the competitive advantage we have by being able to fund transactions including large ones entirely with our own balance sheet. Apotex now ranks as our third largest tenant and further increases our overall allocation to warehouse and industrial.

Another notable second quarter transaction was the $98 million sale leaseback we completed with ABC Technologies, a leading supplier to the global auto industry for a portfolio of nine industrial properties in North America. ABC is an existing tenant, and the transaction enabled us to also extend the lease term on an existing portfolio. And with our most recent investment in ABC, it also moves into our top 10 tenants.

Follow end transactions, either with existing tenants or with private equity sponsors we've worked with before, are an important source of captive deal flow. The current environment has allowed us to expand our sponsor relationships as private equity firms increasingly explore alternative sources of capital, including sale leasebacks. Majority of our investment volume year-to-date came from new sponsor relationships, driven largely by Apotex.

We completed investments totaling $761 million during the second quarter, bringing our investment volume for the first half of the year, $939 million at a weighted average cap rate of 7.3%, 120 basis points above the average for the investments to be completed over the same period last year. While cap rates in certain areas of the net lease market have been slow to move, such as commodity retail, we've been able to transact at more attractive cap rates, especially on warehouse and industrial sale leasebacks, which represent the large majority of our investment volume during the first half of the year.

And while net lease transaction markets have generally slowed over the last 12 months, large corporate sellers with the use of proceeds continue to actively explore sale-lease backs due to a lack of attractive funding alternatives given the tighter bank credit environment and more expensive corporate lending market. We've also seen fewer credible buyers chasing deals. This dynamic, coupled with the significant capital we have available to best, continues to strengthen our competitive position and ability to push cap rates higher. We are also willing to forgo deals with insufficient spread, some of which we are seeing come back to the market with better terms.

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

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

Our $1.8 billion revolving credit facility provides us with significant liquidity. And in combination with our two term loans, represents a significant portion of the total debt we have maturing over the next 2.5 years, around 1/3. Given the strong support we have from our bank group, we fully expect to extend the maturity on our credit facility through a standard recast towards the end of this year. And because it is floating rate, recent interest rate increases are already flowing through our interest expense on that portion of our maturing debt.

Our recent upgrades to BBB+ and Baa1 enhance our credit profile. And although debt markets remain unsettled, we believe we'll continue to find windows of opportunity to issue new bonds both in the U.S. and Europe, where we maintain a strong market presence as a highly rated REIT.

Finally, it's important to note that we have several other internal sources of capital that help mitigate our capital needs, especially useful given the current uncertainty in the capital markets and interest rate environment. And depending on how capital market conditions evolve, it has the potential to be a meaningful competitive advantage over the next few years.

As we previously discussed, we have the proceeds from the U-Haul portfolio, which we currently estimate to be around $465 million coming back in the first quarter of next year, given the exercise of the repurchase option on those properties. We also continue to explore various options for our substantial portfolio of operating self-storage assets including as a source of capital through asset sales. Operating self-storage properties are among the more liquid real estate assets. And in the current market, we believe our portfolio has a value approaching $1.5 billion.

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

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

[Toni Sanzone, Chief Financial Officer]

Thank you, Jason, and good morning, everyone. For the 2023 second quarter, we generated total AFFO of $1.36 per diluted share, up 3.8% over the first quarter, primarily reflecting the accretive impact of recent investments and the continued strength of our rent growth, partly offset by higher interest expense.

The second quarter also included certain nonrecurring items within non-reimbursable property expenses and income taxes that largely offset one another, which I'll come back to shortly.

As Jason discussed, with cap rates remaining well above 2022 levels, we continue to find accretive investments that brought investment volume over the first half of the year to $939 million. We also continue to benefit from the strength of the rent escalations built into our portfolio with contractual same-store rent growth remaining at a peak level of 4.3% year-over-year, 130 basis points above where it was a year ago. The leases with uncapped CPI rent escalations, contractual same-store rent growth was 7.5% for the second quarter, reflecting the lagged impact of CPI on rents and embedded tailwind to our growth.

We also expect our fixed rent increases to continue to trend upward given the higher fixed escalations we've been achieving on new leases, helping sustain elevated same-store rent growth as inflation declines. As a result, we expect our internal growth to remain strong in the second half of the year with contractual same-store rent growth averaging around 4% and to average around 3% in 2024 based on current inflation forecast.

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

Also, the investments we completed during the first half of the year had a weighted average lease term of 22 years, which in conjunction with the positive outcomes on our second quarter re-leasing activity, extended the overall weighted average lease term of our portfolio to 11.2 years. Other lease-related income for the second quarter totaled $5 million, bringing this line item to $18.4 million year-to-date. We continue to expect other lease-related income for the full year to remain in line with 2022.

Disposition activity during the second quarter was minimal, comprising three properties for gross proceeds of $5.5 million, bringing total decisions over the first half of the year to $48 million. For the full year, our guidance continues to assume total dispositions of between $300 million and $400 million including the sale of nine of the 12 Marriott operating hotels we currently own, which represent about 2/3 of the annualized NOI generated by our operating hotel portfolio. The Marriott sales are progressing well with the majority of the properties currently under purchase and sale agreements.

We currently expect NOI from all operating properties to total approximately $90 million to $95 million for 2023, primarily reflecting the timing of the Marriott sales, but also the impact of slightly slower growth within operating self-storage as that industry comes off its recent peak.

Turning to expenses. Interest expense totaled $75.5 million for the second quarter, with the increase over the first quarter, driven by the funding of our investment activity. Relative to the year ago quarter, the increase also reflects the impact of higher base rates. Our weighted average interest rate was 3.3% at the end of the second quarter, which is broadly in line with the first quarter, but up from 2.6% for the year ago quarter.

Non-reimbursed property expenses for the second quarter were $5.4 million, driven lower by a reversal of property tax accruals totaling $6.3 million. These are property taxes that we had previously been accruing due to a tenant's nonpayment over the past few years. The tenant fully repaid those taxes directly, allowing us to reverse our accrual during the second quarter. As a result, we expect this line item to return to a more normalized run rate of around $12 million per quarter for the remainder of 2023.

G&A expense totaled $25 million for the second quarter, about $2 million lower than the first quarter, which typically trends higher given the timing of certain payroll-related items. For the full year, we continue to expect G&A to total between $97 million and $100 million.

Tax expense on an AFFO basis totaled $12.8 million for the second quarter, which included $3.3 million of incremental expense associated with the tax audit in Europe. For the remainder of the year, we expect the quarterly run rate to be closer to $11 million.

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

Moving now to our capital markets activity and balance sheet positioning. As discussed in our last earnings call, we closed on a new three-year EUR500 million unsecured term loan in April and concurrently executed an interest rate swap that fixed the interest rate at 4.3% through the end of 2024, with proceeds primarily used to pay down our revolving credit facility. We did not raise or settle any equity forwards during the second quarter, so continue to have about $385 million of forward equity available to settle.

Turning to our key leverage and liquidity metrics at the end of the second quarter. Debt to gross assets was 41.3%, and net debt to EBITDA was 5.7 times, remaining well within our target leverage ranges of low to mid-40s on debt to gross assets and mid- to high 5 times on net debt to EBITDA. This does not reflect the pro forma impact of settling undrawn equity forwards, which would further reduce net debt to EBITDA to 5.4 times.

We ended the second quarter about $530 million drawn on our $1.8 billion revolving credit facility, maintaining a strong liquidity position, totaling approximately $1.9 billion. Through the combination of unused capacity on our facility, unsettled equity forwards, and anticipated disposition proceeds in the second half of the year, we're positioned to fund the remaining investment volumes embedded in our 2023 guidance on a leverage-neutral basis without the need to raise additional capital this year. We can, therefore, be opportunistic when we access the capital markets.

As Jason discussed, we remain very comfortable with our near-term debt maturities, given our liquidity position, access to capital and the flexibility provided by the significant internal capital sources available to us over the next few years.

In closing, we're pleased with the strong progress we made in the first half of the year towards the investment volume embedded in our guidance and expect continued momentum in the second half given the competitiveness of sale leasebacks and the investment spreads we're achieving. We also expect our same-store growth to continue to lead the net lease peer group. And given the various forms of capital available to us, including from internal sources, we're confident in our ability to fund our investments and the other capital needs over the remainder of this year and into 2024.

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

[Operator]

[Operator Instructions]. Our first question today is coming from Greg McGinniss from Scotiabank. Your line is now live.

[Elmer Chang, Scotiabank]

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

[Jason Fox, Chief Executive Officer]

Yes, sure. So good questions in there. In terms of how has the sale leaseback market change this year, I mean it's been pretty stable for the year. This is especially in the U.S. I think when we think about larger transactions that you mentioned that we've seen larger transactions, I would say, this year and maybe beginning at the end of last year a little more so historically.

I think historically, we've probably still targeted deal sizes that are in the $50 million range, plus or minus. I think we're probably a little bit above that year-to-date, even excluding the Apotex deal, maybe around $75 million. And look, I think the themes are still the same. The competition has thinned out for us. I think that many of the private equity real estate peers that we've competed with previously, they rely on mortgage financing, and that's become more expensive and less available and certainly the themes that are driving sale leasebacks, which is -- especially in the sub-investment grade space, private equity sponsors, is the cost of alternative sources of capital, high-yield bonds or leveraged loans are still much more expensive than where we're targeting our pricing on sale leasebacks. And that's across North America.

I mean, as you brought up North America. I mean we've always really kind of thought of this as one market, pretty much all the deals that we do in North America are dollar-denominated and I think are maybe more driven by what's happening in the U.S. market. So, I think there's some consistency there, and it's still quite constructive and maybe about as strong as we -- the sale-leaseback market in a long time. I don't know if I missed any other questions in there.

[Elmer Chang, Scotiabank]

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

[Jason Fox, Chief Executive Officer]

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

So, the strategy around office, say, is consistent there. I think ultimately, we do expect to move our exposure to zero, but there's really no kind of specific time frame we're looking at that. I don't know Brooks to add on specific expirations that you want to include there?

[Brooks Gordon, Head, Asset Management]

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

[Operator]

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

[Josh Dennerlein, Bank of America]

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

[Jason Fox, Chief Executive Officer]

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

[Toni Sanzone, Chief Financial Officer]

Yes, I got that. Just in terms of what we've seen to date, I think we reported 4.3% contractual same-store in the first two quarters of this year. That's our peak level. We do see that lag continuing to play out, and we'll sort of stay in the 4% range over the back half of this year with that declining into kind of the 3% average for all of 2024.

So still seeing some, again, higher-than-typical growth resulting from the CPI playing through and also from just being able to get higher fixed rent increases in the more recent deals that we're doing, that's sort of helping sustain that on a longer-term basis. So, 4% towards the back half of this year, 3% into next year. And again, maybe some upward movement from what we've seen historical levels beyond that.

[Jason Fox, Chief Executive Officer]

Yes. And Josh, that assumes current forecast. So clearly, if things change, if we just had some rosy GDP numbers come out the other day. So, to the extent inflation reverses, of course, a little bit higher again, then those numbers could change as well. But regardless, I think, still very attractive same-store relative to the peer set in that lease.

[Josh Dennerlein, Bank of America]

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

[Jason Fox, Chief Executive Officer]

Brooks?

[Brooks Gordon, Head, Asset Management]

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

[Josh Dennerlein, Bank of America]

Okay. And by watching has it increased? Or is that why you're watching it? Or just kind of core business?

[Brooks Gordon, Head, Asset Management]

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

[Operator]

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

[Spenser Allaway, Green Street]

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

[Jason Fox, Chief Executive Officer]

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

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

[Spenser Allaway, Green Street]

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

[Jason Fox, Chief Executive Officer]

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

[Spenser Allaway, Green Street]

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

[Jason Fox, Chief Executive Officer]

Yes. I mean, look, Europe would certainly be helpful. We have seen larger deals, as I mentioned a few minutes ago. In the U.S., I think to the extent we can see larger deals or more of them like Apotex that obviously is going to have a big impact on where we finish within the guidance range. So, it's possible, but it's more helpful. With Europe and play.

Clearly, we don't have visibility into Q4 transactions at this point. It does tend to be one of our most if not our most active quarters in most years, but I think that gives us maybe a reason to be optimistic, but a lot of volatility out there, and it's hard to predict. So, I think the range is appropriate at this point.

[Spenser Allaway, Green Street]

Well, thank you for the call.

[Jason Fox, Chief Executive Officer]

No problem.

[Operator]

Next question today is coming from John Kim from BMO Capital Markets. Your line is now live.

[John Kim, BMO Capital Markets]

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

[Jason Fox, Chief Executive Officer]

Toni, do you want to talk to that?

[Toni Sanzone, Chief Financial Officer]

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

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

[John Kim, BMO Capital Markets]

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

[Toni Sanzone, Chief Financial Officer]

Sure. Yes. I think there's a handle of items that run through comprehensive. Remember, that's kind of what runs through AFFO as opposed to our contractual same-store, which is ABR at a point in time. So, some of that is timing, as you referenced, but vacancy certainly plays a role in that delta. And, I think you've really made up probably the majority of the delta between contractual and comprehensive kind of in recent history as well as any -- it goes both ways, additional rent recoveries or disruption in rent collections sort of make up the bulk of that difference. But I would say vacancy is probably the material delta there.

[John Kim, BMO Capital Markets]

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

[Jason Fox, Chief Executive Officer]

Yes. Look, I think we've always looked at all the options that we have, and we've talked about those, certainly selling them as one option. And we don't have to do all one option. We could sell some, we can convert some and maybe there's a reason to continue to hold as operating assets for future sales or conversions. But we are taking a closer look at it right now. I think that we're certainly mindful. In the current environment, it's good to be liquid. I think storage is one of the more liquid asset classes out there.

And so, we want to be prepared if that's a good way to fund deals better than maybe raising equity or other forms that's on the table. So, we're looking at it. I think it's too early to share anything specific. We may not sell anything at all, but I think it's probably a little more something that we're evaluating closer at this point than a quarter or too back.

[John Kim, BMO Capital Markets]

Okay great thank you.

[Jason Fox, Chief Executive Officer]

Yes, welcome.

[Operator]

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

[Brad Heffern, RBC]

Hey, good morning everyone. There were some decent-sized moves in the portfolio stats this quarter that I thought were a little difficult to explain just given there were basically no dispositions. And so, I'm thinking of office exposure down 110 basis points, IG exposure was down 170 and then CPI exposure was down 310.

Can you just talk, maybe it's all the same thing, but can you talk through what's driving those moves?

[Jason Fox, Chief Executive Officer]

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

[Brooks Gordon, Head, Asset Management]

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

[Brad Heffern, RBC]

Okay. Got it. And then can you get the collections percentage for the second quarter? And also, just walk through the watch list and any changes there?

[Jason Fox, Chief Executive Officer]

Toni, do you have a collection?

[Toni Sanzone, Chief Financial Officer]

Yes. I think on collections, we continue to track around and above 99% with take into account recoveries from prior quarters or probably closer to 100% in the quarter.

[Brad Heffern, RBC]

And then on the watch list?

[Brooks Gordon, Head, Asset Management]

Yes, on the watch list front, very stable. Watch list is around 2% of ABR. And again, for context, the kind of COVID era peak was around 4%. It's actually down slightly from the prior quarter. We had one tenant which we upgraded. They were able to restructure their balance sheet and no impact on our lease, so good outcome there. So, the watch list is very much stable from quarter-over-quarter other than that one.

[Brad Heffern, RBC]

Okay, thank you.

[Operator]

Thank you. The next question is coming from Anthony Pallone from JPMorgan. Your line is now live.

[Anthony Paolone, JPMorgan]

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

[Jason Fox, Chief Executive Officer]

Yes. I mean the year-to-date cap rate is 7.3%. I think for the quarter, we're probably in and around to that number, maybe slightly below that, and a lot of that driven by the size of the Apotex deal. So, we're still kind of rebound in -- we're targeting deals in the 7s, and I think that's where we're coming out.

[Anthony Paolone, JPMorgan]

Okay. Got it. And then just as you start to look ahead, I know you take out U-Haul from the expirations in '24, but just any known move-outs in the remaining 3.5 points of revenue next year that we should be thinking about?

[Jason Fox, Chief Executive Officer]

Brooks, do you want to take that?

[Brooks Gordon, Head, Asset Management]

Sure. So, as you mentioned, lease expirations coming up are pretty light through '25. It's about 12%. But then when you back off U-Haul, it's maybe 9%, really not a whole lot remaining to go this year. We do have one warehouse property in the Chicago area, high-quality building, where the tenant is relocating. So, we'll seek to release that. In 2024, we have about 6% of ABR, again, a lot of that is U-Haul. Most of the balance is warehouse in industrial, not a whole lot notable there. And I mentioned we had one recent moved out, which we're working through on a sale right now.

[Anthony Paolone, JPMorgan]

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

[Brooks Gordon, Head, Asset Management]

Well, the bulk of what happened in this quarter was actually the ABC transaction that Jason mentioned, we were able to extend our existing portfolio back out to a fresh 20-year term. So that's really the bulk of the action in the industrial segment there, one tiny little warehouse property, so really not indicative. Broadly speaking, I think in our warehouse properties, there is a mark-to-market opportunity. We don't have a constant lease roll. We have long walls, so that's not as big a driver for us, really the organic growth is a bigger driver.

But again, the industrial tends to exhibit very, very high criticality. So really good renewal probabilities there. So, it's a blend, but I wouldn't really extract anything from a specific quarter per se. ABC was really the big story in industrial.

[Operator]

[Operator Instructions]. Our next question is coming from Eric Wolfe from Citi. Your line is now live.

[Eric Wolfe, Citi]

Good morning, thanks. Just to follow up on the self-storage question. I think you said in your remarks that portfolio is around a billion and a half of value. Just curious sort of what cap rate you're using for that assumption. And if more to market the portfolio, do you think you get better pricing as a portfolio or just sort of breaking it up in individual properties or regions?

[Jason Fox, Chief Executive Officer]

Yes. I mentioned that it was approaching a billion and a half. So, it's probably not billion and a half, but it's probably somewhere between $1 billion and $1.5 billion, maybe closer to the top end of that range. I think it depends on obviously, the specific components and how we consider selling it. I think if we were to sell, I think there are lots of options. I mean we've seen some big trades obviously out there for portfolios.

I think if we can do a portfolio that would be meaningfully smaller, probably wouldn't make a lot of sense to do one-offs. So, it's probably something in between, again, if that's something that we consider to pursue, its still a little early to really give many specifics under what you may do with the portfolio.

[Eric Wolfe, Citi]

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

[Jason Fox, Chief Executive Officer]

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

[Toni Sanzone, Chief Financial Officer]

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

[Eric Wolfe, Citi]

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

[Jason Fox, Chief Executive Officer]

Yes. Look, there probably is a private process that we could undertake if that was something that we really needed to do, we need to do it. We're in a very good position from a capital standpoint. But we do like to point it out that it's -- it's out there, it's a source of really cheap capital. It's not paying a dividend right now and we do have the chance to liquidate it, and we'll probably want to do it in the most efficient way, which would be part of an IPO of that company. I think that's what we would do. Not a lot of visibility on timing. I would imagine it's over a couple of years. If not sooner, it's something that we do want to point out given how cheap that capital is.

[Eric Wolfe, Citi]

Got it. Helpful, thank you.

[Operator]

Your next question is coming from Jim Kammert from Evercore. Your line is now live.

[Jim Kammert, Evercore ISI]

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

[Toni Sanzone, Chief Financial Officer]

If you take CPI out?

[Jim Kammert, Evercore ISI]

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

[Toni Sanzone, Chief Financial Officer]

I think our historical same-store growth has kind of been in the 1.5% to 2% range before inflation started to pick up kind of and reach its peak. So, as I said, the fixed increases are starting to increase as well, so that's playing a part in that. And maybe that would bring it to the top end of that range. But I think that's all looking more historically as opposed to what we see going forward.

It's certainly dependent now on where inflation stabilizes, both in Europe and the U.S. And right now, we're seeing that happened -- or the projections are looking like in the low 2% range in the U.S. and in the mid-2% range in Europe. So that's really how we're thinking about kind of the growth going forward.

[Jim Kammert, Evercore ISI]

Okay. That’s helpful, thank you.

[Operator]

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

[Peter Sands, Head, Investor Relations]

Thanks, Kevin, and thanks, everybody, for your interest in W. P. Carey. If anyone has additional questions, please call Investor Relations directly on [phone]. And that concludes today's call. You now disconnect. Thank you.