WP Carey Inc

NYSE:WPC

Earnings Call Transcript 2018-Q4

[Operator]

Hello, and welcome to W. P. Carey's Fourth Quarter 2018 Earnings Conference Call. My name is Kevin, and I will be your operator today. All lines have been placed on mute to prevent any background noise. Please note that today's event is being recorded. After today's prepared remarks, we will take questions via the phone line. Instructions on how to do so will be given at the appropriate time.

I will now turn this program over to Peter Sands, Director of Institutional Investor Relations. Mr. Sands, please go ahead.

[Peter Sands, Director of Institutional IR]

Good morning, everyone, and thank you for joining us today for our 2018 fourth quarter earnings call. I'd like to remind everyone that some of the statements on this call are not historic facts and may be deemed forward-looking statements. Factors that could cause actual results to differ materially from W. P. Carey's expectations are provided in our SEC filings. An online replay of this conference call will be made available in the Investor Relations section of our website at wpcarey.com, where it will be archived for approximately one year and where you can also find copies of our investor materials.

And with that, I will hand the call over to our Chief Executive Officer, Jason Fox.

[Jason Fox, CEO]

Thank you, Peter, and good morning, everyone.

This morning, I'm joined by our CFO, Toni Sanzone, who will discuss our earnings, guidance and balance sheet, also touching upon the portfolio. And I will focus on our recent transactions and the market environment, as well as making some high level comments about where we are as a company. We're also joined this morning by our President, John Park, and our Head of Asset Management, Brooks Gordon, who are available to answer questions.

For 2018, we were a net buyer at attractive spreads to our cost of capital. In addition to the $5.9 billion of assets we acquired in our merger with CPA:17 at around a 7% cap rate, we completed close to $1 billion of on-balance sheet investments in 2018, primarily into industrial properties, at a weighted average cap rate of 7.0% and with a weighted average lease term of 20 years.

Our 2018 acquisitions and completed capital investment projects spanned 88 properties, net leased to 20 tenants, operating in 12 different industries and located in seven countries, enhancing the diversity of our portfolio. In recent years amid disruption to the retail sector, we've noticed net lease REITs have increasingly emphasized the breadth of their portfolios, the confirmation of our long-held belief that broad diversification is the best approach to net lease investing.

Having covered the strategic, portfolio and balance sheet benefits of the CPA:17 merger on prior calls, today, I will focus more on our recent acquisitions. We had an active last quarter of the year, completing $248 million of investments, consisting of eight acquisitions for $211 million, along with the completion of three capital investment projects at a total cost of $37 million.

Our fourth quarter investments were primarily into industrial assets and exemplify the types of investments we like to make critical properties, on long-term leases with built-in growth, lease to market-leading tenants with growing businesses providing the potential for credit upgrades and future expansion opportunities.

The first was a $33 million sale leaseback of a six-property portfolio with Lakeshore Recycling Systems, the largest independent waste company in Illinois and Wisconsin. The transaction included five industrial facilities as well as a corporate headquarters, all located in the Greater Chicago area. The portfolio is under a master lease on a triple-net basis for a period of 25 years with annual CPI-based rent bumps.

Second was a $31 million investment also in the Greater Chicago area into two properties that house the distribution, warehouse and global headquarters of Break Parts Inc., a multinational manufacturer and distributor of aftermarket automotive products. The properties are triple net leased with the remaining lease term of 11 years and fixed rent increases.

Third, we completed a $41 million acquisition of a distribution facility in Texas, leased to Orgill, the world's largest independent hardware distributor, which serves as its distribution center for the surrounding states.

In addition, the transaction provides for $14 million investment into the expansion of the facility, which we expect to complete in 2019. This is a triple net lease on a 25-year term that resets it upon completion of the expansion.

And fourth, we completed a $55 million cross-border investment in a three-property portfolio, net leased to Faurecia, a global leader in automotive seating, interiors and emissions control technology that equips one in four vehicles sold worldwide and has approximately $20 billion in annual sales.

The transaction was comprised of a manufacturing facility in Mexico and R&D facility just outside of Paris and a warehouse facility in Poland. These are critical assets on long-term leases with lease terms of approximately 19 years for the Mexican site and 15 years for the European sites. They provide built-in rent growth with annual uncapped CPI rent escalations with a rent payable in U.S. dollars for the facility in Mexico and euros for facilities in Europe.

In addition to acquisitions, a meaningful portion of our 2018 investment volume came from discretionary capital investment projects to follow on transactions with existing tenants. During the fourth quarter, we completed three projects at a total cost of $37 million.

This primarily the completion of an additional $24 million build-to-suit expansion for Nord Anglia, a leading global operator of K through 12 private schools. Like the other build-to-suit expansions we completed with this tenant in 2018, the lease term on the existing property was reset to 25 years and includes annual uncapped CPI rent increases .

Our larger pool of assets post merger provides us a wider opportunity set from which to source follow on transactions, and we have an active pipeline of such opportunities. At year-end, we had nine capital investment projects outstanding for an expected total investment of approximately $235 million, of which $160 million is currently expected to be completed during 2019 and is therefore included in our acquisition guidance.

The $235 million total includes the build-to-suit transaction we announced earlier this week with Cuisine Solutions for a $75 million state-of-the-art food production facility in Texas, which we expect to complete in 2020. As part of the transaction, our existing lease with a tenant for its facility in Virginia will be incorporated into a new master lease covering both properties and extended to a term of 26.5 years with fixed annual rent increases.

Turning to the market environment, in Europe, activity levels remain high with many countries experiencing record deal volume in 2018. Foreign capital inflows continue to put pressure on cap rates across all geographies, although interest rates have remained low and are not expected to move up rapidly allowing sufficient investment spread. Industrial remains the favorite sector in Europe; high levels of construction in the tightest yields.

There has been a trend towards last mile in multi-level assets in proximity to large urban areas and European retail is still attracting strong investor interest. There are indicators of an economic slowdown, however, and of course, Brexit continues to create uncertainty and therefore could generate opportunities particularly where a tenant's business model is less impacted by Brexit or may even benefit from it.

In the U.S., deal flow remains high and sentiment is positive, especially given the recent pullback in interest rates, increased M&A activity which is forecast to further accelerate is also creating more sale leaseback opportunities in area to market in which we excel. The industrial sector has seen massive capital inflows driving high demand and lower yields.

Within industrial, we're focusing on sale leasebacks, which generally allow a yield premium to market levels. For office, we're seeing pockets of opportunity, although we'd be very selective about where we would execute with conservative underwriting and we've generally not been excited about U.S. retail and continue to feel that way.

Geographically, the momentum appears to be shifting back to the U.S. in terms of where we are seeing the better opportunities, our pipeline is strong, the number of deals that fit our investment criteria has increased versus a year ago, and we're also better positioned from a cost of capital perspective.

I'll finish with some high level remarks. 2018 marked an important milestone in the history of W.P. Carey, essentially completing the Company's evolution from its origins as a manager of high-quality, net leased real estate funds to a pure play net lease REIT, in a significant one at that, ranking as one of the largest REITs in the MSCI U.S. REIT Index.

Real Estate Ownership is of course a capital-intensive business that benefits from scale and efficiency and a cost to capital that provides an attractive investment spread. Since converting to a REIT in 2012, we've made a number of structural changes to improve the quality of our earnings and increase our operational efficiency.

The total market opportunity for net lease investments remains vast and we have both the expertise and resources to capitalize on it, builds on an investment process honed over nearly five decades. Our increased size also means we can absorb larger single asset or portfolio deals and M&A activity. We've added flexibility to our balance sheet and reduced leverage, putting us in a very strong position to support our 2019 acquisitions and continue to grow real estate AFFO per share.

And with that, I'll hand the call over to Toni to talk more about our balance sheet, earnings and guidance.

[Toni Sanzone, CFO]

Thank you, Jason, and good morning, everyone.

This morning we announced AFFO per share of $1.33 for the fourth quarter and $5.39 for the 2018 full year. This represents a 1.7% increase over our full year results for the prior year. Real estate AFFO per share for 2018 increased 3.8% to $4.39, reflecting the accretive impact of our merger with CPA:17 over the last two months of the year, as well as the impact of our net acquisition volume in same-store growth.

Investment Management earnings declined for the year due primarily due to the elimination of advisory fees from CPA:17 in the last two months of the year, as well as lower structuring revenue.

Jason covered our fourth quarter investment activity, which totaled $248 million at a weighted average cap rate of 7%. This brought total investment volume for the year to $940 million also at a weighted average cap rate of 7% and with a weighted average lease term of 20 years. These are going in cap rates, so our expected yield will rise over time through attractive rent escalations either from fixed rent bumps or increases tied to inflation.

Disposition volume for the full year totaled $525 million driven by $340 million of sales during the fourth quarter, primarily from two transactions , which helped reduce our top 10 tenant concentration and further refined our geographic focus, while also achieving great execution exiting the properties at a weighted average cap rate of 6.8%.

First, we sold nine do-it-yourself retail properties in Germany for $180 million, which we discussed on our last earnings call, allowing us to harvest value created within the portfolio while also proactively managing our overall diversification. Second, we continue to execute on our strategy to focus the portfolio on the U.S. and Northern and Western Europe.

Specifically, we sold a portfolio of 28 properties in Australia for $146 million taking advantage of strong market conditions to opportunistically exit our Australian assets at a cap rate significantly tighter than when we purchased them.

Same-store rent was 1.4% higher year-over-year on a constant currency basis. The definition of same-store properties excludes acquisitions and the properties we acquired in the CPA:17 merger until we have owned them for 12 months. However, CPA:17 assets have rent escalators very similar to our existing portfolio, and once included, we fully expect our same-store rent growth on a combined basis to be in line with our pre-merger portfolio.

By Investing outside of the commodity segment of net lease, we've assembled the portfolio with 99% of ABR coming from leases with built-in rent growth. At year-end, 64% of our ABR had rent escalators in the leases linked to CPI while 32% had fixed increases.

As we discussed on prior calls, the assets we acquired in the CPA:17 merger are well aligned with our existing portfolio whether by geography, tenant industry or property type, maintaining broad diversity. We ended 2018 with 63% of ABR coming from net leased properties in the U.S. and 35% in Europe.

Industrial properties including warehouse facilities represented 44% of ABR at year-end. This is followed by office properties representing 26%, up very slightly as a result of the merger. Retail assets represented 18% of ABR at year-end with the vast majority in Europe and with tenants we view is less prone to disruption from e-commerce.

Europe continues to have significantly lower retail square foot per capita and higher barriers to development relative to the U.S. Our top 10 tenant concentrations has been noticeably reduced as a result of the merger, representing 23.5% of total ABR at the end of 2018 compared to 30.7% just prior to closing the transaction.

That's a meaningful decrease enhancing our diversification and thereby lowering portfolio risk. It also positions us with one of the lowest top 10 concentrations in the net lease peer group.

Moving to our capitalization and balance sheet. During 2018, we raised approximately $1.5 billion in long-term and permanent capital through our capital markets activities. This included two EUR500 million denominated bond offerings in March and October of 2018 with a weighted average coupon rate just under 2.2% and around 8.5-year term.

Net proceeds partially funded our European acquisitions thereby natural hedging euro currency risks, as well as advancing our unsecured debt strategy. We utilized our ATM program during the fourth quarter and in the first quarter of this year to efficiently raised approximately $350 million of equity at a weighted average stock price of just under $70 per share.

Our ATM activity along with our merger, which was an all-stock transaction, had deleveraging impact on our balance sheet, enabled us to enter 2019 in a position of balance sheet strength. We ended the year with debt to gross assets at 42.8% and net debt to EBITDA at 5.8 times. We have a well-laddered series of debt maturities, with just $74 million of debt maturing in 2019 and limited floating rate debt relative to the size of our overall balance sheet.

We remain committed to our unsecured debt strategy, and while our secured debt as a percentage of gross assets increased moderately as a result of the mortgages on the CPA:17 properties we acquired ending the year at 18.3%, we view this is temporary as we have a clear path to reducing secured debt with minimal frictional costs by continuing to repay mortgages as they come due.

We've conservatively managed our balance sheet to ensure ample liquidity, which at year end stood at just over $1.6 billion. In conjunction with our disposition pipeline, this ensures we're well positioned to execute on the acquisition volume in our guidance while maintaining maximum flexibility to access the capital markets when it's advantageous to do so.

Turning now to guidance. For 2019, we expect to generate total AFFO of between $4.95 and $5.15 per share and Real Estate AFFO of between $4.70 and $4.90 per share. At the midpoint of our guidance range, we expect Real Estate AFFO per share to increase almost 10% year-over-year, reflecting the full year impact of the merger with CPA:17.

Our guidance assumes investment volume of between $750 million and $1.25 billion, which includes capital investment projects such as expansions with existing tenants and build-to-suit. It also assumes dispositions of between $500 million and $700 million including the $250 million New York Times repurchase during the fourth quarter.

We expect G&A expense to increase moderately in 2019 to between $75 million and $80 million due to the elimination of expense reimbursements previously received from CPA:17. While we lose the benefit of those reimbursements, we are operating much more efficiently on the same platform with a very scalable business model, as illustrated by the significant decline in G&A as a percentage of both assets and revenue compared to pre-merger levels.

We anticipate our investment management business will represent approximately 5% of our 2019 total AFFO, reflecting both the full year impact of the CPA:17 merger on our advisory fees and our expectation that structuring revenue will have virtually no impact on our overall earnings.

We are extremely pleased with the improvement we are seeing in the quality of our earnings, which we believe is being reflected in the expansion of our AFFO trading multiple, creating value for our shareholders and lowering our cost of capital. This increase is the spread we can achieve and expands the pool of investment opportunities that are accretive to earnings, thereby enhancing our ability to grow Real Estate AFFO per share.

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

[Operator]

[Operator Instructions] Our first question today is coming from Anthony Paolone from JPMorgan. Your line is now live.

[Anthony Paolone, JPMorgan]

My first question is, as it relates to just the deal pipeline as you look into 2019, if you can comment on whether you're seeing more M&A type transactions or one-offs, and also similarly on the transaction side, can you give us a sense as to how your acquisition volume in your guidance for 2019 compares to what historically you've done when you combine both the fund business and the rebalance sheet?

[Jason Fox, CEO]

Let me start with the kind of pipeline and how we characterize it. I would say that it consists mostly of sale leasebacks and build-to-suits, some of which are associated with M&A activity, and we have seen within market increased M&A activity, I think projections from various sources would suggest that that's going to accelerate throughout the year.

So, while some of the sale leasebacks in our portfolio are pipeline now are M&A related, I think you can expect more of that to happen throughout the year. In terms of geography, we're seeing a little bit more opportunity right now in the U.S. relative to years past. I think some of that could be attributed to a little bit of the slowdown in Europe, but I think it's more attributed to some of the growth dynamics that we're seeing in the U.S. right now, again, some of which is M&A activity, but more of it is along the lines of growth with the companies where the through expansions, wanting to access capital through sale-leasebacks and in build-to-suits in some cases as well.

The last question about where our pipeline or where our guidance for that matter is relative to years past, especially when we've done some mergers, I'm not so certain it really correlates with the mergers at all, but our guidance and our pipeline for that matter are stronger than they have been over the last several years. I think you probably have to go back to maybe 2014 and 2015 years in which across the W.P. Carey Group, we did about $3.5 billion of net lease transactions during that two-year period.

[Anthony Paolone, JPMorgan]

And then in the guidance, is there much impact assumed from currency? And also, any thoughts on where our leverage lands sort of at the end of 2019?

[Toni Sanzone, CFO]

Let me start with the currency. In terms of what we're projecting now, we're looking at the current rates basically flowing through our guidance projection. So with the euro at $1.13, expecting that to carry through, but I'll say that we are very well hedged and feel comfortable that any movement in the euro would have a very minimal impact our earnings at this point. I think you kind of translate it to a 10% movement in the euro wouldn't move earnings by more than 1%.

And then just in terms of your question on leverage, I'd say, we were happy to be able to bring our leverage down with the ATM execution in the fourth quarter in earlier this year. Our target leverage levels continue to be in the mid 40% range on the on debt to gross assets and in the mid to high-5s on net debt to EBITDA. So I think again we're comfortable at those levels and we gave ourselves a little bit of room with the activity that we did on the ATM.

[Operator]

Next question today is coming from Todd Stender from Wells Fargo. Your line is now live.

[Todd Stender, Wells Fargo]

Just wanted to flush out these self-storage acquisition. Was this taking out a partner in the JV? I noticed the 90% non-controlling interest. If you could just provide more color on that.

[Jason Fox, CEO]

Yes, sure. This actually was the second component of a portfolio of self-storage assets that CPA:17 had bought earlier in the year prior to the merger. And so this was just the end of that transaction that closed post merger, which is why it shows up as part of our acquisition volume in the fourth quarter. It was a 90%-10% joint venture with Extra Space, who is our property manager as well.

[Todd Stender, Wells Fargo]

So, are they out and you own it - wholly-own at this point?

[Jason Fox, CEO]

No. They are still our JV partner. They still have a 10% interest.

[Todd Stender, Wells Fargo]

Are they managing it as well?

[Jason Fox, CEO]

They are.

[Todd Stender, Wells Fargo]

Can you provide pricing on that and are these stabilized assets?

[Jason Fox, CEO]

Brooks, you can color on that.

[Brooks Gordon, Head of Asset Management]

These are not stabilized assets, so they are in various stages of lease-up right now and we expect those to stabilize over the coming quarters.

[Todd Stender, Wells Fargo]

Any yield expectations, any color you can provide around that?

[Brooks Gordon, Head of Asset Management]

Hard to say now. I mean, it really depends on how the lease-up goes, but it's going according to plan and we are continuing to focus on the lease up there.

[Jason Fox, CEO]

And I think keeping it for round numbers in the 6s that's kind of our expectation on a stabilized cap rate basis.

[Todd Stender, Wells Fargo]

And then just moving to dispositions guidance, could push up to $700 million. Where these coming from? Are these CPA:17 assets and maybe just some of the characteristics of what you are selling?

[Brooks Gordon, Head of Asset Management]

Sure, this is Brooks. Again the guidance is $500 million to $700 million dispositions that does include the New York Times at $250 million. So that's really the big chunk. In terms of deal type, about 50% of that at the low end is purchase option from New York Times, maybe 30% is what we would call non-core, some of which came over in CPA:17.

So for example, operating hotel, as well as an asset in Japan, and those are the really the main buckets. It's not - as Toni mentioned, the CPA:17 portfolio fits very, very nicely with W.P. Carey's existing portfolio. There's not a huge amount of required clean up there.

[Operator]

Our next question is coming from Manny Korchman from Citi. Your line is now live.

[Manny Korchman, Citi]

Jason, maybe you could help us just think about yield expectations on both the total pipeline of acquisitions and dispositions, especially in light of you discussing sort of competitive markets globally.

[Jason Fox, CEO]

Sure, I'll let Brooks touch on dispositions, but in terms of the acquisitions, I think in the U.S., especially with our lower cost to capital, we're targeting deals in the low 6s and into the 7s. I would say in Europe, it's in that range, perhaps 25 basis points lower given the lower borrowing costs, which still allow us to achieve meaningful spreads.

I mean, if you look at us historically, I think, 2018, our weighted average cap rate was in and around 7% and if you look back to the last couple of years, it's probably fallen within very close to that range as well. So that's probably something that we would hope to expect this year and achieve, but I think it all depends on market conditions.

[Brooks Gordon, Head of Asset Management]

And on the disposition front, we expect the all-in execution to be roughly in line with where we are acquiring assets in that low 7s percent cap rate range. And I'll just add that on the discretionary CapEx component of the investment volume, we have seen and continue to expect to see a meaningful premium to marketed investments from a cap rate perspective.

[Manny Korchman, Citi]

And then, is there - are there any other sort of pipeline deals similar to what you discussed with the storage assets that are built into either CPA:17 or the core portfolio that are sort of just lined up and waiting to close rather than you try and find opportunities?

[Jason Fox, CEO]

I mean, I wouldn't say that there related to the CPA:17 acquisition. I think that CPA:17 was fully invested in the self-storage portfolio that was transacted throughout the year 2018 was a bit unique. But in terms of the pipeline, we do have an active pipeline, it's across the geographies and asset classes.

A lot of them, as I mentioned before, are build-to-suits and I should add to the cap rate question you asked that when we're doing the sale leasebacks and build-to-suits, we're typically getting on average costs 50 to 100 basis points premium to where we think these assets would trading the market.

So, I want to give you a sense of what a 7% cap rate may look like in terms of the risk profile, especially given how that we source them, and of course, in our pipeline also includes expansion opportunities and other capital investment projects within the portfolio, some of which are part of CPA:17 acquired assets. I guess there is some correlation there.

Again, those types of transactions we tend to have a lot of leverage on structure in pricing. So those tend to be higher yielding investments or else being equal, we also tend to get the benefit of extended lease terms on the leases that are encumbering those existing assets. So I think all positive.

[Operator]

Our next question is coming from Chris Lucas from Capital One Securities. Your line is now live.

[Chris Lucas, Capital One Securities]

Just a couple of quick questions. Jason, on the - maybe just touching on the acquisition perspective for 2019, do you have a sense as to how much potentially could come from existing customers versus new customers?

[Jason Fox, CEO]

I mean, our pipeline right now of active projects is a little under - I should say pipeline - our current active projects is a little under $250 million, I think about $160 million of that is expected to close this year and would be included in our acquisition volume for the year. Brooks, do you want to kind of talk more generally about what we're targeting and what you can expect from capital investment projects.

[Brooks Gordon, Head of Asset Management]

Sure. I mean, I think to emphasize the benefit - one of the benefits of bringing on CPA:17 is that substantially opens up that pool of target opportunities and we are very focused on it, proactively meeting with tenants and identifying tenants that have a need to grow.

So we expect that to be a meaningful opportunity set over the next few years kind of in the range of the $200 million-ish range, which is currently in the discretionary CapEx. We expect that to be a good working number for the next few years.

[Chris Lucas, Capital One Securities]

And then Jason, just maybe refresh my memory relates to how you guys are thinking about the self-storage portfolio from a core, non-core basis and what your views are in terms of the holding period for it.

[Jason Fox, CEO]

Yes, sure. As we've talked about in the past, I mean, we are focused on being a pure play net lease REIT. So we're not long-term holders of operating properties like storage, but it is an asset class that we know well, the high quality portfolio. So, we're going to be patient with what we decide to do there. We are currently evaluating a number of options, but there's really nothing more to report at this point in time.

[Chris Lucas, Capital One Securities]

And then, Toni, just on the debt maturity profile, there's certainly more mortgage debt today than pre-merger in terms of the overall pro rata share. There's also a fair amount of due over the next several years. But at rates look pretty reasonable in terms of a mark-to-market. I guess, the question I have is what sort of capacity do you have within the overall balance sheet from a refi perspective that would allow you to sort of refi that mortgage debt with the euro bonds, which are obviously significantly lower cost right now.

[Toni Sanzone, CFO]

Yes. I mean, I think just starting with the mortgage debt in general, as you mentioned, it is maturing over a couple of years and even if we were to pay that down as they mature, we'd expect to bring our secured debt back in line with where it was pre-merger levels within a couple of years. In terms of opportunity to bring that forward, we're certainly always evaluating that.

I think for us we evaluate that against kind of the cost to break that at any point in time. You know, but in terms of the overall leverage euro versus U.S., we did see the CPA:17 merger coming on at the time that we did our last Eurobond issuance in October and then certainly took that into account.

So we increased our euro leverage a bit there. I think we're comfortable with the euro leverage levels we have now, but there is still a bit more room, should we choose to do that. Again, it would be certainly market driven, and as I mentioned, we need to have sort of a catalyst to want to bring forward that debt at that point in time.

[Operator]

Our next question today is coming from Greg McGinnis from Scotiabank. Your line is now live.

[Greg McGinnis, Scotiabank]

Brooks, just want to dig into your comment on the 30% dispositions focused on non-core assets a bit. Is the plan to hold onto the Eastern European assets from CPA:17 and could this geography potentially be an area of additional investments from WPC?

[Brooks Gordon, Head of Asset Management]

So, first of all, specifically it's my comment those assets are not baked into that number, that's a very small component of the whole - important to note that those are high-quality properties with long-term leases and good credit tenants. I think that's about 3% of total ABR. So while those are target markets from a new investment perspective, we're certainly comfortable holding those assets, and we do like the investments themselves. And over time, we can be opportunistic with those should we choose to exit those in the future, but those aren't in the 2019 disposition guidance.

[Greg McGinnis, Scotiabank]

And Toni, as the stock continues to trade near all time highs, how are you thinking about ATM usage in 2019? I think you spoke about this a bit, but I'm just trying to get a sense for your thoughts on leverage versus earnings position at this point. And also, are there any additional issuances baked in the guidance?

[Toni Sanzone, CFO]

Yes, like we said, we were very happy with the equity we raised on our ATM since December. We were able to issue capital and pretty attractively priced relative to where we can invest in accretively. And we also had the benefit of increased trading volume in our shares, which we had hoped to achieve as a result of the CPA:17 merger, really.

So, our ability to take advantage of that did a couple of things for us. It reduced our leverage, bringing our net debt to EBITDA back down to under 6 times, which is well ahead of what we initially expected, and it allowed us to pre-fund some of our expected acquisition activity.

So, right now, our balance sheet strength leaves us well positioned with the flexibility to act opportunistically. We don't necessarily need to have an issuance of additional capital this year, which is what our guidance assumes but we'll continue to evaluate the opportunity relative to our capital needs.

[Greg McGinnis, Scotiabank]

Yes, so guidance is not assuming any additional issuances. Thank you. And Jason, just a final question here, could you just give a few details on the decline in occupancy since Q2. Was that related to a specific tenant, are you looking to sell those vacant properties or are they making good releasing opportunities?

[Jason Fox, CEO]

I will let Brooks cover that.

[Brooks Gordon, Head of Asset Management]

The pickup in vacancy really relates to a portfolio of former Bon-Ton locations retail stores, which we do intend to sell. Important to note that one of those is very high quality located warehouse in Allentown, Pennsylvania. I mean, we're in the process of working to redevelop that into a much larger facility, which would be a Class-A warehouse facility and we're working through the permitting process now and we expect that to be a very good outcome.

[Operator]

Our next question today is coming from John Massocca from Ladenburg Thalmann. Your line is now live.

[John Massocca, Ladenburg Thalmann]

Can you maybe provide some additional color on what drove the sale of the Australia assets leased to Inghams. It just - a little bit maybe curious, you originally purchased those about four years ago and I know you get kind of a decent return even when factoring in the CapEx dollars you spent there but is that the simplification of the story, or was it something where you felt like these assets were as valuable as ever going to get or just maybe some color there would be helpful.

[Brooks Gordon, Head of Asset Management]

Sure, this is Brooks. Again, we did exit the Inghams portfolio which completes our exit from Australia. So there's certainly a simplification aspect to the deal itself, but I will add it was a fantastic outcome. We realized on the order of 100 basis point - 250 basis points of cap rate compression over about a 4.5-year hold, so fantastic performing asset for us, it's just Australia is not a target market of ours, we don't have scale there and it's certainly much more difficult to manage from a far. But that said, it was an opportunistic exit and we're very satisfied with the deal itself.

[Jason Fox, CEO]

And let me just add quickly, that deal was done - it was a sale-leaseback as part of an M&A transaction. So I think that's a good example of how we are able to generate significant yield premium through the structuring of sale leaseback, especially alongside private equity firms in M&A transactions and that 250 basis point compression I think some of that was on the upfront structuring, some of it was the markets there got stronger and I think this tenant also improved it's credit. I think that's all part of our thesis on how we invest and the result was a great return. I mean, a very high returning asset for four, five-year hold.

[John Massocca, Ladenburg Thalmann]

Do you have a general IRR on the hold?

[Brooks Gordon, Head of Asset Management]

That's about 15% unlevered IRR over that 4.5-year hold period.

[John Massocca, Ladenburg Thalmann]

And then looking at kind of Page 14, this up tenant improvements in operating expenses were non-maintenance capital expenditures to operating properties, where maybe little high this quarter versus some past quarters, especially when it seems like, not a lot of that was maybe tied to lease renewals and extensions done in the quarter. So maybe kind of what drove that?

[Brooks Gordon, Head of Asset Management]

So, there's a couple different buckets there. This is Brooks. On the non-discretionary CapEx piece, the TIs, about $4 million or thereabouts was the actual funding of tenant improvement allowance from a deal we actually entered into in 2017, it was just funded in this particular quarter and office long term new lease with a new tenant.

On the non-maintenance front, there's another line item there which relates to one of our operating hotels that's going through a renovation and I believe that's about the $6.3 million number, and that's one of the assets, which we expect to sell this year, but we will complete the renovation as well. So that's really be the kind of noise in that number this quarter.

[John Massocca, Ladenburg Thalmann]

And then lastly, given we're kind of getting to the point here where CWI 1 kind of laid out a target for potentially seeking a liquidity event. And I know you guys do lay out kind of the exact terms of your back-end fees on Page 43 to stop, but have you started kind of formulating maybe kind of a range of what the financial benefit of a potential sale is to W.P. Carey or is it just too early for that right now?

[Toni Sanzone, CFO]

Well, I think at this point, as you mentioned this is a process that the Directors are running is one that they're focused on. We don't have a whole lot of involvement in the direction that that will take. So I think it's certainly premature at this point to kind of put any dollar value in terms of where we see that benefiting us and we've mentioned we wouldn't bring those assets on our balance sheet, given their lodging assets, but I'm not sure there's much more there that we can assume at this point.

[Operator]

Our next question is coming from Sheila McGrath from Evercore. Your line is now live.

[Sheila McGrath, Evercore]

I guess I was just wondering if you could update us on if anything meaningful change in the assumptions on the asset management aspect in terms of winding down fees if anything changed there?

[Toni Sanzone, CFO]

In terms of the investment management business?

[Sheila McGrath, Evercore]

Exactly.

[Toni Sanzone, CFO]

No, at this point, Sheila, I think we somewhere in the supplemental on the back we lay out the remaining four funds that we have. Our assumption is that we'll continue to manage those through 2019. That's what's reflected in guidance. And as I mentioned, with the CPA:17 going away that comes down to much less meaningful portion of our total results, so about 5%, and I think if you looked at even the Q4 total of the asset management fees and our interest in the funds, that's probably a reasonable run rate for where we expect that to go for the rest of this year.

[Sheila McGrath, Evercore]

And then could you update us on if the tenant watch list, are there any meaningful tenants are, just update us on the current watch list that would be great.

[Brooks Gordon, Head of Asset Management]

Sure, this is Brooks. Credit quality is very good right now. In fact, improves overall with the acquisition of CPA:17, as you can see in the supplemental, investment grade increases to 29%. From a watch list perspective, it's pretty stable. The primary 10 we have on there, which we've discussed in the past, is the Agrokor portfolio and we making a lot of progress working through restructure with them and we expect that to come off the watch list soon. Too early to report any details, but we do expect to realize some upside relative to the 50% haircut we underwrote when acquiring the assets and that's fully baked into our guidance range.

[Sheila McGrath, Evercore]

Is the 50% that - you closed on the asset at the 50% rental?

[Brooks Gordon, Head of Asset Management]

So that the $11.6 million that's flowing through ABR represents a 50% haircut and reserve to contract rent. And so we expect upside relative to that.

[Sheila McGrath, Evercore]

And then could you just remind us the exact closing date of the New York Times for modeling purpose?

[Brooks Gordon, Head of Asset Management]

December 1st.

[Sheila McGrath, Evercore]

And then capital expenditure outlook in terms of TI's for this year kind of versus historical - just.

[Brooks Gordon, Head of Asset Management]

I think the way to think about TIs, it is certainly very deal specific, it's hard to handicap an exact number because in certain deals, we will take a very capital-light approach and others we will choose to invest a lot more capital. So I hesitate to handicap that with a very specific number, but it will - on the maintenance front that will pick up somewhat with the addition of the operating properties, again which Jason mentioned in the long run, those aren't assets we will own as operating properties.

[Operator]

[Operator Instructions] Our next question is coming from John Massocca from Ladenburg Thalmann. Please proceed with your follow-up.

[John Massocca, Ladenburg Thalmann]

Just a quick follow-up. And I know it's one out of the top 10 here with the close the merger with CPA:17, but Universal Technical Institute, which is within the top 10 previously is kind of talked about potentially restructuring how it views its real estate. I mean, is there any potential downside to your guys holdings of them there, or do you think it's - you have a pretty secure investment with those guys?

[Brooks Gordon, Head of Asset Management]

We have a diversified portfolio of campuses with them. Again, as you noted, it is becoming a less meaningful part of our total and filling out the top 10 and we are presently working through restructuring leases with them kind of one by one. So nothing kind of material. We already did one of them and extended that and working on the others. So each campus is different, but we're making good progress working with them.

[Operator]

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

[Peter Sands, Director of Institutional IR]

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

[Operator]

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