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

Hello, everyone, and good morning. We appreciate you being with us today for the earnings call covering our third quarter of 2022. Prior to starting, please note that certain remarks on this call are not historical facts and might be considered forward-looking statements. Factors that may lead actual results to differ materially from W. P. Carey's expectations can be found in our SEC filings. A replay of this conference call will be accessible online in the Investor Relations section of our website at wpcarey.com, where it will remain archived for roughly 1 year, and where copies of our investor presentations and other related materials are also available. With that said, I'll turn the call over to Jason Fox, our Chief Executive Officer.

Thanks, Peter, and hello everybody. I'm happy to report that our third quarter performance was robust in multiple segments of the company, and we are lifting our full year AFFO per share guidance, with real estate AFFO per share expected to increase by slightly more than 6% compared to last year. Even with the turbulent market environment, we hold a strong position, possessing substantial liquidity and the capacity to deploy capital across asset classes on more than 2 continents, prepared to seize appealing chances when they present themselves. The key issue is timing — when should we put our available capital to work? So this morning, my comments will center on what we've invested in lately and our approach to fresh possibilities in today's fast-moving conditions; however, prior to that, I'd like to lay out 3 main reasons that W. P. Carey stands apart in the net lease space. To begin, in a tougher investing climate, we can achieve greater AFFO growth via our industry-leading contractual same-store rent increases, which hit 3.4% in the third quarter. With today's inflation feeding into rents, we anticipate our contractual same-store rent growth will climb further in 2023, landing somewhere between 4% and 4.5%, and we expect those advantages to persist through 2024. Next, we have brought in favorably priced capital and maintain an extremely robust liquidity profile. Thus far in 2022, we've secured roughly $1 billion in permanent and long-term capital at appealing rates. Right now we hold about $650 million in untapped equity forwards that were raised at an average share price in the 80s, plus we obtained debt capital at rates in the mid-3s via our latest private placement Eurobond issue. On top of that, our fresh upgrade from Moody's to BAA 1 ought to improve the pricing of our bonds. And with total liquidity exceeding $2 billion, we feel assured about our capacity to keep putting money into suitably valued prospects. The third point: we are gaining from our just-finished merger with CPA:18, which delivered greater accretion than we had originally expected, as gains from high-quality real estate AFFO exceeded the reduction in investment management earnings. The net lease properties from CPA:18 fit well with the portfolio we already have, and we anticipate further advantages from its considerable operating self-storage holdings. With self-storage fundamentals performing strongly, these assets give an added boost to our growth. And in our effort to optimize value, we have multiple paths for them, such as transitioning to net lease, divesting at appealing cap rates to generate capital, or keeping a certain share of them. Now turning to what we've invested in recently and the market conditions. In the third quarter, we finished investments amounting to $475 million, which pushed our transaction volume to $1.3 billion for the year so far, and naturally that figure does not include the over $2 billion in assets gained through our merger. Under our diversified strategy, the bulk of our attention stayed on warehouse and industrial assets, representing roughly 80% of what we acquired in the third quarter. During that quarter we kept looking at quite a few possibilities across both regions, yet the vast share of dollars we invested went into the U.S., fueled by one large industrial sale leaseback. All told, the investments we made in the third quarter carried a weighted average cap rate of 6.3%, with completed capital projects included. On the external acquisition side, the figure stood at 6.4%, roughly 50 basis points wider than the average cap rate across our 2021 investments. Bear in mind that we could finance those third quarter acquisitions using debt capital obtained at interest rates in the mid-3s via our recent private placement Eurobond, along with equity raised at a stock price in the mid-80s. Most of the investment volume in the third quarter closed early in that period and reflected a cap rate environment that was generally lower. Across the entire period, we closed transactions at cap rates spanning a range, going up into the 7s. Since that time, bond yields have climbed higher and equities have faced additional pressure, even though certain sellers have been stubbornly sluggish in responding to present market conditions. Sellers who cling to lower cap rate expectations, though, are failing to gain traction on new deals. Buyers have pulled back as well, which has cut competition for deals while lenders are in risk-off mode and leveraged buyers sit largely on the sidelines, given the dramatic rise in their cost of capital or their inability to obtain asset-level debt. Lately, though, pricing on deals has grown incrementally more appealing, and we think market conditions are shifting to our advantage. We are actively wielding our pricing power on new deals, insisting on higher yields, and we are starting to get them; thanks to a strong balance sheet and substantial dry powder from equity already raised, we can offer certainty of close to sellers within a thinner pool of active buyers. Timing of deals stays uncertain, though, as sellers grow accustomed to higher cap rates at varying speeds, even though we think sale-leaseback sellers, who have a use of proceeds, will likely do so faster. We also anticipate that the kinds of investments we target, specifically larger deals, sale leasebacks and warehouse and industrial properties, will experience more cap rate movement than commodity retail. We have moderated our expectations for investment volume over the rest of this year, but I should point out that today's market conditions make predicting investment activity in the near term especially difficult. Given the deals in our pipeline right now, we are comfortable with the bottom half of the range. Whether we can reach the top half will mostly depend on sellers' readiness to transact at sensible pricing, which could shift deals into 2023, positioning us for greater investment activity next year at wider spreads. To wrap up, W. P. Given where the market stands right now, Carey is set up very well. We brought in capital at favorable pricing, and we hold more than $2 billion in liquidity, so when sensibly valued deals come along, we can move on them. With fewer buyers in the mix, we have the ability to set prices, and sellers are starting to get used to cap rates being higher. That said, until cap rates generally come into line with the cost of funding, the money we've gathered at appealing levels lets us keep putting it into the strongest prospects, and our rent growth driven by inflation, which leads the sector, will keep working in our favor; and if a recession does arrive in 2023, our cash flows have shown they hold steady through economic cycles, giving us one of the most secure REIT portfolios; so with that, I'll turn things over to Toni Sanzone, our CFO, who will walk through our results, guidance and balance sheet, and then we'll take questions together with Brooks Gordon, our Head of Asset Management.

Thanks, Jason, and good morning to all of you. We delivered a solid third quarter, with total AFFO reported at $1.36 per share, an increase of $0.12, or 9.7%, compared with the same period a year earlier, and coming almost completely from our real estate segment, which produced AFFO of $1.34 per share. Those results show the accretive effect of our net investment activity and our sector-leading same-store rent growth, along with what the net lease and operating real estate acquired in our merger with CPA:18 contributed. Keep in mind that this transaction closed on August 1, so earnings from the acquired assets are not yet fully captured in our third quarter results. Via the CPA:18 merger, we picked up 41 net lease properties, which added roughly $77 million in annualized base rent, or ABR. We also picked up 67 operating properties, and the vast majority of those make up a high-quality self-storage portfolio that isn't reflected in our ABR or in any of our core net lease or same-store metrics, yet it helps further diversify us overall and adds incrementally to our organic growth. Consequently, we now hold a portfolio of 84 operating self-storage properties, and those are producing annualized operating NOI of approximately $70 million for 2022, which essentially serves as the baseline for future NOI growth. You can find more details on this portfolio on a new page we've added to our supplemental. I'd also like to remind everyone that in January 2023, 12 of the Marriott hotels we own that are currently net leased will convert into operating properties. We anticipate their annualized NOI contribution will be roughly in line with the lease revenue they generate at present, so there will be no material change to AFFO. Now turning to same-store rent growth and asset management activities. Within the net lease sector, W. P. Carey continues to provide the highest level of inflation protection, since 55% of ABR comes from leases with rent increases tied to inflation. In the third quarter, overall contractual same-store rent growth rose to a record 3.4% year-over-year, the highest among our net lease peers. Because of the timing lag on which our inflation-based leases escalate, we expect same-store growth in the fourth quarter to track at a level similar to the third quarter before rising to between 4% and 4.5% in the first quarter and then trending at or around 4% for the rest of 2023. Even if inflation begins to moderate, the lag effect in our leases will keep producing elevated same-store rent growth well into 2024. Comprehensive same-store rent growth for the third quarter, which is based on pro rata net lease rent included in our AFFO, was 1.5% year-over-year, reflecting the impact of elevated rent recoveries in the prior year period; also, during the current year period, we proactively terminated our lease with an office property tenant so we could redevelop it into higher-yielding lab space, for which we already have a new lease signed up. Regarding the termination, we got a payment of $4.2 million in total, which will offset a significant share of the rent interruption and holding costs throughout the redevelopment phase, making our overall result on this asset even better. Leasing activity was busy this quarter, with 10 renewals or extensions in all, recapturing 108% of the previous rents and adding a bit more than 10 years of weighted average lease term. Dispositions in the third quarter involved 3 properties for gross proceeds of $57 million, which brings total disposition proceeds through the end of September to $176 million. Looking at the whole year, we now anticipate finishing dispositions of somewhere between $200 million and $300 million. Because of the present situation in Europe, I'd like to emphasize a few key things regarding our European portfolio. Despite the recent surge in energy prices across the region, our European assets keep performing well. And so far, we haven't seen any defaults or missed payments, nor have we gotten any messages from tenants saying their operations are threatened by expensive energy. We watch this very carefully since those risks might shift, but our portfolio and tenant roster have shown great resilience through business cycles and during the COVID stress test, as well as the newer difficulties arising from the war in Ukraine. As for currency fluctuations, our two-pronged currency hedging approach has worked extremely well to lessen our exposure to the rising U.S. dollar: first, keeping more of our debt in foreign currencies, mainly the euro, acts as a natural hedge, creating foreign denominated interest expense, which lowers our net cash flow exposure; second, we cut the net exposure further via inexpensive contractual cash flow hedges, usually securing rates using a laddered method 4 to 5 years ahead. Realized gains from our cash flow hedges came to $8.7 million in the third quarter and $18 million year-to-date, which show up in the nonoperating income line on our income statement and pass through to our AFFO, substantially counterbalancing the effect of the stronger dollar. Once hedging is factored in, the net effect of foreign currency fluctuations should produce roughly a 1% decrease in our 2022 AFFO per share relative to our initial guidance at the beginning of the year. And we'd anticipate our hedging strategy delivering the same degree of protection into next year, presuming currency rates stay at or near where they are now. Naturally, if the euro or British pound were to rise above current levels, greater foreign currency cash flows would be partially offset by reduced realized hedging gains, creating possible upside for our AFFO. Turning now to our balance sheet and capital markets activity. As Jason mentioned, we continue to hold a very strong capital position, further reinforced by the debt and equity we raised in the third quarter and our ongoing capacity to tap various forms of capital. Regarding borrowing, just a small number of REITs managed to get debt capital market deals done this quarter, and we were one of them. We completed our first-ever private placement bond offering, issuing EUR 350 million in senior unsecured notes across 2 tranches, with a weighted average coupon of 3.58% and a weighted average term of 8.7 years. I'm happy to report that the 2 tranches were priced at 165 and 182 basis points over the 7 and 10-year euro benchmark rates, respectively. This deal was executed well, securing extra favorably priced debt capital that backs ongoing expansion via accretive investments. Turning to equity capital, we settled part of our outstanding equity forwards this quarter, bringing in close to $100 million in proceeds. That took place near the end of the quarter, so it will be fully captured in our fourth quarter diluted share count. We also kept reinforcing our balance sheet position, selling another 1.9 million shares as equity forwards via our ATM program, securing the capacity to fund upcoming investments with an additional roughly $160 million of equity raised at an average price over $86 per share.

Alongside the portion of equity forwards we sold earlier that hasn't settled yet, we have roughly $650 million in dry powder available right now, coming from those unsettled forwards, which were raised at an average price of about $83 per share. On the liquidity side, we finished Q3 with approximately $460 million drawn on our $1.8 billion revolver, and together with the equity forwards still undrawn, that keeps our liquidity exceptionally strong, at more than $2 billion in total. Turning to our upcoming major debt maturities: we have roughly $400 million of mortgages coming due in 2023, and nothing in bonds matures before 2024, which we consider very manageable. Our leverage metrics are still quite healthy. At the close of the quarter, debt to gross assets stood at 40%, putting us at the low end of our target range of mid- to low 40s. In the same way, net debt-to-EBITDA came in at 5.6x, comfortably inside our target range of mid- to high 5x. And cash interest coverage of 6.7x remains one of the strongest among our net lease peers. When we did the merger, we took on roughly $795 million of mortgage debt carrying a weighted average interest rate of 4.5%. All told, our outstanding debt carried a weighted average interest rate of 3% at quarter end, which speaks to the well-timed refinancings we've gotten done over the past few years. The ratings upgrade we received recently from Moody's gives a modest boost to our borrowing costs, including the spreads on our revolving credit facility, which makes up the vast majority of our floating rate debt. Now on to guidance. We're happy to report that we've raised our AFFO guidance by $0.02 per share at the midpoint, which implies growth of 5% year-over-year on total AFFO per share and just over 6% on real estate AFFO per share. Several things are driving that increase, among them strong portfolio performance and lease-related outcomes, plus the successful execution of our third quarter debt issuance. We also tightened our AFFO guidance range, and for the full year we expect total AFFO of between $5.25 and $5.31 per share, which includes real estate AFFO of between $5.16 and $5.22 per share. We're changing our investment volume range to between $1.5 billion and $2 billion, which reflects a transaction environment where cap rates are slowly adjusting to higher funding costs, as Jason discussed. Naturally, given where we are in the year, any investments closed during the fourth quarter won't meaningfully affect our full year 2022 AFFO per share. To wrap up, we continue to see positive momentum in our business, with sector-leading rent growth and a balance sheet that positions us as well as possible for externally driven growth as cap rates start to move higher and spreads widen. With that, I'll turn the call back to the operator for questions.

For my first question, I'd like to direct it to Toni. In 3Q, you posted $1.36 of AFFO, and the 4Q guidance points to roughly $1.24 to $1.30. I believe you said you weren't receiving full credit for the 3Q acquisitions, which would suggest a stronger AFFO in 4Q, yet you also brought up some upside from lease term fees and a larger share count. Could you perhaps shed a bit more light on the components that bring us down to $1.28 at the midpoint for 4Q?

Sure. Yes. That's a good question, R.J. There are, I'd say, several factors at play here — a combination of quite a few items, and while certain ones tend to recur, others are truly one-time in nature; let me walk through a few of them. First, I believe, we've discussed interest rates, and we anticipate that this will genuinely come through in the fourth quarter more as it pertains to our variable rate debt, which — as I mentioned, it's confined to our credit facility, but I'd say the rise in base rates there is something we're seeing come through in our fourth quarter. And when you consider our credit facilities, we hold term loan balances denominated in euro and pound. And truly, prior to September, base rates there were negative for us; so we're witnessing base rates push upward, and that's genuinely going to affect the quarter by roughly $0.02 in the fourth quarter, I'd say. We also brought up FX, and I believe we've emphasized how our hedging strategy plays in. I'd say from one quarter to the next, you'll observe roughly a $0.01 decrease there in terms of the effect related to where rates stand today and what we expect for where they'll remain through the rest of the year; so those are the items of a more recurring type. And I think a few one-offs exist in there too when you examine Q3 versus Q4 — a couple of them — there's a foreign tax adjustment we're assuming arrives in the fourth quarter; that might extend past year-end. It might not occur whatsoever should we receive a favorable outcome there. So that's something we're monitoring that — should it not occur, it might lift us above the midpoint, possibly near the top end; and there were certain recoveries during the third quarter tied to accrued interest on a loan receivable plus a handful of other smaller items that genuinely added up to build on that quarter-over-quarter delta. But I think those are a few of the more material items that flowed through there.

That's useful; then I suppose a broader question for Jason. Guidance implies quite a broad span of acquisitions for 4Q, and based on what you said at the start, you're at ease with the lower bound but might go further. With just 2 months remaining in the quarter, I'm wondering what would need to occur for you to reach roughly the midpoint or the upper portion of that implied range for 4Q?

Yes. Certainly, R.J. Look, predicting this market is hard at the moment. It's truly about where we stand and our finest estimate of where we could land regarding deal volume by the close of the year. Transaction activity is in fact fairly strong—as active, or possibly even more active, than a normal year-end stretch. I believe the key unknown, and what we have yet to see, is how many of those deals circulating in the market form part of a price discovery effort, since not many are closing; they're sort of being repriced and pushed back somewhat; we do have several hundred million dollars of deals we are actively chasing, many of which I'd describe as relationship deals. So we feel we're best positioned as the buyer able to satisfy timing and underwriting requirements, yet pricing expectation gaps persist, and we aren't certain we'll reach a point where we close before year-end; and we're highly focused on ensuring we obtain suitable yields and returns considering present levels in the debt markets. So perhaps the broad answer is that investment volume will truly hinge heavily on sellers' expectations, their readiness to transact at what we consider reasonable pricing. And we'll need to account for any shifts in our cost of capital too.

Good, that helps. Now, is there one particular area — domestic as opposed to international, maybe, or broken out by property type — where we're seeing the biggest cap rate adjustments? And I think you mentioned that you expect a bit more activity around sale leasebacks, but I'd like to know where else you're picking up on additional expansion.

Sure. Sale leasebacks is where it'll show up. That's something we've seen consistently over the years — it's a space where we can command a little more on price. There are fewer players competing for those deals. And many of the ones who used to chase them carry more leverage now, or they're private equity buyers who rely on debt at the asset level. They're mostly not in the market right now, so my sense is that sale-leasebacks continue to show growth. And honestly, if you look at a sale leaseback, the reason behind it is what the money will be used for. That's why I'd say there's not as much rate-hike sensitivity, since these parties have a purpose for the funds — or a requirement for capital. I believe we're noticing activity in Europe. A number of open-ended funds are facing certain liquidity problems. That could open up some opportunities. And my hunch is that if that happens, you'll see a greater number of sellers who are motivated, and that can carry through. I'd say at the lower end of the activity — the U.S. We continue to monitor the retail segment and keep records on all of it—that market matters a great deal to net lease, naturally, yet capitalization rates there have shown more resistance to movement. What I mean is that pricing has likely shifted for those leases too, and it has risen, just not to the same degree as what industrial sale leasebacks are showing us.

Jason, you said there are multiple paths available to you when it comes to the storage properties. This quarter, they gave a solid lift to results. Naturally, that trend may flip in quarters ahead. Still, considering how long you've worked with those properties, do you lean toward keeping them as operating assets? Or has your thinking shifted in any way since you bought assets directly?

Yeah. There's nothing fresh to report regarding what we intend to do with the self-storage assets we operate. Owning and running them is something we've done for a long stretch; in many respects, we've occupied that segment since 2004. As a result, plenty of choices remain open to us. Keeping them is one possibility. Another is switching to net lease, which is what we did before with certain properties. We might also dispose of a few at appealing valuations and put that money back into net lease, should we conclude that's how to best maximize value, or it might involve a mix of those 3 approaches; nothing is off the table. In my view, each one is a strong option, and whichever route we take, patience will guide us. And indeed, in the interim, though same-store growth likely won't match what we saw in '22, come next year, we continue to expect appealing NOI growth, especially when compared with net lease.

John P. Kim, analyst: Turning to those Courtyard Marriott properties, would you lean toward moving them into a net lease arrangement, or would you rather divest them — meaning you wouldn't keep holding them as operating assets?

That's a reasonable way to put it. Brooks, could you share a bit of detail regarding Marriott?

Okay. And like Toni said, the 12 Courtyards whose contracts ended in January of '23 are going to become operating hotels. The handover should be smooth. Marriott is going to keep running and managing them; and per Toni, the economics underneath should come out approximately the same as the net lease economics, so basically no effect on earnings. When it comes to dispositions, 3 of those properties strike us as having genuinely appealing upside redevelopment potential. So we'll probably hold onto those while we look into that further. The rest, meaning 9 assets, we'll probably sell at the right moment; so they probably won't be long-term holds.

All right, and I have one more question. You brought up an office lease termination conversion — turning it into lab space. Could you give us more detail about the location of that asset, along with the capital spend and the development yields you anticipate from it?

Absolutely. It shows up in the CapEx table within our supplemental under unchanged labs in Pleasanton, California. That's a fantastic spot, situated right by the bar stop and the train stop, plus there's potential for expansion at that site too. We got a termination payment from the previous tenant, and at basically the same time signed a long-term lease with an unchanged labs, a medical research toolmaker experiencing rapid growth. As a result, the rent should come in around 15% to 20% above what the prior rent was, with significantly improved bumps over the long term and extremely high criticality. That outcome is something we're quite pleased with, and it generates substantial value for that asset.

Great. Toni, I appreciate the details and the walkthrough of the bridge from 3 to 4Q. But I suppose, just to get to the bottom line, and as we think about 2023, should we view the run rate as closer to $1.36 or to $1.26, which is implied by the midpoint for 4Q?

Yes. I think I'm attempting to provide some color there as we approach the end of the year. I think it's a bit early for us to get into next year's guidance right now, and we're really reluctant to focus on any single quarter. There's always a handful of volatility from varying items and recoveries, as we've discussed, at least termination and otherwise. So I wouldn't suggest that there's a solid run rate in there for you to extrapolate from Q4; but I think we'll aim to give more guidance on the fourth quarter earnings call. I would suspect that we'll keep seeing same-store growth; that's the one item we have a fairly clear picture on in terms of more certainty given where we are right now and the time lag and how things flow through to our leases. So we highlighted those comments in my remarks there, but we would keep seeing that trend upwards above the 4% to 4.5% range. And that's probably the only assumption at this point that we can give you some level of clarity on without getting into any more detail on guidance.

All right, that makes sense. Then, Jason, since your firm primarily engages in sale leasebacks more than any other kind of transaction, you noted that many of the sellers have a purpose for the funds they receive. So I'm curious — what other financing options are they more inclined to pursue more rapidly when they're considering either divesting the property? Or are they more inclined to take on debt, since the credit markets appear to be quite predictable in how they've shifted? And so I suppose what's the reluctance to perhaps pursue the real estate path and stall on transactions? And are there additional aspects of the sale leaseback that could help people get past the obstacle, such as proceeds and similar things, given that you have control over some of those?

Yes. Those are all excellent questions. When it comes to alternatives, I believe this is what makes the opportunity so compelling at present — the options for — relative to a sale leaseback; typically you can issue equity, put in some equity if it's a privately held company, or turn to the debt markets. And a lot of the businesses we focus on are just under investment grade, roughly the BB-type rated businesses. And that's a sector where high-yield debt has shifted dramatically, far more than what we've observed with investment-grade bonds and cap rates too. So that provides us with some pricing leverage there. I believe that's an option they consider. And you're correct, there are levers we can use to make the transactions more appealing, whether it's for us, master leases, appealing increases for the sellers, we can concentrate on proceeds; but we're really focusing on market rents and how we put these transactions together. So there may be certain constraints to that, but it is an appealing opportunity set for us at this time, and we believe that will persist into 2023.

I appreciate the remarks you gave regarding how tenant wellbeing ties into European energy expenses. So my take is that right now you folks aren't worried at all, and it appears no tenant has raised this matter directly with you. Still, I was hoping you might speak in general terms about rent coverage and whether any shifts have shown up over the last few months.

Brooks, would you like to handle that?

Okay, so like Toni said, up to now we haven't really observed any particular effect coming from Europe, especially regarding those sharp increases in energy costs. And I believe it's worth pointing out that most of our ABR in Europe is generated by truly essential kinds of businesses — food retail, DIY, government, finance, telecom, energy. Because of that, the consequences are felt most directly, as you would anticipate, in operations that are more manufacturing in nature. Those, for instance, have the greatest electricity consumption. To give you a sense of the scale, within Europe, manufacturing properties account for just roughly 3% of our worldwide ABR overall. And within that, the heavier manufacturing segment represents only about 1% of ABR. So the exposure is fairly limited; that being said, whenever we underwrite these categories of industrial manufacturing assets, we generally enter with coverage in the high single or double-digit range. That's quite unlike a retail coverage. In other parts of Europe, the effect would be far less direct, with certainly some margin pressure; however, so far, those impacts have mostly been transferred to customers. So we genuinely rely on our fundamentals — long leases with large companies. They possess the scale to adjust, plus critical real estate and diversification. So we believe we're positioned quite well to take on these difficulties and, up to this point, < > have managed to do so.

All right, that's useful detail. Maybe now returning to capitalization rates briefly. Broadly speaking, we've been told that European cap rates took longer to shift and have changed by roughly about 100 basis points, I believe, from the bottom we observed in '21. I'm just wondering, is that approximately the range? Does it line up with what you all have seen so far in '22?

Yeah, that seems reasonable. What I mean is they have shifted. That's a significant change, but I'd agree compared with how far borrowing costs have gone in Europe. It's likely not yet at balance. More generally, I'd say we've observed cap rates — since the start of the year, we discussed this in July. We observed them from the start of the year through the prior earnings call at roughly 50 to 100 basis points of change. I believe from mid-September, near when we saw steeper rises in base rates and debt spreads, we've likely observed an additional 25 to 50 basis points higher, and that covers broadly the U.S. and Europe. However, I think Europe is likely trailing somewhat, definitely compared with the size of the shift in borrowing costs in that region.

What I'd like to know is whether the talks you're having around sale-leaseback lease terms look any different now, simply because CPI has moved up. Are people resisting putting that into a fresh lease?

When you say lease terms involving CPI, that's what you're asking about?

Yeah, considering the current level of CPI, do you encounter greater resistance when you're trying to sign a fresh lease that has a CPI-based rent escalation built into it?