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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello, and welcome to W. P. Carey's Third Quarter 2019 Earnings Conference Call. My name is, Jessie, 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 be taking questions via the phone line. Instructions on how to do so will be given at the appropriate time.
I will now turn today's program over to Peter Sands, Director of Institutional Investor Relations. Mr. Sands, please go ahead.
Good morning, everyone. Thank you for joining us today for our 2019 third quarter earnings call. Before we begin, I would like to remind everyone that some of the statements made on this call are not historic facts, and may be deemed forward-looking statements. Factors that could cause actual results 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 with that, I'll hand the call over to our Chief Executive Officer, Jason Fox.
Thank you, Peter, and good morning, everyone. Since our last earnings call, we further strengthened our balance sheet and continued to make accretive investments, including adding significantly to our deal pipeline for 2020.
Today, I'll review our recent investment activity, give a brief update on a couple of our top 10 tenants, and talk about the steps we've taken to ensure we're well-positioned to drive future earnings growth regardless of the economic backdrop.
Toni Sanzone, our CFO, will cover our third quarter results and updated guidance, the financial impact of the CWI merger, as well as some of the details on our recent capital markets activity and balance sheet positioning. We're joined this morning by our President, John Park; and our Head of Asset Management, Brooks Gordon, who are available to take your questions when we get to that part of the call.
Before talking about the third quarter, I want to briefly give some context to our recent announcement about the proposed merger and internalization of the two CWI lodging funds we manage. In 2017, we established a plan to simplify the company and improve our earnings quality by focusing exclusively on investing for our own balance sheet.
Our merger with CPA:17, which we completed a year ago, accelerated that strategy, essentially transforming us into a pure-play net lease REIT. And while last week's announcement about the CWI funds has a relatively minor impact on us, it does take us incrementally closer to generating 100% of earnings from our real estate portfolio and bringing to fruition the strategic plan we set in motion two years ago.
Turning back to the quarter and starting with the market environment. In the U.S., the third quarter was very much a continuation of the same competitive environment we've spoken about on prior calls. In Europe, negative rates and the search for yield continues to attract investors to net lease, driving further yield compression, especially for prime industrial assets.
We remain focused on high-quality real estate that’s operationally critical and backed by creditworthy tenants, particularly sale-leasebacks where we can often drive better terms through deal structure. Continued improvement to our cost of capital has also enabled us to explore higher-quality industrial assets at lower cap rates.
We continue to compete for deals, not just on price, but also based on our ability to provide certainty of close and ease of execution to sellers. Given our long-standing presence in net lease and strong broker relationships, we continue to see virtually every deal in the market; and given the size and breadth of our portfolio, we have access to an array of off-market deals with existing tenants. We also remain in a unique position of being able to transact on two continents across all property types.
Recently, we've seen the best opportunities in the U.S., and primarily within the industrial sector, which is reflected in our recent investment activity. During the third quarter, we completed $62 million of investments comprising three industrial sale-leasebacks. These are operationally critical properties, supported by growing tenant businesses that provide strong built-in rent growth over long-term leases.
One of the benefits of originating net lease investments through sale-leasebacks is the ability to both transact at better-than-market pricing and achieve longer lease terms. Our third quarter investment volume provided a good spread to our cost of capital, the weighted average cap rate of 7.5%, and had a weighted average term of 23 years.
Since quarter-end, we've completed two additional investments, totaling $63 million, including the $53 million sale-leaseback of a portfolio of three industrial facilities in the U.S. and Mexico, triple net leased to one of the world's largest producers of high-performance tools.
These deals bring our completed investments year-to-date through today to $520 million. However, that does not present the full extent of our recent investment activity. We currently have about $407 million of capital investment projects outstanding, comprising 11 projects, totaling $282 million at quarter-end, which are included in our third quarter supplemental table. And an additional two projects totaling $125 million that we've signed up since quarter-end.
We expect six of these projects, totaling $114 million to be completed in the fourth quarter, with an estimated weighted average cap rate of approximately 8%, illustrating the better-than-average pricing we can often achieve on these sorts of investments. The remainder are expected to be completed after the end of the year adding to our investment pipeline for 2020 and into 2021.
As I mentioned at the outset, we're actively looking to use our improved cost of capital to invest in higher quality industrial real estate, which trades at lower cap rates. I'd like to briefly review two recent transactions that are good examples of this, the cap rates averaging in the mid to high 5s.
During the third quarter, we entered into a $68 million forward commitment on a 614,000 square foot Class A distribution facility in Tennessee, net leased to an investment-grade tenant Fresenius, the world's largest dialysis provider. Construction is expected to be completed in April of 2020, at which time we will acquire the facility and lease it back to the company on a triple net lease basis for 20 years with fixed annual rent escalations.
And since quarter-end, we've entered into a $55 million build-to-suit commitment for a new , 168,000 square foot industrial R&D facility in Germany that we expect to be completed in early 2021, net leased to American Axle, a global Tier 1 automotive supplier with about $7 billion in annual sales.
The facility will be strategically located in a prime industrial park near Frankfurt on a 20-year triple net lease with annual German CPI-based rent escalations. Both of these deals are included in the $407 million of total capital investment projects that I mentioned are currently outstanding.
Turning to our top 10 tenants. In the third quarter, Extra Space moved into our top 10 tenant list as a result of the transaction we entered into with them to convert operating self-storage assets to net leases. Also in July, Extra Space announced that it received an investment-grade rating from S&P.
As a result, at the end of the third quarter, annualized base rent or ABR generated by investment-grade tenants stood at 30%, up from 26% a year ago. Traditionally, our focus has been on investments with tenants that are just below investment grade, which we view as the sweet spot for net lease in terms of the risk-reward trade-off. It also has the potential to create value, as tenants with growing businesses and improving financial performance move up the credit spectrum or are acquired by strategic buyers with investment-grade ratings.
Separately, I wanted to provide an update on another of our top 10 tenants, Pendragon to which we lease a portfolio of 70 car dealerships in the U.K. The combination of industry-wide pressures including Brexit have created a challenging environment for car dealers in Europe, particularly in the U.K. We've been closely monitoring the situation at Pendragon and have been in regular communication with management, as they work their way through near-term issues, particularly excess inventory.
As part of Pendragon's planned operational changes, 10 of the 70 sites we own have been subleased, and we expect an additional eight sites to be subleased in the coming months. We've been encouraged by recent steps they've taken to improve their financial position, including suspending their dividend in divesting U.S. dealerships.
They've also recently hired a well-regarded and experienced CEO to drive operational improvements and clarify their strategic direction. They remain up-to-date on rent for 100% of the portfolio and we do not currently view them as a default risk given their liquidity and low leverage. We will continue to stay in close contact with the tenant, which represents 1.9% of total ABR and we'll of course provide an update on any significant developments.
The important benefit of our size and diversification is that no single tenant even one in the top 10 has an outsized impact on our overall business. Our top 10 concentration remains among the lowest for net lease REITs at 22.6% with no single tenant accounting for more than 3.5% of ABR.
Turning briefly to our balance sheet and some closing comments. This year, the capital markets have remained conducive to both equity and debt capital raising. During the third quarter, we successfully completed our ninth offering of senior unsecured notes at our lowest coupon to-date. We've also raised additional equity through our ATM, proactively pulled for debt repayments and extended our debt maturity profile.
I'm pleased to say that in August, S&P affirmed our investment-grade rating at BBB and revised its outlook to positive, up from stable, specifically citing its favorable view our recent deleveraging.
Given the improvement in our cost of capital, we are willing to be more aggressive on price for high-quality assets. However, we are maintaining our underwriting standards. We're also focusing on transactions with long-term leases and remain proactive in seeking lease extensions well ahead of maturities.
The current real estate cycle is approaching its 10th year and that increasing concerns over the pace of it economic growth. With a defensively positioned balance sheet, a large and diverse portfolio of operationally critical net lease real estate with built-in contractual rent growth, we believe we're well-positioned for a range of economic environments ahead.
And with that, I'll hand the call over to Tony.
Good morning, everyone. We had a solid third quarter, reporting AFFO per share of $1.30 with 95%, or $1.23 per share generated by our core Real Estate segment. Within our Real Estate segment, lease termination and other revenue included the impact of two significant items during the third quarter.
First, we collected $3.3 million in past due rents as part of the restructuring of our Agrokor investments, which we discussed in detail on last quarter's call. And as a reminder, we expect to continue collecting pass-through rents from this tenant in the same amount for the next two quarters.
Second, during the quarter, we settled and collected a bankruptcy claim from a prior tenant dating back to 2009 that contributed additional $8.3 million.
While lease-related settlements and recoveries are fairly common for a portfolio of our size, these amounts were on the larger side, demonstrating the effectiveness of our asset managers in pursuing and achieving positive outcomes.
ABR grew to just over $1.1 billion at quarter-end, primarily reflecting the impact of new investments and strong same-store rent growth of 2.2% year-over-year on a constant currency basis. This included a periodic rent increase of 7.6% during the third quarter from one of our largest tenants U-Haul, which added $2.7 million to ABR. Excluding the impact of the U-Haul rent bumps, our same-store rent growth was still strong at about 1.8%.
As Jason mentioned, year-to-date through today, we've completed investments totaling approximately $520 million, and we currently have about $115 million of capital investment projects scheduled to be completed during the fourth quarter, bringing us to about $635 million for the year.
We continue to have an active pipeline and have started to build our pipeline for 2020 through the forward commitments and build-to-suits Jason discussed. We are pleased with the current pace of activity, which is picking up in the fourth quarter.
However, based on the visibility we currently have into the timing of deal closings, we've adjusted our expectations for full-year investment volume to between $750 million and $1 billion.
Disposition activity for the third quarter included four properties for gross proceeds of $14 million. Subsequent to quarter-end, we closed two additional dispositions for $60 million, bringing total dispositions for the year to $96 million. We're on track to close the New York Times repurchase in December, and remain under contract for the pending sale of an operating hotel property in Florida for $115 million.
Our disposition pipeline includes a few transactions, which may slip into early next year, including the pending hotel sale. For the full year, we've adjusted our assumption for 2019 dispositions to between $375 million and $515 million.
Third quarter leasing activity was relatively quiet, impacting less than 1% of ABR. We executed five lease renewals and extensions with existing tenants that in aggregate recaptured 107% of the prior rent and added 10 years of incremental weighted average lease term. While no single quarter is meaningful in the big picture, we're pleased that overall leasing results in the recent years are showing the benefit of proactively investing discretionary capital within our existing portfolio. We are able to capture attractive incremental returns, strengthen our tenant relationships and importantly extend existing leases at favorable economics.
For new leasing activity, we entered into 20 new leases on existing properties with a weighted average lease term of 22 years. The vast majority of the ABR associated with this relates to the conversion of five additional self-storage operating properties to net leases as part of the transaction with Extra Space we announced last quarter.
As a reminder, the remaining nine properties included in the transaction will convert to net leases as they stabilize over the next few years. Net income for the third quarter included a $26 million impairment charge to reduce the carrying value of a portfolio of four manufacturing facilities, which the tenant is currently working through corporate restructuring. This particular tenant is comprised a significant portion of our heightened watch list for the last two years. And we continue working with them to restructure the lease.
ABR related to this tenant at the end of the third quarter was $5.4 million and the tenant was current on all rent payments through the end of September. As we work through the restructuring with the tenant, we expect annualized rent will initially be reduced to about $1 million starting in the fourth quarter with scheduled increases to $2.4 million over the next four years as the business stabilizes, with the ability to increase further depending on business performance.
Please note the restructuring commenced after the end of the third quarter, so the reduced rent will flow through ABR in the fourth quarter, and will be reflected in our leasing activity once the restructuring is completed.
In aggregate, our heightened watchlist represented about 1.8% of total ABR at the end of the third quarter, and over time has generally trended between 1% and 2%, a level, which we view as very manageable in the context of our large and diverse portfolio.
Importantly, based on prior outcomes, we expect actual losses from assets on heightened watch to be a much lower percentage, mitigated through a combination of our focus on investing in operationally critical properties and our proactive approach to asset management.
Overall, the quality of our portfolio remains healthy and well-diversified by tenant, property type, geography and tenant industry, and occupancy remains high, ending the quarter at 98.4%, up from 98.2% at the end of the second quarter.
Our weighted average lease term is 10.3 years and near-term lease maturities are low with less than 2.5% of ABR expiring before the end of 2020, and the vast majority of those leases are currently either in negotiation or have been completed.
Moving briefly to our Investment Management segment. For the third quarter, Investment Management generated about 5% of total AFFO or $0.07 per share. We've often talked about the contribution from this segment moving toward zero as the remaining managed funds roll off over the next few years.
Last week, the two lodging funds we manage announced their intention to merge and internalized management. As part of this transaction, which includes the redemption of our special general partnership interest in the funds, W. P. Carey will receive consideration totaling $97 million, comprising $32 million of common equity and $65 million of preferred stock in the merged company.
The merger is subject to customary closing conditions and shareholder approval. As such, we currently expect the transaction to close toward the end of the first quarter of 2020, therefore, having no impact on our 2019 results.
Once completed, we expect the contribution from our Investment Management segment to be reduced by approximately half on an annualized basis to around 2% of total AFFO, with management fees and earnings from our partnership interest in the funds, partly replaced by dividends from our ownership stake in the merged company.
Upon completion of the merger, we also expect to provide transition services to the merged company for initial period of time, which will be fully reimbursed for resulting in a net neutral impact on our G&A.
While our exit from the non-traded REIT business has been widely discussed and at this point has a relatively immaterial impact on our overall earnings, this announcement nonetheless represents further progress in our simplification.
Moving to our capital markets activity and balance sheet. As Jason noted, we've remained active on the capital markets front, accessing well-priced capital through both equity and debt issuances.
We further utilized our ATM programs to efficiently raise $130 million of equity during the third quarter at a weighted average share price of $88.76, adding 1.5 million shares to our share count, which is expected to result in a fourth quarter and diluted share count of 173.5 million shares, assuming no further ATM issuance. This activity brought equity raised under our ATM programs during the first nine months of the year to $524 million, which had a deleveraging impact on our balance sheet.
During the third quarter, we also had great execution on a euro denominated bond issuance, raising €500 million with a maturity of 8.6 years, and a coupon of 1.35%. We continue to proactively prepay secured debt with mortgage pay-offs totaling $400 million for the third quarter and $912 million year-to-date.
At quarter end, our weighted average cost of debt was 3.3%, down from 3.6% at the end of last year. The mortgages we repaid this year had a weighted average interest rate of 4.9% as compared to the 2.3% weighted average rate and our two bond issuances this year. As a result, we expect to generate interest expense savings in the fourth quarter and beyond.
We ended the third quarter with a net debt to adjusted EBITDA of 5.2 times and debt to gross assets of 40.7%. We've reduced our ratio of secured debt to gross assets to 11.8%, down from 18.3% at the start of the year and we expect that to come down further in the fourth quarter to around 10%.
At the end of the third quarter, 68% of total ABR was unencumbered compared to 53% at the start of this year, illustrating the significant progress we've made on our unsecured strategy since the CPA:17 merger.
Now, let me wrap-up with guidance. As we noted in our release this morning, we've lowered and narrowed our AFFO guidance range for the year to between $4.95 and $5.01 per share, with real estate AFFO of between $4.70 to $4.76 per share. This reflects the revised guidance assumptions for both acquisition and disposition volume that I previously mentioned.
After taking into account the impact of deleveraging and transaction timing which has been offset by the lease settlements that I discussed, we expect year-over-year growth in real estate AFFO per share of about 7.5%.
In summary, we've had great execution this year in strengthening our balance sheet and positioning us well for continued growth. Looking ahead, while we're seeing some near-term earnings impact from deleveraging, as well as from our continued execution on our plans to exit Investment Management, our focus remains on the long-term growth of our real estate earnings.
And with that, I will hand the call back to the operator to take questions.
Thank you. At this time, we will take questions. [Operator Instructions] Our first question is from Jeremy Metz with BMO Capital Markets. Please proceed with your question.
Hey, good morning.
Good morning, Jeremy.
In terms of -- hi. In terms of the acquisition guidance, the slight reduction that you had there, you mentioned the competitive market; Toni had mentioned some of the visibility in terms of that. So, I'm just wondering is that more of a reflection of that visibility and timing or is it just harder to find deals right now and it's more reflection of that competitive landscape making it a little tougher to get stuff under contract?
Yes, I mean, certainly, it's a competitive market out there. Yields are low. There is -- with uncertainty in the economy, there has been generally a flight to safety, which net lease provides and certainly we've been a beneficiary of that with our cost of capital.
But it's also timing. It's hard to predict, especially with the types of deals we do, the timing on transactions. And look, we feel good about our pipeline right now coming into the fourth quarter. It's shaping up to be our most active of the year at this point in time, which is not atypical for us.
But I think maybe equally important, we have about $400 million of in-progress expansions and build-to-suits that are underway right now. About $100 million of those -- $100 million, maybe $114 million of that $400 million we expect to close or be completed and therefore count towards acquisition volume in 2019. The rest will be 2020, some may be into 2020 even or 2021 even, but we feel pretty good about our pipeline going into 2020 as well at this point in time.
And just sticking with the pipeline and not just what's under contract here for the fourth quarter, but just even a little more broadly, Jason, can you break it down a little between the U.S. and Europe in terms of activity, and just how you're viewing the best opportunity today as you look to deploy capital?
Yes. Year to date, most of our deals -- almost all of our deals have been in the U.S. Some of it's just where the opportunities have been, some of it are the dynamics that we see in Europe with negative rates and even a fiercer search for yield there, but we're starting to see more interesting opportunities in Europe right now.
I think you'll see more activity there in the fourth quarter. We're seeing some more build-to-suits there. I think we've observed that, especially in the industrial space. Europe's kind of real estate stock is a little bit aging and so we've seen more build-to-suit opportunities there in area that we've been active in and have good relationships. So hard to predict exactly what the split is going to be, but Europe is picking up for us relative to the beginning of the year.
Cap rates, I would say that they've come down certainly. We're still finding our deals in the 6s and into the 7s. But with our cost of capital, we've been bidding and really seeing more assets that make sense sub-6%, even into the low-5s. The two deals I’ve referenced earlier, Fresenius and American Axle are good examples of that.
High-quality industrial assets, both of those are build-to-suits, so we're going to be buying in almost by definition at replacement cost. So that's what we're looking at. We're looking for good opportunities, and to the extent we can add higher quality assets by getting a little bit more aggressive on pricing, we've been able to take our hurdle rates down a little bit given our cost of capital. But we still want to maintain discipline on the underwriting side. I think that's important for us.
Appreciate it. And then the last one from me, you mentioned Pendragon and the evolving situation there, you did say, you didn't view it as a default risk. And I'm just wondering is this the -- and sorry if I missed it, but was this the lease restructuring that Toni mentioned here that we should look at in the fourth quarter or is that something we should be keeping an eye on, as we think about 2020 and any potential impact there?
Yes. It's not the lease structuring that Toni mentioned. Brooks, do you want to give a little commentary on Pendragon?
Sure. So again, to clarify, that's not the lease restructuring. And Pendragon, we don't view as a near-term default risk. They have a very low leveraged balance sheet with ample liquidity and they're taking all the right actions to bolster that liquidity. They certainly have been in the news and facing a challenging U.K. auto environment, Brexit, emissions regulations, and other things impacting that.
But we think they're doing the right things, and some recent news from them has shown some improvement. So, we're just watching it very closely, and we stay in very close contact with them. And since it's a big tenant, we thought it would be prudent to mention on the call.
Thanks for the time.
Great.
Thank you. Our next question is from Spenser Allaway with Green Street Advisors. Please proceed with your question.
Thank you. It looks like you guys disposed a few vacant assets during the quarter, so just maybe as it relates to same property metrics, could you maybe provide some color on what same-property occupancy and NOI did during the quarter?
Yes, sure. We saw your note recently on that topic, so I think it's something that we're always open to getting feedback from investors and analysts on how to provide better disclosure, enhance it.
We do currently provide some same-store metrics within our supplemental that's mainly intended to really show the growth that's embedded in our leases. As you know, we also provide a separate table that shows some total impact on re-leasing spreads, really new leases each quarter as well.
So -- but we are working on trying to get better disclosure around vacancies, and I think credit losses as well, both of which certainly have an impact on growth each year. Brooks, I don't know if you want to talk a little more color about what we're doing, and maybe to Spenser's direct question about vacancies this quarter?
Sure. And in this quarter, you're right, we sold 4 small properties. 3 of those were small vacant assets, 1 was an industrial property with the first option, so that was the one that wasn't a vacant property. These were pretty small in the big picture, and . And I think overall vacant dispositions will be a minority part, but a part of our disposition strategy for sure.
And so as Jason mentioned, we're working on thinking about how to better disclose that and think about what we can provide there. I think the primary piece of this is really on the leasing front where we do provide that disclosure in the supplemental.
And as Tony mentioned, no one quarter is a trend, but we have been seeing a pretty positive trend on that front in recent quarters. And for example, if we look at kind of trailing 8-quarter measure of leasing activity, we’ve recovered about 98% of ABR, minimal TIs and leasing commissions, added about eight years of term, and that's a trend that's been improving for the past 10 or 12 quarters, that trailing eight measure. So, we're certainly focused there, because that's a major part of it, but we hear you on the other piece as well and we're working on it.
Okay. Excellent. Thank you for that color.
Thank you. Our next question comes from the line of Anthony Paolone with JP Morgan. Please proceed with your question.
Yeah. Thank you. As you look at industrial in the U.S., which I think you've talked about in the past is being a pretty key area of focus. Are you running into other competitors outside of net leases you try to buy the stuff given just the desire for that property type?
It is competitive. I think there's a lot of different investor types that are targeting net lease. And we tend to focus that target industrial and we tend to buy our properties, I would say, mainly at this point through sale-leasebacks and build-to-suits in addition to the expansions that are embedded in our portfolio. And that's a meaningful part of our new investments in industrial. But it's a competitive market space and I think a lot of people are targeting industrial given the long-term fundamentals.
With sale-leasebacks, we can compete perhaps better than others, given our history and the low execution risk associated with our – with the deals that we work on. We tend to see more sale-leasebacks associated with industrial properties. So that's really a big area, where we compete. We can get better yields and maybe equally important better lease terms and structure as well.
Okay. And then on the watch list, I think you mentioned 1.8%, so it sounds like that does not include Pendragon. And then does that includes the pending lease restructuring tenant or?
Correct. So, Pendragon as I mentioned, we don't view as imminent default risk. The tenant that Toni mentioned in her prepared remarks with the restructure that certainly does reflect that on the watch list and it has been on that watch list for maybe almost two years now and is really the bulk of that list. And just to be clear, flowing through that is the prior ABR that Toni mentioned of $5.4 million so that the larger number there. That will organically come down a bit as that ABR gets adjusted. But yeah, that's a prime example of a watch list tenant
All right. So, that $5.4 million will be reduced three point – three and change. Is that the number or?
That's right. It will come down on an annualized basis to about $1 million, initially.
Okay. And then just a question on FX, the $7.6 million in the quarter, I think there was a loss, and then it got added back per AFFO. Remind me, what that is exactly as it relates to hedging and stuff like that and how that works?
Sure. I think the way that, we hedge our foreign currency risk, first is, obviously, through the natural hedges we have with our euro-denominated debt. But in addition to that, we have foreign currency hedges in place, cash flow hedges for an effective – the rest of that balance. And what we see running through the add-back line item that you're mentioning is really the unrealized gains and losses on marking those derivatives quarterly. So what does flow through AFFO is the settlement of the hedges, the cash piece of it when that occurs. And what we're doing in the financials what you're seeing is the add-back is the non-cash component of the mark-to-market getting added back.
Okay. So that was – that was non-realized the $7.6 million piece?
That's correct.
Okay. So then if I were to just think through your property NOI say from last quarter to this most recent quarter. If there is a change in FX that worked against you, we would just see that in the in the NOI, which is becoming through?
That's the right way to think about it. It's the net of a number of line items, but it comes through the NOI, with the offset coming through our realized gains and losses on the settlements of the hedges.
Okay. And does – is that having an appreciable impact, just as you go from 2Q to 3Q and perhaps into 4Q this year?
It's really not been that significant from one quarter to the next. Year-over-year, it's been fairly significant with the movement in the euro from last year to this year. In terms of what we had baked in to our guidance range, we had certainly captured that in large part. But it – we have an effective hedging strategy that really isn't having a material impact on our AFFO during the year.
Okay. Great. Thank you.
Okay. Thanks, Tony.
Thank you, Tony.
Thank you. Our next question comes from Todd Stender with Wells Fargo. Please proceed with your question.
Hi. Thanks. Just with the AFFO guidance coming in, I wondered, if it had to do anything with the acquisitions that you expected to close, and you just didn't get in early Q3, or is Toni, you – just with the restructuring of that one tenant and lease, maybe that had to do with it. Just kind of getting a sense of – because just – because we're kind of getting late in the year, it seem like a pretty good ratchet down in guidance.
Yeah. I mean, I think to your point, there’s a number of moving pieces that go into our guidance. On the acquisition timing, I would say it was more timing than anything falling out specifically. So if you really look at what we're expecting for the rest of the year, we are expecting about half of our volume almost in the fourth quarter. So that shift from the third to the fourth quarter had a bit of an impact. And I think maybe even more importantly really was the deleveraging that we saw over the course of the year and even further into the third quarter.
If you look at where we started the year and assuming we would run leverage neutral over the course of the year, and then later on the activity that we saw as a result of being opportunistic in both the equity and the debt markets. That had on -- over the course of the year, roughly a $0.04 to $0.05 impact on -- of AFFO dilution. And it's something that we were happy to see in exchange for the stronger balance sheet and improved credit profile in addition to the longer term interest savings that we'll get resulting from the prepayment of our mortgage debt.
Okay, that's very helpful. Thanks. And then just I guess looking at the coupon you achieved on your euro bond in September, I think it's the lowest I've ever seen. Does that allow you to, I don't want to say chase cap rates lower and maybe get into more investment grade deals, because of that. I agree on that's one deal, but if you couple that with your great cost of capital on the equity side, maybe just there is some deals that you may have passed on, in the past that you're looking at now?
I think it's absolutely the case. I mean, our cost of capital is the lowest it's ever been. And given our diversified approach and our reputation in the industry, we are seeing very wide range of deals. We're seeing all the deals out there, for that matter.
So I think you'll start seeing that more. I think we can do deals well into the five. It's even very low fives and still be accretive. So I think you'll see us get more aggressive on pricing. We won't get more aggressive on underwriting. We want to stick to our standards. And if we lose deals based on underwriting, I think that's okay.
I pointed out earlier, but if you think about the two build-to-suits that we talked about, American Axle, and Fresenius, both of those are high quality assets. These are build-to-suits Class A product. One of them is just outside of Frankfurt, and in Germany, cap rates can be quite low.
And Fresenius is going to be really a Class A bulk distribution facility right near their largest manufacturing plant. Both of those deals were in the fives, I think the average was in the mid to high fives So to the extent we can find higher quality real estate, and again maintain underwriting standards, I think you'll see us do more of those type of deals.
Thanks, Jason. And just finally, just with -- how the cap rates on the acquisitions you made, it's pretty diverse, here in the U.S., looks like the Midwest, Canada and the Netherlands, maybe just, kind of, discuss those cap rates if you can, and any differences you're seeing across Europe?
Yeah. Year-to-date right now, I think our cap rate maybe this is through Q3, actually is about 7%, maybe slightly over 7%. Baked in that are again sale leasebacks and build-to-suits we're able to generate some incremental yield, as well as some of the expansion projects within our portfolio, which tend to be very high yielding relative to the same deal that we're to trade in the open market. I would imagine that's going to come down some, as we look to acquire higher quality assets. But I think we'll still see some of the more generous yields given how we source transactions.
And how about length of lease? I guess, maybe just a follow-up -- and any changes to length of leases with the tenants are willingness to sign at this point?
We still have been able to generate long lease terms. I think the weighted average lease term through Q3 for our 2019 deals was about 19 years. Again sale leasebacks and build-to-suits help us dictate terms. It's one of the things that we value in structure and own transactions. We'd be willing to come down on lease term, if we're getting higher quality real estate and we think that there is probably some of that in our pipeline. But I think you'll also see us continue to do sale leasebacks, so we can dictate terms.
Great. Thank you.
Yeah. Welcome.
Thank you. Our next question comes from Manny Korchman with Citigroup. Please proceed with your question.
Hi. Good morning, everyone.
Good morning, Manny.
Jason, maybe to continue on that conversation. Are other buyers thinking at least from the same way? We hear you saying, you're buying higher quality real estate by signing 20 or 25-year leases on I think five cap, is there a big difference in the way you and others are thinking about a 25-year leased asset to a solid tenant, and maybe there differences in credit underwriting for the tenants. But is it worth paying the five cap versus the seven cap when you're looking at 25 years?
I think there's a lot of criteria that goes into how we price transactions. Certainly, the credit matters and we've talked about before that we tend to focus just below investment grade. We think that's the sweet spot in that lease investing. We also like highly critical real estate tends to be stickier on renewals, as well as provide some downside protection to the extended tenant as restructuring and there's certainly going to need the critical real estate.
So there's always a trade-off in pricing. I mean higher quality real estate with at/or below market rents, we certainly are willing to accept shorter lease terms on those and perhaps even pay the same type of cap rates. So it's hard really to give you a specific answer on that because there's a lot of variables. But we're open to a range of lease terms. I think because we're doing sale-leasebacks and build-to-suits, we don't have to necessarily sacrifice or accept shorter lease terms to get some deals done at yields that we like. So I think TBD on that, but it's probably going to continue to be a broad range of lease terms, even though more recently we've been able to generate longer-term restructuring.
Got it. And then just as we look at your AFFO stream and more of it's coming from the real estate business as the other businesses wind down, you're sort of approaching your dividend payout with just the real estate AFFO component. How should we think about dividend growth and coverage in that light?
Yes. I think you know, that's certainly something we've been mindful of as we've been moving away from the investment management fee stream. So we've been conservative in terms of our dividend growth over the last couple of years. I think we're currently in the low to mid 80% payout range. And even with the CWI rolling off, we expect to stay in that range. So I think we'll continue to keep an eye on it and be conservative in that regard. But we feel comfortable around that range.
Thanks, everyone.
Great. Thanks, Manny.
Thank you. The next question is from Chris Lucas with CapitalOne Securities. Please proceed with your question.
Good morning, guys. Just a couple of questions on guidance. Just in terms of the acquisition guidance specifically, just remind me it includes both acquisitions that you're expecting you close this year? And either is it the forward commitments that settle this year or forward commitments that you enter into this year?
It's the one -- the forward commitments that settle and come online and start generating rent during the period. So anything source this year that closes in a future period would be next year's acquisition volume.
Yes, Chris. So I mentioned that the $400 million of build-to-suits and expansion projects that are currently on the way out that $400 million, about a $100 million of those we expect to complete and start generating rent in the fourth quarter, so those will count toward that guidance range that Toni mentioned. Yes, there's $300 million, while there are transactions that we're -- that we've closed effectively, but they haven't completed the construction or commenced rent, they don't hit that transaction volume until that happens, which will be 2020 for a lot of that -- some of that may spillover into 2021.
Okay, thank you for that. And then I guess just maybe if you kind of look at the last five years and your split between sort of traditional acquisitions of income producing property, sale leaseback type transactions and the forward -- the execution of forward commitments, that split what was that? And then sort of -- or should we expect that to change going forward given the environment or is it expected to sort of say similar? I'm just trying to understand sort of how you guys think about that?
Yes. We've been doing more of that, I think. I think we have the skill set internally to source a lot of those and certainly the relationships. When we look at the construction projects and we're not taking development risk on these. These or build-to-suits or expansions within our portfolio that are already leased under long-term. Brooks team has really focused on mining our portfolio of 1,200 properties and I think that there's a lot to do there in terms of extending assets, perhaps some redevelopment as well depending on the situations, I mean, build-to-suits.
If you look at 2018, I think around 10% or 12% of our deal volume where those expansions and build-to-suits will be call capital investment projects, I think this year, it could be closer to 20%, perhaps even 25% and that's probably based on the pipeline right now in visibility we have for 2020 that could go even higher. Although, it's hard to predict that far in advance.
Okay. Thanks for that, Jason. And then, there have been a lot of or several large M&A transactions in the industrial space, particularly in the U.S. and those have tended to kick out a fair amount of sort of resale opportunities I guess if you want to look at their dispositions that come out of those M&A transactions. Is there opportunity for you guys in those? Or is that stuff that you're just not interested in?
No. I think there could be some opportunity there. I mean, again I think the bulk of those portfolios, they're going to be shorter term and in many cases multi-tenant industrial. And that's really the core properties that some of those acquirers are looking to own long-term anyway. To the extent there are single-tenant assets that have lease term that kind of meets our criteria, we're certainly interested in. Again, we have the relationships, whether it's with the bankers or the brokers where we're engaged in that process, I think that we'll have some good opportunities there.
Okay. And then just two detail questions on -- and I apologize if it's somewhere in the disclosure, I hadn't a chance to dig through the supplement. But the mortgage pre -- so you've prepaid a bunch of mortgages. Were there any penalties or yield maintenance costs associated with those for the quarter?
Yes. I have the number in front of me, so for the full year it's roughly about $18 million or about 2% of the total balances that were prepaid.
And Toni, where do those flow in the income statement this cost?
The loss on extinguishment is in other gains and losses line item.
Okay, great. And then the last question from me, because as it relates to the bankruptcy collection from a 2009 bankruptcy. Did you guys have visibility on that, when you set initial guidance? Or was that something that came along at sometime later in the year?
It's something that we've been tracking certainly over time as the case has progressed. And I would say with -- when we went out with guidance at the beginning of the year, we gave a pretty wide range, really taking into account the possibility that, that could settle this year, and certainly, not having certainty on timing or amount, so.
Okay, great. Thank you. That's all I had this morning.
Thank you. The next question comes from Sheila McGrath with Evercore. Please proceed with your question.
Yes. Good morning.
Good morning, Sheila.
Jason, if you look at the larger tenant list, there are three with less than five year remaining, and New York Times, obviously they'll be sold shortly. Just wondering on U-Haul and Marriott, how early do you -- typically, you get some visibility on what's going to happen, or do you expect renewal? Just some color on those two tenants.
So, this is, Brooks. Typically, we're in conversations especially with large tenants. It's early as five to seven years in advance. And that's certainly the case here, nothing new to report on these tenants. But rest assured we're certainly in conversations with all those tenants very early on. Typically, with a smaller tenant, maybe its three to five years in advance, we're really kicking off those conversations. But that's really our approach is to be as proactive as we possibly can on that. It's important to note that New York Times, as you mentioned has a purchase up option in December. U-Haul is kind of the only other side with purchase option maybe that's in 2024.
2024, Okay. And then on the capital investments, you ramp those up. Is there a rule of thumb for stabilized yield on cost? Or how those yields are comparing to your acquisition yields?
I mean I think the rule of thumb is they tend to be higher. I think it all depends on the situation. And there's really two types of capital investment projects that we have. Look, we will probably move into two, but I'll talk specifically about two. What are build-to-suits? These are externally sourced, not associated with our existing portfolio. We tend to get premiums to where those assets would trade once complete, just given the type of structuring involved around a build-to-suit transaction. Maybe that's 50 to 100 basis points premium there, but it does depend on the individual asset.
I think we get a bigger premium on the expansions that we do within our portfolio. Again, hard to put a number on it, and it's probably a pretty big range because there's other benefits that we get out of expanding existing portfolios, such as extending lease terms in addition to putting money to work at an interesting yield. Those could be anywhere from 50 to 300 basis points to give you quite a wide range. But again, it does depend on the other benefits that we get as part of that expansion.
Okay. Thank you.
Welcome
Thank you. [Operator Instructions] Our next question comes from Joshua Dennerlein with Bank of America Merrill Lynch. Please proceed with your question.
Hey, good morning, guys.
Good morning, Josh.
Just curious on the Pendragon. You mentioned that some of the properties were being subleased. What kind -- is it, other auto dealers, that are renting this space from them or what's the other kind of use for those properties?
Yes. For these specific sites for sublease, that's typically the alternate use. I will note that there is a subset of the portfolio, which we view having long-term upside potential and conversion to for example, residential. Some of these are kind of in the path of residential growth. That's certainly not baked in any of our thinking currently, but that's important to note that, that's kind of a much longer-term potential trend there.
Okay, interesting. And I guess they don't ever really want those back their subleasing amount. Was it like a different -- like auto dealer or as far as used cars versus like new cars or something like, how come like a new dealer thinks they can make it work, where Pendragon was having trouble?
Yes. I think that's a little bit less to do with the specific location and more that Pendragon is kind of retrenching and just looking at their total portfolio and saying, we want to focus on a particular subset of our brands and subset of our stores. So, I think it's a little bit less to do with this particular corner was -- wasn't working and more Pendragon refocusing. And so, these locations still are potentially quite good for a different auto dealers who maybe have a different footprint and a different focus.
Okay, that's a good color. I appreciate it. Thank you.
Thanks, Josh.
Thank you.
Thank you. At this time, I'm not showing any further questions. I'll now hand the call back to Mr. Sands.
Thank you. And thank you for joining us today and for your interest in W. P. Carey. If you have additional questions, please call Institutional Investor Relations at 212-492-1110. That concludes today's call. You may disconnect.