W. P. Carey Inc. (WPC) Earnings Call Transcript & Summary

Hello, everybody, and thanks for being with us today on this 2022 First Quarter Earnings Call. Ahead of getting started, I want to note that a number of the remarks shared during this call aren't historical facts and might be considered forward-looking statements. The factors capable of making actual results differ materially from what W. P. Carey expects are laid out in our SEC filings. A web replay of this conference call is going to be posted in the Investor Relations portion of our site, wpcarey.com, and it will stay archived there for roughly 1 year; copies of our investor presentations along with other related materials can be found there too. So with that, I'll hand things over to our Chief Executive Officer, Jason Fox.

Thank you, Peter, and good morning to all of you. The robust AFFO growth we reported today on a year-over-year basis comes from two things: our continued elevated level of investment activity, and inflation starting to pass through into our rents in a more meaningful way. Toni Sanzone, our CFO, will walk through our earnings in greater detail and provide an update on our portfolio, balance sheet and guidance. We haven't experienced any genuine upward pressure on cap rates in more than 10 years. So this morning my remarks will center on the present environment, including how higher interest rates and inflation are affecting us. I'll also go over our recent investment activity and pipeline, and give a short update on our acquisition of CPA:18 as we approach closing that transaction. And given the conflict in Ukraine, I'll discuss how our European portfolio continues to perform strongly and what we expect going forward. Joining Toni and me this morning are John Park, our President, and Brooks Gordon, our Head of Asset Management, and they're available for questions. There's a lot to cover, so let's get started. Beginning with the broader environment, especially how higher interest rates are affecting cap rates and investment spreads. The 10-year treasury is up roughly 100 basis points since early March, and 150 basis points versus March of 2021. For all net lease REITs, the long-term cost of debt has risen significantly. Cap rates, by contrast, tend to respond to increasing rates with a lag, usually measured in quarters, not weeks. Although our cost of debt has clearly climbed, several mitigating factors work in favor of our overall cost of capital and let us keep investing at adequate spreads. First, keep in mind that during 2021 we were quite active in the capital markets, raising nearly $1.5 billion in debt capital, proactively prefunding almost all of our debt maturities through the end of 2023, and locking in an attractive cost of debt, one that is considerably below current market interest rates. Second, our cost of equity has improved substantially since late February, with our stock presently trading near its highest level since late 2019, prior to the arrival of COVID. Because of our capital structure and our commitment to conservative leverage, a lower cost of equity generally has a bigger effect on our overall cost of capital than a higher cost of debt. In a similar vein, from a competitive perspective, we anticipate that higher interest rates will hurt more highly leveraged private equity buyers to a greater degree. Third, as we've said consistently, the spreads we earn on new investments don't come solely from initial going in cap rates. What better captures the contribution to our earnings over time is the unlevered internal rate of return, or the average yields we generate on our investments, which take into account the favorable rent growth we typically achieve across long lease terms. And since more than 99% of our ABR comes from leases with embedded rent growth, most of which is tied to CPI. We still feel positive about the total returns we're generating for investors compared with what our capital costs us. In fact, when it comes to investments where rent growth is linked to CPI, stronger anticipated near-term rent increases could partially offset a higher cost of debt. Also, although we've consistently anticipated that cap rate changes would trail interest rate movements, we're beginning to observe indications of cap rates being pushed upward. However, keep in mind that the bulk of the interest rate shifts that transaction markets are responding to occurred fairly recently, really across the last 6 weeks. And although deal cap rates will ultimately react to elevated interest rates, it's premature to predict precisely the magnitude and the timeline needed to arrive at an equilibrium. Thus far, we've observed cap rates widening gradually on newly priced deals and a small number of deals currently in the market getting repriced. In certain instances, this has led to those deals returning to market or returning to W. P. Carey. And at present, we would likewise price them using wider cap rates. When the market is in transitional phases, such as what we're going through right now, sellers pay more attention to execution risk. Our solid reputation for delivering certainty of close, as a result, provides us a competitive advantage and also typically leads to us transacting at improved yields. With that serving as the market context, I'll now shift to our recent investment activity. So far this year, we've closed investments amounting to $415 million, carrying a weighted average cap rate of 6% and a weighted average lease term of 21 years. Our investments were mostly sale-leasebacks, which gave us the capacity to negotiate lease terms directly, including rent escalations. We keep taking a diversified approach, even though we stay concentrated on warehouse and industrial, which make up roughly half of our portfolio; we're also preserving our emphasis on essential retail in Europe and investigating portions of U.S. retail. Our office exposure kept shrinking gradually, a path we anticipate will persist because of our underweight position toward this asset class. Now to our pipeline; beyond the $415 million of investments we've finished year-to-date, we keep witnessing robust deal momentum. Right now, we have more than $400 million of deals in our pipeline at an advanced stage. And roughly $175 million of capital projects or other commitments slated to be completed in 2022. That provides us solid visibility into approximately $1 billion of investment volume, still fairly early in the year. And we keep expanding our pipeline at a healthy rate, making great strides toward our guidance range of $1.5 billion to $2 billion for full year investment volume. Our projections for full year deal volume are, naturally, prior to the effect of our proposed $2.7 billion acquisition of CPA:18, which should add around $2 billion of assets following roughly $700 million of anticipated dispositions. Our announcement regarding CPA:18 was, in numerous respects, the most consequential event of the first quarter. This gives us a great chance to bring in top-notch properties that we understand thoroughly and that fit nicely with what we already own, while barely affecting our balance sheet — and it basically wraps up our departure from investment management. Just like we told you when we made the announcement, we anticipate this will boost our real estate AFFO right away by roughly 2%, which mostly makes up for the earnings we'll give up once we stop managing CPA:18, and there's appealing built-in potential through its self-storage holdings. Ever since we announced this deal, the investors we've spoken with have responded favorably, and they're broadly acknowledging these advantages; as far as where things stand, I'm happy to report that the 30-day go-shop window closed at the end of March without any rival bids. We're looking at a closing in early August, assuming CPA:18 stockholders give their approval and other standard closing conditions are met. The planned $700 million in asset divestitures, mainly student housing and office properties, are also proceeding as expected, on both our schedule and our price targets. Those sale processes are moving along well. Now shifting to the bigger effect inflation is exerting on our rents. We remain convinced that no other net lease REIT is in a stronger position to benefit from rising inflation via rent increases.

When we look at ABR, rent escalations linked to CPI apply to 58% of it. Among the properties where rent increases are tied to CPI, 40% underwent scheduled bumps in Q1, averaging a 4.5% rise. Keep in mind that this 4.5% reflects the year-over-year effect of Q4 CPI. Given that inflation sits at roughly 8% in the U.S. and Europe right now, we anticipate much stronger rent growth across 2022, with an even bigger effect coming in 2023. In today's climate, we see this as particularly beneficial—something REIT investors may be undervaluing—since it carries no capital cost and could deliver an extended boost to earnings well past the point when inflation starts coming down. Naturally, should inflation expectations keep climbing and remain elevated for a longer stretch, we'd anticipate picking up further gains. Finally, we are paying close attention to what the conflict in Ukraine might mean, including possible effects on our tenants as well as on the deal market. Looking at our holdings, we own very few assets in Eastern Europe—all of them located in NATO member nations—and we hold nothing in Ukraine or Russia. In Eastern Europe, most of what we hold sits in Poland — chiefly OBI, which ranks among the biggest DIY chains in Europe and carries a solid multinational credit out of Germany. So far, when it comes to tenants' capacity to cover their rent, we haven't truly observed any fallout tied to the conflict in Ukraine, neither in Eastern Europe nor across the continent generally, whether that would come from pricier energy or breaks in supply chains; nonetheless, that picture might shift should the fighting drag on. Were we to face serious economic turmoil, something that would probably ripple across the world, our position remains strong enough to handle it. The way our tenants behaved through COVID — a period when we stayed the industry's front-runner on rent collection — is, in our view, the finest gauge of what we should expect. In Q1, our portfolio-wide rent collection rate exceeded 99.7%, and for Europe it hit 99.9%. In the same way, transaction activity across Europe hasn't shown any significant effects so far. Setting aside business matters briefly, I'd also like to mention that we're dedicated to backing humanitarian relief in that area, and we've donated to the American Red Cross, which is providing vital assistance to Ukrainian civilians who've been displaced. Our donation has been matched 2:1 by the W. P. Carey Foundation, amplifying its effect. To wrap up, we think we're in a really strong position given what's happening in the market right now, and there are a few main reasons for that; our balance sheet is investment-grade and well-positioned, with roughly $2 billion in total liquidity, plus we've shown we can access capital, and our cost of capital should keep giving us enough of a spread over our investment opportunities even when cap rates are trailing interest rates. Right now, both S&P and Moody's have given us positive outlooks, and that could mean even more benefits when it comes to our cost of capital, even during periods when the capital markets are difficult. After making record-breaking investments during 2021, our deal flow remains strong, coming through a dynamic pipeline that keeps getting bigger. We can clearly see a path to about $1 billion worth of investments, counting the transactions already completed this year. We're making great progress toward the $1.5 billion to $2 billion in deals that our guidance assumes. Beyond that, we feel confident we will finish acquiring CPA:18, which adds close to $2 billion in assets and will boost our real estate AFFO right away, with additional benefit coming from its self-storage holdings. Strategically, this transaction also streamlines our operations, completing our exit from investment management. And finally — this may matter more than anything else — given how things stand right now, we believe no other net lease REIT is in a stronger position than we are when it comes to inflation, and that comes from the rent escalation structures we've built in plus the fact that such a big portion of our ABR is tied to inflation. Same-store growth for 2022 is coming in at a record level, and assuming inflation remains high, that trend ought to continue. Beyond that, for those who are anxious about choppy markets and the chance of a recession, the way we've diversified our strategy gives investors a particular kind of cushion on the downside, along with a dividend yield of roughly 5%, which is supported by top-tier cash flows and rent collection results that led our sector all the way through COVID. Having said all that, I'll hand things over to Toni.

Thanks, Jason, and good morning to all of you. Earlier today, we announced total AFFO of $1.35 per share for the first quarter, which represents a rise of $0.13, or 11%, compared with a year ago. That figure included real estate AFFO of $1.31 per share, an increase of $0.12, or 10%, over the equivalent period. Real estate revenues grew 12% year-over-year, mainly because of the strength of our investment activity across the past 12 months, the effect of rent increases linked to inflation, and robust performance throughout our portfolio. Lease termination and other income came to $14.1 million for the quarter, and that includes an $8 million termination payment tied to an asset we later sold in April. Our initial guidance range had anticipated this termination payment; for the full year, we anticipate termination and other income will come to roughly $20 million. Looking at expenses, G&A was $23.1 million in the first quarter, versus $22.1 million in the prior year period. As usually happens, G&A came in a bit higher in the first quarter than we would anticipate on a run rate basis, largely because of the timing of payroll taxes. Our guidance still assumes full-year G&A will land between $86 million and $89 million. Property expenses, excluding reimbursable tenant costs, rose $2.9 million year-over-year to $13.8 million, driven by higher carrying costs and costs to reposition certain assets. For the rest of the year, we expect quarterly property level costs to stay at or slightly under this level. Interest expense fell $5.6 million year-over-year, which reflects the interest cost savings from the debt refinancings we finished early in 2021. Finally, nonoperating income included $5.2 million of cash dividends received during the first quarter, made up of a $4.3 million annual dividend on our Lineage Logistics common stock and a $900,000 final dividend on the preferred stock we held in Watermark Lodging Trust. As I noted on last quarter's call, our Watermark preferred stock was redeemed at par, or $65 million, in January. Consequently, we now hold only common stock in the company, and we are not projecting to receive any dividends from it during 2022. Now let me turn to our portfolio. As Jason mentioned, on an ABR basis, 40% of assets with rent increases tied to CPI had rent bumps during the first quarter, with an average increase of 4.5%. The impact of that flowed through to our overall contractual and comprehensive same-store metrics. Consequently, contractual same-store growth rose from 1.8% in the fourth quarter to 2.7% for the first quarter, up almost 100 basis points. Inside that, the uncapped CPI component rose 170 basis points to 3.3%, while the CPI-based component, which includes leases tied to CPI but with caps, rose 70 basis points to 2.4%. As a reminder, the increases in these metrics during the first quarter reflect fourth quarter CPI data given the timing lag inherent in lease escalations. For the rest of this year, we're expecting contractual same-store growth of 3% or better, and given where inflation projections currently stand, we think that figure will climb considerably higher across most of next year, approaching 4%. On the leasing side, the first quarter brought lease extensions with Pendragon, one of our top 10 tenants and a car dealership portfolio we hold in the U.K. Those extensions covered 30 sites and came with highly favorable terms, adding roughly $11 million of ABR along with 11 years of additional lease term, while we recaptured 100% of the previous rent and preserved the rent bumps already in place. Over the coming year, 12 of those sites are slated for sale, and Pendragon will keep paying substantially all of the rent right up until those assets change hands. Once the remaining dispositions close, our Pendragon holdings will consist of 57 assets, carry a weighted average lease term of 14.8 years, and see total ABR shift from 1.8% down to 1.5%. First-quarter disposition activity totaled 6 properties, generating $27 million in proceeds. Turning to the balance sheet and capital markets: from both a debt maturity profile and a liquidity standpoint, our positioning remains very strong. Our maturities are well laddered, our floating rate exposure is limited and comes mostly through the credit facility, and no bond comes due before 2024. As of the close of the first quarter, outstanding debt carried a weighted average interest rate of 2.5% and a weighted average maturity of 5.2 years. Our cash interest coverage ratio rose from 6 to 6.4x during the first quarter and is still one of the best in the net lease peer group; the quarter ended with debt-to-gross assets at 39.7% and net debt to EBITDA at 5.5x, putting both at the low end of our target ranges; we anticipate staying inside our target leverage levels of low to mid-40s for debt-to-gross assets and mid- to high 5x for net debt to EBITDA. Thus far in 2022, capital markets activity has involved equity issuance through our ATM program and drawing on the accordion feature of our credit facility. To be specific, we've sold 2.7 million shares under the ATM so far this year, bringing in roughly $220 million of gross proceeds at a weighted average price of $80.79 per share. This month, we also tapped the accordion on our term loans for about USD 300 million, which lifted total liquidity from $1.8 billion at the end of the first quarter to over $2 billion, with those proceeds going toward paying down revolver balances and leaving the revolver substantially undrawn. That gives us plenty of liquidity to pursue our deal pipeline and the flexibility to time our capital markets access, which matters a great deal in today's environment. Finally, a quick recap of guidance: we're holding our AFFO guidance range at $5.18 to $5.30 per share, which includes real estate AFFO of between $5.03 and $5.15 per share. That still assumes we'll invest somewhere in the range of $1.5 billion to $2 billion, along with $250 million to $350 million in dispositions. And just to remind everyone, the guidance we've issued right now doesn't take into account how our proposed merger with CPA:18 would affect things. With that said, I'll turn things back over to the operator so we can take your questions.

I'd like to start by asking Toni something. My understanding is that the earlier outlook called for same-store rent growth of 2.5% to 3% across the year, and we recorded a 2.7% gain in 1Q. From what you said, it sounds like you anticipate that moving upward, since inflation is running at 3% or higher for the rest of the year. So I'm wondering how you think that will ultimately land for the full year. The reason I ask is that it seems like most of the bump came during the first quarter. So I'd just like to know what the outlook for the whole year looks like.

Yes. Thanks, RJ. I believe you've captured it exactly. What I mean is that we lifted it based on the prints we're now seeing come through. With the first quarter at 2.7%, I'd say we do anticipate something in the 3% range, and possibly above 3% as the year goes on. And I think the thing we keep emphasizing is the lag that exists in the leases. So even though we're seeing that come through, the effect of what we've observed since we gave guidance on the inflation print increase will probably show up in the back half of the year, or actually even nearer to the fourth quarter, and have a far bigger impact on 2023. And I think something else we're noticing is the curves and expectations that this will last longer; so there could be tailwinds into 2023 and into 2024 rather than a bigger effect on 2022.

Got it. And to make sure I have this right — from what you were saying, I believe you mentioned that for '23 you're expecting something close to 4% when it comes to internal growth, or same-store rent growth, based on the inflation figures we've observed up to this point in the year.

Right, I'd say it's possible that particular quarters in '23 could top out in the high 3s, getting nearer to 4.

All right. For my follow-up, I'd like you to weigh in on the fact that we're noticing indications of cap rates being pushed higher. What I want to know is whether any particular geographies, industries, or sectors are showing the beginnings of some movement when it comes to cap rates.

Not really — right now it's purely anecdotal, and I believe that's logical. What I mean is, the jump in interest rates has only happened across the past 6 to 8 weeks. So we're still at a pretty early stage. That said, certain signals do exist, and putting a number on them is difficult — perhaps 25 basis points. What I mean is, among the anecdotes coming our way are transactions being repriced out in the market and, frequently, returning to market and occasionally coming back to us as a possible purchaser. And when we review those deals a month — 2 months after our initial look at them, we might be increasing our pricing on them by some factor, obviously subject to a lot of the particulars. But yes, anecdotal describes it better than anything else. The designs are there. My expectation is that should rates fail to change direction, then I think there's no question we'll witness some widening by the time the year ends. Putting a number on it right now is simply difficult.

To build on that point, Jason — I'm wondering, since there are fewer leveraged purchasers active right now, the expectation seems to be that pricing could come in somewhat stronger, like you were just saying. That said, I'd like to know how this plays into the selling side of that $700 million in asset dispositions, and whether interest might be softer, or the pool of buyers smaller, for those properties because of where interest rates have moved?

Sure. The $700 million we're selling off sits within the CPA:18 deal — roughly 60% of it, meaning slightly more than $400 million, consists of the student housing portfolio that had a purchase option attached, and that option has now been exercised. That means the price is locked in. Nothing occurring in the wider rate environment will affect it whatsoever. As for the remaining 40%, those sales processes are already moving along nicely; it involves one student housing property located in the U.S. — UT-Austin — plus 3 office assets in Europe. Based on early signals, it looks like we're tracking pretty much as planned, on both the schedule and the pricing front, though we'll hold off until we see how the final execution plays out.

So I realize you sort of shared — you shared the cap rate for sort of acquisition activity on a year-to-date basis. Might there have been any sort of split perhaps among things that closed in 1Q '22 versus the things closing afterward or even things closing in sort of January, February versus things closing in March, April, just regarding the cap rate you're seeing on those transactions?

Yes. Look, there is — we aim for a wide range. It's a varied portfolio, a varied model; so normally we do transact inside that 5% to 7% range that we mention. So there is a bit of dispersion. A portion of it might be tied to where rates have moved, but it's likely more a result of the asset mix. Geographies. Europe, we're still witnessing cap rates that are somewhat lower. And clearly, if we're purchasing logistics assets instead of, let's say, a manufacturing property. There's perhaps a bit of delta between those too. So likely not much correlation that we're observing because many of those deals were priced and processed 6 to 8 weeks ago, nearly at the moment of the interest rate increase, but there is a bit of dispersion certainly.

All right, and regarding that $400 million sitting in the tangible pipeline, how should we think about when those deals might close? Would that be something reaching completion within a 6-month period? Or could it perhaps get done during the rest of the year? Any details would be useful.

Yeah. No, these are further along — these are at advanced stages. These are transactions where we have at minimum signed letters of intent or some form of contract. There's still diligence remaining. So we won't claim they're necessarily finalized deals, particularly when sale-leasebacks are involved. But we anticipate timing over the next 30 to 60 days for those transactions. Things could get delayed and the market is volatile. So predicting exactly what occurs is difficult. But those are at advanced stages and we would expect to close them in the relatively near term, probably by the end of this quarter.

Okay. Then, when I check the comprehensive same-store growth disclosure, it looks like part of the strength in uncapped CPI growth was offset somewhat by softer increases in fixed. Any color on what might have been driving that?

Brooks or Toni, if you have any insights into that.

I believe, if we just consider the — what you're asking about concerns the fixed rate pulling down the CPI base, is that precisely what you mean?

When it comes to what gets reported for comprehensive same-store growth, the quarter looked somewhat softer, in my view. It will only involve a small group of properties, but...

Yeah, that sounds about right to me. Looking back before COVID, the pattern we generally observe is that comprehensive comes in somewhere between 50 and 100 basis points under contractual — I don't see any metric this quarter that's showing a particular trend. My sense is comprehensive results are still holding up better, and nothing stands out as dragging it lower. Brooks, I'm not sure whether you'd like to add any particular details there.

Nah, I'd say it's honestly more a matter of timing and anecdotal evidence, plus whatever happened during that particular quarter.

I was checking out Page 3 in the supplemental, the normalized pro rata cash NOI, and it appears to have declined from one quarter to the next. What's driving that? My assumption would have been that, similar to what happens with an acquisition, it should have increased in 1Q compared to 4Q. Is anything distorting that?

Yes. Appreciate that, Josh. There are a few elements, I'd say, that distort things this quarter when you compare against Q4. The main one is really the FX movement versus the prior quarter. Keep in mind this is on a constant currency basis. I believe we've observed roughly a 2% drop in the average euro rate versus the previous quarter. That likely accounts for around a $2 million difference from last quarter. Then the second element, which I brought up during my remarks, is simply a larger property expense figure for the quarter, roughly $2 million. So essentially, when you combine those 2 items, they're what's offsetting the acquisition volume alongside the same-store growth.

All right. All right; that's clear to me. Then it seems as though you've moved into what could be described as a different asset category — funeral homes over in Spain. What gives you confidence when underwriting assets of that kind, and did you share the cap rate for it?

Individual cap rates aren't something we share. My sense is that it likely sits in the lower portion of the band we usually aim for, and that mostly reflects where it is — Spain — plus the reality that most of the worth comes from infill sites inside Barcelona. So locations of genuinely high quality, tough barriers against newcomers, and obviously not much room available to build and fight for position, whether in the sector or on this particular deal — look, this came to us off-market. It was a set of 26 properties alongside the biggest funeral service operator in Spain and Portugal. This sector has come across our desk before; we're fond of it, extremely steady. Economic cycles barely touch it. We're also pleased that the tenant holds the leading market position. On top of that, it's — it's strongly capitalized. Ontario Teachers' Pension plan owns it. The structure also worked well. Master lease, quite solid coverage at the site level, a 30-year lease featuring CPI increases. So plenty of positives exist. And like I said, it's infill Barcelona and roughly 50% of the value is infill Barcelona while roughly 50% of the portfolio is also — bring excellent rated. So I'm not sure I'd label it a new vertical. You're the one who used that term, I believe, yet sure, perhaps a new property type, and should we locate comparable transactions carrying the same traits as this one, or possibly even additional deals involving that tenant down the line. That's something I believe we'd be glad to pursue.

Alright, that's interesting. And then I've got just a single brief follow-up question. I didn't catch this during the opening remarks. What was the reasoning behind the decision to sell off a portion of the Pendragon assets?

Brooks, would you like to handle that?

Absolutely, this is Brooks speaking. Just like Toni said during the remarks, we took 30 of those properties and pushed them out to 20 years with brand-new terms — really strong extension terms that unlocked a huge amount of value. Alongside that extension, we're shedding 12 of the weaker assets. We've already sold 3 of them. 3 more after that, and the rest will get done this year, and all of that is already reflected in our disposition guidance.

I've got a few questions about lease expirations. We saw a new disclosure on the expirations page about a Marriott lease worth $16 million in 2022. Are you worried some tenants won't renew? Or what made that lease worth flagging?

Of course. Like we've said previously, our portfolio holds 18 — right, that's correct. Yes. We hold 18 Courtyard Marriotts. The reason for the extra disclosure was really to clarify that there are 2 tranches. The first covers 12 of them, totaling $16 million in January 2023, with the second tranche in 2027. It was simply meant to separate them since they get blended together on the top 10 list. For that first tranche, we anticipate the likely result will be those converting into operating hotels. Those properties are bouncing back nicely, so it isn't truly a nonrenewal. There's a business behind them, and current expectations are that the underlying operations will actually surpass our in-place AFFO right now. We just wanted that made clear in the disclosure.

All right. Then there's the rise in what I think were leases from 2023, and ABR too. Did that come from short-term lease purchases you made? I'm just trying to figure out what caused that gain. And is there — was there a near-term chance you're enthusiastic about?

No, nothing when it comes to acquisitions. That could relate to — I believe it's quite small, I don't have the shift in front of me right now, but that could be tied to resetting certain Pendragon properties, since we're in the midst of selling off those 12 assets. FX is also constantly running through that, but there's nothing significant there.

All right. Now for a question — somewhat speculative in nature. Jason, what's your take on why CPA:18 didn't draw any other offers? We're aware that certain private equity purchasers are seeking scale. And in theory, CPA:18 might assist in reaching that objective.

Well, I'd say we enjoyed several benefits that have come up before in our discussions, most notably, we were the manager who put those portfolios together; we're deeply familiar with them, which means we can put forward a robust bid without needing diligence. Beyond that, there are additional frictional expenses a different potential buyer would face, for instance mortgage assumption costs plus certain back-end fees and carry that would come to us; that's our best guess. I mean, it's a solid portfolio. My sense is the edge we held likely acted somewhat as a barrier for others. And look, the window when the go-shop took place was a fairly turbulent moment. Interest rates climbed sharply. There's a war in Ukraine, so plenty of developments globally might have made it hard for another party to bid on a fairly varied portfolio containing student housing, self-storage, net lease across both Europe and the U.S; that's our best guess, though we lack extensive insights. I believe the proxy includes certain details and color regarding the interest level other bidders showed. I think quite a few of them signed NDAs and did some work, yet no competing bids emerged.

Turning back to what's been said about the market—cap rates rising and transactions getting repriced—is it that fewer potential buyers are turning up? Or is it simply that folks are adjusting what they expect?

Could be a mix of the two. When cap rates, or rather when interest rates, climb to the degree they have, I figure purchasers have a reference point they can cite to possibly secure somewhat better returns on a given deal. So I suspect that's occurring to some extent. Yet my sense is—and once more, this leans more on anecdotes than hard data; it's closer to an intuition—that rivalry has diminished somewhat. Those buyers relying on heavier leverage, who clearly take a harder hit from the rate surge, appear as though they might be waiting on the sidelines, or at least aren't competing as fiercely, and naturally that benefits us. Still, my impression is there's a certain lack of depth in a number of the processes or properties we've been engaged with—not that every single one fits that pattern, but from talking with brokers, it really does come across as a somewhat less vigorous market. And once more, that works in our favor.

All right. And then perhaps for Toni — if we return to what was discussed regarding raised projections for rent growth at stores open at least a year, my understanding is that this likely leans toward the latter portion of the year, yet it still appears that shifting from to more than 3% ought to be sufficient to nudge the outlook somewhat; so I'm simply wondering, are you merely holding off until a later point in the year to observe how purchases unfold? Or did some counterbalancing element exist that kept the outlook the same this quarter?

Yeah. What I'd say is the particular shift from when we issued guidance on inflation likely carries a $0.02 effect in total; thus I believe that remains comfortably inside the guidance range. I believe several other dynamic pieces exist that we've discussed during this call, such as the consequence for interest rates and how that could lead to tighter cap rates. So taking everything together, that $0.02 isn't particularly significant for this year regarding our position relative to guidance. I think we're pleased with our position. However, other dynamic pieces certainly exist inside the range that would counterbalance that.

Alright, understood. Then I have one about the master lease. Assuming CPA:18 actually wraps up in Q3, would that show up under discontinued operations? Or does the fee income get counted inside AFFO?

Apologies — the CPA:18 dispositions aren't closing?