W. P. Carey Inc. (NYSE:WPC) Q2 2022 Earnings Conference Call July 29, 2022 10:00 AM ET
Company Participants
Peter Sands – Executive Director & Head, Investor Relations
Jason Fox – Chief Executive Officer & Director
Toni Sanzone – Managing Director & Chief Financial Officer
Brooks Gordon – Managing Director & Head, Asset Management
Conference Call Participants
Anthony Paolone – JPMorgan
Nicholas Joseph – Citi
Greg McGinniss – Scotiabank
Spenser Allaway – Green Street
Sheila McGrath – Evercore ISI
John Kim – BMO Capital Markets
Mitch Germain – JMP Securities
Chris Lucas – Capital One Securities
John Massocca – Ladenburg Thalmann
Operator
Hello, and welcome to W. P. Carey’s Second Quarter 2022 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].
It’s now my pleasure to turn the call over to Peter Sands, Head of Investor Relations. Mr. Sands please go ahead.
Peter Sands
Good morning, everyone. Thank you for joining us this morning for our 2022 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 from W. P. Carey’s expectations are provided in our SEC filings. An online replay of this conference call will be made available in the Investor Relations section of our website at wpcarey.com, where it will be archived for approximately one year and where you can also find copies of our investor presentations and other related materials.
And with that, I’ll hand the call over to our Chief Executive Officer, Jason Fox
Jason Fox
Thank you, Peter and good morning, everyone. During the second quarter, we continued to successfully navigate a dynamic market backdrop, performing strongly on a number of fronts. The same-store rent growth reached new high and raising our expectations for the deal volume we can achieve this year. In an environment where investors are concerned about inflation, rising rates and potential for recession, we believe we’re uniquely positioned among our net lease peers to continue growing.
The outperformance of our stock has enabled us to raise additional forward equity, ensuring we have ample capital to deploy some new investments raised at stock prices that help offset some of the spread compression caused by sharply higher interest rates. And with cap rates moving higher, we’re optimistic about our ability to continue investing accretively in the second half of the year.
We also continue to offer downside protection with one of the healthiest balance sheets in the net lease sector, a diversified approach and a roughly 5% dividend yield supported by high-quality cash flows and best-in-class rent collections throughout COVID.
I’m joined this morning by Toni Sanzone our CFO and together will cover these topics in addition to our earnings and updated guidance, which includes the impacts of our merger with CPA 18 closing just a few days from now. John Park, our President; and Brooks Gordon, our Head of Asset Management; are also here to take questions.
I’ll start with our acquisition of CPA 18. Earlier this week, we announced that CPA 18shareholders approved our proposed merger, which is scheduled to close on Monday August 1. This acquisition adds about $2 billion of high-quality real estate to our portfolio at a cap rate in the mid-6s after planned asset sales, the vast majority of which have now been completed.
In addition to being well aligned with our existing portfolio with no integration risk and minimal balance sheet impact, the transaction concludes our exit from the non-traded REIT business, incrementally simplifying our company and enhancing the quality of our cash flows.
I’m pleased to say that we ended up to the high side of our original estimates for accretion from the merger through a combination of several factors including stronger NOI growth from its portfolio of operating self-storage properties.
Moving to our internal growth, with close to 60% of rents coming from leases tied to inflation, we continue to generate sector-leading rent growth as a result of our long-standing focus on sale leasebacks and where we are able to directly negotiate lease structures.
During the second quarter, about 15% of our inflation-based ABR went through scheduled rent increases, with an average increase of 5.6%. Within this leases with uncapped CPI rent bumps saw rent increases averaging just under 7% and CPI-based leases, which had rent bumps tied to CPI but with caps, so rent increases approaching 4%.
This resulted in our overall contractual same-store growth increasing to 3% during the second quarter, which we believe is the highest in the net lease sector. Based on current forecast for inflation, we anticipate that our overall contractual same-store growth will further increase to about 3.5% in the second half of the year and closer to 4% in early 2023 with the potential to move higher if inflation remains at recent levels.
In addition to the assets we’re adding through the CPA 18 merger we’ve also made excellent progress towards the investment volume embedded in our original guidance, including about $1.1 billion investments year-to-date, including $478 million investments during the second quarter and just over $300 million in July.
Within our diversified approach, we remain primarily focused on warehouse and industrial properties, which comprise over 80% of our second quarter deal volume. On a regional basis, our second quarter investments were split roughly two-thirds to one-third between the US and Europe. And we continue to generate strong deal flow from existing tenant and sponsor relationships, representing close to 80% of our second quarter deal volume.
While our pipeline remains fluid, we continue to see plenty of opportunities and feel good about where we are at this point in the year. In total, given the transactions we’ve completed so far those that we have in our pipeline in advanced stages and capital projects or commitments scheduled to complete in 2022. We have good visibility into investment and volume approaching $1.5 billion with five months of the year remaining including the fourth quarter, which is typically the strongest quarter as sellers seek to complete transactions ahead of year-end.
Turning now to the transaction market backdrop, which continued to evolve during the second quarter and can fairly be characterized as remaining in an adjustment period in response to sharply higher interest rates as sellers’ expectations on cap rates catch up with those of buyers across property types and regions.
Broadly speaking to the types of investments we target, we’ve observed market cap rates move roughly 50 to 100 basis points higher year-to-date with the bulk of that movement occurring since the end of the first quarter. The $1.1 billion of investments we completed year-to-date had a weighted average cap rate of about 6.1%, which includes investments closed at tighter cap rates earlier in the year. While we executed deals across a wide range of cap rates, generally we went from making investments with going in cap rates in the fives during the first quarter to making investments with cap rates in the mid-sixes during the second quarter and we see potential for cap rates to further increase during the second half of the year.
Of course, we are not solely focused on initial cap rates. Importantly, our investment spreads are also benefiting from higher growth on newly originated deals. For leases with rent escalations tied to CPI, we’re projecting a relatively high growth rate in the first year or two, benefiting our unlevered IRRs or average yields. Fixed rent bumps on new deals have also been getting gradually higher. The combination of higher rent growth and a more favorable cost of equity means we won’t need to see as much cap rate movement compared to most of our net lease peers in order to get back to the spreads we were achieving last year.
In terms of our ability to win deals, our established approach continues to work, providing certainty of close to sellers given the moderate use of leverage in our underwriting and ample liquidity. In fact, we’ve strengthened our competitive position now that the higher levered buyers including private equity real estate funds and other buyers relying on CMBS have largely moved to the sidelines given dramatic increases in their cost of capital or the unavailability of acetate debt.
This is in Mark’s contrast to the last few years, when sellers would largely overlook the execution risks associated with such buyers allowing them to win deals on pricing that was only a few basis points tighter than traditional REITs.
In terms of the types of transactions we’re focused on, sale leasebacks continue to comprise the large majority of our investments during the second quarter. Corporate owner users of real estate contemplating sale leasebacks typically have a use of proceeds. which supports deal flow during both times of economic expansion often in conjunction with M&A activity and during times of economic contraction – alternative sources of capital such as high-yield debt are considerably more expensive or less available. This is especially the case for tenants just below investment grade which is the segment of the sale-leaseback market in target.
Turning now to our capital position having issued over $300 million of equity forwards through our ATM program during the second quarter at an average price of close to $84 per share, we’re in an exceptionally strong position. In conjunction with previously issued equity forwards that remain undrawn, we currently have enough equity capital available to fund over $1 billion of investments on a leverage-neutral basis.
Our ability to execute on our 2022 investment volume will therefore largely be driven by what happens in the broader economy and net lease transaction markets, particularly cap rates rather than our ability to access the capital markets. The forward equity we sold during the second quarter also factors into our ability to maintain adequate investment spreads with our stock price improving since earlier in the year and relative to where it was during 2021. And because we are conservatively levered, our cost of equity has a larger impact on our overall cost of capital and our cost of debt does. The improvement in our stock price has therefore helped to offset some of the increase in our borrowing costs.
In closing, despite investors’ concerns about the slowing global economy and potential for recession, the factors I have discussed this morning give us confidence in our ability to navigate the second half of the year. In addition to higher internal growth, we expect to continue finding interesting new investment opportunities at increasingly wider cap rates, armed with ample liquidity and an advantaged cost of equity. We also continue to believe we’re better positioned than any other net lease REIT for inflation protection. We have one of the safest REIT portfolios with proven stability in our cash flows.
And with that I’ll pass the call over to Toni.
Toni Sanzone
Thank you, Jason and good morning, everyone. Total AFFO for the second quarter was $1.31 per share with real estate AFFO of $1.27 per share, driven by strong same-store rent growth and the continued pace of our investment activity. We are pleased to announce our updated guidance this morning with an increase to our expected real estate AFFO of $0.08 per share at the midpoint or about 1.6%, driven largely by the expected impact of our merger with CPA 18.
Anticipated accretion from the merger combined with overall strong performance from our core real estate business is expected to more than offset the investment management income, we previously earned from managing CPA18. As a result for the full year, we currently expect total AFFO of between $5.22 and $5.30 per share, an increase of $0.02 to the midpoint of our initial guidance range. This includes real estate AFFO of between $5.13 and $5.21 per share, representing estimated year-over-year growth of approximately 5.7%.
As Jason discussed, given the pace of our investment activity year-to-date and the visibility we have into our pipeline, we are raising our guidance assumption for investment volume by $250 million at the midpoint to between $1.75 billion and $2.25 billion, which of course is separate and in addition to the approximately $2 billion of assets we expect to add through our merger with CPA:18. Upon completion of the merger, we expect CPA:18’s net lease assets to add approximately $75 million of annualized base rent in addition the 65 self-storage operating properties we are acquiring from CPA:18 are expected to generate approximately $60 million of annualized operating NOI, with an estimated $26 million contribution to our 2022 guidance from the close of the merger through the end of the year. This is in addition to roughly $10 million of NOI we currently generate from the 19 self-storage operating properties we owned prior to the merger.
Disposition activity remains on track with our initial expectations of $250 million to $350 million for the full year. Second quarter dispositions comprised eight properties for total proceeds of $93 million, bringing the total for the first half of the year to $119 million. Certain CPA:18 assets initially anticipated to be sold prior to closing the merger are now expected to close in the remainder of 2022, which may take us to the top end of the range.
The addition of high-quality core real estate earnings from CPA:18’s assets over the remainder of the year is expected to offset substantially, all of the income we previously earned from managing CPA:18. Our third quarter results are however expected to include approximately $1 million of asset management fees from CPA:18, as well as between $3 million to $4 million of AFFO from our ownership interest in CPA:18 which are included in earnings from equity method investments.
Beginning in the fourth quarter, those income streams will be eliminated, after which virtually all of our AFFO will be derived directly from real estate further simplifying our business and enhancing the quality of our earnings.
Turning now to our expenses. We expect the CPA:18 merger to have a nominal impact on our expenses incrementally improving our overall efficiency in relation to our asset base and revenues, because substantially all of the net lease assets acquired from CPA:18 are triple net, non-pass-through property expenses are not expected to change materially in the back half of the year.
For G&A expense our updated guidance assumes it will total between $88 million and $91 million for 2022, an increase of approximately $2 million at the midpoint, primarily reflecting the loss of reimbursements from CPA:18.
Interest expense is expected to increase in the second half of the year as we take on approximately $780 million of CPA:18 mortgage debt, at a weighted average interest rate of 4.3%.
Lease termination and other income totaled $2.6 million for the second quarter, a significant decline from $14.1 million in the first quarter. And our guidance currently assumes the total for the year will be approximately $25 million to $30 million. Lastly, non-operating income for the second quarter totaled $6 million, primarily comprising realized gains on foreign currency hedges.
As you may recall, non-operating income for the first quarter also included an annual dividend received from our investment in Lineage Logistics of $4.3 million, which we do not expect to receive again until the first quarter of 2023, and a $900,000 final cash dividend on preferred stock of Watermark Lodging Trust, which has since been redeemed.
For the remainder of the year, we therefore expect this line item to reflect only foreign currency hedging gains. As a reminder, we hedge the impact of foreign currency movements on our cash flows in two principal ways. First, by overweighting debt denominated in foreign currencies, primarily the euro, creating a natural hedge through interest expense. Our foreign denominated operating expenses also add to that natural hedge.
And secondly, we continuously monitor and hedge the majority of the remaining cash flows through derivative contracts, further insulating our earnings from adverse currency movements. This dual approach has proved to be very effective. And as a result, we expect the euro weakness in 2022 to have a very limited impact on our guidance.
Moving now to our balance sheet and capital markets activity. Year-to-date we further strengthened our balance sheet positioning through the use of our ATM program. During the second quarter, we issued equity totalling $39 million at an average price close to $82 per share.
In addition to this, we sold 3.7 million shares through our ATM program in the form of equity forwards during the second quarter, blocking in our ability to fund future investments with over $300 million of equity raised at an average gross price close to $84 per share, and with about $285 million remaining available for settlement under equity forwards, we put in place during 2021, we currently have nearly $600 million of dry powder available from undrawn equity forwards.
On the debt side, as we discussed in our last quarters call, we exercise the accordion feature on our term loans in April for the equivalent of about $300 million, with proceeds used to pay down our revolver balances. We ended the second quarter with about $400 million drawn on our $1.8 billion unsecured revolving credit facility, which in conjunction with our underdrawn equity forwards, puts us in an exceptionally strong liquidity position, totaling over $2 billion at the end of the second quarter.
We expect to fund the merger cash consideration substantially from cash on hand generated by the proceeds received from CPA-18 asset sales with minimal required draw on the facility. With no bonds maturing until 2024 and ample liquidity to fund our second half investments, we will continue to access capital markets opportunistically and especially strong position to be in, given the current uncertainty in capital markets.
Turning to our key leverage metrics. At the end of the second quarter, debt to gross assets was 39.8% toward the low end of our target range, which is expected to be virtually unchanged with the closing of the merger. Similarly, net debt to EBITDA was 5.6 times at quarter end and expected to remain well within our target range with the closing of the merger.
Cash interest coverage ratio was 6.6 times over the second quarter, among the strongest in the net lease peer group. At the end of the quarter, our debt outstanding had a weighted average interest rate of 2.6%, reflecting the proactive management of our liabilities through the debt refinancing we completed in recent years, helping offset the impact of rising interest rates. And as a reminder, our credit facility represents the vast majority of our floating rate debt.
Lastly, I want to mention that earlier this week, we issued our Green Bond Allocation report, which is available on our website. I’m pleased to say the proceeds have been fully allocated to eligible Green projects, all of which have either bream very good or lead Gold Ratings or better. In closing, we remain uniquely positioned to outperform with our sector leading internal growth and strong capital position, supporting continued deal momentum in an environment where cap rates are moving higher.
And with that, I’ll hand the call back to the operator for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]
Our first question today is coming from Anthony Paolone from JPMorgan. Your line is now live.
Anthony Paolone
Yes, thanks. Good morning. So, maybe a question Jason on the deal flow picking up and you seem pretty optimistic about what you’re seeing there. Just wondering how much of that is the environment shifting and becoming more attractive versus just WP Carey’s capital costs holding up relatively well and giving you the opportunity to kind of be more aggressive?
Jason Fox
Yes. It’s probably a combination of the two, Tony. I mean certainly our diversified approach has always given us a wider opportunity set than many of our peers both across asset types as well as geographies. And then we also focus mainly on sale leasebacks. And we’ve continued to see the availability of those ramp up.
We’ve talked in the past about shift in how corporates view owning versus leasing real estate and that’s continued. We’re still seeing sale leasebacks in support of M&A activity, particularly private equity-backed activity, but maybe more recently with the rising rates and the dislocation in the debt capital markets especially the high-yield bond markets where many of our tenants focused just below investment-grade.
We’ve seen — and sellers have seen sale leasebacks as maybe a better alternative source of capital and meaningfully more attractive than their other alternatives. So, it’s probably a combination of something specific to us, but rising rates, obviously, I think sellers understand that cap rates are going to go up as well. And maybe there’s an expectation for many sellers that they’re going to continue to rise and this is a good time to get into the market if cap rates are going to continue to rise some here.
Anthony Paolone
Got it. Thanks. And then on CPA 18 how much more in sales will you need to do after I guess it closes next week. Just wondering like how long you’ll be carrying some extra assets there? And then the mid-6s I think cap rate that you had mentioned I mean what has been roughly the pickup I guess from the better performance coming out of storage there?
Jason Fox
Yes. Brooks do you want to take asset sales? And maybe Toni you can just touch on CPA 18 storage?
Brooks Gordon
Sure. This is Brook. On the disposition front, we’ve completed about 75% of what we’ve planned and we have two more in process, one, we would expect later in August than another kind of later in the summer and maybe early September.
Anthony Paolone
Okay. So, that’s like I guess a little over $100 million — $100 million to $200 million that you’ll kind of still keep for a few months there?
Brooks Gordon
About $100 million, yes.
Anthony Paolone
Okay.
Toni Sanzone
Yes. And then on the self-storage side, I think we’re just seeing continued improvements over the back half of the year in line with what we’ve been seeing in recent periods. So, what that’s done is really kind of moved us into kind of positive accretion or essentially breakeven from what we were initially expecting on the merger.
Anthony Paolone
Okay. And then just last one. Your floating rate there I think it’s about 15% of total and it sounds like you’ll put a little bit more on there with CPA 18. What where do you think you want that to be going forward? How should we think about it?
Toni Sanzone
Yes, I would say our floating rate debt is predominantly limited to our credit facility and our borrowings on our credit facility. While CPA-18 will add pretty minimally to that, I think you can expect that we’ll continue to look to be fixed rate debt going forward. And on the variable side I think maybe it’s important to also remember that a good portion of that is dominating the euro and — so we haven’t entirely seen kind of movement as euro was pegged at a negative base rate even up until now.
So I think that there’s been minimal impact on rates rising for us as it relates to where we are in the year and what we’re expecting for the remainder of the year. But I don’t expect our variable interest rate to move up. I think you would probably see that our exposure there moving down over time.
Jason Fox
Yeah. And Tony keep in mind that we just mentioned that we have about $600 million of equity forwards left to settle. So we have some flexibility on how we fund deals, but also how we treat the floating rate debt on our line.
Anthony Paolone
Got it. Great. Thank you.
Jason Fox
You’re welcome.
Operator
Thank you. Next question is coming from Nicholas Joseph from Citi. Your line is now live.
Nicholas Joseph
Thanks. As you execute on new deals particularly on the sale leaseback side, how are conversations going in terms of rent escalators either CPI-based starting out on new leases or just fixed rate, how are those conversations actually proceeding?
Jason Fox
Yeah. Look we still focus on CPI. And as you can imagine, it’s gotten maybe incrementally more difficult to get those. But we’re still seeing them especially in Europe. I think CPI-linked leases are more standard there. And prior to the recent trends in inflation almost all of our deals were uncapped CPI in Europe especially. I think caps and floors are maybe now part of the conversation.
We’re still getting, I mean, year-to-date I think it’s about maybe just under 50% of the $1.1 billion of deals year-to-date have CPI-based escalator as built in, I think our pipeline is about the same, if some of those have caps, I think the pipeline is maybe more significantly skewed towards uncapped CPI, but it’s got an incrementally more difficult, or maybe it’s just a part of the conversation. But it’s still a big focus point of ours.
Nicholas Joseph
Thanks. That’s helpful. And then just with CPA-18 close in a few days, how much integration work is there to do, obviously, you’ve done this in the past, but just as you think about bringing the assets on to the balance sheet?
Jason Fox
Yeah, it’s — we’ve been managing decent inception — Toni, if you want to talk quickly about the integration is mainly on the accounting side, but it’s not from an operations standpoint or asset management standpoint at all.
Toni Sanzone
Yeah. I think given we’ve been managing assets and as Jason said it’s pretty insignificant even bringing on. From an accounting perspective, it’s not as much of a heavy lift as you’d expect in M&A.
Nicholas Joseph
Thank you very much.
Jason Fox
You’re welcome.
Operator
Thank you. Your next question is coming from Greg McGinniss from Scotiabank. Your line is now live.
Greg McGinniss
Good morning. Jason, just wondering how you’re thinking about tenant credit risk today. As the operating environment and I guess official recession that we’re now in force you to add some tenants to your internal watch list?
Jason Fox
Brooks, do you want to talk about the watch list and tenant credit?
Brooks Gordon
Sure. I mean credit quality is very strong right now, investment grade is a little over 30% and we’re collecting materially all of our rents. From a watch list perspective, it’s still very low. It’s about under 1% and that’s down from a COVID peak of in the kind of 4%-ish range. Certainly we’re potentially nearing the end of the business cycle and so this is the period of time where we’re paying particularly close attention. But really no credit deterioration as of yet.
Jason Fox
Yes. And Greg, I think, COVID is a good tress test for any portfolio for that matter. And I think, we performed obviously very well during that period, kind of, sector leader in terms of collections.
We kind of quickly got to the high 90% range in collections. And — its credit quality and but it’s also credit quality of the assets that we own and the importance that tenants kind of keep rents current.
So we feel good about where we sit in the current environment and whether we do technically hit a recession or maybe we already have. I don’t think its going to be a big concern or impactful for us. But as Brooks said, we do keep a close eye on all the credits within our portfolio.
Greg McGinniss
Okay. Yes. I just wasn’t sure if the kind of continued supply chain issues matched up with your more industrial warehouse focus. The tenant base was – been in any difficulties over kind of the past few months versus kind of accelerated impact from COVID but —
Jason Fox
Not that we’ve seen. Yes. Yes.
Greg McGinniss
Okay. And then, do you have any update in terms of the expected plan for the self-storage assets to CPA:18?
Jason Fox
No real update here. We are acquiring a meaningful sized portfolio. I think its 65 operating assets 42,000 units. We still have a number of options. We’ve owned these for a long time as operating assets.
Certainly, we could continue to own these in that format under the current property management agreements with Cube and Extra Space. But we can also look to put in place a net lease structure similar to what we did with Extra Space a couple of years back. That’s always an option.
And of course, we could sell some or all the properties, depending on what we’re seeing in our ability to fund new deals. So that’s an option. But I think right now, we look at all those as very good alternatives, but I think we’ll be patient with whatever we choose, especially, given the high expected growth within that asset class. We want to see some more stabilization in NOI before we really make any decisions there.
Greg McGinniss
Okay. And I think you mentioned in the past that even if you do convert to a net lease structure, you expect the contribution to earnings to be relatively the same?
Jason Fox
Yes. There could be a little bit of shift between how we book CapEx versus how it flows through to NOI or ABR, but it won’t be meaningful.
Greg McGinniss
Okay. Thank you.
Operator
Thank you. Our next question is coming from Spenser Allaway from Green Street. Your line is now live.
Spenser Allaway
Thank you. Just in regards to your comments on cap rates being around 50 to 100 basis points higher. Is this across the board, or can you just provide a little more color on how that differs in the US versus Europe? And perhaps a little bit more color on specific property types?
Jason Fox
Yes. I mean, I would say, kind of, both geographies, as well as maybe all property types that we’re looking at, they probably fall within that range of 50 to 100 basis points higher. I mean, it’s hard to really quantify.
If anything, I would say, industrial assets in Europe maybe have seen a little bit more movement in other asset classes, but that’s mostly because they had also compressed the most leading up to the end of last year into Q1 as well.
So it’s probably fairly consistent across at least the asset types that we target or the types of deals that we target across geographies and property types.
Spenser Allaway
Okay. And then, just one on tenant health. So energy costs in Europe are obviously kind of moving higher and there’s a growing risk of restricted energy use for business in some particular countries. Have you guys heard anything from tenants? And do you see any risk there?
Jason Fox
Brooks anything on your side? Stuff, I’ll let you answer.
Brooks Gordon
Sure. Yeah. Certainly, energy costs have moved sharply higher in Europe. We have not thus far seen any acute impacts on tenants, certainly, some grumbling. I will say it presents an opportunity for us. So that’s become, incrementally more appealing for tenants, and in certain areas Europe extremely appealing. And so that will present a good run rate opportunity for us going forward.
Jason Fox
Yeah, it’s an opportunity both to invest in capital, but may be equally important. It allows us to kind of have these conversations with tenants get lease extensions kind of further embed our properties within their operations. So I think that’s all positive. But yeah, in the short term it’s going to provide a little bit of pressure on some tenant margins certainly.
Spenser Allaway
Thanks. Thank you, both.
Operator
Thank you. Your next question is coming from Sheila McGrath from Evercore. Your line is now live.
Sheila McGrath
Yes. Good morning. I was just curious, if you could give us some insight on the TPI cap. Those leases that are capped are the escalators are the caps closer to 2% or 3%?
Jason Fox
I think historically, I think within the portfolio Toni correct me, if I’m wrong the caps are in kind of the low 3s. I think on deals that, we’ve been negotiating more recently that include caps maybe they’re up a little bit into the mid-3s. But –
Toni Sanzone
Yeah. I think internationally, it’s mid-3s. And in the US it’s closer to 3%.
Sheila McGrath
Okay. Great. And then on guidance you did tweak that higher on acquisition growth, even in the face of FX, which has been a headwind which has gotten worse. I just wonder absent the FX headwind would guidance have gone even higher? And can you provide any insight on how much of a headwind FX is for in the – for WPC in the back half of the year?
Toni Sanzone
Sure. Yes, Sheila, I’ll take that. I think I mentioned in my remarks that our hedging strategy mitigates the majority of the risk movements in our foreign cash flows. After taking into account hedging, I think the impact from when we initially came out with guidance to where we are now is just under a 1% reduction in total AFFO. And that’s really based on an assumption that the euro holds flat to where it is now, which is about 102.
So, I think potentially there could be some upside there depending on which way you see rates moving over the back half of the year. But we were substantially able to mitigate that with the hedging strategy that we have in place.
Sheila McGrath
Okay. Thank you very much.
Operator
Thank you. Your next question today is coming from John Kim from BMO Capital Markets. You line is now live.
John Kim
Thank you. You remain very active on acquisitions. But Jason, you mentioned that cap rates expansion has really accelerated since your last call. I’m wondering, if you think that dynamic is going to continue? And if so, why not to pause a little bit more on investment activity?
Jason Fox
Yeah. Look, it’s hard to predict what’s going to happen. I mean, we have seen cap rates, if we look at just our portfolio, but we purchased in the first quarter we were buying deals kind of in the 5s. And a lot of those were originated in the second half of 2021, and then closed in Q1, and that was really before we saw a big shift in interest rates.
And then in Q2, I think most of our deals or at least the average of our deals were more mid-6s. I think our pipeline is probably similar maybe slightly higher depending on the mix of assets that that we close. But I mean your question about is it better to wait for higher cap rates. I mean I guess from my perspective, if we’re able to generate sufficient spreads relative to the riskiness of the investments that we’re making, I think we want to stay active and we do believe we’re able to do that in the market and we’re in a very good position from a capital funding perspective as well with $600 million of equity forwards in place that are left to be settled. And when you combine that with the availability on our credit facility, we have kind of $2 billion of liquidity at this point in time. So I think we can do deals now because they’re interesting. And we hope the cap rates continue to increase second half of the year and into next year and we get even more interesting.
John Kim
Okay. You have a fair amount of debt expiring in the next couple of years. Can you just provide an update on where you could raise mortgage debt and unsecured debt today?
Jason Fox
Yes. I mean look, we’re not really in the mortgage market. We do have some mortgages left on the balance sheet from some legacy assets but we’ll likely pay those off as they come due. And we have paid off a lot of those over the past couple of years in prepaid in many cases. There’s not a lot maturing over the next two years I think really our next biggest maturity is 2024. And I think it’s hard to predict where the bond market pricing is right now we’re probably 200 to 250 basis points wider than where we’ve issued in the past and that’s probably both in the US and Europe but it’s pretty dynamic. It’s kind of hard to predict.
I think importantly we do have a lot of flexibility. I mentioned the $600 million of equity forwards a lot of availability on the revolver. And frankly it’s not just the bond markets we look at. I think bank debt as well as private placement market also alternatives. So I think we have flexibility. We can be opportunistic. We really don’t need to issue any debt because of the maturity schedule as well as kind of the funding that’s in place for the deal volume through the end of the year. So we’ll be opportunistic but the market is pretty volatile right now.
Operator
Our next question is coming from Mr. Mitch from JMP Securities. Your line is now live.
Mitch Germain
Thank you. Just confirming there’s no specific plan in place for the CPA debt.
Jason Fox
For the CPA debt for the CPA mortgages that are in place right now?
Mitch Germain
Yes, yes.
Jason Fox
Yes. I mean with those – go ahead Toni, you could answer.
Toni Sanzone
Yes it’s pretty minimal. I think we have about 200 – a little under $300 million being added to our maturities in the next year or so. And so we’ll continue to look to take those out the same way we’ve been dealing with our mortgage debt as they’ve been expiring. I don’t in this environment, we don’t feel obligated to kind of bring any of that forward any sooner than it would expire. But I think we’ll continue to address those as we have been with unsecured borrowings.
Mitch Germain
Okay. That’s helpful. And then if you can provide some perspective on the assets that you’re disposing. It looks like obviously is on vacant but some warehouse and retail is that going to be kind of the mix we should expect going forward? And what sort of characteristics do these properties have?
Jason Fox
Brooks, do you want to take that?
Brooks Gordon
Sure. Yes. So we continue to expect about $250 million to $350 million. And as Toni mentioned, a couple of CPA18 dispositions coming – having on balance sheet brings that likely maybe towards the higher end of that range. Deal type about a quarter by proceeds is vacant assets. The balance is really a mix of managing residual risk and a few opportunistic exits property type will be a little over half office, but a third industrial and warehouse maybe 10% retail. So, it’s a pretty broad mix.
And typically these are really bottoms-up decisions. We’re not necessarily taking a big thematic approach in any given year. So, I will say in the long run we tend to overweight office dispositions.
Mitch Germain
Thank you.
Operator
Thank you. Next question is coming from Chris Lucas from Capital One Securities. Your line is now live.
Chris Lucas
Hey, good morning everybody. Can you hear me okay?
Jason Fox
We can. Yes, good morning Chris.
Chris Lucas
Okay, good morning. So, I guess a couple of questions Jason you mentioned that competition on the — has sort of gone away as rates have gone up. Is there a difference in the competitive environment between the — what’s happening in the US versus what’s happening in Europe?
Jason Fox
Yes, I mean maybe it’s a little bit different. I mean we tend to see more private equity real estate buyers as competition in the US than we do in Europe. And I think they are — they’re typically higher levered buyers they tend to rely on CMBS and other asset level debt. So, that’s either gotten significantly more expensive and in many cases unavailable.
So, I think it thinned out probably a little bit more in the US. I think generally speaking though there’s just less competition in Europe for us. It’s not a crowded space. There is there are no public REITs that focus on what we do. In fact I think many people in Europe consider us as the de facto net lease public REIT even though we don’t obviously trade on an exchange over there.
So, it’s probably a little bit more acute in the US, but some of those same dynamics play out to the extent there are private equity buyers that we’re competing against in Europe.
Chris Lucas
And I guess you mentioned the foreign exchange headwinds is an issue related to sort of the year-to-date performance. But when I think about it I think about the buying power that US investors have relative to the euro. Does that make a big difference I think peak to trough is like 13% move so far just this year. Does that impact how you think about where the opportunity set is for you guys?
Jason Fox
Maybe incrementally it’s helpful but no it’s not part of our thesis. We’re not looking at a currency trade and what we’re acquiring. We typically do borrow meaningfully in euros and ultimately, match fund what we’re doing over there. But to the extent we are buying now and we do see a change or a strengthening of the euro. I think that will provide some cash flow benefits in the future, but it’s all muted based on the hedging strategy that we have in place.
Chris Lucas
Okay. And then just a comment earlier about sort of being maybe towards the end of the business hike. I guess curious just does that change your bias as it relates to your thoughts about investment-grade versus non-investment-grade rated tenants in terms of doing transactions at this point in the cycle?
Jason Fox
Yes. Look in this environment I think that we are seeing more opportunities with some investment-grade tenants, but our focus is still on just below investment-grade. I think that underwriting has always been a key part of our strengths in being in the net lease market, acquiring highly critical real estate is really important, especially as credit profiles potentially weaken even if companies get into some balance sheet trouble and there’s a restructure, we feel pretty confident especially with larger credits that they are going to restructure and with critical operating assets, we tend to fare quite well relative to maybe other unsecured borrowers or the equity holders certainly.
Chris Lucas
Okay. And then Toni a question for you, sort of a follow-up on the cost of debt issuance today. But I guess more focused on what your swap to fix would look like relative to what you could do in the unsecured debt market on a similar maturity, so five to seven years kind of situation?
Toni Sanzone
I think it’s tough to comment on that at any point in time just kind of given the volatility that’s out there both with rates and the FX as we’ve talked about. So hesitant to give kind of a rate as to where we could swap. I think that we certainly think we could do better than what’s out in the unsecured markets and a straight bond offering but hard to quantify the exact number.
Chris Lucas
So maybe just maybe simpler — I’m not looking for a specific number, but the relative cost is the swap to fix a more expensive avenue at this point, or is the unsecured bond market any more expensive avenue?
Jason Fox
Yes. I mean — and maybe you’re talking about the bank markets or even private placements for that matter probably more the bank debt. And I think it’s probably a little bit more attractive than the bond markets, given the volatility and really the fact that no one’s issued bonds in the REIT world anytime recently. So, there’s just a lot of uncertainty there as well.
Chris Lucas
Okay. Thank you. that’s all I have.
Jason Fox
You’re welcome.
Operator
[Operator Instructions] Our next question is from Joshua Dennerlein from Bank of America. Your line is now live.
Unidentified Analyst
Hi, everyone. Hi, it’s Livy Daikin [ph] on for Josh. Just a question on the record same-store rent growth. You guys saw 3%. That growth seemed pretty consistent across property types. I’m just wondering if there’s anything specific you see driving that additional 50 bps? I believe you mentioned for the second half is there any additional upside to that rent growth we might expect from specific appetite? Thank you.
Toni Sanzone
Yes, I would say there’s nothing really specific – yes, I’ve got that. I don’t think there’s anything specific to highlight from an asset-type perspective. I think that the inflation-based linked leases are across the portfolio. And we do continue to see the expectations on inflation outpacing or the actual outpacing expectations. I think we’ve seen 2.7% in the first quarter, 3% in the second quarter. We do expect that to tick up with the rates coming in the back half of the year to closer to 3.5%.
And maybe importantly for us, what we’ve highlighted in the past and it’s important to remember is that, we do see a lag effect in terms of when inflation runs through our leases. So not all of our leases bump every quarter and even every year and the vast majority of our escalations occur on a lag that generally has a look-back period that will pull in inflation from three to six months prior to the escalation date.
So, with the print you’re seeing now you’ll see that push us up in the back half of the year. And then I think we’re seeing current data that’s showing stabilization is now pushing out to the end of 2023 both in the US and Europe. So, we would expect that to have a continued tailwind well into ’23 and into ’24 in terms of how our leases bump. But again, nothing specific on an asset type.
Unidentified Analyst
Okay, great. Thank you — July investment closed? And if maybe there’s any change in your assumptions, your underwriting assumptions on acquisitions given the new portfolio from CPI?
Jason Fox
I missed the first part of that question. I don’t know if it was on my side or your side it broke up there a second. Could you repeat that do you mind?
Unidentified Analyst
Just around if you could talk a little bit more about the July investments closed. I believe you said it was like an additional $300 million?
Jason Fox
Yeah, it was. It was about $300 million. It was predominantly one large transaction and several smaller ones. The large one was about a $260 million sale leaseback. It was with one of the largest food contract manufacturers in the US that serve many or most of the large consumer goods companies and they basically manufacture or produce a lot of the recognizable brands you’d see in the food world.
Good size sale leaseback I think the proceeds were used for growth capital for that company. I think they’re investing in new production lines as they kind of expand and support some new customer products. It was a portfolio of I think about 20 manufacturing and distribution assets, all highly critical to tenants operations. The bulk of those properties are under master lease and I think it was a 20-year term as well with fixing annual increases.
So that was the largest deal in July. And like I said it was a US deal with a private equity sponsor that we work with before. So I think we’re able to get some favorable economics as well.
Unidentified Analyst
Okay, great. Thank you. And if I could just for one more question on the — if there’s any change in your thinking around underwriting besides concerns over the macro environment, but any change in thinking given the CPA, the added assets from CPA?
Jason Fox
No. I mean nothing related to the CPA acquisition CPA-18 acquisition. I think underwriting generally as we mentioned earlier where there’s some economic headwinds I think we’ll be even more acutely focused on credit underwriting than typical and we want to make sure that we’re generating the right spreads. We are seeing cap rates move up. I think importantly, we are also still achieving a meaningful percentage of these new deals with inflation base increases as well. So — but overall, no, I don’t think the underwriting has changed a lot from a credit perspective, or from the real estate or criticality of that real estate to the operations company. It’s all important.
Unidentified Analyst
Great. Thank you.
Operator
Thank you. Your next question is coming from John Massocca from Ladenburg Thalmann. Your line is now live.
John Massocca
Good morning.
Jason Fox
Good morning John.
John Massocca
Just a quick big picture one for me. Given some of the success in capital recycling with CPA-18 assets, does that make you look at your own office portfolio any differently? Just a big portion of that capital recycling was office. I mean, is that — does that give you maybe confidence to potentially do more capital recycling with on balance sheet or currently on balance sheet office assets? I guess, maybe how would you weigh that against a pretty strong cost of capital today?
Jason Fox
Yeah. I mean, look we’ve been doing a little bit more of that over time. I think Brooks mentioned that typically our dispositions are a little bit more weighted in office overall. And if you look at our office exposure, I think five or six years ago, it made up about 30% of our ABR. Today, it’s just under 20%. And maybe that ticks up a little bit with CPA:18, although per forma for some of the dispositions we’re probably going to be in a similar ZIP code.
So look, we’re always evaluating the best way to fund deals, the best way to position our portfolio to optimize our cost of capital. So yeah, I think that’s something that we think about. But really right now we’re primarily focused on adding industrial and retail primarily in Europe, but also perhaps some in the US as well. That’s where our focus is right now.
John Massocca
And I guess, big picture was the office in CPA:18 or the office in particular that you sold are selling from CPA:18. Is that pretty comparable to what’s in the WP Carrier portfolio today?
Jason Fox
Yeah. Brooks, do you want to take that?
Brooks Gordon
Yeah, broadly comparable maybe a slightly higher weighting towards Europe, and the CPA:18 office portfolio, but broadly comparable kind of investment types.
John Massocca
Okay. That’s it for me. Thank you very much.
Jason Fox
Thanks, John.
Operator
Thank you. Your next question is from John Kim from BMO Capital Markets. Your line is now live.
John Kim
Thank you. I was wondering, among your top tenants, if there’s like a watch list you have or any concerns that you have from a credit profile just given the looming recession?
Jason Fox
Brooks, do you want to tackle that?
Brooks Gordon
No. Sure. So broadly speaking, as I mentioned, credit quality is very good, and that very much includes our top 10. So there’s no top 10 tenants on our credit watch list.
John Kim
Okay. And I wanted to confirm, you increased your termination fee guidance for the year by $5 million to $10 million. I just want to confirm that’s not included in your AFFO guidance?
Toni Sanzone
The increase that we are proposing that, I mentioned the $25 million to $30 million is included in our AFFO guidance.
John Kim
It’s part of AFFO. Okay.
Toni Sanzone
Yes, it is.
John Kim
Okay. Great. Thank you.
Operator
Thank you. We’ve reached end of our question-and-answer session. I’d like to turn the floor back over for any further or closing comments.
Peter Sands
Thank you for your interest in W.P. Carey. If you have any additional questions, please call Investor Relations directly on 212-492-1110. And that concludes today’s call. You may now disconnect. Thank you.
Be the first to comment