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

Hello, everyone, and thanks for being with us today for the earnings call covering our third quarter of 2023. Prior to starting, I want to remind all of you that certain remarks shared during this call do not constitute historical facts and might be considered forward-looking statements. The factors that could lead actual outcomes to differ materially, along with W. P. Carey's expectations, are laid out in our SEC filings. A web replay of this conference call will be posted in the Investor Relations portion of our site, wpcarey.com, where it will remain archived for roughly 1 year, and where copies of our investor presentations and other associated materials can also be found. Having said that, I'll now turn things over to Jason Fox, our Chief Executive Officer.

Thanks, Peter, and good morning to all of you. During today's call about earnings, besides going over what we achieved in the third quarter, we'd like to use this time to update you on the strategic plan we announced not long ago concerning our departure from the office segment, covering both the headway made during the past 6 weeks and the ways this leaves us better set up to grow in the future. I'll also go into how the substantial liquidity returning to us places our capital position in an extraordinarily solid spot, and I'll mention what the transaction market looks like right now plus how that shapes our strategy toward fresh investment possibilities. With me this morning is Toni Sanzone, our CFO, who will walk through the third quarter along with what we expect for the rest of 2023, and also our preliminary outlook for 2024 AFFO and the adjustment of our dividend meant to mirror our strategic departure from office. Our President, John Park, and Brooks Gordon, who leads Asset Management for us, are on the line as well for questions. Let's begin with the strategic exit from office, which speeds up the direction we've pursued for roughly the last 8 years to shrink our office exposure and will bring it essentially to 0 within the coming months. I'm happy to report that as of November 1, we finished spinning off Net Lease Office Properties, called NLOP for the purposes of this call. Consequently, properties accounting for approximately two-thirds of our office ABR are now held by NLOP. W. P. Carey holds no stake in NLOP, and since it trades publicly on its own, NLOP will issue its own public disclosures, among them updates about how its asset sales are progressing; meanwhile, we're moving along well in selling the office properties still sitting on our balance sheet, something we call the Office Sale Program. To date, under that program we've closed on 4 office properties, bringing in $143 million in gross proceeds, which counts the Telefonica asset that sold in the third quarter, and we've executed agreements on an additional roughly $500 million; that figure includes our biggest office property, which is net leased to the Spanish government and stays on schedule to be sold back to the tenant for about $350 million in January. All told, based on gross proceeds, we have either closed or put transactions in place for more than 90% of the assets in the program, which gives us confidence that nearly all on-balance sheet office dispositions will wrap up by early 2024. We feel good about the headway achieved so far, especially since the leftover 10%, which we're actively trying to sell, amounts to under 1% of our total ABR. Because of this, by early 2024 our portfolio will be of higher quality, with certain of the strongest metrics found anywhere in the net lease sector. Slightly more than 60% of ABR will be generated by warehouse and industrial assets. Our weighted average lease term is going to stay above 11 years, across a portfolio that keeps a solid geographic spread, and more than 50% of ABR comes from assets whose rent bumps are linked to inflation. Among our peer group, we'll keep delivering some of the strongest same-store rent growth, coming from both CPI-tied leases and larger fixed increases. By moving quickly and deliberately to shed our office exposure, we also make sure we won't carry an earnings drag across several years, nor take on the risks that come with big lease rollovers and rising vacancies caused by weakening demand for office. It's our belief that for the office sector, the leasing market, the financing market and the investment sales market will each stay under strain, and that office assets will produce worse results ahead than they did previously — something that hits a single tenant office portfolio especially hard when its weighted-average lease term is shrinking. All of these considerations fed into our decision to tackle office more decisively, while a decent amount of lease term is still left, and to give investors a cleaner and clearer route to earnings growth in our core portfolio. Looking forward, W. P. Carey will be set up better for growth. Our cash flow quality will improve via better outcomes at lease end, such as fewer vacancies, stronger overall releasing spreads, less downtime and carrying costs, and smaller CapEx needs. Leaving office behind will also let our sector-leading internal growth make a bigger mark on our overall AFFO growth. On top of that, the considerable capital that has come back to us and will keep coming back over the coming months puts us in a unique spot within the net lease space. Taken together, settling our equity forwards, the cash distribution we got when the spin-off was executed, asset sales through the Office Sale Program, plus the forthcoming exercise of the U-Haul purchase option and other dispositions, should produce roughly $2 billion in liquidity. We'll also begin keeping more cash because we reset our dividend. Given our updated investment volume expectations for the rest of 2023 and what we currently assume for 2024, we don't anticipate needing to raise new capital soon, and we might even make it to the end of 2024 without tapping the capital markets should they stay unfavorable, even if we used cash to temporarily pay down our 2024 debt maturities. The sizable store of dry powder we hold hands us a real competitive edge on new deals, particularly against net lease peers who could find themselves capital constrained if they can't reach the capital markets or their cost of capital stays too elevated. Further out, we have other capital sources, including our investment in Lineage Logistics and possible operating property sales, which could open up an even longer runway to fund accretive investments if capital market conditions stay unappealing for a prolonged stretch. Moving on to the deal landscape and our strategy for fresh investments in light of it. In my entire career, I've rarely witnessed a market for sale leasebacks as compelling as what we have right now. Since high-yield debt and other financing options are tight and typically quite costly, sale leasebacks have become the most appealing avenue for raising capital. On top of that, volatility persists in the capital markets, which breeds doubt about how many purchasers can actually gather and invest capital in an accretive manner. The field of competitors has grown thinner, particularly among those buyers relying on mortgage financing. Fewer dollars are out there pursuing transactions. As summer ended, our pipeline was sizable, with roughly $500 million in new investments spread across different phases of execution and featuring cap rates typically in the low to mid-7s. Interest rates climbed consistently throughout the summer, then jumped significantly in late September, which put deal pricing under an even brighter spotlight, so we started to wield our pricing leverage more aggressively, driving cap rates upward to align better with today's capital market conditions. To be specific, we adjusted the cap rates on the bulk of our active deals into the mid- to high 7s and sometimes the 8s, which yields unlevered returns ranging from the high single digits up to the low double digits. Consequently, negotiations and closings are stretching out longer, since sellers are either adapting to the steeper pricing or refusing to accept it; the result was an extremely sluggish third quarter, with investment volume reaching only $40 million, along with diminished projections for total 2023 investment volume. Going forward, we lean strongly toward putting capital to work in new investments, even as we maintain a balanced stance, acknowledging that broader macro elements, such as where interest rates are headed, are also significant. When it comes to sale-leaseback specifically, where sellers feel driven to complete deals because they have a particular purpose for the funds and few appealing options, we think pricing will shift faster than it would in other segments of the net lease market. As cap rates on transactions edge upward over time, we'll commit capital whenever we find opportunities priced appropriately. We'll keep advocating for elevated cap rates, confident that we're in an outstanding position to invest additional capital once sellers revise their expectations; and in the kinds of deals we target, our competition will come from an ever-shrinking group of buyers capable of raising and investing capital. At present, our pipeline exceeds $400 million, with numerous deals moving forward again and approaching completion, the majority of which should finalize near the end of the year. Beyond that, we hold a few sizable portfolio transactions in fairly preliminary phases; and with that, I'll hand the call to Toni.

Thanks, Jason, and good morning to all of you. In the third quarter of 2023, our total AFFO came to $1.32 for each diluted share. That $0.04 drop from the second quarter is mostly due to some nonrecurring items that had boosted our AFFO in the earlier period. Same-store contractual rent growth reached 4.2% in the third quarter, which is 80 basis points higher than the figure from a year earlier, and we anticipate it will stay near 4% in the fourth quarter as the lag in CPI-linked rent increases continues to work its way through our leases. Same-store comprehensive rent growth for the third quarter was 3.5%. In the third quarter, our rent recapture on re-leasing came to 81% overall, largely because of restructurings at 3 of our 4 movie theater properties, which sit in the other category and make up a very small share of our total portfolio. The single office asset that was renewed in the quarter now belongs to NLOP. Looking ahead, we anticipate better rent recapture numbers as a result of our departure from office, though it may fluctuate quarter-to-quarter given the limited re-leasing activity. Now to our 2023 guidance: we have reduced and tightened our AFFO guidance range to $5.17 to $5.23 per share, assuming full-year investment volume between $1.3 billion and $1.5 billion, with nearly $1 billion of investments closed so far this year. As a reminder, when we announced our strategic exit from office in late September, we reset our 2023 AFFO guidance range to account for its anticipated effects. The revised guidance we announced today brings the midpoint of that range down by $0.02 to $5.20, mainly reflecting more uncertainty about the timing of deal closings as we seek higher cap rates on the active deals in our pipeline, as Jason mentioned. We sold 6 properties in the third quarter for gross proceeds of $148 million, which brings dispositions for the first 9 months of the year to $196 million. We expect disposition volume for 2023 to come in between $450 million and $550 million, including as much as $300 million of sales under the Office Sale Program. ABR stood at $1.46 billion at the close of the third quarter. Once the NLOP spin-off was completed, our ABR fell to $1.31 billion, and it should decline further to $1.25 billion when the Office Sale Program finishes in early 2024. Operating NOI for the third quarter was $24 million, mostly made up of $17 million from our operating self-storage portfolio and $6 million from our remaining operating hotel properties. In the third quarter, our disposition activity included the sale of 3 Marriott operating hotels for $49 million, with another 3 sales closed in October totaling $46 million. We now expect NOI from all operating properties to come in between $91 million and $94 million for 2023, factoring in the timing of the operating hotel property sales and slower NOI growth in our operating self-storage portfolio. Lease-related income outside of rent came to $2.3 million in Q3, pushing the year-to-date figure to roughly $21 million. For the entire year, that line is projected to land somewhere between $22 million and $25 million, and that figure has been adjusted so it no longer includes anticipated termination income tied to assets that now sit within NLOP. Now on to costs. Nonreimbursed property expenses reached $13 million in Q3 and $31 million on a year-to-date basis. Keep in mind that in Q2, we booked a onetime gain of $6.3 million from reversing a property tax accrual; looking at the whole of 2023, nonreimbursed property expenses should come in somewhere between $41 million and $43 million. Tax expense — mostly foreign taxes tied to our European portfolio — came to $9.4 million in Q3 and $33 million year-to-date on an AFFO basis, and that includes a onetime charge of $3.3 million during Q2 stemming from a tax audit in Europe; for 2023, cash basis taxes are projected to fall between $43 million and $45 million. G&A came in at $23 million for Q3, and for 2023 should land between $96 million and $98 million — that's a $1.5 million decrease versus the midpoint of the range we gave previously, which mirrors improved visibility into when certain expenses will hit given how far into the year we are. Acting as NLOP's external manager means we'll collect seasoned reimbursements from them. To be specific, asset management fees begin at an initial annual rate of $7.5 million and will step down as NLOP's assets get sold, plus a $4 million yearly administrative reimbursement that stays flat going forward. In Q4, we anticipate receiving asset management fees and reimbursements of roughly $2 million combined, and both will show up as revenue without touching our G&A expense line. Interest expense came to $77 million in Q3, and our weighted average interest rate held steady at 3.3% when the quarter closed. We expect interest expense to fall by $8 million to $10 million in Q4, which mirrors the effect of the NLOP spin-off along with our Office Sale Program. The driver here is the cash proceeds generated by the NLOP distribution, the settling of equity forwards and asset sales; we've assumed that any cash beyond what's needed to pay down our revolver and fund new investments earns interest income at a rate of nearly 5% in the near term. Shifting to 2024: this morning we put out preliminary 2024 AFFO guidance spanning $4.60 to $4.80 per share, which captures the full year effect of the NLOP spin-off plus the estimated impact of our Office Sale Program wrapping up early in the year, paired with a preliminary view on the broader investment climate, disposition activity and where our liquidity stands. Beginning with the spin-off: the assets contributed to NLOP drag AFFO down by roughly $0.50 per share on a full year basis, calculated from their ABR minus property expenses, mortgage interest expense and income taxes. In a similar vein, once we wrap up the asset sales tied to the Office Sale Program in early 2025, we anticipate that will drag our 2024 AFFO per share down by roughly $0.27. Also for 2024, we're looking at bringing in around $0.04 per share altogether from asset management fees plus reimbursements related to running NLOP. As you consider what 2024 earnings will look like, you should factor in where our cash stands and how we put to work the different capital sources we've already brought in and those we anticipate bringing in over the next several months — that should provide a significant cushion against the AFFO drop tied to leaving the office segment, and so it ought to be examined alongside the net investment activity and capital markets activity we foresee for 2024. To be specific, under our present assumptions, investment volume for 2024 comes to $1.5 billion, with more of that landing in the latter half of the year. Given how fluid conditions are, we treat this as a highly preliminary figure meant to indicate direction rather than a goal, and we expect to sharpen it and provide an official range when guidance comes out in February. The dispositions we anticipate in 2024 break down into 4 primary categories.

Starting off, about $500 million is left from office asset sales through the Office Sale Program. Most of that involves the Spanish government portfolio sale, which is under contract and should close in January. Next, we have the U-Haul purchase option being exercised in the first quarter, which we estimate right now will bring in roughly $470 million in gross proceeds. Rent from the U-Haul portfolio during 2024 before the sale is anticipated to be $9.7 million. Then there's possible noncore operating property dispositions of as much as $100 million, which includes 1 Marriott Hotel sale and the chance we sell a student housing operating asset. Finally, looking ahead, we anticipate normal course net lease dispositions ranging from $100 million to $300 million each year. Because of how the U-Haul and Spanish government deals are timed, 2024 disposition volume is heavily concentrated in the first quarter. It's important to mention that our preliminary 2024 guidance incorporates certain simplifying assumptions, and the exact timing of acquisitions and dispositions throughout the year could significantly affect our AFFO. We have 2 bonds totaling $1 billion coming due in 2024, plus approximately $220 million of mortgage debt. Considering the estimated $2 billion of capital inflows we expect, our guidance assumes we have enough capital and liquidity to fund our planned investment activity and pay off our 2024 debt maturities without tapping the debt markets until late in the year, and that we might not need to raise equity capital at all during 2024. On other assumptions, I want to emphasize again that we expect contractual same-store rent growth to stay strong in 2024, averaging around 3% for the full year. For most of the remaining line items affecting AFFO, aside from the impact of the NLOP spin-off and finishing the Office Sale Program, our preliminary 2024 guidance assumptions are fairly consistent with 2023. We plan to give more color and details along with our fourth quarter earnings in February, when we announce our formal guidance for the year. Turning now to our capital markets activity and balance sheet positioning. Alongside the NLOP spin-off, we settled our remaining equity forwards in October, issuing 4.7 million shares and generating aggregate proceeds of $384 million. This was equity we originally raised at a gross price of over $83 per share, which we chose to settle ahead of the spin-off for technical and legal reasons. As Jason mentioned, with around $2 billion of capital expected to return to us through early 2024, we remain exceptionally well positioned to fund acquisitions and manage our upcoming debt maturities. As a result, we continue to have significant flexibility in when and how we access the capital markets, allowing us to seek favorable windows of opportunity to do so. Our debt-to-gross assets target remains in the low to mid-40s, and we're still aiming for mid- to high 5x on net-debt-to-EBITDA. That said, we do anticipate sitting in the low 5s on net-debt-to-EBITDA as we enter 2024, and possibly for a large part of that year. As capital gets deployed into fresh investments, we'd expect leverage to build back up gradually into our target range. I'd also like to point out that we're still on schedule to recast our $1.8 billion credit facility before this year wraps up, extending the maturity on a meaningful chunk of the total debt maturing across the next couple of years. The last item I'd like to cover this morning is the dividend. During our office exit announcement call a few weeks back, we mentioned that following the NLOP spin-off, our plan was to reset the dividend to reflect both how exiting office affects our AFFO and a reduced targeted AFFO payout ratio, which lets us keep more cash flow moving forward that can be reinvested accretively to drive additional AFFO growth. We expect a onetime dividend reset in the fourth quarter to accomplish these objectives, pending approval from our Board. The dividend should reflect a payout ratio in the low to mid-70% range, closer to what our peer group does and helping improve our cost of capital. We anticipate that will mean a onetime reduction of roughly 20% in the fourth quarter relative to our most recently declared dividend. Beyond that, the plan is to grow the dividend alongside our AFFO growth, which we expect will deliver higher dividend growth than what we've seen in recent years. To wrap up, with the NLOP spin-off finished and solid progress made selling the remaining office assets on our balance sheet, we're confident that by early 2024 we will have exited the vast majority of our office exposure, leaving us better positioned for growth; and with approximately $2 billion of capital returning to us, we feel we're exceptionally well positioned to keep investing through 2024, particularly if cap rates keep climbing and capital market conditions stay unfavorable. With that, I'll turn the call back to the operator for questions.

Regarding the 2024 AFFO guidance, it seems there's a bit of dilution tied to the lag in timing between selling properties and putting those proceeds back to work, especially considering the back-half weighting you referenced for investments. So I was hoping you might put a number on it, simply so we could see how AFFO would appear on more of a run rate footing once the proceeds are redeployed.

Yes. Thank you for asking, Eric. What I'd say is we genuinely see 2024 as a fresh baseline for the company. You pointed to the timing of dispositions. Those are heavily weighted toward the earliest portion of the year. As a result, we'll feel some effect in Q1, perhaps a somewhat elevated Q1 there. Yet the expectation, I believe, is to put that capital to work from that point and build off that baseline. I'd note that since the great majority of the office sales, and U-Haul too, are behind us, the run rate truly becomes reestablished early in the year; so that's essentially the way we look at it, and from there we can grow moving forward.

All right, so that essentially means the guidance you've provided would suggest that, when attempting to build a model for 2025, one could assume a growth rate that's more typical, or somewhat more elevated, so to speak, simply because when you put the proceeds back to work — perhaps you're keeping some in cash while selling at 5%, then reinvesting at 7.5%, 8% — you'd anticipate seeing some modest pickup in growth over the course of the year, I'd imagine. Yet it sounds like what you're telling us is that this represents a kind of standard starting point off which we can then build toward 2025.

You've framed it correctly. We do anticipate that growth for 2025 and afterward will be more normalized, and that comes off the 2024 base year, which, once again, includes certain timing-related puts and takes, but effectively serves as our new baseline.

All right, and moving to my next one — regarding that $500 million currently under contract that should probably close, I believe you mentioned sometime in the early part of next year. I'm just wondering, are there conditions that must be satisfied prior to closing? Are there financing contingencies of some sort? Do they need to secure a particular amount of financing at a particular rate? I'd just like to know what has to occur before that $500 million is able to close?

Brooks, would you like to handle that one?

Absolutely, this is Brooks speaking. Most of what Toni referred to involves the Spanish government portfolio deal, and that one is secured by a binding agreement. A number of additional assets are likewise covered by binding agreements. So it's a combination, yet if you combine what's already closed with what's bound by contract, that comes to roughly 65% of the overall plan, and beyond that there's a further portion under contract along with deals currently in progress; and like Toni said, there's a minor remaining piece we continue to work through, though more than 90% of that consists of transactions in progress.

Greg from Scotia here. Jason, what kind of cap rate expansion are you anticipating — how far do you expect them to move from where they stand now? At what level would you say pricing is appropriate? And what would have to happen before you'd consider raising the 2024 investment guidance? Does that depend more on cap rates, or on whether transactions are available?

Honestly, it's somewhat of both. In my view, the two definitely move in tandem. We've watched cap rates rise over roughly the past quarter, reaching a point where we're at ease doing deals — I'd describe that as mid-7s up to the high 7s. For us, that currently feels like a comfortable range. Looking back, there aren't many market comps to reference. That makes it tough to pin down exactly where the market stands today, though it appears there's been an increase of 50 basis points, and that's a fairly comfortable level for us to invest at; but look, things are volatile. Go back a month, and the move was quite sharp until 3 days ago, and at present we're seeing treasury rally somewhat. Predicting is difficult, naturally, yet we hold plenty of liquidity; we have $2 billion of capital arriving over the near term. So there's a tendency to deploy some of that money, and given where cap rates appear to us at the moment — particularly alongside sale leasebacks, where we enjoy some pricing power — we believe that's a favorable position to be in.

Sorry; so from this point, do you anticipate cap rates will keep expanding?

If you'd asked me two days back, my answer would have been affirmative — we figured some growth in cap rates would show up eventually. And honestly, when it comes to how cap rates behave, they're climbing right now, and their shifts usually trail behind what happens with interest rates. Clearly, there was a fairly significant jump within a brief window, even with what happened this week; so buyers who stay disciplined, the way we do, typically advocate for better yields while those selling cling to optimism, and in the end that causes the gap between bids and asks to broaden; and throughout this year, what we've observed is that eventually the sellers relent. And my sense is that pattern will persist as we head into the following year. That said, given how rates have recently ticked back down, forecasting is tough, naturally. My view is that should treasuries stabilize around where they sit now and perhaps drift gradually lower — assuming that decline holds — then I doubt we'll witness any next-year uptick; however, it's possible we won't require one to complete additional transactions, should that scenario play out.

I wanted to ask something else about that. When it comes to the lower acquisition guidance for this year, is the reason simply that some of the deals you've been reviewing in Q2 haven't seen their cap rates shift to a level where you feel comfortable doing the transaction, or have those deals left the market entirely? I'm just wondering if you could share any detail...

Did I hear you say an increase to our guidance for this year? I didn't catch the beginning of your question.

No, no. Regarding the reduced acquisition guidance for this year, I'm just trying to grasp what the main factors are, given that cap rates haven't risen yet?

Yes. The — I believe the primary factor was Q3. I mean, around late summer, let's say August during our previous earnings call, that was truly the most recent occasion we provided an update to the market; we had roughly $1 billion in deals closed year-to-date, plus some capital projects slated to come online later in the year. At that moment, we also had a pipeline exceeding $400 million. So at that point, we felt fairly confident about the $2 billion figure; however, given rate movements, we chose to reprice deals and deal volume, when you consider the broader picture, it isn't about deal volume. It's about how those — how that converts into earnings growth. And that's where our attention is. We did raise pricing. I think much of what sat in our pipeline earlier in the summer that decelerated, in certain instances, disappeared and has since returned for that matter, is what we aim to close during this year and possibly spilling slightly into January. But that's roughly the situation for us at present; it has somewhat reverted to what we were examining during the summer; and we feel fairly confident about future prospects too, since the longer-term pipeline is beginning to accumulate there.

This is Jamie Feldman, and I'm joined by Connor. To kick things off, regarding the $1.5 billion of investments included in your guidance — I realize you described it as somewhat of a placeholder, but could you provide additional detail about where things stand on any of it? In other words, is some of it perhaps just a handicap — could you bucket it into, say, things we're actively pursuing versus things we believe are on the come? And separately, any thoughts at all about yield across those buckets?

Sure, the $1.5 billion for next year — that's an assumption at this point. I wouldn't exactly describe it as a placeholder. Historically, we've managed to deploy capital across all sorts of environments, so I'd view it as a solid starting point. We hope to revise it in February, potentially with some upside, depending on the markets. As things stand today, though, visibility into '24 is limited. Deals generally take, from when we first see them to closing, several months, typically. So a few of the transactions we're pursuing at present might close in January. The early stage pipelines contain some larger transactions, particularly in Europe, where we're seeing opportunities — again, bid-ask spreads are pretty wide — but these are sale leasebacks, there are uses of proceeds. We do believe these sellers will likely transact, though they do take some time. So I'd characterize it as having some green shoots of deal opportunities, but not far enough along for us to feel comfortable saying a chunk of that $1.5 billion is done. That said, over the years we've managed to get deals done in varying environments. Importantly, at present we're sitting on a lot of dry powder. We referenced the $2 billion that either has come in or is coming in over the next couple of months. That will give us a genuine competitive advantage, and we do have a bias toward putting it to work.

All right, that's useful. So following up on what you said, you've got a sizable amount of available capital sitting there. A good deal of property is likely to require new financing, if interest rates don't come down enough to rescue those owners. I recall you mentioned industrial warehouse as one thing you're eyeing. Yet when you look ahead at what this business becomes, you just sold off office all at once. So how do you evaluate other kinds of properties that could suit WPC down the road that perhaps few others are considering? Or does that mean your point at this moment is that these kinds of assets represent the route we'll take to expand — we'll keep putting them into the portfolio and stick to that plan without any changes?

No, here's the thing — we operate as a net lease REIT with a diversified approach. What I'd say is that we've never closed the door on bringing in additional diversification through fresh verticals. And I believe our track record demonstrates we've followed through on that. This year, for instance, we've leaned somewhat more heavily into retail. Earlier this year, we completed projects for a few medical schools that are quite prominent in their markets. Over the past several years, the majority of our work—roughly 70% or more—has involved industrial and warehouse properties. Even so, those categories themselves include a fair amount of variety, such as cold storage, food manufacturing and processing, and some research and development. Beyond that, we obviously hold self-storage assets, some structured as net leases and others that we operate directly. I believe there are chances to move a greater share of those into net leases down the road as well. Our current setup is already fairly broad-based, and that, in my view, lets us survey a fairly wide range of possibilities as we decide where our capital should be deployed. That's something that will shift.

Perhaps a clearer way to frame this would be: taking your portfolio mix measured by NOI after those office dispositions, do you expect that chart to shift significantly once you deploy a large chunk of that capital? Or is your sense that it will remain...

Yeah, if the prior two years tell us anything, I could see industrial warehouse ticking upward somewhat. As things stand today, on a pro forma basis reflecting the office spinoff, after the Office Sale Program wraps up, industrial and warehouse would sit at slightly above 60%, and that might edge higher; still, my view is that we do want to keep diversification. Also, the remaining verticals I brought up represent possibilities we expect to pursue. That said, my guess is the majority continues to go toward industrial.

Toni, during the remarks you'd prepared, you brought up how rent recapture has gotten better now that office is gone. So should we take that to mean comprehensive income is going to track contractual rent bumps more tightly? In the past, I believe you cited a leakage of 100 basis points, and I'm curious whether that figure gets smaller.

Yeah, that's what we anticipate moving forward. That 100 basis points really applies across a long stretch of time. And even with a bit of visibility into what 2024 holds, we're seeing that edge up somewhat. It could definitely swing either direction within any single quarter, simply because of how many leases we have expiring at once, but we do expect a slight gain relative to the 100 basis point drag we've recorded versus our contractual.

All right, and could you help us understand where that $2 billion of proceeds you're anticipating is actually headed? Some of this could be tied to timing, but previously you mentioned $465 million from U-Haul. There's the Office Sale Program at $643 million. Then you've got NLOP and the equity forwards at $735. I just want to confirm whether all of that falls within the $2 billion, that Lineage doesn't, and whether there's anything else I'm overlooking in that figure.