WP Carey Inc

NYSE:WPC

Earnings Call Transcript 2022-Q3

[Operator]

Hello, and welcome to the W. P. Carey Third Quarter 2022 Financial Results Conference Call and Webcast. [Operator Instructions]. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Peter Sands, Director of Institutional Investor Relations. Peter, please go ahead.

[Peter Sands, Executive Director & Head, IR]

Good morning, everyone. Thank you for joining us this morning for our 2022 third 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 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 hand the call over to our Chief Executive Officer, Jason Fox.

[Jason Fox, CEO & Director]

Thank you, Peter, and good morning, everyone. I'm pleased to say we generated strong third quarter results across several areas of our business, raising our expectations for full year AFFO per share with real estate AFFO per share on track for year-over-year growth of just over 6%. Despite the unsettled market backdrop, we're in a position of strength, armed with significant liquidity and the ability to invest across property types over 2 continents, ready to capitalize on attractive opportunities as they arise.

The critical question is when is the right time to utilize our dry powder. Accordingly, I'll focus my remarks this morning on our recent investment activity and how we're approaching new opportunities in the current climate, which is evolving quickly. But before I do that, I would outline 3 key reasons why W. P. Carey remains uniquely positioned within net lease. First, in a more challenging investment environment, we have the ability to drive higher AFFO growth through our best-in-class contractual same-store rent growth, which reached 3.4% for the third quarter. As current inflation flows through to rents, we expect our contractual same-store rent growth to move even higher in 2023 to between 4% and 4.5% and to continue seeing the benefits into 2024.

Second, we've raised well-priced capital and have an exceptionally strong liquidity position. So far in 2022, we've raised approximately $1 billion of permanent and long-term capital at attractive prices. We currently have approximately $650 million of untapped equity forwards raised at a stock price averaging in the 80s, and we raised debt capital priced in the mid-3s through our recent private placement Eurobond issuance. Furthermore, our recent upgrade by Moody's to BAA 1 should enhance pricing on our bonds. And with over $2 billion of total liquidity, we're confident in our ability to continue investing in appropriately priced opportunities.

Third, we're benefiting from our recently completed merger with CPA:18, which resulted in better accretion than we initially anticipated, with gains from high-quality real estate AFFO more than offsetting the loss of investment management earnings. CPA:18 net lease assets are well aligned with our existing portfolio, and we expect to realize additional benefits from its sizable operating self-storage portfolio. Given strong self-storage fundamentals, these assets incrementally provide a tailwind to our growth.

And as we look to maximize value, we have several options for them, including converting to net lease, selling at attractive cap rates as a source of capital or continuing to hold some portion of them. Moving now to our recent investment activity and the market backdrop. During the third quarter, we completed investments totaling $475 million, bringing our deal volume to $1.3 billion year-to-date, which, of course, excludes the more than $2 billion of assets we added through our merger.

Within our diversified approach, we've remained primarily focused on warehouse and industrial, which comprised about 80% of our third quarter acquisitions. And while we continue to explore a good number of opportunities in both regions during the quarter, the large majority of our investment volume was in the U.S., driven by a sizable industrial sale leaseback. Overall, our third quarter investments had a weighted average cap rate of 6.3%, including completed capital projects. And for external acquisitions, it was 6.4%, about 50 basis points wider than the average cap rate on our 2021 investments.

Keep in mind, we were able to fund our third quarter acquisitions with debt capital raised at interest rates in the mid-3s through our recent private placement Eurobond and equity raised at a stock price in the mid-80s. The significant majority of our third quarter investment volume closed earlier in the period and made a generally lower cap rate environment. Over the full period, we transacted at a range of cap rates, including up into the 7s. Since then, bond yields have moved higher and equities have come under further pressure, although some sellers have been stubbornly slow to react to current market conditions.

Sellers holding on to lower cap rate expectations, however, are not getting traction on new deals. Buyers have also stepped back, reducing competition for deals with lenders and risk-off mode and leveraged buyers largely sidelined given the dramatic increase in their cost of capital or inability to secure asset-level debt. Recently, however, deal pricing has become incrementally more interesting, and we believe market conditions are turning in our favor. We're actively exerting our pricing power and new deals, demanding higher yields, which we're beginning to achieve.

With a strong balance sheet and significant dry powder from equity that's already been raised, we're able to provide certainty of closed sellers amid a smaller pool of active buyers. Deal timing remains uncertain, however, with sellers acclimating to higher cap rates at different speeds, although we believe sale-leaseback sellers, which have a use of proceeds are likely to do so more quickly. We also expect the types of investments we focus on, namely larger deals, sale leasebacks and warehouse and industrial properties to see greater cap rate movements than commodity retail.

We've tempered our expectations for investment volume for the remainder of this year, but I would note that the current market conditions make it particularly challenging to predict investment activity over the near term. With the deals in our pipeline today, we feel comfortable with the bottom half of the range. Our ability to move into the top half will largely be governed by sellers' willingness to transact at reasonable pricing, which has the potential to push deals into 2023, setting us up for higher investment activity next year at wider spreads.

In summary, W. P. Carey is ideally positioned for the current environment, having raised well-priced capital and sitting on over $2 billion of liquidity, and we're poised to capitalize on appropriately priced opportunities as they arise. We're able to exert pricing power amid a smaller pool of buyers and sellers are beginning to acclimate to higher cap rates. Until cap rates more broadly align with funding costs, however, the capital we've raised at attractive prices will allow us to continue investing in the best opportunities, and we'll continue benefiting from our sector-leading inflation-driven rent growth.

And to the extent we enter a recession in 2023, we have one of the safest REIT portfolios with proven stability in our cash flows across economic cycles. And with that, I'll hand the call over to Toni Sanzone, our CFO, to review our results, guidance and balance sheet, after which we'll take questions along with our Head of Asset Management, Brooks Gordon.

[Toni Sanzone, MD & CFO]

Thank you, Jason, and good morning, everyone. We had a strong third quarter, reporting total AFFO of $1.36 per share, up $0.12 or 9.7% from the year-ago quarter and derived almost entirely from our real estate segment, which generated AFFO of $1.34 per share. Our results reflect the accretive impact of our net investment activity and sector-leading same-store rent growth as well as the contribution from the net lease and operating real estate acquired in our merger with CPA:18. As a reminder, that transaction closed on August 1, and therefore, our third quarter results do not yet capture a full quarter of earnings from the assets acquired.

Through our merger with CPA:18, we acquired 41 net lease properties, adding about $77 million of annualized base rent or ABR. We also acquired 67 operating properties, the vast majority of which comprise a high-quality self-storage portfolio, which is not reflected in our ABR or any of our core net lease or same-store metrics, but serves to further improve our overall diversification and incrementally adds to our organic growth. As a result, today, we have a portfolio of 84 operating self-storage properties, which are generating annualized operating NOI of approximately $70 million for 2022, which is essentially the baseline for future NOI growth.

Additional details on this portfolio can be found on a new page we've added to our supplemental. I also want to remind everyone that in January 2023, 12 of the Marriott hotels we own that are currently net leased will convert to operating properties. We expect their annualized NOI contribution to be roughly in line with the lease revenue they are currently generating, resulting in no material change to AFFO. Turning now to our same-store rent growth and asset management activities. W. P. Carey continues to offer the highest level of inflation protection within the net lease sector, with 55% of ABR generated from leases with rent increases tied to inflation.

During the third quarter, overall contractual same-store rent growth increased to a record 3.4% year-over-year, the highest in our net lease peer group. Given the timing lag on which our inflation-based leases escalate, we expect our fourth quarter same-store growth to track at a similar level to the third quarter before increasing to between 4% and 4.5% during the first quarter and trending at or around 4% for the remainder of 2023. Even if inflation starts to moderate, the lag effect in our leases will continue to produce elevated levels of same-store rent growth well into 2024.

Comprehensive same-store rent growth for the third quarter, which is based on pro rata net lease rent included in our AFFO, was 1.5% year-over-year, reflecting the impact of elevated rent recoveries in the prior year period. Also during the current year period, we proactively terminated our lease with an office property tenant in order to redevelop it into higher-yielding lab space, for which we already have a new lease signed up. In connection with the termination, we received a payment totaling $4.2 million, which will mitigate a large portion of the rental downtime and carrying costs during the redevelopment period, further improving our overall outcome on this asset.

We had an active quarter for leasing activity with 10 renewals or extensions overall recapturing 108% of the prior rents and adding just over 10 years of weighted average lease term. Disposition activity during the third quarter comprised 3 properties for gross proceeds of $57 million, bringing total disposition proceeds through the end of September to $176 million. For the full year, we currently expect to complete dispositions totaling between $200 million and $300 million.

Given the current environment in Europe, I want to highlight a couple of important points about our European portfolio. Amid the region's current spike in energy prices, our European assets have continued to perform well. And to date, we've not experienced any defaults or nonpayments nor received any inbound communications from tenants that their operations are at risk due to high energy costs. We monitor the situation very closely as those risks could change, but our portfolio and tenant base has proven very resilient across business cycles and throughout the stress test of COVID as well as the more recent challenges stemming from the war in Ukraine.

And regarding currency movements, our dual approach to currency hedging has been remarkably effective in mitigating our risk to the strengthening U.S. dollar: first, overweighting our debt in foreign currencies, primarily the euro, serves as a natural hedge, generating foreign denominated interest expense, which reduces our net cash flow exposure; second, we further reduced the net exposure through low-cost contractual cash flow hedges, typically locking in rates on a laddered approach 4 to 5 years out.

Realized gains on our cash flow hedges totaled $8.7 million for the third quarter and $18 million year-to-date, which appear in the nonoperating income line on our income statement and flow through to our AFFO, materially offsetting the impact of the strengthening dollar. After taking into account hedging, the net impact of foreign currency movements is expected to result in about a 1% decline in our 2022 AFFO per share as compared to our initial guidance at the start of the year. And we would expect our hedging strategy to provide the same level of protection into next year, assuming currency rates remain at or around their current levels.

Of course, to the extent the euro or British pound strengthened concurrent levels, higher foreign currency cash flows would be partly offset by lower realized hedging gains, resulting in potential upside to our AFFO. Moving now to our balance sheet and capital markets activity. As Jason discussed, we remain in a very strong capital position, further bolstered by the debt and equity we raised during the third quarter and our continued ability to access various forms of capital. On the debt side, we are among only a handful of REITs that successfully executed debt capital market issuances during the quarter, with an inaugural private placement bond offering in which we issued EUR 350 million of senior unsecured notes over 2 tranches at a weighted average coupon of 3.58% and a weighted average term of 8.7 years.

I'm pleased to say we priced the 2 tranches at 165 and 182 basis points over the 7- and 10-year euro benchmark rates, respectively. This offering was well executed, locking in additional attractively priced debt capital that supports continued growth through accretive investments. On the equity capital side, we settled a portion of our outstanding equity forwards during the quarter, generating close to $100 million in proceeds. This occurred towards the end of the quarter and will, therefore, be fully reflected in our fourth quarter diluted share count.

We also further strengthened our balance sheet positioning, selling an additional 1.9 million shares in the form of equity forwards through our ATM program, locking in the ability to fund future investments with an additional roughly $160 million of equity raised at an average price over $86 per share. In conjunction with the unsettled portion of previously sold equity forwards, we, therefore, have approximately $650 million of dry powder currently available to us from unsettled equity forwards, raised at an average price around $83 per share.

From a liquidity standpoint, we ended the third quarter about $460 million drawn on our $1.8 billion revolving credit facility, which, in conjunction with our undrawn equity forwards, maintains an exceptionally strong liquidity position, totaling over $2 billion. Looking to our next significant debt maturities. We have about $400 million of mortgages due in 2023 and no bonds maturing until 2024, which we view as very manageable. Our leverage metrics remain very healthy. At quarter end, debt to gross assets was 40%, which is at the low end of our target range of mid- to low 40s.

Similarly, net debt-to-EBITDA was 5.6x, well within our target range of mid- to high 5x. And cash interest coverage of 6.7x continues to be among the strongest in the net lease peer group. In conjunction with the merger, we assumed approximately $795 million of mortgage debt which had a weighted average interest rate of 4.5%. Overall, our debt outstanding had a weighted average interest rate of 3% at quarter end, reflecting the well-timed debt refinancings we've completed in recent years. Our recent ratings upgrade by Moody's incrementally benefits our borrowing costs, including the spreads on our revolving credit facility, which represents the vast majority of our floating rate debt.

Moving now to guidance. We're pleased to announce that we've increased our AFFO guidance by $0.02 per share at the midpoint, implying year-over-year growth of 5% on total AFFO per share and just over 6% on real estate AFFO per share. The increase is driven by a number of factors, including strong portfolio performance and lease-related outcomes as well as the successful execution of our third quarter debt issuance. We also narrowed our AFFO guidance range and for the full year, we expect total AFFO of between $5.25 and $5.31 per share, including real estate AFFO of between $5.16 and $5.22 per share.

We're revising our investment volume range to between $1.5 billion and $2 billion, reflecting a transaction environment in which cap rates are slowly adjusting to higher funding costs, as Jason discussed. Of course, given where we are in the year, investments closed during the fourth quarter will not meaningfully impact our full year 2022 AFFO per share. In closing, we continue to see positive momentum in our business, with sector-leading rent growth and a balance sheet that puts us in the best possible position for externally driven growth as cap rates begin to move higher and spreads widen. And with that, I'll hand the call back to the operator for questions.

[Operator]

[Operator Instructions]. Our first question today is coming from R.J. Milligan from Raymond James.

[Richard Milligan, Raymond James & Associates]

My first question is for Toni. You guys did $1.36 of AFFO in 3Q and guidance for 4Q implies about $1.24 to $1.30. I think you mentioned that you weren't getting full credit for 3Q acquisitions, which would imply a higher AFFO in 4Q, but you also mentioned some benefit from lease term fees, higher share count. I was just wondering if you could maybe give us some more clarity on the pieces that walk you down to the $1.28 at the midpoint for 4Q.

[Toni Sanzone, MD & CFO]

Sure. Yes. Good question, R.J. I think there's a handful of things going on here, a mix of a number of items, some of which have kind of a recurring nature and some that are really more onetime in nature. And I'll take through a couple of those. I think first, we've talked about interest rates, and we're expecting to see that really flow through in the fourth quarter more as it relates to our variable rate debt, which is -- as I said, it's limited to our credit facility, but I think the increase in base rates there, we're seeing flow through our fourth quarter.

And if you think about it on our credit facilities, we have term loan balances that are denominated in euro and pound. And really, before September, we had negative base rates there. So we're seeing the impact of base rates drive up there, and that's really going to have kind of an impact on the quarter to the tune of about $0.02 in the fourth quarter, I would say. We also talked about FX, which I think we've highlighted the impact of our hedging strategy. I think quarter-over-quarter, you'll see about a $0.01 decline there in terms of kind of the impact as it relates to where rates are today and our expectation for where they'll stay for the rest of the year.

So those are kind of the more recurring type items. And I think there's some one-offs in there as well when you look at kind of Q3 to Q4, a couple of them -- we have a foreign tax adjustment that we're assuming comes through in the fourth quarter. That could push out beyond year-end. It could not happen at all if we get a favorable outcome there. So that's something that we're tracking that -- if it doesn't happen, it could push us above the midpoint, potentially close to the top end.

And there were some recoveries in the third quarter around accrued interest on a loan receivable and a handful of other smaller things that really aggregated to kind of build on that delta quarter-over-quarter. But I think that's some of the more material items that went through there.

[Richard Milligan, Raymond James & Associates]

That's helpful. And then I guess a bigger picture question for Jason. There's a wide range of acquisitions in 4Q implied by guidance, and I think in your opening comments, [indiscernible] that you're comfortable at the low end but could do more. And I'm just curious, sitting here with only 2 months left in the quarter, what would have to happen for you guys to hit sort of the midpoint or the higher end of that implied guidance range for 4Q?

[Jason Fox, CEO & Director]

Yes. Sure, R.J. Look, it's difficult market to predict right now. It's really where we are and our best guess on where we might end up on deal volume for the end of the year. Transaction activity is actually quite robust as active or perhaps even more active than a typical end of the year period. I think the big question and what remains to be seen is how many of those transactions that are out in the market are part of a price discovery process as not many are getting done. They're kind of getting repriced and kicked down the road a little bit.

We do have several hundred million dollars of deals that we're actively pursuing, many of which I would characterize as relationship deals. So we feel we're the best position as the buyer who can meet timing and underwriting requirements, but there still are gaps in pricing expectations, and we're not sure if we'll get to a point where we transact by year-end. And we're very focused on making sure that we're achieving appropriate yields and returns given the current levels in the debt markets. So maybe the big picture answer is investment volume is really going to depend a lot on sellers' expectations, their willingness to transact at what we view as reasonable pricing. And we'll have to factor in any changes to our cost of capital as well.

[Richard Milligan, Raymond James & Associates]

That's helpful. And then is there any particular category, whether it be U.S. versus international or property type, where you're seeing the most amount of cap rate movements. And I think you mentioned we're seeing -- you expect to see a little bit more movement in sale leasebacks, but curious where else you're seeing a little bit more expansion.

[Jason Fox, CEO & Director]

Yes. It's going to be in sale leasebacks. And that's a theme for us over the years where we can have a little bit more pricing power. I think that there are fewer competitors that target that space. And many of those that had in the past are more levered or the private equity buyers that rely on asset level debt. And they're mostly out of the market. So I think sale-leasebacks we're continuing to see expansion. And really, when you think about a sale leaseback, those are driven by a use of proceeds.

So I think there's less sensitivity around rising rates because they have a use of -- or a need for capital. I think that we are seeing movement in Europe. There are some open-ended funds that have some liquidity issues. That may create some opportunities. And my guess is, if that is the case, there will be more motivated sellers that can translate through. I think on the low end of the movement -- U.S. retail, and we still track all of that, and we do look at that market. It's a big part of net lease, of course, but those cap rates have proven stickier. I mean probably have adjusted the lease, although they're up as well, but not as much as what we're seeing in industrial sale leasebacks.

[Operator]

Next question today is coming from John Kim from BMO Capital Markets.

[Unidentified Analyst]

Jason, you mentioned you have several options with your storage assets. They provided a nice boost to performance this quarter. Of course, that could always reverse in future quarters. But given your history with these assets, are you more inclined to retain them as operating assets? Or has your view changed at all since you acquired assets outright?

[Jason Fox, CEO & Director]

Yes. No new update on our plans for the operating self-storage assets. We do have a long history of owning them and operating them. We've been in that space since 2004 in many ways. So we still have a lot of options with these. We could continue to own. We could convert to net lease like we've previously done with some of the assets. We could even sell some at attractive prices and reinvest in net lease if we think that's the way to optimize value or it could be some combination of the 3. It's on the table.

All, I think, are very good alternatives, we'll be patient with whatever path we choose. And yes, in the meantime, while same-store growth is probably not going to be what it was in '22, next year, but we still think there'll be attractive NOI growth, certainly relative to net lease.

[Unidentified Analyst]

And with the Courtyard by Marriott assets, are you more inclined to either convert those to a net lease structure or sell them? In other words, not retain them as operating assets?

[Jason Fox, CEO & Director]

Yes. I think that's fair. Brooks, do you want to kind of give a little bit of color around Marriott?

[Brooks Gordon, MD & Head, Asset Management]

Sure. And as Toni mentioned, the outcome for the 12 Courtyards that expired in January of '23, those will convert to operating hotels. That will be a seamless transition. Marriott will continue to operate and manage those. And as Toni mentioned, the underlying economics are expected to be roughly in line with the net lease economics, so no real earnings impact. From a disposition perspective, there's 3 of those assets which we view as having really attractive upside redevelopment opportunities. So we'll likely retain those while we investigate those opportunities further. The balance, so 9 assets, we'll likely exit those over at the appropriate time. So those aren't likely to be long-term holds.

[Unidentified Analyst]

Okay. And one last one for me. You mentioned an office lease termination conversion -- converting to lab space. I was wondering if you could provide more color as to where the asset is located, the capital spend and development yields you expect to get on it?

[Brooks Gordon, MD & Head, Asset Management]

Sure. So this is -- appears on our CapEx table in our supplemental as unchanged labs in Pleasanton, California. It's a great location right next to the bar stop, the train stop, and has some room for expansion on the site as well. So we received a termination payment from the prior tenant and effectively simultaneously entered into a long-term lease with an unchanged labs, which is a fast-growing medical research toolmaker. So the rent will be on the order of 15% to 20% higher than the prior rent, much better bumps long term, very high criticality. So we really like that outcome, creates a lot of value for that asset.

[Operator]

Your next question is coming from Anthony Paolone from JPMorgan.

[Anthony Paolone, JPMorgan Chase & Co.]

Great. Toni, thanks for the items and talking through a bit of the bridge from 3 to 4Q. But I guess just to kind of bottom line and as we look to 2023, is -- should we look at the run rate as being closer to the $1.36 or the $1.26 implied by the midpoint for 4Q?

[Toni Sanzone, MD & CFO]

Yes. I think I'm trying to give kind of some color there as it gets into the end of the year. I think we're a little too soon for us to be getting into next year's guidance at this point, and we're hesitant really to kind of look at any 1 quarter. There's always kind of a handful of volatility due to varying items and recoveries as we've talked about, at least termination and otherwise. So I wouldn't suggest that there's a good run rate in there for you to extrapolate from Q4.

But I think we'll look to give more guidance on the fourth quarter earnings call. I would suspect that we'll continue to see same-store growth. That's the one item that we have kind of a clear picture on in terms of more certainty given where we are right now and the time lag and how things flow through to our leases. So we highlighted those comments in my remarks there, but we would continue to see that trend upwards above the 4% to 4.5% range. And that's probably the only assumption at this point that we can give you some level of clarity on without getting into any more detail on guidance.

[Anthony Paolone, JPMorgan Chase & Co.]

Okay. I understand. And then, Jason, as you guys just do more sale leasebacks than anything else, you mentioned a lot of the sellers have a use of proceeds. So just wondering like what other financing alternatives are they more willing to act on more quickly when they think about either selling the real estate? Or they're more willing to go get debt because the credit markets seem like those are pretty straightforward in how those have moved? And so I guess what's the hesitancy to maybe go to real estate route and drag their feet on deals? And are there other elements of the sale leaseback that can get folks over the hump like proceeds and stuff since you can control some of those things?

[Jason Fox, CEO & Director]

Yes. And those are all good questions. And in terms of alternatives, I think this is what's making the opportunity so interesting right now is that the alternatives for -- to a sale leaseback. It's typically you can issue equity, inject some equity if it's a private company or look to the debt markets. And many of the companies that we target are just below investment grade, call it the BB-type rated companies. And that's a market where the high-yield debt has really moved significantly, much further than we've seen investment-grade bonds and cap rates as well.

So it gives us some pricing power there. I think that's an alternative they think about. And you're right, there are levers we can pull on to make the deals more interesting, whether it's for us, master leases, interesting bumps for the sellers, we can focus on proceeds. But we're really zeroing in on market rents and how we structure these deals. So there's maybe some limits to that, but it is attractive opportunity set for us right now, and we think that will continue into 2023.

[Operator]

Our next question is coming from Spenser Allaway from Green Street.

[Spenser Allaway, Green Street Advisors]

Thanks for the commentary you provided on tenant health as it relates to the European energy cost. So I understand you guys don't have any concern at this moment, and it sounds like there hasn't been any explicit communication by tenants on the topic. But was hoping you could maybe just comment broadly on rent coverage and whether you've seen any changes in recent months?

[Jason Fox, CEO & Director]

Brooks, do you want to take that?

[Brooks Gordon, MD & Head, Asset Management]

Sure. So as Toni mentioned, we have thus far not seen any specific impact coming out of Europe, specifically around the energy cost spikes. And I think it's important to note that the majority of our European ABR comes from really kind of essential businesses, food retail, DIY, government, finance, telecom, energy. And so the impacts are really most directly felt as you'd expect in more of the manufacturing-type operations. Those have the highest power usage, for example.

And to put that in context, in Europe, our manufacturing assets only represent about 3% of our global total ABR. And among that, the kind of heavier manufacturing is really only around 1% of ABR. So it's a reasonably contained exposure. And that said, when we underwrite these industry types of industrial manufacturing assets, we're typically going in with coverages in the high single or double-digit type coverage. It's very different than sort of a retail coverage. Elsewhere in Europe, the impact would be much less direct, certainly some pressure on margins.

But thus far, the impacts have been largely passed on to customers. So we really do fall back on our fundamentals of long leases with big companies. They have the scale to adapt and critical real estate and diversification. So we think we're set up pretty well to absorb these challenges and thus far, [indiscernible] have done so.

[Spenser Allaway, Green Street Advisors]

Okay. Great. That's really helpful color. And then maybe just circling back to cap rates for a second. At a high level, we've heard that European cap rates have been slower to adjust that have moved in the ballpark of about 100 basis points, I think, since the lows we've seen in '21. Just curious, is that kind of range? Is that consistent with what you guys have observed thus far in '22?

[Jason Fox, CEO & Director]

Yes, that's probably fair. I mean they have adjusted. I mean that's a meaningful movement, but I agree relative to how much the cost of debt has moved in Europe. It's probably still not at an equilibrium. I think more broadly, we've seen cap rates -- from the beginning of the year, we talked in July about this. We saw them from beginning of the year to the last earnings call around 50 to 100 basis point movement. I think since mid-September around the time we saw the sharper increases in base rates and debt spreads, we've probably seen another 25 to 50 basis points up, and that's broad U.S. and Europe. But I think Europe is probably lagging a little bit, certainly relative to the magnitude of the movement in the cost of debt over there.

[Operator]

Next question is coming from Nick Joseph from Citi.

[Nicholas Joseph, Citi]

I'm curious if you're seeing any changes in your negotiations on sale-leaseback lease terms, just given higher CPI. Is there a pushback on including that in new lease?

[Jason Fox, CEO & Director]

In terms of lease terms with CPI, is that the question?

[Nicholas Joseph, Citi]

Yes. In terms of just given where CPI is today, is there more pushback if you're signing a new lease today to include a CPI lease [indiscernible] later?

[Jason Fox, CEO & Director]

Yes. I mean it's not impacting the length of the leases that we're able to sign. And again, we're mainly sourcing these through sale leasebacks where we can dictate terms. I think our weighted average lease term for new deals. Q3 was around 20 years, maybe. Even for the year, it's slightly above 20 years. In terms of CPI, look, it does vary a little bit between the U.S. and Europe. In Europe, CPI-linked leases are standard, more customary. And uncapped was very common prior to this jump in inflation that we've seen. So I would say CPI caps and floors are now a little bit more part of the conversation, but it's still customary and something that we can -- that we're focusing on.

I think in the U.S., fix is still more standard. But again, on sale leasebacks, it's something that we focus on and push for, and we are achieving them probably not at the same amount as we had in the past. So there's some change there. But it's not just the CPI increases that are impacted by inflation. Our fixed increases that we're getting in our typical deal now. I think historically, it's probably been in and around 2%. We're seeing fixed increases now in the 2% to 3% range with many of them in the top half of that range and some even above that. So it's kind of flowing through in all different places.

[Nicholas Joseph, Citi]

That's helpful. And then you walked through the difference of the same-store ABR and the comprehensive same-store revenue. Would you expect those to converge going forward and into 2023? Or is there still some noise that could keep the delta between the two?

[Toni Sanzone, MD & CFO]

Yes. I think the noise that we would expect to see there is really still driven by some of the timing of recoveries, rent recoveries that are coming through and when the disruption happened. So we saw some recovery in 2021, which kind of the baseline for the comparison of this year. And we've continued to see some recoveries happen this year. So it really will vary from quarter-to-quarter depending on which period we saw any sense of disruption in which period we had the recovery come in. So in large part, I think we do expect to see the contractual continue to drive the overall comprehensive same-store growth, but there will be some variability there.

[Operator]

Your next question is coming from Brad Heffern from RBC Capital Markets.

[Bradley Heffern, RBC Capital Markets]

It sounded like you were more focused on the U.S. this quarter, and part of that is the pricing moving faster in the U.S. I'm curious, is there also a component of that that's related to either the attractiveness of the assets that you're seeing in Europe or just the general economic backdrop over there?

[Jason Fox, CEO & Director]

I think it's more of the economic backdrop and the type of spreads we're targeting. There are deals we're pursuing over there. I think that there's still maybe a little bit bigger gap between sellers' expectations and where we think deals should be priced based on where debt costs have gone and more generally, our cost of capital. So it's not the quality or the types of deals we're seeing, I think it's more against sellers' expectations.

[Bradley Heffern, RBC Capital Markets]

Okay. Got it. And then on collections, I know they're still very healthy, but there was a 30 basis point decline quarter-over-quarter. I'm curious, is that just lumpiness? Or is there anything that you can point to that's causing that to be a little bit wider?

[Toni Sanzone, MD & CFO]

Yes, no material drivers from...

[Brooks Gordon, MD & Head, Asset Management]

Toni, I...

[Toni Sanzone, MD & CFO]

Do you have the detail on that, Brooks?

[Brooks Gordon, MD & Head, Asset Management]

Sure. I would characterize this all just kind of normal course election. Most of that's been subsequently collected. So I wouldn't point to any real trends there.

[Operator]

Thank you. Next question today is coming from Greg McGinniss from Scotiabank.

[Greg McGinniss, Scotiabank]

Just trying to get a better understanding for how much the transaction market has softened compared to prior quarters. So Jason, what are you seeing regarding total investment opportunities? And if you could talk about the impact from companies with maybe fewer of their own investment options during a more challenging economic environment that are looking for sale leasebacks? Or how much of the market is made up of sellers that have just not adjusted their cap rate expectations?

[Jason Fox, CEO & Director]

Yes. And I think some of this is the last point you made there. I mean the transaction activity is quite strong. And we're looking and reviewing lots of deals on a weekly basis, lots of deals that are getting increasingly more interesting. These are sale-leasebacks. These are, in some cases, in Europe, some distressed sellers. These are portfolio transactions from some U.S. funds as well. So it's kind of a wide range of deals, I would say, predominantly sale-leasebacks though.

But I think to your last point, I'm not sure the percentage of deals that are transacting relative to quarters or years past is probably significantly lower at this point in time. I think there's still a meaningful price discovery process that's ongoing. And it's clear where debt costs have gone, and I think many sellers are still reluctant to lock in higher pricing, but they're getting there because the alternatives are perhaps more expensive, especially when you consider sale leasebacks. And I think there's just a lot of uncertainty whether costs continue to move up and now might be a better time than the future to lock in. So hard to predict, not great visibility, but there is a lot of activities, just a matter of how much of that flows through to actual transactions.

[Bradley Heffern, RBC Capital Markets]

Right. Okay. That's fair. And then maybe as another way to frame out what you're seeing regarding market cap rates. I mean how do you view your current cost of capital? And what are you actually targeting on cap rates for acquisitions? Maybe just to simplify assuming that underlying credit is similar to what you already own?

[Jason Fox, CEO & Director]

Yes, sure. I mean, look, there's various ways to look at cost of capital for us. For instance, taking into account the equity forwards that we raised this year or in our ability to issue debt by swapping into euros, maybe factoring in bank debt and some free cash flow that we generate. I mean that could put our cost of capital in the 5s, say. And on the other hand, if we look at cost of capital exclusively with our current equity trading price and assuming we can only do 10-year bonds through direct issuances either in the U.S. or Europe.

And maybe not account for any free cash flow or bank debt. That probably puts our cost of capital clearly in the 6s and higher or lower in the 6s. It's more dependent on where we're trading on any given day. So a lot of ways to look at it, but maybe what's more important is our view and expectation around putting capital to work, and this goes to your question. I think our perspective is that when we are looking at deals now we want them to reflect the wider pricing that we're seeing in the debt markets today.

So we would expect cap rates to continue moving wider for any deals that we're targeting or executing in the near term. When we think about spreads, we're really looking at spreads to our cost of capital versus the average yields or unlevered IRRs given the bumps that are built into our leases. So right now, we're targeting cap rates. I would say the range has moved up from 5% to 7% in the past to 6% to 8% now. And I would expect us to be probably more likely in the midpoint of that range in the high 6s and into 7s.

And that would generate average yields after factoring in rent somewhere clearly in the 8s and maybe higher inflation-based leases. So that's kind of the zip code we're thinking about, but there's a lot of moving parts here. And on the margin we do have a very well-priced equity forwards to use. And to the extent there's some interesting deals with higher quality that we can lean into. Maybe there's a reason to get a little bit more aggressive. But I think generally, we're going to be focused on that kind of midpoint of that range I mentioned.

[Bradley Heffern, RBC Capital Markets]

That's definitely helpful. And if I could just throw in one more for Toni. Just curious about how much bad debt has been included in 2022 results and given the more complicated economic environment, how you're thinking about '23? And maybe just touch on the tenant watch list as well?

[Toni Sanzone, MD & CFO]

Yes. I think 2022 -- there's been -- as we just talked about kind of the collection rate has trended near 100%. So we really haven't seen any material impact that's flowing through our numbers this year, it's less than 50 basis points on ABR, if that. In terms of next year, I think we'll continue to evaluate the portfolio as we're getting into guidance, I think we start the year with kind of a more conservative view. And we'll adjust that over the year as we're continuing to see tenants pay. But our experience has been really good. Our portfolio continues to hold up and perform well. So I don't think there's any reason for us to expect any major change in our assumptions going into next year.

[Operator]

Your next question is coming from Chris Lucas from Capital One Securities.

[Christopher Lucas, Capital One Securities]

Jason, just kind of a quick recap on CPA:18. I think when the deal was announced, you talked about $2.4 billion transaction net to the company was going to be $2 million you're, I think, at $2.2 billion of added assets, and I know there were some office dispositions planned as part of that. Are those dispositions still planned? Or are you complete with those? Or where do you stand?

[Jason Fox, CEO & Director]

Brooks, do you want to -- can you give some color around that?

[Brooks Gordon, MD & Head, Asset Management]

Sure. We've closed the majority of that. There's still 1 or 2 items we're working on. Some of that may slip into 2023, but it's largely stabilized at this point from perspective of what we wanted to transact on. The biggest piece of that was our student housing assets in CPA:18, which have all been sold to Brookfield, the European student housing. We continue to own one student housing property in the U.S. in Austin, it's very high-quality property. We'll evaluate options for that at the right time as well.

[Christopher Lucas, Capital One Securities]

Toni, then so as a follow-up, did that sort of hold over asset making meaningful contribution to sort of third quarter results?

[Toni Sanzone, MD & CFO]

No, I would say we, by and large, had that all factored in, and I don't think there's been any material movement from disposition flipping that has kind of shifted, as I say, within the range of where we are. Obviously, we moved up and narrowed our range at the end of the year, but I don't think there was a material impact from those dispositions.

[Christopher Lucas, Capital One Securities]

Okay. And then last question for me, Toni, sticking with you, on the mortgages that are maturing next year, how should we be thinking about the timing? And how should we be thinking about how you're looking at refinancing them? And is there a split between domestic and nondomestic currencies?

[Toni Sanzone, MD & CFO]

In terms of the mortgage debt, I think we continue to take the view that we will replace secured debt with unsecured borrowings, and that hasn't changed for us. So we'll look at the timing in the markets around us in terms of how and when we take that out, but I would expect that we'll continue to pay those at maturity, which occurs over the course of the majority of next year. That number in total is pretty insignificant in the grand scheme of the size of our balance sheet at just about $400-plus million of maturities into next year.

So I think it's pretty manageable, and we have a lot of optionality in terms of how we would do that. With the liquidity we have on our credit facility, it gives us some time and some flexibility in terms of where we want to access the markets. In terms of the split between U.S. and Europe. I don't have that in front of me, but I think it's probably similar to the overall portfolio breakdown as well. And again, we'll look at kind of the markets where we are in Europe and where that is relative to the U.S. market and see where the best opportunities are for us.

[Operator]

[Operator Instructions]. Our next question is coming from John Massocca from Ladenburg Thalmann.

[John Massocca, Ladenburg Thalmann & Co.]

So just a quick one for me on the balance sheet. As we think about the kind of forward equity you have outstanding, over a longer term, maybe been to 2023 or even beyond, I mean, how much do you kind of want to keep outstanding at any given time, just given the optionality that provides you potentially in a equity markets or even other capital markets become dislocated, but there's still attractive investment opportunities out there?

[Jason Fox, CEO & Director]

Yes. It's a good question. And I think you highlight what we like about the equity forwards, and we can do those through the ATM like we've been doing. We also did a larger issuance last year as well. We like the flexibility. So I don't know if I can quantify a number. I think a lot of it's going to depend on a number of factors, mainly probably the transaction market, how we're using up our dry powder and really what we think about the equity markets at any point in time. I mean if they're good deals to do with good spreads in the market, we may stay in front of the funding for those deals and continue to issue equity forwards. If there's not, we could probably take a pause, but I think it's really going to be dictated by what the markets look like.

[John Massocca, Ladenburg Thalmann & Co.]

But I guess maybe if capital remains kind of available at relatively attractive rates, we should assume you maintain if not a similar balance, at least some kind of relatively high balance?

[Jason Fox, CEO & Director]

Yes. Again, I think that's fair, but I think a lot of it's going to depend on our perspective on where cap rates have moved, what our cost of capital is and how actively we can deploy that capital. But I think that's probably a fair comment that she made.

[Operator]

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

[Peter Sands, Executive Director & Head, IR]

Great. Thank you, everyone, for your interest in W. P. Carey this morning. If you have additional questions, please call Investor Relations directly on 212-92-1110. And that concludes today's call. You may now disconnect.